Regulatory Capital and Supervision

12 Months Ended

Dec. 31, 2019

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.  This asset level was increased to $3.0 billion in 2018.  Accordingly, the Company is no longer subject to regulatory capital requirements because its total assets are less than $3.0 billion.  The capital requirements became fully-phased in on January 1, 2019.  At December 31, 2019 and 2018, Territorial Savings Bank exceeded all of the fully-phased in regulatory captial requirments and is considered to be “well capitalized” under regulatory guidelines.  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 was being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increased each year until fully implemented at 2.5% on January 1, 2019.

The table below presents the fully-phased in capital required to be considered “well-capitalized” and meet the capital conservation buffer requirement 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, 2019 and 2018:

(Dollars in thousands)	Required Ratio			Actual Amount	Actual Ratio
December 31, 2019:
Tier 1 Leverage Capital
Territorial Savings Bank	5.00	%	$	227,507	10.92	%
Territorial Bancorp Inc.			$	251,558	12.06	%
Common Equity Tier 1 Risk-Based Capital (1)
Territorial Savings Bank	9.00	%	$	227,507	23.31	%
Territorial Bancorp Inc.			$	251,558	25.77	%
Tier 1 Risk-Based Capital (1)
Territorial Savings Bank	10.50	%	$	227,507	23.31	%
Territorial Bancorp Inc.			$	251,558	25.77	%
Total Risk-Based Capital (1)
Territorial Savings Bank	12.50	%	$	230,304	23.59	%
Territorial Bancorp Inc.			$	254,355	26.06	%
December 31, 2018:
Tier 1 Leverage Capital
Territorial Savings Bank	5.00	%	$	225,694	11.09	%
Territorial Bancorp Inc.			$	242,888	11.92	%
Common Equity Tier 1 Risk-Based Capital (1)
Territorial Savings Bank	9.00	%	$	225,694	23.50	%
Territorial Bancorp Inc.			$	242,888	25.29	%
Tier 1 Risk-Based Capital (1)
Territorial Savings Bank	10.50	%	$	225,694	23.50	%
Territorial Bancorp Inc.			$	242,888	25.29	%
Total Risk-Based Capital (1)
Territorial Savings Bank	12.50	%	$	228,423	23.78	%
Territorial Bancorp Inc.			$	245,617	25.57	%

(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 became effective on January 1, 2019.    

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, 2019 and 2018, 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.

Legislation enacted in 2018 requires the federal banking agencies, including the Federal Reserve Board, to establish a “community bank leverage ratio” between 8% to 10% of average total consolidated assets for qualifying institutions with assets of less than $10 billion.  Institutions with capital meeting the specified requirements and electing to follow the alternative framework would be deemed to comply with the applicable regulatory capital requirements, including the risk based requirements.  The federal regulators have adopted 9% as the applicable ratio, effective March 31, 2020.  The Bank is not planning to adopt the alternative framework, with the applicable regulatory requirements.