10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended December 31, 2017

OR

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

For the transition period from              to          

Commission File Number: 001-34403

Territorial Bancorp Inc.

(Name of Registrant as Specified in its Charter)

Maryland	26-4674701
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)
1132 Bishop Street, Suite 2200, Honolulu, Hawaii	96813
(Address of Principal Executive Office)	(Zip Code)

(808) 946-1400

(Registrant’s Telephone Number including area code)

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

Common Stock, par value $0.01 per share

(Title of Class)

The NASDAQ Stock Market LLC

(Name of exchange on which registered)

Securities Registered Under Section 12(g) of the Exchange Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES  ☐  NO  ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of 15(d) of the Act. YES ☐  NO  ☒

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 reports), and (2) has been subject to such requirements for the past 90 days.

YES  ☒  NO  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes  ☒  No ☐

Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. ☐

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.  (Check one):

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 persuant 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

The aggregate value of the voting common equity held by nonaffiliates of the registrant, computed by reference to the closing price of the registrant’s shares of common stock as of June 30, 2017 ($31.19) was $266.0 million.

As of February 28, 2018, there were 9,731,022 shares outstanding of the registrant’s common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2018 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.

TERRITORIAL BANCORP INC.

FORM 10-K

INDEX

PART I
ITEM 1.	Business	2
ITEM 1A.	Risk Factors	15
ITEM 1B.	Unresolved Staff Comments	24
ITEM 2.	Properties	24
ITEM 3.	Legal Proceedings	26
ITEM 4.	Mine Safety Disclosures	26
PART II
ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	27
ITEM 6.	Selected Financial Data	30
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	57
ITEM 8.	Financial Statements and Supplementary Data	57
ITEM 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	107
ITEM 9A.	Controls and Procedures	107
ITEM 9B.	Other Information	107
PART III
ITEM 10.	Directors, Executive Officers and Corporate Governance	108
ITEM 11.	Executive Compensation	108
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	108
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	108
ITEM 14.	Principal Accountant Fees and Services	108
PART IV
ITEM 15.	Exhibits and Financial Statement Schedules	109
ITEM 16.	Form 10-K Summary	111

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K 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” 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.  Except as may be required by law, we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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:

· general economic conditions, 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 or credit 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 U.S. Government, including 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 Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

· 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;

· cyber attacks, 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 changes that may be more difficult or expensive than expected;

· the ability of third-party providers to perform their obligations to us;

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· the ability of the U.S. Government to manage federal debt limits;

· the quality and composition of our investment portfolio;

· changes in our financial condition or results of operations that reduce capital available to pay dividends; and

· changes in the financial condition or future prospects of issuers of securities that we own.

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.  Please also see “Item 1A. Risk Factors.”

PART I

ITEM 1.Business

Territorial Bancorp Inc.

Territorial Bancorp Inc. (the Company) is a Maryland corporation and owns 100% of the outstanding common stock of Territorial Savings Bank.  On July 10, 2009, we completed our initial public offering of common stock in connection with the mutual-to-stock conversion of Territorial Mutual Holding Company, selling 12,233,125 shares of common stock at $10.00 per share. Since the completion of our initial public offering, we have not engaged in any significant business activity other than owning the common stock of and having savings deposits in Territorial Savings Bank, paying dividends and repurchasing shares of common stock.  At December 31, 2017, we had consolidated assets of $2.004 billion, consolidated deposits of $1.597 billion and consolidated stockholders’ equity of $234.9 million.

Our executive offices are located at 1132 Bishop Street, Suite 2200, Honolulu, Hawaii 96813.  Our telephone number at this address is (808) 946-1400.

Territorial Savings Bank

Territorial Savings Bank is a Hawaii state-chartered savings bank headquartered in Honolulu, Hawaii.  Territorial Savings Bank was organized in 1921, and reorganized into the mutual holding company structure in 2002.  Territorial Savings Bank is currently the wholly-owned subsidiary of Territorial Bancorp Inc.  We provide financial services to individuals, families and businesses through our 29 banking offices located throughout the State of Hawaii.

On June 25, 2014, Territorial Savings Bank converted from a federal savings bank to a Hawaii state-chartered savings bank.  On July 10, 2014, Territorial Savings Bank became a member of the Federal Reserve System.

Territorial Savings Bank’s executive offices are located at 1132 Bishop Street, Suite 2200, Honolulu, Hawaii 96813.  Our telephone number at this address is (808) 946-1400.

Available Information

Territorial Bancorp Inc. is a public company, and files interim, quarterly and annual reports with the Securities and Exchange Commission.  These reports and any amendments to these reports are available for free on our website, www.territorialsavings.net.  Information on our website should not be considered a part of this Annual Report on Form 10-K.  These reports are also on file and a matter of public record with the Securities and Exchange Commission and may be read and copied at the Securities and Exchange Commission’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.  The public may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330.  The Securities and Exchange Commission maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (http://www.sec.gov).

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General

Territorial Savings Bank’s business consists primarily of accepting deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in one- to four-family residential mortgage loans and investment securities.  To a much lesser extent, we also originate home equity loans and lines of credit, construction, commercial and other nonresidential real estate loans, consumer loans, multi-family mortgage loans and other loans.  Territorial Savings Bank offers a variety of deposit accounts, including passbook and statement savings accounts, certificates of deposit, money market accounts, commercial and regular checking accounts and Super NOW accounts.  Through our subsidiary, Territorial Financial Services, Inc., we engage in insurance agency activities.  We also offer various non-deposit investments to our customers, including annuities and mutual funds, through a third-party broker-dealer.

Market Area

We conduct business from our corporate offices and from our 29 full-service branch offices located throughout the State of Hawaii.

The largest sector of Hawaii’s economy is the visitor industry.  The Hawaii Tourism Authority reported that 9.4 million visitors came to the state in 2017, a 5.0% increase compared to 2016.  The increase in visitor arrivals is primarily due to growth in the number of visitors from the continental United States and Japan.  Total visitor expenditures in 2017 totaled $16.776 billion, a 6.2% increase compared to 2016.

The unemployment rate for the State of Hawaii was 2.0% in December 2017, representing a decrease from a 2.9% rate in December 2016.  Hawaii’s unemployment rate continued to be lower than the rate for the entire United States, which was 4.1% in December 2017. The growth in the visitor and construction industries have supported the local economy and kept the state’s unemployment rate lower than the national rate.  The construction of several new condominium projects and work on the City and County of Honolulu’s mass transit project has increased employment in Hawaii’s construction industry.

The number of sales and the median sale prices of existing single-family homes and condominium units sold increased in 2017 compared to 2016.  On the island of Oahu, the primary real estate market in Hawaii, sales of existing single-family homes totaled 3,908 units for the year ended December 31, 2017, an increase of 6.3% compared to sales in 2016.  The number of condominium sales, a notable portion of the overall housing market, grew by 6.9% in 2017 compared to 2016.  The median price paid on Oahu for a single-family home in December 2017 was $755,000, an increase of 2.7% compared to the median price in December 2016.  The median price paid on Oahu for condominiums in December 2017 was $405,000, an increase of 3.8% compared to the median price in December 2016.

On the island of Maui, the second largest real estate market in Hawaii, sales of existing single-family homes totaled 1,099 units in 2017, a 2.1%  increase compared to the number of units sold in 2016.  The number of condominium sales totaled 1,451 units in 2017, an increase of 10.7% compared to the number of units sold in 2016.  The median price paid for a single-family home on Maui in December 2017 was $695,000, an increase of 8.8% compared to the median price in December 2016.  The median price paid on Maui for condominiums in December 2017 was $445,000, a 7.2% increase compared to the median price in December 2016.

In 2017, there were 1,352 bankruptcy filings, a decrease of 2.2% compared to the number of filings in 2016.  The decrease in bankruptcy filings is primarily due to growth in Hawaii’s economy.

Competition

We face intense competition in our market area both in making loans and attracting deposits.  We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies and investment banking firms.  Some of our competitors have greater name recognition and market presence that benefit them in attracting business, and offer certain services that we do not or cannot provide.

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Our deposit sources are primarily concentrated in the communities surrounding our banking offices, located in all four counties in the State of Hawaii.  As of June 30, 2017 (the latest date for which information is publicly available), we ranked fifth in FDIC-insured deposit market share in the State of Hawaii (out of 12 banks and thrift institutions with offices in Hawaii), with a 3.6% market share.  As of that date, our largest market share was in the City and County of Honolulu, where we ranked fifth in deposit market share (out of 12 banks and thrift institutions with offices in the City and County) with a 3.7% market share.

Lending Activities

Our primary lending activity is the origination of one- to four-family residential mortgage loans.  To a much lesser extent, we also originate home equity loans and lines of credit, construction, commercial and other nonresidential real estate loans, consumer loans, multi-family mortgage loans and commercial business loans.

One- to Four-Family Residential Mortgage Loans.  At December 31, 2017, $1.445 billion, or 96.7% of our total loan portfolio, consisted of one- to four-family residential mortgage loans.  We offer conforming, fixed-rate and adjustable-rate residential mortgage loans with maturities generally up to 30 years.  There has been little demand for adjustable-rate mortgage loans in our market area.

One- to four-family residential mortgage loans are generally underwritten according to Fannie Mae and Freddie Mac guidelines, and we refer to loans that conform to such guidelines as “conforming loans.”  We generally originate both fixed- and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency, which was $636,150 for single-family homes located in the State of Hawaii for 2017.  We also originate loans above this amount, which are referred to as “jumbo loans.”  These jumbo loan amounts are generally up to $1.0 million, although we originate loans above this amount.  We generally originate fixed-rate jumbo loans with terms of up to 30 years.  We have not originated significant amounts of adjustable-rate jumbo loans in recent years due to customer preference for fixed-rate loans in our market area.  We generally underwrite jumbo loans in a manner similar to conforming loans.  Jumbo loans are not uncommon in our market area.

We originate loans with loan-to-value ratios in excess of 80%, up to and including a loan-to-value ratio of 100%.  We generally require private mortgage insurance for loans with loan-to-value ratios in excess of 80%.  During the year ended December 31, 2017, we originated $3.5 million of one- to four-family residential mortgage loans with loan-to-value ratios in excess of 80%. We offer a variety of credit programs for low- to moderate-income and first-time home purchasers.  These include our first time home purchaser program, where the borrower will receive up to a 50 basis point reduction in points charged in connection with the loan.  We also originate first mortgage loans to lower-income individuals who reside in rural census tracts where the U.S. Department of Agriculture will issue a second mortgage and complete the underwriting of the loan, subject to our review before origination.  We also offer both Federal Housing Administration (FHA) and Veterans Administration (VA) fixed-rate loans.

Other than our loans for the construction of one- to four-family residential mortgage loans (described under “—Nonresidential Real Estate Loans”), we currently do not originate new “interest only” mortgage loans on one- to four-family residential properties (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan).  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).

Home Equity Loans and Lines of Credit.  In addition to traditional one- to four-family residential mortgage loans, we offer home equity loans and home equity lines of credit that are secured primarily by one- to four-family residential homes.  Home equity lines of credit have a maximum term of 10 years during which time the borrower is required to make payments to principal based on the amortization of 0.125% of principal outstanding per month.  Home equity loans may be underwritten with a loan-to-value ratio of 80% when combined with the principal balance of the existing mortgage loan, while lines of credit for owner-occupied properties and investment properties may be underwritten with loan-to-value ratios of 80% and 65%, respectively, when combined with the principal balance of the

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existing mortgage loan.  At December 31, 2017, the outstanding balance of home equity loans totaled $1.6 million, or 0.1% of our total loan portfolio, and the outstanding balance of home equity lines of credit totaled $11.3 million, or 0.8% of our total loan portfolio.

Nonresidential Real Estate Loans.  Our nonresidential real estate loans consist primarily of commercial real estate loans and construction loans for residential real estate projects.  These loans totaled $21.8 million, or 1.5% of our loan portfolio as of December 31, 2017.  The commercial real estate properties primarily include owner-occupied light industrial properties.  We generally seek to originate commercial real estate loans with initial principal balances of $1.0 million or less.  Loans secured by commercial real estate totaled $9.2 million, or 0.6%, of our total loan portfolio at December 31, 2017, and consisted of 11 loans outstanding with an average loan balance of approximately $837,000.  All of our nonresidential real estate loans are secured by properties located in our primary market area.  At December 31, 2017, our largest commercial real estate loan had a principal balance of $3.0 million and was secured by real property and improvements utilized as an office building.  This loan was performing in accordance with its original terms at December 31, 2017.

In the underwriting of commercial real estate loans, we generally lend up to the lesser of 75% of the property’s appraised value or purchase price.  We base our decision to lend primarily on the economic viability of the property and the creditworthiness of the borrower.  In evaluating a proposed commercial real estate loan, we emphasize the ratio of the property’s projected net cash flow to the loan’s debt service requirement (generally requiring a minimum ratio of 110%), computed after deduction for a vacancy factor and property expenses we deem appropriate.  Personal guarantees are usually obtained from commercial real estate borrowers.  We require title insurance, fire and extended coverage casualty insurance, and, if appropriate, flood insurance, in order to protect our security interest in the underlying property.  Almost all of our commercial real estate loans are generated internally by our loan officers.

Commercial real estate loans generally carry higher interest rates and have shorter terms than one- to four-family residential mortgage loans.  Commercial real estate loans, however, entail greater credit risks compared to one- to four-family residential mortgage loans, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers.  In addition, the payment of loans secured by income-producing properties typically depends, in large part, on sufficient income from the property to cover operating expenses and debt service.  Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of the property.  Additionally, any decline in real estate values may be more pronounced for commercial real estate than for residential properties.

We also originate a limited amount of construction loans to experienced developers, almost exclusively for the construction of residential real estate projects.  Construction loans are also made to individuals for the construction of their personal residences.  Construction loans to individuals are generally “interest-only” loans during the construction period, and convert to permanent, amortizing loans following the completion of construction.  At December 31, 2017, construction loans totaled $6.3 million, or 0.4% of total loans receivable.  At December 31, 2017, the additional unadvanced portion of these construction loans totaled $3.6 million.

Construction financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate.  Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions.  If the estimate of construction cost is inaccurate, we may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property.  Moreover, if the estimated value of the completed project is inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the property.  In the event we make a land acquisition loan on property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed.  We currently do not have any land acquisition development and construction loans.  Construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs.  In addition, the ultimate sale or rental of the property may not occur as anticipated.

Loan Originations, Purchases, Sales and Servicing.  All loans that we originate are underwritten pursuant to our policies and procedures, which incorporate standard underwriting guidelines, including those of Freddie Mac and Fannie Mae, to the extent applicable.  We originate both adjustable-rate and fixed-rate loans.  However, in our market area, customer demand is primarily for fixed-rate loans.  Our loan origination and sales activity may be adversely

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affected by a rising interest rate environment that typically results in decreased loan demand.  Most of our one- to four-family residential mortgage loan originations are generated by our branch managers and employees located in our banking offices and our additional commissioned loan officers located in our corporate headquarters.  We also advertise throughout our market area.  We also receive loans from mortgage brokers, mortgage bankers and other financial institutions that work with our staff to process and close these loans.  We underwrite and approve all of these loans.

We sell loans to assist us in managing interest rate risk.  We sold $25.0 million, $48.9 million and $56.2 million of residential mortgage loans (all fixed-rate loans, with terms of 10 years or longer) during the years ended December 31, 2017, 2016 and 2015, respectively.  We had one loan for $403,000 classified as held for sale at December 31, 2017.

We sell our loans without recourse, except for normal representations and warranties provided in sales transactions.  Since 2009, we having been selling loans primarily on a servicing released basis where servicing is transferred to a third-party at the time the loan is sold.  Prior to 2009, most of our loan sales were conducted on a servicing retained basis.   At December 31, 2017, we were servicing loans owned by others with a principal balance of $35.5 million.  Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent borrowers, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans.  We retain a portion of the interest paid by the borrower on the loans we service as consideration for our servicing activities.  For the year ended December 31, 2017, we received servicing fees of $105,000.  At December 31, 2017, substantially all of the loans serviced for Freddie Mac and Fannie Mae were performing in accordance with their contractual terms and we believe that there are no material repurchase obligations associated with these loans.

Loan Approval Procedures and Authority.  Our lending activities follow written, nondiscriminatory underwriting standards and loan origination procedures established by our Board of Directors.  The loan approval process is intended to assess the borrower’s ability to repay the loan and value of the property that will secure the loan.  To assess the borrower’s ability to repay, we review the borrower’s employment and credit history and information on the historical and projected income and expenses of the borrower.

Our policies and loan approval limits are established by the Board of Directors.  Aggregate lending relationships in amounts up to $5.0 million can be approved by designated individual officers or officers acting together with specific lending approval authority.  Relationships in excess of $5.0 million require the approval of the Loan Committee of the Board of Directors.

Territorial Savings Bank also uses automated systems to underwrite one- to four-family residential mortgage loans up to the maximum conforming loan limits as established by the Federal Housing Finance Agency, which was $636,150 for 2017.  We require appraisals of all real property securing one- to four-family residential real estate loans, and on property securing home equity loans and lines of credit.  All appraisers are licensed appraisers and all third-party appraisers are approved by the Board of Directors annually.

Investments

Our Board of Directors has primary responsibility for establishing and overseeing our investment policy.  The Board of Directors has delegated authority to implement the investment policy to our Investment 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.  The investment policy is reviewed at least annually by the Investment Committee, and any changes to the policy are subject to approval by the full Board of Directors.  The overall objectives of the Investment Policy are to maintain a portfolio of high quality and diversified investments to maximize interest income over the long term and to minimize risk, to provide collateral for borrowings, to provide additional earnings when loan production is low, and to reduce our tax liability.  The policy dictates that investment decisions give consideration to the safety of principal, liquidity requirements and potential returns.  Our Senior Vice President and Chief Financial Officer executes our securities portfolio transactions as directed by the Investment Committee.  All purchase and sale transactions are reported to the Board of Directors on a monthly basis.

Our current investment policy permits investments in securities issued by the United States Government as well as mortgage-backed securities and direct obligations of Fannie Mae, Freddie Mac and Ginnie Mae.  The investment policy also permits, with certain limitations, investments in certificates of deposit, bank-owned life insurance,

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collateralized mortgage obligations, trust preferred securities, municipal securities and stock in the Federal Home Loan Bank (FHLB) and the Federal Reserve Bank (FRB).  We purchase stock in the FHLB in order to obtain services such as demand deposit accounts, certificates of deposit, security safekeeping services and borrowings in the form of advances.  As a member of the Federal Reserve System, we are required to hold stock in the FRB.

Our current policies do not permit hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage-backed securities.  As of December 31, 2017, we held no asset-backed securities other than mortgage-backed securities.  As a state savings bank, Territorial Savings Bank is not permitted to invest in equity securities.  This general restriction does not apply to Territorial Bancorp Inc.

The Investments — Debt and Equity Securities topic of the Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) requires that, at the time of purchase, we designate a security as either held-to-maturity, available-for-sale, or trading, based upon our ability and intent to hold the security until maturity.  Securities in the available-for-sale and trading classifications are reported at market value and securities in the held-to-maturity classification are reported at amortized cost.  A periodic review and evaluation of the available-for-sale and held-to-maturity securities portfolios is conducted to determine if the fair value of any security has declined below its carrying value and whether such decline is other-than-temporary.  If we do not have the intent to sell a security and it is not more likely than not that we will be required to sell a security, impairment occurs when the present value of the remaining cash flows is less than the remaining amortized cost basis.  The difference between the present value of remaining cash flows and the remaining amortized cost basis is considered a credit loss.  If a credit loss has occurred, impairment is recorded by writing down the value of a security to the present value of remaining cash flows as a charge to earnings.  The difference between the book value of the security after the write down and the fair market value is considered other comprehensive loss, which is a reduction of stockholders’ equity.

Our held-to-maturity securities at December 31, 2017 consisted primarily of securities with the following carrying values: $404.4 million of mortgage-backed securities and $427,000 of trust preferred securities that were issued by pools of issuers consisting primarily of financial institution holding companies.  At December 31, 2017, all of our mortgage-backed securities were issued by Fannie Mae, Freddie Mac or Ginnie Mae.  At December 31, 2017, we had one security for $2.9 million classified as available-for-sale.  At December 31, 2017, none of the collateral underlying our securities portfolio was considered subprime or Alt-A, and we did not hold any common or preferred stock issued by Freddie Mac or Fannie Mae as of that date.  The fair values of our securities are usually based on published or securities dealers’ market values.

Mortgage-backed securities are securities issued in the secondary market that are collateralized by pools of mortgages.  Certain types of mortgage-backed securities are commonly referred to as “pass-through” certificates because the principal and interest of the underlying loans is “passed through” to investors, net of certain costs, including servicing and guarantee fees.  Mortgage-backed securities typically are collateralized by pools of one- to four-family or multi-family mortgages.  We invest primarily in mortgage-backed securities backed by one- to four-family mortgages.  The interest rate of the security is lower than the interest rates of the underlying loans to allow for payment of servicing and guarantee fees.  Ginnie Mae, a United States Government agency, and government sponsored enterprises, such as Fannie Mae and Freddie Mac, either guarantee the payments or guarantee the timely payment of principal and interest to investors.  Mortgage-backed securities are more liquid than individual mortgage loans since there is an active trading market for such securities.  In addition, mortgage-backed securities may be used to collateralize our borrowings.  Investments in mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such interests, thereby affecting the net yield on our securities.

Sources of Funds

General.  Deposits traditionally have been our primary source of funds for our investment and lending activities.  We also borrow from the FHLB and from securities dealers through securities sold under agreements to repurchase to supplement cash flow needs, to lengthen the maturities of liabilities for interest rate risk management purposes and to manage our cost of funds.  Our additional sources of funds are loan and security repayments, maturing investments, retained earnings, income on other earning assets and the proceeds of loan and security sales.

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Deposits.  We accept deposits primarily from the areas in which our offices are located.  We rely on our competitive pricing and products, convenient locations and quality customer service to attract and retain deposits.  We offer a variety of deposit accounts with a range of interest rates and terms.  Our deposit accounts consist of passbook and statement savings accounts, certificates of deposit, money market accounts, commercial and regular checking accounts and Super NOW accounts.  Historically, we have not accepted brokered deposits.

Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis.  Deposit rates and terms are based primarily on current operating strategies, market interest rates, liquidity requirements and our deposit growth goals.

Borrowings.  Our borrowings consist of advances from the FHLB and funds borrowed from securities sold under agreements to repurchase.  At December 31, 2017, our FHLB advances totaled $107.2 million, or 6.1% of total liabilities, and securities sold under agreements to repurchase totaled $30.0 million, or 1.7% of total liabilities.  At December 31, 2017, we had access to additional FHLB advances of up to $579.4 million.  Advances from the FHLB are secured by our investment in the common stock of the FHLB as well as by a blanket pledge on our assets not otherwise pledged.  Securities sold under agreements to repurchase are secured by mortgage-backed securities.

Subsidiary Activities

Territorial Savings Bank owns 100% of the common stock of Territorial Financial Services, Inc., a Hawaii corporation that engages primarily in insurance activities.  At December 31, 2017, Territorial Savings Bank’s investment in Territorial Financial Services, Inc. was $12,000, and Territorial Financial Services, Inc. had assets of $76,000 at that date.  Territorial Savings Bank also owns 100% of the common stock of Territorial Real Estate Co., Inc., an inactive Hawaii corporation that is authorized to manage and dispose of problem real estate.

Personnel

As of December 31, 2017, we had 269 full-time employees and 14 part-time employees.  Our employees are not represented by any collective bargaining group.  Management believes that we have a good working relationship with our employees.

FEDERAL AND STATE TAXATION

Federal Taxation

General.  Territorial Bancorp Inc. and Territorial Savings Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below.  The following discussion of federal taxation is intended only to summarize material federal income tax matters and is not a comprehensive description of the tax rules applicable to Territorial Bancorp Inc. and Territorial Savings Bank.

Federal Tax Reform.  On December 22, 2017, the President signed into law H.R. 1, commonly known as the Tax Cuts and Jobs Act of 2017 (the Act).  The Act includes a number of changes in existing tax law impacting businesses including, among other things, a reduction of the federal corporate income tax rate from 35% to 21% effective January 1, 2018.  As a result, we were required to re-measure, through income tax expense, our deferred tax assets and liabilities using the enacted rate at which we expect them to be recovered or settled. The re-measurement of our net deferred tax asset resulted in additional income tax expense of $2.1 million.

Method of Accounting.  For federal income tax purposes, Territorial Bancorp Inc. currently reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31st for filing its consolidated federal income tax returns.

Alternative Minimum Tax.   Prior to January 1, 2018, the Internal Revenue Code imposes an alternative minimum tax (AMT) at a rate of 20% on a base of regular taxable income plus certain tax preferences, which we refer to as “alternative minimum taxable income.” The AMT is payable to the extent such alternative minimum taxable income is

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in excess of an exemption amount and the AMT exceeds the regular income tax. Net operating losses can offset no more than 90% of alternative minimum taxable income. Certain AMT payments may be used as credits against regular tax liabilities in future years.  Effective January 1, 2018, the corporate AMT is repealed.   At December 31, 2017, the Company did not have any AMT payments available to carry forward to future periods. 

Net Operating Loss Carryovers.    Prior to January 1, 2018, subject to certain limitations, a company may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years.  For net operating losses generated beginning January 1, 2018, there are no carry backs allowed and an unlimited carry forward period. At December 31, 2017, the Company did not have any net operating loss carry forwards for federal income tax purposes.

Corporate Dividends.  We may exclude from our income 100% of dividends received from Territorial Savings Bank as a member of the same affiliated group of corporations.

Audit of Tax Returns.  Territorial Bancorp Inc.’s 2011 federal income tax return was audited in 2013.  The audit did not result in any material changes to the federal income tax return.  Tax years 2014 to 2016 currently remain subject to examination by the IRS.

State Taxation

Territorial Bancorp Inc. and Territorial Savings Bank are subject to a franchise tax imposed under Hawaii law at a rate of 7.92% of net income.  The net income to which the tax rate is applied is determined in a manner consistent with the taxable income determined for federal purposes with some adjustments.  The principal adjustment to federal taxable income is the inclusion of interest received on municipal bonds in gross income for Hawaii franchise tax purposes.

Territorial Bancorp Inc.’s state franchise tax returns have not been audited in the most recent five-year period.  Tax years 2014 to 2016 currently remain subject to examination by the Department of Taxation of the State of Hawaii.

SUPERVISION AND REGULATION

General

Territorial Savings Bank is a Hawaii state-chartered savings bank and a member of the Federal Reserve System.  Accordingly, Territorial Savings Bank is examined and supervised by the Hawaii Division of Financial Institutions, as its primary state regulator, and by the Board of Governors of the Federal Reserve System, or Federal Reserve Board, as its primary federal regulator.  Territorial Savings Bank is also subject to examination by the Federal Deposit Insurance Corporation, its deposit insurer, under certain circumstances.  This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the Federal Deposit Insurance Corporation’s deposit insurance fund and depositors, and not for the protection of security holders.  Under this system of state and federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates.  The Hawaii Division of Financial Institutions and the Federal Reserve Board examine Territorial Savings Bank and prepare reports for the consideration of the Bank’s Board of Directors on any operating deficiencies.  Territorial Savings Bank’s relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a much lesser extent, state law, especially in matters concerning the ownership of deposit accounts and the form and content of Territorial Savings Bank’s loan documents.

Any change in these laws or regulations, whether by the Hawaii Division of Financial Institutions, the Federal Reserve Board, the Federal Deposit Insurance Corporation or Congress, could have a material adverse impact on Territorial Bancorp Inc., Territorial Savings Bank and their operations.

Territorial Bancorp Inc. maintained its status as a savings and loan holding company in connection with Territorial Savings Bank’s charter conversion.  Accordingly, Territorial Bancorp Inc. is required to file certain reports with, is subject to examination by, and otherwise must comply with the rules and regulations of the Federal Reserve Board.  Territorial Bancorp Inc. is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

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Certain regulatory requirements that are applicable to Territorial Savings Bank and Territorial Bancorp Inc. are described below.  This description of statutes and regulations is not intended to be a complete description of such statutes and regulations and their effects on Territorial Savings Bank and Territorial Bancorp Inc. and is qualified in its entirety by reference to the actual statutes and regulations.

Federal Banking Regulation

Capital Requirements.  Federal regulations require federally insured depository institutions meet several minimum capital standards:  a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets ratio of 8%, and a 4% Tier 1 capital to total assets leverage ratio.  The current capital requirements were effective January 1, 2015 and are the result of a final rule implementing recommendations of the Basel Committee on Banking Supervision (BASEL III) and certain requirements of the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act).

In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset.  Higher levels of capital are required for asset categories believed to present greater risk.  Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings.  Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital.  Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries.  Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital.  Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt.  Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of accumulated other comprehensive income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values.  Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.  In assessing an institution’s capital adequacy, the Federal Reserve Bank takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements.  The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019.  During calendar year 2017, the capital conservation buffer was 1.25%.  It increased to 1.875% as of January 1, 2018.

At December 31, 2017, Territorial Savings Bank’s regulatory capital exceeded that required by the revised capital requirement on a fully phased in basis.

Prompt Corrective Action Regulations.  Under prompt corrective action regulations, the Federal Reserve Board is authorized and, under certain circumstances, required to take supervisory actions against undercapitalized member banks.  The extent of supervisory action depends upon the degree of the institution’s undercapitalization.  For this purpose, a member bank is placed in one of the following five categories based on the bank’s capital:

· well-capitalized (at least 5% leverage capital, 8% Tier 1 risk-based capital, 10% total risk-based capital and 6.5% common equity Tier 1 risk-based capital);

· adequately capitalized (at least 4% leverage capital, 6% Tier 1 risk-based capital, 8% total risk-based capital and 4.5% common equity Tier 1 risk-based capital);

· undercapitalized (less than 4% leverage capital, 6% Tier 1 risk-based capital, 8% total risk-based capital or 4.5% common equity Tier 1 risk-based capital);

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· significantly undercapitalized (less than 3% leverage capital, 4% Tier 1 risk-based capital, 6% total risk-based capital or 3% common equity Tier 1 risk-based capital); and

· critically undercapitalized (less than 2% tangible capital).

At December 31, 2017, Territorial Savings Bank met the criteria for being considered “well-capitalized.”

Capital Distributions.  Federal Reserve member banks must receive the prior approval of the Federal Reserve Board to pay dividends:  (i) in an amount that exceeds the sum of the bank’s net income during the calendar year and retained net income of the prior two calendar years or (ii) that would exceed the bank’s undivided profits.  Even if an application is not otherwise required, every savings bank that is a subsidiary of a savings and loan holding company must file a notice with the Federal Reserve Board at least 30 days before the Board of Directors declares a dividend.

The Federal Reserve Board may disapprove a notice or application if:

· the savings bank would be undercapitalized following the distribution;

· the proposed dividend raises safety and soundness concerns; or

· the dividend would violate a prohibition contained in any statute, regulation with a federal banking regulatory agency or any formal or informal enforcement action.

In addition, the Federal Deposit Insurance Act provides that an insured depository institution shall not make any capital distribution if, after making such distribution, the institution would be undercapitalized.

Community Reinvestment Act and Fair Lending Laws.  All savings banks have a responsibility under the Community Reinvestment Act and related federal regulations to help meet the credit needs of their communities, including low- and moderate-income borrowers.  In connection with its examination of a state member bank, the Federal Reserve Board is required to assess the savings bank’s record of compliance with the Community Reinvestment Act.  In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes.  A savings bank’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities.  The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the Federal Reserve Board, as well as other federal regulatory agencies and the Department of Justice.  The Community Reinvestment Act requires all Federal Deposit Insurance Corporation-insured institutions to publicly disclose their rating.  Territorial Savings Bank received a “satisfactory” Community Reinvestment Act rating in its most recent federal examination.

Insurance of Deposit Accounts.  Territorial Savings Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation.  Deposit insurance per account owner is $250,000.

The Federal Deposit Insurance Corporation charges insured depository institutions premiums to maintain the Deposit Insurance Fund.  Under the Federal Deposit Insurance Corporation’s risk-based assessment system, institutions deemed less risky pay lower assessments.  Assessments for institutions of less than $10 billion of assets are now based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of failure within three years.  That system, effective July 1, 2016, replaces the previous system under which institutions were placed in risk categories.

The Dodd-Frank Act required the Federal Deposit Insurance Corporation to revise its procedures to base its assessments upon each insured institution’s total assets less tangible equity instead of deposits.  The Federal Deposit Insurance Corporation finalized a rule, effective April 1, 2011, that set the assessment range at 2.5 to 45 basis points of total assets less tangible equity.  In conjunction with the Deposit Insurance Fund reserve ratio achieving 1.15%, the assessment range (inclusive of possible adjustments) was reduced for insured institutions of less than $10 billion in total assets to 1.5 basis points to 30 basis points, effective July 1, 2016.

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In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. That payment is established quarterly and during the quarter ended December 31, 2017, equaled 0.54 basis points of total assets less tangible capital.

The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits.  The Federal Deposit Insurance Corporation must seek to achieve the 1.35% ratio by September 30, 2020.  The Dodd-Frank Act requires insured institutions with assets of $10 billion or more to fund the increase from 1.15% to 1.35% and, effective July 1, 2016, such institutions are subject to a surcharge to achieve that goal.  The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the Federal Deposit Insurance Corporation, and the Federal Deposit Insurance Corporation has exercised that discretion by establishing a long-range fund ratio of 2%.

The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank.  Management cannot predict what insurance assessment rates will be in the future.

Federal Home Loan Bank System.  Territorial Savings Bank is a member of the Federal Home Loan Bank System, which consists of eleven regional Federal Home Loan Banks.  The FHLB System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending.  As a member of the FHLB of Des Moines, Territorial Savings Bank is required to acquire and hold shares of capital stock in the FHLB.  As of December 31, 2017, Territorial Savings Bank held $6.5 million of capital stock in the FHLB of Des Moines and was in compliance with this requirement.

Hawaii Banking Regulation

Authority granted by Hawaii laws includes accepting and holding deposits, borrowing from any source, making loans and extensions of credit of any kind, investing in service corporation subsidiaries engaged in activities permissible for service corporations of federal savings banks and engaging in other activities that are usual or incidental to the business of a savings bank.  Hawaii law requires that at least 50% of a savings bank’s loans and extensions of credit be secured by real estate.  In addition, certain commercial loans are limited to 15% of the savings bank’s assets and education loans are limited to 10% of assets.

Hawaii law generally limits a savings bank’s capital distributions to the amount of its retained earnings.

Hawaii has a parity statute, which provides Hawaii savings banks with authority to engage in any activity permitted by federal law for federal savings banks, upon receiving the approval of the Commissioner of Financial Institutions.  Territorial Savings Bank received such approval when it converted from a federal savings bank to a Hawaii savings bank.

Other Regulations

Territorial Savings Bank’s operations are also subject to federal laws applicable to credit transactions, such as the:

· Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

· Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one- to four-family residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services;

· Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

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· Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

· Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;

· fair lending laws;

· Unfair or Deceptive Acts or Practices laws and regulations;

· Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

· Truth in Savings Act; and

· rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

The operations of Territorial Savings Bank are further subject to the:

· Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

· Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

· Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

· The USA PATRIOT Act, which requires financial institutions to, among other things, establish broadened anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering.  Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and

· The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties.  Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.

Holding Company Regulation

General.  Territorial Bancorp Inc. is a nondiversified savings and loan holding company within the meaning of the Home Owners’ Loan Act.  As such, Territorial Bancorp Inc. is registered with the Federal Reserve Board and subject to Federal Reserve Board regulations, examinations, supervision and reporting requirements.  In addition, the Federal Reserve Board has enforcement authority over Territorial Bancorp Inc. and its subsidiaries.  Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution.  The Dodd-Frank Act regulatory restructuring transferred the responsibility for regulating and supervising savings and loan holding companies from the Office of Thrift Supervision to the Federal Reserve Board, effective July 21, 2011.

Permissible Activities. The business activities of Territorial Bancorp Inc. are generally limited to those activities permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act of 1956, as amended, or for multiple savings and loan holding companies.  A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a financial activity.  The Dodd-Frank Act specifies that any savings and loan holding company that engages in activities permissible for a financial holding company must meet the qualitative requirements for a bank holding company to be a financial holding company and conduct the activities in accordance

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with the requirements that would apply to a financial holding company’s conduct of the activity.  Territorial Bancorp Inc. has not elected financial holding company status.  A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the Federal Reserve Board, and certain additional activities authorized by Federal Reserve Board regulations.

Federal law prohibits a savings and loan holding company, including Territorial Bancorp Inc., from directly or indirectly, or through one or more subsidiaries, acquiring more than 5% of another savings institution or holding company thereof, without prior written approval of the Federal Reserve Board.  It also prohibits, with certain exceptions, the acquisition or retention of more than 5% of a nonsubsidiary company engaged in activities that are not closely related to banking or financial in nature, or acquiring or retaining control of an institution that is not federally insured.  In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board must consider, among others, the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.

The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions:

(i) the approval of interstate supervisory acquisitions by savings and loan holding companies; and

(ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition.

The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

Capital.  Savings and loan holding companies have historically not been subject to specific regulatory capital requirements.  The Dodd-Frank Act required the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves.  Instruments such as cumulative preferred stock and trust preferred securities are no longer includable as Tier 1 capital, as was previously the case with bank holding companies, subject to certain grandfathering.  The previously discussed final rule regarding regulatory capital requirements implemented this Dodd-Frank Act requirement as to savings and loan holding companies.  Consolidated regulatory capital requirements identical to those applicable to the subsidiary depository institutions applied to savings and loan holding companies as of January 1, 2015.  As is the case with institutions themselves, the capital conservation buffer for savings and loan holding companies is being phased in between 2016 and 2019.

Source of Strength.  The Dodd-Frank Act also extended the “source of strength” doctrine to savings and loan holding companies.  The Federal Reserve Board has issued regulations requiring that all bank and savings and loan holding companies serve as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.

Dividends and Stock Repurchases.  The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank and savings and loan holding companies.  In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition.  Regulatory guidance provides for prior regulatory review of capital distributions in certain circumstances, such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend.  The guidance also provides for prior regulatory review where the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition.  The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized.  The policy statement also provides for regulatory review prior to a holding company redeeming or repurchasing regulatory capital instruments when the holding company is experiencing financial weaknesses or redeeming or repurchasing common stock or perpetual preferred stock that would result in a net reduction in the amount of such equity instruments outstanding as of the end of a quarter compared with the beginning of the quarter in which the

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redemption or repurchase occurred.  These regulatory policies could affect the ability of Territorial Bancorp Inc. to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.

Qualified Thrift Lender Test

In order for Territorial Bancorp Inc. to continue to be regulated as a savings and loan holding company (rather than bank holding company) when Territorial Savings Bank converted from a federal savings bank to a Hawaii savings bank, Territorial Savings Bank is required to satisfy the same qualified thrift lender (QTL) test that it did as federal savings bank.  The QTL test requires Territorial Savings Bank to either qualify as a “domestic building and loan association” as defined by the Internal Revenue Code or maintain at least 65% of “portfolio assets” in “qualified thrift investments,” primarily residential mortgages and related investments, including mortgage-backed and related securities.  A savings institution that fails the QTL test must operate under specified restrictions and may be subject to enforcement action.  Territorial Savings Bank was in compliance with the QTL test at December 31, 2017.

Change in Control Regulations

Under the Change in Bank Control Act, no person may acquire control of a savings and loan holding company such as the Company unless the Federal Reserve Board has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition.  Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the company’s directors, or a determination by the regulator that the acquirer has the power to direct, or directly or indirectly to exercise a controlling influence over, the management or policies of the institution.  Acquisition of more than 10% of any class of a savings and loan holding company’s voting stock constitutes a rebuttable presumption of control under the regulations under certain circumstances including where, as is the case with Territorial Bancorp Inc., the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.

Federal Securities Laws

Territorial Bancorp Inc.’s common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934.  Territorial Bancorp Inc. is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

Territorial Bancorp Inc. common stock held by persons who are affiliates (generally officers, directors and principal shareholders) of Territorial Bancorp Inc. may not be resold without registration unless sold in accordance with certain resale restrictions.  If Territorial Bancorp Inc. meets specified current public information requirements, each affiliate of Territorial Bancorp Inc. is able to sell in the public market, without registration, a limited number of shares in any three-month period.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. We have prepared policies, procedures and systems designed to ensure compliance with the Sarbanes-Oxley Act and related regulations.

ITEM 1A.Risk Factors

Future changes in interest rates could reduce our profits.

Our ability to make a profit largely depends on our net interest income, which could be negatively affected by changes in interest rates.  Net interest income is the difference between:

· the interest income we earn on our interest-earning assets, such as loans and securities; and

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· the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings.

As a result of our focus on one- to four-family residential real estate loans and the low demand for adjustable-rate loans in our market area, the interest rates we earn on our loans are generally fixed for long periods of time.  Additionally, many of our securities investments are of long maturities with fixed interest rates.  Like many savings institutions, our focus on deposit accounts as a source of funds, which have no stated maturity date or shorter contractual maturities than loans, results in our liabilities having a shorter duration than our assets.  For example, as of December 31, 2017, 95.5% of our loans had maturities of 15 years or longer, while 53.1% of our certificates of deposits had maturities of one year or less.  This imbalance can create significant earnings volatility, because market interest rates change over time.  In a period of rising interest rates, the interest income earned on our assets, such as loans and investments, likely will not increase as rapidly as the interest paid on our liabilities, such as deposits.  Furthermore, our loan origination and sales activity may be adversely affected by a rising interest rate environment that typically results in decreased loan demand.  In a period of declining interest rates, the interest income earned on our assets likely will decrease more rapidly than the interest paid on our liabilities, as borrowers prepay mortgage loans and mortgage-backed securities, thereby requiring us to reinvest these cash flows at lower interest rates.  See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management of Market Risk.”

In addition, changes in interest rates can affect the average life of loans and mortgage-backed and related securities and the fair value of mortgage servicing assets.  A reduction in interest rates results in increased prepayments of loans and mortgage-backed and related securities, as borrowers refinance their loans in order to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities. Additionally, increases in interest rates may decrease loan demand and/or make it more difficult for borrowers to repay adjustable-rate loans.  Potential reduction, or impairment, to the fair value of mortgage servicing assets generally occurs as market interest rates decline.  Alternatively, an increase in market interest rates generally causes an increase in the fair value of mortgage servicing assets.

Changes in interest rates also affect the current fair value of our interest-earning securities portfolio.  Generally, the value of securities moves inversely with changes in interest rates.  At December 31, 2017, the fair value of our investment in held-to-maturity securities totaled $406.7 million.  Net unrealized gains on these securities totaled $1.9 million at December 31, 2017.

At December 31, 2017, our “rate shock” analysis indicated that our economic value of equity (the difference between the market value of our assets and the market value of our liabilities with adjustments made for off-balance sheet items) would decrease by $26.5 million if there was an instantaneous 200 basis point increase in market interest rates.  See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management of Market Risk.”

Our lending activities provide lower interest rates than financial institutions that originate more commercial loans.

Our principal lending activity consists of originating one- to four-family residential real estate mortgage loans.  As of December 31, 2017, these loans totaled $1.445 billion or 96.7% of total loans.  We originate our loans with a focus on limiting credit risk and not to generate the highest return or create the greatest difference between the yield on our interest-earning assets and our cost of funds (interest rate spread).

Residential real estate mortgage loans generally have lower interest rates than commercial business loans, commercial real estate loans and consumer loans.  As a result, we may generate lower interest rate spreads and rates of return when compared to our competitors who originate more consumer or commercial loans than we do.  We intend to continue our focus on residential real estate lending.

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A worsening of economic conditions in our market area could reduce demand for our products and services and/or result in increases in our level of non-performing loans, which could adversely affect our operations, financial condition and earnings.

Local economic conditions have a significant impact on the ability of our borrowers to repay loans and the value of the collateral securing loans.  A deterioration in economic conditions could have the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations:

· demand for our products and services may decline;

· loan delinquencies, problem assets and foreclosures may increase;

· collateral for loans, especially real estate, may decline in value, thereby reducing customers’ future borrowing power, and reducing the value of assets and collateral associated with existing loans; and

· the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.

Moreover, a significant decline in general economic conditions caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, unemployment or other factors beyond our control could further impact these local economic conditions and could further negatively affect the financial results of our banking operations.  In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

We may be adversely affected by recent changes in U.S. tax laws.

The Tax Cuts and Jobs Act, which was enacted in December 2017, is likely to have both positive and negative effects on our financial performance. For example, the new legislation will result in a reduction in our federal corporate tax rate from 35% to 21% beginning in 2018, which will have a favorable impact on our earnings and capital generation abilities. However, the new legislation also enacted limitations on certain deductions that will have an impact on the banking industry, borrowers and the market for single-family residential real estate. These limitations include (i) a lower limit on the deductibility of mortgage interest on single-family residential mortgage and home equity loans, (ii) a limitation on the deductibility of business interest expense and (iii) a limitation on the deductibility of property taxes and state and local income taxes. In addition, as a result of the lower corporate tax rate, we were required under U.S. generally accepted accounting principles (U.S. GAAP) to record a tax expense due to remeasurement in the fourth quarter of 2017 with respect to our deferred income tax assets amounting to $2.1 million.

The recent changes in the tax laws may have an adverse effect on the market for, and valuation of, residential properties, and on the demand for such loans in the future, and could make it harder for borrowers to make their loan payments. In addition, these recent changes may also have a disproportionate effect on taxpayers in states with high residential home prices and high state and local taxes, like Hawaii. If home ownership becomes less attractive, demand for mortgage loans could decrease. The value of the properties securing loans in our loan portfolio may be adversely impacted as a result of the changing economics of home ownership, which could require an increase in our provision for loan losses, which would reduce our profitability and could materially adversely affect our business, financial condition and results of operations.

Historically low interest rates may adversely affect our net interest income and profitability.

In recent years it has been the policy of the Federal Reserve Board to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. As a general matter, our interest-bearing liabilities reprice or mature more quickly than our interest-earning assets, which has been one factor contributing to the increase in our interest rate spread as interest rates decreased.  However, our ability to lower our interest expense continues to be limited since our cost of funds at December 31, 2017 is relatively low while the average yield on our interest-earning assets may continue to decrease as our higher yielding loans and securities are paid off. 

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Accordingly, our net interest income may be adversely affected and may even decrease, which may have an adverse effect on our profitability.

Monetary policies and regulations of the Federal Reserve Board could adversely affect our business, financial condition and results of operations.

In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve Board. An important function of the Federal Reserve Board is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve Board to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the federal funds and discount rates and changes in banks’ reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.

The monetary policies and regulations of the Federal Reserve Board have had a significant effect on the operating results of financial institutions in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.

We are subject to the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to material penalties.

The Community Reinvestment Act (CRA), the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. A successful regulatory challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity and restrictions on activities which could result in the denial of certain corporate applications such as branches.  Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition and results of operations.

Nonresidential real estate loans and commercial business loans increase our exposure to credit risks.

At December 31, 2017, our portfolio of commercial real estate, construction and other nonresidential real estate loans totaled $21.8 million, or 1.5% of total loans.  In addition, at December 31, 2017, our portfolio of commercial business loans totaled $3.9 million, or 0.3% of total loans.  These loans generally expose us to a greater risk of nonpayment and loss than residential real estate loans because repayment of such loans often depends on the successful operations and income stream of the borrowers.  Additionally, such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate loans.

We target our business lending and marketing strategy towards small- to medium-sized businesses.  These small- to medium-sized businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities.  If general economic conditions adversely affect these businesses, our results of operations and financial condition may be negatively impacted.  In addition, some of our commercial business loans are collateralized by a security interest in furniture, fixtures and equipment and the liquidation of collateral in the event of default is often an insufficient source of repayment because the collateral may have limited use or value.

Strong competition within our market areas may limit our growth and profitability.

Competition in the banking and financial services industry is intense.  In our market areas, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally.  Some of our competitors have greater name recognition and market presence that benefit them in attracting business, and offer certain services that we do not or cannot provide.  In addition, larger competitors may be able to price loans and deposits more aggressively than we do, which could affect our ability to grow and remain profitable on a long-term basis.  Our profitability depends upon

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our continued ability to successfully compete in our market areas.  If we must raise interest rates paid on deposits or lower interest rates charged on our loans, our net interest margin and profitability could be adversely affected.  For additional information see “Item 1. Business—Competition.”

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease.

We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans.  In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions.  If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover probable incurred losses in our loan portfolio, resulting in additions to our allowance.  While our allowance for loan losses was 0.2% of total loans at December 31, 2017, material additions to our allowance could materially decrease our net income.

The Financial Accounting Standards Board has adopted a new accounting standard that will be effective for Territorial Bancorp Inc. and Territorial Savings Bank for our first fiscal year after December 15, 2019.  This standard, referred to as Current Expected Credit Loss (CECL), will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses.  This will change the current method of providing allowances for loan losses that are probable, which may require us to increase our allowance for loan losses, and to greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for loan losses.  Any increase in our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses may have a material adverse effect on our financial condition and results of operations.

In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs.  Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities might have a material adverse effect on our financial condition and results of operations.

Our employee stock ownership plan may continue to increase our costs, which would reduce our income.

Our employee stock ownership plan purchased 8% of the total shares of common stock sold in our stock offering using funds borrowed from Territorial Bancorp Inc. We record annual employee stock ownership plan expense in an amount equal to the fair value of the shares of common stock released to employees over the term of the loan.  If the value of the shares of common stock continues to appreciate up to the time shares are released, compensation expense relating to the employee stock ownership plan will increase and our net income will decline.

Concentration of loans in our primary market area may increase risk.

Our success depends primarily on the general economic conditions in the State of Hawaii, as nearly all of our loans are to customers in the state.  Accordingly, the economic conditions in the State of Hawaii have a significant impact on the ability of borrowers to repay loans as well as our ability to originate new loans.  As such, a decline in real estate valuations in this market would lower the value of the collateral securing those loans.  In addition, significant weakening in general economic conditions such as inflation, recession, unemployment or other factors beyond our control could negatively affect our financial results.

Our local economy relies heavily on the tourism industry.  Downturns in this industry could affect our operations and results.

Tourism is the largest sector of Hawaii’s economy.  The Hawaii Tourism Authority reported visitor arrivals and visitor spending grew by 5.0% and 6.2%, respectively, in 2017 compared to 2016.  A downturn in the tourism industry, and the related loss of jobs or operating income for businesses, could have a significant impact on our ability to originate loans, and the ability of borrowers to repay loans, either of which could adversely affect our financial condition and results of operations.

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We are subject to extensive regulatory oversight.

We and our subsidiaries are subject to extensive regulation and supervision.  Regulators have intensified their focus on bank lending criteria and controls, and on the USA PATRIOT Act’s anti-money laundering and Bank Secrecy Act compliance requirements.  There also is increased scrutiny of our compliance practices generally and particularly with the rules enforced by the Office of Foreign Assets Control.  Our failure to comply with these and other regulatory requirements could lead to, among other remedies, administrative enforcement actions and legal proceedings.  In addition, the Dodd-Frank Act and implementing regulations are likely to have a significant effect on the financial services industry, which are likely to increase operating costs and reduce profitability.  Regulatory or legislative changes could make regulatory compliance more difficult or expensive for us, and could cause us to change or limit some of our products and services, or the way we operate our business.

The Federal Reserve Board may require us to commit capital resources to support Territorial Savings Bank.

Federal law requires that a holding company act as a source of financial and managerial strength to its subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve Board may require a holding company to make capital injections into a troubled subsidiary bank and may charge the holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it and therefore may be required to borrow the funds or raise capital. Any loans by a holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by Territorial Bancorp, Inc. to make a required capital injection becomes more difficult and expensive and could have an adverse effect on our business, financial condition and results of operations.

Severe weather, natural disasters and other external events could significantly affect our operations and results.

Because all of our office locations are in the State of Hawaii, severe weather or natural disasters, such as tsunamis, volcanic eruptions, hurricanes and earthquakes and other adverse external events, could have a significant effect on our ability to conduct business.  Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses.  Natural disasters, like the tsunami that occurred in Japan in 2011, could have an impact on the visitor industry in Hawaii.  Accordingly, the occurrence of any such severe weather or natural disaster event could have a material adverse effect on our business, which, in turn, could adversely affect our financial condition and results of operations.

We are subject to certain capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or constrain us from paying dividends or repurchasing shares.

A final capital rule that became effective for financial institutions on January 1, 2015, included minimum risk-based capital and leverage ratios, and refined the definition of what constitutes “capital” for purposes of calculating these ratios.  The minimum capital requirements are: (i) a common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. The final rule also established a “capital conservation buffer” of 2.5%, resulting in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 to risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The capital conservation buffer requirement began to be phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. A financial institution, such as Territorial Savings Bank, is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that can be utilized for such actions.

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Territorial Savings Bank and Territorial Bancorp Inc. met all of these requirements, including the full 2.5% capital conservation buffer, as if these requirements had been fully phased in as of December 31, 2017.

The application of these capital requirements could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions if we were to be unable to comply with such requirements.  Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of our funding, restructure our business models, and/or increase our holdings of liquid assets.  See “Supervision and Regulation—Federal Banking Regulation—Capital Distributions.”

Government responses to economic conditions may adversely affect our operations, financial condition and earnings.

Ongoing uncertainty and adverse developments in the financial services industry and the domestic and international credit markets, and the effect of new legislation and regulatory actions in response to these conditions, may adversely affect our operations by restricting our business activities, including our ability to originate or sell loans, modify loan terms, or foreclose on property securing loans.  These measures may increase our costs of doing business and may have a significant adverse effect on our lending activities, financial performance and operating flexibility.  In addition, these risks could affect the performance and value of our loan and investment securities portfolios, which also would negatively affect our financial performance.

If the Federal Reserve Board continues to increase the federal funds rate, overall interest rates will likely rise, which may negatively impact the housing markets and the U.S. economic recovery.  In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

Noncompliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.

The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities.  If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network.  These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts.  Failure to comply with these regulations could result in fines or sanctions.  During the last year, several banking institutions have received large fines for non-compliance with these laws and regulations.  While we have developed policies and procedures designed to assist in compliance with these laws and regulations, these policies and procedures may not be effective in preventing violations of these laws and regulations.

Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and our income.

In recent years, Congress has taken actions that are intended to strengthen confidence and encourage liquidity in financial institutions, and the Federal Deposit Insurance Corporation has taken actions to increase insurance coverage on deposit accounts.  In addition, there have been proposals made by members of Congress and others that would reduce the amount distressed borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an institution’s ability to foreclose on mortgage collateral.

The potential exists for additional federal or state laws and regulations, or changes in policy, regarding lending and funding practices and liquidity standards, and bank regulatory agencies are expected to be active in responding to concerns and trends identified in examinations, including the expected issuance of many formal enforcement orders.  Bank regulatory agencies, such as the Federal Reserve Board, the Hawaii Division of Financial Institutions and the Federal Deposit Insurance Corporation, govern the activities in which we may engage, primarily for the protection of depositors, and not for the protection or benefit of potential investors.  In addition, new laws, regulations and other regulatory changes may increase our costs of regulatory compliance and of doing business, and otherwise affect our

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operations.  New laws, regulations, and other regulatory changes may significantly affect the markets in which we do business, the markets for and value of our loans and investments, and our ongoing operations, costs and profitability.  Federal and state proposals limiting our rights as a creditor could result in credit losses or increased expense in pursuing our remedies as a creditor.

The building of market share through de novo branching could cause our expenses to increase faster than revenues.

We intend to continue to build market share in the State of Hawaii through de novo branching.  Since 2010, we have opened four de novo branches including the most recent branch opened in 2017.  There are considerable costs involved in opening branches that generally require a period of time to generate the necessary revenues to offset their costs, especially in areas in which we do not have an established presence.  Accordingly, any such business expansion can be expected to negatively impact our earnings for some period of time until certain economies of scale are reached.  Our expenses could be further increased if we encounter delays in the opening of any of our new branches.  Finally, our business expansion may not be successful after establishment.

System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.

The computer systems and network infrastructure we use could be vulnerable to unforeseen problems.  Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers.  Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations.  Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us.  Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage, these security measures may not be successful.  In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data.  A failure of such security measures could have a material adverse effect on our financial condition and results of operations.

We mitigate this risk through guidance promulgated for all financial institutions by the Federal Financial Institutions Examination Council and the regulations issued under the Gramm-Leach-Bliley Act.  This guidance also requires our core data processor to meet these standards.  We regularly self-audit or review exams from auditors as well as federal banking regulators to assure that these standards are being met, internally as well as by our important data processing vendors. We also implemented firewall and other internal controls to protect our systems from compromise.

Nevertheless, our systems could be compromised and it is possible that significant amounts of time and money may be spent to rectify the harm caused by a breach or hack. While we have general liability insurance and cyber liability insurance, we know there are limitations on coverage as well as dollar amount.  Furthermore, cyber incidents carry a greater risk of injury to our reputation.  Finally, depending on the type of incident, banking regulators can impose restrictions on our business and consumer laws may require reimbursement of customer loss.

Our risk management framework may not be effective in mitigating risk and reducing the potential for significant losses.

Our risk management framework is designed to minimize risk and loss to us. We seek to identify, measure, monitor, report and control our exposure to risk, including strategic, market, liquidity, compliance and operational risks. While we use a broad and diversified set of risk monitoring and mitigation techniques, these techniques are inherently limited because they cannot anticipate the existence or future development of currently unanticipated or unknown risks.  Recent economic conditions and heightened legislative and regulatory scrutiny of the financial services industry, among other developments, have increased our level of risk. Accordingly, we could suffer losses as a result of our failure to properly anticipate and manage these risks.

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Our business may be adversely affected by an increasing prevalence of fraud, including cyberfraud, and other financial crimes.

Our loans to businesses and individuals and our deposit relationships and related transactions are subject to exposure to the risk of loss due to fraud, including cyberfraud, and other financial crimes.  Nationally, reported incidents of fraud and other financial crimes have increased.  We have also experienced losses due to apparent fraud and other financial crimes.  While we have policies and procedures designed to prevent such losses, losses may still occur.

Legal and regulatory proceedings and related matters could adversely affect us or the financial services industry in general.

We, and other participants in the financial services industry upon whom we rely to operate, have been and may in the future become involved in legal and regulatory proceedings.  Most of the proceedings we consider to be in the normal course of our business or typical for the industry; however, it is inherently difficult to assess the outcome of these matters, and other participants in the financial services industry or we may not prevail in any proceeding or litigation.  There could be substantial cost and management diversion in such litigation and proceedings, and any adverse determination could have a materially adverse effect on our business, brand or image, or our financial condition and results of our operations.

We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so may materially adversely affect our performance.

We are a community bank, and our reputation is one of the most valuable components of our business.  A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our current market and contiguous areas.  As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates.  If our reputation is negatively affected, by the actions of our employees, by our inability to conduct our operations in a manner that is appealing to current or prospective customers, or otherwise, our business and operating results may be adversely affected.

The corporate governance provisions in our articles of incorporation and bylaws, and the corporate governance provisions under Maryland law, may prevent or impede the holders of our common stock from obtaining representation on our Board of Directors and may impede takeovers of the company that our board might conclude are not in the best interest of Territorial Bancorp Inc. or its stockholders.

Provisions in our articles of incorporation and bylaws may prevent or impede holders of our common stock from obtaining representation on our Board of Directors and may make takeovers of Territorial Bancorp Inc. more difficult.  For example, our Board of Directors is divided into three staggered classes.  A classified board makes it more difficult for stockholders to change a majority of the directors because it generally takes at least two annual elections of directors for this to occur.  Our articles of incorporation include a provision that no person will be entitled to vote any shares of our common stock in excess of 10% of our outstanding shares of common stock.  This limitation does not apply to the purchase of shares by a tax-qualified employee stock benefit plan established by us.  In addition, our articles of incorporation and bylaws restrict who may call special meetings of stockholders and how directors may be removed from office.  Additionally, in certain instances, the Maryland General Corporation Law requires a supermajority vote of our stockholders to approve a merger or other business combination with a large stockholder, if the proposed transaction is not approved by a majority of our directors.

Reductions in defense spending by the federal government could have a detrimental impact on Hawaii’s economy.

The defense industry is the second largest contributor to Hawaii’s economy after the visitor industry, contributing $9.4 billion in the fiscal year 2017 and creating thousands of jobs for residents of the State.  Cuts to defense

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and other general spending could have an adverse impact on Hawaii’s economy, which could adversely affect our financial condition and results of operations.

Our funding sources may prove insufficient to replace deposits at maturity and support our future growth.

We must maintain sufficient funds to respond to the needs of depositors and borrowers.  As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments.  As we continue to grow, we are likely to become more dependent on these sources, which may include FHLB advances, securities sold under agreements to repurchase, proceeds from the sale of loans, federal funds purchased and brokered certificates of deposit.  Adverse operating results or changes in industry conditions could lead to difficulty or an inability to access these additional funding sources.  Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates.  If we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs.  In this case, our operating margins and profitability would be adversely affected.

We are subject to environmental liability risk associated with lending activities.

A significant portion of our loan portfolio is secured by real estate, and we could become subject to environmental liabilities with respect to one or more of these properties. During the ordinary course of business, we may foreclose on and take title to properties securing defaulted loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous conditions or toxic substances are found on these properties, we may be liable for remediation costs, as well as for personal injury and property damage, civil fines and criminal penalties regardless of when the hazardous conditions or toxic substances first affected any particular property. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on nonresidential real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on us.

Changes in management’s estimates and assumptions may have a material impact on our consolidated financial statements and our financial condition or operating results.

In preparing this annual report as well as other periodic reports we are required to file under the Securities Exchange Act of 1934, including our consolidated financial statements, our management is and will be required under applicable rules and regulations to make estimates and assumptions as of a specified date. These estimates and assumptions are based on management’s best estimates and experience as of that date and are subject to substantial risk and uncertainty.  Materially different results may occur as circumstances change and additional information becomes known. Areas requiring significant estimates and assumptions by management include our valuation of investment securities, our determination of our income tax provision, and our evaluation of the adequacy of our allowance for loan losses.

ITEM 1B.Unresolved Staff Comments

Not applicable.

ITEM 2.Properties

We operate from our corporate office in Honolulu, Hawaii, and from our 29 full-service branches located in the State of Hawaii.  The net book value of our premises, land and equipment was $5.7 million at December 31, 2017.  The

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following table sets forth information with respect to our full-service banking offices, including the expiration date of leases with respect to leased facilities.

AINA HAINA	KAIMUKI	KIHEI	PEARLRIDGE
Aina Haina Shopping Center	1108 12th Avenue	Azeka Shopping Center	98-084 Kamehameha Highway
820 West Hind Drive	Honolulu, Oahu 96816	1279 South Kihei Road	Aiea, Oahu 96701
Honolulu, Oahu 96821	12/31/2018	Kihei, Maui 96753	6/30/2022
4/30/2021		1/31/2019
ALA MOANA CENTER	KALIHI-KAPALAMA	KONA	PIIKOI
1450 Ala Moana Boulevard	1199 Dillingham Boulevard	Crossroads Shopping Center	1159 South Beretania Street
Honolulu, Oahu 96814	Honolulu, Oahu 96817	75-1027 Henry Street	Honolulu, Oahu 96814
12/31/2024	8/31/2027	Kailua-Kona, Hawaii 96740	12/31/2020
		8/31/2020
DOWNTOWN	KAMEHAMEHA	LAHAINA	SALT LAKE
1000 Bishop Street	SHOPPING CENTER	Old Lahaina Center	Salt Lake Shopping Center
Honolulu, Oahu 96813	1620 North School Street	170 Papalaua Street	848 Ala Lilikoi Street
12/31/2020	Honolulu, Oahu 96817	Lahaina, Maui 96761	Honolulu, Oahu 96818
	6/30/2025	3/31/2023	1/31/2021
HAWAII KAI	KANEOHE	MANOA	WAIPAHU
Hawaii Kai Shopping Center	46-005 Kawa Street	Manoa Marketplace	Waipahu Town Center
377 Keahole Street	Kaneohe, Oahu 96744	2752 Woodlawn Drive	94-050 Farrington Highway
Honolulu, Oahu 96825	12/31/2019	Honolulu, Oahu 96822	Waipahu, Oahu 96797
9/30/2018		7/10/2023	12/31/2019
HILO	KAPAHULU	McCULLY	WAIPIO
Waiakea Center	Kilohana Square	1111 McCully Street	Laniakea Plaza
315 Makaala Street	1016 Kapahulu Avenue	Honolulu, Oahu 96826	94-1221 Ka Uka Boulevard
Hilo, Hawaii 96720	Honolulu, Oahu 96816	5/31/2018	Waipahu, Oahu 96797
12/31/2018	11/14/2018		9/30/2021
KAHALA	KAPOLEI	MILILANI
4819 Kilauea Avenue	Ace Center at Kapolei	Town Center of Mililani
Honolulu, Oahu 96816	480 Kamokila Boulevard	95-1249 Meheula Parkway
1/31/2019	Kapolei, Oahu 96709	Mililani, Oahu 96789
	7/31/2019	10/11/2019
KAHULUI	KAUAI	NUUANU
Queen Kaahumanu Center	Kukui Grove Shopping Center	Nuuanu Shopping Center
275 W. Kaahumanu Avenue	4393 Kukui Grove Street	1613 Nuuanu Avenue
Kahului, Maui 96732	Lihue, Kauai 96766	Honolulu, Oahu 96817
12/31/2019	2/28/2023	7/22/2021
KAILUA	KEEAUMOKU	PEARL CITY
19 Oneawa Street	735 Keeaumoku Street	Pearl City Shopping Center
Kailua, Oahu 96734	Honolulu, Oahu 96814	850 Kamehameha Highway
	9/30/2029	Pearl City, Oahu 96782
		9/22/2019

25

ITEM 3.Legal Proceedings

From time to time, we are involved as plaintiff or defendant in various legal proceedings arising in the ordinary course of business.  At December 31, 2017, we were not involved in any legal proceedings, the outcome of which we believe would be material to our financial condition or results of operations.

ITEM 4.Mine Safety Disclosures

Not applicable.

26

PART II

ITEM 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a) Market, Holder and Dividend Information.  Our common stock is traded on the NASDAQ Global Select Market under the symbol “TBNK.”  The approximate number of holders of record of Territorial Bancorp Inc.’s common stock as of February 28, 2018 was 1,131.  Certain shares of Territorial Bancorp Inc. are held in “nominee” or “street” name and, accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.  The following table presents quarterly market and dividend information for Territorial Bancorp Inc.’s common stock for the two years ended December 31, 2017.  The following information with respect to high and low intra-day stock prices was provided by the NASDAQ Global Select Market.

					Dividends
					Declared Per
	High		Low		Share
Year Ended December 31, 2017
Quarter ended December 31, 2017	$	33.00	$	29.90	$	0.50
Quarter ended September 30, 2017	$	31.98	$	28.12	$	0.30
Quarter ended June 30, 2017	$	32.79	$	29.08	$	0.20
Quarter ended March 31, 2017	$	34.00	$	30.45	$	0.20
Year Ended December 31, 2016
Quarter ended December 31, 2016	$	33.32	$	27.73	$	0.38
Quarter ended September 30, 2016	$	29.25	$	26.22	$	0.18
Quarter ended June 30, 2016	$	26.74	$	24.96	$	0.18
Quarter ended March 31, 2016	$	27.89	$	24.87	$	0.18

Dividend payments by Territorial Bancorp Inc. are dependent on dividends it receives from Territorial Savings Bank, because Territorial Bancorp Inc. has no source of income other than dividends from Territorial Savings Bank, earnings from the investment of proceeds from the sale of shares of common stock and interest payments with respect to Territorial Bancorp Inc.’s loan to the Employee Stock Ownership Plan.  See “Item 1. Business—Supervision and Regulation—Federal Banking Regulation—Capital Distributions” and “—Holding Company Regulation—Dividends and Stock Repurchases.”

(b) Sales of Unregistered Securities.  Not applicable.

(c) Use of Proceeds.  Not applicable.

(d) Securities Authorized for Issuance Under Equity Compensation Plans.  See “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

27

(e) Stock Repurchases.  The following table sets forth information in connection with repurchases of our shares of common stock during the fourth quarter of 2017:

				Total Number of	Maximum Number of
				Shares Purchased as	Shares That May Yet
		Average Price		Part of Publicly	be Purchased Under
	Total Number of	Paid per		Announced Plans or	the Plans or
Period	Shares Purchased (1)	Share		Programs	Programs (2)
October 1, 2017 through October 31, 2017	28,104	$	32.77	—	217,300
November 1, 2017 through November 30, 2017	40,443	$	32.20	—	217,300
December 1, 2017 through December 31, 2017	—		—	—	217,300
Total	68,547	$	32.43	—	217,300

(1) Includes shares acquired by the Company to settle the exercise price in connection with stock swap or net settlement transactions related to the exercise of stock options.

(2) On March 7, 2016, the Company announced its seventh repurchase program.  Under the repurchase program, the Company is authorized to repurchase up to 275,000 shares of our common stock.  We have entered into a Rule 10b5-1 plan with respect to our stock repurchase program.

(f) Stock Performance Graph.  Set forth below is a stock performance graph comparing (a) the cumulative total return on our shares of common stock between December 31, 2012 and December 31, 2017, (b) the cumulative total return on stocks included in the Total Return Index for the NASDAQ Stock Market (US) over such period, and (c) the cumulative total return on stocks included in the SNL Bank and Thrift Index over such period.  Cumulative return assumes the reinvestment of dividends, and is expressed in dollars based on an assumed investment of $100.

28

There can be no assurance that the Company’s stock performance will continue in the future with the same or similar trend depicted in the graph.  The Company will not make or endorse any predictions as to future stock performance.

29

ITEM 6.Selected Financial Data

The following selected financial data and ratios have been derived, in part, from the consolidated financial statements and notes appearing elsewhere in this Annual Report on Form 10-K.

	At December 31,
	2017		2016		2015		2014		2013
	(In thousands)
Selected Financial Condition Data:
Total assets	$	2,003,846	$	1,877,562	$	1,821,141	$	1,691,897	$	1,616,904
Cash and cash equivalents		32,089		61,273		65,919		75,060		75,365
Investment securities held to maturity		404,792		407,656		493,059		572,922		613,436
Loans receivable, net		1,488,971		1,335,987		1,188,649		968,212		856,542
Bank-owned life insurance		44,201		43,294		42,328		41,303		40,243
Federal Home Loan Bank stock, at cost		6,541		4,945		4,790		11,234		11,689
Deposits		1,597,295		1,493,200		1,445,103		1,359,679		1,288,709
Federal Home Loan Bank advances		107,200		69,000		69,000		15,000		15,000
Securities sold under agreements to repurchase		30,000		55,000		55,000		72,000		72,000
Stockholders’ equity		234,854		229,786		219,641		216,378		212,140
	Year Ended December 31,
	2017		2016		2015		2014		2013
	(In thousands)
Selected Operating Data:
Interest income	$	68,333	$	66,073	$	63,092	$	59,615	$	56,175
Interest expense		9,589		7,844		6,515		6,118		6,282
Net interest income		58,744		58,229		56,577		53,497		49,893
Provision for loan losses		52		310		455		360		39
Net interest income after provision for loan losses		58,692		57,919		56,122		53,137		49,854
Noninterest income		3,846		4,094		4,911		5,177		8,716
Noninterest expense		36,474		34,879		36,499		35,308		35,077
Income before income taxes		26,064		27,134		24,534		23,006		23,493
Income taxes		11,102		10,787		9,786		8,909		8,846
Net income	$	14,962	$	16,347	$	14,748	$	14,097	$	14,647

30

	At or for the Year Ended December 31,
	2017			2016			2015			2014			2013
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets (ratio of net income to average total assets)		0.77	%		0.88	%		0.84	%		0.85	%		0.93	%
Return on average equity (ratio of net income to average equity)		6.34	%		7.20	%		6.75	%		6.54	%		6.71	%
Interest rate spread (1)		3.07	%		3.19	%		3.29	%		3.30	%		3.22	%
Net interest margin (2)		3.15	%		3.26	%		3.36	%		3.37	%		3.28	%
Efficiency ratio (3)		58.27	%		55.96	%		59.36	%		60.18	%		59.85	%
Noninterest expense to average total assets		1.89	%		1.88	%		2.08	%		2.13	%		2.22	%
Average interest-earning assets to average interest-bearing liabilities		115.50	%		115.66	%		115.86	%		115.83	%		117.07	%
Average equity to average total assets		12.20	%		12.25	%		12.46	%		13.02	%		13.82	%
Basic earnings per share	$	1.61		$	1.80		$	1.63		$	1.53		$	1.51
Diluted earnings per share	$	1.57		$	1.76		$	1.59		$	1.51		$	1.49
Dividend payout ratio (4)		76.43	%		52.27	%		47.80	%		46.36	%		41.61	%
Asset Quality Ratios:
Nonperforming assets to total assets		0.21	%		0.24	%		0.30	%		0.26	%		0.37	%
Nonperforming loans to total loans		0.28	%		0.34	%		0.45	%		0.46	%		0.69	%
Allowance for loan losses to nonperforming loans		60.28	%		53.78	%		40.00	%		37.97	%		24.77	%
Allowance for loan losses to total loans		0.17	%		0.18	%		0.18	%		0.17	%		0.17	%
Capital Ratios (bank-level only):
Total capital (to risk-weighted assets)		23.59	%		25.59	%		26.07	%		29.93	%		31.99	%
Common equity Tier 1 capital (to risk-weighted assets) (5)		23.31	%		25.30	%		25.79	%		n/a			n/a
Tier I capital (to risk-weighted assets)		23.31	%		25.30	%		25.79	%		29.68	%		31.75	%
Tier I capital (to total assets)		11.04	%		11.76	%		11.49	%		12.10	%		12.35	%
Other Data:
Number of full-service offices		29			28			28			28			28
Full-time equivalent employees		276			271			275			268			274

(1) The average interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities for the year.

(2) The net interest margin represents net interest income as a percent of average interest-earning assets for the year.

(3) The efficiency ratio represents noninterest expense divided by the sum of net interest income and noninterest income.

(4) The dividend payout ratio represents cash dividends declared per share divided by the diluted earnings per share.

(5) Effective January 1, 2015, a new common equity Tier 1 capital standard was implemented.

31

ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The objective of this section is to help readers understand our views on our results of operations and financial condition.  You should read this discussion in conjunction with the consolidated financial statements and notes to the consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K.

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 accounts, securities sold under agreements to repurchase and FHLB advances.  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.

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 includes nonaccrual loans and real estate owned, totaled $4.2 million, or 0.21% of total assets at December 31, 2017, compared to $4.6 million, or 0.24% of total assets at December 31, 2016, and $5.4 million, or 0.30% of total assets at December 31, 2015.  As of December 31, 2017, nonperforming assets consisted of 17 mortgage loans with a principal balance of $4.2 million.  Our nonperforming loans and loan 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 $52,000, $310,000 and $455,000 for the years ended December 31, 2017, 2016 and 2015, respectively.

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 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.

Our operations in recent years have been affected by our efforts to manage our interest rate risk position.  In 2017, 2016 and 2015, we sold $25.0 million, $48.9 million and $56.2 million, respectively, of fixed-rate mortgage loans.  In 2017 and 2015, we also increased our total long-term fixed rate FHLB advances and securities sold under agreements to repurchase by $13.2 million and $37.0 million, respectively, to reduce our interest rate risk.  See “—Management of Market Risk” for a discussion of the actions we have taken in managing interest rate risk.

All of Territorial Savings Bank’s investments in mortgage-backed securities and collateralized mortgage obligations have been issued by Freddie Mac or Fannie Mae, which are U.S. government-sponsored enterprises, or Ginnie Mae, which is a U.S. government agency.  These agencies guarantee the payment of principal and interest on the Bank’s mortgage-backed securities.  We do not own any preferred stock issued by Fannie Mae or Freddie Mac.  As of December 31, 2017 and 2016, our additional borrowing capacity at the FHLB of Des Moines was $579.4 million and $577.9 million, respectively.

Critical Accounting Policies

We consider accounting policies that require management to exercise significant judgment or discretion or make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income, to be critical accounting policies.  We consider the following to be our critical accounting policies:

32

Allowance for Loan Losses.  We maintain an allowance for loan losses at an amount estimated to equal all credit losses incurred in our loan portfolio that are both probable and reasonable to estimate at a balance sheet date.  To estimate credit losses on impaired loans (in accordance with the Receivables topic of the FASB ASC), we evaluate numerous factors, as described below in “—Allowance for Loan Losses.”  Based on our estimate of the level of allowance for loan losses required, we record a provision for loan losses to maintain the allowance for loan losses at an amount that provides for all losses that are both probable and reasonable to estimate.

Since we cannot predict with certainty the amount of loan charge-offs that will be incurred and because the eventual level of loan charge-offs is affected by numerous conditions beyond our control, a range of loss estimates can reasonably be used to determine the allowance for loan losses and the related provisions for loan losses.  In addition, as an integral part of their examination processes, the bank regulators will periodically review our allowance for loan losses.  The bank regulators may require that we recognize additions to the allowance for loan losses based on their analysis of information available to them at the time of their examination.  Accordingly, actual results could differ materially from those estimates.

Deterioration in the Hawaii real estate market could result in an increase in loan delinquencies, additional increases in our allowance for loan losses and provision for loan losses, as well as an increase in loan charge-offs.

Securities Impairment.  We periodically perform analyses to determine whether there has been an other-than-temporary decline in the value of our securities.  Our held-to-maturity securities consist primarily of debt securities for which we have a positive intent and ability to hold to maturity, and are carried at amortized cost.  Available-for-sale securities are carried at fair value.  We conduct a quarterly review and evaluation of the securities portfolio to determine if the value of any security has declined below its cost or amortized cost, and whether such decline is other-than-temporary.  If such decline is deemed other-than-temporary, we would adjust the cost basis of the security by writing down the security for any credit losses through a charge on the income statement.  The market values of our securities are affected by changes in interest rates as well as shifts in the market’s perception of the issuers.  The fair value of investment securities is usually based on pricing models that consider bid and ask prices and prices at which similar securities traded.  However, if there are no observable market inputs (for securities such as trust preferred securities), we estimate the fair value using unobservable inputs.  We discount projected cash flows using a risk-adjusted discount rate in accordance with the Fair Value Measurements and Disclosures topic of the FASB ASC.

Our investment in PreTSL XXIII was determined to be other-than-temporarily impaired and we recorded an impairment charge of $2.4 million in the year ended December 31, 2010.   PreTSL XXIII has an amortized cost and a remaining cost basis of $427,000 at December 31, 2017 and there is no accumulated other comprehensive loss related to noncredit factors.

We evaluated our $6.5 million investment in FHLB stock for other-than-temporary impairment as of December 31, 2017.  Considering the long-term nature of this investment and the liquidity position of the FHLB of Des Moines, our FHLB stock was not considered to be other-than-temporarily impaired.  As of December 31, 2017, the FHLB of Des Moines has met all of its regulatory capital requirements.  Moody’s Investor Services and Standard and Poor’s have given the FHLB of Des Moines long-term credit ratings of Aaa and AA+, respectively.

We evaluated our $3.1 million investment in FRB stock for other-than-temporary impairment as of December 31, 2017.  Based on the long-term nature of this investment and the liquidity position of the FRB of San Francisco, our FRB stock was not considered to be other-than-temporarily impaired.

Deferred Tax Assets.  Deferred tax assets and liabilities are recognized for the estimated future tax effects attributable to temporary differences and carryforwards.  In 2017, we wrote-down our deferred tax assets by $2.1 million when the federal corporate tax rate was lowered from 35% to 21% due to the Tax Cuts and Jobs Act of 2017.  A valuation allowance may be required if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  In determining whether a valuation allowance is necessary, we consider the level of taxable income in prior years, to the extent that carrybacks are permitted under current tax laws, as well as estimates of future taxable income and tax planning strategies that could be implemented to accelerate taxable income if necessary.  If our estimates of future taxable income were materially overstated or if our assumptions regarding the tax consequences of tax planning strategies were inaccurate, some or all of our deferred tax assets may not be realized, which would result in a charge to earnings.

33

Defined Benefit Retirement Plan.  Defined benefit plan obligations and related assets of our defined benefit retirement plan are presented in Note 17 to the Consolidated Financial Statements.  Effective December 31, 2008, the defined benefit retirement plan was frozen and all plan benefits were fixed as of that date.  Plan assets, which consist primarily of marketable equity securities and mutual funds, are typically valued using market quotations.  Plan obligations and the annual pension expense are determined by independent actuaries through the use of a number of assumptions.  Key assumptions in measuring the plan obligations include the discount rate and the expected long-term rate of return on plan assets.  In determining the discount rate, we utilize a yield that reflects the top 50% of the universe of bonds, ranked in the order of the highest yield.  These bonds provide cash flows that match the timing of expected benefit payments.  Asset returns are based upon the anticipated average rate of earnings expected on the invested funds of the plans.

At December 31, 2017, we used weighted-average discount rates of 4.30% and 3.70% for calculating annual pension expense and projected plan liabilities, respectively, and an expected long-term rate of return on plan assets of 7.25% for calculating annual pension expense.  At December 31, 2016, we used weighted-average discount rates of 4.40% and 4.30% for calculating annual pension expense and projected plan liabilities, respectively, and an expected long-term rate of return on plan assets of 7.50% for calculating annual pension expense.  For both the discount rate and the asset return rate, a range of estimates could reasonably have been used, which would affect the amount of pension expense and pension liability recorded.

A decrease in the discount rate or an increase in the asset return rate would have reduced our pension expense in 2017, while an increase in the discount rate or a decrease in the asset return rate would have the opposite effect.  A 25 basis point decrease in the discount rate assumptions would have decreased our 2017 pension expense by $5,000 and would have increased our year-end 2017 pension liability by $593,000, while a 25 basis point decrease in the asset return rate would have increased our 2017 pension expense by $35,000.

Balance Sheet Analysis

Assets.  At December 31, 2017, our assets were $2.004 billion, an increase of $126.3 million, or 6.7%, from $1.878 billion at December 31, 2016.  The increase was primarily caused by a $153.0 million increase in loans receivable, which was partially offset by a $29.2 million decrease in cash and cash equivalents.

Cash and Cash Equivalents.  At December 31, 2017, we had $32.1 million of cash and cash equivalents compared to $61.3 million at December 31, 2016.   During 2017, cash and cash equivalents decreased by $29.2 million primarily due to funding a $153.0 million increase in loans receivable and $11.1 million of common stock dividends paid.  These uses of cash were partially offset by a $104.1 million increase in deposits, $15.0 million of net income, and a $13.2 million increase in borrowings.

34

Loan Portfolio Composition.  The following table sets forth the composition of our loan portfolio at the dates indicated.

	At December 31,
	2017				2016				2015				2014				2013
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
	(Dollars in thousands)
Real estate loans:
First mortgage:
One- to four-family residential	$	1,444,625	96.65	%	$	1,289,364	96.11	%	$	1,145,904	95.90	%	$	926,074	95.08	%	$	823,273	95.41	%
Multi-family residential		10,799	0.72			9,551	0.71			9,834	0.82			8,920	0.92			4,877	0.57
Construction, commercial and other		21,787	1.46			23,346	1.74			19,288	1.62			18,415	1.89			13,554	1.57
Home equity loans and lines of credit		12,882	0.86			14,805	1.10			15,333	1.28			15,992	1.64			16,524	1.91
Other loans		4,614	0.31			4,564	0.34			4,543	0.38			4,614	0.47			4,649	0.54
Total loans		1,494,707	100.00	%		1,341,630	100.00	%		1,194,902	100.00	%		974,015	100.00	%		862,877	100.00	%
Other items:
Unearned fees and discounts, net		(3,188)				(3,191)				(4,087)				(4,112)				(4,849)
Allowance for loan losses		(2,548)				(2,452)				(2,166)				(1,691)				(1,486)
Loans receivable, net	$	1,488,971			$	1,335,987			$	1,188,649			$	968,212			$	856,542

Loan Portfolio Maturities and Yields.  The following table summarizes the scheduled maturities of our loan portfolio at December 31, 2017.  Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.

	One- to four-family				Multi-family residential				Construction, commercial				Home equity loans and
	residential real estate				real estate				and other real estate				lines of credit				Other loans				Total
			Weighted				Weighted				Weighted				Weighted				Weighted				Weighted
Due During the Years			Average				Average				Average				Average				Average				Average
Ending December 31,	Amount		Rate		Amount		Rate		Amount		Rate		Amount		Rate		Amount		Rate		Amount		Rate
	(Dollars in thousands)
2018	$	101	4.86	%	$	—	—	%	$	569	5.00	%	$	777	6.25	%	$	764	7.21	%	$	2,211	6.20	%
2019 to 2022		989	4.99			2,558	5.42			6,264	5.23			2,585	6.36			1,450	5.62			13,846	5.50
2023 and beyond		1,443,535	3.84			8,241	4.26			14,954	4.51			9,520	4.28			2,400	4.75			1,478,650	3.85
Total	$	1,444,625	3.84	%	$	10,799	4.53	%	$	21,787	4.73	%	$	12,882	4.81	%	$	4,614	5.43	%	$	1,494,707	3.87	%

35

The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at December 31, 2017 that are contractually due after December 31, 2018.

	Due After December 31, 2018
	Fixed		Adjustable		Total
	(In thousands)
Real estate loans:
First mortgage:
One- to four-family residential	$	1,442,477	$	2,047	$	1,444,524
Multi-family residential		10,076		723		10,799
Construction, commercial and other		17,831		3,387		21,218
Home equity loans and lines of credit		1,585		10,520		12,105
Other loans		3,517		333		3,850
Total loans	$	1,475,486	$	17,010	$	1,492,496

Securities.  At December 31, 2017, our securities portfolio totaled $407.6 million, or 20.3% of assets and included $404.8 million classified as held-to-maturity and $2.9 million classified as available-for-sale.  At that date, our securities held to maturity consisted of securities with the following amortized costs: $404.4 million of mortgage-backed securities and $427,000 of trust preferred securities.  All of the mortgage-backed securities were issued by Fannie Mae, Freddie Mac or Ginnie Mae.  At December 31, 2017, none of the underlying collateral consisted of subprime or Alt-A loans (traditionally defined as nonconforming loans having less than full documentation).  At December 31, 2017, we held no common or preferred stock of Fannie Mae or Freddie Mac.

The following table sets forth the amortized cost and estimated fair value of our securities portfolio at the dates indicated.

	At December 31,
	2017				2016				2015
	Amortized				Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value		Cost		Fair Value
	(In thousands)
Available for Sale:
U.S. government sponsored mortgage-backed securities:
Freddie Mac	$	2,870	$	2,851	$	—	$	—	$	—	$	—
Total	$	2,870	$	2,851	$	—	$	—	$	—	$	—
Held to Maturity:
U.S. government sponsored mortgage-backed securities:
Fannie Mae	$	127,768	$	128,069	$	145,065	$	144,490	$	174,947	$	175,432
Freddie Mac		229,120		231,051		205,227		206,855		249,473		254,515
Collateralized mortgage obligations (1)		5,992		5,744		7,364		7,117		10,668		10,349
Ginnie Mae		41,485		40,954		48,842		48,297		57,055		56,770
Total U.S. government sponsored mortgage-backed securities		404,365		405,818		406,498		406,759		492,143		497,066
Trust preferred securities		427		845		1,158		1,163		916		916
Total	$	404,792	$	406,663	$	407,656	$	407,922	$	493,059	$	497,982

(1) All of our collateralized mortgage obligations have been issued by Fannie Mae, Freddie Mac or Ginnie Mae.

36

Any unrealized loss on individual mortgage-backed securities as of December 31, 2017, 2016 and 2015 was caused by increases in market interest rates.  All of our mortgage-backed securities are guaranteed by U.S. government-sponsored enterprises or a U.S. government agency.  Since the decline in market value has been attributable to changes in interest rates and not credit quality, we continue to have the intent not to sell these investments, and it is not more likely than not that we will be required to sell such investments prior to the recovery of the amortized cost basis, we have not considered these investments to be other-than-temporarily impaired as of December 31, 2017, 2016 or 2015.

At December 31, 2017, we owned a trust preferred security with an amortized cost of $427,000.  This security represents an investment in a pool of debt obligations issued primarily by holding companies of Federal Deposit Insurance Corporation-insured financial institutions.

The trust preferred securities market is considered to be inactive as only six transactions have occurred over the past 72 months in the same tranche of securities that we own and no new issues of pooled trust preferred securities have occurred since 2007.  We used a discounted cash flow model to determine whether this security is other-than-temporarily impaired.  The assumptions used in preparing the discounted cash flow model include the following: estimated discount rates, estimated deferral and default rates on collateral, and estimated cash flows.  We used a discount rate equal to three-month LIBOR plus 20.00%.

At December 31, 2017, we had no investments in a single company (other than U.S. government sponsored enterprises) or entity that had an aggregate book value in excess of 10% of our consolidated stockholders’ equity.

37

Portfolio Maturities and Coupons.  The composition and maturities of the investment securities portfolio at December 31, 2017 are summarized in the following table.  Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur.  No tax-equivalent adjustments have been made, as we did not hold any tax-free investment securities at December 31, 2017.

					More than One Year				More than Five Years
	One Year or Less				through Five Years				through Ten Years				More than Ten Years				Total Securities
			Weighted				Weighted				Weighted				Weighted						Weighted
	Amortized		Average		Amortized		Average		Amortized		Average		Amortized		Average		Amortized				Average
	Cost		Coupon		Cost		Coupon		Cost		Coupon		Cost		Coupon		Cost		Fair Value		Coupon
	(Dollars in thousands)
Available for Sale:
U.S. government sponsored mortgage-backed securities:
Freddie Mac	$	—	—	%	$	—	—	%	$	—	—	%	$	2,870	3.00	%	$	2,870	$	2,851	3.00	%
Total	$	—	—	%	$	—	—	%	$	—	—	%	$	2,870	3.00	%	$	2,870	$	2,851	3.00	%
Held to Maturity:
U.S. government sponsored mortgage-backed securities:
Fannie Mae	$	—	—	%	$	7	4.55	%	$	61	3.33	%	$	127,700	3.10	%	$	127,768	$	128,069	3.10	%
Freddie Mac		—	—			3	4.80			—	—			229,117	3.13			229,120		231,051	3.13
Collateralized mortgage obligations (1)		—	—			—	—			—	—			5,992	1.66			5,992		5,744	1.66
Ginnie Mae		—	—			—	—			10	2.75			41,475	2.91			41,485		40,954	2.91
Total U.S. government sponsored mortgage-backed securities		—	—			10	4.63			71	3.25			404,284	3.08			404,365		405,818	3.08
Trust preferred securities		—	—			—	—			—	—			427	3.69			427		845	3.69
Total	$	—	—	%	$	10	4.63	%	$	71	3.25	%	$	404,711	3.08	%	$	404,792	$	406,663	3.08	%

(1) All of our collateralized mortgage obligations have been issued by Fannie Mae, Freddie Mac or Ginnie Mae.

Bank-Owned Life Insurance.  We invest in bank-owned life insurance to provide us with a funding source for our benefit plan obligations.  Bank-owned life insurance also generally provides us noninterest income that is nontaxable.  Interagency federal guidance generally limits our investment in bank-owned life insurance to 25% of the Bank’s Tier 1 capital plus our allowance for loan losses.  At December 31, 2017, this limit was $55.4 million, and we had invested $44.2 million in bank-owned life insurance at that date.

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Deposits.  We accept deposits primarily from the areas in which our offices are located.  We rely on our competitive pricing, convenient locations and customer service to attract and retain deposits.  We offer a variety of deposit accounts with a range of interest rates and terms.  Our deposit accounts consist of passbook and statement savings accounts, certificates of deposit, money market accounts, commercial and regular checking accounts and Super NOW accounts.  Historically, we have not accepted, and do not currently have, brokered deposits.

Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis.  Deposit rates and terms are based primarily on current operating strategies, market interest rates, liquidity requirements and our deposit growth goals.

During the year ended December 31, 2017, our deposits grew by $104.1 million, or 7.0%.  The growth in deposits was primarily due to an increase of $76.2 million in the balance of certificates of deposit and an increase of $18.1 million in the balance of savings accounts for the year ended December 31, 2017.  The increase in certificates of deposit was primarily due to a $41.8 million increase in public deposits and $16.9 million in new accounts at our new Keeaumoku branch, which was opened in April 2017.

At December 31, 2017, we had a total of $312.2 million in certificates of deposit, of which $165.7 million had remaining maturities of one year or less.  Based on historical experience and our current pricing strategy, we believe we will retain a significant portion of these accounts upon maturity.

The following tables set forth the distribution of our average total deposit accounts (including interest-bearing and non-interest-bearing deposits), by account type, for the periods indicated.

	For the Year Ended December 31,
	2017						2016
					Weighted						Weighted
	Average				Average		Average				Average
	Balance		Percent		Rate		Balance		Percent		Rate
	(Dollars in thousands)
Deposit type:
Non-interest-bearing	$	47,148	3.1	%	—	%	$	47,097	3.2	%	—	%
Savings accounts		1,033,454	67.2		0.43	%		1,017,420	69.5		0.41	%
Certificates of deposit		270,225	17.6		1.17	%		226,264	15.4		0.76	%
Money market		5,171	0.3		0.44	%		2,469	0.2		0.41	%
Checking and Super NOW		180,858	11.8		0.02	%		171,716	11.7		0.02	%
Total deposits	$	1,536,856	100.0	%	0.51	%	$	1,464,966	100.0	%	0.42	%

	For the Year Ended December 31, 2015
					Weighted
	Average				Average
	Balance		Percent		Rate
	(Dollars in thousands)
Deposit type:
Non-interest-bearing	$	43,591	3.1	%	—	%
Savings accounts		965,754	69.3		0.38	%
Certificates of deposit		225,048	16.2		0.50	%
Money market		1,117	0.1		0.27	%
Checking and Super NOW		156,776	11.3		0.02	%
Total deposits	$	1,392,286	100.0	%	0.35	%

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As of December 31, 2017, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $250,000 was $192.8 million.  The following table sets forth the maturity of those certificates as of December 31, 2017.

	At
	December 31, 2017
	(In thousands)
Three months or less	$	49,807
Over three months through six months		57,643
Over six months through one year		12,312
Over one year to three years		57,703
Over three years		15,308
Total	$	192,773

Borrowings.  Our borrowings consist of advances from the FHLB and funds borrowed under securities sold under agreements to repurchase.  At December 31, 2017, our FHLB advances totaled $107.2 million, or 6.1% of total liabilities, and our securities sold under agreements to repurchase totaled $30.0 million, or 1.7% of total liabilities.  At December 31, 2017, we had the capability to borrow up to $579.4 million in the form of additional advances from the Federal Home Loan Bank.

During the year ended December 31, 2017, our total borrowings increased by $13.2 million or 10.6%.  The increase was due to a $38.2 million increase in FHLB advances that was partially offset by a $25.0 million pay off of securities sold under agreements to repurchase.  Historically, we have not required any other borrowings to fund our operations.  Instead, we have primarily funded our operations with additional deposits, proceeds from loan and security sales and principal repayments on loans and mortgage-backed securities.

The following table sets forth information concerning balances and interest rates on our FHLB advances at the dates and for the years indicated.

	At or for the Year Ended December 31,
	2017			2016			2015
	(Dollars in thousands)
Balance at end of year	$	107,200		$	69,000		$	69,000
Average balance during year	$	73,416		$	69,504		$	46,186
Maximum outstanding at any month end	$	107,200		$	69,000		$	69,000
Weighted average interest rate at end of year		1.70	%		1.49	%		1.49	%
Average interest rate during year		1.51	%		1.49	%		1.51	%

The following table sets forth information concerning balances and interest rates on our securities sold under agreements to repurchase at the dates and for the years indicated.

	At or for the Year Ended December 31,
	2017			2016			2015
	(Dollars in thousands)
Balance at end of year	$	30,000		$	55,000		$	55,000
Average balance during year	$	51,315		$	55,000		$	60,014
Maximum outstanding at any month end	$	55,000		$	55,000		$	72,000
Weighted average interest rate at end of year		1.66	%		1.57	%		1.57	%
Average interest rate during year		1.59	%		1.57	%		1.66	%

Stockholders’ Equity.  At December 31, 2017, our stockholders’ equity was $234.9 million, an increase of $5.1 million, or 2.2%, from $229.8 million at December 31, 2016.  The increase in stockholders’ equity resulted primarily from net income of $15.0 million, which was partially offset by $11.1 million of dividends paid during the year ended December 31, 2017.

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Average Balances and Yields

The following tables set forth average balance sheets, average yields and rates, and certain other information for the years indicated.  No tax-equivalent yield adjustments were made, as we did not hold any tax-free investments.  All average balances are daily average balances.  Nonaccrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield.  The yields set forth below include the effect of net deferred costs, discounts and premiums that are amortized or accreted to interest income.

		For the Year Ended
		December 31, 2017
		Average
		Outstanding
		Balance			Interest		Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Loans:
Real estate loans:
First mortgage:
One- to four-family residential (1)		$	1,357,508		$	52,751	3.89	%
Multi-family residential			9,572			448	4.68
Construction, commercial and other			22,603			1,032	4.57
Home equity loans and lines of credit			13,930			654	4.69
Other loans			4,925			259	5.26
Total loans			1,408,538			55,144	3.91
Investment securities:
U.S. government sponsored mortgage-backed securities (1)			403,537			12,526	3.10
Trust preferred securities			868			—	0.00
Total securities			404,405			12,526	3.10
Other			51,686			663	1.28
Total interest-earning assets			1,864,629			68,333	3.66
Non-interest-earning assets			69,887
Total assets		$	1,934,516
Interest-bearing liabilities:
Savings accounts		$	1,033,454			4,445	0.43	%
Certificates of deposit			270,225			3,159	1.17
Money market accounts			5,171			23	0.44
Checking and Super NOW accounts			180,858			39	0.02
Total interest-bearing deposits			1,489,708			7,666	0.51
Federal Home Loan Bank advances			73,416			1,105	1.51
Securities sold under agreements to repurchase			51,315			818	1.59
Total interest-bearing liabilities			1,614,439			9,589	0.59
Non-interest-bearing liabilities			84,000
Total liabilities			1,698,439
Stockholders’ equity			236,077
Total liabilities and stockholders’ equity		$	1,934,516
Net interest income					$	58,744
Net interest rate spread (2)							3.07	%
Net interest-earning assets (3)		$	250,190
Net interest margin (4)							3.15	%
Interest-earning assets to interest-bearing liabilities			115.56	%

(footnotes on following page)

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	For the Year Ended December 31,
	2016							2015
	Average							Average
	Outstanding							Outstanding
	Balance			Interest		Yield/ Rate		Balance			Interest		Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Loans:
Real estate loans:
First mortgage:
One- to four-family residential (1)	$	1,210,635		$	48,742	4.03	%	$	1,050,352		$	43,654	4.16	%
Multi-family residential		9,686			453	4.68			9,692			459	4.74
Construction, commercial and other		23,268			1,059	4.55			18,110			837	4.62
Home equity loans and lines of credit		15,493			675	4.36			15,560			709	4.56
Other loans		4,441			239	5.38			4,502			244	5.42
Total loans		1,263,523			51,168	4.05			1,098,216			45,903	4.18
Investment securities:
U.S. government sponsored mortgage-backed securities (1)		454,648			14,365	3.16			529,535			16,873	3.19
Trust preferred securities		974			—	—			790			—	—
Total securities		455,622			14,365	3.15			530,325			16,873	3.18
Other		64,790			540	0.83			57,147			316	0.55
Total interest-earning assets		1,783,935			66,073	3.70			1,685,688			63,092	3.74
Non-interest-earning assets		68,444							67,486
Total assets	$	1,852,379						$	1,753,174
Interest-bearing liabilities:
Savings accounts	$	1,017,420			4,162	0.41	%	$	965,754			3,670	0.38	%
Certificates of deposit		226,264			1,724	0.76			225,048			1,115	0.50
Money market accounts		2,469			10	0.41			1,117			3	0.27
Checking and Super NOW accounts		171,716			37	0.02			156,776			33	0.02
Total interest-bearing deposits		1,417,869			5,933	0.42			1,348,695			4,821	0.36
Federal Home Loan Bank advances		69,504			1,035	1.49			46,186			697	1.51
Securities sold under agreements to repurchase		55,000			876	1.59			60,014			997	1.66
Total interest-bearing liabilities		1,542,373			7,844	0.51			1,454,895			6,515	0.45
Non-interest-bearing liabilities		83,012							79,762
Total liabilities		1,625,385							1,534,657
Stockholders’ equity		226,994							218,517
Total liabilities and stockholders’ equity	$	1,852,379						$	1,753,174
Net interest income				$	58,229						$	56,577
Net interest rate spread (2)						3.19	%						3.29	%
Net interest-earning assets (3)	$	241,562						$	230,793
Net interest margin (4)						3.26	%						3.36	%
Interest-earning assets to interest-bearing liabilities		115.66	%						115.86	%

(1) Average balance includes loans or investments available for sale, as applicable.

(2) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(3) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(4) Net interest margin represents net interest income divided by average total interest-earning assets.

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Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income for the years indicated.  The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume).  The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate).  The total column represents the sum of the prior columns.  For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.

	Year Ended December 31,						Year Ended December 31,
	2017 vs. 2016						2016 vs. 2015
	Increase (Decrease)				Total		Increase (Decrease)				Total
	Due to				Increase		Due to				Increase
	Volume		Rate		(Decrease)		Volume		Rate		(Decrease)
	(In thousands)
Interest-earning assets:
Loans:
Real estate loans:
First mortgage:
One- to four-family residential	$	5,624	$	(1,615)	$	4,009	$	6,400	$	(1,312)	$	5,088
Multi-family residential		(5)		—		(5)		—		(6)		(6)
Construction, commercial and other		(30)		3		(27)		235		(13)		222
Home equity loans and lines of credit		(91)		70		(21)		(3)		(31)		(34)
Other loans		25		(5)		20		(3)		(2)		(5)
Total loans		5,523		(1,547)		3,976		6,629		(1,364)		5,265
U.S. government sponsored mortgage-backed securities		(1,590)		(249)		(1,839)		(2,367)		(141)		(2,508)
Other		(74)		197		123		47		177		224
Total interest-earning assets		3,859		(1,599)		2,260		4,309		(1,328)		2,981
Interest-bearing liabilities:
Savings accounts		66		217		283		203		289		492
Certificates of deposit		383		1,052		1,435		6		603		609
Money market accounts		12		1		13		5		2		7
Checking and Super NOW accounts		2		—		2		3		1		4
Total interest-bearing deposits		463		1,270		1,733		217		895		1,112
Federal Home Loan Bank advances		59		11		70		347		(9)		338
Securities sold under agreements to repurchase		(59)		1		(58)		(81)		(40)		(121)
Total interest-bearing liabilities		463		1,282		1,745		483		846		1,329
Change in net interest income	$	3,396	$	(2,881)	$	515	$	3,826	$	(2,174)	$	1,652

Comparison of Operating Results for the Years Ended December 31, 2017, 2016 and 2015

General.  Net income decreased by $1.4 million, or 8.5%, to $15.0 million for the year ended December 31, 2017 from $16.3 million for the year ended December 31, 2016.  The decrease in net income was caused by a $1.7 million increase in interest expense, a $1.6 million increase in noninterest expense, a $315,000 increase in income tax expense, and a $248,000 decrease in noninterest income. The decreases were partially offset by a $2.3 million increase in interest and dividend income and a $258,000 decrease in loan loss provisions.

Net income increased by $1.6 million, or 10.8%, to $16.3 million for the year ended December 31, 2016 from $14.7 million for the year ended December 31, 2015.  The increase in net income was caused by a $3.0 million increase

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in interest income, a $1.6 million decrease in noninterest expense, and a $145,000 decrease in loan loss provisions. The increases were offset by a $1.3 million increase in interest expense, a $1.0 million increase in income tax expense, and an $817,000 decrease in noninterest income.

Net Interest Income.  Net interest income increased by $515,000, or 0.9%, to $58.7 million for the year ended December 31, 2017 from $58.2 million for the year ended December 31, 2016.  Interest income increased by $2.3 million, or 3.4%, to $68.3 million for the year ended December 31, 2017 from $66.1 million for the year ended December 31, 2016.  The increase in interest income occurred primarily because of an $80.7 million increase in average interest-earning assets, which was partially offset by a four basis point decline in the average yield on interest-earning assets.  Interest expense increased by $1.7 million, or 22.2%, to $9.6 million for the year ended December 31, 2017 from $7.8 million for the year ended December 31, 2016.  The increase in interest expense was due to a $72.1 million increase in average interest-bearing liabilities and an eight basis point increase in the average cost of interest-bearing liabilities.  The interest rate spread and net interest margin were 3.07% and 3.15%, respectively, for the year ended December 31, 2017, compared to 3.19% and 3.26%, respectively, for the year ended December 31, 2016.  The change in the interest rate spread and net interest margin was due to a decrease in the average yield on interest-earning assets and an increase in the cost of average interest-bearing liabilities.

Net interest income increased by $1.7 million, or 2.9%, to $58.2 million for the year ended December 31, 2016 from $56.6 million for the year ended December 31, 2015.  Interest income increased by $3.0 million, or 4.7%, to $66.1 million for the year ended December 31, 2016 from $63.1 million for the year ended December 31, 2015.  The increase in interest income occurred primarily because of a $98.2 million increase in average interest-earning assets, which was partially offset by a four basis point decline in the average yield on interest-earning assets.  Interest expense increased by $1.3 million, or 20.4%, to $7.8 million for the year ended December 31, 2016 from $6.5 million for the year ended December 31, 2015.  The increase in interest expense was due to an $87.5 million increase in average interest-bearing liabilities and a six basis point increase in the average cost of interest-bearing liabilities.  The interest rate spread and net interest margin were 3.19% and 3.26%, respectively, for the year ended December 31, 2016, compared to 3.29% and 3.36%, respectively, for the year ended December 31, 2015.  The change in the interest rate spread and net interest margin was due to a decrease in the average yield on interest-earning assets and an increase in the cost of average interest-bearing liabilities.

Interest Income.  Interest income rose by $2.3 million, or 3.4%, to $68.3 million for the year ended December 31, 2017 from $66.1 million for the year ended December 31, 2016.  Interest income on loans increased by $4.0 million, or 7.8%, to $55.1 million for the year ended December 31, 2017 from $51.2 million for the year ended December 31, 2016.  The increase in interest income on loans occurred because the average balance of loans grew by $145.0 million, or 11.5%, as new loan originations exceeded loan repayments and loan sales.  The increase in interest income that occurred because of growth in the loan portfolio was partially offset by a 14 basis point decline in the average loan yield to 3.91% for the year ended December 31, 2017 compared to 4.05% for the year ended December 31, 2016.  The decline in the average yield on loans occurred because of repayments on higher-yielding loans and the origination of new loans with lower yields.  Interest income on investment securities decreased by $1.8 million, or 12.8%, to $12.5 million for the year ended December 31, 2017 from $14.4 million for the year ended December 31, 2016.  The decrease in interest income on securities occurred primarily because of a $51.2 million decrease in the average securities balance and a five basis point decline in the average investment yield to 3.10% for the year ended December 31, 2017 compared to 3.15% for the year ended December 31, 2016.  The decrease in the average securities balance occurred as repayments and security sales exceeded security purchases.  The repayments on securities were reinvested into higher yielding loans.

Interest income rose by $3.0 million, or 4.7%, to $66.1 million for the year ended December 31, 2016 from $63.1 million for the year ended December 31, 2015.  Interest income on loans increased by $5.3 million, or 11.5%, to $51.2 million for the year ended December 31, 2016 from $45.9 million for the year ended December 31, 2015.  The increase in interest income on loans occurred because the average balance of loans grew by $165.3 million, or 15.1%, as new loan originations exceeded loan repayments and loan sales.  The increase in interest income that occurred because of growth in the loan portfolio was partially offset by a 13 basis point decline in the average loan yield to 4.05% for the year ended December 31, 2016 compared to 4.18% for the year ended December 31, 2015.  The decline in the average yield on loans occurred because of repayments on higher-yielding loans and the origination of new loans with lower yields.  Interest income on investment securities decreased by $2.5 million, or 14.9%, to $14.4 million for the year ended

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December 31, 2016 from $16.9 million for the year ended December 31, 2015.  The decrease in interest income on securities occurred primarily because of a $74.7 million decrease in the average securities balance and a three basis point decline in the average investment yield to 3.15% for the year ended December 31, 2016 compared to 3.18% for the year ended December 31, 2015.  The decrease in the average securities balance occurred as repayments and security sales exceeded security purchases.  The repayments on securities were reinvested into higher yielding loans.

Interest Expense.  Interest expense increased by $1.7 million, or 22.2%, to $9.6 million for the year ended December 31, 2017 from $7.8 million for the year ended December 31, 2016.  Interest expense on deposits increased by $1.7 million, or 29.2%, to $7.7 million for the year ended December 31, 2017 from $5.9 million for the year ended December 31, 2016.  The increase in interest expense on deposits was due to a $71.8 million, or 5.1%, increase in the average balance of deposits and a nine basis point increase in the average cost of deposits. The average balance of deposits grew to $1.490 billion during the year ended December 31, 2017 compared to $1.418 billion during the year ended December 31, 2016.  The average cost of deposits rose primarily because the cost of certificates of deposit rose to 1.17% in 2017 from 0.76% in 2016.  The increase in the average cost of certificates of deposit was primarily due to an increase in interest rates on public deposits.  Interest expense on FHLB advances increased by $70,000, or 6.8%, during the year ended December 31, 2017 compared to the year ended December 31, 2016.  The increase in interest expense on FHLB advances was due to a $3.9 million increase in the average balance of FHLB advances.  Additional advances were obtained in 2017 to extend the maturity of liabilities as part of our efforts to reduce interest rate risk.  Interest expense on securities sold under agreements to repurchase declined by $58,000, or 6.6%, during the year ended December 31, 2017 compared to the year ended December 31, 2016.  The decrease in interest expense on securities sold under agreements to repurchase was caused by a $3.7 million, or 6.7%, decrease in the average outstanding balance of securities sold under agreements to repurchase.  The decline in the average balance of securities sold under agreements to repurchase occurred as the Company paid off matured borrowings in 2017.

Interest expense increased by $1.3 million, or 20.4%, to $7.8 million for the year ended December 31, 2016 from $6.5 million for the year ended December 31, 2015.  Interest expense on deposits increased by $1.1 million, or 23.1%, to $5.9 million for the year ended December 31, 2016 from $4.8 million for the year ended December 31, 2015.  The increase in interest expense on deposits was due to a $69.2 million, or 5.1%, increase in the average balance of deposits and a six basis point increase in the average cost of deposits. The average balance of deposits grew to $1.418 billion during the year ended December 31, 2016 compared to $1.349 billion during the year ended December 31, 2015. Interest rates increased due to an increase in the cost of savings accounts and certificates of deposit. Interest expense on FHLB advances increased by $338,000, or 48.5%, during the year ended December 31, 2016 compared to the year ended December 31, 2015.  The increase in interest expense on FHLB advances was due to a $23.3 million increase in the average balance of FHLB advances.  Additional advances were obtained in 2015 to extend the maturity of liabilities and reduce interest rate risk.  Interest expense on securities sold under agreements to repurchase declined by $121,000, or 12.1%, during the year ended December 31, 2016 compared to the year ended December 31, 2015.  The decrease in interest expense on securities sold under agreements to repurchase was caused by a $5.0 million, or 8.4%, decrease in the average outstanding balance of securities sold under agreements to repurchase.  The decrease in the average balance was augmented by a seven basis point decrease in the average interest rate to 1.59% for the year ended December 31, 2016 compared to 1.66% for the year ended December 31, 2015.  The decline in the average balance of securities sold under agreements to repurchase occurred as the Company paid off matured borrowings in 2015.

Provision for Loan Losses.  Based on our analysis of the factors described in “—Allowance for Loan Losses,” we recorded provisions for loan losses of $52,000, $310,000 and $455,000 for the years ended December 31, 2017, 2016 and 2015, respectively.  The decrease in loan loss provisions from 2016 to 2017 is primarily due to a decrease in nonperforming loans and relatively low levels of loan losses.  The provisions for loan losses included net recoveries of $44,000 for the year ended December 31, 2017, net charge-offs of $24,000 for the year ended December 31, 2016, and net recoveries of $20,000 for the year ended December 31, 2015.  The provisions recorded resulted in ratios of the allowance for loan losses to total loans of 0.17% at December 31, 2017 and 0.18% at December 31, 2016 and 2015.  Nonaccrual loans totaled $4.2 million, $4.6 million and $5.4 million at December 31, 2017, 2016 and 2015, respectively.  To the best of our knowledge, at December 31, 2017, 2016 and 2015, we had provided for all losses that are both probable and reasonable to estimate at those respective dates.

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Noninterest Income.  The following table summarizes changes in noninterest income for the years ended December 31, 2017, 2016 and 2015.

	Year Ended December 31,						Change 2017/2016				Change 2016/2015
	2017		2016		2015		$ Change		% Change		$ Change		% Change
	(Dollars in thousands)
Service fees on loan and deposit accounts	$	1,962	$	1,960	$	2,161	$	2	0.1	%	$	(201)	(9.3)	%
Income on bank-owned life insurance		907		966		1,026		(59)	(6.1)	%		(60)	(5.8)	%
Gain on sale of investment securities		431		370		701		61	16.5	%		(331)	(47.2)	%
Gain on sale of loans		199		406		503		(207)	(51.0)	%		(97)	(19.3)	%
Other		347		392		520		(45)	(11.5)	%		(128)	(24.6)	%
Total	$	3,846	$	4,094	$	4,911	$	(248)	(6.1)	%	$	(817)	(16.6)	%

Noninterest income declined by $248,000 for the year ended December 31, 2017 compared to the year ended December 31, 2016.  During the years ended December 31, 2017 and 2016, we sold $25.0 million and $48.9 million, respectively, of mortgage loans held for sale, primarily to reduce interest rate risk, and recognized gains of $199,000 and $406,000, respectively.  During the years ended December 31, 2017 and 2016, we sold $7.0 million and $5.1 million, respectively, of held-to-maturity investment securities and recognized gross realized gains of $431,000 and $370,000, respectively.  The sale of held-to-maturity securities, for which the Company had already received a substantial portion of the outstanding principal (at least 85%), is in accordance with the Investments — Debt and Equity Securities topic of the FASB ASC and will not affect the historical cost basis used to account for the remaining securities in the held-to-maturity portfolio. 

Noninterest income declined by $817,000 for the year ended December 31, 2016 compared to the year ended December 31, 2015.  During the years ended December 31, 2016 and 2015, we sold $5.1 million and $7.0 million, respectively, of held-to-maturity investment securities and recognized gross realized gains of $370,000 and $701,000, respectively.  The sale of held-to-maturity securities, for which the Company had already received a substantial portion of the outstanding principal (at least 85%), is in accordance with the Investments — Debt and Equity Securities topic of the FASB ASC and will not affect the historical cost basis used to account for the remaining securities in the held-to-maturity portfolio.  During the years ended December 31, 2016 and 2015, we also sold $48.9 million and $56.2 million, respectively, of mortgage loans held for sale primarily to reduce interest rate risk and recognized gains of $406,000 and $503,000, respectively.  Service fees on loan and deposit accounts decreased by $201,000 for the year ended December 31, 2016 compared to the year ended December 31, 2015 primarily due to a decrease in return item fees that was partially offset by an increase in broker loan fee income.  The decrease in return item fees occurred because of a change we made in our overdraft loan program in response to regulatory guidance.

Noninterest Expense.  The following table summarizes changes in noninterest expense for the years ended December 31, 2017, 2016 and 2015.

	Year Ended December 31,						Change 2017/2016				Change 2016/2015
	2017		2016		2015		$ Change		% Change		$ Change		% Change
	(Dollars in thousands)
Salaries and employee benefits	$	21,614	$	20,591	$	21,497	$	1,023	5.0	%	$	(906)	(4.2)	%
Occupancy		5,937		5,749		5,809		188	3.3	%	$	(60)	(1.0)	%
Equipment		3,614		3,566		3,894		48	1.3	%	$	(328)	(8.4)	%
Federal deposit insurance premiums		605		743		857		(138)	(18.6)	%	$	(114)	(13.3)	%
Other general and administrative expenses		4,704		4,230		4,442		474	11.2	%	$	(212)	(4.8)	%
Total	$	36,474	$	34,879	$	36,499	$	1,595	4.6	%	$	(1,620)	(4.4)	%

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Noninterest expense increased by $1.6 million to $36.5 million for the year ended December 31, 2017 from $34.9 million for the year ended December 31, 2016.  Salaries and employee benefits expense increased by $1.0 million for the year ended December 31, 2017 primarily due to an increase in employee stock ownership plan (ESOP) expense, additional $1,000 year-end bonuses paid to non-management employees to share the benefits we will receive from the reduction in the federal corporate tax rate from 35% to 21%, and a decrease in the capitalized cost of new loan originations.  The increase in ESOP expense occurred because of a change in the methodology of distributing dividends to participants in the ESOP plan.  The decrease in the number of new loans originated in 2017 compared to 2016 decreased capitalized loan costs and increased salary expense.  These increases were offset by a decrease in share-based compensation that resulted when a majority of awards under our 2010 equity incentive plan became fully vested in 2016.  The increase in other general and administrative expenses was mainly due to increases in marketing, legal and professional fees.  Occupancy expense increased primarily due to increases in rent, furniture, fixture and equipment and repairs and maintenance expenses.  Federal deposit insurance premiums declined because of a decrease in the insurance assessment rate on deposits in the third quarter of 2016. 

Noninterest expense decreased by $1.6 million to $34.9 million for the year ended December 31, 2016 from $36.5 million for the year ended December 31, 2015.  Salaries and employee benefits decreased by $906,000 during the year ended December 31, 2016 primarily due to a decrease in share-based compensation, an increase in the capitalized cost of new loan originations and a decrease in year-end incentive compensation accruals.  The reduction in the cost of share-based compensation plans occurred as the majority of awards under our 2010 equity incentive plan became fully vested during the year.  In addition, the origination of new mortgage loans in 2016 increased capitalized loan costs and decreased salary expense.  As new loans are originated, the Bank capitalizes the cost of new loan originations and reduces the salary expense attributable to such originations.  The decrease in equipment expense is primarily due to declines in equipment leasing, depreciation and data processing expenses.  Other general and administrative expenses decreased primarily due to a reduction in accounting and auditing expenses and in the loss provisions for undrawn lines of credit.  Federal deposit insurance premiums declined because of a decrease in the insurance assessment rate on deposits. 

Income Tax Expense.  Income taxes were $11.1 million for 2017, reflecting an effective tax rate of 42.6%, $10.8 million for 2016, reflecting an effective tax rate of 39.8%, and $9.8 million for 2015, reflecting an effective tax rate of 39.9%.  The effective tax rate in 2017 was higher than the effective tax rate in 2016 and 2015 due to a $2.1 million write-down of deferred income tax assets that resulted when the federal corporate income tax rate was lowered from 35% to 21% due to the Tax Cuts and Jobs Act of 2017.  The increase in income tax expense that occurred in 2017 because of the write-down of deferred income tax assets was partially offset by a $1.0 million tax benefit received on the exercise of stock options.

Nonperforming and Problem Assets

When a residential mortgage loan or home equity line of credit is 15 days past due, we attempt personal, direct contact with the borrower to determine when payment will be made.  On the first day of the following month, we mail a letter reminding the borrower of the delinquency, and will send an additional letter when a loan is 60 days or more past due.  If necessary, subsequent late notices are issued and the account will be monitored on a regular basis thereafter.  By the 121st day of delinquency, unless the borrower has made arrangements to bring the loan current, we will refer the loan to legal counsel to commence foreclosure proceedings.  Upon the recommendation of our Vice President of Mortgage Loan Servicing, the Senior Vice President in charge of the Mortgage Loan Servicing Department can shorten these time frames.

Commercial business loans, commercial real estate loans and consumer loans are generally handled in the same manner as residential mortgage loans or home equity lines of credit.  All commercial business loans that are 15 days past due are immediately referred to our senior lending officer.  In addition, we generate past due notices and attempt direct contact with a borrower when a consumer loan is 10 days past due.  Because consumer loans are generally unsecured, we may commence collection procedures earlier for consumer loans than for residential mortgage loans or home equity lines of credit.

Loans are placed on nonaccrual status when payment of principal or interest is more than 90 days contractually delinquent or when, in the opinion of management, collection of principal or interest in full appears doubtful.  When

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loans are placed on a nonaccrual status, unpaid accrued interest is fully reversed.  The payments received on nonaccrual loans are recorded as a reduction of principal.  The loan may be returned to accrual status if both principal and interest payments are brought current and full payment of principal and interest is expected.

Nonperforming Assets.  The table below sets forth the amounts and categories of our nonperforming assets (loans and real estate owned) at the dates indicated.

	At December 31,
	2017			2016			2015			2014			2013
	(Dollars in thousands)
Nonaccrual loans:
Real estate loans:
First mortgage:
One- to four-family residential	$	4,062		$	4,402		$	5,282		$	4,153		$	5,840
Home equity loans and lines of credit		165			156			124			296			160
Other loans		—			1			9			4			—
Total nonaccrual loans		4,227			4,559			5,415			4,453			6,000
Real estate owned:
Real estate loans:
First mortgage:
One- to four-family residential		—			—			—			—			—
Total real estate owned		—			—			—			—			—
Total nonperforming assets		4,227			4,559			5,415			4,453			6,000
Loans delinquent 90 days or greater and still accruing interest		—			—			—			—			—
Restructured loans still accruing interest:
Real estate loans:
First mortgage:
One- to four-family residential		915			1,185			1,203			2,005			2,533
Total restructured loans still accruing interest		915			1,185			1,203			2,005			2,533
Total nonperforming assets, accruing loans delinquent for 90 days or more and restructured loans still accruing interest	$	5,142		$	5,744		$	6,618		$	6,458		$	8,533
Ratios:
Nonperforming loans to total loans		0.28	%		0.34	%		0.45	%		0.46	%		0.69	%
Nonperforming assets to total assets		0.21	%		0.24	%		0.30	%		0.26	%		0.37	%

For the year ended December 31, 2017, gross interest income that would have been recorded had our nonaccruing loans been current in accordance with original terms was $240,000.  For the year ended December 31, 2017, we recognized no interest income on such nonaccruing loans on a cash basis during the year.  For the year ended December 31, 2017, gross interest income due and collected on our accruing restructured loans was $58,000.

The Company had 10 troubled debt restructurings totaling $2.1 million as of December 31, 2017 that were considered to be impaired.  This total included nine one- to four-family residential mortgage loans totaling $2.0 million and one home equity loan for $92,000.  Four of the loans, totaling $915,000, were performing in accordance with their restructured terms and accruing interest at December 31, 2017.  Five of the loans, totaling $1.0 million, were performing in accordance with their restructured terms but not accruing interest at December 31, 2017.  One of the loans, for $149,000, was more than 150 days delinquent and not accruing interest at December 31, 2017.  The Company had 13 troubled debt restructurings totaling $2.9 million as of December 31, 2016 that were considered to be impaired.  This total included 12 one- to four-family residential mortgage loans totaling $2.8 million and one home equity loan for $107,000.  Five of the loans, totaling $1.2 million, were performing in accordance with their restructured terms and accruing interest at December 31, 2016.  Seven of the loans, totaling $1.6 million, were performing in accordance with their restructured terms but not accruing interest at December 31, 2016.  One of the loans, for $149,000, was more than

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149 days delinquent and not accruing interest at December 31, 2016.  There were no new troubled debt restructurings in 2017 or 2016.

Delinquent Loans. The following table sets forth our loan delinquencies by type and by amount at the dates indicated.

	Loans Delinquent For
	60-89 Days			90 Days and Over			Total
	Number	Amount		Number	Amount		Number	Amount
	(Dollars in thousands)
At December 31, 2017
Real estate loans:
First mortgage:
One- to four-family residential	4	$	1,207	4	$	1,589	8	$	2,796
Home equity loans and lines of credit	—		—	1		41	1		41
Other loans	6		0	—		—	6		0
Total loans	10	$	1,207	5	$	1,630	15	$	2,837
At December 31, 2016
Real estate loans:
First mortgage:
One- to four-family residential	1	$	133	4	$	1,358	5	$	1,491
Home equity loans and lines of credit	1		35	2		49	3		84
Other loans	4		0	1		1	5		1
Total loans	6	$	168	7	$	1,408	13	$	1,576
At December 31, 2015
Real estate loans:
First mortgage:
One- to four-family residential	—	$	—	6	$	1,615	6	$	1,615
Home equity loans and lines of credit	—		—	—		—	—		—
Other loans	3		1	1		10	4		11
Total loans	3	$	1	7	$	1,625	10	$	1,626
At December 31, 2014
Real estate loans:
First mortgage:
One- to four-family residential	2	$	736	2	$	593	4	$	1,329
Home equity loans and lines of credit	—		—	1		161	1		161
Other loans	4		1	1		4	5		5
Total loans	6	$	737	4	$	758	10	$	1,495
At December 31, 2013
Real estate loans:
First mortgage:	1	$	612	5	$	1,577	6	$	2,189
One- to four-family residential	9		4	—		—	9		4
Other loans	10	$	616	5	$	1,577	15	$	2,193
Total loans

Real Estate Owned.  Real estate acquired by us as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned.  When property is acquired it is recorded at estimated fair value at the date of foreclosure less the cost to sell, establishing a new cost basis.  Estimated fair value generally represents the price a buyer would be willing to pay on the basis of current market conditions, including normal terms from other financial institutions.  Holding costs and declines in estimated fair value result in charges to expense after acquisition.  At December 31, 2017, 2016, 2015, 2014, and 2013, we had no real estate owned.

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Classification of Assets.  Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets as substandard, doubtful or loss.  An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.  Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.  Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted.

We maintain an allowance for loan losses at an amount estimated to equal all credit losses incurred in our loan portfolio that are both probable and reasonable to estimate at a balance sheet date.  Our determination as to the classification of our assets and the amount of our loss allowances is subject to review by bank regulators, who can require that we establish additional loss allowances.  We regularly review our asset portfolio to determine whether any assets require classification in accordance with applicable regulations.  On the basis of our review of our assets at December 31, 2017, we had substandard assets of $5.4 million and no doubtful or loss assets.  Substandard assets at December 31, 2017 included $1.7 million of troubled debt restructurings, $3.3 million of nonperforming loans and $427,000 of trust preferred securities.  At December 31, 2016, we had $6.5 million of substandard assets and no doubtful or loss assets.  Substandard assets at December 31, 2016 included $2.3 million of troubled debt restructurings, $3.1 million of nonperforming loans and $1.2 million of trust preferred securities.  We classify any loan that is delinquent 90 days or more as substandard.  Loans which have been delinquent for fewer days may also be classified as substandard.

In addition to classifying assets as substandard, doubtful or loss, we also categorize assets as special mention.  A special mention asset has potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date.  We designate any loan that is 30 to 89 days delinquent as special mention.  Loans which have been delinquent for fewer days may also be categorized as special mention.  At December 31, 2017 and 2016, special mention assets were $799,000 and $421,000, respectively.

Allowance for Loan Losses

We provide for loan losses based upon the consistent application of our documented allowance for loan loss methodology.  All loan losses are charged to the allowance for loan losses and all recoveries are credited to it.  Additions to the allowance for loan losses are provided by charges to income based on various factors which, in our judgment, deserve current recognition in estimating probable losses.  We regularly review the loan portfolio and make provisions for loan losses in order to maintain the allowance for loan losses in accordance with GAAP.

General allowances are established for loan losses on a portfolio basis for loans that do not meet the definition of impaired in accordance with current accounting standards.  The portfolio is grouped into similar risk characteristics, primarily loan type and loan-to-value ratios. We apply an estimated loss rate to each loan group.  The loss rates applied are based upon our loss experience adjusted, as appropriate, for the qualitative and environmental factors discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions.  Actual loan losses may be significantly more than the allowance for loan losses we have established, which could have a material negative effect on our financial results.

Residential mortgage loans represent the largest segment of our loan portfolio.  All of the residential mortgage loans are secured by a first mortgage on residential real estate in Hawaii, consist primarily of fixed-rate mortgage loans that have been underwritten to Freddie Mac and Fannie Mae guidelines and have similar risk characteristics.  The loan loss allowance is determined by first calculating the historical loss rate for this segment of the portfolio.  The loss rate may be adjusted for qualitative and environmental factors.  The allowance for loan loss is calculated by multiplying the adjusted loss rate by the total loans in this segment of the portfolio.

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The adjustments to historical loss experience are based on an evaluation of several qualitative and environmental factors, including:

· changes in lending policies and procedures, including changes in underwriting standards and collections, charge-off and recovery practices;

· changes in international, national, and local economic trends;

· changes in the types of loans in the loan portfolio;

· changes in the experience and ability of personnel in the mortgage loan origination and loan servicing departments;

· changes in the number and amount of delinquent loans and classified assets;

· changes in the type and volume of loans being originated;

· changes in the value of underlying collateral for collateral dependent loans;

· changes in any concentration of credit; and

· external factors such as competition, legal and regulatory requirements on the level of estimated credit losses in the existing loan portfolio.

We also use historical loss rates adjusted for qualitative and environmental factors to establish loan loss allowances for the following portfolio segments:

· home equity loans and lines of credit; and

· consumer and other loans.

We have a limited loss experience for the construction, commercial and other mortgage segment of the loan portfolio.  The loan loss allowance on this portfolio segment is determined using the loan loss rate of other financial institutions in the State of Hawaii.  The allowance for loan loss is calculated by multiplying the loan loss rate of other financial institutions in the state by the total loans in this segment of the loan portfolio.

The allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.  The unallocated allowance is established to provide for probable losses that have been incurred as of the reporting date but are not reflected in the allocated allowance.

We evaluate our loan portfolio on a quarterly basis and the allowance is adjusted accordingly.  While we use the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations.  In addition, as an integral part of their examination process, the bank regulators will periodically review the allowance for loan losses.  The bank regulators may require us to increase the allowance based on their analysis of information available at the time of their examination.

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The following table sets forth activity in our allowance for loan losses for the years indicated.

	At or For the Year Ended December 31,
	2017			2016			2015			2014			2013
(Dollars in thousands)
Balance at beginning of year	$	2,452		$	2,166		$	1,691		$	1,486		$	1,672
Charge-offs:
Real estate loans:
First mortgage:
One- to four-family residential		11			33			—			118			299
Home equity loans and lines of credit		—			—			—			10			50
Other loans		26			28			53			57			146
Total charge-offs		37			61			53			185			495
Recoveries:
Real estate loans:
First mortgage:
One- to four-family residential		75			24			3			9			235
Construction, commercial and other		—			1			11			2			12
Home equity loans and lines of credit		—			—			47			4			7
Other loans		6			12			12			15			16
Total recoveries		81			37			73			30			270
Net (charge-offs) recoveries		44			(24)			20			(155)			(225)
Provision for loan losses		52			310			455			360			39
Balance at end of year	$	2,548		$	2,452		$	2,166		$	1,691		$	1,486
Ratios:
Net charge-offs to average loans outstanding		0.00	%		0.00	%		0.00	%		0.02	%		0.03	%
Allowance for loan losses to nonperforming loans at end of year		60.28	%		53.78	%		40.00	%		37.97	%		24.77	%
Allowance for loan losses to total loans at end of year		0.17	%		0.18	%		0.18	%		0.17	%		0.17	%

Allocation of Allowance for Loan Losses.  The following tables set forth the allowance for loan losses allocated by loan category and the percent of loans in each category to total loans at the dates indicated.  The allowance

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for loan losses allocated to each category is not necessarily indicative of future losses in any particular category.  The allowance for loan losses for each category is affected by the national and Hawaii economies as well as other factors.

	At December 31,
	2017				2016				2015
			Percent of				Percent of				Percent of
			Loans in Each				Loans in Each				Loans in Each
	Allowance for		Category to		Allowance for		Category to		Allowance for		Category to
	Loan Losses		Total Loans		Loan Losses		Total Loans		Loan Losses		Total Loans
	(Dollars in thousands)
Real estate loans:
First mortgage:
One- to four-family residential	$	1,706	96.65	%	$	1,579	96.11	%	$	1,365	95.90	%
Multi-family residential		15	0.72			15	0.71			15	0.82
Construction, commercial and other		539	1.46			519	1.74			517	1.62
Home equity loans and lines of credit		1	0.86			2	1.10			3	1.28
Other loans		55	0.31			115	0.34			72	0.38
Total allocated allowance		2,316	100.00	%		2,230	100.00	%		1,972	100.00	%
Unallocated		232				222				194
Total	$	2,548			$	2,452			$	2,166

	At December 31,
	2014				2013
			Percent of				Percent of
			Loans in Each				Loans in Each
	Allowance for		Category to		Allowance for		Category to
	Loan Losses		Total Loans		Loan Losses		Total Loans
	(Dollars in thousands)
Real estate loans:
First mortgage:
One- to four-family residential	$	410	95.08	%	$	375	95.41	%
Multi-family residential		3	0.92			1	0.57
Construction, commercial and other		977	1.89			799	1.57
Home equity loans and lines of credit		5	1.64			10	1.91
Other loans		263	0.47			229	0.54
Total allocated allowance		1,658	100.00	%		1,414	100.00	%
Unallocated		33				72
Total	$	1,691			$	1,486

In 2015, we revised the qualitative factors that were used to determine the allowance for loan losses.  As a result of these modifications, we increased the portion of the allowance for loan losses attributable to first mortgage loans and decreased the portion of the allowance for loan losses attributable to construction, commercial and other mortgage loans, and other loans.  The allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

Management of Market Risk

General.  Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates.  Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates.  Our Board of Directors has established an Asset/Liability Management Committee, which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors.

53

Because 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 checking and savings accounts and short-term borrowings.  In addition, there is little demand for adjustable-rate mortgage loans in the Hawaii market area.  This has resulted in our being particularly vulnerable to increases in interest rates, as our interest-bearing liabilities mature or reprice more quickly than our interest-earning assets.

We continue our efforts to reduce interest rate risk.  In 2017, 2016 and 2015, we sold $25.0 million, $48.9 million and $56.2 million, respectively, of fixed-rate mortgage loans.  In 2017 and 2015, we also increased our total long-term fixed rate FHLB advances and securities sold under agreements to repurchase by $13.2 million and $37.0 million, respectively, to reduce our interest rate risk.  In addition, we may utilize the following strategies to further reduce our interest rate risk:

· Continuing our efforts to increase our core checking and passbook accounts, which are less rate-sensitive than certificates of deposit and which provide us with a stable, low-cost source of funds;

· Continuing to repay short-term borrowings;

· Maintaining overnight cash balances at the Federal Reserve Bank or a portfolio of short-term investments;

· Purchasing mortgage-backed securities with shorter durations;

· Selling a portion of the fixed-rate mortgage loans we originate to Freddie Mac or Fannie Mae;

· Extending the maturity of our liabilities by obtaining longer-term fixed-rate FHLB advances and securities sold under agreements to repurchase;

· Subject to the maintenance of our credit quality standards, originating commercial loans and home equity lines of credit, which have adjustable interest rates and shorter average lives than first mortgage loans; and

· Maintaining relatively high regulatory capital ratios.

Our policies do not permit hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage-backed securities.  We have no current intention to sell loans classified as held-for-investment.

Economic Value of Equity.  We use an interest rate sensitivity analysis that computes changes in the economic value of equity (EVE) of our cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. EVE represents the market value of portfolio equity and is equal to the present value of assets minus the present value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market-risk-sensitive instruments in the event of an instantaneous and sustained 100 to 400 basis point increase or a 100 basis point decrease in market interest rates with no effect given to any steps that we might take to counter the effect of that interest rate movement. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below. Given the current relatively low level of market interest rates, an EVE calculation for an interest rate decrease of greater than 100 basis points has not been prepared.

54

The following table presents our internal calculations of the estimated changes in our EVE as of December 31, 2017 that would result from the designated instantaneous changes in the interest rate yield curve.

									Increase
									(Decrease) in
			Estimated				EVE Ratio as a		EVE Ratio as a
Change in			Increase				Percent of		Percent of
Interest Rates	Estimated EVE		(Decrease) in		Percentage		Present Value		Present Value of
(bp) (1)	(2)		EVE		Change in EVE		of Assets (3)(4)		Assets (3)(4)
(Dollars in thousands)
+400	$	169,417	$	(80,946)	(32.33)	%	10.50	%	(2.11)	%
+300	$	196,472	$	(53,891)	(21.53)	%	11.53	%	(1.08)	%
+200	$	223,891	$	(26,472)	(10.57)	%	12.44	%	(0.17)	%
+100	$	246,363	$	(4,000)	(1.60)	%	12.98	%	0.37	%
0	$	250,363	$	—	—	%	12.61	%	—	%
(100)	$	217,588	$	(32,775)	(13.09)	%	10.65	%	(1.96)	%

(1) Assumes an instantaneous uniform change in interest rates at all maturities.

(2) EVE is the difference between the present value of an institution’s assets and liabilities.

(3) Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.

(4) EVE Ratio represents EVE divided by the present value of assets.

Certain shortcomings are inherent in the methodologies used in determining interest rate risk through changes in EVE.  Modeling changes in EVE requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates.  In this regard, the EVE table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities.  Accordingly, although the EVE table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our EVE and net interest income and will differ from actual results.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations.  Territorial Savings Bank’s primary sources of funds consist of deposit inflows, cash balances at the FRB, loan and security repayments, advances from the FHLB, securities sold under agreements to repurchase, proceeds from loan and security sales and principal repayments on securities.  While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage 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 of December 31, 2017.

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.

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Excess liquid assets are invested generally in interest-earning deposits or securities and may also be used to pay off short-term borrowings.

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 December 31, 2017, the Company’s cash and cash equivalents totaled $32.1 million. 

If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB, which provide an additional source of funds.  We also utilize securities sold under agreements to repurchase as another borrowing source.  At December 31, 2017, we had the ability to borrow up to an additional $579.4 million from the FHLB.  Advances from the FHLB and securities sold under agreements to repurchase were $107.2 million and $30.0 million, respectively for the year ended December 31, 2017.  In 2017, FHLB advances increased by $38.2 million while securities under agreements to repurchase decreased by $25.0 million.  The increase in FHLB advances was used primarily to fund the growth in the mortgage loan portfolio, pay off maturing securities sold under agreements to repurchase and to reduce our interest rate risk.

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 December 31, 2017, we had $15.5 million in loan commitments outstanding, most of which were for fixed-rate loans.  In addition to commitments to originate loans, we had $27.2 million in unused lines of credit to borrowers.  Certificates of deposit due within one year of December 31, 2017 totaled $165.7 million, or 10.4% of total deposits.  If these deposits do not remain with us, we may be required to seek other sources of funds, including loan sales, brokered deposits, securities sold under agreements to repurchase and FHLB 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 December 31, 2018.  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 years ended December 31, 2017, 2016 and 2015, we originated $337.2 million, $389.9 million and $436.0 million of loans, respectively.  During these years, we purchased $59.9 million, $3.8 million and $11.6 million of securities, respectively.  We increased the amount of securities purchased in 2017 to offset principal repayments and to maintain the size and interest income on our securities portfolio.

Financing activities consist primarily of activity in deposit accounts, FHLB advances, securities sold under agreements to repurchase, stock repurchases and dividend payments.  We experienced net increases in deposits of $104.1 million and $48.1 million for the years ended December 31, 2017 and 2016, 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.

As a separate legal entity, the Company is required to have liquidity to fund stock repurchases and dividend payments to shareholders and for other corporate purposes.  As of December 31, 2017, we have 217,300 shares that may be purchased under our current share repurchase program.  Shares repurchased will reduce the amount of shares issued and outstanding.  The repurchased shares may be reissued in connection with share-based compensation plans and for general corporate purposes.  During the years ended December 31, 2017 and 2016, the Company had accumulated repurchases of 3,138,153 of the total 3,374,253 shares authorized by the Board of Directors.  There were no shares repurchased as part of our common stock repurchase program during 2017.  During 2016, shares were repurchased at an average cost of $25.96.  At December 31, 2017 and 2016, on a stand-alone basis, the Company had cash in banks of $20.1 million and $15.3 million, respectively.

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.  At December 31, 2017, Territorial Savings Bank and the Company exceeded all regulatory capital requirements and are considered to be “well capitalized” under regulatory guidelines.  See Note 23 of the Notes to the Consolidated Financial Statements.

56

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.  For additional information, see Note 22 of the Notes to the Consolidated Financial Statements.

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.

The following table summarizes our significant fixed and determinable contractual obligations and other funding needs by payment date at December 31, 2017.  The payment amounts represent those amounts due to the recipient and do not include any unamortized premiums or discounts or other similar carrying amount adjustments.

	Payments Due by Period
			More Than		More Than
	One Year		One Year to		Three Years to		More Than
Contractual Obligations	or Less		Three Years		Five Years		Five Years		Total
	(In thousands)
Long-term debt	$	46,200	$	76,000	$	15,000	$	—	$	137,200
Operating leases		2,809		4,272		2,756		4,557		14,394
Purchase obligations		2,569		4,939		4,833		178		12,519
Certificates of deposit		165,706		101,695		44,824		—		312,225
Total	$	217,284	$	186,906	$	67,413	$	4,735	$	476,338
Commitments to extend credit	$	15,470	$	—	$	—	$	—	$	15,470

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 2(u) with our audited financial statements.

Impact of Inflation and Changing Prices

Our consolidated financial statements and related notes have been prepared in accordance with U.S. GAAP.  U.S. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation.  The impact of inflation is reflected in the increased cost of our operations.  Unlike industrial companies, our assets and liabilities are primarily monetary in nature.  As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.

ITEM 7A.Quantitative and Qualitative Disclosures About Market Risk

Information required by this item is included in “ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” above.

ITEM 8.Financial Statements and Supplementary Data

57

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of

Territorial Bancorp, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Territorial Bancorp, Inc. and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes(collectively referred to as the “consolidatedfinancial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework 2013 issued by COSO.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the

58

transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Portland, Oregon

March [15], 2018

We have served as the Company’s auditor since 2015.

59

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2017 and 2016

(Dollars in thousands, except share data)

	December 31,		December 31,
	2017		2016
ASSETS
Cash and cash equivalents	$	32,089	$	61,273
Investment securities available for sale		2,851		—
Investment securities held to maturity, at amortized cost (fair value of $406,663 and $407,922 at December 31, 2017 and December 31, 2016, respectively)		404,792		407,656
Loans held for sale		403		1,601
Loans receivable, net		1,488,971		1,335,987
Federal Home Loan Bank stock, at cost		6,541		4,945
Federal Reserve Bank stock, at cost		3,103		3,095
Accrued interest receivable		5,142		4,732
Premises and equipment, net		5,721		4,327
Bank-owned life insurance		44,201		43,294
Income taxes  receivable		1,571		122
Deferred income tax assets, net		4,609		7,905
Prepaid expenses and other assets		3,852		2,625
Total assets	$	2,003,846	$	1,877,562
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits	$	1,597,295	$	1,493,200
Advances from the Federal Home Loan Bank		107,200		69,000
Securities sold under agreements to repurchase		30,000		55,000
Accounts payable and accrued expenses		26,390		23,258
Income taxes payable		1,483		1,616
Advance payments by borrowers for taxes and insurance		6,624		5,702
Total liabilities		1,768,992		1,647,776
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 9,915,058 and 9,778,974 shares at December 31, 2017 and December 31, 2016, respectively		99		98
Additional paid-in capital		73,050		71,914
Unearned ESOP shares		(5,383)		(5,872)
Retained earnings		172,782		168,962
Accumulated other comprehensive loss		(5,694)		(5,316)
Total stockholders’ equity		234,854		229,786
Total liabilities and stockholders’ equity	$	2,003,846	$	1,877,562

See accompanying notes to consolidated financial statements.

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Income

For the years ended December 31, 2017, 2016 and 2015
(Dollars in thousands, except per share data)

	2017		2016		2015
Interest income:
Loans	$	55,144	$	51,168	$	45,903
Investment securities		12,526		14,365		16,873
Other investments		663		540		316
Total interest income		68,333		66,073		63,092
Interest expense:
Deposits		7,666		5,933		4,821
Advances from the Federal Home Loan Bank		1,105		1,035		697
Securities sold under agreements to repurchase		818		876		997
Total interest expense		9,589		7,844		6,515
Net interest income		58,744		58,229		56,577
Provision for loan losses		52		310		455
Net interest income after provision for loan losses		58,692		57,919		56,122
Noninterest income:
Service fees on loan and deposit accounts		1,962		1,960		2,161
Income on bank-owned life insurance		907		966		1,026
Gain on sale of investment securities		431		370		701
Gain on sale of loans		199		406		503
Other		347		392		520
Total noninterest income		3,846		4,094		4,911
Noninterest expense:
Salaries and employee benefits		21,614		20,591		21,497
Occupancy		5,937		5,749		5,809
Equipment		3,614		3,566		3,894
Federal deposit insurance premiums		605		743		857
Other general and administrative expenses		4,704		4,230		4,442
Total noninterest expense		36,474		34,879		36,499
Income before income taxes		26,064		27,134		24,534
Income taxes		11,102		10,787		9,786
Net income	$	14,962	$	16,347	$	14,748
Basic earnings per share	$	1.61	$	1.78	$	1.59
Diluted earnings per share	$	1.57	$	1.74	$	1.56
Cash dividends declared per common share	$	1.20	$	0.92	$	0.76
Basic weighted-average shares outstanding		9,273,783		9,093,385		9,073,015
Diluted weighted-average shares outstanding		9,532,724		9,311,975		9,263,267

See accompanying notes to consolidated financial statements.

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income
For the years ended December 31, 2017, 2016 and 2015

(Dollars in thousands)

	2017		2016		2015
Net income	$	14,962	$	16,347	$	14,748
Change in unfunded pension liability		(373)		(240)		(12)
Change in unrealized loss on securities		(5)		13		27
Change in noncredit related loss on trust preferred securities		—		147		137
Other comprehensive income (loss), net of tax		(378)		(80)		152
Comprehensive income	$	14,584	$	16,267	$	14,900

See accompanying notes to consolidated financial statements.

62

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

For the years ended December 31, 2017, 2016 and 2015
(Dollars in thousands, except share data)

									Accumulated
			Additional		Unearned				Other		Total
	Common		Paid-in		ESOP		Retained		Comprehensive		Stockholders’
	Stock		Capital		Shares		Earnings		Income (Loss)		Equity
Balances at December 31, 2014	$	99	$	75,229	$	(6,851)	$	153,289	$	(5,388)	$	216,378
Net income		—		—		—		14,748		—		14,748
Other comprehensive income		—		—		—		—		152		152
Cash dividends paid ($0.76 per share)		—		—		—		(7,013)		—		(7,013)
Share-based compensation		1		3,085		—		—		—		3,086
Allocation of 48,932 ESOP shares		—		720		490		—		—		1,210
Repurchase of 373,711 shares of company common stock		(4)		(8,933)		—		—		—		(8,937)
Exercise of 1,000 options for common stock		—		17		—		—		—		17
Balances at December 31, 2015	$	96	$	70,118	$	(6,361)	$	161,024	$	(5,236)	$	219,641
Net income		—		—		—		16,347		—		16,347
Other comprehensive loss		—		—		—		—		(80)		(80)
Cash dividends paid ($0.92 per share)		—		—		—		(8,409)		—		(8,409)
Share-based compensation		1		2,041		—		—		—		2,042
Allocation of 48,932 ESOP shares		—		864		489		—		—		1,353
Repurchase of 118,723 shares of company common stock		(1)		(3,293)		—		—		—		(3,294)
Exercise of 125,870 options for common stock		2		2,184		—		—		—		2,186
Balances at December 31, 2016	$	98	$	71,914	$	(5,872)	$	168,962	$	(5,316)	$	229,786
Net income		—		—		—		14,962		—		14,962
Other comprehensive loss		—		—		—		—		(378)		(378)
Cash dividends paid ($1.20 per share)		—		—		—		(11,142)		—		(11,142)
Share-based compensation		—		106		—		—		—		106
Allocation of 48,932 ESOP shares		—		1,040		489		—		—		1,529
Repurchase of 160,003 shares of company common stock		(2)		(5,127)		—		—		—		(5,129)
Exercise of 294,887 options for common stock		3		5,117		—		—		—		5,120
Balances at December 31, 2017	$	99	$	73,050	$	(5,383)	$	172,782	$	(5,694)	$	234,854

See accompanying notes to consolidated financial statements.

63

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the years ended December 31, 2017, 2016 and 2015
(Dollars in thousands)

	2017		2016		2015
Cash flows from operating activities:
Net income	$	14,962	$	16,347	$	14,748
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses		52		310		455
Depreciation and amortization		1,129		1,139		1,296
Deferred income tax expense (benefit)		3,436		1,490		(2,223)
Amortization of fees, discounts, and premiums		(478)		(715)		(492)
Origination of loans held for sale		(23,665)		(49,157)		(57,337)
Proceeds from sales of loans held for sale		25,063		49,207		56,493
Gain on sale of loans, net		(199)		(406)		(503)
Net gain on sale of real estate owned		—		—		(12)
Gain on sale of investment securities held to maturity		(431)		(370)		(701)
Net loss on disposal of premises and equipment		24		—		4
ESOP expense		1,529		1,353		1,210
Share-based compensation expense		106		2,042		3,086
Increase in accrued interest receivable		(410)		(48)		(248)
Net increase in bank-owned life insurance		(907)		(966)		(1,025)
Net increase in prepaid expenses and other assets		(1,227)		(355)		(366)
Net increase (decrease) in accounts payable and accrued expenses		2,604		(1,081)		249
Net increase in advance payments by borrowers for taxes and insurance		922		578		1,208
Net increase in income taxes receivable		(1,449)		(122)		—
Net increase (decrease) in income taxes payable		(133)		(479)		1,269
Net cash from operating activities		20,928		18,767		17,111
Cash flows from investing activities:
Purchases of investment securities held to maturity		(56,899)		(3,803)		(11,606)
Purchases of investment securities available for sale		(2,970)		—		—
Principal repayments on investment securities held to maturity		52,831		83,234		85,802
Principal repayments on investment securities available for sale		99		—		—
Proceeds from sale of investment securities held to maturity		7,446		5,462		7,718
Loan originations, net of principal repayments on loans receivable		(152,631)		(146,095)		(220,215)
Purchases of Federal Home Loan Bank stock		(5,929)		(1,075)		(3,120)
Proceeds from redemption of Federal Home Loan Bank stock		4,333		920		9,564
Purchases of Federal Reserve Bank stock		(8)		(73)		(97)
Proceeds from sale of real estate owned		—		—		204
Purchases of premises and equipment		(2,547)		(563)		(604)
Net cash from investing activities		(156,275)		(61,993)		(132,354)

(Continued)

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the years ended December 31, 2017, 2016 and 2015
(Dollars in thousands)

	2017		2016		2015
Cash flows from financing activities:
Net increase in deposits	$	104,095	$	48,097	$	85,424
Proceeds from advances from the Federal Home Loan Bank		144,525		23,000		120,000
Repayments of advances from the Federal Home Loan Bank		(106,325)		(23,000)		(66,000)
Proceeds from securities sold under agreements to repurchase		—		—		30,000
Repayments of securities sold under agreements to repurchase		(25,000)		—		(47,000)
Purchases of Fed Funds		10		10		10
Sales of Fed Funds		(10)		(10)		(10)
Proceeds from exercise of stock options		—		566		17
Repurchases of common stock		(9)		(1,674)		(9,326)
Cash dividends paid		(11,123)		(8,409)		(7,013)
Net cash from financing activities		106,163		38,580		106,102
Net decrease in cash and cash equivalents		(29,184)		(4,646)		(9,141)
Cash and cash equivalents at beginning of the period		61,273		65,919		75,060
Cash and cash equivalents at end of the period	$	32,089	$	61,273	$	65,919
Supplemental disclosure of cash flow information:
Cash paid for:
Interest on deposits and borrowings	$	9,231	$	7,863	$	6,648
Income taxes		9,319		9,645		10,324
Supplemental disclosure of noncash investing and financing activities:
Company stock acquired through stock swap and net settlement transactions	$	5,120	$	1,620	$	—
Loans transferred to real estate owned		—		—		192
Investments purchased, not settled		—		—		1,200
Investments purchased prior period, settled current period		—		1,200		—
Company stock repurchased prior period, settled current period		—		—		389
Dividends declared, not yet paid		19		—		—

See accompanying notes to consolidated financial statements.

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(1)Organization

On July 10, 2009, Territorial Savings Bank completed a conversion from a mutual holding company to a stock holding company.  As part of the conversion, Territorial Mutual Holding Company and Territorial Savings Group, Inc., the former holding companies for Territorial Savings Bank, ceased to exist as separate legal entities, and Territorial Bancorp Inc. became the holding company for Territorial Savings Bank. Upon completion of the conversion and reorganization, a special “liquidation account” was established in an amount equal to the total equity of Territorial Mutual Holding Company as of December 31, 2008.  The liquidation account is to provide eligible account holders and supplemental eligible account holders who maintain their deposit accounts with Territorial Savings Bank after the conversion with a liquidation interest in the unlikely event of the complete liquidation of Territorial Savings Bank after the conversion.  The balance of the liquidation account at December 31, 2017 was $11.0 million.

On June 25, 2014, Territorial Savings Bank converted from a federal savings bank to a Hawaii state-chartered savings bank.  On July 10, 2014, Territorial Savings Bank became a member of the Federal Reserve System.

(2)Summary of Significant Accounting Policies

(a) Description of Business

Territorial Bancorp Inc. (the Company), through its wholly-owned subsidiary, Territorial Savings Bank (the Bank), provides loan and deposit products and services primarily to individual customers through 29 branches located throughout Hawaii. We deal primarily in residential mortgage loans in the State of Hawaii.  The Company’s earnings depend primarily on its net interest income, which is the difference between the interest income earned on interest-earning assets (loans receivable and investments) and the interest expense incurred on interest-bearing liabilities (deposit liabilities and borrowings). Deposits traditionally have been the principal source of the Bank’s funds for use in lending, meeting liquidity requirements, and making investments. The Company also derives funds from receipt of interest and principal repayments on outstanding loans receivable and investments, borrowings from the Federal Home Loan Bank (FHLB), securities sold under agreements to repurchase, and proceeds from issuance of common stock.

(b)  Principles of Consolidation

The consolidated financial statements include the accounts and results of operations of Territorial Bancorp Inc. and Territorial Savings Bank and its wholly-owned subsidiaries, Territorial Real Estate Co., Inc. and Territorial Financial Services, Inc. Significant intercompany balances and transactions have been eliminated in consolidation.

(c)  Cash and Cash Equivalents

Cash and cash equivalents includes cash and due from banks, interest-bearing deposits in other banks, federal funds sold, and short-term, highly liquid investments with original maturities of three months or less.

(d)  Investment Securities

The Company classifies and accounts for its investment securities as follows: (1) held-to-maturity debt securities in which the Company has the positive intent and ability to hold to maturity are reported at amortized cost; (2) trading securities that are purchased for the purpose of selling in the near term are reported at fair value, with unrealized gains and losses included in current earnings; and (3) available-for-sale securities not classified as either held-to-maturity or trading securities are reported at fair value, with unrealized gains and losses excluded from current earnings and reported as a separate component of equity.

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At December 31, 2017, the Company classified all of its investments, except $2.9 million of securities, as held-to-maturity.  At December 31, 2016, the Company classified all of its investments as held-to-maturity.

A decline in the market value of any available-for-sale or held-to-maturity security below cost, that is deemed to be other than temporary, results in an impairment to reduce the carrying amount to fair value. To determine whether impairment is other than temporary, the Company considers the type of the investment, the cause of the decline in value and the amount and duration of the decline in value.  It also considers whether it has the intent and ability not to sell and would not be required to sell for a sufficient period of time to recover the remaining amortized cost basis.

Gains or losses on the sale of investment securities are computed using the specific-identification method. The Company amortizes premiums and accretes discounts associated with investment securities using the interest method over the contractual life of the respective investment security. Such amortization and accretion is included in the interest income line item in the consolidated statements of income.  Interest income is recognized when earned.

(e)  Loans Receivable

This policy applies to all loan classes.  Loans receivable are stated at the principal amount outstanding, less the allowance for loan losses, loan origination fees and costs, and commitment fees. Interest on loans receivable is accrued as earned. 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. For nonaccrual loans, the Company records payments received as a reduction in principal. The Company, considering current information and events regarding the borrowers’ ability to repay their obligations, considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, if the loan is considered to be collateral dependent, based on the fair value of the collateral less estimated costs to sell.  Impairment losses are written off against the allowance for loan losses. For nonaccrual impaired 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.

(f)  Loans Held for Sale

Loans held for sale are stated at the lower of aggregate cost or market value. Net fees and costs of originating loans held for sale are deferred and are included in the basis for determining the gain or loss on sales of loans held for sale.

(g)  Deferred Loan Origination Fees and Unearned Loan Discounts

Loan origination and commitment fees and certain direct loan origination costs are being deferred, and the net amount is recognized over the life of the related loan as an adjustment to yield. Net deferred loan fees are amortized using the interest method over the contractual term of the loan, adjusted for actual prepayments. Net unamortized fees on loans paid in full are recognized as a component of interest income.

(h)  Real Estate Owned

Real estate owned is valued at the time of foreclosure at fair value, less estimated cost to sell, thereby establishing a new cost basis. The Company obtains appraisals based on recent comparable sales to assist management in estimating the fair value of real estate owned. Subsequent to acquisition, real estate owned is valued at the lower of cost or fair value, less estimated cost to sell. Declines in value are charged to expense through a direct write-down of the asset. Costs related to holding real estate are charged to expense while costs related to development and improvements are capitalized.

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Gains from the sale of real estate owned, if any, are recognized when title has passed, minimum down payment requirements are met, the terms of any notes received are such as to satisfy continuing investment requirements, and the Company is relieved of any requirements for continued involvement with the properties. If the minimum down payment or the continuing investment is not adequate to meet the criteria specified in the Property, Plant and Equipment topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC), the Company will defer income recognition and account for such sales using alternative methods, such as installment, deposit, or cost recovery.

(i)  Allowance for Loan Losses

The Company maintains an allowance adequate to cover Management’s estimate of probable loan losses as of the balance sheet date. The Company’s allowance for loan losses is maintained at a level considered adequate to provide for losses that can be estimated based upon specific and general conditions. All loan losses are charged, and all recoveries are credited, to the allowance for loan losses. Additions to the allowance for loan losses are provided by charges to income based on various factors, which, in the Company’s judgment, deserve current recognition in estimating probable losses. Charge-offs to the allowance are made when management determines that collectability of all or a portion of a loan is doubtful and available collateral is insufficient to repay the loan.

General allowances are established for loan losses on a portfolio basis for loans that do not meet the definition of impaired, in accordance with the Receivables topic of the FASB ASC.  The portfolio is grouped into similar risk characteristics, primarily loan type and loan-to-value ratio. The Company applies an estimated loss rate to each loan group. The loss rates applied are based upon its loss experience adjusted, as appropriate, for environmental factors discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions.  Actual loan losses may be significantly more than the allowance for loan losses the Company has established, which could have a material negative effect on its financial results.

Residential mortgage loans represent the largest segment of the Company’s loan portfolio.  All of the residential mortgage loans are secured by a first mortgage on residential real estate in Hawaii and consist primarily of fixed-rate mortgage loans which have been underwritten to Freddie Mac and Fannie Mae guidelines and have similar risk characteristics.  The loan loss allowance is determined by first calculating the historical loss rate for this segment of the portfolio.  The loss rate may be adjusted for qualitative and environmental factors.  The allowance for loan loss is calculated by multiplying the adjusted loss rate by the total loans in this segment of the portfolio.

The adjustments to historical loss experience are based on an evaluation of several qualitative and environmental factors, including:

· changes in lending policies and procedures, including changes in underwriting standards and collections, charge-off and recovery practices;

· changes in international, national, and local economic trends;

· changes in the types of loans in the loan portfolio;

· changes in the experience and ability of personnel in the mortgage loan origination and loan servicing departments;

· changes in the number and amount of delinquent loans and classified assets;

· changes in the type and volume of loans being originated;

· changes in the value of underlying collateral for collateral dependent loans;

· changes in any concentration of credit; and

· external factors such as competition, legal and regulatory requirements on the level of estimated credit losses in the existing loan portfolio.

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The Company also uses historical loss rates adjusted for qualitative and environmental factors to establish loan loss allowances for the following portfolio segments:

· home equity loans and lines of credit; and

· consumer and other loans.

The Company has a limited loss experience for the construction, commercial and other mortgage segment of the loan portfolio.  The loan loss allowance on this portfolio segment is determined using the loan loss rate of other financial institutions in the State of Hawaii.  The allowance for loan loss is calculated by multiplying the loan loss rate of other financial institutions in the state by the total loans in this segment of the Company’s loan portfolio.

The allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. In addition, the unallocated allowance is established to provide for probable losses that have been incurred as of the reporting date but are not reflected in the allocated allowance.

While the Company uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, the bank regulators will periodically review the allowance for loan losses. The bank regulators may require the Company to increase the allowance based on their analysis of information available at the time of their examination.

(j)  Transfer of Financial Assets

Transfers of financial assets are accounted for as sales when control is surrendered. Control is surrendered when the assets have been isolated from the Company, the transferee obtains the right to pledge or exchange the assets without constraint, and the Company does not maintain effective control over the transferred assets. Mortgage loans sold for cash are accounted for as sales as the above criteria have been met.

Mortgage loans may also be packaged into securities that are issued and guaranteed by U.S. government-sponsored enterprises or a U.S. government agency. The Company receives 100% of the mortgage-backed securities issued. Securitizations are not accounted for as sales and no gain or loss is recognized. The mortgage-backed securities received in securitizations are valued at amortized cost and classified as held-to-maturity.

Mortgage loan transfers accounted for as sales and securitizations are without recourse, except for normal representations and warranties provided in sales transactions, and the Company may retain the related rights to service the loans.  The retained servicing rights create mortgage servicing assets that are accounted for in accordance with the Transfers and Servicing topic of the FASB ASC.  Mortgage servicing assets are initially valued at fair value and subsequently at the lower of cost or fair value and are amortized in proportion to and over the period of estimated net servicing income.  The Company uses a discounted cash flow model to determine the fair value of retained mortgage servicing rights. Prior to 2010, we retained the servicing rights on residential mortgage loans sold.  In 2010, we began selling loans primarily on a servicing-released basis.

(k)  Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is principally computed on the straight-line method over the estimated useful lives of the respective assets. The estimated useful life of buildings and improvements is 30 years, furniture, fixtures, and equipment is 3 to 10 years, and automobiles are 3 years. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset.

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(l)  Income Taxes

The Company files consolidated federal income tax and consolidated state franchise tax returns.

Deferred tax assets and liabilities are recognized using the asset and liability method of accounting for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

We establish income tax contingency reserves for potential tax liabilities related to uncertain tax positions.  A liability for income tax uncertainties would be recorded for unrecognized tax benefits related to uncertain tax positions where it is more likely than not that the position will be sustained upon examination by a taxing authority.

As of December 31, 2017 and 2016, the Company had not recognized a liability for income tax uncertainties in the accompanying consolidated balance sheets because Management concluded that the Company does not have uncertain tax positions.

The Company recognizes interest and penalties related to tax liabilities in other interest expense and other general and administrative expenses, respectively, in the consolidated statements of income.

Tax years 2014 to 2016 currently remain subject to examination by the Internal Revenue Service and by the Department of Taxation of the State of Hawaii.

(m)  Impairment of Long-Lived Assets

Long-lived assets, such as premises and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the consolidated balance sheets and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.

(n)  Pension Plan

Pension benefit costs (returns) are charged (credited) to salaries and employee benefits expense, and the corresponding prepaid (accrued) pension cost is recorded in prepaid expenses and other assets or accounts payable and accrued expenses in the consolidated balance sheets. The Company’s policy is to fund pension costs in amounts that will not be less than the minimum funding requirements of the Employee Retirement Income Security Act of 1974 and will not exceed the maximum tax-deductible amounts. The Company generally funds at least the net periodic pension cost, subject to limits and targeted funded status as determined with the consulting actuary.

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(o)  Supplemental Employee Retirement Plan (SERP)

The SERP is a noncontributory supplemental retirement plan covering certain current and former employees of the Company.  Benefits in the SERP plan are paid after retirement, in addition to the benefits provided by the Pension Plan.  The Company accrues SERP costs over the estimated period until retirement by charging salaries and employee benefits expense in the consolidated statements of income, with a corresponding credit to accounts payable and accrued expenses in the consolidated balance sheets.

(p)  Employee Stock Ownership Plan (ESOP)

The cost of shares issued to the ESOP, but not yet allocated to participants, is shown as a reduction of stockholders’ equity.  Compensation expense is based on the market price of shares as they are committed to be released to participant accounts.  Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares reduce debt and accrued interest.

(q)  Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period.  Diluted earnings per share is computed by dividing net income by the sum of the weighted-average number of shares outstanding plus the dilutive effect of stock options and restricted stock.  ESOP shares not committed to be released are not considered outstanding.

We have two forms of our outstanding common stock: common stock and unvested restricted stock awards.  Holders of unvested restricted stock awards receive non-forfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings.  The computed basic and diluted earnings per share are substantially equivalent using both the two-class and the treasury stock methods of calculating earnings per share.

(r)  Common Stock Repurchase Program

In 2016, 2014, 2013, 2011 and 2010, the Company adopted common stock repurchase programs in which shares repurchased reduce the amount of shares issued and outstanding.  The repurchased shares may be reissued in connection with share-based compensation plans and for general corporate purposes.  As of December 31, 2017 and 2016, the Company had accumulated repurchases of 3,138,153 of the total 3,374,253 shares authorized by the Board of Directors.  There were no shares repurchased as part of our common stock repurchase program during 2017.  During 2016, shares were repurchased at an average cost of $25.96. 

(s)  Bank-Owned Life Insurance

The Company’s investment in bank-owned life insurance is based on cash surrender value.  The Company invests in bank-owned life insurance to provide a funding source for benefit plan obligations. Bank-owned life insurance also generally provides noninterest income that is nontaxable. Federal regulations generally limit the investment in bank-owned life insurance to 25% of the Bank’s Tier 1 capital plus the allowance for loan losses.  At December 31, 2017, this limit was $55.4 million and the Company had invested $44.2 million in bank-owned life insurance at that date.

(t)  Use of Estimates

The preparation of the consolidated financial statements requires management to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the allowance for loan losses; valuation of certain investment securities and determination as to whether declines in fair value below amortized cost are other than temporary; valuation

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allowances for deferred income tax assets; mortgage servicing assets; and assets and obligations related to employee benefit plans.  Accordingly, actual results could differ from those estimates.

(u)  Recently Issued Accounting Pronouncements

In May 2014, the FASB amended the Revenue Recognition topic of the FASB ASC.  The amendment seeks to clarify the principles for recognizing revenue as well as to develop common revenue standards for U.S. generally accepted accounting principles and International Financial Reporting Standards.  The Company has reviewed all revenue sources to determine if the sources are in scope for this guidance.  Net interest income from financial assets and liabilities are explicitly excluded from the scope of the amendment.  The Company’s overall assessment of key in-scope revenue sources include service charges on deposit accounts, rental income from safe deposit boxes and commissions on insurance and annuity sales.  The guidance will not have a significant impact on the Company’s revenue recognition for these key in-scope revenue sources.  The Company adopted this amendment effective January 1, 2018, under the modified retrospective approach.

In January 2016, the FASB amended the Financial Instruments – Overall topic of the FASB ASC.  The amendment addresses several aspects of recognition, measurement, presentation and disclosure of financial instruments.  Included are: (a) a requirement to measure equity investments at fair value, with changes in fair value recognized in net income, (b) a simplification of the impairment assessment of equity investments without readily determinable fair values, (c) the elimination of the requirement to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet, and (d) a requirement to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.   Since the Company does not own any equity securities subject to the amendment in its investment portfolio, the amendment will not have a material impact on its consolidated financial statements.  The Company will continue to evaluate the effects that the use of exit prices will have on its fair value disclosures.  The amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. 

In February 2016, the FASB amended the Leases topic of the FASB ASC.  The primary effects of the amendment will be to recognize lease assets and lease liabilities on the balance sheet and to disclose certain information about leasing arrangements.  The amendment is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  The Company has several lease agreements for branch locations and equipment that will require recognition on the consolidated balance sheets upon adoption of the amendment.  The Company will continue to evaluate the effects that the adoption of this amendment will have on its consolidated financial statements.

In March 2016, the FASB amended the Compensation – Stock Compensation topic of the FASB ASC.  The amendment includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements.  Some of the key provisions of the amendment require companies to record all excess tax benefits and tax deficiencies as income tax benefit or expense in the income statement rather than as an adjustment to additional paid-in capital.  In addition, the amendment requires that excess tax benefits should be reported as an operating activity on the statement of cash flows and increases the amount an employer can withhold for taxes for share-based compensation awards.  The amendment is effective for annual periods beginning after December 15, 2016.  The Company adopted this amendment effective January 1, 2017.  The adoption of this amendment has resulted in increased volatility to income tax expense related to excess tax benefits and tax deficiencies for share-based compensation.  The amount of tax benefits or deficiencies recognized in income tax expense depends on the number of options exercised and the difference in the stock prices at the exercise and grant dates.  For the year ended December 31, 2017, the Company recognized in earnings $1.0 million of tax benefits related to the exercise of stock options.

In June 2016, the FASB amended various sections of the FASB ASC related to the accounting for credit losses on financial instruments.  The amendment changes the threshold for recognizing losses from a “probable” to an “expected” model.  The new model is referred to as the current expected credit loss model

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and applies to loans, leases, held-to-maturity investments, loan commitments and financial guarantees.  The amendment requires the measurement of all expected credit losses for financial assets as of the reporting date (including historical experience, current conditions and reasonable and supportable forecasts) and enhanced disclosures that will help financial statement users understand the estimates and judgments used in estimating credit losses and evaluating the credit quality of an organization’s portfolio.  The amendment is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  The Company will apply the amendment’s provisions as a cumulative-effect adjustment to retained earnings at the beginning of the first period the amendment is effective. The Company is currently evaluating the effects that the adoption of this amendment will have on its consolidated financial statements by gathering the information that is necessary to make the calculations required by the amendment.  This may result in increased credit losses on financial instruments recorded in the consolidated financial statements.

In March 2017, the FASB amended the Compensation – Retirement Benefits topic of the FASB ASC.  The amendment requires the service cost component of net benefit cost to be reported in the same line item as other compensation costs arising from employee services.  It also requires the other components of net benefit cost to be reported in the income statement separately from the service cost component.  The amendment is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods.  The Company does not expect the adoption of this amendment to have a material effect on its consolidated financial statements.

In February 2018, the FASB amended the Income Statement – Reporting Comprehensive Income topic of the FASB ASC.  Existing accounting standards require that the tax effects of tax rate changes on deferred taxes be recorded in current income.  Deferred taxes previously included in accumulated other comprehensive income are not allowed to be adjusted and may not reflect current tax rates.  This amendment allows the reclassification from accumulated other comprehensive income to retained earnings the tax effects resulting from the Tax Cuts and Jobs Act passed in December 2017.  The amendment is effective for fiscal years beginning after December 15, 2018, with early adoption permitted in any period for which financial statements have not yet been issued.  The Company expects to adopt this amendment during the first quarter of 2018 with the reclassification of $1.1 million of deferred taxes between accumulated other comprehensive income and retained earnings.

(3)Cash and Cash Equivalents

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

	December 31,
(Dollars in thousands)	2017		2016
Cash and due from banks	$	9,114	$	9,043
Interest-earning deposits in other banks		22,975		52,230
Cash and cash equivalents	$	32,089	$	61,273

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

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(4)Investment Securities

The amortized cost and fair values of investment securities are as follows:

	Amortized		Gross Unrealized				Estimated
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
December 31, 2017:
Available-for-sale:
U.S. government-sponsored mortgage-backed securities	$	2,870	$	—	$	(19)	$	2,851
Total	$	2,870	$	—	$	(19)	$	2,851
Held-to-maturity:
U.S. government-sponsored mortgage-backed securities	$	404,365	$	6,056	$	(4,603)	$	405,818
Trust preferred securities		427		418		—		845
Total	$	404,792	$	6,474	$	(4,603)	$	406,663
December 31, 2016:
Held-to-maturity:
U.S. government-sponsored mortgage-backed securities	$	406,498	$	7,285	$	(7,024)	$	406,759
Trust preferred securities		1,158		5		—		1,163
Total	$	407,656	$	7,290	$	(7,024)	$	407,922

The amortized cost and estimated fair value of investment securities by maturity date at December 31, 2017 are shown below. Incorporated in the maturity schedule are mortgage-backed and trust preferred 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 within 5 years	$	—	$	—
Due after 5 years through 10 years		—		—
Due after 10 years		2,870		2,851
Total	$	2,870	$	2,851
Held-to-maturity:
Due within 5 years	$	10	$	11
Due after 5 years through 10 years		71		71
Due after 10 years		404,711		406,581
Total	$	404,792	$	406,663

Realized gains and losses and the proceeds from sales of held-to-maturity securities are shown in the table below.  Most of the securities which were sold were U.S. government-sponsored mortgage-backed securities.

(Dollars in thousands)	2017		2016		2015
Proceeds from sales	$	7,446	$	5,462	$	7,718
Gross gains		431		370		701
Gross losses		—		—		—

The sale of these mortgage-backed securities, for which the Company had already collected a substantial portion of the outstanding purchased principal (at least 85%), is in accordance with the Investments – Debt and Equity Securities topic of the FASB ASC and does not taint management’s assertion of intent to hold remaining securities in the held-to-maturity portfolio to maturity.

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In 2015, the Company recognized a gross realized gain of $61,000 from the sale of one of the trust preferred securities the Company owned, PreTSL XXIV.  The Company previously wrote off the entire book value of this security when it incurred an other-than-temporary impairment charge in prior years.  The trust preferred security sold was classified in the held-to-maturity portfolio.  Since the credit rating of this security was downgraded, in accordance with the Investment-Debt and Equity Securities topic of the FASB ASC, the sale of this security does not taint management’s intent to hold the remaining securities in the held-to-maturity portfolio.

Investment securities with amortized costs of $287.2 million and $239.9 million at December 31, 2017 and 2016, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and transaction clearing accounts.

Provided below is a summary of investment securities, which were in an unrealized loss position at December 31, 2017 and 2016. The Company does not intend to sell held-to-maturity and available-for-sale 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)
December 31, 2017:
Available-for-sale:
U.S. government-sponsored mortgage-backed securities	$	2,851	$	19	$	—	$	—	1	$	2,851	$	19
Held-to-maturity:
U.S. government-sponsored mortgage-backed securities	$	41,163	$	299	$	140,200	$	4,304	49	$	181,363	$	4,603
December 31, 2016:
Held-to-maturity:
U.S. government-sponsored mortgage-backed securities	$	179,741	$	5,599	$	23,402	$	1,425	50	$	203,143	$	7,024

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, the Company does not consider these investments to be other-than-temporarily impaired as of December 31, 2017.

Trust Preferred Securities. At December 31, 2017, the Company owned one trust preferred security, PreTSL XXIII. PreTSL XXIII has an amortized cost and a remaining cost basis of $427,000 at December 31, 2017.  The trust preferred security represents an investment in a pool of debt obligations issued primarily by holding companies for Federal Deposit Insurance Corporation-insured financial institutions.  This security is classified in the Company’s held-to-maturity investment portfolio.

The trust preferred securities market is considered to be inactive as only six transactions have occurred over the past 72 months in the same tranche of securities that we own and no new issues of pooled trust preferred securities have occurred since 2007.  We used a discounted cash flow model to determine whether this security is other-than-temporarily impaired.  The assumptions used in preparing the discounted cash flow model include the following: estimated discount rates, estimated deferral and default rates on collateral, and estimated cash flows.

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Based on the Company’s review, the Company’s investment in PreTSL XXIII did not incur additional impairment during the years ended December 31, 2017, 2016 and 2015 and there is no accumulated other comprehensive loss related to noncredit factors.

It is reasonably possible that the fair value of the trust preferred security could decline in the near term if the overall economy and the financial condition of some of the issuers deteriorate further and the liquidity of this security remains low.  As a result, there is a risk that the Company’s remaining cost basis of $427,000 on the trust preferred security could be credit-related other-than-temporarily impaired in the near term.  The impairment, if any, could be material to the Company’s consolidated statements of income.

The table below provides a cumulative roll forward of credit losses recognized in earnings for debt securities held and not intended to be sold:

(Dollars in thousands)	2017		2016
Balance at January 1,	$	2,403	$	2,403
Credit losses on debt securities for which other-than-temporary impairment was not previously recognized		—		—
Credit losses on debt securities which were sold		—		—
Balance at December 31,	$	2,403	$	2,403

The table below shows the components of accumulated other comprehensive loss, net of taxes, resulting from other-than-temporarily impaired securities:

	December 31,
(Dollars in thousands)	2017		2016
Noncredit losses on other-than-temporarily impaired securities, net of taxes	$	—	$	—

(5)Federal Home Loan Bank Stock

The Bank, as a member of the FHLB system, is required to obtain and hold shares of capital stock in the FHLB. At December 31, 2017 and 2016, the Bank met such requirement.  At December 31, 2017 and 2016, the Bank owned $6.5 million and $4.9 million, respectively, of capital stock of the FHLB Des Moines.

The Company evaluated its investment in the stock of the FHLB Des Moines for impairment. Based on the Company’s evaluation of the underlying investment, including the long-term nature of the investment and the liquidity position of the FHLB Des Moines, the Company did not consider its FHLB stock other-than-temporarily impaired.

(6)Federal Reserve Bank Stock

The Bank, as a member of the Federal Reserve System, is required to hold shares of capital stock of the FRB of San Francisco equal to six percent of capital and surplus of the Bank.  At December 31, 2017 and 2016, the Bank met such requirement.  At December 31, 2017 and 2016, the Bank owned $3.1 million of capital stock of the FRB of San Francisco.

The Company evaluated its investment in the stock of the FRB of San Francisco for impairment.  Based on the Company’s evaluation of the underlying investment, including the long-term nature of the investment and the liquidity position of the FRB of San Francisco, the Company did not consider its FRB stock other-than-temporarily impaired.

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(7)Loans Receivable and Allowance for Loan Losses

The components of loans receivable are as follows:

	December 31,
(Dollars in thousands)	2017		2016
Real estate loans:
First mortgages:
One- to four-family residential	$	1,444,625	$	1,289,364
Multi-family residential		10,799		9,551
Construction, commercial and other		21,787		23,346
Home equity loans and lines of credit		12,882		14,805
Total real estate loans		1,490,093		1,337,066
Other loans:
Loans on deposit accounts		274		204
Consumer and other loans		4,340		4,360
Total other loans		4,614		4,564
Less:
Net unearned fees and discounts		(3,188)		(3,191)
Allowance for loan losses		(2,548)		(2,452)
Total unearned fees, discounts and allowance for loan losses		(5,736)		(5,643)
Loans receivable, net	$	1,488,971	$	1,335,987

The table below presents the activity in the allowance for loan losses by portfolio segment:

			Construction,		Home
			Commercial		Equity
			and Other		Loans and
	Residential		Mortgage		Lines of		Consumer
(Dollars in thousands)	Mortgage		Loans		Credit		and Other		Unallocated		Totals
2017:
Balance, beginning of year	$	1,594	$	519	$	2	$	115	$	222	$	2,452
Provision (reversal of provision) for loan losses		63		20		(1)		(40)		10		52
		1,657		539		1		75		232		2,504
Charge-offs		(11)		—		—		(26)		—		(37)
Recoveries		75		—		—		6		—		81
Net recoveries (charge-offs)		64		—		—		(20)		—		44
Balance, end of year	$	1,721	$	539	$	1	$	55	$	232	$	2,548
2016:
Balance, beginning of year	$	1,380	$	517	$	3	$	72	$	194	$	2,166
Provision (reversal of provision) for loan losses		223		1		(1)		59		28		310
		1,603		518		2		131		222		2,476
Charge-offs		(33)		—		—		(28)		—		(61)
Recoveries		24		1		—		12		—		37
Net recoveries (charge-offs)		(9)		1		—		(16)		—		(24)
Balance, end of year	$	1,594	$	519	$	2	$	115	$	222	$	2,452
2015:
Balance, beginning of year	$	413	$	977	$	5	$	263	$	33	$	1,691
Provision (reversal of allowance) for loan losses		964		(471)		(49)		(150)		161		455
		1,377		506		(44)		113		194		2,146
Charge-offs		—		—		—		(53)		—		(53)
Recoveries		3		11		47		12		—		73
Net recoveries (charge-offs)		3		11		47		(41)		—		20
Balance, end of year	$	1,380	$	517	$	3	$	72	$	194	$	2,166

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In 2016, the Company changed the look-back period that is used to calculate the historical loss rate from five to seven years.  The look-back period was extended to seven years because the longer look-back period is considered to be more representative of an entire economic cycle.  The seven year look-back period includes loan charge-offs and recoveries related to the recession and the subsequent economic recovery.  The change in the look-back period did not have a material effect on the allowance for loan losses.

The allowance for loan loss for each segment of the loan portfolio is generally determined by calculating the historical loss of each segment in the look-back period and adding a qualitative adjustment for the following factors:

· changes in lending policies and procedures, including changes in underwriting standards and collections, charge-off and recovery practices;

· changes in international, national, and local economic trends;

· changes in the types of loans in the loan portfolio;

· changes in the experience and ability of personnel in the mortgage loan origination and loan servicing departments;

· changes in the number and amount of delinquent loans and classified assets;

· changes in the type and volume of loans being originated;

· changes in the value of underlying collateral for collateral dependent loans;

· changes in any concentration of credit; and

· external factors such as competition, legal and regulatory requirements on the level of estimated credit losses in the existing loan portfolio.

The allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.  The unallocated allowance is established for probable losses that have been incurred as of the reporting date but are not reflected in the allocated allowance.

Management considers the allowance for loan losses at December 31, 2017 to be at an appropriate level to provide for probable losses that can be reasonably estimated based on general and specific conditions at that date.  While the Company uses the best information it has available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations.  To the extent actual outcomes differ from the estimates, additional provisions for credit losses may be required that would reduce future earnings.  In addition, as an integral part of their examination process, the bank regulators periodically review the allowance for loan losses and may require the Company to increase the allowance based on their analysis of information available at the time of their examination.

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The table below presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method:

			Construction,		Home
			Commercial		Equity
			and Other		Loans and
	Residential		Mortgage		Lines of		Consumer
(Dollars in thousands)	Mortgage		Loans		Credit		and Other		Unallocated		Totals
December 31, 2017:
Allowance for loan losses:
Ending allowance balance:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		1,721		539		1		55		232		2,548
Total ending allowance balance	$	1,721	$	539	$	1	$	55	$	232	$	2,548
Loans:
Ending loan balance:
Individually evaluated for impairment	$	4,977	$	—	$	165	$	—	$	—	$	5,142
Collectively evaluated for impairment		1,447,326		21,701		12,722		4,628		—		1,486,377
Total ending loan balance	$	1,452,303	$	21,701	$	12,887	$	4,628	$	—	$	1,491,519
December 31, 2016:
Allowance for loan losses:
Ending allowance balance:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		1,594		519		2		115		222		2,452
Total ending allowance balance	$	1,594	$	519	$	2	$	115	$	222	$	2,452
Loans:
Ending loan balance:
Individually evaluated for impairment	$	5,587	$	—	$	156	$	1	$	—	$	5,744
Collectively evaluated for impairment		1,290,209		23,256		14,656		4,574		—		1,332,695
Total ending loan balance	$	1,295,796	$	23,256	$	14,812	$	4,575	$	—	$	1,338,439

The table below presents the balance of impaired loans individually evaluated for impairment by class of loans:

			Unpaid
	Recorded		Principal
(Dollars in thousands)	Investment		Balance
December 31, 2017:
With no related allowance recorded:
One- to four-family residential mortgages	$	4,977	$	5,897
Home equity loans and lines of credit		165		228
Total	$	5,142	$	6,125
December 31, 2016:
With no related allowance recorded:
One- to four-family residential mortgages	$	5,587	$	6,469
Home equity loans and lines of credit		156		204
Consumer and other		1		1
Total	$	5,744	$	6,674

The table below presents the average recorded investment and interest income recognized on impaired loans by class of loans:

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	Average
	Recorded		Interest Income
(Dollars in thousands)	Investment		Recognized
2017:
With no related allowance recorded:
One- to four-family residential mortgages	$	5,112	$	58
Home equity loans and lines of credit		175		—
Consumer and other		—		—
Total	$	5,287	$	58
2016:
With no related allowance recorded:
One- to four-family residential mortgages	$	5,743	$	72
Home equity loans and lines of credit		161		—
Consumer and other		1		—
Total	$	5,905	$	72
2015:
With no related allowance recorded:
One- to four-family residential mortgages	$	6,642	$	71
Home equity loans and lines of credit		131		—
Consumer and other		9		—
Total	$	6,782	$	71

There were no loans individually evaluated for impairment with a related allowance for loan loss as of December 31, 2017, 2016 or 2015. Loans individually evaluated for impairment do not have an allocated allowance for loan loss because they are written down to fair value at the time of impairment.

The table below presents the aging of loans and accrual status by class of loans:

															Loans
															More Than
															90 Days
	30 - 59		60 - 89		90 Days or										Past Due
	Days Past		Days Past		Greater		Total Past		Loans Not		Total		Nonaccrual		and Still
(Dollars in thousands)	Due		Due		Past Due		Due		Past Due		Loans		Loans		Accruing
December 31, 2017:
One- to four-family residential mortgages	$	—	$	1,207	$	1,589	$	2,796	$	1,438,725	$	1,441,521	$	4,062	$	—
Multi-family residential mortgages		—		—		—		—		10,782		10,782		—		—
Construction, commercial and other mortgages		—		—		—		—		21,701		21,701		—		—
Home equity loans and lines of credit		—		—		41		41		12,846		12,887		165		—
Loans on deposit accounts		—		—		—		—		274		274		—		—
Consumer and other		4		—		—		4		4,350		4,354		—		—
Total	$	4	$	1,207	$	1,630	$	2,841	$	1,488,678	$	1,491,519	$	4,227	$	—
December 31, 2016:
One- to four-family residential mortgages	$	185	$	133	$	1,358	$	1,676	$	1,284,590	$	1,286,266	$	4,402	$	—
Multi-family residential mortgages		—		—		—		—		9,530		9,530		—		—
Construction, commercial and other mortgages		—		—		—		—		23,256		23,256		—		—
Home equity loans and lines of credit		16		35		49		100		14,712		14,812		156		—
Loans on deposit accounts		—		—		—		—		204		204		—		—
Consumer and other		3		—		1		4		4,367		4,371		1		—
Total	$	204	$	168	$	1,408	$	1,780	$	1,336,659	$	1,338,439	$	4,559	$	—

The Company primarily uses the aging of loans and accrual status to monitor the credit quality of its loan portfolio.  When a mortgage loan becomes seriously delinquent (90 days or more contractually past due), it displays weaknesses that may result in a loss. As a loan becomes more delinquent, the likelihood of the borrower repaying the loan decreases and the loan becomes more collateral-dependent. A mortgage loan becomes collateral-dependent when the proceeds for repayment can be expected to come only from the sale or operation of

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the collateral and not from borrower repayments.  Generally, appraisals are obtained after a loan becomes collateral-dependent or is four months delinquent.  The carrying value of collateral-dependent loans is adjusted to the fair value of the collateral less selling costs.  Any commercial real estate, commercial, construction or equity loan that has a loan balance in excess of a specified amount is also periodically reviewed to determine whether the loan exhibits any weaknesses and is performing in accordance with its contractual terms.

The Company had 17 nonaccrual loans with a book value of $4.2 million at December 31, 2017 and 19 nonaccrual loans with a book value of $4.6 million as of December 31, 2016.  The Company collected interest on nonaccrual loans of $179,000, $195,000 and $233,000 during 2017, 2016 and 2015, respectively, but due to regulatory requirements, the Company recorded the interest as a reduction of principal.  The Company would have recognized additional interest income of $240,000, $268,000 and $312,000 during 2017, 2016, and 2015, respectively, had the loans been accruing interest.  The Company did not have any loans more than 90 days past due and still accruing interest as of December 31, 2017, 2016 or 2015.

There were no loans modified in a troubled debt restructuring during the year ended December 31, 2017 or 2016. There were no new troubled debt restructurings within the past 12 months that subsequently defaulted.

The table below summarizes troubled debt restucturings by class of loans:

	Number of		Accrual		Number of		Nonaccrual
(Dollars in thousands)	Loans		Status		Loans		Status		Total
December 31, 2017:
One- to four-family residential mortgages		4	$	915		5	$	1,074	$	1,989
Home equity loans and lines of credit		—		—		1		92		92
Total		4	$	915		6	$	1,166	$	2,081
December 31, 2016:
One- to four-family residential mortgages		5	$	1,185		7	$	1,629	$	2,814
Home equity loans and lines of credit		—		—		1		107		107
Total		5	$	1,185		8	$	1,736	$	2,921

One of the restructured loans, for $149,000, was more than 149 days delinquent and not accruing interest as of December 31, 2017 and 2016.  Restructurings include deferrals of interest and/or principal payments and temporary or permanent reductions in interest rates due to the financial difficulties of the borrowers.  At December 31, 2017, we have no commitments to lend any additional funds to these borrowers.

The Company had no real estate owned as of December 31, 2017 or 2016.  There were three one- to four-family residential mortgage loans totaling $650,000 and one home equity loan for $41,000 in the process of foreclosure as of December 31, 2017.  There were three one-to four-family residential mortgage loans totaling $660,000 and one home equity loan for $42,000 in the process of foreclosure as of December 31, 2016.

Nearly all of our real estate loans are collateralized by real estate located in the State of Hawaii. Loan-to-value ratios on these real estate loans generally do not exceed 80% at the time of origination.

During the years ended December 31, 2017, 2016 and 2015, the Company sold $25.0 million, $48.9 million and $56.2 million, respectively, of mortgage loans held for sale and recognized gains of $199,000, $406,000, and $503,000, respectively.  The Company had one loan held for sale for $403,000 at December 31, 2017 and five loans held for sale totaling $1.6 million at December 31, 2016.

The Company serviced loans for others of $35.5 million, $41.5 million and $51.8 million at December 31, 2017, 2016, and 2015, respectively.  Of these amounts, $1.5 million, $2.2 million, and $2.8 million relate to securitizations for which the Company continues to hold the related mortgage-backed securities at December 31, 2017, 2016, and 2015, respectively.  The amount of contractually specified servicing fees earned was $105,000,

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$128,000 and $153,000 for 2017, 2016, and 2015, respectively.  The fees are reported in service fees on loan and deposit accounts in the consolidated statements of income.

In the normal course of business, the Company has made loans to certain directors and executive officers under terms which management believes are consistent with the Company’s general lending policies.  Loans to directors and executive officers amounted to $890,000 at December 31, 2017 and $1.4 million at December 31, 2016.

(8)Accrued Interest Receivable

The components of accrued interest receivable are as follows:

	December 31,
(Dollars in thousands)	2017		2016
Investment securities	$	1,045	$	1,064
Loans receivable		4,090		3,658
Interest-bearing deposits		7		10
Total	$	5,142	$	4,732

(9)Mortgage Servicing Assets

Mortgage servicing assets are created when the Company sells mortgage loans and retains the rights to service the loans.  Mortgage servicing assets are accounted for in accordance with the Transfers and Servicing topic of the FASB ASC and are initially valued at fair value and subsequently at the lower of cost or fair value.  We amortize mortgage servicing assets in proportion to and over the period of estimated net servicing income.  All servicing assets are grouped into categories based on the interest rate and original term of the loan sold.  Mortgage servicing assets related to loan sales are recorded as a gain on sale of loans and totaled $3,000 and $0 for the years ended December 31, 2017 and 2016, respectively.

The table below presents the changes in our mortgage servicing assets:

(Dollars in thousands)	2017		2016
Balance at beginning of year	$	307	$	426
Additions		3		—
Impairments		—		(49)
Amortization		(47)		(70)
Balance at end of year	$	263	$	307

The table below presents the gross carrying values, accumulated amortization, and net carrying values of our mortgage servicing assets:

	December 31,
(Dollars in thousands)	2017		2016
Gross carrying value	$	1,310	$	1,307
Accumulated amortization		(1,047)		(1,000)
Net carrying value	$	263	$	307

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The estimated amortization expense for our mortgage servicing assets for the next five years and all years thereafter are as follows:

(Dollars in thousands)
2018	$	48
2019		32
2020		26
2021		22
2022		20
Thereafter		115
Total	$	263

The Company uses a discounted cash flow model to determine the fair value of retained mortgage servicing assets.  The discounted cash flow model is also used to assess impairment of servicing assets.  Impairments are recorded as adjustments to amortization expense and included in service fees on loan and deposit accounts in the statements of income.  Critical assumptions used in the discounted cash flow model include mortgage prepayment speeds, discount rates and cost of servicing.

Prepayment speed may be affected by economic factors such as home price appreciation, market interest rates, the availability of other loan products to our borrowers and customer payment patterns.  Prepayment speeds include the impact of all borrower prepayments, including full payoffs, additional principal payments and the impact of loans paid off due to foreclosure liquidations.  As market interest rates decline, prepayment speeds will generally increase as customers refinance existing mortgage loans under more favorable interest rate terms and future cash flows will generally decline resulting in a potential reduction, or impairment, to the fair value of the mortgage servicing assets.  Alternatively, an increase in market interest rates may cause a decrease in prepayment speeds and therefore an increase in the fair value of mortgage servicing assets.

The table below presents the fair values and key assumptions used in determining the fair values of our mortgage servicing assets as of December 31, 2017 and 2016:

	2017			2016
Fair value, beginning of year (in thousands)	$	368		$	441
Fair value, end of year (in thousands)		311			368
Weighted average discount rate		10.50	%		10.50	%
Weighted average prepayment speed assumption (PSA prepayment speed)		173.3			159.2
Annual cost to service (per loan)	$	70		$	65

The PSA prepayment model assumes increasing prepayment rates for the first 30 months of a loan’s term and constant prepayment rates thereafter.

(10)Interest Rate Lock and Forward Loan Sale Commitments

The Company may enter into interest rate lock commitments with borrowers on loans intended to be sold. To manage interest rate risk on the lock commitments, the Company may also enter into forward loan sale commitments.  The interest rate lock commitments and forward loan sale commitments are treated as derivatives and are recorded at their fair values in prepaid expenses and other assets or in accounts payable and accrued expenses.  Changes in fair value are recorded in current earnings.  At December 31, 2017, interest rate locks and forward loan sale commitments on loans held for sale amounted to $2.5 million and $2.9 million, respectively.

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The table below presents the location of assets and liabilities related to derivatives:

		Asset Derivatives				Liability Derivatives
	Location on	Fair Value at December 31,				Fair Value at December 31,
(Dollars in thousands)	Balance Sheet	2017		2016		2017		2016
Interest rate contracts	Prepaid expenses and other assets	$	8	$	104	$	—	$	—
Interest rate contracts	Accounts payable and accrued expenses		—		—		8		104
Total derivatives		$	8	$	104	$	8	$	104

The table below presents the location of gains and losses related to derivatives:

	Location of
	Loss on
(Dollars in thousands)	Statement of Income	2017		2016
Interest rate contracts	Gain on sale of loans	$	—	$	6

(11)Premises and Equipment

Premises and equipment are as follows:

	December 31,
(Dollars in thousands)	2017		2016
Land	$	585	$	585
Buildings and improvements		1,301		1,045
Leasehold improvements		13,915		13,005
Furniture, fixtures and equipment		5,727		5,261
Automobiles		115		115
		21,643		20,011
Less accumulated depreciation and amortization		(15,962)		(16,066)
		5,681		3,945
Construction in progress		40		382
Total	$	5,721	$	4,327

Depreciation expense was $1.1 million, $1.1 million and $1.3 million for the years ended December 31, 2017, 2016 and 2015, respectively.

(12) Deposits

Deposit accounts by type are summarized with their respective weighted-average interest rates as follows:

	December 31,
	2017				2016
(Dollars in thousands)	Amount		Rate		Amount		Rate
Non-interest bearing	$	49,725	-	%	$	47,703	-	%
Savings accounts		1,040,248	0.46			1,022,159	0.41
Certificates of deposit		312,225	1.34			236,043	0.96
Money market		5,578	0.43			3,406	0.44
Checking and Super NOW		189,519	0.02			183,889	0.02
Total	$	1,597,295	0.56	%	$	1,493,200	0.43	%

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The maturity of certificate of deposit accounts at December 31, 2017 is as follows (dollars in thousands):

Maturing in:
2018	$	165,706
2019		70,272
2020		31,423
2021		20,458
2022		24,366
Total	$	312,225

Certificates of deposit with balances greater than or equal to $250,000 totaled $192.8 mllion and $141.6 million at December 31, 2017 and 2016, respectively. Deposit accounts in the Bank are insured by the FDIC, generally up to a maximum of $250,000 per account owner.

Interest expense by type of deposit is as follows:

(Dollars in thousands)	2017		2016		2015
Savings	$	4,445	$	4,162	$	3,670
Certificates of deposit and money market		3,182		1,734		1,118
Checking and Super NOW		39		37		33
Total	$	7,666	$	5,933	$	4,821

At December 31, 2017 and 2016, overdrawn deposit accounts totaled $22,000 and have been reclassified as loans in the consolidated balance sheets.

(13)Advances from the Federal Home Loan Bank

Federal Home Loan Bank advances are secured by a blanket pledge on the Bank’s assets not otherwise pledged. Our credit line with the FHLB Des Moines is equal to 35% of the Bank’s total assets and as of December 31, 2017 and 2016, we had the capacity to borrow an additional $579.4 million and $577.9 million, respectively.

Advances outstanding consisted of the following:

	December 31,
	2017				2016
			Weighted				Weighted
			Average				Average
(Dollars in thousands)	Amount		Rate		Amount		Rate
Due within one year	$	46,200	1.39	%	$	—	—	%
Due over 1 year to 2 years		31,000	1.79			37,000	1.33
Due over 2 years to 3 years		15,000	1.85			22,000	1.66
Due over 3 years to 4 years		15,000	2.32			10,000	1.66
Total	$	107,200	1.70	%	$	69,000	1.49	%

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(14)Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase are treated as financings and the obligations to repurchase the identical securities sold are reflected as a liability with the securities collateralizing the agreements classified as an asset. Securities sold under agreements to repurchase are summarized as follows:

	2017				2016
			Weighted				Weighted
	Repurchase		Average		Repurchase		Average
(Dollars in thousands)	Liability		Rate		Liability		Rate
Maturing:
1 year or less	$	—	—	%	$	25,000	1.46	%
Over 1 year to 2 years		25,000	1.66			—	—
Over 2 years to 3 years		5,000	1.65			25,000	1.66
Over 3 years to 4 years		—	—			5,000	1.65
Total	$	30,000	1.66	%	$	55,000	1.57	%

Below is a summary comparing the carrying value and fair value of securities pledged to secure repurchase agreements, the repurchase liability, and the amount at risk at December 31, 2017. The amount at risk is the greater of the carrying value or fair value over the repurchase liability and refers to the potential loss to the Company if the secured lender fails to return the security at the maturity date of the agreement.  All the agreements to repurchase are with JP Morgan Securities and the securities pledged are mortgage-backed securities issued and guaranteed by U.S. government sponsored enterprises.  The repurchase liability cannot exceed 90% of the fair value of securities pledged.  In the event of a decline in the fair value of securities pledged to less than the required amount due to market conditions or principal repayments, the Company is obligated to pledge additional securities or other suitable collateral to cure the deficiency.

									Weighted
	Carrying		Fair						Average
	Value of		Value of		Repurchase		Amount		Months to
(Dollars in thousands)	Securities		Securities		Liability		at Risk		Maturity
Maturing:
Over 90 days	$	39,834	$	39,986	$	30,000	$	9,986	17

(15)Offsetting of Financial Liabilities

Securities sold under agreements to repurchase are subject to a right of offset in the event of default.  See Note 14, Securities Sold Under Agreements to Repurchase, for additional information.

					Net Amount of		Gross Amount Not Offset in the
	Gross Amount		Gross Amount		Liabilities		Balance Sheet
	of Recognized		Offset in the		Presented in the		Financial		Cash Collateral
(Dollars in thousands)	Liabilities		Balance Sheet		Balance Sheet		Instruments		Pledged		Net Amount
December 31, 2017:
Securities sold under agreements to repurchase	$	30,000	$	—	$	30,000	$	30,000	$	—	$	—
December 31, 2016:
Securities sold under agreements to repurchase	$	55,000	$	—	$	55,000	$	55,000	$	—	$	—

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(16)Income Taxes

Allocation of federal and state income taxes between current and deferred provisions is as follows:

(Dollars in thousands)	2017		2016		2015
Current
Federal	$	6,219	$	7,487	$	10,176
State		1,447		1,810		1,833
		7,666		9,297		12,009
Deferred
Federal		3,273		1,339		(2,147)
State		163		151		(76)
		3,436		1,490		(2,223)
Total	$	11,102	$	10,787	$	9,786

The federal statutory corporate tax rate for the years ended December 31, 2017, 2016 and 2015 was 35%. A reconciliation of the tax provision based on the statutory corporate rate on pretax income and the provision for taxes as shown in the accompanying consolidated statements of income is as follows:

(Dollars in thousands)	2017			2016			2015
Income tax expense at statutory rate	$	9,123		$	9,497		$	8,587
Income tax effect of:
Other tax-exempt income		(317)			(338)			(359)
Share-based compensation		2			68			87
State income taxes, net of federal income tax benefits		1,104			1,057			1,104
Tax benefit from the exercise of stock options (1)		(1,046)			—			—
Write-down of deferred income taxes (2)		2,054			—			—
Other		182			503			367
Total income tax expense	$	11,102		$	10,787		$	9,786
Effective income tax rate		42.59	%		39.75	%		39.89	%

(1) Starting in 2017 a new accounting standard requires that any excess tax benefits resulting from the exercise of stock options be recognized in income tax expense.  Prior to the adoption of the new standard, the excess tax benefits were recorded as additional paid-in-capital.

(2) Income tax expense for 2017 included a $2.1 million write-down of deferred income tax assets that resulted when the federal corporate tax rate was lowered from 35% to 21% due to the Tax Cuts and Jobs Act.

The components of income taxes payable (receivable) are as follows:

	December 31,
(Dollars in thousands)	2017		2016
Current taxes payable (receivable):
Federal	$	(1,571)	$	(122)
State		1,483		1,616
	$	(88)	$	1,494
Deferred taxes receivable:
Federal	$	(3,178)	$	(6,350)
State		(1,431)		(1,555)
	$	(4,609)	$	(7,905)

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The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:

	December 31,
(Dollars in thousands)	2017		2016
Deferred tax assets:
Premises and equipment	$	966	$	1,737
Hawaii franchise tax		440		560
Unfunded pension liability		1,229		1,550
Allowance for loan losses		678		969
Impaired asset write-down		724		1,020
Employee benefit plans		2,580		3,785
Equity incentive plan		420		1,330
Unrealized losses on securities available-for-sale		17		21
Deferred compensation		453		744
Other		137		215
		7,644		11,931
Deferred tax liabilities:
Net deferred loan fees		2,676		3,566
FHLB stock dividends		126		196
Prepaid expense		163		143
Premiums on loans sold		70		121
		3,035		4,026
Net deferred tax assets	$	4,609	$	7,905

Deferred tax assets and liabilities at December 31, 2017 and 2016 were calculated using federal corporate tax rates of 21% and 35%, respectively.  The corporate tax rate was lowered to 21% due to the Tax Cuts and Jobs Act of 2017.  The lower tax rate caused a $2.1 million increase in income tax expense and write down of deferred income tax assets. 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced. There was no valuation allowance for deferred tax assets as of December 31, 2017 and 2016.

(17)Employee Benefit Plans

The Company has a noncontributory defined benefit pension plan (Pension Plan) that covers most employees with at least one year of service. The benefits are based on years of service and the employees’ compensation during the service period. The Company’s policy is to accrue the actuarially determined pension costs and to fund pension costs within regulatory guidelines. The Company reviews its assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is appropriate to do so. The effect of modifications to those assumptions is recorded in accumulated other comprehensive income (AOCI) beginning in 2006 and amortized to net periodic benefit cost over future periods using the corridor method. The Company believes that the assumptions utilized in recording its obligations under the plan are reasonable based on its experience and market conditions.

On November 4, 2008, the Board of Directors approved changes to the Company’s defined benefit pension plan. Effective December 31, 2008, there are no further accrual of benefits for any participants and benefits do not

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increase with any additional years of service. Employees already enrolled in the Pension Plan as of December 31, 2008 will be 100% vested if they have at least five years of service. For employees with less than five years of service, vesting would occur at the employee’s five-year anniversary date.

In addition, the Company sponsors a Supplemental Employee Retirement Plan (SERP), a noncontributory supplemental retirement benefit plan, which covers certain current and former employees of the Company for amounts in addition to those provided under the Pension Plan.

The following table sets forth the status of the Pension Plan and SERP at the dates indicated:

	Pension Plan				SERP
	December 31,
(Dollars in thousands)	2017		2016		2017		2016
Accumulated benefit obligation at end of year	$	19,314	$	17,496	$	9,242	$	9,044
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	17,496	$	17,321	$	9,044	$	8,891
Service cost		193		194		75		38
Interest cost		763		752		140		132
Actuarial loss (gain)		1,670		(90)		—		—
Benefits paid		(808)		(681)		(17)		(17)
Benefit obligation at end of year		19,314		17,496		9,242		9,044
Change in plan assets:
Fair value of plan assets at beginning of year		14,804		13,140		—		—
Actual return on plan assets		1,931		345		—		—
Employer contributions		—		2,000		17		17
Benefits paid		(808)		(681)		(17)		(17)
Fair value of plan assets at end of year		15,927		14,804		—		—
Funded status at end of year	$	(3,387)	$	(2,692)	$	(9,242)	$	(9,044)
Amounts recognized in the consolidated balance sheets:
Accounts payable and accrued expenses - liability	$	(3,387)	$	(2,692)	$	(9,242)	$	(9,044)
Amounts recognized in accumulated other comprehensive loss:
Net actuarial loss	$	9,096	$	8,582	$	—	$	—
Prior service cost		149		154		—		—
Accumulated other comprehensive loss, before tax	$	9,245	$	8,736	$	—	$	—

The following table sets forth the changes recognized in accumulated other comprehensive loss for the years indicated:

	Pension Plan
	Year Ended December 31,
(Dollars in thousands)	2017		2016
Accumulated other comprehensive loss at beginning of year, before tax	$	8,736	$	8,375
Actuarial net loss arising during the period		764		580
Amortizations (recognized in net periodic benefit cost):
Actuarial loss		(250)		(214)
Prior service cost		(5)		(5)
Total recognized in other comprehensive loss		509		361
Accumulated other comprehensive loss at end of year, before tax	$	9,245	$	8,736

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For the years ended December 31, 2017 and 2016, the following weighted average assumptions were used to determine benefit obligations at the end of the year:

	Pension Plan				SERP
	Year Ended December 31,
	2017		2016		2017		2016
Assumptions used to determine the year-end benefit obligations:
Discount rate	3.70	%	4.30	%	5.04	%	5.05	%
Rate of compensation increase	N/A		N/A		5.00	%	5.00	%

The Company does not expect any plan assets to be returned to the Company during calendar year 2018.

The dates used to determine retirement measurements for the Pension Plan were December 31, 2017 and 2016.

The Company’s investment strategy for the defined benefit retirement plan is to maintain a consistent rate of return with primary emphasis on capital appreciation and secondary emphasis on income to enhance the purchasing power of the plan’s assets over the long-term and to preserve capital. The investment policy establishes a target allocation for each asset class that is reviewed periodically and rebalanced when considered appropriate. Normal target allocations at December 31, 2017 were 55% domestic equity securities, 10% international equity securities and 35% bonds.  Equity securities primarily include stocks, investment in exchange traded funds and large-cap, mid-cap and small-cap mutual funds.  Bonds include U.S. Treasuries, mortgage-backed securities and corporate bonds of companies in diversified industries. Other types of investments include money market funds and savings accounts opened with the Company.

As of December 31, 2017 and 2016, the Pension Plan’s assets measured at fair value were classified as follows:

			Fair Value of Measurements at Report Date Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Total Fair		Assets		Inputs		Inputs
(Dollars in thousands)	Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2017:
Cash	$	846	$	846	$	—	$	—
Equities		11,814		11,814		—		—
Mutual funds (1)		3,267		3,267		—		—
Total	$	15,927	$	15,927	$	—	$	—
December 31, 2016:
Cash	$	1,839	$	1,839	$	—	$	—
Equities		9,794		9,794		—		—
Mutual funds (1)		3,171		3,171		—		—
Total	$	14,804	$	14,804	$	—	$	—

(1) This category includes mutual funds that invest in equities and bonds.  The mutual fund managers have the ability to change the amounts invested in equities and bonds depending on their investment outlook.

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Estimated future benefit payments reflecting expected future service at December 31, 2017 are as follows:

	Pension
(Dollars in thousands)	Plan		SERP
2018	$	954	$	17
2019		1,007		6,488
2020		1,039		150
2021		1,092		2,320
2022		1,133		144
2023 - 2027		5,794		665
Total	$	11,019	$	9,784

For the years ended December 31, 2017, 2016, and 2015, the following weighted average assumptions were used to determine net periodic benefit cost for the fiscal years shown:

	Pension Plan						SERP
	Year Ended December 31,
(Dollars in thousands)	2017		2016		2015		2017		2016		2015
Assumptions used to determine the net periodic benefit cost:
Discount rate	4.30	%	4.40	%	4.10	%	5.03	%	5.05	%	5.06	%
Expected return on plan assets	7.25		7.50		7.50		N/A		N/A		N/A
Rate of compensation increase	N/A		N/A		N/A		5.00		5.00		5.00

The components of net periodic benefit cost were as follows:

	Pension Plan						SERP
	Year Ended December 31,
(Dollars in thousands)	2017		2016		2015		2017		2016		2015
Net periodic benefit cost for the year:
Service cost	$	193	$	194	$	120	$	75	$	38	$	29
Interest cost		763		752		722		140		132		125
Expected return on plan assets		(1,026)		(1,015)		(976)		—		—		—
Amortization of prior service cost		5		5		—		—		—		—
Recognized actuarial loss		250		214		215		—		—		—
Recognized curtailment loss		—		—		—		—		—		—
Net periodic benefit cost	$	185	$	150	$	81	$	215	$	170	$	154

The estimated prior service cost and net actuarial loss that will be amortized from AOCI into net periodic pension benefit cost in 2018 are $5,000 and $249,000, respectively.

The expected return on plan assets is based on the weighted-average long-term rates of return for the types of assets held in the plan. The expected return on plan assets is adjusted when there is a change in the expected long-term rate of return or in the composition of assets held in the plan.  The discount rate is based on the return of high-quality fixed-income investments that can be used to fund the benefit payments under the Company’s defined benefit plan.

The Company does not expect to make any contributions to the defined benefit pension plan in 2018.  The Company expects to make a $17,000 contribution to the SERP in 2018 to cover actual benefit payments.

The Company also has a 401(k) defined contribution plan and profit sharing plan covering all employees after one year of service. The 401(k) plan provides for employer matching contributions, as determined by the Company, based on a percentage of employees’ contributions subject to a maximum amount defined in the plan agreement. The Company’s 401(k) matching contributions, based on 5% of employees’ contributions for 2017, 2016 and 2015, amounted to $57,000, $57,000, and $56,000, respectively. The Company contributes to the profit sharing plan an amount determined by the Board of Directors. No contributions were made to the profit sharing plan for years ended December 31, 2017, 2016 and 2015.

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(18)Employee Stock Ownership Plan

Effective January 1, 2009, Territorial Savings Bank adopted an Employee Stock Ownership Plan (ESOP) for eligible employees.  The ESOP borrowed $9.8 million from the Company and used those funds to acquire 978,650 shares, or 8%, of the total number of shares issued by the Company in its initial public offering.  The shares were acquired at a price of $10.00 per share.

The loan is secured by the shares purchased with the loan proceeds and will be repaid by the ESOP over the 20-year term of the loan with funds from Territorial Savings Bank’s contributions to the ESOP and dividends payable on the shares.  The interest rate on the ESOP loan is an adjustable rate equal to the prime rate, as published in The Wall Street Journal.  The interest rate adjusts annually and will be the prime rate on the first business day of the calendar year.

Shares purchased by the ESOP are held by a trustee in an unallocated suspense account, and shares are released annually from the suspense account on a pro-rata basis as principal and interest payments are made by the ESOP to the Company.  The trustee allocates the shares released among participants on the basis of each participant’s proportional share of compensation relative to all participants.  As shares are committed to be released from the suspense account, Territorial Savings Bank reports compensation expense based on the average fair value of shares released with a corresponding credit to stockholders’ equity.  The shares committed to be released are considered outstanding for earnings per share computations.  Compensation expense recognized for the years ended December 31, 2017 and 2016 amounted to $1.8 million and $1.1 million, respectively.

Shares held by the ESOP trust were as follows:

	December 31,
	2017		2016
Allocated shares		397,912		372,997
Unearned shares		538,261		587,193
Total ESOP shares		936,173		960,190
Fair value of unearned shares, in thousands	$	16,616	$	19,283

The ESOP restoration plan is a non-qualified plan that provides supplemental benefits to certain executives who are prevented from receiving the full benefits contemplated by the ESOP’s benefit formula.  The supplemental cash payments consist of payments representing shares that cannot be allocated to the participants under the ESOP due to IRS limitations imposed on tax-qualified plans. We accrue for these benefits over the period during which employees provide services to earn these benefits.  For the years ended December 31, 2017 and 2016, we accrued $341,000 and $454,000, respectively, for the ESOP restoration plan.

(19)Share-Based Compensation

On August 19, 2010, Territorial Bancorp Inc. adopted the 2010 Equity Incentive Plan, which provides for awards of stock options and restricted stock to key officers and outside directors.  In accordance with the Compensation — Stock Compensation topic of the FASB ASC, the cost of the 2010 Equity Incentive Plan is based on the fair value of the awards on the grant date.  The fair value of restricted stock is based on the closing price of the Company’s stock on the grant date.  The fair value of stock options is estimated using a Black-Scholes option pricing model using assumptions for dividend yield, stock price volatility, risk-free interest rate and option term.  These assumptions are based on our judgments regarding future events, are subjective in nature, and cannot be determined with precision.  The cost of the awards will be recognized on a straight-line basis over the three-, five- or six-year vesting period during which participants are required to provide services in exchange for the awards.

The Company recognized compensation expense, measured as the fair value of the share-based award on the date of grant, on a straight-line basis over the vesting period.  Share-based compensation is recorded in the statement of income as a component of salaries and employee benefits with a corresponding increase in stockholders’

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equity.  The table below presents information on compensation expense and the related tax benefit for all share-based awards:

(In thousands)	2017		2016		2015
Compensation expense	$	153	$	1,789	$	2,670
Income tax benefit		42		718		1,072

Shares of our common stock issued under the 2010 Equity Incentive Plan shall be authorized shares.   The maximum number of shares that will be awarded under the plan is 1,862,637 shares.

Stock Options

The table below presents the stock option activity of the Company:

		Weighted			Aggregate
		Average		Remaining	Intrinsic
		Exercise		Contractual	Value
	Options	Price		Life (years)	(in thousands)
Options outstanding at December 31, 2014	832,954	$	17.38	5.68	$	3,471
Granted	3,600		26.23	9.67
Exercised	1,000		17.36			8
Forfeited	3,254		17.36
Expired	—
Options outstanding at December 31, 2015	832,300	$	17.42	4.70	$	8,588
Granted	—
Exercised	125,870		17.36			1,378
Forfeited	—
Expired	—
Options outstanding at December 31, 2016	706,430	$	17.43	3.70	$	10,884
Granted	—
Exercised	294,887		17.36			4,345
Forfeited	—
Expired	—
Options outstanding at December 31, 2017	411,543	$	17.48	2.73	$	5,509
Options vested and exercisable at December 31, 2017	410,343	$	17.46	2.71	$	5,503

The following summarizes certain stock option activity of the Company:

(In thousands)	2017		2016		2015
Intrinsic value of stock options exercised	$	4,345	$	1,378	$	8
Proceeds received from stock options exercised		5,119		2,186		17
Tax benefits realized from stock options exercised		1,601		368		3
Total fair value of stock options that vested		37		4,495		3,854

During the year ended December 31, 2017, the Company issued 135,210 shares of common stock in exchange for 294,887 stock options and 159,677 common shares.  Pursuant to the provisions of our equity incentive plan, optionees are permitted to use the value of common stock they own in a stock swap transaction or use a net settlement method to pay the exercise price of stock options.

As of December 31, 2017, the Company had $3,000 of unrecognized compensation costs related to the stock option plan.  The cost of the stock option plan is being amortized over a three-year vesting period.

Restricted Stock

Restricted stock is accounted for as a fixed grant using the fair value of the Company’s stock at the time of grant.  Unvested restricted stock may not be disposed of or transferred during the vesting period.  Restricted stock carries

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the right to receive dividends, although dividends attributable to restricted stock may be retained by the Company until the shares vest, at which time they are paid to the award recipient.

The table below presents the restricted stock activity:

		Weighted
		Average Grant
	Restricted	Date Fair
	Stock	Value
Nonvested at December 31, 2014	226,733	$	17.39
Granted	3,600		26.33
Vested	113,332		17.39
Forfeited	2,459		17.36
Nonvested at December 31, 2015	114,542	$	17.67
Granted	—		—
Vested	112,142		17.49
Forfeited	—		—
Nonvested at December 31, 2016	2,400	$	26.23
Granted	9,604		29.53
Vested	1,200		26.23
Forfeited	—		—
Nonvested at December 31, 2017	10,804	$	29.16

During the year ended December 31, 2017, the Company issued 9,604 shares of restricted stock to certain members of executive management under the 2010 Equity Incentive Plan.  The fair value of the restricted stock is based on the value of the Company’s stock on the date of grant.  Restricted stock will vest over three years from the date of the grant.

As of December 31, 2017, the Company had $246,000 of unrecognized compensation costs related to restricted stock. 

During the year ended December 31, 2017, the Company issued 11,525 of performance-based restricted stock units (PRSUs) to certain members of executive management under the 2010 Equity Incentive Plan.  These PRSUs will vest in the first quarter of 2020 after our Compensation Committee determines whether a performance condition that compares the Company’s return on average equity to the SNL Bank Index is achieved.  Depending on the Company’s performance, the actual number of these PRSUs that are issued at the end of the vesting period can vary between 0% to 150% of the target award.  For the PRSUs, an estimate is made of the number of shares expected to vest based on the probability that the performance criteria will be achieved to determine the amount of compensation expense to be recognized.  This estimate is re-evaluated quarterly and total compensation expense is adjusted for any change in the current period.

The table below presents the PRSUs that will vest on a performance condition:

	Performance-
	Based Restricted
	Stock Units	Weighted
	Based on a	Average Grant
	Performance	Date Fair
	Condition	Value
Nonvested at December 31, 2016	—	$	—
Granted	11,525		29.53
Vested	—		—
Forfeited	—		—
Nonvested at December 31, 2017	11,525	$	29.53

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The fair value of these PRSUs is based on the fair value of the Company’s stock on the date of grant.  As of December 31, 2017, the Company had $194,000 of unrecognized compensation costs related to these PRSUs.  Performance will be measured over a three-year period and will be cliff vested.

During the year ended December 31, 2017, the Company issued 2,881 of PRSUs to certain members of executive management under the 2010 Equity Incentive Plan.  These PRSUs will vest in the first quarter of 2020 after our Compensation Committee determines whether a market condition that compares the Company’s total stock return to the SNL Bank Index is achieved.  The number of shares that will be expensed will not be adjusted for performance.  The fair value of these PRSUs is based on a Monte Carlo valuation of the Company’s stock on the date of grant.  The assumptions which were used in the Monte Carlo valuation of the PRSUs are:

Grant date: May 25, 2017

Performance period: January 1, 2017 to December 31, 2019

2.60 year risk-free rate on grant date: 1.40%

December 31, 2016 closing price: $32.84

Closing stock price on date of grant: $29.53

Annualized volatility (based on 2.60 year historical volatility as of the grant date): 15.7%

Annual dividend preceeding the grant date: $0.80

The table below presents the PRSUs that will vest on a market condition:

	Performance-
	Based Restricted	Monte Carlo
	Stock Units	Valuation of
	Based on a	the Company's
	Market Condition	Stock
Nonvested at December 31, 2016	—	$	—
Granted	2,881		24.44
Vested	—		—
Forfeited	—		—
Nonvested at December 31, 2017	2,881	$	24.44

As of December 31, 2017, the Company had $37,000 of unrecognized compensation costs related to the PRSUs that are based on a market condition.  Performance will be measured over a three-year period and will be cliff vested. 

(20)Earnings Per Share

Holders of unvested restricted stock receive nonforfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings.  Unvested resticted stock awards that contain nonforfeitable rights to dividends or dividend equivalents are considered to be participating securities in the earnings per share

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computation using the two-class method.  Under the two-class method, earnings are allocated to common shareholders and participating securities according to their respective rights to earnings.

The table below presents the information used to compute basic and diluted earnings per share:

	For the Year Ended December 31,
(Dollars in thousands, except per share data)	2017		2016		2015
Net income	$	14,962	$	16,347	$	14,748
Income allocated to participating securities		(27)		(126)		(297)
Net income available to common shareholders	$	14,935	$	16,221	$	14,451
Weighted-average number of shares used in:
Basic earnings per share		9,273,783		9,093,385		9,073,015
Dilutive common stock equivalents:
Stock options and restricted stock units		258,941		218,590		190,252
Diluted earnings per share		9,532,724		9,311,975		9,263,267
Net income per common share, basic	$	1.61	$	1.78	$	1.59
Net income per common share, diluted	$	1.57	$	1.74	$	1.56

(21)Other Comprehensive Loss

The table below presents the changes in the components of accumulated other comprehensive income and loss, net of taxes:

			Noncredit
			Related
			Loss on
	Unfunded		Trust		Unrealized
	Pension		Preferred		Loss on
(Dollars in thousands)	Liability		Securities		Securities		Total
December 31, 2017:
Balances at beginning of year	$	5,284	$	—	$	32	$	5,316
Other comprehensive loss, net of taxes		373		—		5		378
Amounts reclassified from accumulated other comprehensive loss		—		—		—		—
Net current period other comprehensive loss		373		—		5		378
Balances at end of year	$	5,657	$	—	$	37	$	5,694
December 31, 2016:
Balances at beginning of year	$	5,044	$	147	$	45	$	5,236
Other comprehensive loss (income), net of taxes		240		(147)		(13)		80
Amounts reclassified from accumulated other comprehensive loss		—		—		—		—
Net current period other comprehensive loss (income)		240		(147)		(13)		80
Balances at end of year	$	5,284	$	—	$	32	$	5,316
December 31, 2015:
Balances at beginning of year	$	5,032	$	284	$	72	$	5,388
Other comprehensive loss (income), net of taxes		12		(137)		(27)		(152)
Amounts reclassified from accumulated other comprehensive loss		—		—		—		—
Net current period other comprehensive loss (income)		12		(137)		(27)		(152)
Balances at end of year	$	5,044	$	147	$	45	$	5,236

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The table below presents the tax effect on each component of accumulated other comprehensive loss:

	Year Ended December 31,
	2017						2016						2015
	Pretax				After Tax		Pretax				After Tax		Pretax				After Tax
(Dollars in thousands)	Amount		Tax		Amount		Amount		Tax		Amount		Amount		Tax		Amount
Unfunded pension liability	$	509	$	(136)	$	373	$	361	$	(121)	$	240	$	20	$	(8)	$	12
Noncredit related loss on trust preferred securities		—		—		—		(242)		95		(147)		(226)		89		(137)
Unrealized loss on securities		9		(4)		5		(22)		9		(13)		(45)		18		(27)
Total	$	518	$	(140)	$	378	$	97	$	(17)	$	80	$	(251)	$	99	$	(152)

(22)Commitments

(a) Loan Commitments

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any terms or conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on an individual basis. The Company’s policy is to require suitable collateral, primarily real estate, to be provided by customers prior to disbursement of approved loans. At December 31, 2017 and 2016, the Company had loan commitments aggregating to $15.5 million (interest rates from 2.875% to 4.125%) and $50.5 million (interest rates from 2.500% to 4.625%), respectively, primarily consisting of fixed-rate residential first mortgage loans.  In addition to commitments to originate loans, at December 31, 2017 and 2016, the Company had $27.2 million and $28.6 million, respectively, in unused lines of credit to borrowers.

(b) Lease Commitments

The Company leases a majority of its premises under operating leases expiring on various dates through 2029. Total rental expense comprised minimum rentals of $3.0 million, $2.9 million, and $2.9 million for the years ended December 31, 2017, 2016, and 2015, respectively.

At December 31, 2017, future minimum rental commitments under all noncancelable operating leases are as follows:

(Dollars in thousands)
2018	$	2,809
2019		2,353
2020		1,919
2021		1,463
2022		1,293
Thereafter		4,557
Total	$	14,394

Certain leases are renegotiable during the period of the lease or have renewal options at the expiration of the lease term. The majority of lease agreements relates to real estate and generally provides that the Company pay taxes, maintenance, insurance, and certain other operating expenses applicable to the leased premises.

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In addition, the Company leases to a tenant certain property that it owns. Future minimum rental income for this noncancelable lease is as follows:

(Dollars in thousands)
2018	$	110
2019		110
2020		110
2021		110
2022		—
Thereafter		—
Total	$	440

Rental income comprised of minimum rentals for 2017, 2016, and 2015 was approximately $110,000 each year.

(c) Reserve Requirements

The Company is required by the Federal Reserve Bank to maintain reserves based on the amount of deposits held. The reserve requirement at December 31, 2017 and 2016 was $12.8 million and $10.7 million, respectively, and the Company met such requirements.

(23)Regulatory Capital and Supervision

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.  Effective January 1, 2015, the well capitalized threshold for Tier 1 risk-based capital was increased from 6.0% to 8.0% and a new capital standard, common equity tier 1 risk-based capital, was implemented with a 6.5% ratio requirement for a financial institution to be considered well capitalized.  Additionally, effective January 1, 2015, consolidated regulatory capital requirements identical to those applicable to the subsidiary depository institutions became applicable to savings and loan holding companies over $1.0 billion in assets, such as the Company.  The capital requirements become fully-phased in on January 1, 2019.  At December 31, 2017, Territorial Savings Bank and the Company exceeded all of the fully-phased in regulatory capital requirements and are considered to be “well capitalized” under regulatory guidelines. 

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The table below present the fully-phased in capital required to be considered “well-capitalized” as a percentage of total and risk-weighted assets and the percentage and the total amount of capital maintained for Territorial Savings Bank and the Company at December 31, 2017 and 2016:

(Dollars in thousands)	Required Ratio			Actual Amount	Actual Ratio
December 31, 2017:
Tier 1 Leverage Capital
Territorial Savings Bank	5.00	%	$	218,826	11.04	%
Territorial Bancorp Inc.	5.00	%	$	240,548	12.13	%
Common Equity Tier 1 Risk-Based Capital (1)
Territorial Savings Bank	9.00	%	$	218,826	23.31	%
Territorial Bancorp Inc.	9.00	%	$	240,548	25.62	%
Tier 1 Risk-Based Capital (1)
Territorial Savings Bank	10.50	%	$	218,826	23.31	%
Territorial Bancorp Inc.	10.50	%	$	240,548	25.62	%
Total Risk-Based Capital (1)
Territorial Savings Bank	12.50	%	$	221,460	23.59	%
Territorial Bancorp Inc.	12.50	%	$	243,182	25.90	%
December 31, 2016:
Tier 1 Leverage Capital
Territorial Savings Bank (2)	9.00	%	$	219,365	11.76	%
Territorial Bancorp Inc.	5.00	%	$	235,102	12.60	%
Common Equity Tier 1 Risk-Based Capital (1)
Territorial Savings Bank	9.00	%	$	219,365	25.30	%
Territorial Bancorp Inc.	9.00	%	$	235,102	27.11	%
Tier 1 Risk-Based Capital (1)
Territorial Savings Bank	10.50	%	$	219,365	25.30	%
Territorial Bancorp Inc.	10.50	%	$	235,102	27.11	%
Total Risk-Based Capital (1)
Territorial Savings Bank	12.50	%	$	221,912	25.59	%
Territorial Bancorp Inc.	12.50	%	$	237,649	27.41	%

(1) The required Common Equity Tier 1 Risk-Based Capital, Tier 1 Risk-Based Capital and Total Risk-Based Capital ratios are based on the fully-phased in capital ratios in the Basel III capital regulations plus the 2.50% capital conservation buffer that becomes effective on January 1, 2019.   

(2) On July 10, 2014, Territorial Savings Bank became a member of the Federal Reserve System.  As a condition of membership, Territorial Savings Bank was required to maintain a Tier 1 Leverage Capital ratio of 9.00% for three years. 

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 the Company’s 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 December 31, 2017 and 2016, 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.

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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 parent company.

(24)Contingencies

The Company is involved in various claims and legal actions arising out of the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated balance sheets or consolidated statements of income.

(25)Fair Value of Financial Instruments

In accordance with the Fair Value Measurements and Disclosures topic of the FASB ASC, the Company groups its financial assets and liabilities valued at fair value into three levels based on the markets in which the financial assets and liabilities are traded and the reliability of the assumptions used to determine fair value as follows:

· Level 1 — Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities traded in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

· Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

· Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect management’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of discounted cash flow models and similar techniques that require the use of significant judgment or estimation.

In accordance with the Fair Value Measurements and Disclosures topic, the Company bases its fair values on the price that it would expect to receive if an asset were sold or the price that it would expect to pay to transfer a liability in an orderly transaction between market participants at the measurement date.  Also as required, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements.

The Company uses fair value measurements to determine fair value disclosures.  Investment securities held for sale and derivatives are recorded at fair value on a recurring basis.  From time to time, the Company may be required to record other financial assets at fair value on a nonrecurring basis, such as loans held for sale, impaired loans and investments, and mortgage servicing assets. These nonrecurring fair value adjustments typically involve application of the lower of cost or fair value accounting or write-downs of individual assets.

Cash and Cash Equivalents, Accrued Interest Receivable and Accrued Interest Payable. The carrying amount approximates fair value because of the short maturity of these instruments.

Investment Securities.  The estimated fair values of U.S. government-sponsored mortgage-backed securities are considered Level 2 inputs because the valuation for investment securities utilized pricing models that varied based on asset class and included trade, bid and other observable market information.

The trust preferred securities represent investments in a pool of debt obligations issued primarily by holding companies for Federal Deposit Insurance Corporation-insured financial institutions.  The trust preferred securities market is considered to be inactive as only six transactions have occurred over the past 72 months in the same tranche of securities we own and no new issues of pooled trust preferred securities have occurred since 2007.  The fair value of our trust preferred securities was determined using a discounted cash flow model.  Our model used a discount rate equal to three-month LIBOR plus 20.00%.

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The discounted cash flow analysis includes a review of all issuers within the pool.  The fair value of the trust preferred securities are classified as Level 3 inputs because they are based on discounted cash flow models.

FHLB Stock. FHLB stock, which is redeemable for cash at par value, is reported at its par value.

FRB Stock. FRB stock, which is redeemable for cash at par value, is reported at its par value.

Loans. The fair value of loans is estimated by discounting the future cash flows, including estimated prepayments, using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.  The fair value of loans is not based on the concept of exit price.

Loans Held for Sale. The fair value of loans held for sale is determined based on prices quoted in the secondary market for similar loans.

Deposits. The fair value of checking and Super NOW savings accounts, passbook accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting future cash flows using the rates currently offered for deposits with similar remaining maturities.

Advances From the FHLB and Securities Sold Under Agreements to Repurchase. Fair value is estimated by discounting future cash flows using the rates currently offered to the Company for debt with similar remaining maturities.

Interest Rate Contracts.  The Company may enter into interest rate lock commitments with borrowers on loans intended to be sold.  To manage interest rate risk on the lock commitments, the Company may also enter into forward loan sale commitments. The interest rate lock commitments and forward loan sale commitments are treated as derivatives and are recorded at their fair value determined by referring to prices quoted in the secondary market for similar contracts.  Interest rate contracts that are classified as assets are included with prepaid expenses and other assets on the consolidated balance sheet while interest rate contracts that are classified as liabilities are included with accounts payable and accrued expenses.

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The estimated fair values of the Company’s financial instruments are as follows:

	Carrying				Fair Value Measurements Using
(Dollars in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
December 31, 2017
Assets
Cash and cash equivalents	$	32,089	$	32,089	$	32,089	$	—	$	—
Investment securities available for sale		2,851		2,851		—		2,851		—
Investment securities held to maturity		404,792		406,663		—		405,818		845
Loans held for sale		403		414		—		414		—
Loans receivable, net		1,488,971		1,505,097		—		—		1,505,097
FHLB stock		6,541		6,541		—		6,541		—
FRB stock		3,103		3,103		—		3,103		—
Accrued interest receivable		5,142		5,142		7		1,045		4,090
Interest rate contracts		8		8		—		8		—
Liabilities
Deposits		1,597,295		1,595,992		—		1,285,070		310,922
Advances from the Federal Home Loan Bank		107,200		107,019		—		107,019		—
Securities sold under agreements to repurchase		30,000		29,846		—		29,846		—
Accrued interest payable		575		575		—		115		460
Interest rate contracts		8		8		—		8		—
December 31, 2016
Assets
Cash and cash equivalents	$	61,273	$	61,273	$	61,273	$	—	$	—
Investment securities held to maturity		407,656		407,922		—		406,759		1,163
Loans held for sale		1,601		1,601		—		1,601		—
Loans receivable, net		1,335,987		1,352,137		—		—		1,352,137
FHLB stock		4,945		4,945		—		4,945		—
FRB stock		3,095		3,095		—		3,095		—
Accrued interest receivable		4,732		4,732		10		1,064		3,658
Interest rate contracts		104		104		—		104		—
Liabilities
Deposits		1,493,200		1,493,094		—		1,257,157		235,937
Advances from the Federal Home Loan Bank		69,000		69,068		—		69,068		—
Securities sold under agreements to repurchase		55,000		55,123		—		55,123		—
Accrued interest payable		218		218		—		172		46
Interest rate contracts		104		104		—		104		—

At December 31, 2017 and 2016, neither the commitment fees received on commitments to extend credit nor the fair value thereof was material to the consolidated financial statements of the Company.

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The table below presents the balance of assets and liabilities measured at fair value on a recurring basis:

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
December 31, 2017
Interest rate contracts — assets	$	—	$	8	$	—	$	8
Interest rate contracts — liabilities		—		(8)		—		(8)
Available-for-sale investments		—		2,851		—		2,851
December 31, 2016
Interest rate contracts — assets	$	—	$	104	$	—	$	104
Interest rate contracts — liabilities		—		(104)		—		(104)

The fair value of interest rate contracts was determined by referring to prices quoted in the secondary market for similar contracts. The fair value of available-for-sale investments was determined using pricing models that consider bid and ask prices and prices at which similar securities traded.

The table below presents the balance of assets measured at fair value on a nonrecurring basis as of December 31, 2017 and 2016 and the related gains and losses for the years then ended:

	Fair Value
(Dollars in thousands)	Adjustment Date	Level 1		Level 2		Level 3		Total			Total Gains (Losses)
December 31, 2017
Impaired loans	3/31/2017	$	—	$	87	$	—	$	87	$	(11)
December 31, 2016
Trust preferred securities	9/30/2016	$	—	$	—	$	1,066	$	1,066	$	242
Mortgage servicing assets	6/30/2016		—		—		341		341		(49)
Impaired loans	8/31/2016		—		64		—		64		(33)
Loans held for sale	12/31/2016		—		1,601		—		1,601		(1)

The fair value of trust preferred securities is determined using a discounted cash flow model.  The assumptions used in the discounted cash flow model are discussed above.  Gains and losses on trust preferred securities that are credit related are included in net other-than-temporary impairment losses in the consolidated statements of income.  Gains and losses on trust preferred securities that are not credit related are included in other comprehensive income in the consolidated statements of comprehensive income.  Mortgage servicing assets are valued using a discounted cash flow model.  Assumptions used in the model include mortgage prepayment speeds, discount rates and cost of servicing.  Losses on mortgage servicing assets are included in service fees on loan and deposit accounts in the consolidated statements of income.  The fair value of impaired loans is determined using the value of collateral less estimated selling costs.  Losses on impaired loans are included in the provision for loan losses in the consolidated statements of income.  The fair value of loans held for sale is determined based on the prices quoted in the secondary market for similar loans.  Losses on loans held for sale are included in gain on sale of loans in the consolidated statements of income.

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The table below presents the significant unobservable inputs for Level 3 nonrecurring fair value measurements:

				Unobservable
(Dollars in thousands)	Fair Value		Valuation Technique	Input	Value
December 31, 2016:
Trust preferred securities	$	1,066	Discounted cash flow	Discount rate		Three-month LIBOR plus 20.00%
Mortgage servicing assets		341	Discounted cash flow	Discount rate		10.50%
				Prepayment speed (PSA)		158.4 - 203.5
				Annual cost to service (per loan, in dollars)	$	65

(26)Parent Company Only

Presented below are the condensed balance sheet, statement of income, and statement of cash flows for Territorial Bancorp Inc.

Condensed Balance Sheet

	December 31,
(Dollars in thousands)	2017		2016
Assets
Cash	$	20,093	$	15,288
Investment in Territorial Savings Bank		213,132		214,050
Receivable from Territorial Savings Bank		1,539		373
Prepaid expenses and other assets		141		81
Total assets	$	234,905	$	229,792
Liabilities and Equity
Other liabilities	$	51	$	6
Equity		234,854		229,786
Total liabilities and equity	$	234,905	$	229,792

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Condensed Statement of Income

	For the Year Ended December 31,
(Dollars in thousands)	2017		2016		2015
Interest and dividend income:
Dividends from Territorial Savings Bank	$	16,200	$	7,500	$	14,000
Interest-earning deposit with Territorial Savings Bank		49		34		29
Total interest and dividend income		16,249		7,534		14,029
Noninterest expense:
Salaries		37		40		34
Other general and administrative expenses		989		745		829
Total noninterest expense		1,026		785		863
Income before income taxes and equity in undistributed earnings in subsidiaries		15,223		6,749		13,166
Income taxes		(384)		(285)		(416)
Income before equity in undistributed earnings in subsidiaries		15,607		7,034		13,582
Equity in undistributed earnings of Territorial Savings Bank, net of dividends		(645)		9,313		1,166
Net income	$	14,962	$	16,347	$	14,748

Condensed Statement of Cash Flows

	For the Year Ended December 31,
(Dollars in thousands)	2017		2016		2015
Cash flows from operating activities:
Net income	$	14,962	$	16,347	$	14,748
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of Territorial Savings Bank, net of dividends		645		(9,313)		(1,166)
ESOP expense		1,529		1,353		1,210
Net (increase) decrease in prepaid expenses and other assets		(1,226)		659		1,170
Net increase (decrease) in other liabilities		27		(18)		(18)
Net cash provided by operating activities		15,937		9,028		15,944
Cash flows from investing activities:
Investment in Territorial Savings Bank		—		—		—
Net cash used in investing activities		—		—		—
Cash flows from financing activities:
Proceeds from issuance of common stock		—		566		17
Repurchases of common stock		(9)		(1,674)		(9,326)
Cash dividends paid		(11,123)		(8,409)		(7,013)
Net cash used in financing activities		(11,132)		(9,517)		(16,322)
Net increase (decrease) in cash		4,805		(489)		(378)
Cash at beginning of the period		15,288		15,777		16,155
Cash at end of the period	$	20,093	$	15,288	$	15,777

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(27)Unaudited Quarterly Financial Information

	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter		Full Year
	(Dollars in thousands, except per share data)
2017:
Interest income	$	16,781	$	16,777	$	17,177	$	17,598	$	68,333
Interest expense		2,121		2,253		2,518		2,697		9,589
Net interest income		14,660		14,524		14,659		14,901		58,744
Provision (reversal of provision) for loan losses		71		(123)		54		50		52
Net interest income after provision for loan losses		14,589		14,647		14,605		14,851		58,692
Noninterest income		1,022		1,059		909		856		3,846
Noninterest expense		8,707		8,754		8,761		10,252		36,474
Income before income taxes		6,904		6,952		6,753		5,455		26,064
Income taxes		2,583		2,651		2,580		3,288		11,102
Net income		4,321		4,301		4,173		2,167		14,962
Basic earnings per share		0.47		0.46		0.45		0.23		1.61
Diluted earnings per share		0.46		0.45		0.44		0.23		1.57
Cash dividends declared per common share		0.20		0.20		0.30		0.50		1.20

	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter		Full Year
	(Dollars in thousands, except per share data)
2016:
Interest income	$	16,380	$	16,543	$	16,669	$	16,481	$	66,073
Interest expense		1,883		1,944		1,964		2,053		7,844
Net interest income		14,497		14,599		14,705		14,428		58,229
Provision for loan losses		28		84		107		91		310
Net interest income after provision for loan losses		14,469		14,515		14,598		14,337		57,919
Noninterest income		886		1,134		1,003		1,071		4,094
Noninterest expense		9,059		8,988		8,645		8,187		34,879
Income before income taxes		6,296		6,661		6,956		7,221		27,134
Income taxes		2,512		2,624		2,792		2,859		10,787
Net income		3,784		4,037		4,164		4,362		16,347
Basic earnings per share		0.41		0.44		0.45		0.48		1.78
Diluted earnings per share		0.40		0.43		0.44		0.46		1.74
Cash dividends declared per common share		0.18		0.18		0.18		0.38		0.92

(28)Subsequent Events

On January 25, 2018, the Board of Directors of Territorial Bancorp Inc. declared a quarterly cash dividend of $0.20 per share of common stock.  The dividend was paid on February 22, 2018 to stockholders of record as of February 8, 2018.

106

ITEM 9.Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

None.

ITEM 9A.Controls and Procedures

(a) An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chairman of the Board, President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31, 2017. Based on that evaluation, the Company’s management, including the Chairman of the Board, President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended December 31, 2017, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

(b) Management’s annual report on internal control over financial reporting.

Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting as such term is defined in Rule 13a-15(f) in the Exchange Act. The Company’s internal control system is a process designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.

Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on our financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on our assessment we believe that, as of December 31, 2017, the Company’s internal control over financial reporting is effective based on those criteria.

The Company’s independent registered public accounting firm that audited the consolidated financial statements has issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017, and it is included in Item 8, under Part II of this Annual Report on Form 10-K.

ITEM 9B.Other Information

None.

107

PART III

ITEM 10.Directors, Executive Officers and Corporate Governance

The information in Territorial Bancorp Inc.’s definitive Proxy Statement for the 2018 Annual Meeting of Stockholders under the captions “Proposal 1—Election of Directors,” “Information About Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Code of Ethics and Business Conduct,” “Nominating and Corporate Governance Committee Procedures—Procedures to be Followed by Stockholders,” “Committees of the Board of Directors” and “—Audit Committee” is incorporated herein by reference.

ITEM 11.Executive Compensation

The information in Territorial Bancorp Inc.’s definitive Proxy Statement for the 2018 Annual Meeting of Stockholders under the caption “Executive Compensation” is incorporated herein by reference.

ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information in Territorial Bancorp Inc.’s definitive Proxy Statement for the 2018 Annual Meeting of Stockholders under the caption “Stock Ownership” is incorporated herein by reference.  Information with respect to the security ownership of our directors and executive officers is included above in “Item 10. Directors, Executive Officers and Corporate Governance,” and is incorporated herein by reference.

Equity Compensation Plan Information

Set forth below is information as of December 31, 2017 with respect to compensation plans (other than our employee stock ownership plan) under which equity securities of the Registrant are authorized for issuance.

Equity Compensation Plan Information

				Number of Securities
				Remaining Available for
				Future Issuance Under
	Number of Securities to	Weighted-average		Share-based
	Be Issued Upon Exercise	Exercise Price of		Compensation Plans
	of Outstanding Options,	Outstanding Options,		(excluding securities
	Warrants and Rights	Warrants and Rights		reflected in first column)
Equity compensation plans approved by security holders (1)	410,343	$	17.46	246,576

(1) Reflects stock options only

ITEM 13.Certain Relationships and Related Transactions, and Director Independence

The information in Territorial Bancorp Inc.’s definitive Proxy Statement for the 2018 Annual Meeting of Stockholders under the captions “Transactions with Certain Related Persons” and “Proposal 1 — Election of Directors” is incorporated herein by reference.

ITEM 14.Principal Accountant Fees and Services

The information in Territorial Bancorp Inc.’s definitive Proxy Statement for the 2018 Annual Meeting of Stockholders under the captions “Proposal II—Ratification of Independent Registered Public Accounting Firm—Audit Fees” and “—Pre-Approval of Services by the Independent Registered Public Accounting Firm” is incorporated herein by reference.

108

PART IV

ITEM 15.Exhibits and Financial Statement Schedules

(a)Financial Statements

The following documents are filed as part of this annual report:

(i) Reports of Independent Registered Public Accounting Firms

(ii) Consolidated Balance Sheets at December 31, 2017 and 2016

(iii) Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015

(iv) Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015

(v) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015

(vi) Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015

(vii) Notes to Consolidated Financial Statements

(b)Exhibits

3.1	Articles of Incorporation of Territorial Bancorp Inc. (1)
3.2	Bylaws of Territorial Bancorp Inc. (1)
4	Form of Common Stock Certificate of Territorial Bancorp Inc. (1)
10.1	Employment Agreement between Territorial Bancorp Inc. and Allan S. Kitagawa (2)
10.2	Employment Agreement between Territorial Savings Bank and Allan S. Kitagawa (1)
10.3	First Amendment to Employment Agreement between Territorial Savings Bank and Allan S. Kitagawa (4)
10.4	Employment Agreement between Territorial Bancorp Inc. and Vernon Hirata (2)
10.5	Employment Agreement between Territorial Savings Bank and Vernon Hirata (1)
10.6	First Amendment to Employment Agreement between Territorial Savings Bank and Vernon Hirata (4)
10.7	Employment Agreement between Territorial Bancorp Inc. and Ralph Y. Nakatsuka (2)
10.8	Employment Agreement between Territorial Savings Bank and Ralph Y. Nakatsuka (1)
10.9	First Amendment to Employment Agreement between Territorial Savings Bank and Ralph Y. Nakatsuka (4)
10.10	Supplemental Executive Retirement Agreement between Territorial Savings Bank and Allan S. Kitagawa (1)
10.11	Supplemental Executive Retirement Agreement between Territorial Savings Bank and Vernon Hirata (1)
10.12	Supplemental Executive Retirement Agreement between Territorial Savings Bank and Ralph Y. Nakatsuka (1)
10.13	Executive Deferred Incentive Agreement between Territorial Savings Bank and Allan S. Kitagawa (1)
10.14	Executive Deferred Incentive Agreement between Territorial Savings Bank and Vernon Hirata (1)
10.15	[Intentionally omitted]
10.16	Territorial Savings Bank Non-Qualified Supplemental Employee Stock Ownership Plan (2)
10.17	Territorial Savings Bank Executive Incentive Compensation Plan (1)
10.18	First Amendment to Territorial Savings Bank Executive Incentive Compensation Plan (1)
10.19	Second Amendment to Territorial Savings Bank Executive Incentive Compensation Plan (4)
10.20	[Intentionally Omitted]
10.21	Form of Employee Restricted Stock Award (4)
10.22	Form of Employee Stock Option Award (4)
10.23	Form of Director Restricted Stock Award (4)
10.24	Form of Director Stock Option Award (4)
10.25	Territorial Savings Bank Separation Pay Plan and Summary Plan Description (1)
10.26	Amendment One to Territorial Savings Bank Amended and Restated Supplemental Employee Retirement Agreement for Vernon Hirata (5)
10.27	Amendment One to Territorial Savings Bank Amended and Restated Supplemental Employee Retirement Agreement for Ralph Nakatsuka (5)
10.28	Amendment One to Territorial Savings Bank Amended and Restated Supplemental Employee Retirement Agreement for Karen J. Cox (5)

109

10.29	Amendment Two to Territorial Savings Bank Amended and Restated Supplemental Employee Retirement Agreement for Vernon Hirata (6)
10.30	Amendment Two to Territorial Savings Bank Amended and Restated Supplemental Employee Retirement Agreement for Ralph Nakatsuka (6)
10.31	Second Amendment to Employment Agreement between Territorial Savings Bank and Vernon Hirata (7)
10.32	Third Amendment to Employment Agreement between Territorial Savings Bank and Vernon Hirata (8)
10.33	First Amendment to Employment Agreement between Territorial Bancorp Inc. and Vernon Hirata (8)
10.34	Second Amendment to Employment Agreement between Territorial Savings Bank and Allan S. Kitagawa (8)
10.35	First Amendment to Employment Agreement between Territorial Bancorp Inc. and Allan S. Kitagawa (8)
10.36	Second Amendment to Employment Agreement between Territorial Savings Bank and Ralph Nakatsuka (8)
10.37	First Amendment to Employment Agreement between Territorial Bancorp Inc. and Ralph Nakatsuka (8)
10.38	First Amendment to Amended and Restated Executive Deferred Incentive Agreement between Territorial Savings Bank and Vernon Hirata (8)
10.39	First Amendment to Amended and Restated Supplemental Employee Retirement Agreement between Territorial Savings Bank and Allan S. Kitagawa (8)
10.40	Third Amendment to Amended and Restated Supplemental Employee Retirement Agreement between Territorial Savings Bank and Vernon Hirata (8)
10.41	Third Amendment to Amended and Restated Supplemental Employee Retirement Agreement between Territorial Savings Bank and Ralph Nakatsuka (8)
10.42	Territorial Bancorp Inc. 2010 Equity Incentive Plan, as amended and restated (9)
10.43	Territorial Bancorp Inc. Annual Incentive Plan, as amended (10)
23.1	Consent of Moss Adams LLP
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	The following financial statements from Territorial Bancorp Inc.’s Annual Report on Form 10-K for the year ended December 31, 2017, filed on March 15, 2018, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, (vi) the Notes to Consolidated Financial Statements.
101.INS	Interactive datafile XBRL Instance Document
101.SCH	Interactive datafile XBRL Taxonomy Extension Schema Document
101.CAL	Interactive datafile XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	Interactive datafile XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	Interactive datafile XBRL Taxonomy Extension Label Linkbase
101.PRE	Interactive datafile XBRL Taxonomy Extension Presentation Linkbase Document

(1) Incorporated by reference to the Registration Statement on Form S-1 (file no. 333-155388), initially filed November 14, 2008.

(2) Incorporated by reference to the Current Report on Form 8-K (file no. 001-34403), filed November 18, 2009.

(3) Incorporated by reference to the Proxy Statement for the 2010 Annual Meeting of Stockholders (file no. 001-34403), filed July 12, 2010.

(4) Incorporated by reference to the Annual Report on Form 10-K/A (file no. 001-34403), filed March 29, 2011.

(5) Incorporated by reference to the Annual Report on Form 10-Q (file no. 001-34403), filed May 14, 2011.

(6) Incorporated by reference to the Annual Report on Form 10-K (file no. 001-34403), filed March 14, 2012.

(7) Incorporated by reference to the Annual Report on Form 10-K (file no. 001-34403), filed March 15, 2013.

(8) Incorporated by reference to the Quarterly Report on Form 10-Q (file no. 001-34403), filed November 7, 2014.

(9) Incorporated by reference to Appendix A to the proxy statement for the Annual Meeting of Shareholders (file No. 001-34403), filed April 24, 2017.

110

(10) Incorporated by reference to Appendix B to the proxy statement for the Annual Meeting of Stockholders (file No. 001-34403), filed April 24, 2017.

(c)Financial Statement Schedules

Not applicable.

ITEM 16.Form 10-K Summary

Not applicable.

111

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	TERRITORIAL BANCORP INC.
Date: March 15, 2018	By:	/s/  Allan S. Kitagawa
		Allan S. Kitagawa
		Chairman of the Board, President and Chief Executive Officer
		(Duly Authorized Representative)

Pursuant to requirements of the Exchange Act, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signatures	Title	Date
/s/ Allan S. Kitagawa	Chairman of the Board,	March 15, 2018
Allan S. Kitagawa	President and Chief
	Executive Officer (Principal
	Executive Officer)
/s/ Melvin M. Miyamoto	Senior Vice President and	March 15, 2018
Melvin M. Miyamoto	Chief Financial Officer
	(Principal Financial and
	Accounting Officer)
/s/ Kirk W. Caldwell	Director	March 15, 2018
Kirk W. Caldwell
/s/ Howard Y. Ikeda	Director	March 15, 2018
Howard Y. Ikeda
/s/ David S. Murakami	Director	March 15, 2018
David S. Murakami
/s/ Richard I. Murakami	Director	March 15, 2018
Richard I. Murakami
/s/ Francis E. Tanaka	Director	March 15, 2018
Francis E. Tanaka

112

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements No. 333-168839 and No. 333-170579 on Form S-8 of Territorial Bancorp Inc. of our reports dated March 15, 2018, with respect to the consolidated financial statements of Territorial Bancorp Inc. and Subsidiaries and the effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K for the year ended December 31, 2017.

/s/ Moss Adams LLP

Portland, Oregon

March 15, 2018

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Allan S. Kitagawa, certify that:

1)I have reviewed this Annual Report on Form 10-K of Territorial Bancorp Inc.;

2)Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3)Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4)The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a—15(f) and 15d—15(f)) for the registrant and have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5)The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 15, 2018

/s/    Allan S. Kitagawa

Allan S. Kitagawa

Chairman of the Board, President and

Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Melvin M. Miyamoto, certify that:

1)I have reviewed this Annual Report on Form 10-K of Territorial Bancorp Inc.;

2)Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3)Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4)The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a—15(f) and 15d—15(f)) for the registrant and have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5)The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 15, 2018

/s/    Melvin M. Miyamoto

Melvin M. Miyamoto

Senior Vice President and Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Territorial Bancorp Inc. (the “Company”) on Form 10-K for the year ended December 31, 2017 as filed with the Securities and Exchange Commission (the “Report”), the undersigned, Allan S. Kitagawa, Chairman of the Board, President and Chief Executive Officer of the Company,  and Melvin M. Miyamoto, Senior Vice President and Chief Financial Officer, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,  that to best of his knowledge:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Allan S. Kitagawa	Date: March 15, 2018
Allan S. Kitagawa
Chairman of the Board, President and
Chief Executive Officer
/s/ Melvin M. Miyamoto	Date: March 15, 2018
Melvin M. Miyamoto
Senior Vice President and Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Territorial Bancorp Inc. and will be retained by Territorial Bancorp Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

XML

Document and Entity Information - USD ($) $ in Millions	12 Months Ended
	Dec. 31, 2017	Feb. 28, 2018	Jun. 30, 2017
Document and Entity Information
Entity Registrant Name	Territorial Bancorp Inc.
Entity Central Index Key	0001447051
Document Type	10-K
Document Period End Date	Dec. 31, 2017
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Public Float			$ 266.0
Entity Common Stock, Shares Outstanding		9,731,022
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	FY

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
ASSETS
Cash and cash equivalents	$ 32,089	$ 61,273
Investment securities available for sale	2,851
Investment securities held to maturity, at amortized cost (fair value of $406,663 and $407,922 at December 31, 2017 and December 31, 2016, respectively)	404,792	407,656
Loans held for sale	403	1,601
Loans receivable, net	1,488,971	1,335,987
Federal Home Loan Bank stock, at cost	6,541	4,945
Federal Reserve Bank stock, at cost	3,103	3,095
Accrued interest receivable	5,142	4,732
Premises and equipment, net	5,721	4,327
Bank-owned life insurance	44,201	43,294
Income taxes receivable	1,571	122
Deferred income tax assets, net	4,609	7,905
Prepaid expenses and other assets	3,852	2,625
Total assets	2,003,846	1,877,562
Liabilities:
Deposits	1,597,295	1,493,200
Advances from the Federal Home Loan Bank	107,200	69,000
Securities sold under agreements to repurchase	30,000	55,000
Accounts payable and accrued expenses	26,390	23,258
Income taxes payable	1,483	1,616
Advance payments by borrowers for taxes and insurance	6,624	5,702
Total liabilities	1,768,992	1,647,776
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 9,915,058 and 9,778,974 shares at December 31, 2017 and December 31, 2016, respectively	99	98
Additional paid-in capital	73,050	71,914
Unearned ESOP shares	(5,383)	(5,872)
Retained earnings	172,782	168,962
Accumulated other comprehensive loss	(5,694)	(5,316)
Total stockholders' equity	234,854	229,786
Total liabilities and stockholders' equity	$ 2,003,846	$ 1,877,562

XML

Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Consolidated Balance Sheets
Investment securities held to maturity, fair value (in dollars)	$ 406,663	$ 407,922
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, authorized shares	50,000,000	50,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, authorized shares	100,000,000	100,000,000
Common stock, shares issued	9,915,058	9,778,974
Common stock, shares outstanding	9,915,058	9,778,974

XML

Consolidated Statements of Income - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Interest income:
Loans	$ 55,144	$ 51,168	$ 45,903
Investment securities	12,526	14,365	16,873
Other investments	663	540	316
Total interest income	68,333	66,073	63,092
Interest expense:
Deposits	7,666	5,933	4,821
Advances from the Federal Home Loan Bank	1,105	1,035	697
Securities sold under agreements to repurchase	818	876	997
Total interest expense	9,589	7,844	6,515
Net interest income	58,744	58,229	56,577
Provision for loan losses	52	310	455
Net interest income after provision for loan losses	58,692	57,919	56,122
Noninterest income:
Service fees on loan and deposit accounts	1,962	1,960	2,161
Income on bank-owned life insurance	907	966	1,026
Gain on sale of investment securities	431	370	701
Gain on sale of loans	199	406	503
Other	347	392	520
Total noninterest income	3,846	4,094	4,911
Noninterest expense:
Salaries and employee benefits	21,614	20,591	21,497
Occupancy	5,937	5,749	5,809
Equipment	3,614	3,566	3,894
Federal deposit insurance premiums	605	743	857
Other general and administrative expenses	4,704	4,230	4,442
Total noninterest expense	36,474	34,879	36,499
Income before income taxes	26,064	27,134	24,534
Income taxes	11,102	10,787	9,786
Net income	$ 14,962	$ 16,347	$ 14,748
Basic earnings per share (in dollars per share)	$ 1.61	$ 1.78	$ 1.59
Diluted earnings per share (in dollars per share)	1.57	1.74	1.56
Cash dividends declared per common share (in dollars per share)	$ 1.20	$ 0.92	$ 0.76
Basic weighted-average shares outstanding (in shares)	9,273,783	9,093,385	9,073,015
Diluted weighted-average shares outstanding (in shares)	9,532,724	9,311,975	9,263,267

XML

Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Consolidated Statements of Comprehensive Income
Net income	$ 14,962	$ 16,347	$ 14,748
Change in unfunded pension liability	(373)	(240)	(12)
Change in unrealized loss on securities	(5)	13	27
Change in noncredit related loss on trust preferred securities		147	137
Other comprehensive income (loss), net of tax	(378)	(80)	152
Comprehensive income	$ 14,584	$ 16,267	$ 14,900

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Consolidated Statements of Stockholders' Equity - USD ($) $ in Thousands	Common Stock	Additional Paid-in Capital	Unearned ESOP Shares	Retained Earnings	Accumulated Other Comprehensive Income (Loss)	Total
Balance at Dec. 31, 2014	$ 99	$ 75,229	$ (6,851)	$ 153,289	$ (5,388)	$ 216,378
Increase (Decrease) in Stockholders' Equity
Net income				14,748		14,748
Other comprehensive income (loss)					152	152
Cash dividends paid ($1.20 per share, $0.92 per share and $0.76 per share for the years ended December 31, 2017, 2016 and 2015 respectively)				(7,013)		(7,013)
Share-based compensation	1	3,085				3,086
Allocation of ESOP shares (48,932 shares for the years ended December 31, 2017, 2016 and 2015 respectively)		720	490			1,210
Repurchase of company common stock (160,003 shares, 118,723 shares and 373,711 shares for the years ended December 31, 2017, 2016 and 2015, respectively)	(4)	(8,933)				(8,937)
Exercise of options for common stock (294,887 shares, 125,870 shares and 1,000 shares for the years ended December 31, 2017, 2016 and 2015, respectively)		17				17
Balance at Dec. 31, 2015	96	70,118	(6,361)	161,024	(5,236)	219,641
Increase (Decrease) in Stockholders' Equity
Net income				16,347		16,347
Other comprehensive income (loss)					(80)	(80)
Cash dividends paid ($1.20 per share, $0.92 per share and $0.76 per share for the years ended December 31, 2017, 2016 and 2015 respectively)				(8,409)		(8,409)
Share-based compensation	1	2,041				2,042
Allocation of ESOP shares (48,932 shares for the years ended December 31, 2017, 2016 and 2015 respectively)		864	489			1,353
Repurchase of company common stock (160,003 shares, 118,723 shares and 373,711 shares for the years ended December 31, 2017, 2016 and 2015, respectively)	(1)	(3,293)				(3,294)
Exercise of options for common stock (294,887 shares, 125,870 shares and 1,000 shares for the years ended December 31, 2017, 2016 and 2015, respectively)	2	2,184				2,186
Balance at Dec. 31, 2016	98	71,914	(5,872)	168,962	(5,316)	229,786
Increase (Decrease) in Stockholders' Equity
Net income				14,962		14,962
Other comprehensive income (loss)					(378)	(378)
Cash dividends paid ($1.20 per share, $0.92 per share and $0.76 per share for the years ended December 31, 2017, 2016 and 2015 respectively)				(11,142)		(11,142)
Share-based compensation		106				106
Allocation of ESOP shares (48,932 shares for the years ended December 31, 2017, 2016 and 2015 respectively)		1,040	489			1,529
Repurchase of company common stock (160,003 shares, 118,723 shares and 373,711 shares for the years ended December 31, 2017, 2016 and 2015, respectively)	(2)	(5,127)				(5,129)
Exercise of options for common stock (294,887 shares, 125,870 shares and 1,000 shares for the years ended December 31, 2017, 2016 and 2015, respectively)	3	5,117				5,120
Balance at Dec. 31, 2017	$ 99	$ 73,050	$ (5,383)	$ 172,782	$ (5,694)	$ 234,854

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Consolidated Statements of Stockholders' Equity (Parenthetical) - $ / shares	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Consolidated Statements of Stockholders' Equity, Share Data
Cash dividends paid (in dollars per share)	$ 1.2	$ 0.92	$ 0.76
Common Stock
Consolidated Statements of Stockholders' Equity, Share Data
Allocation of ESOP shares, shares	48,932	48,932	48,932
Repurchase of company common stock, shares	160,003	118,723	373,711
Exercise of options for common stock, shares	294,887	125,870	1,000

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Consolidated Statements of Cash Flows - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Cash flows from operating activities:
Net income	$ 14,962	$ 16,347	$ 14,748
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses	52	310	455
Depreciation and amortization	1,129	1,139	1,296
Deferred income tax expense (benefit)	3,436	1,490	(2,223)
Amortization of fees, discounts, and premiums	(478)	(715)	(492)
Origination of loans held for sale	(23,665)	(49,157)	(57,337)
Proceeds from sales of loans held for sale	25,063	49,207	56,493
Gain on sale of loans, net	(199)	(406)	(503)
Net gain on sale of real estate owned			(12)
Gain on sale of investment securities held to maturity	(431)	(370)	(701)
Net loss on disposal of premises and equipment	24		4
ESOP expense	1,529	1,353	1,210
Share-based compensation expense	106	2,042	3,086
Increase in accrued interest receivable	(410)	(48)	(248)
Net increase in bank-owned life insurance	(907)	(966)	(1,025)
Net increase in prepaid expenses and other assets	(1,227)	(355)	(366)
Net increase (decrease) in accounts payable and accrued expenses	2,604	(1,081)	249
Net increase in advance payments by borrowers for taxes and insurance	922	578	1,208
Net increase in income taxes receivable	(1,449)	(122)
Net increase (decrease) in income taxes payable	(133)	(479)	1,269
Net cash from operating activities	20,928	18,767	17,111
Cash flows from investing activities:
Purchases of investment securities held to maturity	(56,899)	(3,803)	(11,606)
Purchases of investment securities available for sale	(2,970)
Principal repayments on investment securities held to maturity	52,831	83,234	85,802
Principal repayments on investment securities available for sale	99
Proceeds from sale of investment securities held to maturity	7,446	5,462	7,718
Loan originations, net of principal repayments on loans receivable	(152,631)	(146,095)	(220,215)
Purchases of Federal Home Loan Bank stock	(5,929)	(1,075)	(3,120)
Proceeds from redemption of Federal Home Loan Bank stock	4,333	920	9,564
Purchases of Federal Reserve Bank stock	(8)	(73)	(97)
Proceeds from sale of real estate owned			204
Purchases of premises and equipment	(2,547)	(563)	(604)
Net cash from investing activities	(156,275)	(61,993)	(132,354)
Cash flows from financing activities:
Net increase in deposits	104,095	48,097	85,424
Proceeds from advances from the Federal Home Loan Bank	144,525	23,000	120,000
Repayments of advances from the Federal Home Loan Bank	(106,325)	(23,000)	(66,000)
Proceeds from securities sold under agreements to repurchase			30,000
Repayments of securities sold under agreements to repurchase	(25,000)		(47,000)
Purchases of Fed Funds	10	10	10
Sales of Fed Funds	(10)	(10)	(10)
Proceeds from exercise of stock options		566	17
Repurchases of common stock	(9)	(1,674)	(9,326)
Cash dividends paid	(11,123)	(8,409)	(7,013)
Net cash from financing activities	106,163	38,580	106,102
Net decrease in cash and cash equivalents	(29,184)	(4,646)	(9,141)
Cash and cash equivalents at beginning of the period	61,273	65,919	75,060
Cash and cash equivalents at end of the period	32,089	61,273	65,919
Cash paid for:
Interest on deposits and borrowings	9,231	7,863	6,648
Income taxes	9,319	9,645	10,324
Supplemental disclosure of noncash investing and financing activities:
Company stock acquired through stock swap and net settlement transactions	5,120	1,620
Loans transferred to real estate owned			192
Investments purchased, not settled			1,200
Investments purchased prior period, settled current period		$ 1,200
Company stock repurchased prior period, settled current period			$ 389
Dividends declared, not yet paid	$ 19

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Organization

12 Months Ended

Dec. 31, 2017

Organization

Organization

(1)Organization

On July 10, 2009, Territorial Savings Bank completed a conversion from a mutual holding company to a stock holding company.  As part of the conversion, Territorial Mutual Holding Company and Territorial Savings Group, Inc., the former holding companies for Territorial Savings Bank, ceased to exist as separate legal entities, and Territorial Bancorp Inc. became the holding company for Territorial Savings Bank. Upon completion of the conversion and reorganization, a special “liquidation account” was established in an amount equal to the total equity of Territorial Mutual Holding Company as of December 31, 2008.  The liquidation account is to provide eligible account holders and supplemental eligible account holders who maintain their deposit accounts with Territorial Savings Bank after the conversion with a liquidation interest in the unlikely event of the complete liquidation of Territorial Savings Bank after the conversion.  The balance of the liquidation account at December 31, 2017 was $11.0 million.

On June 25, 2014, Territorial Savings Bank converted from a federal savings bank to a Hawaii state-chartered savings bank.  On July 10, 2014, Territorial Savings Bank became a member of the Federal Reserve System.

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Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2017

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

(2)Summary of Significant Accounting Policies

(a) Description of Business

Territorial Bancorp Inc. (the Company), through its wholly-owned subsidiary, Territorial Savings Bank (the Bank), provides loan and deposit products and services primarily to individual customers through 29 branches located throughout Hawaii. We deal primarily in residential mortgage loans in the State of Hawaii.  The Company’s earnings depend primarily on its net interest income, which is the difference between the interest income earned on interest-earning assets (loans receivable and investments) and the interest expense incurred on interest-bearing liabilities (deposit liabilities and borrowings). Deposits traditionally have been the principal source of the Bank’s funds for use in lending, meeting liquidity requirements, and making investments. The Company also derives funds from receipt of interest and principal repayments on outstanding loans receivable and investments, borrowings from the Federal Home Loan Bank (FHLB), securities sold under agreements to repurchase, and proceeds from issuance of common stock.

(b)  Principles of Consolidation

The consolidated financial statements include the accounts and results of operations of Territorial Bancorp Inc. and Territorial Savings Bank and its wholly-owned subsidiaries, Territorial Real Estate Co., Inc. and Territorial Financial Services, Inc. Significant intercompany balances and transactions have been eliminated in consolidation.

(c)  Cash and Cash Equivalents

Cash and cash equivalents includes cash and due from banks, interest-bearing deposits in other banks, federal funds sold, and short-term, highly liquid investments with original maturities of three months or less.

(d)  Investment Securities

The Company classifies and accounts for its investment securities as follows: (1) held-to-maturity debt securities in which the Company has the positive intent and ability to hold to maturity are reported at amortized cost; (2) trading securities that are purchased for the purpose of selling in the near term are reported at fair value, with unrealized gains and losses included in current earnings; and (3) available-for-sale securities not classified as either held-to-maturity or trading securities are reported at fair value, with unrealized gains and losses excluded from current earnings and reported as a separate component of equity. At December 31, 2017, the Company classified all of its investments, except $2.9 million of securities, as held-to-maturity.  At December 31, 2016, the Company classified all of its investments as held-to-maturity.

A decline in the market value of any available-for-sale or held-to-maturity security below cost, that is deemed to be other than temporary, results in an impairment to reduce the carrying amount to fair value. To determine whether impairment is other than temporary, the Company considers the type of the investment, the cause of the decline in value and the amount and duration of the decline in value.  It also considers whether it has the intent and ability not to sell and would not be required to sell for a sufficient period of time to recover the remaining amortized cost basis.

Gains or losses on the sale of investment securities are computed using the specific-identification method. The Company amortizes premiums and accretes discounts associated with investment securities using the interest method over the contractual life of the respective investment security. Such amortization and accretion is included in the interest income line item in the consolidated statements of income.  Interest income is recognized when earned.

(e)  Loans Receivable

This policy applies to all loan classes.  Loans receivable are stated at the principal amount outstanding, less the allowance for loan losses, loan origination fees and costs, and commitment fees. Interest on loans receivable is accrued as earned. 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. For nonaccrual loans, the Company records payments received as a reduction in principal. The Company, considering current information and events regarding the borrowers’ ability to repay their obligations, considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, if the loan is considered to be collateral dependent, based on the fair value of the collateral less estimated costs to sell.  Impairment losses are written off against the allowance for loan losses. For nonaccrual impaired 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.

(f)  Loans Held for Sale

Loans held for sale are stated at the lower of aggregate cost or market value. Net fees and costs of originating loans held for sale are deferred and are included in the basis for determining the gain or loss on sales of loans held for sale.

(g)  Deferred Loan Origination Fees and Unearned Loan Discounts

Loan origination and commitment fees and certain direct loan origination costs are being deferred, and the net amount is recognized over the life of the related loan as an adjustment to yield. Net deferred loan fees are amortized using the interest method over the contractual term of the loan, adjusted for actual prepayments. Net unamortized fees on loans paid in full are recognized as a component of interest income.

(h)  Real Estate Owned

Real estate owned is valued at the time of foreclosure at fair value, less estimated cost to sell, thereby establishing a new cost basis. The Company obtains appraisals based on recent comparable sales to assist management in estimating the fair value of real estate owned. Subsequent to acquisition, real estate owned is valued at the lower of cost or fair value, less estimated cost to sell. Declines in value are charged to expense through a direct write-down of the asset. Costs related to holding real estate are charged to expense while costs related to development and improvements are capitalized.

Gains from the sale of real estate owned, if any, are recognized when title has passed, minimum down payment requirements are met, the terms of any notes received are such as to satisfy continuing investment requirements, and the Company is relieved of any requirements for continued involvement with the properties. If the minimum down payment or the continuing investment is not adequate to meet the criteria specified in the Property, Plant and Equipment topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC), the Company will defer income recognition and account for such sales using alternative methods, such as installment, deposit, or cost recovery.

(i)  Allowance for Loan Losses

The Company maintains an allowance adequate to cover Management’s estimate of probable loan losses as of the balance sheet date. The Company’s allowance for loan losses is maintained at a level considered adequate to provide for losses that can be estimated based upon specific and general conditions. All loan losses are charged, and all recoveries are credited, to the allowance for loan losses. Additions to the allowance for loan losses are provided by charges to income based on various factors, which, in the Company’s judgment, deserve current recognition in estimating probable losses. Charge-offs to the allowance are made when management determines that collectability of all or a portion of a loan is doubtful and available collateral is insufficient to repay the loan.

General allowances are established for loan losses on a portfolio basis for loans that do not meet the definition of impaired, in accordance with the Receivables topic of the FASB ASC.  The portfolio is grouped into similar risk characteristics, primarily loan type and loan-to-value ratio. The Company applies an estimated loss rate to each loan group. The loss rates applied are based upon its loss experience adjusted, as appropriate, for environmental factors discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions.  Actual loan losses may be significantly more than the allowance for loan losses the Company has established, which could have a material negative effect on its financial results.

Residential mortgage loans represent the largest segment of the Company’s loan portfolio.  All of the residential mortgage loans are secured by a first mortgage on residential real estate in Hawaii and consist primarily of fixed-rate mortgage loans which have been underwritten to Freddie Mac and Fannie Mae guidelines and have similar risk characteristics.  The loan loss allowance is determined by first calculating the historical loss rate for this segment of the portfolio.  The loss rate may be adjusted for qualitative and environmental factors.  The allowance for loan loss is calculated by multiplying the adjusted loss rate by the total loans in this segment of the portfolio.

The adjustments to historical loss experience are based on an evaluation of several qualitative and environmental factors, including:

· changes in lending policies and procedures, including changes in underwriting standards and collections, charge-off and recovery practices;

· changes in international, national, and local economic trends;

· changes in the types of loans in the loan portfolio;

· changes in the experience and ability of personnel in the mortgage loan origination and loan servicing departments;

· changes in the number and amount of delinquent loans and classified assets;

· changes in the type and volume of loans being originated;

· changes in the value of underlying collateral for collateral dependent loans;

· changes in any concentration of credit; and

· external factors such as competition, legal and regulatory requirements on the level of estimated credit losses in the existing loan portfolio.

The Company also uses historical loss rates adjusted for qualitative and environmental factors to establish loan loss allowances for the following portfolio segments:

· home equity loans and lines of credit; and

· consumer and other loans.

The Company has a limited loss experience for the construction, commercial and other mortgage segment of the loan portfolio.  The loan loss allowance on this portfolio segment is determined using the loan loss rate of other financial institutions in the State of Hawaii.  The allowance for loan loss is calculated by multiplying the loan loss rate of other financial institutions in the state by the total loans in this segment of the Company’s loan portfolio.

The allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. In addition, the unallocated allowance is established to provide for probable losses that have been incurred as of the reporting date but are not reflected in the allocated allowance.

While the Company uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, the bank regulators will periodically review the allowance for loan losses. The bank regulators may require the Company to increase the allowance based on their analysis of information available at the time of their examination.

(j)  Transfer of Financial Assets

Transfers of financial assets are accounted for as sales when control is surrendered. Control is surrendered when the assets have been isolated from the Company, the transferee obtains the right to pledge or exchange the assets without constraint, and the Company does not maintain effective control over the transferred assets. Mortgage loans sold for cash are accounted for as sales as the above criteria have been met.

Mortgage loans may also be packaged into securities that are issued and guaranteed by U.S. government-sponsored enterprises or a U.S. government agency. The Company receives 100% of the mortgage-backed securities issued. Securitizations are not accounted for as sales and no gain or loss is recognized. The mortgage-backed securities received in securitizations are valued at amortized cost and classified as held-to-maturity.

Mortgage loan transfers accounted for as sales and securitizations are without recourse, except for normal representations and warranties provided in sales transactions, and the Company may retain the related rights to service the loans.  The retained servicing rights create mortgage servicing assets that are accounted for in accordance with the Transfers and Servicing topic of the FASB ASC.  Mortgage servicing assets are initially valued at fair value and subsequently at the lower of cost or fair value and are amortized in proportion to and over the period of estimated net servicing income.  The Company uses a discounted cash flow model to determine the fair value of retained mortgage servicing rights. Prior to 2010, we retained the servicing rights on residential mortgage loans sold.  In 2010, we began selling loans primarily on a servicing-released basis.

(k)  Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is principally computed on the straight-line method over the estimated useful lives of the respective assets. The estimated useful life of buildings and improvements is 30 years, furniture, fixtures, and equipment is 3 to 10 years, and automobiles are 3 years. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset.

(l)  Income Taxes

The Company files consolidated federal income tax and consolidated state franchise tax returns.

Deferred tax assets and liabilities are recognized using the asset and liability method of accounting for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

We establish income tax contingency reserves for potential tax liabilities related to uncertain tax positions.  A liability for income tax uncertainties would be recorded for unrecognized tax benefits related to uncertain tax positions where it is more likely than not that the position will be sustained upon examination by a taxing authority.

As of December 31, 2017 and 2016, the Company had not recognized a liability for income tax uncertainties in the accompanying consolidated balance sheets because Management concluded that the Company does not have uncertain tax positions.

The Company recognizes interest and penalties related to tax liabilities in other interest expense and other general and administrative expenses, respectively, in the consolidated statements of income.

Tax years 2014 to 2016 currently remain subject to examination by the Internal Revenue Service and by the Department of Taxation of the State of Hawaii.

(m)  Impairment of Long-Lived Assets

Long-lived assets, such as premises and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the consolidated balance sheets and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.

(n)  Pension Plan

Pension benefit costs (returns) are charged (credited) to salaries and employee benefits expense, and the corresponding prepaid (accrued) pension cost is recorded in prepaid expenses and other assets or accounts payable and accrued expenses in the consolidated balance sheets. The Company’s policy is to fund pension costs in amounts that will not be less than the minimum funding requirements of the Employee Retirement Income Security Act of 1974 and will not exceed the maximum tax-deductible amounts. The Company generally funds at least the net periodic pension cost, subject to limits and targeted funded status as determined with the consulting actuary.

(o)  Supplemental Employee Retirement Plan (SERP)

The SERP is a noncontributory supplemental retirement plan covering certain current and former employees of the Company.  Benefits in the SERP plan are paid after retirement, in addition to the benefits provided by the Pension Plan.  The Company accrues SERP costs over the estimated period until retirement by charging salaries and employee benefits expense in the consolidated statements of income, with a corresponding credit to accounts payable and accrued expenses in the consolidated balance sheets.

(p)  Employee Stock Ownership Plan (ESOP)

The cost of shares issued to the ESOP, but not yet allocated to participants, is shown as a reduction of stockholders’ equity.  Compensation expense is based on the market price of shares as they are committed to be released to participant accounts.  Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares reduce debt and accrued interest.

(q)  Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period.  Diluted earnings per share is computed by dividing net income by the sum of the weighted-average number of shares outstanding plus the dilutive effect of stock options and restricted stock.  ESOP shares not committed to be released are not considered outstanding.

We have two forms of our outstanding common stock: common stock and unvested restricted stock awards.  Holders of unvested restricted stock awards receive non-forfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings.  The computed basic and diluted earnings per share are substantially equivalent using both the two-class and the treasury stock methods of calculating earnings per share.

(r)  Common Stock Repurchase Program

In 2016, 2014, 2013, 2011 and 2010, the Company adopted common stock repurchase programs in which shares repurchased reduce the amount of shares issued and outstanding.  The repurchased shares may be reissued in connection with share-based compensation plans and for general corporate purposes.  As of December 31, 2017 and 2016, the Company had accumulated repurchases of 3,138,153 of the total 3,374,253 shares authorized by the Board of Directors.  There were no shares repurchased as part of our common stock repurchase program during 2017.  During 2016, shares were repurchased at an average cost of $25.96. 

(s)  Bank-Owned Life Insurance

The Company’s investment in bank-owned life insurance is based on cash surrender value.  The Company invests in bank-owned life insurance to provide a funding source for benefit plan obligations. Bank-owned life insurance also generally provides noninterest income that is nontaxable. Federal regulations generally limit the investment in bank-owned life insurance to 25% of the Bank’s Tier 1 capital plus the allowance for loan losses.  At December 31, 2017, this limit was $55.4 million and the Company had invested $44.2 million in bank-owned life insurance at that date.

(t)  Use of Estimates

The preparation of the consolidated financial statements requires management to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the allowance for loan losses; valuation of certain investment securities and determination as to whether declines in fair value below amortized cost are other than temporary; valuation allowances for deferred income tax assets; mortgage servicing assets; and assets and obligations related to employee benefit plans.  Accordingly, actual results could differ from those estimates.

(u)  Recently Issued Accounting Pronouncements

In May 2014, the FASB amended the Revenue Recognition topic of the FASB ASC.  The amendment seeks to clarify the principles for recognizing revenue as well as to develop common revenue standards for U.S. generally accepted accounting principles and International Financial Reporting Standards.  The Company has reviewed all revenue sources to determine if the sources are in scope for this guidance.  Net interest income from financial assets and liabilities are explicitly excluded from the scope of the amendment.  The Company’s overall assessment of key in-scope revenue sources include service charges on deposit accounts, rental income from safe deposit boxes and commissions on insurance and annuity sales.  The guidance will not have a significant impact on the Company’s revenue recognition for these key in-scope revenue sources.  The Company adopted this amendment effective January 1, 2018, under the modified retrospective approach.

In January 2016, the FASB amended the Financial Instruments – Overall topic of the FASB ASC.  The amendment addresses several aspects of recognition, measurement, presentation and disclosure of financial instruments.  Included are: (a) a requirement to measure equity investments at fair value, with changes in fair value recognized in net income, (b) a simplification of the impairment assessment of equity investments without readily determinable fair values, (c) the elimination of the requirement to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet, and (d) a requirement to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.   Since the Company does not own any equity securities subject to the amendment in its investment portfolio, the amendment will not have a material impact on its consolidated financial statements.  The Company will continue to evaluate the effects that the use of exit prices will have on its fair value disclosures.  The amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. 

In February 2016, the FASB amended the Leases topic of the FASB ASC.  The primary effects of the amendment will be to recognize lease assets and lease liabilities on the balance sheet and to disclose certain information about leasing arrangements.  The amendment is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  The Company has several lease agreements for branch locations and equipment that will require recognition on the consolidated balance sheets upon adoption of the amendment.  The Company will continue to evaluate the effects that the adoption of this amendment will have on its consolidated financial statements.

In March 2016, the FASB amended the Compensation – Stock Compensation topic of the FASB ASC.  The amendment includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements.  Some of the key provisions of the amendment require companies to record all excess tax benefits and tax deficiencies as income tax benefit or expense in the income statement rather than as an adjustment to additional paid-in capital.  In addition, the amendment requires that excess tax benefits should be reported as an operating activity on the statement of cash flows and increases the amount an employer can withhold for taxes for share-based compensation awards.  The amendment is effective for annual periods beginning after December 15, 2016.  The Company adopted this amendment effective January 1, 2017.  The adoption of this amendment has resulted in increased volatility to income tax expense related to excess tax benefits and tax deficiencies for share-based compensation.  The amount of tax benefits or deficiencies recognized in income tax expense depends on the number of options exercised and the difference in the stock prices at the exercise and grant dates.  For the year ended December 31, 2017, the Company recognized in earnings $1.0 million of tax benefits related to the exercise of stock options.

In June 2016, the FASB amended various sections of the FASB ASC related to the accounting for credit losses on financial instruments.  The amendment changes the threshold for recognizing losses from a “probable” to an “expected” model.  The new model is referred to as the current expected credit loss model and applies to loans, leases, held-to-maturity investments, loan commitments and financial guarantees.  The amendment requires the measurement of all expected credit losses for financial assets as of the reporting date (including historical experience, current conditions and reasonable and supportable forecasts) and enhanced disclosures that will help financial statement users understand the estimates and judgments used in estimating credit losses and evaluating the credit quality of an organization’s portfolio.  The amendment is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  The Company will apply the amendment’s provisions as a cumulative-effect adjustment to retained earnings at the beginning of the first period the amendment is effective. The Company is currently evaluating the effects that the adoption of this amendment will have on its consolidated financial statements by gathering the information that is necessary to make the calculations required by the amendment.  This may result in increased credit losses on financial instruments recorded in the consolidated financial statements.

In March 2017, the FASB amended the Compensation – Retirement Benefits topic of the FASB ASC.  The amendment requires the service cost component of net benefit cost to be reported in the same line item as other compensation costs arising from employee services.  It also requires the other components of net benefit cost to be reported in the income statement separately from the service cost component.  The amendment is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods.  The Company does not expect the adoption of this amendment to have a material effect on its consolidated financial statements.

In February 2018, the FASB amended the Income Statement – Reporting Comprehensive Income topic of the FASB ASC.  Existing accounting standards require that the tax effects of tax rate changes on deferred taxes be recorded in current income.  Deferred taxes previously included in accumulated other comprehensive income are not allowed to be adjusted and may not reflect current tax rates.  This amendment allows the reclassification from accumulated other comprehensive income to retained earnings the tax effects resulting from the Tax Cuts and Jobs Act passed in December 2017.  The amendment is effective for fiscal years beginning after December 15, 2018, with early adoption permitted in any period for which financial statements have not yet been issued.  The Company expects to adopt this amendment during the first quarter of 2018 with the reclassification of $1.1 million of deferred taxes between accumulated other comprehensive income and retained earnings.

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Cash and Cash Equivalents

12 Months Ended

Dec. 31, 2017

Cash and Cash Equivalents

Cash and Cash Equivalents

(3)Cash and Cash Equivalents

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

	December 31,
(Dollars in thousands)	2017		2016
Cash and due from banks	$	9,114	$	9,043
Interest-earning deposits in other banks		22,975		52,230
Cash and cash equivalents	$	32,089	$	61,273

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

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Investment Securities

12 Months Ended

Dec. 31, 2017

Investment Securities.

Investment Securities

(4)Investment Securities

The amortized cost and fair values of investment securities are as follows:

	Amortized		Gross Unrealized				Estimated
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
December 31, 2017:
Available-for-sale:
U.S. government-sponsored mortgage-backed securities	$	2,870	$	—	$	(19)	$	2,851
Total	$	2,870	$	—	$	(19)	$	2,851
Held-to-maturity:
U.S. government-sponsored mortgage-backed securities	$	404,365	$	6,056	$	(4,603)	$	405,818
Trust preferred securities		427		418		—		845
Total	$	404,792	$	6,474	$	(4,603)	$	406,663
December 31, 2016:
Held-to-maturity:
U.S. government-sponsored mortgage-backed securities	$	406,498	$	7,285	$	(7,024)	$	406,759
Trust preferred securities		1,158		5		—		1,163
Total	$	407,656	$	7,290	$	(7,024)	$	407,922

The amortized cost and estimated fair value of investment securities by maturity date at December 31, 2017 are shown below. Incorporated in the maturity schedule are mortgage-backed and trust preferred 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 within 5 years	$	—	$	—
Due after 5 years through 10 years		—		—
Due after 10 years		2,870		2,851
Total	$	2,870	$	2,851
Held-to-maturity:
Due within 5 years	$	10	$	11
Due after 5 years through 10 years		71		71
Due after 10 years		404,711		406,581
Total	$	404,792	$	406,663

Realized gains and losses and the proceeds from sales of held-to-maturity securities are shown in the table below.  Most of the securities which were sold were U.S. government-sponsored mortgage-backed securities.

(Dollars in thousands)	2017		2016		2015
Proceeds from sales	$	7,446	$	5,462	$	7,718
Gross gains		431		370		701
Gross losses		—		—		—

The sale of these mortgage-backed securities, for which the Company had already collected a substantial portion of the outstanding purchased principal (at least 85%), is in accordance with the Investments – Debt and Equity Securities topic of the FASB ASC and does not taint management’s assertion of intent to hold remaining securities in the held-to-maturity portfolio to maturity.

In 2015, the Company recognized a gross realized gain of $61,000 from the sale of one of the trust preferred securities the Company owned, PreTSL XXIV.  The Company previously wrote off the entire book value of this security when it incurred an other-than-temporary impairment charge in prior years.  The trust preferred security sold was classified in the held-to-maturity portfolio.  Since the credit rating of this security was downgraded, in accordance with the Investment-Debt and Equity Securities topic of the FASB ASC, the sale of this security does not taint management’s intent to hold the remaining securities in the held-to-maturity portfolio.

Investment securities with amortized costs of $287.2 million and $239.9 million at December 31, 2017 and 2016, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and transaction clearing accounts.

Provided below is a summary of investment securities, which were in an unrealized loss position at December 31, 2017 and 2016. The Company does not intend to sell held-to-maturity and available-for-sale 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)
December 31, 2017:
Available-for-sale:
U.S. government-sponsored mortgage-backed securities	$	2,851	$	19	$	—	$	—	1	$	2,851	$	19
Held-to-maturity:
U.S. government-sponsored mortgage-backed securities	$	41,163	$	299	$	140,200	$	4,304	49	$	181,363	$	4,603
December 31, 2016:
Held-to-maturity:
U.S. government-sponsored mortgage-backed securities	$	179,741	$	5,599	$	23,402	$	1,425	50	$	203,143	$	7,024

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, the Company does not consider these investments to be other-than-temporarily impaired as of December 31, 2017.

Trust Preferred Securities. At December 31, 2017, the Company owned one trust preferred security, PreTSL XXIII. PreTSL XXIII has an amortized cost and a remaining cost basis of $427,000 at December 31, 2017.  The trust preferred security represents an investment in a pool of debt obligations issued primarily by holding companies for Federal Deposit Insurance Corporation-insured financial institutions.  This security is classified in the Company’s held-to-maturity investment portfolio.

The trust preferred securities market is considered to be inactive as only six transactions have occurred over the past 72 months in the same tranche of securities that we own and no new issues of pooled trust preferred securities have occurred since 2007.  We used a discounted cash flow model to determine whether this security is other-than-temporarily impaired.  The assumptions used in preparing the discounted cash flow model include the following: estimated discount rates, estimated deferral and default rates on collateral, and estimated cash flows.

Based on the Company’s review, the Company’s investment in PreTSL XXIII did not incur additional impairment during the years ended December 31, 2017, 2016 and 2015 and there is no accumulated other comprehensive loss related to noncredit factors.

It is reasonably possible that the fair value of the trust preferred security could decline in the near term if the overall economy and the financial condition of some of the issuers deteriorate further and the liquidity of this security remains low.  As a result, there is a risk that the Company’s remaining cost basis of $427,000 on the trust preferred security could be credit-related other-than-temporarily impaired in the near term.  The impairment, if any, could be material to the Company’s consolidated statements of income.

The table below provides a cumulative roll forward of credit losses recognized in earnings for debt securities held and not intended to be sold:

(Dollars in thousands)	2017		2016
Balance at January 1,	$	2,403	$	2,403
Credit losses on debt securities for which other-than-temporary impairment was not previously recognized		—		—
Credit losses on debt securities which were sold		—		—
Balance at December 31,	$	2,403	$	2,403

The table below shows the components of accumulated other comprehensive loss, net of taxes, resulting from other-than-temporarily impaired securities:

	December 31,
(Dollars in thousands)	2017		2016
Noncredit losses on other-than-temporarily impaired securities, net of taxes	$	—	$	—

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Federal Home Loan Bank Stock

12 Months Ended

Dec. 31, 2017

FHLB stock

Federal Home Loan Bank Stock

Federal Home Loan Bank Stock

(5)Federal Home Loan Bank Stock

The Bank, as a member of the FHLB system, is required to obtain and hold shares of capital stock in the FHLB. At December 31, 2017 and 2016, the Bank met such requirement.  At December 31, 2017 and 2016, the Bank owned $6.5 million and $4.9 million, respectively, of capital stock of the FHLB Des Moines.

The Company evaluated its investment in the stock of the FHLB Des Moines for impairment. Based on the Company’s evaluation of the underlying investment, including the long-term nature of the investment and the liquidity position of the FHLB Des Moines, the Company did not consider its FHLB stock other-than-temporarily impaired.

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Federal Reserve Bank Stock

12 Months Ended

Dec. 31, 2017

FRB stock

Federal Home Loan Bank Stock

Federal Reserve Bank Stock

(6)Federal Reserve Bank Stock

The Bank, as a member of the Federal Reserve System, is required to hold shares of capital stock of the FRB of San Francisco equal to six percent of capital and surplus of the Bank.  At December 31, 2017 and 2016, the Bank met such requirement.  At December 31, 2017 and 2016, the Bank owned $3.1 million of capital stock of the FRB of San Francisco.

The Company evaluated its investment in the stock of the FRB of San Francisco for impairment.  Based on the Company’s evaluation of the underlying investment, including the long-term nature of the investment and the liquidity position of the FRB of San Francisco, the Company did not consider its FRB stock other-than-temporarily impaired.

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Loans Receivable and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2017

Loans Receivable and Allowance for Loan Losses

Loans Receivable and Allowance for Loan Losses

(7)Loans Receivable and Allowance for Loan Losses

The components of loans receivable are as follows:

	December 31,
(Dollars in thousands)	2017		2016
Real estate loans:
First mortgages:
One- to four-family residential	$	1,444,625	$	1,289,364
Multi-family residential		10,799		9,551
Construction, commercial and other		21,787		23,346
Home equity loans and lines of credit		12,882		14,805
Total real estate loans		1,490,093		1,337,066
Other loans:
Loans on deposit accounts		274		204
Consumer and other loans		4,340		4,360
Total other loans		4,614		4,564
Less:
Net unearned fees and discounts		(3,188)		(3,191)
Allowance for loan losses		(2,548)		(2,452)
Total unearned fees, discounts and allowance for loan losses		(5,736)		(5,643)
Loans receivable, net	$	1,488,971	$	1,335,987

The table below presents the activity in the allowance for loan losses by portfolio segment:

			Construction,		Home
			Commercial		Equity
			and Other		Loans and
	Residential		Mortgage		Lines of		Consumer
(Dollars in thousands)	Mortgage		Loans		Credit		and Other		Unallocated		Totals
2017:
Balance, beginning of year	$	1,594	$	519	$	2	$	115	$	222	$	2,452
Provision (reversal of provision) for loan losses		63		20		(1)		(40)		10		52
		1,657		539		1		75		232		2,504
Charge-offs		(11)		—		—		(26)		—		(37)
Recoveries		75		—		—		6		—		81
Net recoveries (charge-offs)		64		—		—		(20)		—		44
Balance, end of year	$	1,721	$	539	$	1	$	55	$	232	$	2,548
2016:
Balance, beginning of year	$	1,380	$	517	$	3	$	72	$	194	$	2,166
Provision (reversal of provision) for loan losses		223		1		(1)		59		28		310
		1,603		518		2		131		222		2,476
Charge-offs		(33)		—		—		(28)		—		(61)
Recoveries		24		1		—		12		—		37
Net recoveries (charge-offs)		(9)		1		—		(16)		—		(24)
Balance, end of year	$	1,594	$	519	$	2	$	115	$	222	$	2,452
2015:
Balance, beginning of year	$	413	$	977	$	5	$	263	$	33	$	1,691
Provision (reversal of allowance) for loan losses		964		(471)		(49)		(150)		161		455
		1,377		506		(44)		113		194		2,146
Charge-offs		—		—		—		(53)		—		(53)
Recoveries		3		11		47		12		—		73
Net recoveries (charge-offs)		3		11		47		(41)		—		20
Balance, end of year	$	1,380	$	517	$	3	$	72	$	194	$	2,166

In 2016, the Company changed the look-back period that is used to calculate the historical loss rate from five to seven years.  The look-back period was extended to seven years because the longer look-back period is considered to be more representative of an entire economic cycle.  The seven year look-back period includes loan charge-offs and recoveries related to the recession and the subsequent economic recovery.  The change in the look-back period did not have a material effect on the allowance for loan losses.

The allowance for loan loss for each segment of the loan portfolio is generally determined by calculating the historical loss of each segment in the look-back period and adding a qualitative adjustment for the following factors:

· changes in lending policies and procedures, including changes in underwriting standards and collections, charge-off and recovery practices;

· changes in international, national, and local economic trends;

· changes in the types of loans in the loan portfolio;

· changes in the experience and ability of personnel in the mortgage loan origination and loan servicing departments;

· changes in the number and amount of delinquent loans and classified assets;

· changes in the type and volume of loans being originated;

· changes in the value of underlying collateral for collateral dependent loans;

· changes in any concentration of credit; and

· external factors such as competition, legal and regulatory requirements on the level of estimated credit losses in the existing loan portfolio.

The allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.  The unallocated allowance is established for probable losses that have been incurred as of the reporting date but are not reflected in the allocated allowance.

Management considers the allowance for loan losses at December 31, 2017 to be at an appropriate level to provide for probable losses that can be reasonably estimated based on general and specific conditions at that date.  While the Company uses the best information it has available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations.  To the extent actual outcomes differ from the estimates, additional provisions for credit losses may be required that would reduce future earnings.  In addition, as an integral part of their examination process, the bank regulators periodically review the allowance for loan losses and may require the Company to increase the allowance based on their analysis of information available at the time of their examination.

The table below presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method:

			Construction,		Home
			Commercial		Equity
			and Other		Loans and
	Residential		Mortgage		Lines of		Consumer
(Dollars in thousands)	Mortgage		Loans		Credit		and Other		Unallocated		Totals
December 31, 2017:
Allowance for loan losses:
Ending allowance balance:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		1,721		539		1		55		232		2,548
Total ending allowance balance	$	1,721	$	539	$	1	$	55	$	232	$	2,548
Loans:
Ending loan balance:
Individually evaluated for impairment	$	4,977	$	—	$	165	$	—	$	—	$	5,142
Collectively evaluated for impairment		1,447,326		21,701		12,722		4,628		—		1,486,377
Total ending loan balance	$	1,452,303	$	21,701	$	12,887	$	4,628	$	—	$	1,491,519
December 31, 2016:
Allowance for loan losses:
Ending allowance balance:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		1,594		519		2		115		222		2,452
Total ending allowance balance	$	1,594	$	519	$	2	$	115	$	222	$	2,452
Loans:
Ending loan balance:
Individually evaluated for impairment	$	5,587	$	—	$	156	$	1	$	—	$	5,744
Collectively evaluated for impairment		1,290,209		23,256		14,656		4,574		—		1,332,695
Total ending loan balance	$	1,295,796	$	23,256	$	14,812	$	4,575	$	—	$	1,338,439

The table below presents the balance of impaired loans individually evaluated for impairment by class of loans:

			Unpaid
	Recorded		Principal
(Dollars in thousands)	Investment		Balance
December 31, 2017:
With no related allowance recorded:
One- to four-family residential mortgages	$	4,977	$	5,897
Home equity loans and lines of credit		165		228
Total	$	5,142	$	6,125
December 31, 2016:
With no related allowance recorded:
One- to four-family residential mortgages	$	5,587	$	6,469
Home equity loans and lines of credit		156		204
Consumer and other		1		1
Total	$	5,744	$	6,674

The table below presents the average recorded investment and interest income recognized on impaired loans by class of loans:

	Average
	Recorded		Interest Income
(Dollars in thousands)	Investment		Recognized
2017:
With no related allowance recorded:
One- to four-family residential mortgages	$	5,112	$	58
Home equity loans and lines of credit		175		—
Consumer and other		—		—
Total	$	5,287	$	58
2016:
With no related allowance recorded:
One- to four-family residential mortgages	$	5,743	$	72
Home equity loans and lines of credit		161		—
Consumer and other		1		—
Total	$	5,905	$	72
2015:
With no related allowance recorded:
One- to four-family residential mortgages	$	6,642	$	71
Home equity loans and lines of credit		131		—
Consumer and other		9		—
Total	$	6,782	$	71

There were no loans individually evaluated for impairment with a related allowance for loan loss as of December 31, 2017, 2016 or 2015. Loans individually evaluated for impairment do not have an allocated allowance for loan loss because they are written down to fair value at the time of impairment.

The table below presents the aging of loans and accrual status by class of loans:

															Loans
															More Than
															90 Days
	30 - 59		60 - 89		90 Days or										Past Due
	Days Past		Days Past		Greater		Total Past		Loans Not		Total		Nonaccrual		and Still
(Dollars in thousands)	Due		Due		Past Due		Due		Past Due		Loans		Loans		Accruing
December 31, 2017:
One- to four-family residential mortgages	$	—	$	1,207	$	1,589	$	2,796	$	1,438,725	$	1,441,521	$	4,062	$	—
Multi-family residential mortgages		—		—		—		—		10,782		10,782		—		—
Construction, commercial and other mortgages		—		—		—		—		21,701		21,701		—		—
Home equity loans and lines of credit		—		—		41		41		12,846		12,887		165		—
Loans on deposit accounts		—		—		—		—		274		274		—		—
Consumer and other		4		—		—		4		4,350		4,354		—		—
Total	$	4	$	1,207	$	1,630	$	2,841	$	1,488,678	$	1,491,519	$	4,227	$	—
December 31, 2016:
One- to four-family residential mortgages	$	185	$	133	$	1,358	$	1,676	$	1,284,590	$	1,286,266	$	4,402	$	—
Multi-family residential mortgages		—		—		—		—		9,530		9,530		—		—
Construction, commercial and other mortgages		—		—		—		—		23,256		23,256		—		—
Home equity loans and lines of credit		16		35		49		100		14,712		14,812		156		—
Loans on deposit accounts		—		—		—		—		204		204		—		—
Consumer and other		3		—		1		4		4,367		4,371		1		—
Total	$	204	$	168	$	1,408	$	1,780	$	1,336,659	$	1,338,439	$	4,559	$	—

The Company primarily uses the aging of loans and accrual status to monitor the credit quality of its loan portfolio.  When a mortgage loan becomes seriously delinquent (90 days or more contractually past due), it displays weaknesses that may result in a loss. As a loan becomes more delinquent, the likelihood of the borrower repaying the loan decreases and the loan becomes more collateral-dependent. A mortgage loan becomes collateral-dependent when the proceeds for repayment can be expected to come only from the sale or operation of the collateral and not from borrower repayments.  Generally, appraisals are obtained after a loan becomes collateral-dependent or is four months delinquent.  The carrying value of collateral-dependent loans is adjusted to the fair value of the collateral less selling costs.  Any commercial real estate, commercial, construction or equity loan that has a loan balance in excess of a specified amount is also periodically reviewed to determine whether the loan exhibits any weaknesses and is performing in accordance with its contractual terms.

The Company had 17 nonaccrual loans with a book value of $4.2 million at December 31, 2017 and 19 nonaccrual loans with a book value of $4.6 million as of December 31, 2016.  The Company collected interest on nonaccrual loans of $179,000,  $195,000 and $233,000 during 2017, 2016 and 2015, respectively, but due to regulatory requirements, the Company recorded the interest as a reduction of principal.  The Company would have recognized additional interest income of $240,000,  $268,000 and $312,000 during 2017, 2016, and 2015, respectively, had the loans been accruing interest.  The Company did not have any loans more than 90 days past due and still accruing interest as of December 31, 2017, 2016 or 2015.

There were no loans modified in a troubled debt restructuring during the year ended December 31, 2017 or 2016. There were no new troubled debt restructurings within the past 12 months that subsequently defaulted.

The table below summarizes troubled debt restucturings by class of loans:

	Number of		Accrual		Number of		Nonaccrual
(Dollars in thousands)	Loans		Status		Loans		Status		Total
December 31, 2017:
One- to four-family residential mortgages		4	$	915		5	$	1,074	$	1,989
Home equity loans and lines of credit		—		—		1		92		92
Total		4	$	915		6	$	1,166	$	2,081
December 31, 2016:
One- to four-family residential mortgages		5	$	1,185		7	$	1,629	$	2,814
Home equity loans and lines of credit		—		—		1		107		107
Total		5	$	1,185		8	$	1,736	$	2,921

One of the restructured loans, for $149,000, was more than 149 days delinquent and not accruing interest as of December 31, 2017 and 2016.  Restructurings include deferrals of interest and/or principal payments and temporary or permanent reductions in interest rates due to the financial difficulties of the borrowers.  At December 31, 2017, we have no commitments to lend any additional funds to these borrowers.

The Company had no real estate owned as of December 31, 2017 or 2016.  There were three one- to four-family residential mortgage loans totaling $650,000 and one home equity loan for $41,000 in the process of foreclosure as of December 31, 2017.  There were three one-to four-family residential mortgage loans totaling $660,000 and one home equity loan for $42,000 in the process of foreclosure as of December 31, 2016.

Nearly all of our real estate loans are collateralized by real estate located in the State of Hawaii. Loan-to-value ratios on these real estate loans generally do not exceed 80% at the time of origination.

During the years ended December 31, 2017, 2016 and 2015, the Company sold $25.0 million, $48.9 million and $56.2 million, respectively, of mortgage loans held for sale and recognized gains of $199,000,  $406,000, and $503,000, respectively.  The Company had one loan held for sale for $403,000 at December 31, 2017 and five loans held for sale totaling $1.6 million at December 31, 2016.

The Company serviced loans for others of $35.5 million, $41.5 million and $51.8 million at December 31, 2017, 2016, and 2015, respectively.  Of these amounts, $1.5 million, $2.2 million, and $2.8 million relate to securitizations for which the Company continues to hold the related mortgage-backed securities at December 31, 2017, 2016, and 2015, respectively.  The amount of contractually specified servicing fees earned was $105,000,  $128,000 and $153,000 for 2017, 2016, and 2015, respectively.  The fees are reported in service fees on loan and deposit accounts in the consolidated statements of income.

In the normal course of business, the Company has made loans to certain directors and executive officers under terms which management believes are consistent with the Company’s general lending policies.  Loans to directors and executive officers amounted to $890,000 at December 31, 2017 and $1.4 million at December 31, 2016.

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Accrued Interest Receivable

12 Months Ended

Dec. 31, 2017

Accrued Interest Receivable

Accrued Interest Receivable

(8)Accrued Interest Receivable

The components of accrued interest receivable are as follows:

	December 31,
(Dollars in thousands)	2017		2016
Investment securities	$	1,045	$	1,064
Loans receivable		4,090		3,658
Interest-bearing deposits		7		10
Total	$	5,142	$	4,732

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Mortgage Servicing Assets

12 Months Ended

Dec. 31, 2017

Mortgage Servicing Assets.

Mortgage Servicing Assets

(9)Mortgage Servicing Assets

Mortgage servicing assets are created when the Company sells mortgage loans and retains the rights to service the loans.  Mortgage servicing assets are accounted for in accordance with the Transfers and Servicing topic of the FASB ASC and are initially valued at fair value and subsequently at the lower of cost or fair value.  We amortize mortgage servicing assets in proportion to and over the period of estimated net servicing income.  All servicing assets are grouped into categories based on the interest rate and original term of the loan sold.  Mortgage servicing assets related to loan sales are recorded as a gain on sale of loans and totaled $3,000 and $0 for the years ended December 31, 2017 and 2016, respectively.

The table below presents the changes in our mortgage servicing assets:

(Dollars in thousands)	2017		2016
Balance at beginning of year	$	307	$	426
Additions		3		—
Impairments		—		(49)
Amortization		(47)		(70)
Balance at end of year	$	263	$	307

The table below presents the gross carrying values, accumulated amortization, and net carrying values of our mortgage servicing assets:

	December 31,
(Dollars in thousands)	2017		2016
Gross carrying value	$	1,310	$	1,307
Accumulated amortization		(1,047)		(1,000)
Net carrying value	$	263	$	307

The estimated amortization expense for our mortgage servicing assets for the next five years and all years thereafter are as follows:

(Dollars in thousands)
2018	$	48
2019		32
2020		26
2021		22
2022		20
Thereafter		115
Total	$	263

The Company uses a discounted cash flow model to determine the fair value of retained mortgage servicing assets.  The discounted cash flow model is also used to assess impairment of servicing assets.  Impairments are recorded as adjustments to amortization expense and included in service fees on loan and deposit accounts in the statements of income.  Critical assumptions used in the discounted cash flow model include mortgage prepayment speeds, discount rates and cost of servicing.

Prepayment speed may be affected by economic factors such as home price appreciation, market interest rates, the availability of other loan products to our borrowers and customer payment patterns.  Prepayment speeds include the impact of all borrower prepayments, including full payoffs, additional principal payments and the impact of loans paid off due to foreclosure liquidations.  As market interest rates decline, prepayment speeds will generally increase as customers refinance existing mortgage loans under more favorable interest rate terms and future cash flows will generally decline resulting in a potential reduction, or impairment, to the fair value of the mortgage servicing assets.  Alternatively, an increase in market interest rates may cause a decrease in prepayment speeds and therefore an increase in the fair value of mortgage servicing assets.

The table below presents the fair values and key assumptions used in determining the fair values of our mortgage servicing assets as of December 31, 2017 and 2016:

	2017			2016
Fair value, beginning of year (in thousands)	$	368		$	441
Fair value, end of year (in thousands)		311			368
Weighted average discount rate		10.50	%		10.50	%
Weighted average prepayment speed assumption (PSA prepayment speed)		173.3			159.2
Annual cost to service (per loan)	$	70		$	65

The PSA prepayment model assumes increasing prepayment rates for the first 30 months of a loan’s term and constant prepayment rates thereafter.

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Interest Rate Lock and Forward Loan Sale Commitments

12 Months Ended

Dec. 31, 2017

Interest Rate Lock and Forward Loan Sale Commitments

Interest Rate Lock and Forward Loan Sale Commitments

(10)Interest Rate Lock and Forward Loan Sale Commitments

The Company may enter into interest rate lock commitments with borrowers on loans intended to be sold. To manage interest rate risk on the lock commitments, the Company may also enter into forward loan sale commitments.  The interest rate lock commitments and forward loan sale commitments are treated as derivatives and are recorded at their fair values in prepaid expenses and other assets or in accounts payable and accrued expenses.  Changes in fair value are recorded in current earnings.  At December 31, 2017, interest rate locks and forward loan sale commitments on loans held for sale amounted to $2.5 million and $2.9 million, respectively.

The table below presents the location of assets and liabilities related to derivatives:

		Asset Derivatives				Liability Derivatives
	Location on	Fair Value at December 31,				Fair Value at December 31,
(Dollars in thousands)	Balance Sheet	2017		2016		2017		2016
Interest rate contracts	Prepaid expenses and other assets	$	8	$	104	$	—	$	—
Interest rate contracts	Accounts payable and accrued expenses		—		—		8		104
Total derivatives		$	8	$	104	$	8	$	104

The table below presents the location of gains and losses related to derivatives:

	Location of
	Loss on
(Dollars in thousands)	Statement of Income	2017		2016
Interest rate contracts	Gain on sale of loans	$	—	$	6

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Premises and Equipment

12 Months Ended

Dec. 31, 2017

Premises and Equipment

Premises and Equipment

(11)Premises and Equipment

Premises and equipment are as follows:

	December 31,
(Dollars in thousands)	2017		2016
Land	$	585	$	585
Buildings and improvements		1,301		1,045
Leasehold improvements		13,915		13,005
Furniture, fixtures and equipment		5,727		5,261
Automobiles		115		115
		21,643		20,011
Less accumulated depreciation and amortization		(15,962)		(16,066)
		5,681		3,945
Construction in progress		40		382
Total	$	5,721	$	4,327

Depreciation expense was $1.1 million, $1.1 million and $1.3 million for the years ended December 31, 2017, 2016 and 2015, respectively.

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Deposits

12 Months Ended

Dec. 31, 2017

Deposits

Deposits

(12) Deposits

Deposit accounts by type are summarized with their respective weighted-average interest rates as follows:

	December 31,
	2017				2016
(Dollars in thousands)	Amount		Rate		Amount		Rate
Non-interest bearing	$	49,725	-	%	$	47,703	-	%
Savings accounts		1,040,248	0.46			1,022,159	0.41
Certificates of deposit		312,225	1.34			236,043	0.96
Money market		5,578	0.43			3,406	0.44
Checking and Super NOW		189,519	0.02			183,889	0.02
Total	$	1,597,295	0.56	%	$	1,493,200	0.43	%

The maturity of certificate of deposit accounts at December 31, 2017 is as follows (dollars in thousands):

Maturing in:
2018	$	165,706
2019		70,272
2020		31,423
2021		20,458
2022		24,366
Total	$	312,225

Certificates of deposit with balances greater than or equal to $250,000 totaled $192.8 mllion and $141.6 million at December 31, 2017 and 2016, respectively. Deposit accounts in the Bank are insured by the FDIC, generally up to a maximum of $250,000 per account owner.

Interest expense by type of deposit is as follows:

(Dollars in thousands)	2017		2016		2015
Savings	$	4,445	$	4,162	$	3,670
Certificates of deposit and money market		3,182		1,734		1,118
Checking and Super NOW		39		37		33
Total	$	7,666	$	5,933	$	4,821

At December 31, 2017 and 2016, overdrawn deposit accounts totaled $22,000 and have been reclassified as loans in the consolidated balance sheets.

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Advances from the Federal Home Loan Bank

12 Months Ended

Dec. 31, 2017

Advances from the Federal Home Loan Bank

Advances from the Federal Home Loan Bank

(13)Advances from the Federal Home Loan Bank

Federal Home Loan Bank advances are secured by a blanket pledge on the Bank’s assets not otherwise pledged. Our credit line with the FHLB Des Moines is equal to 35% of the Bank’s total assets and as of December 31, 2017 and 2016, we had the capacity to borrow an additional $579.4 million and $577.9 million, respectively.

Advances outstanding consisted of the following:

	December 31,
	2017				2016
			Weighted				Weighted
			Average				Average
(Dollars in thousands)	Amount		Rate		Amount		Rate
Due within one year	$	46,200	1.39	%	$	—	—	%
Due over 1 year to 2 years		31,000	1.79			37,000	1.33
Due over 2 years to 3 years		15,000	1.85			22,000	1.66
Due over 3 years to 4 years		15,000	2.32			10,000	1.66
Total	$	107,200	1.70	%	$	69,000	1.49	%

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Securities Sold Under Agreements to Repurchase

12 Months Ended

Dec. 31, 2017

Securities Sold Under Agreements to Repurchase

Securities Sold Under Agreements to Repurchase

(14)Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase are treated as financings and the obligations to repurchase the identical securities sold are reflected as a liability with the securities collateralizing the agreements classified as an asset. Securities sold under agreements to repurchase are summarized as follows:

	2017				2016
			Weighted				Weighted
	Repurchase		Average		Repurchase		Average
(Dollars in thousands)	Liability		Rate		Liability		Rate
Maturing:
1 year or less	$	—	—	%	$	25,000	1.46	%
Over 1 year to 2 years		25,000	1.66			—	—
Over 2 years to 3 years		5,000	1.65			25,000	1.66
Over 3 years to 4 years		—	—			5,000	1.65
Total	$	30,000	1.66	%	$	55,000	1.57	%

Below is a summary comparing the carrying value and fair value of securities pledged to secure repurchase agreements, the repurchase liability, and the amount at risk at December 31, 2017. The amount at risk is the greater of the carrying value or fair value over the repurchase liability and refers to the potential loss to the Company if the secured lender fails to return the security at the maturity date of the agreement.  All the agreements to repurchase are with JP Morgan Securities and the securities pledged are mortgage-backed securities issued and guaranteed by U.S. government sponsored enterprises.  The repurchase liability cannot exceed 90% of the fair value of securities pledged.  In the event of a decline in the fair value of securities pledged to less than the required amount due to market conditions or principal repayments, the Company is obligated to pledge additional securities or other suitable collateral to cure the deficiency.

									Weighted
	Carrying		Fair						Average
	Value of		Value of		Repurchase		Amount		Months to
(Dollars in thousands)	Securities		Securities		Liability		at Risk		Maturity
Maturing:
Over 90 days	$	39,834	$	39,986	$	30,000	$	9,986	17

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Offsetting of Financial Liabilities

12 Months Ended

Dec. 31, 2017

Offsetting of Financial Liabilities

Offsetting of Financial Liabilities

(15)Offsetting of Financial Liabilities

Securities sold under agreements to repurchase are subject to a right of offset in the event of default.  See Note 14, Securities Sold Under Agreements to Repurchase, for additional information.

					Net Amount of		Gross Amount Not Offset in the
	Gross Amount		Gross Amount		Liabilities		Balance Sheet
	of Recognized		Offset in the		Presented in the		Financial		Cash Collateral
(Dollars in thousands)	Liabilities		Balance Sheet		Balance Sheet		Instruments		Pledged		Net Amount
December 31, 2017:
Securities sold under agreements to repurchase	$	30,000	$	—	$	30,000	$	30,000	$	—	$	—
December 31, 2016:
Securities sold under agreements to repurchase	$	55,000	$	—	$	55,000	$	55,000	$	—	$	—

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Income Taxes

12 Months Ended

Dec. 31, 2017

Income Taxes

Income Taxes

(16)Income Taxes

Allocation of federal and state income taxes between current and deferred provisions is as follows:

(Dollars in thousands)	2017		2016		2015
Current
Federal	$	6,219	$	7,487	$	10,176
State		1,447		1,810		1,833
		7,666		9,297		12,009
Deferred
Federal		3,273		1,339		(2,147)
State		163		151		(76)
		3,436		1,490		(2,223)
Total	$	11,102	$	10,787	$	9,786

The federal statutory corporate tax rate for the years ended December 31, 2017, 2016 and 2015 was 35%. A reconciliation of the tax provision based on the statutory corporate rate on pretax income and the provision for taxes as shown in the accompanying consolidated statements of income is as follows:

(Dollars in thousands)	2017			2016			2015
Income tax expense at statutory rate	$	9,123		$	9,497		$	8,587
Income tax effect of:
Other tax-exempt income		(317)			(338)			(359)
Share-based compensation		2			68			87
State income taxes, net of federal income tax benefits		1,104			1,057			1,104
Tax benefit from the exercise of stock options (1)		(1,046)			—			—
Write-down of deferred income taxes (2)		2,054			—			—
Other		182			503			367
Total income tax expense	$	11,102		$	10,787		$	9,786
Effective income tax rate		42.59	%		39.75	%		39.89	%

(1) Starting in 2017 a new accounting standard requires that any excess tax benefits resulting from the exercise of stock options be recognized in income tax expense.  Prior to the adoption of the new standard, the excess tax benefits were recorded as additional paid-in-capital.

(2) Income tax expense for 2017 included a $2.1 million write-down of deferred income tax assets that resulted when the federal corporate tax rate was lowered from 35% to 21% due to the Tax Cuts and Jobs Act.

The components of income taxes payable (receivable) are as follows:

	December 31,
(Dollars in thousands)	2017		2016
Current taxes payable (receivable):
Federal	$	(1,571)	$	(122)
State		1,483		1,616
	$	(88)	$	1,494
Deferred taxes receivable:
Federal	$	(3,178)	$	(6,350)
State		(1,431)		(1,555)
	$	(4,609)	$	(7,905)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:

	December 31,
(Dollars in thousands)	2017		2016
Deferred tax assets:
Premises and equipment	$	966	$	1,737
Hawaii franchise tax		440		560
Unfunded pension liability		1,229		1,550
Allowance for loan losses		678		969
Impaired asset write-down		724		1,020
Employee benefit plans		2,580		3,785
Equity incentive plan		420		1,330
Unrealized losses on securities available-for-sale		17		21
Deferred compensation		453		744
Other		137		215
		7,644		11,931
Deferred tax liabilities:
Net deferred loan fees		2,676		3,566
FHLB stock dividends		126		196
Prepaid expense		163		143
Premiums on loans sold		70		121
		3,035		4,026
Net deferred tax assets	$	4,609	$	7,905

Deferred tax assets and liabilities at December 31, 2017 and 2016 were calculated using federal corporate tax rates of 21% and 35%, respectively.  The corporate tax rate was lowered to 21% due to the Tax Cuts and Jobs Act of 2017.  The lower tax rate caused a $2.1 million increase in income tax expense and write down of deferred income tax assets. 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced. There was no valuation allowance for deferred tax assets as of December 31, 2017 and 2016.

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Employee Benefit Plans

12 Months Ended

Dec. 31, 2017

Employee Benefit Plans

Employee Benefit Plans

(17)Employee Benefit Plans

The Company has a noncontributory defined benefit pension plan (Pension Plan) that covers most employees with at least one year of service. The benefits are based on years of service and the employees’ compensation during the service period. The Company’s policy is to accrue the actuarially determined pension costs and to fund pension costs within regulatory guidelines. The Company reviews its assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is appropriate to do so. The effect of modifications to those assumptions is recorded in accumulated other comprehensive income (AOCI) beginning in 2006 and amortized to net periodic benefit cost over future periods using the corridor method. The Company believes that the assumptions utilized in recording its obligations under the plan are reasonable based on its experience and market conditions.

On November 4, 2008, the Board of Directors approved changes to the Company’s defined benefit pension plan. Effective December 31, 2008, there are no further accrual of benefits for any participants and benefits do not increase with any additional years of service. Employees already enrolled in the Pension Plan as of December 31, 2008 will be 100% vested if they have at least five years of service. For employees with less than five years of service, vesting would occur at the employee’s five-year anniversary date.

In addition, the Company sponsors a Supplemental Employee Retirement Plan (SERP), a noncontributory supplemental retirement benefit plan, which covers certain current and former employees of the Company for amounts in addition to those provided under the Pension Plan.

The following table sets forth the status of the Pension Plan and SERP at the dates indicated:

	Pension Plan				SERP
	December 31,
(Dollars in thousands)	2017		2016		2017		2016
Accumulated benefit obligation at end of year	$	19,314	$	17,496	$	9,242	$	9,044
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	17,496	$	17,321	$	9,044	$	8,891
Service cost		193		194		75		38
Interest cost		763		752		140		132
Actuarial loss (gain)		1,670		(90)		—		—
Benefits paid		(808)		(681)		(17)		(17)
Benefit obligation at end of year		19,314		17,496		9,242		9,044
Change in plan assets:
Fair value of plan assets at beginning of year		14,804		13,140		—		—
Actual return on plan assets		1,931		345		—		—
Employer contributions		—		2,000		17		17
Benefits paid		(808)		(681)		(17)		(17)
Fair value of plan assets at end of year		15,927		14,804		—		—
Funded status at end of year	$	(3,387)	$	(2,692)	$	(9,242)	$	(9,044)
Amounts recognized in the consolidated balance sheets:
Accounts payable and accrued expenses - liability	$	(3,387)	$	(2,692)	$	(9,242)	$	(9,044)
Amounts recognized in accumulated other comprehensive loss:
Net actuarial loss	$	9,096	$	8,582	$	—	$	—
Prior service cost		149		154		—		—
Accumulated other comprehensive loss, before tax	$	9,245	$	8,736	$	—	$	—

The following table sets forth the changes recognized in accumulated other comprehensive loss for the years indicated:

	Pension Plan
	Year Ended December 31,
(Dollars in thousands)	2017		2016
Accumulated other comprehensive loss at beginning of year, before tax	$	8,736	$	8,375
Actuarial net loss arising during the period		764		580
Amortizations (recognized in net periodic benefit cost):
Actuarial loss		(250)		(214)
Prior service cost		(5)		(5)
Total recognized in other comprehensive loss		509		361
Accumulated other comprehensive loss at end of year, before tax	$	9,245	$	8,736

For the years ended December 31, 2017 and 2016, the following weighted average assumptions were used to determine benefit obligations at the end of the year:

	Pension Plan				SERP
	Year Ended December 31,
	2017		2016		2017		2016
Assumptions used to determine the year-end benefit obligations:
Discount rate	3.70	%	4.30	%	5.04	%	5.05	%
Rate of compensation increase	N/A		N/A		5.00	%	5.00	%

The Company does not expect any plan assets to be returned to the Company during calendar year 2018.

The dates used to determine retirement measurements for the Pension Plan were December 31, 2017 and 2016.

The Company’s investment strategy for the defined benefit retirement plan is to maintain a consistent rate of return with primary emphasis on capital appreciation and secondary emphasis on income to enhance the purchasing power of the plan’s assets over the long-term and to preserve capital. The investment policy establishes a target allocation for each asset class that is reviewed periodically and rebalanced when considered appropriate. Normal target allocations at December 31, 2017 were 55% domestic equity securities, 10% international equity securities and 35% bonds.  Equity securities primarily include stocks, investment in exchange traded funds and large-cap, mid-cap and small-cap mutual funds.  Bonds include U.S. Treasuries, mortgage-backed securities and corporate bonds of companies in diversified industries. Other types of investments include money market funds and savings accounts opened with the Company.

As of December 31, 2017 and 2016, the Pension Plan’s assets measured at fair value were classified as follows:

			Fair Value of Measurements at Report Date Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Total Fair		Assets		Inputs		Inputs
(Dollars in thousands)	Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2017:
Cash	$	846	$	846	$	—	$	—
Equities		11,814		11,814		—		—
Mutual funds (1)		3,267		3,267		—		—
Total	$	15,927	$	15,927	$	—	$	—
December 31, 2016:
Cash	$	1,839	$	1,839	$	—	$	—
Equities		9,794		9,794		—		—
Mutual funds (1)		3,171		3,171		—		—
Total	$	14,804	$	14,804	$	—	$	—

(1) This category includes mutual funds that invest in equities and bonds.  The mutual fund managers have the ability to change the amounts invested in equities and bonds depending on their investment outlook.

Estimated future benefit payments reflecting expected future service at December 31, 2017 are as follows:

	Pension
(Dollars in thousands)	Plan		SERP
2018	$	954	$	17
2019		1,007		6,488
2020		1,039		150
2021		1,092		2,320
2022		1,133		144
2023 - 2027		5,794		665
Total	$	11,019	$	9,784

For the years ended December 31, 2017, 2016, and 2015, the following weighted average assumptions were used to determine net periodic benefit cost for the fiscal years shown:

	Pension Plan						SERP
	Year Ended December 31,
(Dollars in thousands)	2017		2016		2015		2017		2016		2015
Assumptions used to determine the net periodic benefit cost:
Discount rate	4.30	%	4.40	%	4.10	%	5.03	%	5.05	%	5.06	%
Expected return on plan assets	7.25		7.50		7.50		N/A		N/A		N/A
Rate of compensation increase	N/A		N/A		N/A		5.00		5.00		5.00

The components of net periodic benefit cost were as follows:

	Pension Plan						SERP
	Year Ended December 31,
(Dollars in thousands)	2017		2016		2015		2017		2016		2015
Net periodic benefit cost for the year:
Service cost	$	193	$	194	$	120	$	75	$	38	$	29
Interest cost		763		752		722		140		132		125
Expected return on plan assets		(1,026)		(1,015)		(976)		—		—		—
Amortization of prior service cost		5		5		—		—		—		—
Recognized actuarial loss		250		214		215		—		—		—
Recognized curtailment loss		—		—		—		—		—		—
Net periodic benefit cost	$	185	$	150	$	81	$	215	$	170	$	154

The estimated prior service cost and net actuarial loss that will be amortized from AOCI into net periodic pension benefit cost in 2018 are $5,000 and $249,000, respectively.

The expected return on plan assets is based on the weighted-average long-term rates of return for the types of assets held in the plan. The expected return on plan assets is adjusted when there is a change in the expected long-term rate of return or in the composition of assets held in the plan.  The discount rate is based on the return of high-quality fixed-income investments that can be used to fund the benefit payments under the Company’s defined benefit plan.

The Company does not expect to make any contributions to the defined benefit pension plan in 2018.  The Company expects to make a $17,000 contribution to the SERP in 2018 to cover actual benefit payments.

The Company also has a 401(k) defined contribution plan and profit sharing plan covering all employees after one year of service. The 401(k) plan provides for employer matching contributions, as determined by the Company, based on a percentage of employees’ contributions subject to a maximum amount defined in the plan agreement. The Company’s 401(k) matching contributions, based on 5% of employees’ contributions for 2017, 2016 and 2015, amounted to $57,000,  $57,000, and $56,000, respectively. The Company contributes to the profit sharing plan an amount determined by the Board of Directors. No contributions were made to the profit sharing plan for years ended December 31, 2017, 2016 and 2015.

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Employee Stock Ownership Plan

12 Months Ended

Dec. 31, 2017

Employee Stock Ownership Plan

Employee Stock Ownership Plan

Employee Stock Ownership Plan

(18)Employee Stock Ownership Plan

Effective January 1, 2009, Territorial Savings Bank adopted an Employee Stock Ownership Plan (ESOP) for eligible employees.  The ESOP borrowed $9.8 million from the Company and used those funds to acquire 978,650 shares, or 8%, of the total number of shares issued by the Company in its initial public offering.  The shares were acquired at a price of $10.00 per share.

The loan is secured by the shares purchased with the loan proceeds and will be repaid by the ESOP over the 20-year term of the loan with funds from Territorial Savings Bank’s contributions to the ESOP and dividends payable on the shares.  The interest rate on the ESOP loan is an adjustable rate equal to the prime rate, as published in The Wall Street Journal.  The interest rate adjusts annually and will be the prime rate on the first business day of the calendar year.

Shares purchased by the ESOP are held by a trustee in an unallocated suspense account, and shares are released annually from the suspense account on a pro-rata basis as principal and interest payments are made by the ESOP to the Company.  The trustee allocates the shares released among participants on the basis of each participant’s proportional share of compensation relative to all participants.  As shares are committed to be released from the suspense account, Territorial Savings Bank reports compensation expense based on the average fair value of shares released with a corresponding credit to stockholders’ equity.  The shares committed to be released are considered outstanding for earnings per share computations.  Compensation expense recognized for the years ended December 31, 2017 and 2016 amounted to $1.8 million and $1.1 million, respectively.

Shares held by the ESOP trust were as follows:

	December 31,
	2017		2016
Allocated shares		397,912		372,997
Unearned shares		538,261		587,193
Total ESOP shares		936,173		960,190
Fair value of unearned shares, in thousands	$	16,616	$	19,283

The ESOP restoration plan is a non-qualified plan that provides supplemental benefits to certain executives who are prevented from receiving the full benefits contemplated by the ESOP’s benefit formula.  The supplemental cash payments consist of payments representing shares that cannot be allocated to the participants under the ESOP due to IRS limitations imposed on tax-qualified plans. We accrue for these benefits over the period during which employees provide services to earn these benefits.  For the years ended December 31, 2017 and 2016, we accrued $341,000 and $454,000, respectively, for the ESOP restoration plan.

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Share-Based Compensation

12 Months Ended

Dec. 31, 2017

2010 Equity Incentive Plan

Share-Based Compensation

Share-Based Compensation

(19)Share-Based Compensation

On August 19, 2010, Territorial Bancorp Inc. adopted the 2010 Equity Incentive Plan, which provides for awards of stock options and restricted stock to key officers and outside directors.  In accordance with the Compensation — Stock Compensation topic of the FASB ASC, the cost of the 2010 Equity Incentive Plan is based on the fair value of the awards on the grant date.  The fair value of restricted stock is based on the closing price of the Company’s stock on the grant date.  The fair value of stock options is estimated using a Black-Scholes option pricing model using assumptions for dividend yield, stock price volatility, risk-free interest rate and option term.  These assumptions are based on our judgments regarding future events, are subjective in nature, and cannot be determined with precision.  The cost of the awards will be recognized on a straight-line basis over the three-, five- or six-year vesting period during which participants are required to provide services in exchange for the awards.

The Company recognized compensation expense, measured as the fair value of the share-based award on the date of grant, on a straight-line basis over the vesting period.  Share-based compensation is recorded in the statement of income as a component of salaries and employee benefits with a corresponding increase in stockholders’ equity.  The table below presents information on compensation expense and the related tax benefit for all share-based awards:

(In thousands)	2017		2016		2015
Compensation expense	$	153	$	1,789	$	2,670
Income tax benefit		42		718		1,072

Shares of our common stock issued under the 2010 Equity Incentive Plan shall be authorized shares.   The maximum number of shares that will be awarded under the plan is 1,862,637 shares.

Stock Options

The table below presents the stock option activity of the Company:

		Weighted			Aggregate
		Average		Remaining	Intrinsic
		Exercise		Contractual	Value
	Options	Price		Life (years)	(in thousands)
Options outstanding at December 31, 2014	832,954	$	17.38	5.68	$	3,471
Granted	3,600		26.23	9.67
Exercised	1,000		17.36			8
Forfeited	3,254		17.36
Expired	—
Options outstanding at December 31, 2015	832,300	$	17.42	4.70	$	8,588
Granted	—
Exercised	125,870		17.36			1,378
Forfeited	—
Expired	—
Options outstanding at December 31, 2016	706,430	$	17.43	3.70	$	10,884
Granted	—
Exercised	294,887		17.36			4,345
Forfeited	—
Expired	—
Options outstanding at December 31, 2017	411,543	$	17.48	2.73	$	5,509
Options vested and exercisable at December 31, 2017	410,343	$	17.46	2.71	$	5,503

The following summarizes certain stock option activity of the Company:

(In thousands)	2017		2016		2015
Intrinsic value of stock options exercised	$	4,345	$	1,378	$	8
Proceeds received from stock options exercised		5,119		2,186		17
Tax benefits realized from stock options exercised		1,601		368		3
Total fair value of stock options that vested		37		4,495		3,854

During the year ended December 31, 2017, the Company issued 135,210 shares of common stock in exchange for 294,887 stock options and 159,677 common shares.  Pursuant to the provisions of our equity incentive plan, optionees are permitted to use the value of common stock they own in a stock swap transaction or use a net settlement method to pay the exercise price of stock options.

As of December 31, 2017, the Company had $3,000 of unrecognized compensation costs related to the stock option plan.  The cost of the stock option plan is being amortized over a three-year vesting period.

Restricted Stock

Restricted stock is accounted for as a fixed grant using the fair value of the Company’s stock at the time of grant.  Unvested restricted stock may not be disposed of or transferred during the vesting period.  Restricted stock carries the right to receive dividends, although dividends attributable to restricted stock may be retained by the Company until the shares vest, at which time they are paid to the award recipient.

The table below presents the restricted stock activity:

		Weighted
		Average Grant
	Restricted	Date Fair
	Stock	Value
Nonvested at December 31, 2014	226,733	$	17.39
Granted	3,600		26.33
Vested	113,332		17.39
Forfeited	2,459		17.36
Nonvested at December 31, 2015	114,542	$	17.67
Granted	—		—
Vested	112,142		17.49
Forfeited	—		—
Nonvested at December 31, 2016	2,400	$	26.23
Granted	9,604		29.53
Vested	1,200		26.23
Forfeited	—		—
Nonvested at December 31, 2017	10,804	$	29.16

During the year ended December 31, 2017, the Company issued 9,604 shares of restricted stock to certain members of executive management under the 2010 Equity Incentive Plan.  The fair value of the restricted stock is based on the value of the Company’s stock on the date of grant.  Restricted stock will vest over three years from the date of the grant.

As of December 31, 2017, the Company had $246,000 of unrecognized compensation costs related to restricted stock. 

During the year ended December 31, 2017, the Company issued 11,525 of performance-based restricted stock units (PRSUs) to certain members of executive management under the 2010 Equity Incentive Plan.  These PRSUs will vest in the first quarter of 2020 after our Compensation Committee determines whether a performance condition that compares the Company’s return on average equity to the SNL Bank Index is achieved.  Depending on the Company’s performance, the actual number of these PRSUs that are issued at the end of the vesting period can vary between 0% to 150% of the target award.  For the PRSUs, an estimate is made of the number of shares expected to vest based on the probability that the performance criteria will be achieved to determine the amount of compensation expense to be recognized.  This estimate is re-evaluated quarterly and total compensation expense is adjusted for any change in the current period.

The table below presents the PRSUs that will vest on a performance condition:

	Performance-
	Based Restricted
	Stock Units	Weighted
	Based on a	Average Grant
	Performance	Date Fair
	Condition	Value
Nonvested at December 31, 2016	—	$	—
Granted	11,525		29.53
Vested	—		—
Forfeited	—		—
Nonvested at December 31, 2017	11,525	$	29.53

The fair value of these PRSUs is based on the fair value of the Company’s stock on the date of grant.  As of December 31, 2017, the Company had $194,000 of unrecognized compensation costs related to these PRSUs.  Performance will be measured over a three-year period and will be cliff vested.

During the year ended December 31, 2017, the Company issued 2,881 of PRSUs to certain members of executive management under the 2010 Equity Incentive Plan.  These PRSUs will vest in the first quarter of 2020 after our Compensation Committee determines whether a market condition that compares the Company’s total stock return to the SNL Bank Index is achieved.  The number of shares that will be expensed will not be adjusted for performance.  The fair value of these PRSUs is based on a Monte Carlo valuation of the Company’s stock on the date of grant.  The assumptions which were used in the Monte Carlo valuation of the PRSUs are:

Grant date: May 25, 2017

Performance period: January 1, 2017 to December 31, 2019

2.60 year risk-free rate on grant date: 1.40%

December 31, 2016 closing price: $32.84

Closing stock price on date of grant: $29.53

Annualized volatility (based on 2.60 year historical volatility as of the grant date): 15.7%

Annual dividend preceeding the grant date: $0.80

The table below presents the PRSUs that will vest on a market condition:

	Performance-
	Based Restricted	Monte Carlo
	Stock Units	Valuation of
	Based on a	the Company's
	Market Condition	Stock
Nonvested at December 31, 2016	—	$	—
Granted	2,881		24.44
Vested	—		—
Forfeited	—		—
Nonvested at December 31, 2017	2,881	$	24.44

As of December 31, 2017, the Company had $37,000 of unrecognized compensation costs related to the PRSUs that are based on a market condition.  Performance will be measured over a three-year period and will be cliff vested. 

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Earnings Per Share

12 Months Ended

Dec. 31, 2017

Earnings Per Share

Earnings Per Share

(20)Earnings Per Share

Holders of unvested restricted stock receive nonforfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings.  Unvested resticted stock awards that contain nonforfeitable rights to dividends or dividend equivalents are considered to be participating securities in the earnings per share computation using the two-class method.  Under the two-class method, earnings are allocated to common shareholders and participating securities according to their respective rights to earnings.

The table below presents the information used to compute basic and diluted earnings per share:

	For the Year Ended December 31,
(Dollars in thousands, except per share data)	2017		2016		2015
Net income	$	14,962	$	16,347	$	14,748
Income allocated to participating securities		(27)		(126)		(297)
Net income available to common shareholders	$	14,935	$	16,221	$	14,451
Weighted-average number of shares used in:
Basic earnings per share		9,273,783		9,093,385		9,073,015
Dilutive common stock equivalents:
Stock options and restricted stock units		258,941		218,590		190,252
Diluted earnings per share		9,532,724		9,311,975		9,263,267
Net income per common share, basic	$	1.61	$	1.78	$	1.59
Net income per common share, diluted	$	1.57	$	1.74	$	1.56

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Other Comprehensive Loss

12 Months Ended

Dec. 31, 2017

Other Comprehensive Loss

Other Comprehensive Loss

(21)Other Comprehensive Loss

The table below presents the changes in the components of accumulated other comprehensive income and loss, net of taxes:

			Noncredit
			Related
			Loss on
	Unfunded		Trust		Unrealized
	Pension		Preferred		Loss on
(Dollars in thousands)	Liability		Securities		Securities		Total
December 31, 2017:
Balances at beginning of year	$	5,284	$	—	$	32	$	5,316
Other comprehensive loss, net of taxes		373		—		5		378
Amounts reclassified from accumulated other comprehensive loss		—		—		—		—
Net current period other comprehensive loss		373		—		5		378
Balances at end of year	$	5,657	$	—	$	37	$	5,694
December 31, 2016:
Balances at beginning of year	$	5,044	$	147	$	45	$	5,236
Other comprehensive loss (income), net of taxes		240		(147)		(13)		80
Amounts reclassified from accumulated other comprehensive loss		—		—		—		—
Net current period other comprehensive loss (income)		240		(147)		(13)		80
Balances at end of year	$	5,284	$	—	$	32	$	5,316
December 31, 2015:
Balances at beginning of year	$	5,032	$	284	$	72	$	5,388
Other comprehensive loss (income), net of taxes		12		(137)		(27)		(152)
Amounts reclassified from accumulated other comprehensive loss		—		—		—		—
Net current period other comprehensive loss (income)		12		(137)		(27)		(152)
Balances at end of year	$	5,044	$	147	$	45	$	5,236

The table below presents the tax effect on each component of accumulated other comprehensive loss:

	Year Ended December 31,
	2017						2016						2015
	Pretax				After Tax		Pretax				After Tax		Pretax				After Tax
(Dollars in thousands)	Amount		Tax		Amount		Amount		Tax		Amount		Amount		Tax		Amount
Unfunded pension liability	$	509	$	(136)	$	373	$	361	$	(121)	$	240	$	20	$	(8)	$	12
Noncredit related loss on trust preferred securities		—		—		—		(242)		95		(147)		(226)		89		(137)
Unrealized loss on securities		9		(4)		5		(22)		9		(13)		(45)		18		(27)
Total	$	518	$	(140)	$	378	$	97	$	(17)	$	80	$	(251)	$	99	$	(152)

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Commitments

12 Months Ended

Dec. 31, 2017

Commitments

Commitments

(22)Commitments

(a) Loan Commitments

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any terms or conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on an individual basis. The Company’s policy is to require suitable collateral, primarily real estate, to be provided by customers prior to disbursement of approved loans. At December 31, 2017 and 2016, the Company had loan commitments aggregating to $15.5 million (interest rates from 2.875% to 4.125%) and $50.5 million (interest rates from 2.500% to 4.625%), respectively, primarily consisting of fixed-rate residential first mortgage loans.  In addition to commitments to originate loans, at December 31, 2017 and 2016, the Company had $27.2 million and $28.6 million, respectively, in unused lines of credit to borrowers.

(b) Lease Commitments

The Company leases a majority of its premises under operating leases expiring on various dates through 2029. Total rental expense comprised minimum rentals of $3.0 million, $2.9 million, and $2.9 million for the years ended December 31, 2017, 2016, and 2015, respectively.

At December 31, 2017, future minimum rental commitments under all noncancelable operating leases are as follows:

(Dollars in thousands)
2018	$	2,809
2019		2,353
2020		1,919
2021		1,463
2022		1,293
Thereafter		4,557
Total	$	14,394

Certain leases are renegotiable during the period of the lease or have renewal options at the expiration of the lease term. The majority of lease agreements relates to real estate and generally provides that the Company pay taxes, maintenance, insurance, and certain other operating expenses applicable to the leased premises.

In addition, the Company leases to a tenant certain property that it owns. Future minimum rental income for this noncancelable lease is as follows:

(Dollars in thousands)
2018	$	110
2019		110
2020		110
2021		110
2022		—
Thereafter		—
Total	$	440

Rental income comprised of minimum rentals for 2017, 2016, and 2015 was approximately $110,000 each year.

(c) Reserve Requirements

The Company is required by the Federal Reserve Bank to maintain reserves based on the amount of deposits held. The reserve requirement at December 31, 2017 and 2016 was $12.8 million and $10.7 million, respectively, and the Company met such requirements.

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Regulatory Capital and Supervision

12 Months Ended

Dec. 31, 2017

Regulatory Capital and Supervision

Regulatory Capital and Supervision

(23)Regulatory Capital and Supervision

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.  Effective January 1, 2015, the well capitalized threshold for Tier 1 risk-based capital was increased from 6.0% to 8.0% and a new capital standard, common equity tier 1 risk-based capital, was implemented with a 6.5% ratio requirement for a financial institution to be considered well capitalized.  Additionally, effective January 1, 2015, consolidated regulatory capital requirements identical to those applicable to the subsidiary depository institutions became applicable to savings and loan holding companies over $1.0 billion in assets, such as the Company.  The capital requirements become fully-phased in on January 1, 2019.  At December 31, 2017, Territorial Savings Bank and the Company exceeded all of the fully-phased in regulatory capital requirements and are considered to be “well capitalized” under regulatory guidelines. 

The table below present the fully-phased in capital required to be considered “well-capitalized” as a percentage of total and risk-weighted assets and the percentage and the total amount of capital maintained for Territorial Savings Bank and the Company at December 31, 2017 and 2016:

(Dollars in thousands)	Required Ratio			Actual Amount	Actual Ratio
December 31, 2017:
Tier 1 Leverage Capital
Territorial Savings Bank	5.00	%	$	218,826	11.04	%
Territorial Bancorp Inc.	5.00	%	$	240,548	12.13	%
Common Equity Tier 1 Risk-Based Capital (1)
Territorial Savings Bank	9.00	%	$	218,826	23.31	%
Territorial Bancorp Inc.	9.00	%	$	240,548	25.62	%
Tier 1 Risk-Based Capital (1)
Territorial Savings Bank	10.50	%	$	218,826	23.31	%
Territorial Bancorp Inc.	10.50	%	$	240,548	25.62	%
Total Risk-Based Capital (1)
Territorial Savings Bank	12.50	%	$	221,460	23.59	%
Territorial Bancorp Inc.	12.50	%	$	243,182	25.90	%
December 31, 2016:
Tier 1 Leverage Capital
Territorial Savings Bank (2)	9.00	%	$	219,365	11.76	%
Territorial Bancorp Inc.	5.00	%	$	235,102	12.60	%
Common Equity Tier 1 Risk-Based Capital (1)
Territorial Savings Bank	9.00	%	$	219,365	25.30	%
Territorial Bancorp Inc.	9.00	%	$	235,102	27.11	%
Tier 1 Risk-Based Capital (1)
Territorial Savings Bank	10.50	%	$	219,365	25.30	%
Territorial Bancorp Inc.	10.50	%	$	235,102	27.11	%
Total Risk-Based Capital (1)
Territorial Savings Bank	12.50	%	$	221,912	25.59	%
Territorial Bancorp Inc.	12.50	%	$	237,649	27.41	%

(1) The required Common Equity Tier 1 Risk-Based Capital, Tier 1 Risk-Based Capital and Total Risk-Based Capital ratios are based on the fully-phased in capital ratios in the Basel III capital regulations plus the 2.50% capital conservation buffer that becomes effective on January 1, 2019.   

(2) On July 10, 2014, Territorial Savings Bank became a member of the Federal Reserve System.  As a condition of membership, Territorial Savings Bank was required to maintain a Tier 1 Leverage Capital ratio of 9.00% for three years. 

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 the Company’s 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 December 31, 2017 and 2016, 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 parent company.

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Contingencies

12 Months Ended

Dec. 31, 2017

Contingencies

Contingencies

(24)Contingencies

The Company is involved in various claims and legal actions arising out of the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated balance sheets or consolidated statements of income.

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Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2017

Fair Value of Financial Instruments

Fair Value of Financial Instruments

(25)Fair Value of Financial Instruments

In accordance with the Fair Value Measurements and Disclosures topic of the FASB ASC, the Company groups its financial assets and liabilities valued at fair value into three levels based on the markets in which the financial assets and liabilities are traded and the reliability of the assumptions used to determine fair value as follows:

· Level 1 — Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities traded in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

· Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

· Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect management’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of discounted cash flow models and similar techniques that require the use of significant judgment or estimation.

In accordance with the Fair Value Measurements and Disclosures topic, the Company bases its fair values on the price that it would expect to receive if an asset were sold or the price that it would expect to pay to transfer a liability in an orderly transaction between market participants at the measurement date.  Also as required, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements.

The Company uses fair value measurements to determine fair value disclosures.  Investment securities held for sale and derivatives are recorded at fair value on a recurring basis.  From time to time, the Company may be required to record other financial assets at fair value on a nonrecurring basis, such as loans held for sale, impaired loans and investments, and mortgage servicing assets. These nonrecurring fair value adjustments typically involve application of the lower of cost or fair value accounting or write-downs of individual assets.

Cash and Cash Equivalents, Accrued Interest Receivable and Accrued Interest Payable. The carrying amount approximates fair value because of the short maturity of these instruments.

Investment Securities.  The estimated fair values of U.S. government-sponsored mortgage-backed securities are considered Level 2 inputs because the valuation for investment securities utilized pricing models that varied based on asset class and included trade, bid and other observable market information.

The trust preferred securities represent investments in a pool of debt obligations issued primarily by holding companies for Federal Deposit Insurance Corporation-insured financial institutions.  The trust preferred securities market is considered to be inactive as only six transactions have occurred over the past 72 months in the same tranche of securities we own and no new issues of pooled trust preferred securities have occurred since 2007.  The fair value of our trust preferred securities was determined using a discounted cash flow model.  Our model used a discount rate equal to three-month LIBOR plus 20.00%.

The discounted cash flow analysis includes a review of all issuers within the pool.  The fair value of the trust preferred securities are classified as Level 3 inputs because they are based on discounted cash flow models.

FHLB Stock. FHLB stock, which is redeemable for cash at par value, is reported at its par value.

FRB Stock. FRB stock, which is redeemable for cash at par value, is reported at its par value.

Loans. The fair value of loans is estimated by discounting the future cash flows, including estimated prepayments, using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.  The fair value of loans is not based on the concept of exit price.

Loans Held for Sale. The fair value of loans held for sale is determined based on prices quoted in the secondary market for similar loans.

Deposits. The fair value of checking and Super NOW savings accounts, passbook accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting future cash flows using the rates currently offered for deposits with similar remaining maturities.

Advances From the FHLB and Securities Sold Under Agreements to Repurchase. Fair value is estimated by discounting future cash flows using the rates currently offered to the Company for debt with similar remaining maturities.

Interest Rate Contracts.  The Company may enter into interest rate lock commitments with borrowers on loans intended to be sold.  To manage interest rate risk on the lock commitments, the Company may also enter into forward loan sale commitments. The interest rate lock commitments and forward loan sale commitments are treated as derivatives and are recorded at their fair value determined by referring to prices quoted in the secondary market for similar contracts.  Interest rate contracts that are classified as assets are included with prepaid expenses and other assets on the consolidated balance sheet while interest rate contracts that are classified as liabilities are included with accounts payable and accrued expenses.

The estimated fair values of the Company’s financial instruments are as follows:

	Carrying				Fair Value Measurements Using
(Dollars in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
December 31, 2017
Assets
Cash and cash equivalents	$	32,089	$	32,089	$	32,089	$	—	$	—
Investment securities available for sale		2,851		2,851		—		2,851		—
Investment securities held to maturity		404,792		406,663		—		405,818		845
Loans held for sale		403		414		—		414		—
Loans receivable, net		1,488,971		1,505,097		—		—		1,505,097
FHLB stock		6,541		6,541		—		6,541		—
FRB stock		3,103		3,103		—		3,103		—
Accrued interest receivable		5,142		5,142		7		1,045		4,090
Interest rate contracts		8		8		—		8		—
Liabilities
Deposits		1,597,295		1,595,992		—		1,285,070		310,922
Advances from the Federal Home Loan Bank		107,200		107,019		—		107,019		—
Securities sold under agreements to repurchase		30,000		29,846		—		29,846		—
Accrued interest payable		575		575		—		115		460
Interest rate contracts		8		8		—		8		—
December 31, 2016
Assets
Cash and cash equivalents	$	61,273	$	61,273	$	61,273	$	—	$	—
Investment securities held to maturity		407,656		407,922		—		406,759		1,163
Loans held for sale		1,601		1,601		—		1,601		—
Loans receivable, net		1,335,987		1,352,137		—		—		1,352,137
FHLB stock		4,945		4,945		—		4,945		—
FRB stock		3,095		3,095		—		3,095		—
Accrued interest receivable		4,732		4,732		10		1,064		3,658
Interest rate contracts		104		104		—		104		—
Liabilities
Deposits		1,493,200		1,493,094		—		1,257,157		235,937
Advances from the Federal Home Loan Bank		69,000		69,068		—		69,068		—
Securities sold under agreements to repurchase		55,000		55,123		—		55,123		—
Accrued interest payable		218		218		—		172		46
Interest rate contracts		104		104		—		104		—

At December 31, 2017 and 2016, neither the commitment fees received on commitments to extend credit nor the fair value thereof was material to the consolidated financial statements of the Company.

The table below presents the balance of assets and liabilities measured at fair value on a recurring basis:

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
December 31, 2017
Interest rate contracts — assets	$	—	$	8	$	—	$	8
Interest rate contracts — liabilities		—		(8)		—		(8)
Available-for-sale investments		—		2,851		—		2,851
December 31, 2016
Interest rate contracts — assets	$	—	$	104	$	—	$	104
Interest rate contracts — liabilities		—		(104)		—		(104)

The fair value of interest rate contracts was determined by referring to prices quoted in the secondary market for similar contracts. The fair value of available-for-sale investments was determined using pricing models that consider bid and ask prices and prices at which similar securities traded.

The table below presents the balance of assets measured at fair value on a nonrecurring basis as of December 31, 2017 and 2016 and the related gains and losses for the years then ended:

	Fair Value
(Dollars in thousands)	Adjustment Date	Level 1		Level 2		Level 3		Total			Total Gains (Losses)
December 31, 2017
Impaired loans	3/31/2017	$	—	$	87	$	—	$	87	$	(11)
December 31, 2016
Trust preferred securities	9/30/2016	$	—	$	—	$	1,066	$	1,066	$	242
Mortgage servicing assets	6/30/2016		—		—		341		341		(49)
Impaired loans	8/31/2016		—		64		—		64		(33)
Loans held for sale	12/31/2016		—		1,601		—		1,601		(1)

The fair value of trust preferred securities is determined using a discounted cash flow model.  The assumptions used in the discounted cash flow model are discussed above.  Gains and losses on trust preferred securities that are credit related are included in net other-than-temporary impairment losses in the consolidated statements of income.  Gains and losses on trust preferred securities that are not credit related are included in other comprehensive income in the consolidated statements of comprehensive income.  Mortgage servicing assets are valued using a discounted cash flow model.  Assumptions used in the model include mortgage prepayment speeds, discount rates and cost of servicing.  Losses on mortgage servicing assets are included in service fees on loan and deposit accounts in the consolidated statements of income.  The fair value of impaired loans is determined using the value of collateral less estimated selling costs.  Losses on impaired loans are included in the provision for loan losses in the consolidated statements of income.  The fair value of loans held for sale is determined based on the prices quoted in the secondary market for similar loans.  Losses on loans held for sale are included in gain on sale of loans in the consolidated statements of income.

The table below presents the significant unobservable inputs for Level 3 nonrecurring fair value measurements:

				Unobservable
(Dollars in thousands)	Fair Value		Valuation Technique	Input	Value
December 31, 2016:
Trust preferred securities	$	1,066	Discounted cash flow	Discount rate		Three-month LIBOR plus 20.00%
Mortgage servicing assets		341	Discounted cash flow	Discount rate		10.50%
				Prepayment speed (PSA)		158.4 - 203.5
				Annual cost to service (per loan, in dollars)	$	65

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Parent Company Only

12 Months Ended

Dec. 31, 2017

Parent Company Only

Parent Company Only

(26)Parent Company Only

Presented below are the condensed balance sheet, statement of income, and statement of cash flows for Territorial Bancorp Inc.

Condensed Balance Sheet

	December 31,
(Dollars in thousands)	2017		2016
Assets
Cash	$	20,093	$	15,288
Investment in Territorial Savings Bank		213,132		214,050
Receivable from Territorial Savings Bank		1,539		373
Prepaid expenses and other assets		141		81
Total assets	$	234,905	$	229,792
Liabilities and Equity
Other liabilities	$	51	$	6
Equity		234,854		229,786
Total liabilities and equity	$	234,905	$	229,792

Condensed Statement of Income

	For the Year Ended December 31,
(Dollars in thousands)	2017		2016		2015
Interest and dividend income:
Dividends from Territorial Savings Bank	$	16,200	$	7,500	$	14,000
Interest-earning deposit with Territorial Savings Bank		49		34		29
Total interest and dividend income		16,249		7,534		14,029
Noninterest expense:
Salaries		37		40		34
Other general and administrative expenses		989		745		829
Total noninterest expense		1,026		785		863
Income before income taxes and equity in undistributed earnings in subsidiaries		15,223		6,749		13,166
Income taxes		(384)		(285)		(416)
Income before equity in undistributed earnings in subsidiaries		15,607		7,034		13,582
Equity in undistributed earnings of Territorial Savings Bank, net of dividends		(645)		9,313		1,166
Net income	$	14,962	$	16,347	$	14,748

Condensed Statement of Cash Flows

	For the Year Ended December 31,
(Dollars in thousands)	2017		2016		2015
Cash flows from operating activities:
Net income	$	14,962	$	16,347	$	14,748
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of Territorial Savings Bank, net of dividends		645		(9,313)		(1,166)
ESOP expense		1,529		1,353		1,210
Net (increase) decrease in prepaid expenses and other assets		(1,226)		659		1,170
Net increase (decrease) in other liabilities		27		(18)		(18)
Net cash provided by operating activities		15,937		9,028		15,944
Cash flows from investing activities:
Investment in Territorial Savings Bank		—		—		—
Net cash used in investing activities		—		—		—
Cash flows from financing activities:
Proceeds from issuance of common stock		—		566		17
Repurchases of common stock		(9)		(1,674)		(9,326)
Cash dividends paid		(11,123)		(8,409)		(7,013)
Net cash used in financing activities		(11,132)		(9,517)		(16,322)
Net increase (decrease) in cash		4,805		(489)		(378)
Cash at beginning of the period		15,288		15,777		16,155
Cash at end of the period	$	20,093	$	15,288	$	15,777

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Unaudited Quarterly Financial Information

12 Months Ended

Dec. 31, 2017

Unaudited Quarterly Financial Information

Unaudited Quarterly Financial Information

(27)Unaudited Quarterly Financial Information

	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter		Full Year
	(Dollars in thousands, except per share data)
2017:
Interest income	$	16,781	$	16,777	$	17,177	$	17,598	$	68,333
Interest expense		2,121		2,253		2,518		2,697		9,589
Net interest income		14,660		14,524		14,659		14,901		58,744
Provision (reversal of provision) for loan losses		71		(123)		54		50		52
Net interest income after provision for loan losses		14,589		14,647		14,605		14,851		58,692
Noninterest income		1,022		1,059		909		856		3,846
Noninterest expense		8,707		8,754		8,761		10,252		36,474
Income before income taxes		6,904		6,952		6,753		5,455		26,064
Income taxes		2,583		2,651		2,580		3,288		11,102
Net income		4,321		4,301		4,173		2,167		14,962
Basic earnings per share		0.47		0.46		0.45		0.23		1.61
Diluted earnings per share		0.46		0.45		0.44		0.23		1.57
Cash dividends declared per common share		0.20		0.20		0.30		0.50		1.20

	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter		Full Year
	(Dollars in thousands, except per share data)
2016:
Interest income	$	16,380	$	16,543	$	16,669	$	16,481	$	66,073
Interest expense		1,883		1,944		1,964		2,053		7,844
Net interest income		14,497		14,599		14,705		14,428		58,229
Provision for loan losses		28		84		107		91		310
Net interest income after provision for loan losses		14,469		14,515		14,598		14,337		57,919
Noninterest income		886		1,134		1,003		1,071		4,094
Noninterest expense		9,059		8,988		8,645		8,187		34,879
Income before income taxes		6,296		6,661		6,956		7,221		27,134
Income taxes		2,512		2,624		2,792		2,859		10,787
Net income		3,784		4,037		4,164		4,362		16,347
Basic earnings per share		0.41		0.44		0.45		0.48		1.78
Diluted earnings per share		0.40		0.43		0.44		0.46		1.74
Cash dividends declared per common share		0.18		0.18		0.18		0.38		0.92

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Subsequent Events

12 Months Ended

Dec. 31, 2017

Subsequent Events

Subsequent Events

(28)Subsequent Events

On January 25, 2018, the Board of Directors of Territorial Bancorp Inc. declared a quarterly cash dividend of $0.20 per share of common stock.  The dividend was paid on February 22, 2018 to stockholders of record as of February 8, 2018.

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Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2017

Summary of Significant Accounting Policies

Principles of Consolidation

(b)  Principles of Consolidation

The consolidated financial statements include the accounts and results of operations of Territorial Bancorp Inc. and Territorial Savings Bank and its wholly-owned subsidiaries, Territorial Real Estate Co., Inc. and Territorial Financial Services, Inc. Significant intercompany balances and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

(c)  Cash and Cash Equivalents

Cash and cash equivalents includes cash and due from banks, interest-bearing deposits in other banks, federal funds sold, and short-term, highly liquid investments with original maturities of three months or less.

Investment Securities

(d)  Investment Securities

The Company classifies and accounts for its investment securities as follows: (1) held-to-maturity debt securities in which the Company has the positive intent and ability to hold to maturity are reported at amortized cost; (2) trading securities that are purchased for the purpose of selling in the near term are reported at fair value, with unrealized gains and losses included in current earnings; and (3) available-for-sale securities not classified as either held-to-maturity or trading securities are reported at fair value, with unrealized gains and losses excluded from current earnings and reported as a separate component of equity. At December 31, 2017, the Company classified all of its investments, except $2.9 million of securities, as held-to-maturity.  At December 31, 2016, the Company classified all of its investments as held-to-maturity.

A decline in the market value of any available-for-sale or held-to-maturity security below cost, that is deemed to be other than temporary, results in an impairment to reduce the carrying amount to fair value. To determine whether impairment is other than temporary, the Company considers the type of the investment, the cause of the decline in value and the amount and duration of the decline in value.  It also considers whether it has the intent and ability not to sell and would not be required to sell for a sufficient period of time to recover the remaining amortized cost basis.

Gains or losses on the sale of investment securities are computed using the specific-identification method. The Company amortizes premiums and accretes discounts associated with investment securities using the interest method over the contractual life of the respective investment security. Such amortization and accretion is included in the interest income line item in the consolidated statements of income.  Interest income is recognized when earned.

Loans Receivable

(e)  Loans Receivable

This policy applies to all loan classes.  Loans receivable are stated at the principal amount outstanding, less the allowance for loan losses, loan origination fees and costs, and commitment fees. Interest on loans receivable is accrued as earned. 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. For nonaccrual loans, the Company records payments received as a reduction in principal. The Company, considering current information and events regarding the borrowers’ ability to repay their obligations, considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, if the loan is considered to be collateral dependent, based on the fair value of the collateral less estimated costs to sell.  Impairment losses are written off against the allowance for loan losses. For nonaccrual impaired 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.

Loans Held for Sale

(f)  Loans Held for Sale

Loans held for sale are stated at the lower of aggregate cost or market value. Net fees and costs of originating loans held for sale are deferred and are included in the basis for determining the gain or loss on sales of loans held for sale.

Deferred Loan Origination Fees and Unearned Loan Discounts

(g)  Deferred Loan Origination Fees and Unearned Loan Discounts

Loan origination and commitment fees and certain direct loan origination costs are being deferred, and the net amount is recognized over the life of the related loan as an adjustment to yield. Net deferred loan fees are amortized using the interest method over the contractual term of the loan, adjusted for actual prepayments. Net unamortized fees on loans paid in full are recognized as a component of interest income.

Real Estate Owned

(h)  Real Estate Owned

Real estate owned is valued at the time of foreclosure at fair value, less estimated cost to sell, thereby establishing a new cost basis. The Company obtains appraisals based on recent comparable sales to assist management in estimating the fair value of real estate owned. Subsequent to acquisition, real estate owned is valued at the lower of cost or fair value, less estimated cost to sell. Declines in value are charged to expense through a direct write-down of the asset. Costs related to holding real estate are charged to expense while costs related to development and improvements are capitalized.

Gains from the sale of real estate owned, if any, are recognized when title has passed, minimum down payment requirements are met, the terms of any notes received are such as to satisfy continuing investment requirements, and the Company is relieved of any requirements for continued involvement with the properties. If the minimum down payment or the continuing investment is not adequate to meet the criteria specified in the Property, Plant and Equipment topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC), the Company will defer income recognition and account for such sales using alternative methods, such as installment, deposit, or cost recovery.

Allowance for Loan Losses

(i)  Allowance for Loan Losses

The Company maintains an allowance adequate to cover Management’s estimate of probable loan losses as of the balance sheet date. The Company’s allowance for loan losses is maintained at a level considered adequate to provide for losses that can be estimated based upon specific and general conditions. All loan losses are charged, and all recoveries are credited, to the allowance for loan losses. Additions to the allowance for loan losses are provided by charges to income based on various factors, which, in the Company’s judgment, deserve current recognition in estimating probable losses. Charge-offs to the allowance are made when management determines that collectability of all or a portion of a loan is doubtful and available collateral is insufficient to repay the loan.

General allowances are established for loan losses on a portfolio basis for loans that do not meet the definition of impaired, in accordance with the Receivables topic of the FASB ASC.  The portfolio is grouped into similar risk characteristics, primarily loan type and loan-to-value ratio. The Company applies an estimated loss rate to each loan group. The loss rates applied are based upon its loss experience adjusted, as appropriate, for environmental factors discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions.  Actual loan losses may be significantly more than the allowance for loan losses the Company has established, which could have a material negative effect on its financial results.

Residential mortgage loans represent the largest segment of the Company’s loan portfolio.  All of the residential mortgage loans are secured by a first mortgage on residential real estate in Hawaii and consist primarily of fixed-rate mortgage loans which have been underwritten to Freddie Mac and Fannie Mae guidelines and have similar risk characteristics.  The loan loss allowance is determined by first calculating the historical loss rate for this segment of the portfolio.  The loss rate may be adjusted for qualitative and environmental factors.  The allowance for loan loss is calculated by multiplying the adjusted loss rate by the total loans in this segment of the portfolio.

The adjustments to historical loss experience are based on an evaluation of several qualitative and environmental factors, including:

· changes in lending policies and procedures, including changes in underwriting standards and collections, charge-off and recovery practices;

· changes in international, national, and local economic trends;

· changes in the types of loans in the loan portfolio;

· changes in the experience and ability of personnel in the mortgage loan origination and loan servicing departments;

· changes in the number and amount of delinquent loans and classified assets;

· changes in the type and volume of loans being originated;

· changes in the value of underlying collateral for collateral dependent loans;

· changes in any concentration of credit; and

· external factors such as competition, legal and regulatory requirements on the level of estimated credit losses in the existing loan portfolio.

The Company also uses historical loss rates adjusted for qualitative and environmental factors to establish loan loss allowances for the following portfolio segments:

· home equity loans and lines of credit; and

· consumer and other loans.

The Company has a limited loss experience for the construction, commercial and other mortgage segment of the loan portfolio.  The loan loss allowance on this portfolio segment is determined using the loan loss rate of other financial institutions in the State of Hawaii.  The allowance for loan loss is calculated by multiplying the loan loss rate of other financial institutions in the state by the total loans in this segment of the Company’s loan portfolio.

The allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. In addition, the unallocated allowance is established to provide for probable losses that have been incurred as of the reporting date but are not reflected in the allocated allowance.

While the Company uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, the bank regulators will periodically review the allowance for loan losses. The bank regulators may require the Company to increase the allowance based on their analysis of information available at the time of their examination.

Transfer of Financial Assets

(j)  Transfer of Financial Assets

Transfers of financial assets are accounted for as sales when control is surrendered. Control is surrendered when the assets have been isolated from the Company, the transferee obtains the right to pledge or exchange the assets without constraint, and the Company does not maintain effective control over the transferred assets. Mortgage loans sold for cash are accounted for as sales as the above criteria have been met.

Mortgage loans may also be packaged into securities that are issued and guaranteed by U.S. government-sponsored enterprises or a U.S. government agency. The Company receives 100% of the mortgage-backed securities issued. Securitizations are not accounted for as sales and no gain or loss is recognized. The mortgage-backed securities received in securitizations are valued at amortized cost and classified as held-to-maturity.

Mortgage loan transfers accounted for as sales and securitizations are without recourse, except for normal representations and warranties provided in sales transactions, and the Company may retain the related rights to service the loans.  The retained servicing rights create mortgage servicing assets that are accounted for in accordance with the Transfers and Servicing topic of the FASB ASC.  Mortgage servicing assets are initially valued at fair value and subsequently at the lower of cost or fair value and are amortized in proportion to and over the period of estimated net servicing income.  The Company uses a discounted cash flow model to determine the fair value of retained mortgage servicing rights. Prior to 2010, we retained the servicing rights on residential mortgage loans sold.  In 2010, we began selling loans primarily on a servicing-released basis.

Premises and Equipment

(k)  Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is principally computed on the straight-line method over the estimated useful lives of the respective assets. The estimated useful life of buildings and improvements is 30 years, furniture, fixtures, and equipment is 3 to 10 years, and automobiles are 3 years. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset.

Income Taxes

(l)  Income Taxes

The Company files consolidated federal income tax and consolidated state franchise tax returns.

Deferred tax assets and liabilities are recognized using the asset and liability method of accounting for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

We establish income tax contingency reserves for potential tax liabilities related to uncertain tax positions.  A liability for income tax uncertainties would be recorded for unrecognized tax benefits related to uncertain tax positions where it is more likely than not that the position will be sustained upon examination by a taxing authority.

As of December 31, 2017 and 2016, the Company had not recognized a liability for income tax uncertainties in the accompanying consolidated balance sheets because Management concluded that the Company does not have uncertain tax positions.

The Company recognizes interest and penalties related to tax liabilities in other interest expense and other general and administrative expenses, respectively, in the consolidated statements of income.

Tax years 2014 to 2016 currently remain subject to examination by the Internal Revenue Service and by the Department of Taxation of the State of Hawaii.

Impairment of Long-Lived Assets

(m)  Impairment of Long-Lived Assets

Long-lived assets, such as premises and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the consolidated balance sheets and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.

Pension Plan

(n)  Pension Plan

Pension benefit costs (returns) are charged (credited) to salaries and employee benefits expense, and the corresponding prepaid (accrued) pension cost is recorded in prepaid expenses and other assets or accounts payable and accrued expenses in the consolidated balance sheets. The Company’s policy is to fund pension costs in amounts that will not be less than the minimum funding requirements of the Employee Retirement Income Security Act of 1974 and will not exceed the maximum tax-deductible amounts. The Company generally funds at least the net periodic pension cost, subject to limits and targeted funded status as determined with the consulting actuary.

Supplemental Employee Retirement Plan (SERP)

(o)  Supplemental Employee Retirement Plan (SERP)

The SERP is a noncontributory supplemental retirement plan covering certain current and former employees of the Company.  Benefits in the SERP plan are paid after retirement, in addition to the benefits provided by the Pension Plan.  The Company accrues SERP costs over the estimated period until retirement by charging salaries and employee benefits expense in the consolidated statements of income, with a corresponding credit to accounts payable and accrued expenses in the consolidated balance sheets.

Employee Stock Ownership Plan (ESOP)

(p)  Employee Stock Ownership Plan (ESOP)

The cost of shares issued to the ESOP, but not yet allocated to participants, is shown as a reduction of stockholders’ equity.  Compensation expense is based on the market price of shares as they are committed to be released to participant accounts.  Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares reduce debt and accrued interest.

Earnings Per Share

(q)  Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period.  Diluted earnings per share is computed by dividing net income by the sum of the weighted-average number of shares outstanding plus the dilutive effect of stock options and restricted stock.  ESOP shares not committed to be released are not considered outstanding.

We have two forms of our outstanding common stock: common stock and unvested restricted stock awards.  Holders of unvested restricted stock awards receive non-forfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings.  The computed basic and diluted earnings per share are substantially equivalent using both the two-class and the treasury stock methods of calculating earnings per share.

Common Stock Repurchase Program

(r)  Common Stock Repurchase Program

In 2016, 2014, 2013, 2011 and 2010, the Company adopted common stock repurchase programs in which shares repurchased reduce the amount of shares issued and outstanding.  The repurchased shares may be reissued in connection with share-based compensation plans and for general corporate purposes.  As of December 31, 2017 and 2016, the Company had accumulated repurchases of 3,138,153 of the total 3,374,253 shares authorized by the Board of Directors.  There were no shares repurchased as part of our common stock repurchase program during 2017.  During 2016, shares were repurchased at an average cost of $25.96. 

Bank-Owned Life Insurance

(s)  Bank-Owned Life Insurance

The Company’s investment in bank-owned life insurance is based on cash surrender value.  The Company invests in bank-owned life insurance to provide a funding source for benefit plan obligations. Bank-owned life insurance also generally provides noninterest income that is nontaxable. Federal regulations generally limit the investment in bank-owned life insurance to 25% of the Bank’s Tier 1 capital plus the allowance for loan losses.  At December 31, 2017, this limit was $55.4 million and the Company had invested $44.2 million in bank-owned life insurance at that date.

Use of Estimates

(t)  Use of Estimates

The preparation of the consolidated financial statements requires management to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the allowance for loan losses; valuation of certain investment securities and determination as to whether declines in fair value below amortized cost are other than temporary; valuation allowances for deferred income tax assets; mortgage servicing assets; and assets and obligations related to employee benefit plans.  Accordingly, actual results could differ from those estimates.

Recently Issued Accounting Pronouncements

(u)  Recently Issued Accounting Pronouncements

In May 2014, the FASB amended the Revenue Recognition topic of the FASB ASC.  The amendment seeks to clarify the principles for recognizing revenue as well as to develop common revenue standards for U.S. generally accepted accounting principles and International Financial Reporting Standards.  The Company has reviewed all revenue sources to determine if the sources are in scope for this guidance.  Net interest income from financial assets and liabilities are explicitly excluded from the scope of the amendment.  The Company’s overall assessment of key in-scope revenue sources include service charges on deposit accounts, rental income from safe deposit boxes and commissions on insurance and annuity sales.  The guidance will not have a significant impact on the Company’s revenue recognition for these key in-scope revenue sources.  The Company adopted this amendment effective January 1, 2018, under the modified retrospective approach.

In January 2016, the FASB amended the Financial Instruments – Overall topic of the FASB ASC.  The amendment addresses several aspects of recognition, measurement, presentation and disclosure of financial instruments.  Included are: (a) a requirement to measure equity investments at fair value, with changes in fair value recognized in net income, (b) a simplification of the impairment assessment of equity investments without readily determinable fair values, (c) the elimination of the requirement to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet, and (d) a requirement to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.   Since the Company does not own any equity securities subject to the amendment in its investment portfolio, the amendment will not have a material impact on its consolidated financial statements.  The Company will continue to evaluate the effects that the use of exit prices will have on its fair value disclosures.  The amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. 

In February 2016, the FASB amended the Leases topic of the FASB ASC.  The primary effects of the amendment will be to recognize lease assets and lease liabilities on the balance sheet and to disclose certain information about leasing arrangements.  The amendment is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  The Company has several lease agreements for branch locations and equipment that will require recognition on the consolidated balance sheets upon adoption of the amendment.  The Company will continue to evaluate the effects that the adoption of this amendment will have on its consolidated financial statements.

In March 2016, the FASB amended the Compensation – Stock Compensation topic of the FASB ASC.  The amendment includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements.  Some of the key provisions of the amendment require companies to record all excess tax benefits and tax deficiencies as income tax benefit or expense in the income statement rather than as an adjustment to additional paid-in capital.  In addition, the amendment requires that excess tax benefits should be reported as an operating activity on the statement of cash flows and increases the amount an employer can withhold for taxes for share-based compensation awards.  The amendment is effective for annual periods beginning after December 15, 2016.  The Company adopted this amendment effective January 1, 2017.  The adoption of this amendment has resulted in increased volatility to income tax expense related to excess tax benefits and tax deficiencies for share-based compensation.  The amount of tax benefits or deficiencies recognized in income tax expense depends on the number of options exercised and the difference in the stock prices at the exercise and grant dates.  For the year ended December 31, 2017, the Company recognized in earnings $1.0 million of tax benefits related to the exercise of stock options.

In June 2016, the FASB amended various sections of the FASB ASC related to the accounting for credit losses on financial instruments.  The amendment changes the threshold for recognizing losses from a “probable” to an “expected” model.  The new model is referred to as the current expected credit loss model and applies to loans, leases, held-to-maturity investments, loan commitments and financial guarantees.  The amendment requires the measurement of all expected credit losses for financial assets as of the reporting date (including historical experience, current conditions and reasonable and supportable forecasts) and enhanced disclosures that will help financial statement users understand the estimates and judgments used in estimating credit losses and evaluating the credit quality of an organization’s portfolio.  The amendment is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  The Company will apply the amendment’s provisions as a cumulative-effect adjustment to retained earnings at the beginning of the first period the amendment is effective. The Company is currently evaluating the effects that the adoption of this amendment will have on its consolidated financial statements by gathering the information that is necessary to make the calculations required by the amendment.  This may result in increased credit losses on financial instruments recorded in the consolidated financial statements.

In March 2017, the FASB amended the Compensation – Retirement Benefits topic of the FASB ASC.  The amendment requires the service cost component of net benefit cost to be reported in the same line item as other compensation costs arising from employee services.  It also requires the other components of net benefit cost to be reported in the income statement separately from the service cost component.  The amendment is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods.  The Company does not expect the adoption of this amendment to have a material effect on its consolidated financial statements.

In February 2018, the FASB amended the Income Statement – Reporting Comprehensive Income topic of the FASB ASC.  Existing accounting standards require that the tax effects of tax rate changes on deferred taxes be recorded in current income.  Deferred taxes previously included in accumulated other comprehensive income are not allowed to be adjusted and may not reflect current tax rates.  This amendment allows the reclassification from accumulated other comprehensive income to retained earnings the tax effects resulting from the Tax Cuts and Jobs Act passed in December 2017.  The amendment is effective for fiscal years beginning after December 15, 2018, with early adoption permitted in any period for which financial statements have not yet been issued.  The Company expects to adopt this amendment during the first quarter of 2018 with the reclassification of $1.1 million of deferred taxes between accumulated other comprehensive income and retained earnings.

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Cash and Cash Equivalents (Tables)

12 Months Ended

Dec. 31, 2017

Cash and Cash Equivalents

Schedule of balances of cash and cash equivalents

	December 31,
(Dollars in thousands)	2017		2016
Cash and due from banks	$	9,114	$	9,043
Interest-earning deposits in other banks		22,975		52,230
Cash and cash equivalents	$	32,089	$	61,273

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Investment Securities (Tables)

12 Months Ended

Dec. 31, 2017

Investment Securities.

Schedule of amortized cost and fair values of investment securities

	Amortized		Gross Unrealized				Estimated
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
December 31, 2017:
Available-for-sale:
U.S. government-sponsored mortgage-backed securities	$	2,870	$	—	$	(19)	$	2,851
Total	$	2,870	$	—	$	(19)	$	2,851
Held-to-maturity:
U.S. government-sponsored mortgage-backed securities	$	404,365	$	6,056	$	(4,603)	$	405,818
Trust preferred securities		427		418		—		845
Total	$	404,792	$	6,474	$	(4,603)	$	406,663
December 31, 2016:
Held-to-maturity:
U.S. government-sponsored mortgage-backed securities	$	406,498	$	7,285	$	(7,024)	$	406,759
Trust preferred securities		1,158		5		—		1,163
Total	$	407,656	$	7,290	$	(7,024)	$	407,922

Schedule of amortized cost and estimated fair value of investment securities by maturity

	Amortized		Estimated
(Dollars in thousands)	Cost		Fair Value
Available-for-sale:
Due within 5 years	$	—	$	—
Due after 5 years through 10 years		—		—
Due after 10 years		2,870		2,851
Total	$	2,870	$	2,851
Held-to-maturity:
Due within 5 years	$	10	$	11
Due after 5 years through 10 years		71		71
Due after 10 years		404,711		406,581
Total	$	404,792	$	406,663

Schedule of realized gains and losses and proceeds from sales of securities held to maturity

(Dollars in thousands)	2017		2016		2015
Proceeds from sales	$	7,446	$	5,462	$	7,718
Gross gains		431		370		701
Gross losses		—		—		—

Summary of investment securities in an unrealized loss position

	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)
December 31, 2017:
Available-for-sale:
U.S. government-sponsored mortgage-backed securities	$	2,851	$	19	$	—	$	—	1	$	2,851	$	19
Held-to-maturity:
U.S. government-sponsored mortgage-backed securities	$	41,163	$	299	$	140,200	$	4,304	49	$	181,363	$	4,603
December 31, 2016:
Held-to-maturity:
U.S. government-sponsored mortgage-backed securities	$	179,741	$	5,599	$	23,402	$	1,425	50	$	203,143	$	7,024

Cumulative roll forward of credit losses recognized in earnings for debt securities held and not intended to be sold

(Dollars in thousands)	2017		2016
Balance at January 1,	$	2,403	$	2,403
Credit losses on debt securities for which other-than-temporary impairment was not previously recognized		—		—
Credit losses on debt securities which were sold		—		—
Balance at December 31,	$	2,403	$	2,403

Schedule of components of accumulated other comprehensive loss, net of taxes, resulting from other-than-temporarily impaired securities

	December 31,
(Dollars in thousands)	2017		2016
Noncredit losses on other-than-temporarily impaired securities, net of taxes	$	—	$	—

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Loans Receivable and Allowance for Loan Losses (Tables)

12 Months Ended

Dec. 31, 2017

Loans Receivable and Allowance for Loan Losses

Schedule of components of loans receivable

	December 31,
(Dollars in thousands)	2017		2016
Real estate loans:
First mortgages:
One- to four-family residential	$	1,444,625	$	1,289,364
Multi-family residential		10,799		9,551
Construction, commercial and other		21,787		23,346
Home equity loans and lines of credit		12,882		14,805
Total real estate loans		1,490,093		1,337,066
Other loans:
Loans on deposit accounts		274		204
Consumer and other loans		4,340		4,360
Total other loans		4,614		4,564
Less:
Net unearned fees and discounts		(3,188)		(3,191)
Allowance for loan losses		(2,548)		(2,452)
Total unearned fees, discounts and allowance for loan losses		(5,736)		(5,643)
Loans receivable, net	$	1,488,971	$	1,335,987

Schedule of activity in allowance for loan losses by portfolio segment

			Construction,		Home
			Commercial		Equity
			and Other		Loans and
	Residential		Mortgage		Lines of		Consumer
(Dollars in thousands)	Mortgage		Loans		Credit		and Other		Unallocated		Totals
2017:
Balance, beginning of year	$	1,594	$	519	$	2	$	115	$	222	$	2,452
Provision (reversal of provision) for loan losses		63		20		(1)		(40)		10		52
		1,657		539		1		75		232		2,504
Charge-offs		(11)		—		—		(26)		—		(37)
Recoveries		75		—		—		6		—		81
Net recoveries (charge-offs)		64		—		—		(20)		—		44
Balance, end of year	$	1,721	$	539	$	1	$	55	$	232	$	2,548
2016:
Balance, beginning of year	$	1,380	$	517	$	3	$	72	$	194	$	2,166
Provision (reversal of provision) for loan losses		223		1		(1)		59		28		310
		1,603		518		2		131		222		2,476
Charge-offs		(33)		—		—		(28)		—		(61)
Recoveries		24		1		—		12		—		37
Net recoveries (charge-offs)		(9)		1		—		(16)		—		(24)
Balance, end of year	$	1,594	$	519	$	2	$	115	$	222	$	2,452
2015:
Balance, beginning of year	$	413	$	977	$	5	$	263	$	33	$	1,691
Provision (reversal of allowance) for loan losses		964		(471)		(49)		(150)		161		455
		1,377		506		(44)		113		194		2,146
Charge-offs		—		—		—		(53)		—		(53)
Recoveries		3		11		47		12		—		73
Net recoveries (charge-offs)		3		11		47		(41)		—		20
Balance, end of year	$	1,380	$	517	$	3	$	72	$	194	$	2,166

Schedule of balance in allowance for loan losses and recorded investment in loans by portfolio segment and based on impairment method

			Construction,		Home
			Commercial		Equity
			and Other		Loans and
	Residential		Mortgage		Lines of		Consumer
(Dollars in thousands)	Mortgage		Loans		Credit		and Other		Unallocated		Totals
December 31, 2017:
Allowance for loan losses:
Ending allowance balance:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		1,721		539		1		55		232		2,548
Total ending allowance balance	$	1,721	$	539	$	1	$	55	$	232	$	2,548
Loans:
Ending loan balance:
Individually evaluated for impairment	$	4,977	$	—	$	165	$	—	$	—	$	5,142
Collectively evaluated for impairment		1,447,326		21,701		12,722		4,628		—		1,486,377
Total ending loan balance	$	1,452,303	$	21,701	$	12,887	$	4,628	$	—	$	1,491,519
December 31, 2016:
Allowance for loan losses:
Ending allowance balance:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		1,594		519		2		115		222		2,452
Total ending allowance balance	$	1,594	$	519	$	2	$	115	$	222	$	2,452
Loans:
Ending loan balance:
Individually evaluated for impairment	$	5,587	$	—	$	156	$	1	$	—	$	5,744
Collectively evaluated for impairment		1,290,209		23,256		14,656		4,574		—		1,332,695
Total ending loan balance	$	1,295,796	$	23,256	$	14,812	$	4,575	$	—	$	1,338,439

Schedule of balance of impaired loans individually evaluated for impairment by class of loans

			Unpaid
	Recorded		Principal
(Dollars in thousands)	Investment		Balance
December 31, 2017:
With no related allowance recorded:
One- to four-family residential mortgages	$	4,977	$	5,897
Home equity loans and lines of credit		165		228
Total	$	5,142	$	6,125
December 31, 2016:
With no related allowance recorded:
One- to four-family residential mortgages	$	5,587	$	6,469
Home equity loans and lines of credit		156		204
Consumer and other		1		1
Total	$	5,744	$	6,674

Schedule of average recorded investment and interest income recognized on impaired loans by class of loans

	Average
	Recorded		Interest Income
(Dollars in thousands)	Investment		Recognized
2017:
With no related allowance recorded:
One- to four-family residential mortgages	$	5,112	$	58
Home equity loans and lines of credit		175		—
Consumer and other		—		—
Total	$	5,287	$	58
2016:
With no related allowance recorded:
One- to four-family residential mortgages	$	5,743	$	72
Home equity loans and lines of credit		161		—
Consumer and other		1		—
Total	$	5,905	$	72
2015:
With no related allowance recorded:
One- to four-family residential mortgages	$	6,642	$	71
Home equity loans and lines of credit		131		—
Consumer and other		9		—
Total	$	6,782	$	71

Schedule of aging of loans and accrual status by class of loans

															Loans
															More Than
															90 Days
	30 - 59		60 - 89		90 Days or										Past Due
	Days Past		Days Past		Greater		Total Past		Loans Not		Total		Nonaccrual		and Still
(Dollars in thousands)	Due		Due		Past Due		Due		Past Due		Loans		Loans		Accruing
December 31, 2017:
One- to four-family residential mortgages	$	—	$	1,207	$	1,589	$	2,796	$	1,438,725	$	1,441,521	$	4,062	$	—
Multi-family residential mortgages		—		—		—		—		10,782		10,782		—		—
Construction, commercial and other mortgages		—		—		—		—		21,701		21,701		—		—
Home equity loans and lines of credit		—		—		41		41		12,846		12,887		165		—
Loans on deposit accounts		—		—		—		—		274		274		—		—
Consumer and other		4		—		—		4		4,350		4,354		—		—
Total	$	4	$	1,207	$	1,630	$	2,841	$	1,488,678	$	1,491,519	$	4,227	$	—
December 31, 2016:
One- to four-family residential mortgages	$	185	$	133	$	1,358	$	1,676	$	1,284,590	$	1,286,266	$	4,402	$	—
Multi-family residential mortgages		—		—		—		—		9,530		9,530		—		—
Construction, commercial and other mortgages		—		—		—		—		23,256		23,256		—		—
Home equity loans and lines of credit		16		35		49		100		14,712		14,812		156		—
Loans on deposit accounts		—		—		—		—		204		204		—		—
Consumer and other		3		—		1		4		4,367		4,371		1		—
Total	$	204	$	168	$	1,408	$	1,780	$	1,336,659	$	1,338,439	$	4,559	$	—

Summary of troubled debt restructurings by class of loan

	Number of		Accrual		Number of		Nonaccrual
(Dollars in thousands)	Loans		Status		Loans		Status		Total
December 31, 2017:
One- to four-family residential mortgages		4	$	915		5	$	1,074	$	1,989
Home equity loans and lines of credit		—		—		1		92		92
Total		4	$	915		6	$	1,166	$	2,081
December 31, 2016:
One- to four-family residential mortgages		5	$	1,185		7	$	1,629	$	2,814
Home equity loans and lines of credit		—		—		1		107		107
Total		5	$	1,185		8	$	1,736	$	2,921

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Accrued Interest Receivable (Tables)

12 Months Ended

Dec. 31, 2017

Accrued Interest Receivable

Schedule of components of accrued interest receivable

	December 31,
(Dollars in thousands)	2017		2016
Investment securities	$	1,045	$	1,064
Loans receivable		4,090		3,658
Interest-bearing deposits		7		10
Total	$	5,142	$	4,732

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Mortgage Servicing Assets (Tables)

12 Months Ended

Dec. 31, 2017

Mortgage Servicing Assets.

Schedule of changes in mortgage servicing assets

(Dollars in thousands)	2017		2016
Balance at beginning of year	$	307	$	426
Additions		3		—
Impairments		—		(49)
Amortization		(47)		(70)
Balance at end of year	$	263	$	307

Schedule of gross carrying values, accumulated amortization, and net carrying values of mortgage servicing assets

	December 31,
(Dollars in thousands)	2017		2016
Gross carrying value	$	1,310	$	1,307
Accumulated amortization		(1,047)		(1,000)
Net carrying value	$	263	$	307

Schedule of estimated future amortization expense for mortgage servicing assets

(Dollars in thousands)
2018	$	48
2019		32
2020		26
2021		22
2022		20
Thereafter		115
Total	$	263

Schedule of fair values and key assumptions used in determining fair values of mortgage servicing assets

	2017			2016
Fair value, beginning of year (in thousands)	$	368		$	441
Fair value, end of year (in thousands)		311			368
Weighted average discount rate		10.50	%		10.50	%
Weighted average prepayment speed assumption (PSA prepayment speed)		173.3			159.2
Annual cost to service (per loan)	$	70		$	65

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Interest Rate Lock and Forward Loan Sale Commitments (Tables)

12 Months Ended

Dec. 31, 2017

Interest Rate Lock and Forward Loan Sale Commitments

Schedule of location of assets and liabilities related to derivatives

		Asset Derivatives				Liability Derivatives
	Location on	Fair Value at December 31,				Fair Value at December 31,
(Dollars in thousands)	Balance Sheet	2017		2016		2017		2016
Interest rate contracts	Prepaid expenses and other assets	$	8	$	104	$	—	$	—
Interest rate contracts	Accounts payable and accrued expenses		—		—		8		104
Total derivatives		$	8	$	104	$	8	$	104

Schedule of location of gains and losses related to derivatives

	Location of
	Loss on
(Dollars in thousands)	Statement of Income	2017		2016
Interest rate contracts	Gain on sale of loans	$	—	$	6

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Premises and Equipment (Tables)

12 Months Ended

Dec. 31, 2017

Premises and Equipment

Schedule of premises and equipment

	December 31,
(Dollars in thousands)	2017		2016
Land	$	585	$	585
Buildings and improvements		1,301		1,045
Leasehold improvements		13,915		13,005
Furniture, fixtures and equipment		5,727		5,261
Automobiles		115		115
		21,643		20,011
Less accumulated depreciation and amortization		(15,962)		(16,066)
		5,681		3,945
Construction in progress		40		382
Total	$	5,721	$	4,327

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Deposits (Tables)

12 Months Ended

Dec. 31, 2017

Deposits

Summary of deposit accounts by type with their respective weighted-average interest rates

	December 31,
	2017				2016
(Dollars in thousands)	Amount		Rate		Amount		Rate
Non-interest bearing	$	49,725	-	%	$	47,703	-	%
Savings accounts		1,040,248	0.46			1,022,159	0.41
Certificates of deposit		312,225	1.34			236,043	0.96
Money market		5,578	0.43			3,406	0.44
Checking and Super NOW		189,519	0.02			183,889	0.02
Total	$	1,597,295	0.56	%	$	1,493,200	0.43	%

Schedule of maturity of certificate of deposit accounts

Maturing in:
2018	$	165,706
2019		70,272
2020		31,423
2021		20,458
2022		24,366
Total	$	312,225

Schedule of interest expense by type of deposit

(Dollars in thousands)	2017		2016		2015
Savings	$	4,445	$	4,162	$	3,670
Certificates of deposit and money market		3,182		1,734		1,118
Checking and Super NOW		39		37		33
Total	$	7,666	$	5,933	$	4,821

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Advances from the Federal Home Loan Bank (Tables)

12 Months Ended

Dec. 31, 2017

Advances from the Federal Home Loan Bank

Schedule of advances outstanding

	December 31,
	2017				2016
			Weighted				Weighted
			Average				Average
(Dollars in thousands)	Amount		Rate		Amount		Rate
Due within one year	$	46,200	1.39	%	$	—	—	%
Due over 1 year to 2 years		31,000	1.79			37,000	1.33
Due over 2 years to 3 years		15,000	1.85			22,000	1.66
Due over 3 years to 4 years		15,000	2.32			10,000	1.66
Total	$	107,200	1.70	%	$	69,000	1.49	%

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Securities Sold Under Agreements to Repurchase (Tables)

12 Months Ended

Dec. 31, 2017

Securities Sold Under Agreements to Repurchase

Summary of securities sold under agreements to repurchase

	2017				2016
			Weighted				Weighted
	Repurchase		Average		Repurchase		Average
(Dollars in thousands)	Liability		Rate		Liability		Rate
Maturing:
1 year or less	$	—	—	%	$	25,000	1.46	%
Over 1 year to 2 years		25,000	1.66			—	—
Over 2 years to 3 years		5,000	1.65			25,000	1.66
Over 3 years to 4 years		—	—			5,000	1.65
Total	$	30,000	1.66	%	$	55,000	1.57	%

Summary comparing carrying value and fair value of securities pledged to secure repurchase agreements, repurchase liability, and amount at risk

									Weighted
	Carrying		Fair						Average
	Value of		Value of		Repurchase		Amount		Months to
(Dollars in thousands)	Securities		Securities		Liability		at Risk		Maturity
Maturing:
Over 90 days	$	39,834	$	39,986	$	30,000	$	9,986	17

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Offsetting of Financial Liabilities (Tables)

12 Months Ended

Dec. 31, 2017

Offsetting of Financial Liabilities

Schedule of securities sold under agreements to repurchase subject to conditional right of offset

					Net Amount of		Gross Amount Not Offset in the
	Gross Amount		Gross Amount		Liabilities		Balance Sheet
	of Recognized		Offset in the		Presented in the		Financial		Cash Collateral
(Dollars in thousands)	Liabilities		Balance Sheet		Balance Sheet		Instruments		Pledged		Net Amount
December 31, 2017:
Securities sold under agreements to repurchase	$	30,000	$	—	$	30,000	$	30,000	$	—	$	—
December 31, 2016:
Securities sold under agreements to repurchase	$	55,000	$	—	$	55,000	$	55,000	$	—	$	—

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Income Taxes (Tables)

12 Months Ended

Dec. 31, 2017

Income Taxes

Schedule of allocation of federal and state income taxes between current and deferred provisions

(Dollars in thousands)	2017		2016		2015
Current
Federal	$	6,219	$	7,487	$	10,176
State		1,447		1,810		1,833
		7,666		9,297		12,009
Deferred
Federal		3,273		1,339		(2,147)
State		163		151		(76)
		3,436		1,490		(2,223)
Total	$	11,102	$	10,787	$	9,786

Schedule of reconciliation of tax provision based on statutory corporate rate on pretax income and provision for taxes

(Dollars in thousands)	2017			2016			2015
Income tax expense at statutory rate	$	9,123		$	9,497		$	8,587
Income tax effect of:
Other tax-exempt income		(317)			(338)			(359)
Share-based compensation		2			68			87
State income taxes, net of federal income tax benefits		1,104			1,057			1,104
Tax benefit from the exercise of stock options (1)		(1,046)			—			—
Write-down of deferred income taxes (2)		2,054			—			—
Other		182			503			367
Total income tax expense	$	11,102		$	10,787		$	9,786
Effective income tax rate		42.59	%		39.75	%		39.89	%

(1) Starting in 2017 a new accounting standard requires that any excess tax benefits resulting from the exercise of stock options be recognized in income tax expense.  Prior to the adoption of the new standard, the excess tax benefits were recorded as additional paid-in-capital.

(2) Income tax expense for 2017 included a $2.1 million write-down of deferred income tax assets that resulted when the federal corporate tax rate was lowered from 35% to 21% due to the Tax Cuts and Jobs Act.

Schedule of components of income taxes payable (receivable)

	December 31,
(Dollars in thousands)	2017		2016
Current taxes payable (receivable):
Federal	$	(1,571)	$	(122)
State		1,483		1,616
	$	(88)	$	1,494
Deferred taxes receivable:
Federal	$	(3,178)	$	(6,350)
State		(1,431)		(1,555)
	$	(4,609)	$	(7,905)

Schedule of tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities

	December 31,
(Dollars in thousands)	2017		2016
Deferred tax assets:
Premises and equipment	$	966	$	1,737
Hawaii franchise tax		440		560
Unfunded pension liability		1,229		1,550
Allowance for loan losses		678		969
Impaired asset write-down		724		1,020
Employee benefit plans		2,580		3,785
Equity incentive plan		420		1,330
Unrealized losses on securities available-for-sale		17		21
Deferred compensation		453		744
Other		137		215
		7,644		11,931
Deferred tax liabilities:
Net deferred loan fees		2,676		3,566
FHLB stock dividends		126		196
Prepaid expense		163		143
Premiums on loans sold		70		121
		3,035		4,026
Net deferred tax assets	$	4,609	$	7,905

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Employee Benefit Plans (Tables)

12 Months Ended

Dec. 31, 2017

Employee Benefit Plans

Schedule of status of Pension Plan and SERP

	Pension Plan				SERP
	December 31,
(Dollars in thousands)	2017		2016		2017		2016
Accumulated benefit obligation at end of year	$	19,314	$	17,496	$	9,242	$	9,044
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	17,496	$	17,321	$	9,044	$	8,891
Service cost		193		194		75		38
Interest cost		763		752		140		132
Actuarial loss (gain)		1,670		(90)		—		—
Benefits paid		(808)		(681)		(17)		(17)
Benefit obligation at end of year		19,314		17,496		9,242		9,044
Change in plan assets:
Fair value of plan assets at beginning of year		14,804		13,140		—		—
Actual return on plan assets		1,931		345		—		—
Employer contributions		—		2,000		17		17
Benefits paid		(808)		(681)		(17)		(17)
Fair value of plan assets at end of year		15,927		14,804		—		—
Funded status at end of year	$	(3,387)	$	(2,692)	$	(9,242)	$	(9,044)
Amounts recognized in the consolidated balance sheets:
Accounts payable and accrued expenses - liability	$	(3,387)	$	(2,692)	$	(9,242)	$	(9,044)
Amounts recognized in accumulated other comprehensive loss:
Net actuarial loss	$	9,096	$	8,582	$	—	$	—
Prior service cost		149		154		—		—
Accumulated other comprehensive loss, before tax	$	9,245	$	8,736	$	—	$	—

Schedule of changes recognized in accumulated other comprehensive loss for Pension Plan

	Pension Plan
	Year Ended December 31,
(Dollars in thousands)	2017		2016
Accumulated other comprehensive loss at beginning of year, before tax	$	8,736	$	8,375
Actuarial net loss arising during the period		764		580
Amortizations (recognized in net periodic benefit cost):
Actuarial loss		(250)		(214)
Prior service cost		(5)		(5)
Total recognized in other comprehensive loss		509		361
Accumulated other comprehensive loss at end of year, before tax	$	9,245	$	8,736

Schedule of weighted average assumptions used to determine benefit obligations

	Pension Plan				SERP
	Year Ended December 31,
	2017		2016		2017		2016
Assumptions used to determine the year-end benefit obligations:
Discount rate	3.70	%	4.30	%	5.04	%	5.05	%
Rate of compensation increase	N/A		N/A		5.00	%	5.00	%

Schedule of Pension Plan's assets measured at fair value

			Fair Value of Measurements at Report Date Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Total Fair		Assets		Inputs		Inputs
(Dollars in thousands)	Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2017:
Cash	$	846	$	846	$	—	$	—
Equities		11,814		11,814		—		—
Mutual funds (1)		3,267		3,267		—		—
Total	$	15,927	$	15,927	$	—	$	—
December 31, 2016:
Cash	$	1,839	$	1,839	$	—	$	—
Equities		9,794		9,794		—		—
Mutual funds (1)		3,171		3,171		—		—
Total	$	14,804	$	14,804	$	—	$	—

(1) This category includes mutual funds that invest in equities and bonds.  The mutual fund managers have the ability to change the amounts invested in equities and bonds depending on their investment outlook.

Schedule of estimated future benefit payments reflecting expected future service

	Pension
(Dollars in thousands)	Plan		SERP
2018	$	954	$	17
2019		1,007		6,488
2020		1,039		150
2021		1,092		2,320
2022		1,133		144
2023 - 2027		5,794		665
Total	$	11,019	$	9,784

Schedule of weighted average assumptions used to determine net periodic benefit cost

	Pension Plan						SERP
	Year Ended December 31,
(Dollars in thousands)	2017		2016		2015		2017		2016		2015
Assumptions used to determine the net periodic benefit cost:
Discount rate	4.30	%	4.40	%	4.10	%	5.03	%	5.05	%	5.06	%
Expected return on plan assets	7.25		7.50		7.50		N/A		N/A		N/A
Rate of compensation increase	N/A		N/A		N/A		5.00		5.00		5.00

Schedule of components of net periodic benefit cost

	Pension Plan						SERP
	Year Ended December 31,
(Dollars in thousands)	2017		2016		2015		2017		2016		2015
Net periodic benefit cost for the year:
Service cost	$	193	$	194	$	120	$	75	$	38	$	29
Interest cost		763		752		722		140		132		125
Expected return on plan assets		(1,026)		(1,015)		(976)		—		—		—
Amortization of prior service cost		5		5		—		—		—		—
Recognized actuarial loss		250		214		215		—		—		—
Recognized curtailment loss		—		—		—		—		—		—
Net periodic benefit cost	$	185	$	150	$	81	$	215	$	170	$	154

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Employee Stock Ownership Plan (Tables)

12 Months Ended

Dec. 31, 2017

Employee Stock Ownership Plan

Schedule of shares held by the ESOP trust

	December 31,
	2017		2016
Allocated shares		397,912		372,997
Unearned shares		538,261		587,193
Total ESOP shares		936,173		960,190
Fair value of unearned shares, in thousands	$	16,616	$	19,283

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Share-Based Compensation (Tables)

12 Months Ended

Dec. 31, 2017

Schedule of compensation expense and related tax benefit for all share-based awards

(In thousands)	2017		2016		2015
Compensation expense	$	153	$	1,789	$	2,670
Income tax benefit		42		718		1,072

Schedule of stock option activity

		Weighted			Aggregate
		Average		Remaining	Intrinsic
		Exercise		Contractual	Value
	Options	Price		Life (years)	(in thousands)
Options outstanding at December 31, 2014	832,954	$	17.38	5.68	$	3,471
Granted	3,600		26.23	9.67
Exercised	1,000		17.36			8
Forfeited	3,254		17.36
Expired	—
Options outstanding at December 31, 2015	832,300	$	17.42	4.70	$	8,588
Granted	—
Exercised	125,870		17.36			1,378
Forfeited	—
Expired	—
Options outstanding at December 31, 2016	706,430	$	17.43	3.70	$	10,884
Granted	—
Exercised	294,887		17.36			4,345
Forfeited	—
Expired	—
Options outstanding at December 31, 2017	411,543	$	17.48	2.73	$	5,509
Options vested and exercisable at December 31, 2017	410,343	$	17.46	2.71	$	5,503

Summary of certain stock option activity

(In thousands)	2017		2016		2015
Intrinsic value of stock options exercised	$	4,345	$	1,378	$	8
Proceeds received from stock options exercised		5,119		2,186		17
Tax benefits realized from stock options exercised		1,601		368		3
Total fair value of stock options that vested		37		4,495		3,854

Restricted Stock

Schedule of restricted stock award activity

		Weighted
		Average Grant
	Restricted	Date Fair
	Stock	Value
Nonvested at December 31, 2014	226,733	$	17.39
Granted	3,600		26.33
Vested	113,332		17.39
Forfeited	2,459		17.36
Nonvested at December 31, 2015	114,542	$	17.67
Granted	—		—
Vested	112,142		17.49
Forfeited	—		—
Nonvested at December 31, 2016	2,400	$	26.23
Granted	9,604		29.53
Vested	1,200		26.23
Forfeited	—		—
Nonvested at December 31, 2017	10,804	$	29.16

Restricted Stock Units Based on a Performance Condition

Schedule of restricted stock award activity

	Performance-
	Based Restricted
	Stock Units	Weighted
	Based on a	Average Grant
	Performance	Date Fair
	Condition	Value
Nonvested at December 31, 2016	—	$	—
Granted	11,525		29.53
Vested	—		—
Forfeited	—		—
Nonvested at December 31, 2017	11,525	$	29.53

Restricted Stock Units Based on a Market Condition

Schedule of restricted stock award activity

	Performance-
	Based Restricted	Monte Carlo
	Stock Units	Valuation of
	Based on a	the Company's
	Market Condition	Stock
Nonvested at December 31, 2016	—	$	—
Granted	2,881		24.44
Vested	—		—
Forfeited	—		—
Nonvested at December 31, 2017	2,881	$	24.44

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Earnings Per Share (Tables)

12 Months Ended

Dec. 31, 2017

Earnings Per Share

Schedule of information used to compute basic and diluted earnings per share

	For the Year Ended December 31,
(Dollars in thousands, except per share data)	2017		2016		2015
Net income	$	14,962	$	16,347	$	14,748
Income allocated to participating securities		(27)		(126)		(297)
Net income available to common shareholders	$	14,935	$	16,221	$	14,451
Weighted-average number of shares used in:
Basic earnings per share		9,273,783		9,093,385		9,073,015
Dilutive common stock equivalents:
Stock options and restricted stock units		258,941		218,590		190,252
Diluted earnings per share		9,532,724		9,311,975		9,263,267
Net income per common share, basic	$	1.61	$	1.78	$	1.59
Net income per common share, diluted	$	1.57	$	1.74	$	1.56

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Other Comprehensive Loss (Tables)

12 Months Ended

Dec. 31, 2017

Other Comprehensive Loss

Schedule of changes in components of accumulated other comprehensive income and loss, net of taxes

			Noncredit
			Related
			Loss on
	Unfunded		Trust		Unrealized
	Pension		Preferred		Loss on
(Dollars in thousands)	Liability		Securities		Securities		Total
December 31, 2017:
Balances at beginning of year	$	5,284	$	—	$	32	$	5,316
Other comprehensive loss, net of taxes		373		—		5		378
Amounts reclassified from accumulated other comprehensive loss		—		—		—		—
Net current period other comprehensive loss		373		—		5		378
Balances at end of year	$	5,657	$	—	$	37	$	5,694
December 31, 2016:
Balances at beginning of year	$	5,044	$	147	$	45	$	5,236
Other comprehensive loss (income), net of taxes		240		(147)		(13)		80
Amounts reclassified from accumulated other comprehensive loss		—		—		—		—
Net current period other comprehensive loss (income)		240		(147)		(13)		80
Balances at end of year	$	5,284	$	—	$	32	$	5,316
December 31, 2015:
Balances at beginning of year	$	5,032	$	284	$	72	$	5,388
Other comprehensive loss (income), net of taxes		12		(137)		(27)		(152)
Amounts reclassified from accumulated other comprehensive loss		—		—		—		—
Net current period other comprehensive loss (income)		12		(137)		(27)		(152)
Balances at end of year	$	5,044	$	147	$	45	$	5,236

Schedule of tax effect on each component of accumulated other comprehensive loss

	Year Ended December 31,
	2017						2016						2015
	Pretax				After Tax		Pretax				After Tax		Pretax				After Tax
(Dollars in thousands)	Amount		Tax		Amount		Amount		Tax		Amount		Amount		Tax		Amount
Unfunded pension liability	$	509	$	(136)	$	373	$	361	$	(121)	$	240	$	20	$	(8)	$	12
Noncredit related loss on trust preferred securities		—		—		—		(242)		95		(147)		(226)		89		(137)
Unrealized loss on securities		9		(4)		5		(22)		9		(13)		(45)		18		(27)
Total	$	518	$	(140)	$	378	$	97	$	(17)	$	80	$	(251)	$	99	$	(152)

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Commitments (Tables)

12 Months Ended

Dec. 31, 2017

Commitments

Schedule of future minimum rental commitments under all noncancelable operating leases

(Dollars in thousands)
2018	$	2,809
2019		2,353
2020		1,919
2021		1,463
2022		1,293
Thereafter		4,557
Total	$	14,394

Schedule of future minimum rental income for noncancelable lease

(Dollars in thousands)
2018	$	110
2019		110
2020		110
2021		110
2022		—
Thereafter		—
Total	$	440

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Regulatory Capital and Supervision (Tables)

12 Months Ended

Dec. 31, 2017

Regulatory Capital and Supervision

Schedule of regulatory capital ratios

(Dollars in thousands)	Required Ratio			Actual Amount	Actual Ratio
December 31, 2017:
Tier 1 Leverage Capital
Territorial Savings Bank	5.00	%	$	218,826	11.04	%
Territorial Bancorp Inc.	5.00	%	$	240,548	12.13	%
Common Equity Tier 1 Risk-Based Capital (1)
Territorial Savings Bank	9.00	%	$	218,826	23.31	%
Territorial Bancorp Inc.	9.00	%	$	240,548	25.62	%
Tier 1 Risk-Based Capital (1)
Territorial Savings Bank	10.50	%	$	218,826	23.31	%
Territorial Bancorp Inc.	10.50	%	$	240,548	25.62	%
Total Risk-Based Capital (1)
Territorial Savings Bank	12.50	%	$	221,460	23.59	%
Territorial Bancorp Inc.	12.50	%	$	243,182	25.90	%
December 31, 2016:
Tier 1 Leverage Capital
Territorial Savings Bank (2)	9.00	%	$	219,365	11.76	%
Territorial Bancorp Inc.	5.00	%	$	235,102	12.60	%
Common Equity Tier 1 Risk-Based Capital (1)
Territorial Savings Bank	9.00	%	$	219,365	25.30	%
Territorial Bancorp Inc.	9.00	%	$	235,102	27.11	%
Tier 1 Risk-Based Capital (1)
Territorial Savings Bank	10.50	%	$	219,365	25.30	%
Territorial Bancorp Inc.	10.50	%	$	235,102	27.11	%
Total Risk-Based Capital (1)
Territorial Savings Bank	12.50	%	$	221,912	25.59	%
Territorial Bancorp Inc.	12.50	%	$	237,649	27.41	%

(1) The required Common Equity Tier 1 Risk-Based Capital, Tier 1 Risk-Based Capital and Total Risk-Based Capital ratios are based on the fully-phased in capital ratios in the Basel III capital regulations plus the 2.50% capital conservation buffer that becomes effective on January 1, 2019.   

(2) On July 10, 2014, Territorial Savings Bank became a member of the Federal Reserve System.  As a condition of membership, Territorial Savings Bank was required to maintain a Tier 1 Leverage Capital ratio of 9.00% for three years. 

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Fair Value of Financial Instruments (Tables)

12 Months Ended

Dec. 31, 2017

Fair Value of Financial Instruments

Schedule of estimated fair values of financial instruments

	Carrying				Fair Value Measurements Using
(Dollars in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
December 31, 2017
Assets
Cash and cash equivalents	$	32,089	$	32,089	$	32,089	$	—	$	—
Investment securities available for sale		2,851		2,851		—		2,851		—
Investment securities held to maturity		404,792		406,663		—		405,818		845
Loans held for sale		403		414		—		414		—
Loans receivable, net		1,488,971		1,505,097		—		—		1,505,097
FHLB stock		6,541		6,541		—		6,541		—
FRB stock		3,103		3,103		—		3,103		—
Accrued interest receivable		5,142		5,142		7		1,045		4,090
Interest rate contracts		8		8		—		8		—
Liabilities
Deposits		1,597,295		1,595,992		—		1,285,070		310,922
Advances from the Federal Home Loan Bank		107,200		107,019		—		107,019		—
Securities sold under agreements to repurchase		30,000		29,846		—		29,846		—
Accrued interest payable		575		575		—		115		460
Interest rate contracts		8		8		—		8		—
December 31, 2016
Assets
Cash and cash equivalents	$	61,273	$	61,273	$	61,273	$	—	$	—
Investment securities held to maturity		407,656		407,922		—		406,759		1,163
Loans held for sale		1,601		1,601		—		1,601		—
Loans receivable, net		1,335,987		1,352,137		—		—		1,352,137
FHLB stock		4,945		4,945		—		4,945		—
FRB stock		3,095		3,095		—		3,095		—
Accrued interest receivable		4,732		4,732		10		1,064		3,658
Interest rate contracts		104		104		—		104		—
Liabilities
Deposits		1,493,200		1,493,094		—		1,257,157		235,937
Advances from the Federal Home Loan Bank		69,000		69,068		—		69,068		—
Securities sold under agreements to repurchase		55,000		55,123		—		55,123		—
Accrued interest payable		218		218		—		172		46
Interest rate contracts		104		104		—		104		—

Schedule of assets and liabilities measured at fair value on a recurring basis

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
December 31, 2017
Interest rate contracts — assets	$	—	$	8	$	—	$	8
Interest rate contracts — liabilities		—		(8)		—		(8)
Available-for-sale investments		—		2,851		—		2,851
December 31, 2016
Interest rate contracts — assets	$	—	$	104	$	—	$	104
Interest rate contracts — liabilities		—		(104)		—		(104)

Schedule of assets measured at fair value on a nonrecurring basis and related gains and losses

	Fair Value
(Dollars in thousands)	Adjustment Date	Level 1		Level 2		Level 3		Total			Total Gains (Losses)
December 31, 2017
Impaired loans	3/31/2017	$	—	$	87	$	—	$	87	$	(11)
December 31, 2016
Trust preferred securities	9/30/2016	$	—	$	—	$	1,066	$	1,066	$	242
Mortgage servicing assets	6/30/2016		—		—		341		341		(49)
Impaired loans	8/31/2016		—		64		—		64		(33)
Loans held for sale	12/31/2016		—		1,601		—		1,601		(1)

Schedule of significant unobservable inputs for Level 3 nonrecurring fair value measurements

				Unobservable
(Dollars in thousands)	Fair Value		Valuation Technique	Input	Value
December 31, 2016:
Trust preferred securities	$	1,066	Discounted cash flow	Discount rate		Three-month LIBOR plus 20.00%
Mortgage servicing assets		341	Discounted cash flow	Discount rate		10.50%
				Prepayment speed (PSA)		158.4 - 203.5
				Annual cost to service (per loan, in dollars)	$	65

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Parent Company Only (Tables)

12 Months Ended

Dec. 31, 2017

Parent Company Only

Condensed Balance Sheet

Condensed Balance Sheet

	December 31,
(Dollars in thousands)	2017		2016
Assets
Cash	$	20,093	$	15,288
Investment in Territorial Savings Bank		213,132		214,050
Receivable from Territorial Savings Bank		1,539		373
Prepaid expenses and other assets		141		81
Total assets	$	234,905	$	229,792
Liabilities and Equity
Other liabilities	$	51	$	6
Equity		234,854		229,786
Total liabilities and equity	$	234,905	$	229,792

Condensed Statement of Income

Condensed Statement of Income

	For the Year Ended December 31,
(Dollars in thousands)	2017		2016		2015
Interest and dividend income:
Dividends from Territorial Savings Bank	$	16,200	$	7,500	$	14,000
Interest-earning deposit with Territorial Savings Bank		49		34		29
Total interest and dividend income		16,249		7,534		14,029
Noninterest expense:
Salaries		37		40		34
Other general and administrative expenses		989		745		829
Total noninterest expense		1,026		785		863
Income before income taxes and equity in undistributed earnings in subsidiaries		15,223		6,749		13,166
Income taxes		(384)		(285)		(416)
Income before equity in undistributed earnings in subsidiaries		15,607		7,034		13,582
Equity in undistributed earnings of Territorial Savings Bank, net of dividends		(645)		9,313		1,166
Net income	$	14,962	$	16,347	$	14,748

Condensed Statement of Cash Flows

Condensed Statement of Cash Flows

	For the Year Ended December 31,
(Dollars in thousands)	2017		2016		2015
Cash flows from operating activities:
Net income	$	14,962	$	16,347	$	14,748
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of Territorial Savings Bank, net of dividends		645		(9,313)		(1,166)
ESOP expense		1,529		1,353		1,210
Net (increase) decrease in prepaid expenses and other assets		(1,226)		659		1,170
Net increase (decrease) in other liabilities		27		(18)		(18)
Net cash provided by operating activities		15,937		9,028		15,944
Cash flows from investing activities:
Investment in Territorial Savings Bank		—		—		—
Net cash used in investing activities		—		—		—
Cash flows from financing activities:
Proceeds from issuance of common stock		—		566		17
Repurchases of common stock		(9)		(1,674)		(9,326)
Cash dividends paid		(11,123)		(8,409)		(7,013)
Net cash used in financing activities		(11,132)		(9,517)		(16,322)
Net increase (decrease) in cash		4,805		(489)		(378)
Cash at beginning of the period		15,288		15,777		16,155
Cash at end of the period	$	20,093	$	15,288	$	15,777

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Unaudited Quarterly Financial Information (Tables)

12 Months Ended

Dec. 31, 2017

Unaudited Quarterly Financial Information

Schedule of unaudited quarterly financial information

	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter		Full Year
	(Dollars in thousands, except per share data)
2017:
Interest income	$	16,781	$	16,777	$	17,177	$	17,598	$	68,333
Interest expense		2,121		2,253		2,518		2,697		9,589
Net interest income		14,660		14,524		14,659		14,901		58,744
Provision (reversal of provision) for loan losses		71		(123)		54		50		52
Net interest income after provision for loan losses		14,589		14,647		14,605		14,851		58,692
Noninterest income		1,022		1,059		909		856		3,846
Noninterest expense		8,707		8,754		8,761		10,252		36,474
Income before income taxes		6,904		6,952		6,753		5,455		26,064
Income taxes		2,583		2,651		2,580		3,288		11,102
Net income		4,321		4,301		4,173		2,167		14,962
Basic earnings per share		0.47		0.46		0.45		0.23		1.61
Diluted earnings per share		0.46		0.45		0.44		0.23		1.57
Cash dividends declared per common share		0.20		0.20		0.30		0.50		1.20

	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter		Full Year
	(Dollars in thousands, except per share data)
2016:
Interest income	$	16,380	$	16,543	$	16,669	$	16,481	$	66,073
Interest expense		1,883		1,944		1,964		2,053		7,844
Net interest income		14,497		14,599		14,705		14,428		58,229
Provision for loan losses		28		84		107		91		310
Net interest income after provision for loan losses		14,469		14,515		14,598		14,337		57,919
Noninterest income		886		1,134		1,003		1,071		4,094
Noninterest expense		9,059		8,988		8,645		8,187		34,879
Income before income taxes		6,296		6,661		6,956		7,221		27,134
Income taxes		2,512		2,624		2,792		2,859		10,787
Net income		3,784		4,037		4,164		4,362		16,347
Basic earnings per share		0.41		0.44		0.45		0.48		1.78
Diluted earnings per share		0.40		0.43		0.44		0.46		1.74
Cash dividends declared per common share		0.18		0.18		0.18		0.38		0.92

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Organization (Details) $ in Millions	Dec. 31, 2017 USD ($)
Plan of Conversion and Reorganization and Registration of Shares
Plan of conversion and reorganization
Liquidation account balance	$ 11.0

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Summary of Significant Accounting Policies - Description of Business, Investment Securities and Transfer of Financial Assets (Details) $ in Thousands	12 Months Ended
	Dec. 31, 2017 USD ($) item
Description of Business
Number of branches through which loan and deposit products and services are provided to individual customers | item	29
Investment Securities
Investment securities available for sale | $	$ 2,851
Transfer of financial assets
Percentage of receipt on transfer of mortgage-backed securities issued	100.00%

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Summary of Significant Accounting Policies - Premises and Equipment Useful Lives (Details)	12 Months Ended
	Dec. 31, 2017
Buildings and improvements
Premises and equipment
Estimated useful life	30 years
Furniture, fixtures and equipment | Minimum
Premises and equipment
Estimated useful life	3 years
Furniture, fixtures and equipment | Maximum
Premises and equipment
Estimated useful life	10 years
Automobiles
Premises and equipment
Estimated useful life	3 years

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Summary of Significant Accounting Policies - Common Stock Repurchase Program and Forms of Outstanding Common Stock (Details)	12 Months Ended
	Dec. 31, 2017 security shares	Dec. 31, 2016 $ / shares shares
Common stock
Number of different forms of outstanding common stock | security	2
Common Stock Repurchase Program
Common Stock Repurchase Program
Total accumulated shares repurchased	3,138,153	3,138,153
Shares authorized under repurchase program	3,374,253
Repurchase of company common stock, shares	0
Average cost of shares repurchased (in dollars per share) | $ / shares		$ 25.96

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Summary of Significant Accounting Policies - Bank-Owned Life Insurance (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Bank-Owned Life Insurance
Amount of investment in bank-owned life insurance	$ 44,201	$ 43,294
Territorial Savings Bank
Bank-Owned Life Insurance
Percentage applied on Tier 1 capital plus allowance for loan losses to calculate ceiling limit of investment	25.00%
Amount of ceiling limit of investment	$ 55,400

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Summary of Significant Accounting Policies - Recently Issued Accounting Pronouncements (Details) - USD ($) $ in Millions	3 Months Ended	12 Months Ended
	Mar. 31, 2018	Dec. 31, 2017
ASU 2016-09 Compensation - Stock Compensation | Employee Stock Options
Recently Issued Accounting Pronouncements
Tax benefits realized from stock options exercised		$ 1.0
ASU 2018-02 - Income Statement - Reporting Comprehensive Income | Forecast
Recently Issued Accounting Pronouncements
Expected reclassification of deferred taxes between accumulated other comprehensive income and retained earnings	$ 1.1

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Cash and Cash Equivalents (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Cash and Cash Equivalents
Cash and due from banks	$ 9,114	$ 9,043
Interest-earning deposits in other banks	22,975	52,230
Cash and cash equivalents	$ 32,089	$ 61,273	$ 65,919	$ 75,060

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Investment Securities - Amortized Cost and Fair Values of Available-for-Sale Securities (Details) $ in Thousands	Dec. 31, 2017 USD ($)
Available-for-sale:
Amortized Cost	$ 2,870
Gross Unrealized Losses	(19)
Estimated Fair Value	2,851
U.S. government-sponsored mortgage-backed securities
Available-for-sale:
Amortized Cost	2,870
Gross Unrealized Losses	(19)
Estimated Fair Value	$ 2,851

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Investment Securities - Amortized Cost and Fair Values of Held-to-Maturity Securities (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Held-to-maturity:
Amortized Cost	$ 404,792	$ 407,656
Gross Unrealized Gains	6,474	7,290
Gross Unrealized Losses	(4,603)	(7,024)
Estimated Fair Value	406,663	407,922
U.S. government-sponsored mortgage-backed securities
Held-to-maturity:
Amortized Cost	404,365	406,498
Gross Unrealized Gains	6,056	7,285
Gross Unrealized Losses	(4,603)	(7,024)
Estimated Fair Value	405,818	406,759
Trust preferred securities
Held-to-maturity:
Amortized Cost	427	1,158
Gross Unrealized Gains	418	5
Estimated Fair Value	$ 845	$ 1,163

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Investment Securities - Maturity Schedule of Available-for-Sale Securities (Details) $ in Thousands	Dec. 31, 2017 USD ($)
Amortized Cost
Due within 5 years	$ 0
Due after 5 years through 10 years	0
Due after 10 years	2,870
Amortized Cost	2,870
Estimated Fair Value
Due within 5 years	0
Due after 5 years through 10 years	0
Due after 10 years	2,851
Estimated Fair Value	$ 2,851

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Investment Securities - Maturity Schedule of Held-to-Maturity Securities (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Held-to-maturity, Amortized Cost
Due within 5 years	$ 10
Due after 5 years through 10 years	71
Due after 10 years	404,711
Amortized Cost	404,792	$ 407,656
Held-to-maturity, Estimated Fair Value
Due within 5 years	11
Due after 5 years through 10 years	71
Due after 10 years	406,581
Estimated Fair Value	$ 406,663	$ 407,922

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Investment Securities - Realized Gains and Losses and Proceeds from Sales (Details)	12 Months Ended
	Dec. 31, 2017 USD ($)	Dec. 31, 2016 USD ($)	Dec. 31, 2015 USD ($) security
Realized gains and losses and the proceeds from sales of securities available for sale, held to maturity and trading
Proceeds from sales	$ 7,446,000	$ 5,462,000	$ 7,718,000
Gross gains	$ 431,000	$ 370,000	701,000
Held-to-maturity debt securities | PreTSL XXIV
Realized gains and losses and the proceeds from sales of securities available for sale, held to maturity and trading
Gross gains			$ 61,000
Number of securities sold | security			1
U.S. government-sponsored mortgage-backed securities | Minimum
Realized gains and losses and the proceeds from sales of securities available for sale, held to maturity and trading
Portion of outstanding purchased principal already collected	85.00%

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Investment Securities - Securities Pledged (Details) - USD ($) $ in Millions	Dec. 31, 2017	Dec. 31, 2016
Pledged investment securities
Investment securities pledged to secure public deposit, securities sold under agreement to repurchase and transaction clearing accounts	$ 287.2	$ 239.9

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Investment Securities – Available-for-Sale Unrealized Loss Position Summary (Details) - U.S. government-sponsored mortgage-backed securities $ in Thousands	Dec. 31, 2017 USD ($) security
Schedule of Available-for-sale Securities [Line Items]
Less Than 12 Months Fair Value	$ 2,851
Less Than 12 Months Unrealized Losses	$ 19
Number of Securities | security	1
Total Fair Value	$ 2,851
Total Unrealized Losses	$ 19

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Investment Securities - Held-to-Maturity Unrealized Loss Position Summary (Details) - U.S. government-sponsored mortgage-backed securities $ in Thousands	Dec. 31, 2017 USD ($) security	Dec. 31, 2016 USD ($) security
Investment Securities
Less Than 12 Months Fair Value	$ 41,163	$ 179,741
Less Than 12 Months Unrealized Losses	299	5,599
12 Months or Longer Fair Value	140,200	23,402
12 Months or Longer Unrealized Losses	$ 4,304	$ 1,425
Total Number of Securities | security	49	50
Total Fair Value	$ 181,363	$ 203,143
Total Unrealized Losses	$ 4,603	$ 7,024

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Investment Securities - Trust Preferred Securities (Details)	72 Months Ended	120 Months Ended
	Dec. 31, 2017 USD ($) Transaction security	Dec. 31, 2017 USD ($) item security	Dec. 31, 2016 USD ($)
Investment Securities
Amortized cost	$ 404,792,000	$ 404,792,000	$ 407,656,000
Trust preferred securities
Investment Securities
Amortized cost	$ 427,000	$ 427,000	$ 1,158,000
Number of market transactions of the security | Transaction	6
Period of minimal activity in trust preferred securities tranche determining the market to be inactive	72 months
Number of new security pools | item		0
Accumulated other comprehensive loss	$ 0	$ 0
Trust preferred securities | PreTSL XXIII
Investment Securities
Number of securities owned | security	1	1
Amortized cost	$ 427,000	$ 427,000
Remaining cost basis	$ 427,000	$ 427,000

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Investment Securities - Cumulative Roll Forward of Credit Losses Recognized in Earnings (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Cumulative roll forward of credit losses recognized in earnings for debt securities held and not intended to be sold
Balance at the beginning of the period	$ 2,403	$ 2,403
Credit losses on debt securities which were sold
Balance at the end of the period	$ 2,403	$ 2,403

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Federal Home Loan Bank Stock (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Investment in stock
Capital stock of the FHLB owned	$ 6,541	$ 4,945
Territorial Savings Bank
Investment in stock
Capital stock of the FHLB owned	$ 6,500	$ 4,900

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Federal Reserve Bank Stock (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Investment in stock
Capital stock of the Federal Reserve Bank owned	$ 3,103	$ 3,095
Territorial Savings Bank
Investment in stock
Requirement to hold shares of capital stock of the Federal Reserve Bank as a percentage of capital and surplus (as a percent)	6.00%
Capital stock of the Federal Reserve Bank owned	$ 3,100	$ 3,100

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Loans Receivable and Allowance for Loan Losses - Components (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Real estate loans:
Total real estate loans	$ 1,490,093	$ 1,337,066
Other loans:
Total other loans	4,614	4,564
Less: Net unearned fees and discounts	(3,188)	(3,191)
Less: Allowance for loan losses	(2,548)	(2,452)	$ (2,166)	$ (1,691)
Total unearned fees, discounts and allowance for loan losses	(5,736)	(5,643)
Loans receivable, net	1,488,971	1,335,987
One- to four-family residential
Real estate loans:
Total real estate loans	1,444,625	1,289,364
Multi-family residential
Real estate loans:
Total real estate loans	10,799	9,551
Construction, Commercial and Other Mortgage Loans
Real estate loans:
Total real estate loans	21,787	23,346
Other loans:
Less: Allowance for loan losses	(539)	(519)	(517)	(977)
Home Equity Loans and Lines of Credit
Real estate loans:
Total real estate loans	12,882	14,805
Other loans:
Less: Allowance for loan losses	(1)	(2)	$ (3)	$ (5)
Loans on Deposit Accounts
Other loans:
Total other loans	274	204
Consumer and Other
Other loans:
Total other loans	$ 4,340	$ 4,360

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Loans Receivable and Allowance for Loan Losses - Activity in Allowance for Loan Losses (Details) - USD ($) $ in Thousands	3 Months Ended								12 Months Ended			24 Months Ended
	Dec. 31, 2017	Sep. 30, 2017	Jun. 30, 2017	Mar. 31, 2017	Dec. 31, 2016	Sep. 30, 2016	Jun. 30, 2016	Mar. 31, 2016	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2015
Activity in allowance for loan losses
Balance, beginning of year				$ 2,452				$ 2,166	$ 2,452	$ 2,166	$ 1,691
Provision (reversal of provision) for loan losses	$ 50	$ 54	$ (123)	71	$ 91	$ 107	$ 84	28	52	310	455
Allowance for loan losses on loans receivable after provision (reversal of allowance)									2,504	2,476	2,146
Charge-offs									(37)	(61)	(53)
Recoveries									81	37	73
Net recoveries (charge-offs)									44	(24)	20
Balance, end of year	2,548				2,452				2,548	$ 2,452	2,166	$ 2,166
Look back period to calculate historical loss of each segment										7 years		5 years
Residential Mortgage
Activity in allowance for loan losses
Balance, beginning of year				1,594				1,380	1,594	$ 1,380	413
Provision (reversal of provision) for loan losses									63	223	964
Allowance for loan losses on loans receivable after provision (reversal of allowance)									1,657	1,603	1,377
Charge-offs									(11)	(33)
Recoveries									75	24	3
Net recoveries (charge-offs)									64	(9)	3
Balance, end of year	1,721				1,594				1,721	1,594	1,380	$ 1,380
Construction, Commercial and Other Mortgage Loans
Activity in allowance for loan losses
Balance, beginning of year				519				517	519	517	977
Provision (reversal of provision) for loan losses									20	1	(471)
Allowance for loan losses on loans receivable after provision (reversal of allowance)									539	518	506
Recoveries										1	11
Net recoveries (charge-offs)										1	11
Balance, end of year	539				519				539	519	517	517
Home Equity Loans and Lines of Credit
Activity in allowance for loan losses
Balance, beginning of year				2				3	2	3	5
Provision (reversal of provision) for loan losses									(1)	(1)	(49)
Allowance for loan losses on loans receivable after provision (reversal of allowance)									1	2	(44)
Recoveries											47
Net recoveries (charge-offs)											47
Balance, end of year	1				2				1	2	3	3
Consumer and other loans
Activity in allowance for loan losses
Balance, beginning of year				115				72	115	72	263
Provision (reversal of provision) for loan losses									(40)	59	(150)
Allowance for loan losses on loans receivable after provision (reversal of allowance)									75	131	113
Charge-offs									(26)	(28)	(53)
Recoveries									6	12	12
Net recoveries (charge-offs)									(20)	(16)	(41)
Balance, end of year	55				115				55	115	72	72
Unallocated
Activity in allowance for loan losses
Balance, beginning of year				$ 222				$ 194	222	194	33
Provision (reversal of provision) for loan losses									10	28	161
Allowance for loan losses on loans receivable after provision (reversal of allowance)									232	222	194
Balance, end of year	$ 232				$ 222				$ 232	$ 222	$ 194	$ 194

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Loans Receivable and Allowance for Loan Losses - Balance in Allowance for Loan Losses and Recorded Investment (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Allowance for loan losses:
Collectively evaluated for impairment	$ 2,548	$ 2,452
Total ending allowance balance	2,548	2,452	$ 2,166	$ 1,691
Loans:
Individually evaluated for impairment	5,142	5,744
Collectively evaluated for impairment	1,486,377	1,332,695
Total ending loan balance	1,491,519	1,338,439
Residential Mortgage
Allowance for loan losses:
Collectively evaluated for impairment	1,721	1,594
Total ending allowance balance	1,721	1,594	1,380	413
Loans:
Individually evaluated for impairment	4,977	5,587
Collectively evaluated for impairment	1,447,326	1,290,209
Total ending loan balance	1,452,303	1,295,796
Construction, Commercial and Other Mortgage Loans
Allowance for loan losses:
Collectively evaluated for impairment	539	519
Total ending allowance balance	539	519	517	977
Loans:
Collectively evaluated for impairment	21,701	23,256
Total ending loan balance	21,701	23,256
Home Equity Loans and Lines of Credit
Allowance for loan losses:
Collectively evaluated for impairment	1	2
Total ending allowance balance	1	2	3	5
Loans:
Individually evaluated for impairment	165	156
Collectively evaluated for impairment	12,722	14,656
Total ending loan balance	12,887	14,812
Consumer and other loans
Allowance for loan losses:
Collectively evaluated for impairment	55	115
Total ending allowance balance	55	115	72	263
Loans:
Individually evaluated for impairment		1
Collectively evaluated for impairment	4,628	4,574
Total ending loan balance	4,628	4,575
Unallocated
Allowance for loan losses:
Collectively evaluated for impairment	232	222
Total ending allowance balance	$ 232	$ 222	$ 194	$ 33

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Loans Receivable and Allowance for Loan Losses - Impaired Loans (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Impaired loans
Average Recorded Investment	$ 5,287	$ 5,905	$ 6,782
Interest Income Recognized	58	72	71
Loans individually evaluated for impairment with a related allowance for loan loss	0	0	0
One- to four-family residential
Impaired loans
Average Recorded Investment	5,112	5,743	6,642
Interest Income Recognized	58	72	71
Home Equity Loans and Lines of Credit
Impaired loans
Average Recorded Investment	175	161	131
Consumer and other loans
Impaired loans
Average Recorded Investment		1	$ 9
Individually Evaluated for Impairment
Impaired loans
Recorded Investment	5,142	5,744
Unpaid Principal Balance	6,125	6,674
Individually Evaluated for Impairment | One- to four-family residential
Impaired loans
Recorded Investment	4,977	5,587
Unpaid Principal Balance	5,897	6,469
Individually Evaluated for Impairment | Home Equity Loans and Lines of Credit
Impaired loans
Recorded Investment	165	156
Unpaid Principal Balance	$ 228	204
Individually Evaluated for Impairment | Consumer and other loans
Impaired loans
Recorded Investment		1
Unpaid Principal Balance		$ 1

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Loans Receivable and Allowance for Loan Losses - Aging of Loans and Accrual Status (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Financing Receivable, Recorded Investment, Past Due
Total Past Due	$ 2,841	$ 1,780
Loans Not Past Due	1,488,678	1,336,659
Total ending loan balance	1,491,519	1,338,439
Nonaccrual Loans	4,227	4,559
One- to four-family residential
Financing Receivable, Recorded Investment, Past Due
Total Past Due	2,796	1,676
Loans Not Past Due	1,438,725	1,284,590
Total ending loan balance	1,441,521	1,286,266
Nonaccrual Loans	4,062	4,402
Multi-family residential
Financing Receivable, Recorded Investment, Past Due
Loans Not Past Due	10,782	9,530
Total ending loan balance	10,782	9,530
Construction, Commercial and Other Mortgage Loans
Financing Receivable, Recorded Investment, Past Due
Loans Not Past Due	21,701	23,256
Total ending loan balance	21,701	23,256
Home Equity Loans and Lines of Credit
Financing Receivable, Recorded Investment, Past Due
Total Past Due	41	100
Loans Not Past Due	12,846	14,712
Total ending loan balance	12,887	14,812
Nonaccrual Loans	165	156
Loans on Deposit Accounts
Financing Receivable, Recorded Investment, Past Due
Loans Not Past Due	274	204
Total ending loan balance	274	204
Consumer and Other
Financing Receivable, Recorded Investment, Past Due
Total Past Due	4	4
Loans Not Past Due	4,350	4,367
Total ending loan balance	4,354	4,371
Nonaccrual Loans		1
30 - 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due	4	204
30 - 59 Days Past Due | One- to four-family residential
Financing Receivable, Recorded Investment, Past Due
Total Past Due		185
30 - 59 Days Past Due | Home Equity Loans and Lines of Credit
Financing Receivable, Recorded Investment, Past Due
Total Past Due		16
30 - 59 Days Past Due | Consumer and Other
Financing Receivable, Recorded Investment, Past Due
Total Past Due	4	3
60 - 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due	1,207	168
60 - 89 Days Past Due | One- to four-family residential
Financing Receivable, Recorded Investment, Past Due
Total Past Due	1,207	133
60 - 89 Days Past Due | Home Equity Loans and Lines of Credit
Financing Receivable, Recorded Investment, Past Due
Total Past Due		35
90 Days or Greater Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due	1,630	1,408
90 Days or Greater Past Due | One- to four-family residential
Financing Receivable, Recorded Investment, Past Due
Total Past Due	1,589	1,358
90 Days or Greater Past Due | Home Equity Loans and Lines of Credit
Financing Receivable, Recorded Investment, Past Due
Total Past Due	$ 41	49
90 Days or Greater Past Due | Consumer and Other
Financing Receivable, Recorded Investment, Past Due
Total Past Due		$ 1

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Loans Receivable and Allowance for Loan Losses - Delinquent and Nonaccrual Loans (Details)	12 Months Ended
	Dec. 31, 2017 USD ($) loan	Dec. 31, 2016 USD ($) loan	Dec. 31, 2015 USD ($)
Accounts, Notes, Loans and Financing Receivable
Nonaccrual Loans	$ 4,227,000	$ 4,559,000
Mortgage Loans on Real Estate | Minimum
Accounts, Notes, Loans and Financing Receivable
Loan delinquency period that may result in loss	90 days
Loan delinquency period after which an appraisal is obtained of the underlying collateral	4 months
Non Accrual Loans
Accounts, Notes, Loans and Financing Receivable
Number of loans | loan	17	19
Nonaccrual Loans	$ 4,200,000	$ 4,600,000
Interest collected on nonaccrual loans recorded as a reduction of principal	179,000	195,000	$ 233,000
Non accrual loans, additional interest income that would have been recognized had the loans been accruing interest	$ 240,000	$ 268,000	$ 312,000

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Loans Receivable and Allowance for Loan Losses - Troubled Debt Restructurings (Details)	12 Months Ended
	Dec. 31, 2017 USD ($) loan	Dec. 31, 2016 USD ($) loan
Additional disclosures
Loans modified by troubled debt restructurings considered impaired	$ 2,081,000	$ 2,921,000
Real estate owned	$ 0	$ 0
Accruing interest
Additional disclosures
Number of loans modified by troubled debt restructurings considered impaired | loan	4	5
Loans modified by troubled debt restructurings considered impaired	$ 915,000	$ 1,185,000
Non Accrual Loans
Additional disclosures
Number of loans modified by troubled debt restructurings considered impaired | loan	6	8
Loans modified by troubled debt restructurings considered impaired	$ 1,166,000	$ 1,736,000
Non Accrual Loans | More than 149 days past due
Additional disclosures
Number of loans modified by troubled debt restructurings considered impaired | loan	1	1
Loans modified by troubled debt restructurings considered impaired	$ 149,000	$ 149,000
Loans modified in troubled debt restructuring
Troubled debt restructurings
Number of Loans | loan	0	0
Number of loans subsequently defaulted | loan	0
Additional disclosures
Commitments to lend additional funds to borrowers	$ 0
One- to four-family residential
Additional disclosures
Loans modified by troubled debt restructurings considered impaired	$ 1,989,000	$ 2,814,000
Mortgage loans in process of foreclosure, number of contracts | loan	3	3
Mortgage loans in process of foreclosure, total value	$ 650,000	$ 660,000
One- to four-family residential | Accruing interest
Additional disclosures
Number of loans modified by troubled debt restructurings considered impaired | loan	4	5
Loans modified by troubled debt restructurings considered impaired	$ 915,000	$ 1,185,000
One- to four-family residential | Non Accrual Loans
Additional disclosures
Number of loans modified by troubled debt restructurings considered impaired | loan	5	7
Loans modified by troubled debt restructurings considered impaired	$ 1,074,000	$ 1,629,000
Home Equity Loans and Lines of Credit
Additional disclosures
Loans modified by troubled debt restructurings considered impaired	$ 92,000	$ 107,000
Mortgage loans in process of foreclosure, number of contracts | loan	1	1
Mortgage loans in process of foreclosure, total value	$ 41,000	$ 42,000
Home Equity Loans and Lines of Credit | Non Accrual Loans
Additional disclosures
Number of loans modified by troubled debt restructurings considered impaired | loan	1	1
Loans modified by troubled debt restructurings considered impaired	$ 92,000	$ 107,000

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Loans Receivable and Allowance for Loan Losses - Collateral, Sales, Serviced for Others, Directors and Executive Officers (Details)	12 Months Ended
	Dec. 31, 2017 USD ($) loan	Dec. 31, 2016 USD ($) loan	Dec. 31, 2015 USD ($) loan
Accounts, Notes, Loans and Financing Receivable
Loans serviced for others	$ 35,500,000	$ 41,500,000	$ 51,800,000
Loans serviced for others, securitization for which the company continues to hold the related mortgage-backed securities	1,500,000	2,200,000	2,800,000
Loans serviced for others, amount of contractually specified servicing fees earned	105,000	128,000	153,000
Loans to related parties
Loans to directors and executive officers	$ 890,000	1,400,000
Mortgage Loans on Real Estate | Maximum
Accounts, Notes, Loans and Financing Receivable
Loan to value ratio (as a percent)	80.00%
Residential Mortgage Loans Held For Sale
Accounts, Notes, Loans and Financing Receivable
Residential mortgage loans sold, loan amount	$ 25,000,000	48,900,000	56,200,000
Residential mortgage loans sold, recognized gains	$ 199,000	$ 406,000	$ 503,000
Number of loans | loan	1	5	5
Residential mortgage loans held for sale	$ 403,000	$ 1,600,000

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Accrued Interest Receivable (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Components of accrued interest receivable
Accrued interest receivable	$ 5,142	$ 4,732
Investment securities
Components of accrued interest receivable
Accrued interest receivable	1,045	1,064
Loans receivable
Components of accrued interest receivable
Accrued interest receivable	4,090	3,658
Interest-bearing deposits
Components of accrued interest receivable
Accrued interest receivable	$ 7	$ 10

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Mortgage Servicing Assets (Details) - USD ($)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Gross carrying values, accumulated amortization, and net carrying values of mortgage servicing assets
Gain on sale of loans	$ 3,000	$ 0
Mortgage servicing assets
Balance at beginning of year	307,000	426,000
Additions	3,000
Impairments		(49,000)
Amortization	(47,000)	(70,000)
Balance at end of year	263,000	307,000
Gross carrying value	1,310,000	1,307,000
Accumulated amortization	(1,047,000)	(1,000,000)
Net carrying value	263,000	307,000
Estimated amortization expense
Net carrying value	263,000	307,000
Fair values and key assumptions used in determining the fair values of mortgage servicing assets
Fair value, beginning of year	368,000	441,000
Fair value, end of year	311,000	368,000
Annual cost to service (in dollars per loan)	$ 70	$ 65
Term of loan for which PSA prepayment model assumes increasing prepayment rates	30 months
Weighted Average
Fair values and key assumptions used in determining the fair values of mortgage servicing assets
Discount rate (as a percent)	10.50%	10.50%
Prepayment speed assumption (PSA prepayment speed)	173.30%	159.20%
Mortgage Servicing Assets
Mortgage servicing assets
Net carrying value	$ 263,000
Estimated amortization expense
2018	48,000
2019	32,000
2020	26,000
2021	22,000
2022	20,000
Thereafter	115,000
Net carrying value	$ 263,000

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Interest Rate Lock and Forward Loan Sale Commitments - Notional Amounts (Details) $ in Millions	Dec. 31, 2017 USD ($)
Interest rate locks
Interest rate lock and forward loan sale commitments
Amount of derivatives	$ 2.5
Forward commitment | Loans receivable | Sale
Interest rate lock and forward loan sale commitments
Amount of derivatives	$ 2.9

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Interest Rate Lock and Forward Loan Sale Commitments - Location of Assets and Liabilities (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Assets and liabilities related to derivatives
Fair value of asset derivatives	$ 8	$ 104
Fair value of liability derivatives	8	104
Interest rate contracts | Prepaid expenses and other assets
Assets and liabilities related to derivatives
Fair value of asset derivatives	8	104
Interest rate contracts | Accounts payable and accrued expenses
Assets and liabilities related to derivatives
Fair value of liability derivatives	$ 8	$ 104

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Interest Rate Lock and Forward Loan Sale Commitments - Location of Gains and Losses (Details) $ in Thousands	12 Months Ended
	Dec. 31, 2016 USD ($)
Interest rate contracts | Gain on sale of loans
Gains and losses related to derivatives
Gain (loss) related to derivatives	$ 6

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Premises and Equipment (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Premises and equipment
Gross	$ 21,643	$ 20,011
Less accumulated depreciation and amortization	(15,962)	(16,066)
Net	5,681	3,945
Construction in progress	40	382
Total	5,721	4,327
Depreciation expense	1,100	1,100	$ 1,300
Land
Premises and equipment
Gross	585	585
Buildings and improvements
Premises and equipment
Gross	1,301	1,045
Leasehold improvements
Premises and equipment
Gross	13,915	13,005
Furniture, fixtures and equipment
Premises and equipment
Gross	5,727	5,261
Automobiles
Premises and equipment
Gross	$ 115	$ 115

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Deposits (Details) - USD ($)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Deposit amount
Non-interest bearing	$ 49,725,000	$ 47,703,000
Savings accounts	1,040,248,000	1,022,159,000
Certificates of deposit	312,225,000	236,043,000
Money market	5,578,000	3,406,000
Checking and Super NOW	189,519,000	183,889,000
Total	$ 1,597,295,000	$ 1,493,200,000
Interest rate
Savings accounts (as a percent)	0.46%	0.41%
Certificates of deposit (as a percent)	1.34%	0.96%
Money market (as a percent)	0.43%	0.44%
Checking and Super NOW (as a percent)	0.02%	0.02%
Total (as a percent)	0.56%	0.43%
Maturity of certificate of deposit accounts
2018	$ 165,706,000
2019	70,272,000
2020	31,423,000
2021	20,458,000
2022	24,366,000
Total	312,225,000	$ 236,043,000
Deposit with balances greater than or equal to $250,000
Maximum amount of account owner deposit in bank insured by FDIC	250,000
Interest expense by type of deposit
Savings	4,445,000	4,162,000	$ 3,670,000
Certificates of deposit and money market	3,182,000	1,734,000	1,118,000
Checking and Super NOW	39,000	37,000	33,000
Total	7,666,000	5,933,000	$ 4,821,000
Overdrawn deposit accounts reclassified as loans	22,000	22,000
Domestic
Deposit with balances greater than or equal to $250,000
Total	$ 192,800,000	$ 141,600,000

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Advances from the Federal Home Loan Bank (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Federal Home Loan Bank, Advances, Rolling Maturity
Due within one year	$ 46,200
Due over 1 year to 2 years	31,000	$ 37,000
Due over 2 years to 3 years	15,000	22,000
Due over 3 years to 4 years	15,000	10,000
Total	$ 107,200	$ 69,000
Weighted Average Rate
Due within one year (as a percent)	1.39%
Due over 1 year to 2 years (as a percent)	1.79%	1.33%
Due over 2 years to 3 years (as a percent)	1.85%	1.66%
Due over 3 years to 4 years (as a percent)	2.32%	1.66%
Total (as a percent)	1.70%	1.49%
FHLB Des Moines
Federal Home Loan Bank advances
Available additional unused FHLB advances	$ 579,400	$ 577,900
Territorial Savings Bank | FHLB Des Moines
Federal Home Loan Bank advances
Percentage of total assets used to determine maximum line of credit	35.00%

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Securities Sold Under Agreements to Repurchase - Summary of Repurchase Liability by Maturity (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Securities sold under agreements to repurchase
Repurchase Liability	$ 30,000	$ 55,000
Weighted Average
Securities sold under agreements to repurchase
Rate (as a percent)	1.66%	1.57%
1 year or less
Securities sold under agreements to repurchase
Repurchase Liability		$ 25,000
1 year or less | Weighted Average
Securities sold under agreements to repurchase
Rate (as a percent)		1.46%
Over 1 year to 2 years
Securities sold under agreements to repurchase
Repurchase Liability	$ 25,000
Over 1 year to 2 years | Weighted Average
Securities sold under agreements to repurchase
Rate (as a percent)	1.66%
Over 2 years to 3 years
Securities sold under agreements to repurchase
Repurchase Liability	$ 5,000	$ 25,000
Over 2 years to 3 years | Weighted Average
Securities sold under agreements to repurchase
Rate (as a percent)	1.65%	1.66%
Over 3 years to 4 years
Securities sold under agreements to repurchase
Repurchase Liability		$ 5,000
Over 3 years to 4 years | Weighted Average
Securities sold under agreements to repurchase
Rate (as a percent)		1.65%

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Securities Sold Under Agreements to Repurchase - Summary of Securities Pledged (Details) $ in Thousands	12 Months Ended
	Dec. 31, 2017 USD ($)
Securities sold under agreements to repurchase
Repurchase liability maximum	90.00%
Maturing Over 90 days
Securities sold under agreements to repurchase
Carrying Value of Securities	$ 39,834
Fair Value of Securities	39,986
Repurchase Liability	30,000
Amount at Risk	$ 9,986
Weighted Average Months to Maturity	17 months

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Offsetting of Financial Liabilities (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Securities sold under agreements to repurchase
Gross Amount of Recognized Liabilities	$ 30,000	$ 55,000
Net Amount of Liabilities Presented in the Balance Sheet	30,000	55,000
Gross amount not offset in the balance sheet
Financial Instruments	$ 30,000	$ 55,000

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Income Taxes - Provision and Reconciliation to Federal Statutory Corporate Tax Rate (Details) - USD ($) $ in Thousands		3 Months Ended								12 Months Ended
	Jan. 01, 2018	Dec. 31, 2017	Sep. 30, 2017	Jun. 30, 2017	Mar. 31, 2017	Dec. 31, 2016	Sep. 30, 2016	Jun. 30, 2016	Mar. 31, 2016	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Current
Federal										$ 6,219	$ 7,487	$ 10,176
State										1,447	1,810	1,833
Total current										7,666	9,297	12,009
Deferred
Federal										3,273	1,339	(2,147)
State										163	151	(76)
Total deferred										3,436	1,490	(2,223)
Total income tax expense		$ 3,288	$ 2,580	$ 2,651	$ 2,583	$ 2,859	$ 2,792	$ 2,624	$ 2,512	$ 11,102	$ 10,787	$ 9,786
Federal statutory corporate tax rate (as a percent)	21.00%									35.00%	35.00%	35.00%
Reconciliation of tax provision
Income tax expense at statutory rate										$ 9,123	$ 9,497	$ 8,587
Income tax effect of:
Other tax-exempt income										(317)	(338)	(359)
Share-based compensation										2	68	87
State income taxes, net of federal income tax benefits										1,104	1,057	1,104
Tax benefit from the exercise of stock options										(1,046)
Write-down of deferred income taxes										2,054
Other										182	503	367
Total income tax expense		$ 3,288	$ 2,580	$ 2,651	$ 2,583	$ 2,859	$ 2,792	$ 2,624	$ 2,512	$ 11,102	$ 10,787	$ 9,786
Effective income tax rate (as a percent)										42.59%	39.75%	39.89%

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Income Taxes - Components of Income Taxes Payable (Receivable) (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Components of income taxes payable (receivable)
Current taxes (receivable)	$ (1,571)	$ (122)
Total current taxes payable (receivable)	(88)	1,494
Deferred taxes receivable	(4,609)	(7,905)
State
Components of income taxes payable (receivable)
Current taxes payable	1,483	1,616
Deferred taxes receivable	(1,431)	(1,555)
Federal
Components of income taxes payable (receivable)
Current taxes (receivable)	(1,571)	(122)
Deferred taxes receivable	$ (3,178)	$ (6,350)

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Income Taxes - Deferred Tax Components (Details) - USD ($) $ in Thousands		12 Months Ended
	Jan. 01, 2018	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Deferred tax assets:
Premises and equipment		$ 966	$ 1,737
Hawaii franchise tax		440	560
Unfunded pension liability		1,229	1,550
Allowance for loan losses		678	969
Impaired asset write-down		724	1,020
Employee benefit plans		2,580	3,785
Equity incentive plan		420	1,330
Unrealized losses on securities available-for-sale		17	21
Deferred compensation		453	744
Other		137	215
Total		7,644	11,931
Deferred tax liabilities:
Net deferred loan fees		2,676	3,566
FHLB stock dividends		126	196
Prepaid expense		163	143
Premium on loans sold		70	121
Total		3,035	4,026
Net deferred tax assets		$ 4,609	$ 7,905
Federal statutory corporate tax rate (as a percent)	21.00%	35.00%	35.00%	35.00%
Write-down of deferred income taxes		$ 2,054
Valuation allowance for deferred tax assets		$ 0	$ 0

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Employee Benefit Plans - Pension Plan Participants (Details) - Pension Plan		12 Months Ended
	Dec. 31, 2008	Dec. 31, 2017
Employee benefit plans
Required service period to participate in the plan		1 year
Vesting percentage for employees already enrolled with at least five years of service as of effective date of plan change	100.00%
Minimum service period for employees already enrolled to be 100% vested as of effective date of plan change	5 years
Vesting period if minimum service period for employees already enrolled was not met as of effective date of plan change	5 years

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Employee Benefit Plans - Status of Pension Plan and SERP (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Pension Plan
Employee benefit plans
Accumulated benefit obligation at end of year	$ 19,314	$ 17,496
Change in projected benefit obligation:
Benefit obligation at beginning of year	17,496	17,321
Service cost	193	194	$ 120
Interest cost	763	752	722
Actuarial loss (gain)	1,670	(90)
Benefits paid	(808)	(681)
Benefit obligation at end of year	19,314	17,496	17,321
Change in plan assets:
Fair value of plan assets at beginning of year	14,804	13,140
Actual return on plan assets	1,931	345
Employer contributions		2,000
Benefits paid	(808)	(681)
Fair value of plan assets at end of year	15,927	14,804	13,140
Funded status at end of year	(3,387)	(2,692)
Amounts recognized in accumulated other comprehensive loss:
Net actuarial loss	9,096	8,582
Prior service cost	149	154
Accumulated other comprehensive loss, before tax	9,245	8,736	8,375
Pension Plan | Accounts payable and accrued expenses
Amounts recognized in the consolidated balance sheets:
Accounts payable and accrued expenses - liability	(3,387)	(2,692)
Supplemental Employee Retirement Plan (SERP)
Employee benefit plans
Accumulated benefit obligation at end of year	9,242	9,044
Change in projected benefit obligation:
Benefit obligation at beginning of year	9,044	8,891
Service cost	75	38	29
Interest cost	140	132	125
Benefits paid	(17)	(17)
Benefit obligation at end of year	9,242	9,044	$ 8,891
Change in plan assets:
Employer contributions	17	17
Benefits paid	(17)	(17)
Funded status at end of year	(9,242)	(9,044)
Supplemental Employee Retirement Plan (SERP) | Accounts payable and accrued expenses
Amounts recognized in the consolidated balance sheets:
Accounts payable and accrued expenses - liability	$ (9,242)	$ (9,044)

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Employee Benefit Plans - Changes Recognized in Accumulated Other Comprehensive Loss for Pension Plan (Details) - Pension Plan - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Amounts recognized in accumulated other comprehensive loss:
Accumulated other comprehensive loss at beginning of year, before tax	$ 8,736	$ 8,375
Actuarial net loss arising during the period	764	580
Amortizations (recognized in net periodic benefit cost):
Actuarial loss	(250)	(214)
Prior service cost	(5)	(5)
Total recognized in other comprehensive loss	509	361
Accumulated other comprehensive loss at end of year, before tax	$ 9,245	$ 8,736

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Employee Benefit Plans - Assumptions Used to Determine Benefit Obligations and Pension Plan Investment Strategy (Details)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Pension Plan
Weighted average assumptions used to determine the year-end benefit obligations
Discount rate (as a percent)	3.70%	4.30%
Pension Plan | Domestic equity securities
Normal target allocation
Normal target allocation (as a percent)	55.00%
Pension Plan | International equity securities
Normal target allocation
Normal target allocation (as a percent)	10.00%
Pension Plan | Bonds
Normal target allocation
Normal target allocation (as a percent)	35.00%
Supplemental Employee Retirement Plan (SERP)
Weighted average assumptions used to determine the year-end benefit obligations
Discount rate (as a percent)	5.04%	5.05%
Rate of compensation increase (as a percent)	5.00%	5.00%

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Employee Benefit Plans - Pension Plan Assets Measured at Fair Value (Details) - Pension Plan - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Assets measured at fair values
Fair value of assets	$ 15,927	$ 14,804	$ 13,140
Cash
Assets measured at fair values
Fair value of assets	846	1,839
Equity
Assets measured at fair values
Fair value of assets	11,814	9,794
Mutual Funds
Assets measured at fair values
Fair value of assets	3,267	3,171
Level 1
Assets measured at fair values
Fair value of assets	15,927	14,804
Level 1 | Cash
Assets measured at fair values
Fair value of assets	846	1,839
Level 1 | Equity
Assets measured at fair values
Fair value of assets	11,814	9,794
Level 1 | Mutual Funds
Assets measured at fair values
Fair value of assets	$ 3,267	$ 3,171

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Employee Benefit Plans - Future Benefit Payments and Net Periodic Benefit Cost Assumptions and Components (Details) - USD ($)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Pension Plan
Estimated future benefit payments
2018	$ 954,000
2019	1,007,000
2020	1,039,000
2021	1,092,000
2022	1,133,000
2023 - 2027	5,794,000
Total	$ 11,019,000
Assumptions used to determine the net periodic benefit cost:
Discount rate (as a percent)	4.30%	4.40%	4.10%
Expected return on plan assets (as a percent)	7.25%	7.50%	7.50%
Net periodic benefit cost for the year:
Service cost	$ 193,000	$ 194,000	$ 120,000
Interest cost	763,000	752,000	722,000
Expected return on plan assets	(1,026,000)	(1,015,000)	(976,000)
Amortization of prior service cost	5,000	5,000
Recognized actuarial loss	250,000	214,000	215,000
Net periodic benefit cost	185,000	$ 150,000	$ 81,000
Estimated prior service cost and net actuarial loss that will be amortized from AOCI into net periodic pension benefit cost
Prior service cost	5,000
Net actuarial loss	249,000
Supplemental Employee Retirement Plan (SERP)
Estimated future benefit payments
2018	17,000
2019	6,488,000
2020	150,000
2021	2,320,000
2022	144,000
2023 - 2027	665,000
Total	$ 9,784,000
Assumptions used to determine the net periodic benefit cost:
Discount rate (as a percent)	5.03%	5.05%	5.06%
Rate of compensation increase (as a percent)	5.00%	5.00%	5.00%
Net periodic benefit cost for the year:
Service cost	$ 75,000	$ 38,000	$ 29,000
Interest cost	140,000	132,000	125,000
Net periodic benefit cost	215,000	$ 170,000	$ 154,000
Expected contribution
2018	$ 17,000

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Employee Benefit Plans - Defined Contribution and Profit Sharing Plans (Details) - USD ($)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Defined Contribution Plan Disclosure [Line Items]
Required service period to participate in plans	1 year
401(k) plan
Defined Contribution Plan Disclosure [Line Items]
Company matching contribution of employees' contributions (as a percent)	5.00%	5.00%	5.00%
Employer's matching contribution (in dollars)	$ 57,000	$ 57,000	$ 56,000
Profit sharing plan
Defined Contribution Plan Disclosure [Line Items]
Employer's matching contribution (in dollars)	$ 0	$ 0	$ 0

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Employee Stock Ownership Plan - Loan, Expense and Shares (Details) - USD ($) $ / shares in Units, $ in Thousands		12 Months Ended
	Jul. 10, 2009	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Employee Stock Ownership Plan
ESOP expense		$ 1,529	$ 1,353	$ 1,210
Allocated shares		397,912	372,997
Unearned shares		538,261	587,193
Total ESOP shares		936,173	960,190
Fair value of unearned shares, in thousands		$ 16,616	$ 19,283
ESOP
Employee Stock Ownership Plan
Amount borrowed from employer	$ 9,800
Shares purchased	978,650
Percentage of shares issued in initial public offering	8.00%
Employee stock ownership plan, price per share of shares acquired in initial public offering (in dollars per share)	$ 10.00
Term of loan		20 years
ESOP expense		$ 1,800	$ 1,100
ESOP | Prime rate
Employee Stock Ownership Plan
Variable interest rate		prime rate, as published in The Wall Street Journal

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Employee Stock Ownership Plan - Nonqualified ESOP Restoration Plan (Details) - USD ($)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
ESOP restoration | Certain executives
Deferred Compensation Arrangement with Individual, Excluding Share-based Payments and Postretirement Benefits
Accrued benefits	$ 341,000	$ 454,000

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Share-Based Compensation - Plan Provisions (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Share-Based Compensation
Compensation expense	$ 153	$ 1,789	$ 2,670
Income tax benefit	$ 42	$ 718	$ 1,072
Number of shares authorized	1,862,637
2010 Equity Incentive Plan | Vesting period one
Share-Based Compensation
Vesting period	3 years
2010 Equity Incentive Plan | Vesting period two
Share-Based Compensation
Vesting period	5 years
2010 Equity Incentive Plan | Vesting period three
Share-Based Compensation
Vesting period	6 years

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Share-Based Compensation - Stock Option Activity (Details) - USD ($)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Common Stock
Stock option activity
Exercised (in shares)	294,887	125,870	1,000
Stock option activity
Shares of common stock issued in exchange for stock options and common shares	135,210
Common shares exchanged	159,677
Stock Options
Stock option activity
Balance at beginning of period (in shares)	706,430	832,300	832,954
Granted (in shares)			3,600
Exercised (in shares)	294,887	125,870	1,000
Forfeited (in shares)			3,254
Balance at end of period (in shares)	411,543	706,430	832,300	832,954
Options vested and exercisable (in shares)	410,343
Weighted Average Exercise Price
Balance at beginning of period (in dollars per share)	$ 17.43	$ 17.42	$ 17.38
Granted (in dollars per share)			26.23
Exercised (in dollars per share)	17.36	17.36	17.36
Forfeited (in dollars per share)			17.36
Balance at end of period (in dollars per share)	17.48	$ 17.43	$ 17.42	$ 17.38
Options vested and exercisable (in dollars per share)	$ 17.46
Remaining Contractual Life
Options outstanding	2 years 8 months 23 days	3 years 8 months 12 days	4 years 8 months 12 days	5 years 8 months 5 days
Granted			9 years 8 months 1 day
Options vested and exercisable	2 years 8 months 16 days
Aggregate Intrinsic Value
Beginning of period	$ 10,884,000	$ 8,588,000	$ 3,471,000
Exercised	4,345,000	1,378,000	8,000
End of period	5,509,000	10,884,000	8,588,000	$ 3,471,000
Options vested and exercisable	5,503,000
Stock option activity
Intrinsic value of stock options exercised	4,345,000	1,378,000	8,000
Proceeds received from stock options exercised	5,119,000	2,186,000	17,000
Tax benefits realized from stock options exercised	1,601,000	368,000	3,000
Total fair value of stock options that vested	37,000	$ 4,495,000	$ 3,854,000
Unrecognized compensation costs	$ 3,000
Vesting period	3 years

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Share-Based Compensation - Restricted Stock Awards (Details) - USD ($)		12 Months Ended
	May 25, 2017	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Restricted Stock
Restricted Stock Awards
Non-vested at beginning of period (in shares)		2,400	114,542	226,733
Granted (in shares)		9,604		3,600
Vested (in shares)		1,200	112,142	113,332
Forfeited (in shares)				2,459
Non-vested at end of period (in shares)		10,804	2,400	114,542
Weighted Average Grant Date Fair Value
Non-vested at beginning of period (in dollars per share)		$ 26.23	$ 17.67	$ 17.39
Granted (in dollars per share)		29.53		26.33
Vested (in dollars per share)		26.23	17.49	17.39
Forfeited (in dollars per share)				17.36
Non-vested at end of period (in dollars per share)		$ 29.16	26.23	$ 17.67
Unrecognized compensation
Vesting period		3 years
Unrecognized compensation costs		$ 246,000
Restricted Stock Units Based on a Performance Condition
Restricted Stock Awards
Granted (in shares)		11,525
Non-vested at end of period (in shares)		11,525
Weighted Average Grant Date Fair Value
Granted (in dollars per share)		$ 29.53
Non-vested at end of period (in dollars per share)		$ 29.53
Unrecognized compensation
Vesting period		3 years
Unrecognized compensation costs		$ 194,000
Restricted Stock Units Based on a Performance Condition | Minimum
Unrecognized compensation
Shares vesting as a percentage of target		0.00%
Restricted Stock Units Based on a Performance Condition | Maximum
Unrecognized compensation
Shares vesting as a percentage of target		150.00%
Restricted Stock Units Based on a Market Condition
Restricted Stock Awards
Granted (in shares)		2,881
Non-vested at end of period (in shares)		2,881
Weighted Average Grant Date Fair Value
Granted (in dollars per share)		$ 24.44
Non-vested at end of period (in dollars per share)		$ 24.44
Unrecognized compensation
Vesting period		3 years
Unrecognized compensation costs		$ 37,000
Assumptions used in the Monte Carlo valuation of PRSUs
Term used for risk-free rate and historical volatility	2 years 7 months 6 days
Risk-free interest rate (as a percent)	1.40%
Closing stock price (in dollars per share)	$ 29.53		$ 32.84
Annualized volatility (as a percent)	15.70%
Annual dividend preceding the grant date (in dollars per share)	$ 0.80

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Earnings Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2017	Sep. 30, 2017	Jun. 30, 2017	Mar. 31, 2017	Dec. 31, 2016	Sep. 30, 2016	Jun. 30, 2016	Mar. 31, 2016	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Earnings Per Share
Net income	$ 2,167	$ 4,173	$ 4,301	$ 4,321	$ 4,362	$ 4,164	$ 4,037	$ 3,784	$ 14,962	$ 16,347	$ 14,748
Income allotted to participating securities									(27)	(126)	(297)
Net income available to common shareholders									$ 14,935	$ 16,221	$ 14,451
Weighted-average number of shares used in:
Basic earnings per share (in shares)									9,273,783	9,093,385	9,073,015
Dilutive common stock equivalents:
Stock options and restricted stock units (in shares)									258,941	218,590	190,252
Diluted earnings per share (in shares)									9,532,724	9,311,975	9,263,267
Net income per common share, basic (in dollars per share)	$ 0.23	$ 0.45	$ 0.46	$ 0.47	$ 0.48	$ 0.45	$ 0.44	$ 0.41	$ 1.61	$ 1.78	$ 1.59
Net income per common share, diluted (in dollars per share)	$ 0.23	$ 0.44	$ 0.45	$ 0.46	$ 0.46	$ 0.44	$ 0.43	$ 0.40	$ 1.57	$ 1.74	$ 1.56

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Other Comprehensive Loss - Changes in Components of Accumulated Other Comprehensive Income and Loss (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Changes in the components of accumulated other comprehensive loss, net of taxes
Balances at beginning of year	$ (229,786)	$ (219,641)	$ (216,378)
Net current period other comprehensive loss (income)	378	80	(152)
Balances at end of year	(234,854)	(229,786)	(219,641)
Accumulated Other Comprehensive Income (Loss)
Changes in the components of accumulated other comprehensive loss, net of taxes
Balances at beginning of year	5,316	5,236	5,388
Other comprehensive loss (income), net of taxes	378	80	(152)
Net current period other comprehensive loss (income)	378	80	(152)
Balances at end of year	5,694	5,316	5,236
Unfunded Pension Liability
Changes in the components of accumulated other comprehensive loss, net of taxes
Balances at beginning of year	5,284	5,044	5,032
Other comprehensive loss (income), net of taxes	373	240	12
Net current period other comprehensive loss (income)	373	240	12
Balances at end of year	5,657	5,284	5,044
Noncredit Related Loss | Trust preferred securities
Changes in the components of accumulated other comprehensive loss, net of taxes
Balances at beginning of year		147	284
Other comprehensive loss (income), net of taxes		(147)	(137)
Net current period other comprehensive loss (income)		(147)	(137)
Balances at end of year			147
Unrealized Loss on Securities
Changes in the components of accumulated other comprehensive loss, net of taxes
Balances at beginning of year	32	45	72
Other comprehensive loss (income), net of taxes	5	(13)	(27)
Net current period other comprehensive loss (income)	5	(13)	(27)
Balances at end of year	$ 37	$ 32	$ 45

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Other Comprehensive Loss - Tax Effect on Each Component (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Tax effect on each component of other comprehensive loss
Net current period other comprehensive loss (income)	$ 378	$ 80	$ (152)
Accumulated Other Comprehensive Income (Loss)
Tax effect on each component of other comprehensive loss
Pretax amount	518	97	(251)
Tax	(140)	(17)	99
Net current period other comprehensive loss (income)	378	80	(152)
Unfunded Pension Liability
Tax effect on each component of other comprehensive loss
Pretax amount	509	361	20
Tax	(136)	(121)	(8)
Net current period other comprehensive loss (income)	373	240	12
Noncredit Related Loss | Trust preferred securities
Tax effect on each component of other comprehensive loss
Pretax amount		(242)	(226)
Tax		95	89
Net current period other comprehensive loss (income)		(147)	(137)
Unrealized Loss on Securities
Tax effect on each component of other comprehensive loss
Pretax amount	9	(22)	(45)
Tax	(4)	9	18
Net current period other comprehensive loss (income)	$ 5	$ (13)	$ (27)

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Commitments - Loans (Details) - USD ($) $ in Millions	Dec. 31, 2017	Dec. 31, 2016
Commitments to originate loans
Loan Commitments
Commitment amount	$ 15.5	$ 50.5
Commitments to originate loans | Minimum
Loan Commitments
Interest rate (as a percent)	2.875%	2.50%
Commitments to originate loans | Maximum
Loan Commitments
Interest rate (as a percent)	4.125%	4.625%
Unused lines of credit to borrowers
Loan Commitments
Commitment amount	$ 27.2	$ 28.6

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Commitments - Leases (Details) - USD ($)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Lease Commitments
Minimum rental expense	$ 3,000,000	$ 2,900,000	$ 2,900,000
Future minimum rental commitments under all noncancelable operating leases
2018	2,809,000
2019	2,353,000
2020	1,919,000
2021	1,463,000
2022	1,293,000
Thereafter	4,557,000
Total	14,394,000
Future minimum rental income for noncancelable lease
2018	110,000
2019	110,000
2020	110,000
2021	110,000
Total	440,000
Minimum rental income	110,000	110,000	$ 110,000
Reserve Requirements
Federal Reserve Bank reserve requirements	$ 12,800,000	$ 10,700,000

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Regulatory Capital and Supervision (Details) $ in Thousands		12 Months Ended
	Jul. 10, 2014	Dec. 31, 2017 USD ($) item	Dec. 31, 2016 USD ($) item	Dec. 31, 2014
Total Risk-Based Capital
Capital Conservation Buffer (percent)		2.50%	2.50%
Number of conditions or events that have changed the institution's category under capital guidelines | item		0	0
Territorial Savings Bank
Regulatory capital and supervision
Well capitalized threshold for Tier 1 risk-based capital (percent)		8.00%		6.00%
Well capitalized threshold for Common Equity Tier 1 risk-based capital (percent)		6.50%
Tier 1 Leverage Capital
Required Ratio	9.00%	5.00%	9.00%
Actual Amount		$ 218,826	$ 219,365
Actual Ratio		11.04%	11.76%
Common Equity Tier 1 Risk-Based Capital
Required Ratio		9.00%	9.00%
Actual Amount		$ 218,826	$ 219,365
Actual Ratio		23.31%	25.30%
Tier 1 Risk-Based Capital
Required Ratio		10.50%	10.50%
Actual Amount		$ 218,826	$ 219,365
Actual Ratio		23.31%	25.30%
Total Risk-Based Capital
Required Ratio		12.50%	12.50%
Actual Amount		$ 221,460	$ 221,912
Actual Ratio		23.59%	25.59%
Term to maintain Tier 1 Leverage Capital ratio as a condition of membership	3 years
Territorial Bancorp Inc.
Regulatory capital and supervision
Threshold of assets requiring consolidated regulatory capital requirements identical to those applicable to subsidiary depository institutions		$ 1,000,000
Tier 1 Leverage Capital
Required Ratio		5.00%	5.00%
Actual Amount		$ 240,548	$ 235,102
Actual Ratio		12.13%	12.60%
Common Equity Tier 1 Risk-Based Capital
Required Ratio		9.00%	9.00%
Actual Amount		$ 240,548	$ 235,102
Actual Ratio		25.62%	27.11%
Tier 1 Risk-Based Capital
Required Ratio		10.50%	10.50%
Actual Amount		$ 240,548	$ 235,102
Actual Ratio		25.62%	27.11%
Total Risk-Based Capital
Required Ratio		12.50%	12.50%
Actual Amount		$ 243,182	$ 237,649
Actual Ratio		25.90%	27.41%

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Fair Value of Financial Instruments - Trust Preferred Securities (Details) - Trust preferred securities	12 Months Ended		72 Months Ended	120 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2017 Transaction	Dec. 31, 2017 shares
Investment Securities
Number of market transactions of the security | Transaction			6
Period of minimal activity in trust preferred securities tranche determining the market to be inactive			72 months
Securities issued | shares				0
Fair Value, Measurements, Nonrecurring | Level 3 | Discounted cash flow model | LIBOR
Investment Securities
Discount rate variable rate basis	three-month LIBOR	Three-month LIBOR
Discount rate, margin added to variable rate (as a percent)	20.00%	20.00%

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Fair Value of Financial Instruments - Estimated Fair Values (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Assets
Investment securities available for sale	$ 2,851
Investment securities held to maturity	406,663	$ 407,922
Carrying Amount
Assets
Cash and cash equivalents	32,089	61,273
Investment securities available for sale	2,851
Investment securities held to maturity	404,792	407,656
Loans held for sale	403	1,601
Loans receivable, net	1,488,971	1,335,987
FHLB stock	6,541	4,945
FRB stock	3,103	3,095
Accrued interest receivable	5,142	4,732
Interest rate contracts	8	104
Liabilities
Deposits	1,597,295	1,493,200
Advances from the Federal Home Loan Bank	107,200	69,000
Securities sold under agreements to repurchase	30,000	55,000
Accrued interest payable	575	218
Interest rate contracts	8	104
Estimated Fair Value
Assets
Cash and cash equivalents	32,089	61,273
Investment securities available for sale	2,851
Investment securities held to maturity	406,663	407,922
Loans held for sale	414	1,601
Loans receivable, net	1,505,097	1,352,137
FHLB stock	6,541	4,945
FRB stock	3,103	3,095
Accrued interest receivable	5,142	4,732
Interest rate contracts	8	104
Liabilities
Deposits	1,595,992	1,493,094
Advances from the Federal Home Loan Bank	107,019	69,068
Securities sold under agreements to repurchase	29,846	55,123
Accrued interest payable	575	218
Interest rate contracts	8	104
Estimated Fair Value | Level 1
Assets
Cash and cash equivalents	32,089	61,273
Accrued interest receivable	7	10
Estimated Fair Value | Level 2
Assets
Investment securities available for sale	2,851
Investment securities held to maturity	405,818	406,759
Loans held for sale	414	1,601
FHLB stock	6,541	4,945
FRB stock	3,103	3,095
Accrued interest receivable	1,045	1,064
Interest rate contracts	8	104
Liabilities
Deposits	1,285,070	1,257,157
Advances from the Federal Home Loan Bank	107,019	69,068
Securities sold under agreements to repurchase	29,846	55,123
Accrued interest payable	115	172
Interest rate contracts	8	104
Estimated Fair Value | Level 3
Assets
Investment securities held to maturity	845	1,163
Loans receivable, net	1,505,097	1,352,137
Accrued interest receivable	4,090	3,658
Liabilities
Deposits	310,922	235,937
Accrued interest payable	$ 460	$ 46

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Fair Value of Financial Instruments - Recurring Basis (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Assets and Liabilities Measured at Fair Value on Recurring Basis
Available-for-sale investments	$ 2,851
Fair Value, Measurements, Recurring
Assets and Liabilities Measured at Fair Value on Recurring Basis
Interest rate contracts - assets	8	$ 104
Interest rate contracts - liabilities	(8)	(104)
Available-for-sale investments	2,851
Fair Value, Measurements, Recurring | Level 2
Assets and Liabilities Measured at Fair Value on Recurring Basis
Interest rate contracts - assets	8	104
Interest rate contracts - liabilities	(8)	$ (104)
Available-for-sale investments	$ 2,851

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Fair Value of Financial Instruments - Nonrecurring Basis (Details) - Fair Value, Measurements, Nonrecurring - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Loans held for sale
Assets Measured at Fair Value on Nonrecurring Basis and Related Losses
Fair value		$ 1,601
Total Gains (Losses)		(1)
Trust preferred securities
Assets Measured at Fair Value on Nonrecurring Basis and Related Losses
Fair value		1,066
Total Gains (Losses)		242
Mortgage Servicing Assets
Assets Measured at Fair Value on Nonrecurring Basis and Related Losses
Fair value		341
Total Gains (Losses)		(49)
Impaired loans
Assets Measured at Fair Value on Nonrecurring Basis and Related Losses
Fair value	$ 87	64
Total Gains (Losses)	(11)	(33)
Level 2 | Loans held for sale
Assets Measured at Fair Value on Nonrecurring Basis and Related Losses
Fair value		1,601
Level 2 | Impaired loans
Assets Measured at Fair Value on Nonrecurring Basis and Related Losses
Fair value	$ 87	64
Level 3 | Trust preferred securities
Assets Measured at Fair Value on Nonrecurring Basis and Related Losses
Fair value		1,066
Level 3 | Mortgage Servicing Assets
Assets Measured at Fair Value on Nonrecurring Basis and Related Losses
Fair value		$ 341

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Fair Value of Financial Instruments - Significant Unobservable Inputs (Details) - USD ($)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Significant Unobservable Inputs for Level Three Nonrecurring Fair Value Measurements
Annual cost to service (in dollars per loan)	$ 70	$ 65
Discounted cash flow model | Trust preferred securities
Significant Unobservable Inputs for Level Three Nonrecurring Fair Value Measurements
Fair Value		1,066,000
Fair Value, Measurements, Nonrecurring | Trust preferred securities
Significant Unobservable Inputs for Level Three Nonrecurring Fair Value Measurements
Fair Value		1,066,000
Fair Value, Measurements, Nonrecurring | Mortgage Servicing Assets
Significant Unobservable Inputs for Level Three Nonrecurring Fair Value Measurements
Fair Value		341,000
Fair Value, Measurements, Nonrecurring | Level 3 | Trust preferred securities
Significant Unobservable Inputs for Level Three Nonrecurring Fair Value Measurements
Fair Value		1,066,000
Fair Value, Measurements, Nonrecurring | Level 3 | Mortgage Servicing Assets
Significant Unobservable Inputs for Level Three Nonrecurring Fair Value Measurements
Fair Value		$ 341,000
Fair Value, Measurements, Nonrecurring | Level 3 | Discounted cash flow model | Trust preferred securities | LIBOR
Significant Unobservable Inputs for Level Three Nonrecurring Fair Value Measurements
Discount rate variable rate basis	three-month LIBOR	Three-month LIBOR
Discount rate, margin added to variable rate (as a percent)	20.00%	20.00%
Fair Value, Measurements, Nonrecurring | Level 3 | Discounted cash flow model | Mortgage Servicing Assets
Significant Unobservable Inputs for Level Three Nonrecurring Fair Value Measurements
Fair Value		$ 341,000
Discount rate (as a percent)		10.50%
Annual cost to service (in dollars per loan)		$ 65
Fair Value, Measurements, Nonrecurring | Level 3 | Discounted cash flow model | Mortgage Servicing Assets | Minimum
Significant Unobservable Inputs for Level Three Nonrecurring Fair Value Measurements
Prepayment speed (PSA) (as percent)		158.40%
Fair Value, Measurements, Nonrecurring | Level 3 | Discounted cash flow model | Mortgage Servicing Assets | Maximum
Significant Unobservable Inputs for Level Three Nonrecurring Fair Value Measurements
Prepayment speed (PSA) (as percent)		203.50%

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Parent Company Only - Condensed Balance Sheet (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Assets
Prepaid expenses and other assets	$ 3,852	$ 2,625
Total assets	2,003,846	1,877,562
Liabilities and Equity
Equity	234,854	229,786	$ 219,641	$ 216,378
Total liabilities and stockholders' equity	2,003,846	1,877,562
Territorial Bancorp Inc.
Assets
Cash	20,093	15,288	$ 15,777	$ 16,155
Investment in Territorial Savings Bank	213,132	214,050
Receivable from Territorial Savings Bank	1,539	373
Prepaid expenses and other assets	141	81
Total assets	234,905	229,792
Liabilities and Equity
Other liabilities	51	6
Equity	234,854	229,786
Total liabilities and stockholders' equity	$ 234,905	$ 229,792

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Parent Company Only - Condensed Statement of Income (Details) - USD ($) $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2017	Sep. 30, 2017	Jun. 30, 2017	Mar. 31, 2017	Dec. 31, 2016	Sep. 30, 2016	Jun. 30, 2016	Mar. 31, 2016	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Interest and dividend income:
Total interest income	$ 17,598	$ 17,177	$ 16,777	$ 16,781	$ 16,481	$ 16,669	$ 16,543	$ 16,380	$ 68,333	$ 66,073	$ 63,092
Noninterest expense:
Salaries									21,614	20,591	21,497
Other general and administrative expenses									4,704	4,230	4,442
Total noninterest expense	10,252	8,761	8,754	8,707	8,187	8,645	8,988	9,059	36,474	34,879	36,499
Income before income taxes	5,455	6,753	6,952	6,904	7,221	6,956	6,661	6,296	26,064	27,134	24,534
Income taxes	3,288	2,580	2,651	2,583	2,859	2,792	2,624	2,512	11,102	10,787	9,786
Net income	$ 2,167	$ 4,173	$ 4,301	$ 4,321	$ 4,362	$ 4,164	$ 4,037	$ 3,784	14,962	16,347	14,748
Territorial Bancorp Inc.
Interest and dividend income:
Dividends from Territorial Savings Bank									16,200	7,500	14,000
Interest-earning deposit with Territorial Savings Bank									49	34	29
Total interest income									16,249	7,534	14,029
Noninterest expense:
Salaries									37	40	34
Other general and administrative expenses									989	745	829
Total noninterest expense									1,026	785	863
Income before income taxes									15,223	6,749	13,166
Income taxes									(384)	(285)	(416)
Income before equity in undistributed earnings in subsidiaries									15,607	7,034	13,582
Equity in undistributed earnings of Territorial Savings Bank, net of dividends									(645)	9,313	1,166
Net income									$ 14,962	$ 16,347	$ 14,748

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Parent Company Only - Condensed Statement of Cash Flows (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Cash flows from operating activities:
Net income	$ 14,962	$ 16,347	$ 14,748
Adjustments to reconcile net income to net cash from operating activities:
ESOP expense	1,529	1,353	1,210
Net (increase) decrease in prepaid expenses and other assets	(1,227)	(355)	(366)
Net cash from operating activities	20,928	18,767	17,111
Cash flows from investing activities:
Net cash from investing activities	(156,275)	(61,993)	(132,354)
Cash flows from financing activities:
Repurchases of common stock	(9)	(1,674)	(9,326)
Cash dividends paid	(11,123)	(8,409)	(7,013)
Net cash from financing activities	106,163	38,580	106,102
Net decrease in cash and cash equivalents	(29,184)	(4,646)	(9,141)
Territorial Bancorp Inc.
Cash flows from operating activities:
Net income	14,962	16,347	14,748
Adjustments to reconcile net income to net cash from operating activities:
Equity in undistributed earnings of Territorial Savings Bank, net of dividends	645	(9,313)	(1,166)
ESOP expense	1,529	1,353	1,210
Net (increase) decrease in prepaid expenses and other assets	(1,226)	659	1,170
Net increase (decrease) in other liabilities	27	(18)	(18)
Net cash from operating activities	15,937	9,028	15,944
Cash flows from financing activities:
Proceeds from issuance of common stock		566	17
Repurchases of common stock	(9)	(1,674)	(9,326)
Cash dividends paid	(11,123)	(8,409)	(7,013)
Net cash from financing activities	(11,132)	(9,517)	(16,322)
Net decrease in cash and cash equivalents	4,805	(489)	(378)
Cash at beginning of the period	15,288	15,777	16,155
Cash at end of the period	$ 20,093	$ 15,288	$ 15,777

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Unaudited Quarterly Financial Information (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2017	Sep. 30, 2017	Jun. 30, 2017	Mar. 31, 2017	Dec. 31, 2016	Sep. 30, 2016	Jun. 30, 2016	Mar. 31, 2016	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Unaudited Quarterly Financial Information
Interest income	$ 17,598	$ 17,177	$ 16,777	$ 16,781	$ 16,481	$ 16,669	$ 16,543	$ 16,380	$ 68,333	$ 66,073	$ 63,092
Interest expense	2,697	2,518	2,253	2,121	2,053	1,964	1,944	1,883	9,589	7,844	6,515
Net interest income	14,901	14,659	14,524	14,660	14,428	14,705	14,599	14,497	58,744	58,229	56,577
Provision (reversal of provision) for loan losses	50	54	(123)	71	91	107	84	28	52	310	455
Net interest income after provision for loan losses	14,851	14,605	14,647	14,589	14,337	14,598	14,515	14,469	58,692	57,919	56,122
Noninterest income	856	909	1,059	1,022	1,071	1,003	1,134	886	3,846	4,094	4,911
Noninterest expense	10,252	8,761	8,754	8,707	8,187	8,645	8,988	9,059	36,474	34,879	36,499
Income before income taxes	5,455	6,753	6,952	6,904	7,221	6,956	6,661	6,296	26,064	27,134	24,534
Income taxes	3,288	2,580	2,651	2,583	2,859	2,792	2,624	2,512	11,102	10,787	9,786
Net income	$ 2,167	$ 4,173	$ 4,301	$ 4,321	$ 4,362	$ 4,164	$ 4,037	$ 3,784	$ 14,962	$ 16,347	$ 14,748
Basic earnings per share (in dollars per share)	$ 0.23	$ 0.45	$ 0.46	$ 0.47	$ 0.48	$ 0.45	$ 0.44	$ 0.41	$ 1.61	$ 1.78	$ 1.59
Diluted earnings per share (in dollars per share)	0.23	0.44	0.45	0.46	0.46	0.44	0.43	0.40	1.57	1.74	1.56
Cash dividends declared per common share (in dollars per share)	$ 0.50	$ 0.30	$ 0.20	$ 0.20	$ 0.38	$ 0.18	$ 0.18	$ 0.18	$ 1.20	$ 0.92	$ 0.76

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Subsequent Events (Details) - $ / shares		3 Months Ended								12 Months Ended
	Jan. 25, 2018	Dec. 31, 2017	Sep. 30, 2017	Jun. 30, 2017	Mar. 31, 2017	Dec. 31, 2016	Sep. 30, 2016	Jun. 30, 2016	Mar. 31, 2016	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Subsequent Events
Quarterly cash dividend declared on common stock (in dollars per share)		$ 0.50	$ 0.30	$ 0.20	$ 0.20	$ 0.38	$ 0.18	$ 0.18	$ 0.18	$ 1.20	$ 0.92	$ 0.76
Subsequent event
Subsequent Events
Quarterly cash dividend declared on common stock (in dollars per share)	$ 0.20