2 0 1 8 A N N U A L R E P O R T
T R A N S I T I O N I N G T O H I G H P E R F O R M I N G :
AN
INFLECTION POINT
SELECTED FINANCIAL DATA
AT OR FOR THE YEARS ENDED JUNE 30
(in thousands, except per share data)
SELECTED FINANCIAL CONDITION DATA:
Total assets
Loans receivable, net
Deposits
Stockholders’ equity
2018 2017 2016 2015 2014
$3,304,169
2,504,792
2,196,253
409,242
$3,206,533
2,330,319
2,048,451
397,647
$2,717,677
1,811,539
1,802,696
359,976
$2,783,114 $2,074,454
1,473,529
1,583,047
377,151
1,663,333
1,872,126
371,050
SELECTED OPERATIONS DATA:
Net income
Net income (adjusted)*
Net interest income
PER SHARE DATA:
Earnings per share - basic
Earnings per share - basic (adjusted)*
Earnings per share - diluted
Earnings per share - diluted (adjusted)*
Market price - close
Book value - common
Tangible book value - common *
SELECTED FINANCIAL RATIOS:
Performance ratios:
Return on assets
Return on assets (adjusted)*
Return on equity
Return on equity (adjusted)*
Tax equivalent net interest margin
Efficiency ratio (adjusted)*
$8,235
25,886
100,630
$11,847
17,111
91,191
$11,456
12,228
81,707
$8,025
11,784
79,766
$10,342
8,256
54,849
$0.45
$1.44
$0.44
$1.38
$28.15
$21.49
$19.96
0.25%
0.80%
2.05%
6.43%
3.43%
70.12%
$0.66
$0.96
$0.65
$0.94
$24.40
$20.96
$19.37
0.40%
0.58%
3.14%
4.54%
3.49%
75.48%
$0.65
$0.70
$0.65
$0.70
$18.50
$20.00
$19.05
0.42%
0.45%
3.16%
3.37%
3.37%
80.43%
$0.42
$0.61
$0.42
$0.61
$16.76
$19.04
$18.06
0.32%
0.47%
2.12%
3.11%
3.64%
79.68%
1.15%
90.02%
0.07%
$0.54
$0.44
$0.54
$0.44
$15.77
$18.28
$17.68
0.62%
0.49%
2.86%
2.28%
3.79%
78.50%
2.53%
61.79%
0.19%
Asset quality ratios:
Nonperforming assets to total assets
Allowance for loan losses to nonaccruing loans
Net charge-offs to average loans
0.44%
192.96%
—
0.62%
154.77%
0.01%
0.90%
114.98%
0.06%
Capital ratios:
Common Equity Tier I Capital
(to Risk-weighted assets)
Tier I Capital (to Total adjusted assets)
Tier I Capital (to Risk-weighted assets)
Total Risk-based Capital (to Risk-weighted assets)
12.97%
13.07%
14.39%
15.92%
N/A
11.45%
12.97%
13.72%
11.13%
13.07%
13.89%
11.78%
14.39%
15.38%
11.91%
15.92%
17.03%
18.03%
20.87%
22.12%
NONFINANCIAL DATA:
Common shares outstanding
Branch offices
Full time equivalent employees
19,041,668
43
520
18,967,875
41
486
17,998,750
38
448
19,488,449
43
475
20,632,008
34
456
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NC
ARDEN
ASHEVILLE (3)
CARY
CHARLOTTE
CHERRYVILLE
CLYDE
COLUMBUS
EDEN
FOREST CITY
GREENSBORO
HENDERSONVILLE
LEXINGTON
RALEIGH
REIDSVILLE
SHELBY
TRYON
WAYNESVILLE
WEAVERVILLE
WINSTON-SALEM
VA
BRISTOL
DALEVILLE
DANVILLE (2)
MARTINSVILLE
ROANOKE (4)
VINTON
TN
JEFFERSON CITY
JOHNSON CITY (3)
KINGSPORT (2)
KNOXVILLE (2)
MORRISTOWN (2)
SC
GREENVILLE (2)
JEFFERSON CITY
BRISTOL
FOREST CITY
GREENSBORO
CARY
COLUMBUS
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2018
OR
For the Transition Period From __________________ To __________________
Commission File Number 1-35593
HOMETRUST BANCSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
Maryland
45-5055422
10 Woodfin Street, Asheville, North Carolina
(Address of Principal Executive Offices)
28801
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (828) 259-3939
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, par value $0.01 per share
Name of Each Exchange on Which Registered
The NASDAQ Stock Market LLC
Securities Registered Pursuant to Section 12(g) of the Act:
Preferred Share Purchase Rights
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
[X] 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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes [X] No [ ].
Indicate by 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 the
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
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,” "emerging growth company" in Rule 12b-2 of the Exchange
Act.
Large Accelerated Filer [ ]
Non-Accelerated Filer [ ] (Do not check if a smaller reporting company)
Emerging growth company [ ]
Accelerated Filer [X]
Smaller reporting company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
[ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
As of September 10, 2018, there were issued and outstanding 19,015,568 shares of the Registrant’s Common Stock. The aggregate market value of the voting stock held
by non-affiliates of the Registrant computed by reference to the closing price of such stock as of December 31, 2017, was $472.7 million. (The exclusion from such amount
of the market value of the shares owned by any person shall not be deemed an admission by the Registrant that such person is an affiliate of the Registrant).
HOMETRUST BANCSHARES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2018
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 1
Item 1A.
Item 1B.
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8
Item 9
Item 9A.
Item 9B.
Item 10
Item 11
Item 12
Item 13
Item 14
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Control and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
PART III
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15
Exhibits and Financial Statement Schedules
Signatures
PART IV
Page
4
36
47
47
48
48
48
50
51
68
69
117
117
118
118
118
118
118
118
119
122
2
Forward-Looking Statements
Certain matters in this Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking
statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,”
“expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar
expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could.” Forward-looking statements include statements
with respect to our beliefs, plans, objectives, goals, expectations, assumptions, and statements about future economic performance and projections
of financial items. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause
actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: the
credit risks of lending activities, including changes in the level and trend of loan delinquencies and write offs and changes in our allowance for
loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets; changes in
general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences
between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for
loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; decreases in the secondary
market for the sale of loans that we originate; results of examinations of us by the Board of Governors of the Federal Reserve System (“Federal
Reserve”), the North Carolina Office of the Commissioner of Banks (“NCCOB”), or other regulatory authorities, including the possibility that
any such regulatory authority may, among other things, require us to increase our allowance for loan losses, write-down assets, change our
regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and
earnings; legislative or regulatory changes that adversely affect our business including the effect of Dodd-Frank Wall Street Reform and Consumer
Protection Act (the "Dodd-Frank Act"), changes in laws or regulations, changes in regulatory policies and principles or the application or
interpretation of laws and regulations by regulatory agencies and tax authorities, including changes in deferred tax asset and liability activity, or
the interpretation of regulatory capital or other rules, including as a result of Basel III; our ability to attract and retain deposits; management's
assumptions in determining the adequacy of the allowance for loan losses; our ability to control operating costs and expenses, especially costs
associated with our operation as a public company; the use of estimates in determining fair value of certain assets, which estimates may prove
to be incorrect and result in significant declines in valuation; difficulties in reducing risks associated with the loans on our balance sheet; staffing
fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated
charges; disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems
or on the third-party vendors who perform several of our critical processing functions; our ability to retain key members of our senior management
team; costs and effects of litigation, including settlements and judgments; our ability to successfully integrate any assets, liabilities, customers,
systems, and management personnel we may in the future acquire into our operations and our ability to realize related revenue synergies and
cost savings within expected time frames and any goodwill charges related thereto; increased competitive pressures among financial services
companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or
regulations or to respond to regulatory actions; adverse changes in the securities markets; inability of key third-party providers to perform their
obligations to us; changes in accounting principles, policies or guidelines and practices, as may be adopted by the financial institution regulatory
agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board; and other economic, competitive,
governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and the other risks detailed from
time to time in our filings with the Securities and Exchange Commission ("SEC"), including this report on Form 10-K.
Any of the forward-looking statements are based upon management’s beliefs and assumptions at the time they are made. We undertake no
obligation to publicly update or revise any forward-looking statements included in this report or to update the reasons why actual results could
differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the forward-looking statements discussed in this report might not occur and you should not put undue reliance
on any forward-looking statements.
As used throughout this report, the terms “we”, “our”, “us”, “HomeTrust Bancshares” or the “Company” refer to HomeTrust Bancshares, Inc.
and its consolidated subsidiaries, including HomeTrust Bank (“HomeTrust” or "Bank") unless the context indicates otherwise.
3
Item 1. Business
General
PART I
HomeTrust Bancshares, Inc., a Maryland corporation, was formed for the purpose of becoming the holding company for HomeTrust Bank in
connection with HomeTrust Bank’s conversion from mutual to stock form, which was completed on July 10, 2012 (the “Conversion”). As a bank
holding company and financial holding company, HomeTrust Bancshares, Inc. is regulated by the Federal Reserve. At June 30, 2018, the Company
had consolidated total assets of $3.3 billion, total deposits of $2.2 billion and stockholders’ equity of $409.2 million. The Company has not
engaged in any significant activity other than holding the stock of the Bank. Accordingly, the information set forth in this Annual Report on Form
10-K (“Form 10-K”), including the audited consolidated financial statements and related data, relates primarily to the Bank and its subsidiary.
As a North Carolina state-chartered bank, and member of the Federal Reserve System, the Bank's primary regulators are the NCCOB and the
Federal Reserve. The Bank's deposits are federally insured up to applicable limits by the Federal Deposit Insurance Corporation ("FDIC"). The
Bank is a member of the Federal Home Loan Bank of Atlanta (“FHLB” or “FHLB of Atlanta”), which is one of the 12 regional banks in the
Federal Home Loan Bank System (“FHLB System”). Our headquarters is located in Asheville, North Carolina.
The Bank was originally formed in 1926. Between fiscal years 1996 and 2011, HomeTrust Bank's board of directors and executive management
expanded the Bank beyond its historical Asheville market and created a unique partnership through mergers between six established banks and
one de novo bank located in Tryon, Shelby, Eden, Lexington, Cherryville and Forest City, North Carolina, through which hometown community
banks could combine their financial resources to achieve a shared vision.
Starting in 2013, we entered seven attractive markets through various acquisitions and new office openings, as well as expanded our product
lines. New locations and markets included:
•
•
•
•
•
•
BankGreenville Financial Corporation (“BankGreenville”) - one office in Greenville, South Carolina (acquired in July 2013)
Jefferson Bancshares, Inc. (“Jefferson”) - nine offices across East Tennessee (acquired in May 2014)
Commercial loan production office ("LPO") in Roanoke, Virginia (opened in July 2014)
Bank of Commerce - one office in Charlotte, North Carolina (acquired in July 2014)
Ten Bank of America Branch Offices - nine in southwest Virginia, one in Eden, North Carolina (acquired in November 2014)
Commercial LPO in Raleigh, North Carolina (opened in November 2014) and later converted into full service branch (converted in April
2017)
• United Financial of North Carolina, Inc. ("United Financial") - municipal lease company headquartered in Fletcher, North Carolina (acquired
in December 2016)
•
•
TriSummit Bancorp, Inc. ("TriSummit") - six offices in East Tennessee (acquired in January 2017)
Commercial LPO Greensboro, North Carolina (opened in August 2017)
• De novo branch in Cary, North Carolina (Opened in March 2018)
By expanding our geographic footprint and hiring local experienced talent, we have built a foundation that allows us to focus on organic growth,
while maintaining "Our Commitment to the Customer Experience" that has differentiated our brand and characterized our success to date.
Our mission is to create stockholder value by building relationships with our employees, customers, and communities. By building a platform
that supports growth and profitability, we are continuing our transition toward becoming a high-performing community bank and helping our
customers every day to be "Ready For What's Next."
Our principal business consists of attracting deposits from the general public and investing those funds, along with borrowed funds, in loans
secured by first and second mortgages on one-to-four family residences including home equity loans, construction and land/lot loans, commercial
real estate loans, construction and development loans, commercial and industrial loans, U.S. Small Business Administration ("SBA") loans,
equipment finance leases, indirect automobile loans, and municipal leases. We also purchase investment securities consisting primarily of securities
issued by United States Government agencies and government-sponsored enterprises, as well as, commercial paper and certificates of deposit
insured by the FDIC.
We offer a variety of deposit accounts for individuals, businesses, and nonprofit organizations. Deposits are our primary source of funds for our
lending and investing activities.
4
Market Areas
HomeTrust Bank operates in nine metropolitan statistical areas ("MSAs"): Asheville, NC, with a population of 456,000 as of June 2017; Charlotte-
Concord-Gastonia, NC-SC, with a population of 2.5 million as of June 2017; Greensboro, NC, with a population of 761,000 as of June 2017;
Greenville-Anderson-Mauldin, SC, with a population of 896,000 as of June 2017; Johnson City, TN, with a population of 202,000 as of June
2017; Kingsport-Bristol-Bristol, TN-VA, with a population of 307,000 as of June 2017; Knoxville, TN, with a population of 877,000 as of June
2017; Morristown, TN, with a population of 118,000 as of June 2017; Roanoke, VA, with a population of 314,000 as of June 2017; and Raleigh,
NC, with a population of 1.3 million as of June 2017 according to the United State Census Bureau.
Asheville is known for its natural beauty, scenic surroundings, and its vibrant cultural and arts community that parallels that of many larger cities
in the United States. It is home to a number of historical attractions, the most prominent of which is the Biltmore Estate, a historic mansion with
gardens and a winery that draws approximately one million tourists each year. Due to its scenic location and diverse cultural and historical
offerings, the Asheville metropolitan area is a popular destination for tourists, which continues to positively impact our local economy. In addition,
affordable housing prices, compared to many bigger cities, combined with the region’s favorable climate have also made the Asheville metropolitan
area an increasingly attractive destination for retirees seeking to relocate from other parts of the United States. The area has several major
employers which include: Buncombe County Public Schools, City of Asheville, Mission Health System and Hospital, The Biltmore Company,
Ingles Markets, Inc., and the VA Medical Center. Also supporting the economy is the Asheville Regional Airport that transports over one million
passengers a year as well as numerous colleges and universities, medical centers, and arts and entertainment facilities. HomeTrust Bank is the
only community bank headquartered in this vibrant and growing market.
The Charlotte-Concord-Gastonia, NC-SC metropolitan area is located in both North and South Carolina, within and surrounding the city of
Charlotte. Located in the Piedmont region of the Southeastern United States, the Charlotte metropolitan area is well known for its lower cost of
living, diversified economy, national sports teams, and thriving arts community that has led it to be one of the highest in-migration cities in the
country according to the Charlotte Chamber. The region is headquarters to several Fortune 500 and Fortune 1000 companies, including Bank of
America, Duke Energy, Sealed Air, Nucor Steel, Sonic Automotive, and Lowe's Home Improvement Stores. The Charlotte MSA is the largest
in the Carolinas.
The Raleigh, NC metropolitan area is located in the northeast central region of North Carolina and routinely ranks among the nation's highest
in places to do business and obtain an education. Raleigh is the capital of North Carolina, home to North Carolina State University and central
to one of the fastest growing areas in the country - the Research Triangle Park. With its proximity to the Research Triangle Park and several
major universities, including the University of North Carolina at Chapel Hill and Duke University, Raleigh has become known for its strengths
in technology and innovation.
The Greensboro, NC metropolitan area is centrally located in North Carolina. Major employment sectors for the MSA include services,
manufacturing, government, financial activities, and retail trade. Major employers for the MSA include Guilford County Schools, Guilford
County, Cone Health, and the City of Greensboro.
The Greenville-Anderson-Mauldin, SC metropolitan area is located in upstate South Carolina, in the foothills of the Blue Ridge Mountains.
Major employment sectors for the MSA include services, manufacturing, and retail trade including major facilities for BMW, Michelin, Walgreens,
and Lockheed Martin. Additional employers include Greenville Health System, Greenville County School District, and Bon Secours St. Francis
Health System.
The Johnson City, TN metropolitan area is an economic hub largely fueled by East Tennessee State University and the medical "Med-Tech"
corridor, anchored by the Johnson City Medical Center, Franklin Woods Community Hospital and affiliated facilities. The city’s museums and
historical sites include the Hands On! Museum and the Tipton-Haynes State Historic Site, which hosts the annual Bluegrass and Sorghum Making
Festival, as well as other seasonal events.
The Kingsport-Bristol-Bristol, TN-VA MSA is home to the headquarters of Eastman Chemical Company as well as a diverse mix of manufacturing
firms, technology companies, and small businesses. The major economic components in Kingsport are healthcare, manufacturing and educational
services.
The Knoxville, TN metropolitan area is located where the French Broad and Holston Rivers converge to form the Tennessee River. It is the
largest city in East Tennessee and ranks third largest in the state. It is located in a broad valley between the Cumberland Mountains to the northwest
and the Great Smoky Mountains to the southeast. The Knoxville area is frequently cited in national surveys, including Livability.com's Top 10
Best Affordable Places to Live. The University of Tennessee calls Knoxville home, with over 28,000 students, making an array of educational
and cultural opportunities available to area residents. Affordable housing, health care costs below the national average, a low crime rate, and a
pleasant climate and location with nearby lakes and mountains are factors which make Knoxville an attractive place to settle. Major employment
sectors in the Knoxville area include government, education, and healthcare.
The Morristown, TN metropolitan area includes facilities for numerous Fortune 500 companies including General Electric, International Paper,
Alcoa (Howmet), Coca-Cola, Lear Corporation, Pepsi Bottling, NCR Corporation and Colgate-Palmolive. Morristown also includes the facilities
of a number of international companies from countries such as Germany, Japan, Sweden, United Kingdom, Italy, Canada and France. Local
industries include furniture manufacturing, poultry processing, aircraft parts, healthcare products, and automotive parts. Agriculture including
soybeans, corn, livestock and dairy are also significant economic components. Morristown's major job providing segments are healthcare,
manufacturing, educational services, furniture and related products, transportation equipment, educational services, and accommodation and
food services.
5
The Roanoke, VA metropolitan area is located in the Roanoke Valley of western Virginia in the midst of the Blue Ridge and Alleghany Mountains.
This 1,874-square mile region is bordered on the west by West Virginia and along the east by the Blue Ridge Mountains. The area is strategically
accessible to both the East Coast and Mid-West markets with Interstate 81 passing through the region, Interstate 64 directly north, and Interstate
77 nearby to the south. The Roanoke MSA is the transportation hub of the area with an integrated interstate highway, rail, and air transportation
network. Roanoke has the most diverse economy in Virginia according to Virginia Business and is the cultural and business hub for western
Virginia. The Roanoke MSA is home to several large regional banking offices, headquarters of the Fortune 500 retailer Advance Auto, and to
several large advanced manufacturing operations, such as those owned by ITT Exelis, Dynax America, and Optical Cable Corporation, among
others. The Roanoke, VA MSA’s major employment sectors include government, health care and social assistance, retail trade, and manufacturing.
Unemployment data remains one of our most informative indicators of our local economy. Based on information from the U.S. Bureau of Labor
Statistics we have set forth below information regarding the unemployment rates nationally and in our market areas.
Location
U.S. National
North Carolina
Asheville MSA
Charlotte/Concord/Gastonia
Greensboro
Raleigh
South Carolina
Greenville
Tennessee
Morristown
Johnson City
Kingsport-Bristol
Knoxville
Virginia
Roanoke
As of June 30,
2018
4.2%
4.2%
3.4%
3.9%
4.5%
3.7%
3.8%
3.3%
3.5%
4.4%
4.5%
4.2%
3.9%
4.2%
3.4%
2017
4.5%
4.2%
3.4%
4.0%
4.9%
3.7%
4.0%
3.9%
3.6%
4.4%
4.7%
4.6%
4.1%
3.7%
4.0%
The Bank has built a strong foundation in the communities we serve and takes pride in the role we play. The directors and market presidents of
each region work with their management team and employees to support local nonprofit and community organizations. Each location helps
provide critical services to meet the financial needs of its customers and improve the quality of life for individuals and businesses in its community.
Initiatives supporting our communities include affordable housing, education and financial education, and the arts. We support these initiatives
through both financial and people resources in all of our communities. Collectively, bank employees volunteer thousands of hours annually in
their local communities; from helping to build homes to teaching grade school youth how to start healthy savings habits, bank employees are
making a positive difference in the lives of others every day.
Competition
We face strong competition in originating real estate and other loans and in attracting deposits. Competition in originating real estate loans comes
primarily from other commercial banks, savings institutions, credit unions, life insurance companies, and mortgage bankers. Other commercial
banks, credit unions, and finance companies provide vigorous competition in consumer lending. In addition, in indirect auto financings, we also
compete with specialty consumer finance companies, including automobile manufacturers’ captive finance companies. Commercial and industrial
loan competition is primarily from local and regional commercial banks. We believe that we compete effectively because we consistently deliver
high-quality, personal service to our customers that results in a high level of customer satisfaction. Adding to our competitive advantage is
commitment to technological resources, which has expanded our customer service capabilities and increased efficiencies in our lending process.
6
We attract our deposits through our branch office system. Competition for deposits is principally from other commercial banks, savings institutions,
and credit unions located in the same communities, as well as mutual funds and other alternative investments. We believe that we compete for
deposits by offering superior service and a variety of deposit accounts at competitive rates. We also have a highly competitive suite of cash
management services, online/mobile banking, and internal support expertise specific to the needs of small to mid-sized commercial business
customers. Based on the most recent branch deposit data, HomeTrust Bank's deposit market share was:
Location
Rank(1)
Deposit Market Share(1)
North Carolina
Asheville MSA
Charlotte/Gastonia
Raleigh
South Carolina
Greenville
Tennessee
Morristown
Johnson City
Kingsport-Bristol
Knoxville
Virginia
Roanoke
Bristol
16th
6th
20th
24th
77th
23rd
48th
2nd
4th
7th
25th
64th
5th
5th
0.34%
7.34%
0.05%
0.06%
0.04%
0.28%
0.32%
21.73%
7.50%
3.57%
0.22%
0.11%
6.48%
4.86%
___________________________________________________________________
(1) Source: FDIC data as of June 30, 2017
Overall, we distinguish ourselves from larger, national banks operating in our market areas by providing local decision-making and competitive
customer-driven products with excellent service, responsiveness, and execution. In addition, our larger capital base and product mix enable us
to compete effectively against smaller banks. Our bankers believe that strong relationships lead to great things and strive everyday to ensure our
customers are "ready for what's next" in their financial future.
In addition, the way we create differentiation from our competition to fuel organic growth is by focusing on “HOW” we deliver our products
and services. Many of our employees have been a part of HomeTrust Bank for decades, while a significant number of employees have more
recently brought their industry knowledge and expertise to us through internal growth and acquisitions, reflecting their desire to be a part of a
high performing team that works well together to make a difference for customers. We strive to create organizational clarity by adhering to our
core values of caring and teamwork while continuing to reach for our aspirational values of customer satisfaction, accountability, continuous
improvement, and humility. This “culture model” includes four key principles:
• making a difference for customers every day is both fun and personally rewarding;
•
success is built on relationships;
• we must continually add value to relationships with our customers and with each other; and
• we need to grow ourselves and our ability to make a difference and add value to relationships.
In implementing these principles, the directors, management team, and employees work together as a team to meet the financial needs of our
customers while supporting local nonprofit and community organizations to improve the quality of life for individuals and businesses in our
communities. We support affordable housing and education initiatives to help build healthy communities through both financial assistance and
employees volunteering thousands of hours annually in their local markets. We believe the opportunity to stay close to our customers gives us
a unique position in the banking industry as compared to our larger competitors and we are committed to continuing to build strong relationships
with our employees, customers, and communities for generations to come.
7
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The following table shows the composition of our loan portfolio in dollar amounts and in percentages (before deductions for deferred fees and
allowances for loan losses) at the dates indicated.
Fixed-rate loans:
Retail consumer loans:
One-to-four family
Home equity - originated
Construction and land/lots
Indirect auto finance
Consumer
Commercial loans:
Commercial real estate
Construction and development
Commercial and industrial
Municipal leases
Total fixed-rate loans
Adjustable-rate loans:
Retail consumer loans:
One-to-four family
Home equity - originated
Home equity - purchased
Construction and land/lots
Consumer
Commercial loans:
Commercial real estate
Construction and development
Commercial and industrial
Total adjustable-rate loans
Total loans
Less:
Deferred costs (fees), net
Allowance for losses
2018
At June 30,
2017
2016
Amount
Percent
Amount
Percent
Amount
Percent
(Dollars in thousands)
$
333,986
163
59,283
173,095
6,457
441,796
55,682
87,568
109,172
1,267,202
330,303
137,401
166,276
6,318
5,922
415,519
136,420
61,255
1,259,414
2,526,616
(764)
(21,060)
13.2% $
—
2.3
6.9
0.3
17.5
2.2
3.5
4.3
50.2%
13.1%
5.4
6.6
0.3
0.2
16.4
5.4
2.4
49.8%
100.0%
365,566
1,664
42,149
140,879
7,887
444,055
50,231
73,600
101,175
1,227,206
318,523
155,404
162,407
7,987
13
286,353
147,735
46,787
1,125,209
2,352,415
(945)
(21,151)
15.5% $
0.1
1.8
6.0
0.3
18.9
2.1
3.1
4.4
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13.5%
6.6
6.9
0.3
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6.3
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100.0%
326,347
416
27,907
108,478
4,620
303,854
29,204
42,874
103,183
946,883
297,354
162,877
144,377
10,195
15
182,707
57,636
30,415
885,576
1,832,459
372
(21,292)
17.8%
—
1.5
5.9
0.3
16.6
1.6
2.3
5.7
51.7%
16.2%
8.9
7.9
0.6
—
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3.1
1.7
48.3%
100.0%
Total loans receivable, net
$
2,504,792
$
2,330,319
$
1,811,539
The increase in loans since 2016 was primarily due to the $258.1 million in loans acquired from TriSummit and organic loan growth, especially
the origination of indirect auto finance loans, commercial real estate, and construction and development loans. For further discussion, see
"Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of this report.
9
Loan Maturity. The following table sets forth certain information at June 30, 2018 regarding the dollar amount of loans maturing in our portfolio
based on their contractual terms to maturity, but does not include scheduled payments or potential prepayments. Loan balances do not include
undisbursed loan proceeds, unearned discounts, unearned income and allowance for loan losses.
One-to-four family
Amount
Weighted Average Rate
Home equity - originated
Amount
Weighted Average Rate
Home equity - purchased
Amount
Weighted Average Rate
Construction and land/lots
Amount
Weighted Average Rate
Indirect auto finance
Amount
Weighted Average Rate
Consumer
Amount
Weighted Average Rate
Retail Consumer
Due During Years Ending June 30,
2019
2020
2021
2022 to
2023
2024 to
2027
2028 to
2032
2033 and
following
Total
(Dollars in thousands)
$ 11,824
10,993
19,579
44,326
44,644
165,816
367,107
$ 664,289
5.21%
4.79%
4.42%
4.27%
4.41%
3.53%
4.12%
4.04%
$ 5,703
5.14%
5,389
5.13%
4,892
5.44%
21,828
21,913
11,650
66,189
$ 137,564
5.17%
4.96%
5.32%
5.51%
5.33%
$
$
$
$
—
—%
514
6.25%
243
3.75%
301
5.63%
—
—%
—
—%
—
—%
—
—%
— 166,276
—%
4.71%
$ 166,276
4.71%
128
6.13%
267
5.44%
1,182
5.43%
4,748
5.79%
4,669
5.35%
54,093
$
65,601
4.02%
4.29%
2,266
3.66%
10,479
77,399
82,708
3.22%
3.27%
3.94%
—
—%
— $ 173,095
—%
3.59%
298
4.33%
977
5.21%
2,404
4.85%
835
5.37%
2,988
5.01%
4,576
6.82%
$
12,379
5.69%
Commercial Loans
Due During Years Ending June 30,
Commercial real estate
Amount
Weighted Average Rate
Construction and development
Amount
Weighted Average Rate
Commercial and industrial
Amount
Weighted Average Rate
Municipal leases(1)
Amount
Weighted Average Rate
2019
2020
2021
2022 to
2023
2024 to
2027
2028 to
2032
2033 and
following
Total
(Dollars in thousands)
51,553
64,940
133,575
294,958
185,963
96,380
29,946
$ 857,315
4.54%
4.17%
4.12%
4.15%
4.17%
4.31%
5.29%
4.23%
67,156
33,669
25,010
48,301
10,564
5.24%
5.01%
4.77%
3.98%
3.62%
4,953
4.03%
2,449
3.79%
$ 192,102
4.86%
24,396
12,086
26,655
44,284
36,142
5.09%
5.12%
4.86%
4.36%
4.29%
2,642
6.03%
2,618
4.84%
$ 148,823
4.59%
832
4.09%
956
3.37%
3,148
3.55%
12,077
18,415
44,150
29,594
$ 109,172
3.32%
4.95%
4.48%
4.78%
4.54%
10
Due During Years Ending June 30,
2019
2020
2021
2022 to 2023
2024 to 2027
2028 to 2032
2033 and following
Total
Total
Weighted
Average
Rate
Amount
(Dollars in thousands)
$
$
162,522
130,725
224,582
546,759
405,932
333,248
722,848
2,526,616
4.99%
4.58
4.34
4.25
4.47
4.01
4.47
4.39%
_________________________________________________________
(1) The weighted average rate of municipal loans is adjusted for a 30% combined federal and state tax rate since the interest income from these leases is tax exempt.
The total amount of loans due after June 30, 2019, which have predetermined interest rates is $1.21 billion, while the total amount of loans which
have adjustable interest rates is $1.15 billion.
Lending Authority. Loan credit authority is granted to various officers of the Bank and approved at least annually by the Credit Risk Committee,
which is made up of the Chief Banking Officer, Chief Credit Officer, and Chief Risk Officer. Generally, total credit exposure that exceeds the
loan credit authority of each officer must be approved by the Senior Credit Officer or Chief Credit Officer. In the absence of the Chief Credit
Officer, another Senior Credit Officer not directly involved with the borrower may approve the credit instead of the Chief Credit Officer.
Loan relationships in excess of $7.5 million in total credit exposure must be approved by our Senior Loan Committee, which is comprised of
the Chief Banking Officer, Chief Credit Officer, and/or the Commercial Banking Group Executive. Any loan submitted for Senior Loan Committee
approval must have the prior approval of the Relationship Manager, the Market President and their assigned Senior Credit Officer. Loans in
excess of $15.0 million in total credit exposure must be approved by the Executive Loan Committee comprised of the Chief Executive Officer,
Chief Banking Officer, Commercial Banking Group Executive, Chief Credit Officer and another Senior Credit Officer not involved with the
credit at a meeting of at least three members, one of whom must be either the Chief Credit Officer or the Senior Credit Officer. A 70% vote is
required for approval. Total credit exposure exceeding 60% of the Bank’s legal lending limit must be approval by the Bank's board of directors.
At June 30, 2018, the maximum amount under federal regulation that we could lend to any one borrower and the borrower’s related entities was
approximately $53.5 million. Our five largest lending relationships are with commercial borrowers and totaled $106.6 million in the aggregate,
or 4.2% of our $2.5 billion loan portfolio at June 30, 2018. As of June 30, 2018, all loans to these borrowers were performing in accordance with
their original repayment terms.
The largest lending relationship at June 30, 2018 consisted of three loans totaling approximately $24.4 million to three borrowers in Charlotte,
NC. The largest loan in this relationship had an outstanding balance of $11.6 million as of June 30, 2018 and was secured by a non-owner-
occupied medical office property located in southeast Louisiana. The remaining relationship exposure consisted of two loans secured by non-
owner-occupied medical office properties located in Gaston County, North Carolina and northwest Georgia.
The second largest lending relationship at June 30, 2018 was approximately $21.9 million consisting of six loans. The largest loan in this
relationship at June 30, 2018 had an outstanding balance of $7.0 million and was secured by a hotel property located in Greensboro, NC. The
remaining relationship exposure consisted of loans secured by hotel properties located in Wake Forest, NC, Clinton, SC, and Fayetteville, NC.
The third largest lending relationship at June 30, 2018 was $20.6 million consisting of seven loans, the largest of which had an outstanding
balance of $5.8 million and was secured by a non-owner-occupied flex-space property located in Greensboro, NC. The remaining exposure
consisted of loans secured by non-owner-occupied industrial properties and non-owner-occupied stand-alone retail properties. These properties
were located in eastern Tennessee, central Tennessee, southwest Virginia, and northwest Georgia.
The fourth largest lending relationship at June 30, 2018 was $20.4 million consisting of nine loans, the largest of which had an outstanding
balance of approximately $5 million and was secured by a non-owner-occupied industrial property in Roanoke, VA. The remaining relationship
exposure was secured by non-owner-occupied industrial and flex-space properties, as well as self-storage properties, all of which were located
throughout southwest Virginia.
The fifth largest lending relationship at June 30, 2018 was approximately $19.3 million consisting of three loans, the largest of which had an
outstanding balance of $12.1 million and was primarily secured by accounts receivable, inventory, and other business assets. Additionally, the
loan was secured by owner-occupied industrial property, which also secured the second largest loan in the relationship with an outstanding
balance of approximately $6.1 million. The borrower and collateral securing these loans are located in western North Carolina.
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Retail Consumer Loans
One-to-Four Family Real Estate Lending. We originate loans secured by first mortgages on one-to-four family residences typically for the
purchase or refinance of owner-occupied primary or secondary residences located primarily in our market areas. We originate one-to-four family
residential mortgage loans primarily through referrals from real estate agents, builders, and from existing customers. Walk-in customers are also
important sources of loan originations. At June 30, 2018, $664.3 million, or 26.3%, of our loan portfolio consisted of loans secured by one-to-
four family residences.
We originate both fixed-rate loans and adjustable-rate loans. We generally originate mortgage loans in amounts up to 80% of the lesser of the
appraised value or purchase price of a mortgaged property, but will also permit loan-to-value ratios of up to 95%. For loans exceeding an 80%
loan-to-value ratio we generally require the borrower to obtain private mortgage insurance covering us for any loss on the amount of the loan in
excess of 80% in the event of foreclosure.
The majority of our one-to-four family residential loans are originated with fixed rates and have terms of ten to 30 years. At June 30, 2018 our
one-to-four family residential loan portfolio included $334.0 million in fixed rate loans, of which $24.9 million were ten year fixed rate loans.
We generally originate fixed rate mortgage loans with terms greater than 15 years for sale to various secondary market investors on a servicing
released basis. We also originate adjustable-rate mortgage, or ARM, loans which have interest rates that adjust annually to the yield on U.S.
Treasury securities adjusted to a constant one-year maturity plus a margin. Most of our ARM loans are hybrid loans, which after an initial fixed
rate period of one, five, seven, or ten years will convert to an annual adjustable interest rate for the remaining term of the loan. Our ARM loans
have terms up to 30 years. Our pricing strategy for mortgage loans includes setting interest rates that are competitive with other local financial
institutions and consistent with our asset/liability management objectives. Our ARM loans generally have a floor interest rate set at the initial
interest rate, and a cap of two percentage points on rate adjustments during any one year and six percentage points over the life of the loan. As
a consequence of using caps, the interest rates on these loans may not be as rate sensitive as is our cost of funds.
We generally retain ARM loans that we originate in our loan portfolio rather than selling them in the secondary market. The retention of ARM
loans in our loan portfolio helps us reduce our exposure to changes in interest rates. There are, however, unquantifiable credit risks resulting
from the potential of increased interest to be paid by the customer as a result of increases in interest rates. It is possible that during periods of
rising interest rates the risk of default on ARM loans may increase as a result of repricing and the increased costs to the borrower. We attempt
to reduce the potential for delinquencies and defaults on ARM loans by qualifying the borrower based on the borrower’s ability to repay the
ARM loan assuming that the maximum interest rate that could be charged at the first adjustment period remains constant during the loan term.
Another consideration is that although ARM loans allow us to increase the sensitivity of our asset base due to changes in the interest rates, the
extent of this interest sensitivity is limited by the periodic and lifetime interest rate adjustment limits. Because of these considerations, we have
no assurance that yield increases on ARM loans will be sufficient to offset increases in our cost of funds.
Most of our loans are written using generally accepted underwriting guidelines, and are readily saleable to Freddie Mac, Fannie Mae, or other
private investors. Our real estate loans generally contain a “due on sale” clause allowing us to declare the unpaid principal balance due and
payable upon the sale of the security property. The average size of our one-to-four family residential loans was $122,128 at June 30, 2018.
A majority of our loans are “non-conforming” because they are adjustable rate mortgages which contain interest rate floors or do not satisfy
credit or other requirements due to personal and financial reasons (i.e. divorce, bankruptcy, length of time employed, etc.), conforming loan
limits (i.e. jumbo mortgages), and other requirements, imposed by secondary market purchasers. Some of these borrowers have higher debt-to-
income ratios, or the loans are secured by unique properties in rural markets for which there are no sales of comparable properties to support the
value according to secondary market requirements. We may require additional collateral or lower loan-to-value ratios to reduce the risk of these
loans. We believe that these loans satisfy a need in our local market areas. As a result, subject to market conditions, we intend to continue to
originate these types of loans. Total non-conforming loans were $373.2 million at June 30, 2018, including $101.6 million of jumbo one- to four-
family residential loans which may also expose us to increased risk because of their larger balances.
Property appraisals on real estate securing our one-to-four family loans in excess of $250,000 that are not originated for sale are made by a state-
licensed or state-certified independent appraiser approved by the board of directors. Appraisals are performed in accordance with applicable
regulations and policies. For loans that are less than $250,000, we may use the tax assessed value, broker price opinions, and/or a property
inspection in lieu of an appraisal. We generally require title insurance policies on all first mortgage real estate loans originated. Homeowners,
liability, fire and, if required, flood insurance policies are also required for one-to-four family loans. We do not originate permanent one-to-four
family mortgage loans with a negatively amortizing payment schedule, and currently do not offer interest-only mortgage loans. We have not
typically originated stated income or low or no documentation one-to-four family loans. At June 30, 2018, $6.1 million of our one-to-four family
loans were interest-only of which $5.8 million served as collateral for commercial purpose loans. In connection with the new rules issued by the
Consumer Financial Protection Bureau ("CFPB"), which includes a definition for “qualified mortgage” loans based on the borrower’s ability to
repay the loan, we believe that substantially all of the mortgage loans approved by us meet this standard.
At June 30, 2018, $86.1 million of our one-to-four family loan portfolio consisted of loans secured by non-owner occupied residential properties.
Loans secured by residential rental properties represent a unique credit risk to us and, as a result, we adhere to specific underwriting guidelines
for such loans. Additionally, we have established specific loan portfolio concentration limits for loans secured by residential rental property to
prevent excessive credit risk that could result from an elevated concentration of these loans. A primary risk factor in non-owner occupied residential
real estate lending is the consistency of rental income of the property. Payments on loans secured by rental properties often depend on the
successful operation and management of the properties, as well as, the ability of tenants to pay rent. As a result, repayment of such loans may
be subject to adverse economic conditions and unemployment trends, and may be sensitive to changes in the supply and demand for such
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properties. We consider and review a rental income cash flow analysis of the borrower and consider the net operating income of the property,
the borrower’s expertise, credit history and profitability, and the value of the underlying property. We generally require collateral on these loans
to be a first mortgage along with an assignment of rents and leases. We periodically monitor the performance and cash flow sufficiency of certain
residential rental property borrowers based on a number of factors such as loan performance, loan size, total borrower credit exposure, and risk
grade.
Home Equity Lines of Credit. Our originated home equity lines of credit ("HELOCs"), consisting primarily of adjustable-rate lines of credit,
have been one of the largest component of our retail loan portfolio over the past several years. At June 30, 2018, HELOCs-originated totaled
$137.6 million or 5.4% of our loan portfolio of which $69.7 million was secured by a first lien on owner-occupied residential property. The lines
of credit may be originated in amounts, together with the amount of the existing first mortgage, typically up to 85% of the value of the property
securing the loan (less any prior mortgage loans) with an adjustable-rate of interest based on The Wall Street Journal prime rate plus a margin.
Currently, our home equity line of credit floor interest rate is dependent on the overall loan to value, and has a cap of 16% above the floor rate
over the life of the loan. Originated HELOCs generally have up to a ten-year draw period and amounts may be reborrowed after payment at any
time during the draw period. Once the draw period has lapsed, the payment is amortized over a 15-year period based on the loan balance at that
time. At June 30, 2018, unfunded commitments on these lines of credit totaled $187.4 million.
Our underwriting standards for originated HELOCs are similar to our one-to-four family loan underwriting standards and include a determination
of the applicant’s credit history and an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan. The
stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment, and additionally
from any verifiable secondary income.
In December 2014, the Company began purchasing HELOCs originated by other financial institutions. At June 30, 2018, HELOCs-purchased
totaled $166.3 million, or 6.6% of our loan portfolio. Unfunded commitments on these lines of credit were $35.4 million at June 30, 2018. The
credit risk characteristics are different for these loans since they were not originated by the Company and the collateral is located outside the
Company’s market area, primarily in several western states. All of these loans were originated in 2012 or later and had an average FICO score
of 740 and loan to values of less than 90% at origination. Loan charge-offs in this portfolio since December 2014 totaled $48,000. The Company
will continue to monitor the performance of these loans and adjust the allowance for loan losses as necessary.
HELOCs generally entail greater risk than do one-to-four family residential mortgage loans where we are in the first lien position. For those
home equity lines secured by a second mortgage, it is unlikely that we will be successful in recovering all or a portion of our loan proceeds in
the event of default unless we are prepared to repay the first mortgage loan and such repayment and the costs associated with a foreclosure are
justified by the value of the property.
Construction and Land/Lots. We have been an active originator of construction to permanent loans to homeowners building a residence. In
addition, we originate land/lot loans predominately for the purchase or refinance of an improved lot for the construction of a residence to be
occupied by the borrower. All of our construction and land/lot loans were made on properties located within our market area.
At June 30, 2018, our construction and land/lot loan portfolio was $65.6 million compared to $50.1 million at June 30, 2017. At June 30, 2018,
unfunded loan commitments totaled $58.9 million, compared to $42.4 million at June 30, 2017. Construction-to-permanent loans are made for
the construction of a one-to-four family property which is intended to be occupied by the borrower as either a primary or secondary residence.
Construction-to-permanent loans are originated to the homeowner rather than the homebuilder and are structured to be converted to a first lien
fixed- or adjustable-rate permanent loan at the completion of the construction phase. We do not originate construction phase only or junior lien
construction-to-permanent loans. The permanent loan is generally underwritten to the same standards as our one-to-four family residential loans
and may be held by us for portfolio investment or sold in the secondary market. At June 30, 2018 our construction-to-permanent loans totaled
$52.6 million and the average loan size was $199,000. During the construction phase, which typically lasts for six to 12 months, we make periodic
inspections of the construction site and loan proceeds are disbursed directly to the contractors or borrowers as construction progresses. Typically,
disbursements are made in monthly draws during the construction period. Loan proceeds are disbursed based on a percentage of completion.
Construction-to-permanent loans require payment of interest only during the construction phase. Prior to making a commitment to fund a
construction loan, we require an appraisal of the property by an independent appraiser. Construction loans may be originated up to 95% of the
cost or of the appraised value upon completion, whichever is less; however, we generally do not originate construction loans which exceed the
lower of 80% loan to cost or appraised value without securing adequate private mortgage insurance or other form of credit enhancement such
as the Federal Housing Administration or other governmental guarantee. We also require general liability, builder’s risk hazard insurance, title
insurance, and flood insurance (as applicable, for properties located or to be built in a designated flood hazard area) on all construction loans.
At June 30, 2018, the largest construction to permanent loan had an outstanding balance of $2.5 million and was performing according to the
original repayment terms.
Included in our construction and land/lot loan portfolio are land/lot loans, which are typically loans secured by developed lots in residential
subdivisions located in our market areas. We originate these loans to individuals intending to construct their primary or secondary residence on
the lot within one year from the date of origination. This portfolio may also include loans for the purchase or refinance of unimproved land that
is generally less than or equal to five acres, and for which the purpose is to commence the improvement of the land and construction of an owner-
occupied primary or secondary residence within one year from the date of loan origination.
Land/lot loans are typically originated in an amount up to 70% of the lower of the purchase price or appraisal, are secured by a first lien on the
property, for up to a 20-year term, require payments of interest only and are structured with an adjustable rate of interest on terms similar to our
one-to-four family residential mortgage loans. At June 30, 2018, our land/lot loans totaled $13.0 million and the average land/lot loan size was
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$53,000. At June 30, 2018, the largest land/lot loan had an outstanding balance of $414,000 and was performing according to the original
repayment terms.
Construction and land/lot lending affords us the opportunity to achieve higher interest rates and fees with shorter terms to maturity than the rates
and fees generated by our one-to-four family permanent mortgage lending. Construction/permanent loans, however, generally involve a higher
degree of risk than our one-to-four family permanent mortgage lending. If our appraisal of the value of the completed residence proves to be
overstated, we may have inadequate security for the repayment of the loan upon completion of construction and may incur a loss. Land/lot loans
also pose additional risk because of the lack of income being produced by the property and the potential illiquid nature of the collateral. These
risks can also be significantly impacted by supply and demand conditions.
Indirect Auto Finance. As of June 30, 2018, our indirect auto finance installment contracts totaled $173.1 million, or 6.9% of our total loan
portfolio. Going forward, the Company expects to maintain the size of this portfolio at approximately the same current percentage of the total
loan portfolio. As an indirect lender, we market to automobile dealerships, both manufacturer franchised dealerships and independent dealerships,
who utilize our origination platform to provide automotive financing through installment contracts on new and used vehicles. As of June 30,
2018, we worked with 68 auto dealerships located in western North Carolina and upstate South Carolina. Working with strong dealerships within
our market area provides us with the opportunity to actively deepen customer relationships through cross-selling opportunities, as 83.0% of our
indirect auto finance loans are originated to noncustomers.
The dealers are compensated via an industry standard commission, known as dealer reserve, on marked-up interest rates or from flat rate
commission amounts. Our auto finance sales team uses purchased industry data to provide quantitative analysis of dealer sales history to target
strong dealerships as the starting point of building long lasting, successful relationships. Local, quick decisions, broad hour coverage, personalized
customer service, and prompt contract funding are keys to our success in this competitive line of business. Additionally, our process has been
designed to integrate with existing dealership practices, utilize an industry leading decision engine, which provides our internal underwriters
with the tools needed to respond quickly to loans meeting our credit policy criteria.
Our underwriting guidelines for indirect auto loans allow for financing the entire cost of the vehicle and therefore focuses on the ability of the
borrower to repay the loan rather than the value of the underlying collateral. Our underwriting procedures for indirect auto loans include an
evaluation of an applicant's credit profile along with certain applicant specific characteristics to arrive at an estimate of the associated credit risk.
Additionally, internal underwriters may also verify an applicant's employment income and/or residency or where appropriate, verify an applicant's
payment history directly with the applicant's creditors. We will also generally verify receipt of the automobile and other information directly
with the borrower.
Indirect auto finance customers receive a fixed rate loan in an amount and at an interest rate that is commensurate to their FICO credit score,
consumer payment credit history, loan term, and based on our underwriting procedures. The amount financed by us will generally be up to the
full sales price of the vehicle plus sales tax, dealer preparation fees, license fees and title fees, plus the cost of service and warranty contracts
and "GAP" insurance coverage obtained in connection with the vehicle or the financing (such amounts in addition to the sales price, collectively
the "Additional Vehicle Costs"). Accordingly, the amount financed by us generally may exceed, depending on the credit score and applicant’s
profile, in the case of new vehicles, the manufacturer's suggested retail price of the financed vehicle and the Additional Vehicle Costs. In the
case of used vehicles, if the applicant meets our creditworthiness criteria, the amount financed may exceed the vehicle's value as assigned by
the NADA Official Used Car Guide, our primary reference source of used cars and the Additional Vehicle Costs.
Our indirect auto portfolio at June 30, 2018, consisted of 9,664 installment loan contracts with a weighted-average contract rate of 4.60%, an
average FICO credit score of 754, and an average loan to value ratio of 96.1% based on wholesale dealer invoice on new cars and the NADA
Official Used Car Guide for used cars. Approximately 96% were originated through manufacturer franchised dealerships and approximately 4%
were originated through independent dealerships; 46% were contracts on new vehicles and 54% were contracts on used vehicles. The loan term
is averaging 69 months which is comparable to national auto industry data.
Because our primary focus for indirect auto loans is on the credit quality of the customer rather than the value of the collateral, the collectability
of an indirect auto loan is more likely than a single-family first mortgage loan to be affected by adverse personal circumstances. We rely on the
borrower's continuing financial stability, rather than on the value of the vehicle, for the repayment of an indirect auto loan. Because automobiles
usually rapidly depreciate in value, it is unlikely that a repossessed vehicle will cover repayment of the outstanding loan balance.
Consumer Lending. Our consumer loans consist of loans secured by deposits accounts or personal property such as automobiles, boats, and
motorcycles, as well as unsecured consumer debt. At June 30, 2018, our consumer loans totaled $12.4 million, or 0.5% of our loan portfolio. We
originate our consumer loans primarily in our market areas.
Consumer loans generally have shorter terms to maturity, which reduces our exposure to changes in interest rates. In addition, management
believes that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the number
of customer relationships and providing cross-marketing opportunities.
Our underwriting standards for consumer loans include a determination of the applicant’s credit history and an assessment of the applicant’s
ability to meet existing obligations and payments on the proposed loan. The stability of the applicant’s monthly income may be determined by
verification of gross monthly income from primary employment, and additionally from any verifiable secondary income.
Consumer loans generally entail greater risk than do one-to-four family residential mortgage loans, particularly in the case of consumer loans
that are unsecured or secured by rapidly depreciable assets, such as automobiles. In these cases, any repossessed collateral for a defaulted loan
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may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan collections are dependent on the
borrower’s continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.
Commercial Loans
Commercial Real Estate Lending. We originate commercial real estate loans, including loans secured by office buildings, retail/wholesale
facilities, hotels, industrial facilities, medical and professional buildings, churches, and multifamily residential properties located primarily in
our market areas. As of June 30, 2018, $857.3 million or 33.9% of our total loan portfolio was secured by commercial real estate property,
including multifamily loans totaling $106.7 million, or 4.2% of our total loan portfolio. Of the remaining amount, $222.5 million was identified
as owner occupied commercial real estate, and $528.1 million was secured by income producing, or non-owner-occupied commercial real estate.
Commercial real estate loans generally are priced at a higher rate of interest than one-to-four family residential loans. Typically, these loans have
higher loan balances, are more difficult to evaluate and monitor, and involve a greater degree of risk than one-to-four family residential loans.
Often payments on loans secured by commercial or multi-family properties are dependent on the successful operation and management of the
property; therefore, repayment of these loans may be affected by adverse conditions in the real estate market or the economy. We generally
require and obtain loan guarantees from financially capable parties based upon the review of personal financial statements. If the borrower is a
corporation, we generally require and obtain personal guarantees from the corporate principals based upon a review of their personal financial
statements and individual credit reports.
The average outstanding loan size in our commercial real estate portfolio was $667,000 as of June 30, 2018. The Bank’s commercial focus is on
developing and fostering strong banking relationships with small to mid-size clients within our market area. At June 30, 2018, the largest
commercial real estate loan in our portfolio was to a local borrower in Asheville, NC for $12.9 million, secured by a hotel. Our largest multi-
family loan as of June 30, 2018 was a 76.74% interest in a 91 unit apartment property in Charlotte, NC with an outstanding balance of $9.9
million. Both of these loans were performing according to their original repayment terms as of June 30, 2018.
We offer both fixed- and adjustable-rate commercial real estate loans. Our commercial real estate mortgage loans generally include a balloon
maturity of five years or less. Amortization terms are generally limited to 20 years. Adjustable rate based loans typically include a floor and
ceiling interest rate and are indexed to The Wall Street Journal prime rate, or the one-month London Interbank Offered Rate ("LIBOR"), plus or
minus an interest rate margin and rates generally adjust daily. The maximum loan to value ratio for commercial real estate loans is generally up
to 80% on purchases and refinances. We require appraisals of all non-owner occupied commercial real estate securing loans in excess of $250,000,
and all owner-occupied commercial real estate securing loans in excess of $500,000, performed by independent appraisers. For loans less than
these amounts, we may use the tax assessed value, broker price opinions, and/or a property inspection in lieu of an appraisal.
If we foreclose on a commercial real estate loan, our holding period for the collateral typically is longer than for one-to-four family residential
mortgage loans because there are fewer potential purchasers of the collateral. Further, our commercial real estate loans generally have relatively
large balances to single borrowers or related groups of borrowers. Accordingly, if we make any errors in judgment in the collectability of our
commercial real estate loans, any resulting charge-offs may be larger on a per loan basis than those incurred with our retail loan portfolios.
Construction and Development Lending. We originate residential construction and development loans for the construction of single-family
residences, condominiums, townhouses, and residential developments. Our commercial construction development loans are for the development
of business properties, including multi-family, retail, office/warehouse and office buildings. Our land, lots, and development loans are
predominately for the purchase or refinance of unimproved land held for future residential development, improved residential lots held for
speculative investment purposes and for the future construction of speculative one-to-four family or commercial real estate.
Our expansion into larger metro markets combined with the hiring of experienced commercial real estate relationship managers, credit officers,
and the development of a construction risk management group to better manage construction risk, has led to a significant increase in and conscience
effort to grow the construction and development portfolio. At June 30, 2018, our construction and development loans totaled $192.1 million, or
7.6% of our total loan portfolio. At June 30, 2018, $54.0 million or 28.1% of our construction and development loans required interest-only
payments. A minimal amount of these construction loans provide for interest payments to be paid out of an interest reserve, which is established
in connection with the origination of the loan pursuant to which we will fund the borrower's monthly interest payments and add the payments
to the outstanding principal balance of the loan. Unfunded commitments at June 30, 2018 totaled $151.6 million compared to $116.0 million at
June 30, 2017. Land acquisition and development loans are included in the construction and development loan portfolio, and represent loans
made to developers for the purpose of acquiring raw land and/or for the subsequent development and sale of residential lots. Such loans typically
finance land purchase and infrastructure development of properties (i.e. roads, utilities, etc.) with the aim of making improved lots ready for
subsequent sale to consumers or builders for ultimate construction of residential units. The primary source of repayment is generally the cash
flow from developer sale of lots or improved parcels of land, secondary sources and personal guarantees, which may provide an additional
measure of security for such loans.
Land acquisition and development loans are generally secured by property in our primary market areas. In addition, these loans are secured by
a first lien on the property, are generally limited up to 65% of the lower of the acquisition price or the appraised value of the land and generally
have a maximum amortization term of ten years with a balloon maturity of up to three years. We require title insurance and, if applicable, a
hazardous waste survey reporting that the land is free of hazardous or toxic waste. At June 30, 2018, our land acquisition and development loans
in our commercial construction and development portfolio totaled $64.5 million. The largest land acquisition and development loan had an
outstanding balance at June 30, 2018 of $5.2 million and was performing according to its repayment terms. The subject loan is secured by a
residential lot development. At June 30, 2018, 12 land acquisition and development loans totaling $2.0 million were classified as nonaccruing.
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Part of our land acquisition and development portfolio consists of speculative construction loans for homes. These homes typically have an
average price ranging from $200,000 to $500,000. Speculative construction loans are made to home builders and are termed “speculative” because
the home builder does not have, at the time of loan origination, a signed contract with a home buyer who has a commitment for permanent
financing with either us or another lender for the finished home. The home buyer may be identified either during or after the construction period,
with the risk that the builder will have to fund the debt service on the speculative construction loan and finance real estate taxes and other carrying
costs of the completed home for a significant period of time after the completion of construction, until a home buyer is identified. Loans to
finance the construction of speculative single-family homes and subdivisions are generally offered to experienced builders with proven track
records of performance, are qualified using the same standards as other commercial loan credits and require cash reserves to carry projects
through construction completions and sale of the project. These loans require payment of interest-only during the construction phase. At June
30, 2018, loans for the speculative construction of single family properties totaled $48.7 million compared to $44.9 million at June 30, 2017. At
June 30, 2018, we had 17 borrowers with an aggregate outstanding loan balance over $1.0 million which comprise 55.5% of the total balance
for the speculative construction of single family properties and secured by properties located in our market areas. At June 30, 2018, four speculative
construction loans totaling $85,000 were classified as nonaccruing. Unfunded commitments remained unchanged at $30.1 million at both June
30, 2018 and 2017.
Commercial construction and construction to permanent loans are offered on an adjustable interest rate or fixed interest rate basis. Adjustable
interest rate loans typically include a floor and ceiling interest rate and are indexed to The Wall Street Journal prime rate, plus or minus an interest
rate margin. The initial construction period is generally limited to 12 to 24 months from the date of origination, and amortization terms are
generally limited to 20 years; however, amortization terms of up to 25 years may be available for certain property types based on elevated
underwriting and qualification criteria. Construction to permanent loans generally include a balloon maturity of five years or less; however,
balloon maturities of greater than five years are allowed on a limited basis depending on factors such as property type, amortization term, lease
terms, pricing, or the availability of credit enhancements. Construction loan proceeds are disbursed commensurate with the percentage of
completion of work in place, as documented by periodic internal or third-party inspections. The maximum loan-to-value limit applicable to these
loans is generally 80% of the appraised post-construction value. Disbursement of funds is at our sole discretion and is based on the progress of
construction. At June 30, 2018 we had $79.3 million of non-residential construction loans included in our commercial construction and
development loan portfolio.
We require all real estate securing construction and development loans to be appraised by an independent Bank-approved state-licensed or state-
certified real estate appraiser. General liability, builder’s risk hazard insurance, title insurance, and flood insurance (as applicable, for properties
located or to be built in a designated flood hazard area) are also required on all construction and development loans.
Construction and development lending affords us the opportunity to achieve higher interest rates and fees with shorter terms to maturity than
the rates and fees generated by our single-family permanent mortgage lending.
For the reasons set forth below, construction and development lending involves additional risks when compared with permanent residential
lending. Our construction and development loans are based upon estimates of costs in relation to values associated with the completed project.
Funds are advanced upon the collateral for the project based on an estimate of costs that will produce a future value at completion. Because of
the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental
regulation on real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the completed project
loan-to-value ratio. Changes in the demand, such as for new housing, and higher than anticipated building costs may cause actual results to vary
significantly from those estimated. This type of lending also typically involves higher loan principal amounts and is often concentrated with a
small number of builders. These loans often involve the disbursement of funds with repayment substantially dependent on the success of the
ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the
borrower or guarantor to repay principal and interest. If our appraisal of the value of a completed project proves to be overstated, we may have
inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss. Because construction
loans require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are more difficult and
costly to monitor. Increases in market rates of interest may have a more pronounced effect on construction loans by rapidly increasing the end-
purchasers' borrowing costs, thereby reducing the overall demand for the project. Properties under construction are often difficult to sell and
typically must be completed in order to be successfully sold which also complicates the process of working out problem construction loans. This
may require us to advance additional funds and/or contract with another builder to complete construction and assume the market risk of selling
the project at a future market price, which may or may not enable us to fully recover unpaid loan funds and associated construction and liquidation
costs. Furthermore, in the case of speculative construction loans, there is the added risk associated with identifying an end-purchaser for the
finished project. Land acquisition and development loans also pose additional risk because of the lack of income being produced by the property
and the potential illiquid nature of the collateral. These risks can also be significantly influenced by supply and demand conditions.
Commercial and Industrial Loans. We typically offer commercial and industrial loans to small businesses located in our primary market areas.
These loans are primarily originated as conventional loans to business borrowers, which include lines of credit, term loans, and letters of credit.
These loans are typically secured by collateral and are used for general business purposes, including working capital financing, equipment
financing, capital investment, and general investments. Loan terms vary from typically one to five years. The interest rates on such loans are
either fixed rate or adjustable rate indexed to The Wall Street Journal prime rate plus a margin. Inherent with our extension of business credit is
the business deposit relationship which frequently includes multiple accounts and related services from which we realize low cost deposits plus
service and ancillary fee income.
Commercial and industrial loans typically have shorter maturity terms and higher interest rates than real estate loans, but generally involve more
credit risk because of the type and nature of the collateral. We are focusing our efforts on small- to medium-sized, privately-held companies with
16
local or regional businesses that operate in our market areas. At June 30, 2018, commercial and industrial loans totaled $148.8 million, which
represented 5.9% of our total loan portfolio. Our commercial and industrial lending policy includes credit file documentation and analysis of the
borrower’s background, capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well as an evaluation of other
conditions affecting the borrower. Analysis of the borrower’s past, present and future cash flows is also an important aspect of our credit analysis.
We generally obtain personal guarantees on our commercial business loans.
During fiscal 2018, we began commercial business loan originations made under the U.S. Small Business Administration ("SBA") 7(a) and
United States Department of Agriculture Business & Industry (“USDA B&I”) programs to small businesses located throughout the Southeast.
We originate these loans and utilize a third party service provider that assists with processing and closing services based on the Bank’s underwriting
and credit approval criteria. Loans made by the Bank under the SBA 7(a) and USDA B&I programs generally are made to small businesses to
provide working capital needs, to refinance existing debt or to provide funding for the purchase of businesses, real estate, machinery, and
equipment. These loans generally are secured by a combination of assets that may include receivables, inventory, furniture, fixtures, equipment,
business real property, commercial real estate and sometimes additional collateral such as an assignment of life insurance and a lien on personal
real estate owned by the guarantor(s). The terms of these loans vary by use of funds. The loans are primarily underwritten on the basis of the
borrower’s ability to service the loan from qualifying business income. Under the SBA 7(a) and USDA B&I loan program the loans carry a
government guaranty up to 90% of the loan in some cases. Typical maturities for this type of loan vary up to twenty-five years and can be thirty
years in some circumstances. SBA 7(a) and USDA B&I loans will normally be adjustable rate loans based upon the Wall Street Journal prime
lending rate. Under the loan programs, we will typically sell in the secondary market the guaranteed portion of these loans to generate noninterest
income and retain the related unguaranteed portion of these loans; loan servicing is handled by a third party loan sub-service provider for a fee
paid for by the purchaser of the guaranteed loan portion. We generally offer SBA 7(a) loans up to $5.0 million and USDA B&I loans up to $10.0
million. During the year ended June 30, 2018, we originated $17.7 million and sold participating interests of $13.2 million in SBA 7(a) and
USDA B&I loans.
Repayment of our commercial and industrial loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the
collateral securing these loans may fluctuate in value. Our commercial and industrial loans are originated primarily based on the identified cash
flow of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral consists of equipment,
inventory or accounts receivable. Credit support provided by the borrower for most of these loans and the probability of repayment is based on
the liquidation of the pledged collateral and enforcement of a personal guarantee, if any. As a result, in the case of loans secured by accounts
receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect
amounts due from its customers. The collateral securing other loans may depreciate over time, may be difficult to appraise and may fluctuate in
value based on the success of the business.
Municipal Leases. We offer ground and equipment lease financing to fire departments located primarily throughout North Carolina and, to a
lesser extent, South Carolina. Municipal leases are secured primarily by a ground lease in our name with a sublease to the borrower for a fire
station or an equipment lease for fire trucks and firefighting equipment. Prior to December 31, 2016, we originated these loans primarily through
a third party that assigned the lease to us after we funded the loan. On December 31, 2016, we acquired the third party originator, United Financial
of North Carolina, Inc., and now all originations and underwriting is performed directly by us prior to funding. These leases are at a fixed rate
of interest and may have a term to maturity of up to 20 years.
At June 30, 2018, municipal leases totaled $109.2 million, which represented 4.3% of our total loan portfolio. At that date, $38.7 million, or
35.4% of our municipal leases were secured by fire trucks, $28.7 million, or 26.3%, were secured by firehouses, $39.0 million or 35.7%, were
secured by both, with the remaining $2.8 million or 2.6% secured by miscellaneous firefighting equipment. At June 30, 2018, the average
outstanding municipal lease size was $384,000.
Repayment of our municipal leases is often dependent on the tax revenues collected by the county/municipality on behalf of the fire department.
Although a municipal lease does not constitute a general obligation of the county/municipality for which the county/municipality's taxing power
is pledged, a municipal lease is ordinarily backed by the county/municipality's covenant to budget for, appropriate and pay the tax revenues to
the fire department. However, certain municipal leases contain "non-appropriation" clauses which provide that the municipality has no obligation
to make lease or installment purchase payments in future years unless money is appropriated for such purpose on a yearly basis. In the case of
a "non-appropriation" lease, our ability to recover under the lease in the event of non-appropriation or default will be limited solely to the
repossession of the leased property, without recourse to the general credit of the lessee, and disposition or releasing of the property might prove
difficult. At June 30, 2018, $11.6 million of our municipal leases contained a non-appropriation clause.
Loan Originations, Purchases, Sales, Repayments and Servicing
We originate both fixed-rate and adjustable-rate loans. Our ability to originate loans, however, is dependent upon customer demand for loans in
our market area. Demand is affected by competition and the interest rate environment. During the past few years, we, like many other financial
institutions, have experienced significant prepayments on loans due to the low interest rate environment prevailing in the United States. In periods
of economic uncertainty, the ability of financial institutions, including us, to originate large dollar volumes of real estate loans may be substantially
reduced or restricted, with a resultant decrease in interest income. We do not generally purchase loans or loan participations except for certain
HELOCs. We actively sell the majority of our long-term fixed-rate residential first mortgage loans to the secondary market at the time of origination
and retain our adjustable-rate residential mortgages and certain fixed-rate mortgages with terms to maturity less than or equal to 15 years and
other consumer and commercial loans. In addition, we began selling the guaranteed portion of SBA 7(a) and USDA B&I loans during fiscal
2018. During the years ended June 30, 2018 and 2017 we sold $139.2 million and $138.1 million, respectively, of predominantly one-to-four
17
family loans and SBA 7(a) loans to the secondary market. We release the servicing on the loans we sell into the secondary market. Loans are
generally sold on a non-recourse basis.
In addition to interest earned on loans and loan origination fees, we receive fees for loan commitments, late payments and other miscellaneous
services. The fees vary from time to time, generally depending on the supply of funds and other competitive conditions in the market.
The following table shows our loan origination, purchase, sale and repayment activities for the periods indicated.
Originations:(1)
Retail consumer:
One-to-four family
Home equity - originated
Construction and land/lots
Indirect auto finance
Consumer
Commercial loans:
Commercial real estate
Construction and development
Commercial and industrial
Municipal leases
Total loans originated
Purchases:
Retail consumer:
Home equity - purchased
Commercial loans:
Commercial real estate
Municipal leases
Loans acquired through business combination
Total loans purchased or acquired
Sales and repayments:
Retail consumer:
One-to-four family
Home equity - originated
Consumer
Commercial loans:
Commercial real estate
Construction and development
Commercial and industrial
Total sales
Principal repayments
Total reductions
Net increase
Years Ended June 30,
2018
2017
2016
$
189,562
$
233,478
$
173,540
(In thousands)
57,018
100,421
99,558
3,100
257,494
234,102
77,871
21,038
47,072
71,674
84,707
2,722
238,870
192,803
92,591
8,278
50,406
42,493
87,844
4,192
137,660
164,945
22,933
—
1,040,164
$
972,195
$
684,013
60,371
$
77,000
$
109,045
790
—
—
930
8,973
258,059
61,161
$
344,962
$
489
11,118
—
120,652
125,830
$
135,365
$
92,054
—
—
—
116
13,244
139,190
787,487
926,677
174,648
$
$
—
—
2,781
—
—
138,146
660,548
798,694
518,463
$
$
15
1
89
44
287
92,490
565,142
657,632
147,033
$
$
$
$
$
$
________________________________________________
(1) Originations include one-to-four family loans, SBA 7(a) loans, and USDA B&I loans originated for sale of $143.8 million, $134.3 million, and $92.0 million for years ended
June 30, 2018, 2017, and 2016, respectively.
18
Asset Quality
Loan Delinquencies and Collection Procedure. When a borrower fails to make a required payment on a residential real estate loan, we attempt
to cure the delinquency by contacting the borrower. A late notice is sent 15 days after the due date, and the borrower may also be contacted by
phone at this time. If the delinquency continues, subsequent efforts are made to contact the delinquent borrower and additional collection notices
and letters are sent. When a loan is 90 days delinquent, we may commence repossession or a foreclosure action. Reasonable attempts are made
to collect from borrowers prior to referral to an attorney for collection. In certain instances, we may modify the loan or grant a limited moratorium
on loan payments to enable the borrower to reorganize their financial affairs, and we attempt to work with the borrower to establish a repayment
schedule to cure the delinquency.
Delinquent consumer loans are handled in a similar manner, except that late notices are sent within 30 days after the due date. Our procedures
for repossession and sale of consumer collateral are subject to various requirements under the applicable consumer protection laws, as well as,
other applicable laws and the determination by us that it would be beneficial from a cost basis.
Delinquent commercial loans are initially handled by the relationship manager of the loan, who is responsible for contacting the borrower. Larger
problem commercial loans are transferred to the Bank's Special Assets Department for resolution or collection activities. The Special Assets
Department may work with the commercial relationship managers to see that the necessary steps are taken to collect delinquent loans, while
ensuring that standard default notices and letters are mailed to the borrower. If a commercial loan becomes more problematic, or goes 90 days
past the due date, a Special Assets officer will take over the loan for further collection activities including any legal action that may be necessary.
If an acceptable workout or disposition plan of a delinquent commercial loan cannot be reached, we generally initiate foreclosure or repossession
proceedings on any collateral securing the loan.
The following table sets forth our loan delinquencies by type, by amount and by percentage of type at June 30, 2018.
Loans Delinquent For:
Total Loans Delinquent
30-89 Days
90 Days and Over
30 Days or More
Number
Amount
Percent
of
Loan
Category Number
Percent
of
Loan
Category Number
Amount
(Dollars in thousands)
$
3,001
98
44
335
238
0.45%
0.07
0.07
0.19
1.92
169
0.02
31
8
3
13
6
17
$
1,756
268
54
127
39
0.26%
0.19
0.08
0.07
0.32
1,412
0.16
83
9
5
39
14
19
Percent
of
Loan
Category
0.72%
0.27
0.15
0.27
2.24
Amount
$
4,757
366
98
462
277
1,581
0.18
260
15
4,160
$
0.14
0.01
0.16%
12
34
124
1,928
69
5,653
$
1.00
0.05
0.22%
15
35
219
2,188
84
9,813
$
1.14
0.06
0.39%
Retail consumer loans:
One-to-four family
Home equity - originated
Construction and land/lots
Indirect auto finance
Consumer
Commercial loans:
Commercial real estate
Construction and
development
Commercial and industrial
Total
52
1
2
26
8
2
3
1
95
Nonperforming Assets. Nonperforming assets were $14.6 million, or 0.44% of total assets at June 30, 2018, compared to $20.0 million, or
0.62%, at June 30, 2017.
Over the past several years we have significantly improved our risk profile by aggressively managing and reducing our problem assets. We
continue to believe our level of nonperforming assets is manageable, and we believe that we have sufficient capital and human resources to
manage the collection of our nonperforming assets in an orderly fashion. However, our operating results could be adversely impacted if we are
unable to effectively manage our nonperforming assets.
Loans are placed on nonaccrual status when the collection of principal and/or interest becomes doubtful or other factors involving the loan
warrant placing the loan on nonaccrual status. Troubled debt restructurings are loans which have renegotiated loan terms to assist borrowers who
are unable to meet the original terms of their loans. Such modifications to loan terms may include a lower interest rate, a reduction in principal,
or a longer term to maturity. During the fiscal year ended June 30, 2018, 31 loans for $4.2 million were modified from their original terms and
were classified as a troubled debt restructuring. This compares to 41 loans for $4.9 million that were modified in the fiscal year ended June 30,
2017. As of June 30, 2018, the outstanding balance of troubled debt restructured loans was $26.2 million, comprised of 329 loans as compared
to $32.7 million comprised of 361 loans at June 30, 2017.
19
Once a nonaccruing troubled debt restructuring has performed according to its modified terms for six months and the collection of principal and
interest under the revised terms is deemed probable, the troubled debt restructuring is removed from nonaccrual status. At June 30, 2018, $4.2
million of troubled debt restructurings were classified as nonaccrual, including $1.5 million of construction and development loans, the largest
of which was $1.0 million as discussed below. As of June 30, 2018, $21.2 million, or 81.3% of the restructured loans have a current payment
status as compared to $27.0 million, or 82.6% at June 30, 2017. Performing troubled debt restructurings decreased $5.8 million, or 21.4%, from
June 30, 2017 to June 30, 2018. The table below sets forth the amounts and categories of nonperforming assets.
Nonaccruing loans:(1)
Retail consumer loans:
One-to-four family
Home equity - originated
Home equity - purchased
Construction and land/lots
Indirect auto finance
Consumer
Commercial loans:
Commercial real estate
Construction and development
Commercial and industrial
Municipal leases
Total nonaccruing loans
Real Estate Owned assets:
Retail consumer loans:
One-to-four family
Home equity - originated
Construction and land/lots
Commercial loans:
Commercial real estate
Construction and development
Total foreclosed assets
Total nonperforming assets
Total nonperforming assets as a percentage of total assets
Performing Troubled Debt Restructurings
2018
2017
2016
2015
2014
At June 30,
$
4,308
$
656
187
165
255
321
2,863
2,045
114
—
(In thousands)
$
6,453
1,291
9,192
1,026
$
10,523
$
14,917
1,856
2,749
192
245
1
29
2,756
1,766
827
106
—
188
20
15
3,222
1,417
3,019
419
—
465
—
49
5,103
3,461
3,081
316
—
443
—
27
12,953
5,697
1,134
—
10,914
13,666
18,518
24,854
37,920
801
197
498
990
45
690
794
30
846
1,613
20
1,096
3,876
627
1,613
1,730
458
3,684
14,598
0.44%
21,251
$
$
2,736
1,857
6,318
19,984
0.62%
27,043
$
$
1,211
3,075
5,956
24,474
0.90%
28,263
$
$
978
3,317
7,024
31,878
1.15%
21,891
$
$
3,820
4,725
14,661
52,581
2.53%
22,179
$
$
_______________________________________
(1)
Purchased-credit impaired ("PCI") loans totaling $3,353 at June 30, 2018, $6,664 at June 30, 2017, $6,607 at June 30, 2016, $8,158 at June 30, 2015, and $9,091 at June 30, 2014
are excluded from nonaccruing loans due to the accretion of discounts established in accordance with the acquisition method of accounting for business combinations.
For the years ended June 30, 2018 and 2017, gross interest income which would have been recorded had the nonaccruing loans been current in
accordance with their original terms amounted to $668,000 and $897,000, respectively. The amount that was included in interest income on such
loans was $702,000 and $1.0 million, respectively. At June 30, 2018, $13.9 million in impaired loans were individually evaluated for impairment;
$197,000 of the allowance for loan losses was allocated to these individually impaired loans at period-end. A loan is impaired when it is probable,
based on current information and events, that we will be unable to collect all contractual principal and interest payments due in accordance with
the terms of the loan agreements. Troubled debt restructurings are also considered impaired. Impaired loans are measured on an individual basis
for individually significant loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a
practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. The amount of
impairment, if any, and any subsequent changes are included in the allowance for loan losses.
We record real estate owned ("REO") (property acquired through a lending relationship) at fair value less cost to sell on a non-recurring basis.
All REO properties are recorded at amounts which are equal to the fair value of the properties based on independent appraisals (reduced by
estimated selling costs) upon transfer of the loans to REO. From time to time, non-recurring fair value adjustments to REO are recorded to reflect
partial write-downs based on an observable market price or current appraised value of property. The individual carrying values of these assets
are reviewed for impairment at least annually and any additional impairment charges are expensed to operations. For the years ended June 30,
2018 and 2017, we recognized $539,000 and $292,000, respectively, of REO impairment charges.
20
Within our nonaccruing loans, as of June 30, 2018 we had one nonaccrual lending relationship with aggregate loan exposure in excess of $1.0
million, or 9.4% of our total nonaccruing loans. This loan is a $1.0 million troubled debt restructuring for construction and development loan
secured by improved land zoned for commercial purposes located in Buncombe County, NC. At June 30, 2018, we had $3.7 million of REO,
the largest of which had a book value of $563,000 and is related to commercial real estate located in Boiling Springs, NC. The second and third
largest REO properties at June 30, 2018 consist of multifamily properties located in Bristol, VA with book values of $549,000 and $312,000,
respectively. At June 30, 2018 all other REO properties have individual book values of less than $212,000.
REO decreased $2.6 million, to $3.7 million at June 30, 2018 primarily due to the $3.9 million in sales of REO, partially offset by $1.3 million
in transfers from loans. The total balance of REO included $956,000 in land, construction and development projects (both residential and
commercial), $1.7 million in commercial real estate, and $998,000 in single-family homes at June 30, 2018.
In fiscal 2018, we liquidated $8.4 million in REO based on contractual loan values at the time of foreclosure, realizing $3.9 million in net proceeds,
or 46.5%, of the foreclosed contractual loan balances. As of June 30, 2018, the book value of our REO, expressed as a percentage of the related
contractual loan balances at the time the properties were transferred to REO was 39.8%.
Other Loans of Concern. In addition to the nonperforming assets set forth in the table above, as of June 30, 2018, there were 351 accruing loans
totaling $32.8 million with respect to which known information about the possible credit problems of the borrowers have caused management
to have concerns as to the ability of the borrowers to comply with present loan repayment terms and which may result in the future inclusion of
such items in the nonperforming asset categories. These loans have been considered in management’s determination of our allowance for loan
losses.
Classified Assets. Loans and other assets, such as debt and equity securities considered to be of lesser quality, are classified 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 characterized by the “distinct possibility” that the insured institution
will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses 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 classified as “loss” are those considered “uncollectible” and of such
little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.
When we classify a problem asset as either substandard or doubtful, we may establish a specific allowance for loan losses in an amount deemed
prudent by management. When we classify problem assets as “loss,” we either establish a specific allowance for losses equal to 100% of that
portion of the asset so classified or charge off such amount. Our determination as to the classification of our assets and the amount of our valuation
allowances is subject to review by our bank regulators, which may order the establishment of additional general or specific loss allowances.
Assets which do not currently expose us to sufficient risk to warrant classification in one of the aforementioned categories but possess weakness
are designated by us as “special mention.”
We regularly review the problem assets in our portfolio to determine whether any assets require classification in accordance with applicable
regulations. On the basis of management's review of our assets, at June 30, 2018, our classified assets (consisting of $29.4 million of loans and
$3.7 million of REO) totaled $33.1 million, or 1.00%, of our assets, of which $10.9 million was included in nonaccruing loans. The aggregate
amounts of our classified assets and special mention loans at the dates indicated (as determined by management), were as follows:
Classified Assets:
Loss
Doubtful
Substandard
– performing
– nonaccruing
Total classified loans
REO
Total classified assets
Special mention loans
At June 30,
2018
2017
(In thousands)
$
31
$
952
18,042
10,349
29,374
3,684
33,058
14,359
28
1,560
29,436
12,869
43,893
6,318
50,211
18,481
68,692
Total classified assets and special mention loans
$
47,417
$
Allowance for Loan Losses. The allowance for loan losses is a valuation account that reflects our estimation of the losses in our loan portfolio
to the extent they are reasonable to estimate. The allowance is maintained through provisions for loan losses that are charged to earnings in the
period they are established. We charge losses on loans against the allowance for loan losses when we believe the collection of loan principal is
unlikely. Recoveries on loans previously charged off are added back to the allowance.
In recent years, home and lot sales activity and real estate values have improved along with general economic conditions in our market areas
resulting in materially lower loan charge-offs and nonaccruing loans than in prior fiscal years. Proactively managing our loan portfolio and
21
aggressively resolving troubled assets has been and will continue to be a primary focus for us. As a result, our nonperforming assets declined
substantially over the last several years. At June 30, 2018, our nonaccruing loans decreased to $10.9 million as compared to $13.7 million at
June 30, 2017, and $18.5 million at June 30, 2016. At June 30, 2018, $5.6 million, or 51.6%, of our total nonaccruing loans were current on their
loan payments as compared to $6.6 million, or 48.0%, of total nonaccruing loans at June 30, 2017. During fiscal 2018 classified assets decreased
$17.2 million, or 34.2%, to $33.1 million and delinquent loans (loans delinquent 30 days or more) decreased $5.4 million, or 35.5%, to $9.8
million at June 30, 2018. There were $91,000 and $141,000 in net loan charge-offs during the fiscal years ended June 30, 2018 and 2017,
respectively. There was no provision for loan losses during fiscal 2018 or 2017. We did not record a loan loss provision in either fiscal year as
our improved risk profile, as indicated by the improvement in our key credit quality metrics, offset any additional allowance that might have
been required to cover loan growth. Although we continue to actively engage our borrowers in resolving remaining problem assets, future
additions to our allowance for loan losses will be meaningfully influenced by the course of economic conditions in our primary market areas as
well as the national economy.
At June 30, 2018, our allowance for loan losses was $21.1 million, or 0.83%, of our total loan portfolio, and 193.0% of total nonaccruing loans.
Excluding loans acquired, which have been recorded at fair value with an appropriate credit discount, the allowance for loan losses was 0.91%
of total loans at June 30, 2018. Management’s estimation of an appropriate allowance for loan losses is inherently subjective as it requires
estimates and assumptions that are susceptible to significant revisions as more information becomes available or as future events change. The
level of allowance is based on estimates and the ultimate losses may vary from these estimates. Large groups of smaller balance homogeneous
loans, such as residential real estate, small commercial real estate, home equity and consumer loans, are evaluated in the aggregate using historical
loss factors adjusted for current economic conditions. Assessing the allowance for loan losses is inherently subjective as it requires making
material estimates, including the amount and timing of future cash flows expected to be received. In the opinion of management, the allowance,
when taken as a whole, reflects estimated loan losses in our loan portfolio.
A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled
payments of principal or interest when due. Factors considered by management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays
and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Future additions to the allowance for loan losses may be necessary if economic and other conditions in the future differ substantially from the
current operating environment. In addition, the Federal Reserve and the NCCOB as an integral part of their examination process periodically
review our loan and REO portfolios and the related allowance for loan losses and valuation allowance for foreclosed real estate. The regulators
may require the allowance for loan losses or the valuation allowance for foreclosed real estate to be increased based on their review of information
available at the time of the examination, which would negatively affect our earnings.
22
The following table summarizes the distribution of the allowance for loan losses by loan category at the dates indicated.
2018
2017
At June 30,
2016
2015
2014
Percent
of loans
in each
category
to total
loans
Amount
Percent
of loans
in each
category
to total
loans
Amount
Percent
of loans
in each
category
to total
loans
Amount
Percent
of loans
in each
category
to total
loans
Amount
Percent
of loans
in each
category
to total
loans
Amount
(Dollars in thousands)
$ 3,360
26.29% $ 4,476
29.08% $ 6,595
34.04% $ 7,990
38.61% $ 10,527
44.09%
1,123
5.44
1,384
6.68
1,997
8.91
1,777
9.56
2,487
9.90
795
6.58
838
6.90
558
7.88
432
4.27
—
—
1,153
1,126
68
2.60
6.85
0.49
977
881
57
2.13
5.99
0.34
1,344
1,016
61
2.08
5.92
0.25
1,822
464
128
2.73
3.11
0.22
2,420
113
184
3.95
0.59
0.42
Allocated at end of
period to:
Retail consumer loans:
One-to-four family
Home equity -
originated
Home equity -
purchased
Construction and land/
lots
Indirect auto finance
Consumer
Commercial loans:
Commercial real estate
8,195
33.94
7,351
31.04
6,430
26.55
6,339
26.20
5,439
25.21
Construction and
development
Commercial and
industrial
Municipal leases
Total loans
3,346
7.60
3,166
8.42
1,908
4.74
1,581
3.83
1,241
3.78
1,476
418
$ 21,060
5.89
4.32
1,524
497
100.00% $ 21,151
5.12
4.30
721
662
100.00% $ 21,292
4.00
5.63
1,104
737
100.00% $ 22,374
5.03
6.44
249
769
100.00% $ 23,429
4.97
7.09
100.00%
23
The following table sets forth an analysis of our allowance for loan losses at the dates and for the periods indicated.
Years Ended June 30,
2018
2017
2016
2015
2014
Balance at beginning of period:
Provision for (recovery of) loan losses
$
21,151
—
$
21,292
—
(Dollars in thousands)
$
$
22,374
—
Charge-offs:
Retail consumer loans:
One-to-four family
Home equity - originated
Home equity - purchased
Construction and land/lots
Indirect auto finance
Consumer
Total retail consumer loans
Commercial loans:
Commercial real estate
Construction and development
Commercial and industrial
Municipal leases
Total commercial loans
Total charge-offs
Recoveries:
Retail consumer loans:
One-to-four family
Home equity - originated
Construction and land/lots
Indirect auto finance
Consumer
Total retail consumer loans
Commercial loans:
Commercial real estate
Construction and development
Commercial and industrial
Municipal leases
Total commercial loans
Total recoveries
Net charge-offs
Balance at end of period
538
9
—
2
578
15
1,142
282
381
842
—
1,505
2,647
411
307
173
39
60
990
439
18
48
165
531
18
1,219
139
21
1,171
—
1,331
2,550
181
231
487
122
63
1,084
799
94
—
321
281
168
1,663
200
259
1,582
—
2,041
3,704
683
157
44
58
292
1,234
$
23,429
150
32,073
(6,300)
1,878
551
—
483
107
274
3,293
704
368
495
—
1,567
4,860
758
231
95
34
91
1,209
3,269
330
—
804
—
33
4,436
413
377
110
—
900
5,336
875
153
624
—
10
1,662
107
81
1,378
—
1,566
2,556
91
21,060
58
539
728
—
1,325
2,409
141
21,151
883
265
240
—
1,388
2,622
1,082
21,292
479
1,311
656
—
2,446
3,655
1,205
22,374
$
$
120
1,052
159
—
1,331
2,993
2,343
23,429
$
$
$
Net charge-offs during the period to average loans outstanding
during the period
Net charge-offs during the period to average non-performing
assets
Allowance as a percentage of nonperforming assets
Allowance as a percentage of total loans(1)
—%
0.01%
0.06%
0.07%
0.19%
0.53%
0.67%
144.27%
105.84%
0.83%
0.90%
3.77%
87.00%
1.16%
2.89%
70.19%
1.33%
3.40%
44.56%
1.56%
______________
(1) Excluding loans acquired, which have been recorded at fair value with an appropriate credit discount, the allowance for loan losses was 0.91%, 1.03%, 1.32%, 1.58%, and 2.05%
of total loans at June 30, 2018, 2017, 2016, 2015, and 2014, respectively.
24
Investment Activities
The Bank invests in various securities based on investment policies that have been approved by our board of directors and adhere to bank
regulations. These securities include: United States Treasury obligations, securities of various federal agencies, including mortgage-backed
securities, callable agency securities, certain certificates of deposit of insured banks and savings institutions, repurchase agreements, municipal
bonds, investment grade corporate bonds and commercial paper, and federal funds. See “How We Are Regulated - HomeTrust Bank” for a
discussion of additional restrictions on our investment activities.
Our chief executive officer and chief financial officer have the basic responsibility for the management of our investment portfolio, subject to
the direction and guidance of the board of directors. These officers consider various factors when making decisions, including the marketability,
maturity, and tax consequences of the proposed investment. The maturity structure of investments will be affected by various market conditions,
including the current and anticipated slope of the yield curve, the level of interest rates, the trend of new deposit inflows, and the anticipated
demand for funds via deposit withdrawals and loan originations and purchases.
The general objectives of our investment portfolio are to provide liquidity when loan demand is high, to assist in maintaining earnings when
loan demand is low and to optimize earnings while satisfactorily managing risk, including credit risk, reinvestment risk, liquidity risk, and interest
rate risk. At June 30, 2018, our $154.9 million securities portfolio consisted primarily of U.S. government agency securities and mortgage-backed
securities, all held as available for sale. We currently do not have any investments held to maturity or for trading.
These securities are of high quality, possess minimal credit risk, and have an aggregate market value which is $2.1 million less than total amortized
cost as of June 30, 2018. For more information, please see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results
of Operations - Asset/Liability Management” and Note 3 of the Notes to Consolidated Financial Statements contained in Item 8 in this report.
The Company began purchasing commercial paper during fiscal 2015 in conjunction with its short-term leverage strategy, to take advantage of
higher returns with relatively low risk, yet remain highly liquid. The commercial paper balance at June 30, 2018 was $229.1 million. For more
information, please see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Comparison of
Financial Condition at June 30, 2018 and June 30, 2017.”
We do not currently participate in hedging programs, stand-alone contracts for interest rate caps, floors or swaps, or other activities involving
the use of off-balance sheet derivative financial instruments and have no present intention to do so. Further, we do not invest in securities which
are not rated investment grade.
As a member of the FHLB of Atlanta, we had $29.9 million in stock of the FHLB of Atlanta at June 30, 2018. For the years ended June 30, 2018
and 2017, we received $1.6 million and $1.3 million, respectively, in dividends from the FHLB of Atlanta. As a member bank of the Federal
Reserve, the Bank is required to maintain stock in the Federal Reserve Bank of Richmond ("FRB"). At June 30, 2018 we had $7.3 million in
FRB stock. For the years ended June 30, 2018 and 2017, we received $438,000 and $383,000, respectively, in dividends from the FRB.
The following table sets forth the composition of our securities portfolio and other investments at the dates indicated. All securities at the dates
indicated have been classified as available for sale. At June 30, 2018, our securities portfolio did not contain securities of any issuer with an
aggregate book value in excess of 10% of our equity capital, excluding those issued by the United States government or its agencies or United
States government sponsored entities.
2018
Book
Value
Fair
Value
At June 30,
2017
Book
Value
Fair
Value
(In thousands)
2016
Book
Value
Fair
Value
Securities available for sale:
U.S. government agencies
Mortgage-backed securities
Municipal bonds
Corporate bonds
Equity securities
Total securities available for sale
FHLB stock
FRB stock
Total securities
$
$
48,025
71,949
30,865
6,166
63
157,068
29,907
7,307
194,282
$
$
47,542
70,599
30,766
6,023
63
154,993
29,907
7,307
192,207
$
$
65,947
92,841
34,135
6,267
63
199,253
32,071
7,284
238,608
$
$
65,830
92,971
34,510
6,293
63
199,667
32,071
7,284
239,022
$
$
77,356
95,668
16,242
7,773
63
197,102
23,304
6,182
226,588
$
$
77,980
97,408
17,234
7,967
63
200,652
23,304
6,182
230,138
25
The composition and contractual maturities of our investment securities portfolio as of June 30, 2018, excluding equity securities, FHLB, and
FRB stock, are indicated 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.
Securities available for sale:
U.S. government agencies:
Amortized cost
Fair value
Weighted average yield
Mortgage-backed securities
Amortized cost
Fair value
Weighted average yield
Municipal bonds
Amortized cost
Fair value
Weighted average yield
Corporate bonds
Amortized cost
Fair value
Weighted average yield
Total securities
Amortized cost
Fair value
1 year or less
Over 1 year
to 5 years
June 30, 2018
Over 5 to 10
years
(Dollars in thousands)
Over 10 years
$
$
25,984
25,827
22,041
21,715
1.23%
1.74%
$
— $
— $
—
—%
—
—%
1,000
996
8,183
8,008
26,610
25,836
36,156
35,759
Total
48,025
47,542
1.47%
71,949
70,599
2.63%
1.61%
2.07%
2.81%
2.40%
2,744
2,746
13,066
12,925
5,749
5,829
9,306
9,266
30,865
30,766
1.94%
2.61%
3.76%
2.89%
2.85%
—
—
—%
6,166
6,023
3.15%
—
—
—%
—
—
—%
6,166
6,023
3.15%
$
$
29,728
29,569
$
$
49,456
48,671
$
$
32,359
31,665
$
$
45,462
45,025
$
$
157,005
154,930
Weighted average yield
1.34%
2.13%
2.37%
2.83%
2.23%
Sources of Funds
General. Our sources of funds are primarily deposits, borrowings, payments of principal and interest on loans, and funds provided from operations.
Deposits increased $147.8 million, or 7.2%, to $2.2 billion at June 30, 2018 as compared to $2.0 billion at June 30, 2017.
Deposits. We offer a variety of deposit accounts with a wide range of interest rates and terms to both consumers and businesses. Our deposits
consist of savings, money market and demand accounts, and certificates of deposit ("CDs"). We solicit deposits primarily in our market areas.
At June 30, 2018, 2017 and 2016, we had $108.9 million, $16.8 million, and $13.6 million in brokered deposits, respectively, which included
certificates of deposit made under our participation in the Certificate of Deposit Account Registry Service® (“CDARS”). Through CDARS, we
can provide a depositor the ability to place up to $50.0 million on deposit with us while receiving FDIC insurance on the entire deposit by placing
customer funds in excess of the FDIC deposit limits with other financial institutions in the CDARS network. In return, these financial institutions
place customer funds with us on a reciprocal basis. As of June 30, 2018, core deposits, which we define as our non-certificate or non-time deposit
accounts, represented approximately 76.5% of total deposits.
We primarily rely on competitive pricing policies, marketing, and customer service to attract and retain deposits. The flow of deposits is influenced
significantly by general economic conditions, changes in money market and prevailing interest rates and competition. The variety of deposit
accounts we offer has allowed us to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. We have
become more susceptible to short-term fluctuations in deposit flows as customers have become more interest rate conscious. We try to manage
the pricing of our deposits in keeping with our asset/liability management, liquidity and profitability objectives, subject to competitive factors.
Based on our experience, we believe that our deposits are relatively stable sources of funds. Despite this stability, our ability to attract and
maintain these deposits and the rates paid on them has been and will continue to be significantly affected by market conditions.
Approximately 23.5% of our total deposits are comprised of CDs. Our liquidity could be reduced if a significant amount of CDs, maturing within
a short period of time, were not renewed. Historically, a significant portion of our CDs remain with us after they mature and we believe that this
will continue. However, the need to retain these time deposits could result in an increase in our cost of funds.
26
The following table sets forth our deposit flows during the periods indicated.
(Dollars in thousands)
Beginning balance
Deposits acquired from business combination
Net deposit increase (decrease)
Interest credited
Ending balance
Net increase (decrease)
Percent increase (decrease)
Years Ended June 30,
2018
2,048,451
—
141,048
6,754
2,196,253
147,802
7.22%
$
$
$
2017
1,802,696
280,234
(39,067)
4,588
2,048,451
245,755
13.63%
$
$
$
$
$
$
2016
1,872,126
—
(73,961)
4,531
1,802,696
(69,430)
(3.71)%
The following table sets forth the dollar amount of deposits in the various types of deposit programs offered by us at the dates indicated.
2018
2017
2016
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
(Dollars in thousands)
Transaction and Savings Deposits:
Interest-bearing checking
Noninterest-bearing checking
Savings
Money market
Total non-certificates
Certificates:
0.00-0.99%
1.00-1.99%
2.00-2.99%
3.00-3.99%
4.00-4.99%
5.00% and over
Total certificates
Total deposits
$
471,364
317,822
213,250
677,665
$ 1,680,101
$
273,087
197,875
35,707
5,066
4,415
2
$
516,152
$ 2,196,253
21.46% $
14.47
469,377
310,172
237,149
9.71
569,607
30.86
76.50% $ 1,586,305
22.91% $
15.14
403,574
225,336
210,817
11.58
520,320
27.81
77.44% $ 1,360,047
12.43% $
360,449
89,279
2,755
5,234
4,427
2
462,146
100.00% $ 2,048,451
9.01
1.63
0.23
0.20
—
23.50% $
17.60% $
385,342
40,841
2,760
9,275
4,427
4
442,649
100.00% $ 1,802,696
4.36
0.13
0.26
0.22
—
22.56% $
22.39%
12.50
11.69
28.86
75.45%
21.38%
2.27
0.15
0.51
0.25
—
24.55%
100.00%
27
The following table shows rate and maturity information for our CDs at June 30, 2018.
0.00-
0.99%
1.00-
1.99%
2.00-
2.99%
3.00-
3.99%
4.00-
4.99%
(In thousands)
5.00%
or
greater
Percent
of
Total
Total
Quarter ending:
September 30, 2018
$ 103,720
$ 81,898
$
— $
$
— $
— $ 185,703
December 31, 2018
March 31, 2019
June 30, 2019
September 30, 2019
December 31, 2019
March 31, 2020
June 30, 2020
September 30, 2020
December 31, 2020
March 31, 2021
June 30, 2021
Thereafter
Total
40,571
28,569
22,178
13,497
10,655
8,560
9,246
6,286
6,666
3,674
3,723
15,742
43,361
23,124
21,827
10,583
7,420
1,518
482
541
1,361
1,173
948
3,639
4
16,408
3,991
442
3,244
81
1,305
434
318
101
652
8,727
85
—
—
—
2,768
1,392
772
21
—
—
—
—
28
—
—
—
69
—
—
—
—
—
—
—
4,346
4,415
$
—
—
—
—
—
—
—
2
—
—
—
—
2
83,936
68,101
47,996
27,359
22,711
10,931
11,054
7,263
8,345
4,948
5,323
32,482
36.0%
16.3
13.2
9.3
5.3
4.4
2.1
2.1
1.4
1.6
1.0
1.0
6.3
$ 273,087
$ 197,875
$ 35,707
$
5,066
$
$ 516,152
100.0%
Percent of total
52.9%
38.3%
6.9%
1.0%
0.9%
—%
100.0%
The following table indicates the amount of our CDs by time remaining until maturity as of June 30, 2018.
3 Months
or Less
$
$
17,166
116,575
51,961
185,702
$
$
Maturity
Over
3 to 6
Months
Over
6 to 12
Months
Over
12 Months
Total
(In thousands)
21,828
$
69,839
24,432
116,099
$
$
$
27,795
52,122
4,018
83,935
66,390
62,166
1,860
130,416
$
$
133,179
300,702
82,271
516,152
CDs less than $100,000
CDs of $100,000 or more
Public funds(1)
Total certificates of deposit
_______________________________
(1) Deposits from government and other public entities.
Borrowings. Although deposits are our primary source of funds, we may utilize borrowings to manage interest rate risk or as a cost-effective
source of funds when they can be invested at a positive interest rate spread for additional capacity to fund loan demand according to our asset/
liability management goals. Our borrowings consist of advances from the FHLB of Atlanta. In November 2014, management made a strategic
decision to increase our borrowings of low-cost FHLB funds to generate additional net interest income with the proceeds, as well as dividend
income from the required purchase of additional FHLB stock.
We may obtain advances from the FHLB of Atlanta upon the security of certain of our mortgage loans and mortgage-backed and other securities.
These advances may be made pursuant to several different credit programs, each of which has its own interest rate, range of maturities and call
features, and all long-term advances are required to provide funds for residential home financing. As of June 30, 2018, we had $635.0 million
in FHLB advances outstanding and the ability to borrow an additional $79.2 million. In addition to FHLB advances, at June 30, 2018 we had a
$132.3 million line of credit with the FRB, subject to qualifying collateral, and $60.0 million available through lines of credit with three unaffiliated
banks, none of which was outstanding at June 30, 2018. See Note 10 of the Notes to Consolidated Financial Statements included in Item 8 of
this Form 10-K for more information about our borrowings.
28
The following tables set forth information regarding our borrowings at the end of and during the periods indicated.
Maximum balance:
Federal Home Loan Bank advances
Average balances:
Federal Home Loan Bank advances
Weighted average interest rate:
Federal Home Loan Bank advances
Balance outstanding at end of period:
Federal Home Loan Bank advances
Weighted average interest rate:
Federal Home Loan Bank advances
Subsidiary and Other Activities
Year ended June 30,
2018
2017
2016
(Dollars in thousands)
$
$
699,000
658,240
$
$
696,500
577,848
$
$
507,000
482,576
1.41%
0.63%
0.31%
2018
At June 30,
2017
(Dollars in thousands)
2016
$
635,000
$
696,500
$
491,000
1.95%
1.13%
0.42%
HomeTrust Bank has one operating subsidiary, Western North Carolina Service Corporation (“WNCSC”), whose primary purpose is to own
several office buildings in Asheville, North Carolina which are leased to HomeTrust Bank. Our capital investment in WNCSC as of June 30,
2018 was $938,000.
Employees
At June 30, 2018, we had a total of 466 full-time employees and 54 part-time employees. Our employees are not represented by any collective
bargaining group. Management considers its employee relations to be good. Management also considers our employees to be a great team of
highly engaged, competent and caring people who ensure every day that our customers are "Ready For What's Next" in their financial life. Their
performance creates word-of-mouth referrals that result in the growth of new customers and expanded customer relationships.
Internet Website
We maintain a website with the address www.hometrustbancshares.com. The information contained on our website is not included as a part of,
or incorporated by reference into, this Annual Report on Form 10-K. Other than an investor’s own Internet access charges, we make available
free of charge through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and
amendments to these reports, as soon as reasonably practicable after we have electronically filed such material with, or furnished such material
to, the SEC.
HOW WE ARE REGULATED
General. HomeTrust Bancshares, Inc. is subject to examination and supervision by, and is required to file certain reports with, the Federal
Reserve. HomeTrust Bancshares, Inc. is also subject to the rules and regulations of the SEC under the federal securities laws.
The Bank is subject to examination and regulation primarily by the NCCOB and the Federal Reserve. This system of regulation and supervision
establishes a comprehensive framework of activities in which the Bank may engage and is intended primarily for the protection of depositors
and the FDIC deposit insurance fund. The Bank is periodically examined by the NCCOB and the Federal Reserve to ensure that it satisfies
applicable standards with respect to its capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. The
NCCOB and the Federal Reserve also regulates the branching authority of the Bank. The Bank’s relationship with its depositors and borrowers
is regulated by federal consumer protection laws. The CFPB issues regulations under those laws that the Bank must comply with. The Bank’s
relationship with its depositors and borrowers is also regulated by state laws with respect to certain matters, including the enforceability of loan
documents.
On August 25, 2014, the Bank converted from a federal savings bank to a national bank. In connection with the conversion of the Bank, HomeTrust
Bancshares, Inc. changed from a savings and loan holding company to a bank holding company, regulated under the Bank Holding Company
Act ("BHCA"). On December 31, 2015, the Bank converted from a national bank to a North Carolina state-chartered bank and remained a
member of the Federal Reserve System. Prior to December 31, 2015, the Bank was regulated by the Office of the Comptroller of the Currency.
In connection with the charter change, the Company elected to be treated as a financial holding company by the Federal Reserve.
29
The following is a brief description of certain laws and regulations applicable to HomeTrust Bancshares, Inc. and the Bank. Descriptions of laws
and regulations here and elsewhere in this report do not purport to be complete and are qualified in their entirety by reference to the actual laws
and regulations. Legislation is introduced from time to time in the United States Congress that may affect the operations of HomeTrust Bancshares
and the Bank. In addition, the regulations that govern us may be amended from time to time. Any such legislation or regulatory changes in the
future could adversely affect our operations and financial condition.
Financial Regulatory Reform. The Dodd-Frank Act, which was enacted in July 2010, imposed various restrictions and an expanded framework
of regulatory oversight for financial entities, including depository institutions and their holding companies.
In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Regulatory Relief Act”), was enacted to modify or
remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While the Act maintains
most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository
institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion. Many of these changes could result in
meaningful regulatory changes for community banks such as HomeTrust Bank, and their holding companies.
The Regulatory Relief Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and
simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion
by instructing the federal banking regulators to establish a single “Community Bank Leverage Ratio” of between 8 and 10 percent. Any qualifying
depository institution or its holding company that exceeds the “community bank leverage ratio” will be considered to have met generally applicable
leverage and risk-based regulatory capital requirements and any qualifying depository institution that exceeds the new ratio will be considered
to be “well capitalized” under the prompt corrective action rules. In addition, the Regulatory Relief Act includes certain regulatory relief regarding
such matters as call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures and risk weights for certain high-risk
commercial real estate loans.
It is difficult at this time to predict when or how any new standards under the Regulatory Relief Act will ultimately be applied to us or what
specific impact the Act and the yet-to-be-written implementing rules and regulations will have on community banks.
Regulation of HomeTrust Bank
The Bank is subject to regulation and oversight by the NCCOB and the Federal Reserve extending to all aspects of its operations, including but
not limited to requirements concerning an allowance for loan losses, lending and mortgage operations, interest rates received on loans and paid
on deposits, the payment of dividends to the Company, loans to officers and directors, mergers and acquisitions, capital, and the opening and
closing of branches. See "- Current Capital Requirements for HomeTrust Bank," "-Limitations on Dividends and Other Capital Distributions"
and “-New Capital Rules” for additional details.
As a state-chartered institution, the Bank is subject to periodic examinations by the NCCOB and the Federal Reserve. During these examinations,
the examiners assess compliance with state and federal banking regulations and the safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk exposure, and employee
compensation and benefits. Any institution that fails to comply with these standards must submit a compliance plan.
The Bank is subject to a statutory lending limit on aggregate loans to one person or a group of persons combined because of certain relationships
and common interests. That limit is generally equal to 15% of unimpaired capital and surplus, which was $53.5 million as of June 30, 2018. The
limit is increased to 25% for loans fully secured by readily marketable collateral. The Bank has no lending relationships in excess of its lending
limit.
The NCCOB and the Federal Reserve have enforcement responsibility over the Bank and the authority to bring actions against the Bank and
certain institution-affiliated parties, including officers, directors, and employees, for violations of laws or regulations and for engaging in unsafe
and unsound practices. Formal enforcement actions include the issuance of a capital directive or cease and desist order, civil money penalties,
removal of officers and/or directors, and receivership or conservatorship of the institution.
Pursuant to the Dodd-Frank Act, federal banking and securities regulators issued final rules to implement Section 619 of the Dodd-Frank Act
(the “Volcker Rule”). These rules became effective April 15, 2014, but the Federal Reserve extended the conformance period for certain features
to July 21, 2017. Generally, subject to a transition period and certain exceptions, the Volcker Rule restricts insured depository institutions and
their affiliates from engaging in short-term proprietary trading of certain securities, investing in funds not registered with the SEC with collateral
not entirely comprised of loans, and from engaging in hedging activities that do not hedge a specific identified risk.
Insurance of Accounts and Regulation by the FDIC. The deposit insurance fund of the FDIC insures deposit accounts in HomeTrust Bank up
to $250,000 per separately insured deposit ownership right or category.
Under the FDIC’s risk-based assessment system, insured institutions are assessed based on supervisory ratings and in general, stronger institutions
pay lower rates while riskier institutions pay higher rates. Currently, assessment rates (inclusive of certain possible adjustments) range from 1.5
to 40.0 basis points of each institution’s total average consolidated assets less average tangible equity (subject to upward adjustment for certain
debt). The FDIC has authority to increase insurance assessments, and any significant increases would have an adverse effect on the operating
expenses and results of operations of the Company. Management cannot predict what assessment rates will be in the future.
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Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
We do not currently know of any practice, condition, or violation that may lead to termination of our deposit insurance.
Transactions with Related Parties. Federal laws strictly limit the ability of banks to engage in certain transactions with their affiliates, including
their bank holding companies. Transactions between the Bank and its affiliates are required to be on terms as favorable to the Bank as transactions
with non-affiliates. Certain of these transactions, such as loans to an affiliate, are restricted to a percentage of the Bank's capital, and loans to
affiliates require eligible collateral in specified amounts. HomeTrust Bancshares, Inc is an affiliate of the Bank.
Federal law generally prohibits loans by HomeTrust Bancshares to its executive officers and directors, but there is a specific exception for loans
made by HomeTrust Bank to its executive officers and directors in compliance with federal banking laws. However, HomeTrust Bank’s authority
to extend credit to its executive officers, directors and 10% shareholders (“insiders”), as well as entities those insiders control, is limited. The
individual and aggregate amounts of loans that HomeTrust Bank may make to insiders are based, in part, on HomeTrust Bank’s capital level and
require that certain board approval procedures be followed. Such loans are required to be made on terms substantially the same as those offered
to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit
or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees.
Loans to executive officers are subject to additional limitations based on the type of loan involved.
Current Capital Requirements for HomeTrust Bank. The Bank is required to maintain specified levels of regulatory capital under federal
banking regulations. The capital adequacy requirements are quantitative measures established by regulation that require the Bank to maintain
minimum amounts and ratios of capital. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional
discretionary actions by bank regulators that, if undertaken, could have a direct material effect on the Company's financial statements.
Effective January 1, 2015 (with some changes transitioned into full effectiveness by January 1, 2019), the Bank became subject to capital
regulations, which created a new required ratio for common equity Tier 1 (“CET1”) capital, increased the minimum leverage and Tier 1 capital
ratios, changed the risk-weightings of certain assets for purposes of the risk-based capital ratios, created an additional capital conservation buffer
over the required capital ratios, and changed what qualifies as capital for purposes of meeting the capital requirements. These regulations
implement the regulatory capital reforms required by the Dodd Frank Act and the “Basel III” requirements.
Under the capital regulations, the minimum required capital ratios for the Company and the Bank are (i) a CETI capital ratio of 4.5%; (ii) a Tier
1 capital ratio of 6.0%; (iii) a total capital ratio of 8.0%; and (iv) a Tier 1 leverage ratio of 4.0% for all financial institutions. CET1 generally
consists of common stock and retained earnings. Tier 1 capital generally consists of CET1 and noncumulative perpetual preferred stock. Tier 2
capital generally consists of other preferred stock and subordinated debt meeting certain conditions plus an amount of the allowance for loan
and lease losses up to 1.25% of assets. Total capital is the sum of Tier 1 and Tier 2 capital. The CET1 capital ratio, the Tier 1 capital ratio and
the total capital ratio are sometimes referred to as the risk-based capital ratios and are determined based on risk-weightings of assets and certain
off-balance sheet items that range from 0% to 1,250%.
In addition to the capital requirements, there are a number of changes in what constitutes regulatory capital, subject to a certain transition period.
These changes include the phasing-out of certain instruments as qualifying capital. At June 30, 2018 the Bank did not have any of these instruments.
Mortgage servicing and deferred tax assets over designated percentages of CET1 are deducted from capital, subject to a transition period ending
December 31, 2017. Because of our asset size, we were eligible to elect and have elected to permanently opt-out of the inclusion of unrealized
gains and losses on available for sale debt and equity securities in our capital calculations.
As noted above, in addition to the risk-based capital ratios, the Bank must maintain a capital conservation buffer consisting of additional CET1
capital greater than 2.5% of risk-weighted assets above the minimum levels for such ratios in order to avoid limitations on paying dividends,
engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such
actions. The capital conservation buffer requirement began to be phased in starting in January 2016 at an amount more than 0.625% of risk-
weighted assets and will increase each year until fully implemented to an amount more than 2.5% of risk-weighted assets in January 2019. Once
fully phased in on January 1, 2019, the new minimum capital ratios applicable to the Company and the Bank are (i) a CETI capital ratio of 7.0%;
(ii) a Tier 1 capital ratio of 8.5%; (iii) a total capital ratio of 10.5%; and (iv) a Tier 1 leverage ratio of 4.0%. As of June 30, 2018, the conservation
buffer was 1.875%.
To be consider “well capitalized,” a depository institution must have a Tier 1 capital ratio of at least 8%, a total capital ratio of at least 10%, a
CET1 capital ratio of at least 6.5% and a leverage ratio of at least 5% and not be subject to an individualized order, directive or agreement under
which its primary federal banking regulator requires it to maintain a specific capital level. Institutions that are not well capitalized are subject to
certain restrictions on brokered deposits and interest rates on deposits. Under certain circumstances, regulators are required to take certain actions
against banks that fail to meet the minimum required capital ratios. Any such institution must submit a capital restoration plan and, until such
plan is approved may not increase its assets, acquire another depository institution, establish a branch or engage in any new activities, or make
capital distributions. As of June 30, 2018, HomeTrust Bank met the requirements to be “well capitalized” and met the fully phased-in capital
conservation buffer requirement. For additional information regarding the Bank’s required and actual capital levels at June 30, 2018, see Note
18 of the Notes to Consolidated Financial Statements included in Item 8 in this report.
Federal Home Loan Bank System. HomeTrust Bank is a member of the FHLB of Atlanta, one of 11 regional Federal Home Loan Banks that
administer the home financing credit function of financial institutions. The Federal Home Loan Banks are subject to the oversight of the Federal
Housing Finance Agency (“FHFA”) and each FHLB serves as a reserve or central bank for its members within its assigned region. The Federal
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Home Loan Banks are funded primarily from proceeds derived from the sale of consolidated obligations of the Federal Home Loan Bank System
and makes loans or advances to members in accordance with policies and procedures established by the Board of Directors of the FHLB, which
are subject to the oversight of the FHFA. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by
the FHLB. In addition, all long-term advances are required to provide funds for residential home financing. See “Business -Sources of Funds -
Borrowings.”
At June 30, 2018, the Bank held $29.9 million in FHLB stock that was in compliance with the holding requirements. The FHLB pays dividends
quarterly, and HomeTrust Bank received $1.6 million in dividends during the year ended June 30, 2018.
The FHLBs continue to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of FHLB
dividends paid and could continue to do so in the future. These contributions could also have an adverse effect on the value of FHLB stock in
the future. A reduction in value of the Bank’s FHLB stock may result in a decrease in net income and possibly capital.
Commercial Real Estate Lending Concentrations. The federal banking agencies have issued guidance on sound risk management practices for
concentrations in commercial real estate lending. The particular focus is on exposure to commercial real estate loans that are dependent on the
cash flow from the real estate held as collateral and that are likely to be sensitive to conditions in the commercial real estate market (as opposed
to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is not to limit a
bank’s commercial real estate lending but to guide banks in developing risk management practices and capital levels commensurate with the
level and nature of real estate concentrations. The guidance directs the Federal Reserve and other bank regulatory agencies to focus their
supervisory resources on institutions that may have significant commercial real estate loan concentration risk. A bank that has experienced rapid
growth in commercial real estate lending, has notable exposure to a specific type of commercial real estate loan, or is approaching or exceeding
the following supervisory criteria may be identified for further supervisory analysis with respect to real estate concentration risk:
• Total reported loans for construction, land development and other land represent 100% or more of the bank’s total regulatory capital; or
• Total commercial real estate loans (as defined in the guidance) represent 300% or more of the bank’s total regulatory capital and the outstanding
balance of the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months.
The guidance provides that the strength of an institution’s lending and risk management practices with respect to such concentrations will be
taken into account in supervisory guidance on evaluation of capital adequacy. As of June 30, 2018, HomeTrust Bank’s aggregate recorded loan
balances for construction, land development and land loans were 56.1% of regulatory capital. In addition, at June 30, 2018, HomeTrust Bank’s
loans on commercial real estate, as defined by the guidance, were 247.6% of regulatory capital.
Community Reinvestment and Consumer Protection Laws. In connection with its deposit-taking, lending and other activities, the Bank is
subject to a number of federal laws designed to protect consumers and promote lending for various purposes. The CFPB issues regulations and
standards under these federal consumer protection laws, which include the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Home
Mortgage Disclosure Act, the Real Estate Settlement Procedures Act and others. The CFPB has promulgated a number of proposed and final
regulations under these laws that will affect our consumer businesses. Among these regulatory initiatives, are final regulations setting “ability
to repay” and “qualified mortgage” standards for residential mortgage loans and establishing new mortgage loan servicing and loan originator
compensation standards. In addition, customer privacy regulations limit the ability of the Bank to disclose nonpublic consumer information to
non-affiliated third parties. These regulations require disclosure of privacy policies and allow consumers to prevent certain personal information
from being shared with non-affiliated parties.
The Community Reinvestment Act ("CRA") requires that the Federal Reserve assess the Bank's record in meeting the credit needs of the
communities it serves, especially low and moderate income neighborhoods. Under the CRA, institutions are assigned a rating of "outstanding,"
"satisfactory," "needs to improve," or "substantial non-compliance." The Bank received an "satisfactory" rating in its most recent CRA evaluation.
Bank Secrecy Act / Anti-Money Laundering Laws. The Bank is subject to the Bank Secrecy Act and other anti-money laundering laws and
regulations, including the USA PATRIOT Act of 2001. These laws and regulations require the Bank to implement policies, procedures, and
controls to detect, prevent, and report money laundering and terrorist financing and to verify the identity of their customers. Violations of these
requirements can result in substantial civil and criminal sanctions. In addition, provisions of the USA PATRIOT Act require the federal financial
institution regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing mergers
and acquisitions.
Limitations on Dividends. NCCOB and the Federal Reserve regulations impose various restrictions on the ability of the Bank to pay dividends.
The Bank generally may pay dividends during any calendar year in an amount up to 100% of net income for the year-to-date plus retained net
income for the two preceding years, without the approval of the Federal Reserve. If the Bank proposes to pay a dividend that will exceed this
limitation, it must obtain the Federal Reserve's prior approval. The Federal Reserve may object to a proposed dividend based on safety and
soundness concerns. No insured depository institution may pay a dividend if, after paying the dividend, the institution would be undercapitalized.
In addition, as noted above, if the Bank does not have the required capital conservation buffer, its ability to pay dividends to HomeTrust Bancshares,
Inc. will be limited.
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Holding Company Regulation
As a bank holding company under the BHCA, HomeTrust Bancshares, Inc. is subject to regulation, supervision, and examination by the Federal
Reserve. The Federal Reserve has enforcement authority with respect to HomeTrust Bancshares, Inc. similar to its enforcement authority over
the Bank. We are required to file quarterly reports with the Federal Reserve and provide additional information as the Federal Reserve may
require. The Federal Reserve may examine us, and any of our subsidiaries, and charge us for the cost of the examination. The Federal Reserve
also has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties,
to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general,
enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices. HomeTrust Bancshares, Inc. is also
required to file certain reports with, and otherwise comply with the rules and regulations of the SEC.
The Bank Holding Company Act. Under the BHCA, we are supervised by the Federal Reserve. The Federal Reserve has a policy that a bank
holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations
in an unsafe or unsound manner. In addition, the Dodd-Frank Act and earlier Federal Reserve policy provide that a bank holding company should
serve as a source of strength to its subsidiary banks by having the ability to provide financial assistance to its subsidiary banks during periods
of financial distress to the banks. A bank holding company's failure to meet its obligation to serve as a source of strength to its subsidiary banks
will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve's regulations
or both. No regulations have yet been proposed by the Federal Reserve to implement the source of strength doctrine required by the Dodd-Frank
Act. HomeTrust Bancshares, Inc. and any subsidiaries that it may control are considered “affiliates” within the meaning of the Federal Reserve
Act, and transactions between HomeTrust Bancshares, Inc. and affiliates are subject to numerous restrictions. With some exceptions, HomeTrust
Bancshares, Inc. and its subsidiaries are prohibited from tying the provision of various services, such as extensions of credit, to other services
offered by HomeTrust Bancshares, Inc. or by its affiliates.
Permissible Activities. The business activities of HomeTrust Bancshares, Inc. are generally limited to those activities permissible for bank
holding companies under Section 4(c)(8) of the BHCA, those permitted for a financial holding company under Section 4(f) of the BHCA, and
certain additional activities authorized by regulation. The BHCA generally prohibits a financial holding company from acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company. A bank holding
company must obtain Federal Reserve approval before acquiring directly or indirectly, ownership or control of any voting shares of another bank
or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the
majority of such shares).
Capital Requirements for HomeTrust Bancshares. As a bank holding company, HomeTrust Bancshares, Inc. is subject to the minimum
regulatory capital requirements established by the Federal Reserve regulation, which generally are the same as the capital requirements for the
Bank. These capital requirements include provisions that might impact the ability of the Company to pay dividends to its stockholders or repurchase
its shares. For a description of the capital regulations, see " Regulation of HomeTrust Bank-Current Capital Requirements for HomeTrust Bank"
and Note 18 of the Notes to Consolidated Financial Statements included in Item 8 in this report.
At June 30, 2018, the HomeTrust Bancshares, Inc. exceeded its minimum regulatory capital requirements under Federal Reserve regulations.
Federal Securities Law. The stock of HomeTrust Bancshares, Inc. is registered with the SEC under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). HomeTrust Bancshares, Inc. is subject to the information, proxy solicitation, insider trading restrictions, and
other requirements of the SEC under the Exchange Act.
The SEC has adopted regulations and policies applicable to a registered company under the Exchange Act that seek to increase corporate
responsibility, provide for enhanced penalties for accounting and auditing improprieties and protect investors by improving the accuracy and
reliability of corporate disclosures in SEC filings. These regulations and policies include very specific additional disclosure requirements and
mandate corporate governance practices.
On October 28, 2015, the Auditing Standards Board of the American Institute of Certified Public Accountants ("AICPA") issued Statement on
Auditing Standards ("SAS") No. 130 - An Audit of Internal Control Over Financial Reporting That Is Integrated With an Audit of Financial
Statement. Under SAS 130, our auditors are required to opine on the effectiveness of internal controls over financial reporting for the current
fiscal year.
Sarbanes-Oxley Act. The Sarbanes-Oxley Act (“SOX Act”) of 2002 addresses a broad range of corporate governance, auditing and accounting,
executive compensation, and disclosure requirements for public companies and their directors and officers. The SOX Act requires our Chief
Executive Officer and Chief Financial Officer to certify the accuracy of certain information included in our quarterly and annual reports. The
rules require these officers to certify that they are responsible for establishing, maintaining, and regularly evaluating the effectiveness of our
financial reporting and disclosure controls and procedures; that they have made certain disclosures to the auditors and to the Audit Committee
of the Board of Directors about our controls and procedures; and that they have included information in their quarterly and annual filings about
their evaluation and whether there have been significant changes to the controls and procedures or other factors which would significantly impact
these controls subsequent to their evaluation. Section 404 of the SOX Act requires management to undertake an assessment of the adequacy and
effectiveness of our internal controls over financial reporting and requires our auditors to attest to and report on the effectiveness of these controls.
Dividends. The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses
its view that although there are no specific regulations restricting dividend payments by bank holding companies other than state corporate laws,
a bank holding company must maintain an adequate capital position and generally should not pay cash dividends unless the company's net income
33
for the past year is sufficient to fully fund the cash dividends and that the prospective rate of earnings appears consistent with the company's
capital needs, asset quality, and overall financial condition. The Federal Reserve policy statement also indicates that it would be inappropriate
for a company experiencing serious financial problems to borrow funds to pay dividends. As described above under “Regulation of HomeTrust
Bank-Current Capital Requirements for HomeTrust Bank," the capital conservation buffer requirement can also restrict HomeTrust Bancshares,
Inc. and the Bank’s ability to pay dividends.
Stock Repurchases. A bank holding company, except for certain “well-capitalized” and highly rated bank holding companies, is required to
give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the
purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding twelve
months, is equal to 10% or more of its consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption if it determines
that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order or any condition
imposed by, or written agreement with, the Federal Reserve.
Legislative and Regulatory Proposals. Any changes in the extensive regulatory scheme to which the HomeTrust Bancshares, Inc. or the Bank
is and will be subject, whether by any of the federal banking agencies or Congress, or the North Carolina legislature or NCCOB, could have a
material effect on the Company or HomeTrust Bank, and HomeTrust Bancshares, Inc. and the Bank cannot predict what, if any, future actions
may be taken by legislative or regulatory authorities or what impact such actions may have.
Federal Taxation
General. HomeTrust Bancshares Inc. and the 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 HomeTrust Bancshares and HomeTrust.
On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the
“Tax Act”). The Tax Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and
businesses. For businesses, the Tax Act reduces the corporate federal income tax rate from a maximum of 35% to a flat 21%. The corporate
federal income tax rate reduction was effective January 1, 2018. Since the Company has a fiscal year end of June 30th, the reduced federal
corporate income tax rate for fiscal year 2018 was the result of the application of a blended federal statutory tax rate of 27.5%, which was based
on the applicable tax rates before and after the Tax Act and corresponding number of days in the fiscal year before and after enactment, and then
will be a flat 21% corporate income tax rate for fiscal 2019 and thereafter. The Tax Act also required a revaluation the Company’s deferred tax
assets and liabilities to account for the future impact of lower corporate income tax rates and other provisions of the legislation. As a result of
the Company’s revaluation, the net deferred tax asset (“DTA”) was reduced through an increase to the provision for income tax. The revaluation
of our DTA balance resulted in a one-time increase for the fiscal year ended June 30, 2018 to federal income tax of $17.6 million. See Note 12
"Income Taxes" in the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information.
Method of Accounting. For federal income tax purposes, the Company currently reports its income and expenses on the accrual method of
accounting and uses a fiscal year ending on June 30th for filing its federal income tax return. The Small Business Protection Act of 1996 eliminated
the use of the reserve method of accounting for bad debt reserves by savings institutions, effective for taxable years beginning after 1995.
Minimum Tax. Prior to the enactment of the Tax Act, the Internal Revenue Code ("IRC") imposed an alternative minimum tax at a rate of 20%
on a base of regular taxable income plus certain tax preferences, called alternative minimum taxable income. The alternative minimum tax was
payable to the extent such alternative minimum taxable income was in excess of the regular tax. Net operating losses could offset no more than
90% of alternative minimum taxable income. Certain payments of alternative minimum tax could be used as credits against regular tax liabilities
in future years. At June 30, 2018, we had alternative minimum tax credit carryforwards of approximately $4.9 million. Upon enactment of the
Tax Act, the alternative minimum tax was repealed.
Net Operating Loss Carryovers. A financial institution may carryback net operating losses to the preceding two taxable years and forward to
the succeeding 20 taxable years. This provision applies to losses incurred in taxable years beginning after August 6, 1997. In 2009, IRC 172 (b)
(1) was amended to allow businesses to carry back losses incurred in 2008 and 2009 for up to five years to offset 50% of the available income
from the fifth year and 100% of the available income for the other four years. At June 30, 2018, we had $40.8 million of net operating loss
carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. HomeTrust Bancshares, Inc. files a consolidated return with the Bank. As a result, any dividends
HomeTrust Bancshares, Inc. receives from the Bank will not be included as income to HomeTrust Bancshares, Inc. The corporate dividends-
received deduction is 100%, or 80% in the case of dividends received from corporations with which a corporate recipient does not file a consolidated
tax return, depending on the level of stock ownership of the payer of the dividend.
State Taxation
North Carolina. On July 24, 2013, The Tax Simplification and Reduction Act of 2013 was signed into law. With this act, corporate income tax
rates in North Carolina were reduced as net General Fund tax collection revenues goals were met. For tax years beginning on or after January
1, 2017, 2016, and 2015 the tax rate was 3%, 4%, and 5%, respectively. In June 2017, the state announced an additional reduction in the tax rate
to 2.5% beginning on January 1, 2019. This rate reduction is not contingent on any revenue goals. The decrease in the North Carolina corporate
tax rate will continue to decrease the deferred tax assets currently recorded on our balance sheet with a corresponding increase to our income
tax provision, as temporary tax differences are reversed at lower state tax rates.
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If a corporation in North Carolina does business in North Carolina and in one or more other states, North Carolina taxes a fraction of the
corporation’s income based on the amount of sales, payroll, and property it maintains within North Carolina. North Carolina franchise tax is
levied on business corporations at the rate of $1.50 per $1,000 of the largest of the following three alternate bases: (i) the amount of the corporation’s
capital stock, surplus, and undivided profits apportionable to the state; (ii) 55% of the appraised value of the corporation’s property in the state
subject to local taxation; or (iii) the book value of the corporation’s real and tangible personal property in the state less any outstanding debt that
was created to acquire or improve real property in the state.
Any cash dividends, in excess of a certain exempt amount, that would be paid with respect to HomeTrust Bancshares common stock to a
shareholder (including a partnership and certain other entities) who is a resident of North Carolina will be subject to the North Carolina income
tax. Any distribution by a corporation from earnings according to percentage ownership is considered a dividend, and the definition of a dividend
for North Carolina income tax purposes may not be the same as the definition of a dividend for federal income tax purposes. A corporate
distribution may be treated as a dividend for North Carolina income tax purposes if it is paid from funds that exceed the corporation’s earned
surplus and profits under certain circumstances.
South Carolina. The state of South Carolina requires banks to file a bank tax return. As a multi-state bank, we pay taxes on the portion of
revenue generated within the state. In 2018 and 2017 the tax rate was 5.0% and 4.5%, respectively.
Tennessee. The state of Tennessee requires banks to file a franchise and excise tax form for financial institutions. The franchise tax is based on
the portion of revenue generated in the state, the net worth of the Bank, and the applicable franchise tax, which was $0.25 per $100 in 2018 and
2017. The excise tax is based on the taxable income (as defined by the state), the portion of revenue generated in the state, and the applicable
excise tax, which was 6.5% in 2018 and 2017.
Virginia. The state of Virginia requires banks to file a bank franchise tax. The tax is based on the portion of capital deployed within the state
and county level (as defined by the state) and taxed at $1 per $100 of taxable value.
The following individuals are executive officers of HomeTrust Bancshares and HomeTrust Bank and hold the offices set forth below opposite
their names.
EXECUTIVE OFFICERS
Name
Dana L. Stonestreet
Tony J. VunCannon
Howard L. Sellinger
C. Hunter Westbrook
Keith Houghton
Parrish Little
___________________
(1) As of June 30, 2018.
Age(1)
64
53
65
55
56
50
Position
Chairman, President and Chief Executive Officer
Executive Vice President, Chief Financial Officer, Corporate Secretary, and Treasurer
Executive Vice President and Chief Information Officer
Executive Vice President and Chief Banking Officer
Executive Vice President and Chief Credit Officer
Executive Vice President and Chief Risk Officer
Biographical Information. Set forth below is certain information regarding the executive officers of HomeTrust Bancshares and HomeTrust
Bank. There are no family relationships among or between the executive officers.
Dana L. Stonestreet, Chairman and Chief Executive Officer. In his 29 years of service, Mr. Stonestreet has overseen ten acquisitions and the
growth of the Bank from $300 million to $3.3 billion in assets at June 30, 2018. As part of the CEO succession plan for HomeTrust Bancshares,
Inc. and the Bank, Mr. Stonestreet, who had been serving as President and Chief Operating Officer and as a director of HomeTrust Bank since
2008 and as President and Chief Operating Officer of HomeTrust Bancshares, Inc. since HomeTrust Bank’s mutual-to-stock conversion, became
co-Chief Executive Officer of HomeTrust Bancshares, Inc. and the Bank in July 2013. Mr. Stonestreet became President, Chairman and Chief
Executive Officer of HomeTrust Bancshares, Inc. and the Bank effective at the annual meeting in November 2013. Mr. Stonestreet joined
HomeTrust Bank in 1989 as its Chief Financial Officer and was promoted to Chief Operating Officer in 2003. Mr. Stonestreet began his career
with Hurdman & Cranston (an accounting firm that was later merged into KPMG) as a certified public accountant. Mr. Stonestreet serves as a
director of the HUB Community Economic Development Alliance Board. In addition, Mr. Stonestreet has served as Chairman of the Asheville
Chamber of Commerce and as a director for RiverLink, the YMCA, United Way, the North Carolina Bankers Association and other community
organizations. In July 2017, Mr. Stonestreet was appointed to the North Carolina Banking Commission for a four-year term. Mr. Stonestreet’s
29 years of service with HomeTrust Bank gives him in-depth knowledge of nearly all aspects of its operations. Mr. Stonestreet’s accounting
background and prior service as HomeTrust Bank’s Chief Financial Officer also provide him with a strong understanding of the various financial
matters brought before the Board.
Tony J. VunCannon, Executive Vice President, Chief Financial Officer, Corporate Secretary, and Treasurer. Mr. VunCannon has served as
HomeTrust Bank's Chief Financial Officer since July 2006. Mr. VunCannon joined the Bank in April 1992 as Controller; later becoming the
Treasurer in March 1997 until July 2006 when he was also named Chief Financial Officer. In 2018, he was named Corporate Secretary. Prior to
joining the Bank, Mr. VunCannon worked as an auditor in KPMG’s Charlotte office where his focus was in the community banking sector. Mr.
VunCannon is a graduate of the University of North Carolina at Chapel Hill with a Bachelor of Science Degree in Business Administration/
Accounting. He is also a Certified Public Accountant.
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Howard L. Sellinger, Executive Vice President and Chief Information Officer. Mr. Sellinger has served as Chief Information Officer of HomeTrust
Bank since July 1997. Mr. Sellinger joined HomeTrust Bank in 1975 as a management trainee. Mr. Sellinger became the Office Manager of the
Skyland office from 1976 until 1978. His experience also includes being the Head of Mortgage Loan Operations with loan approval authority,
the Head of Loan Servicing with workout approval authority, and was responsible for regulatory compliance in Lending and Deposit Operations
for many years. In 1988, he was named Operations Manager and was promoted to Vice President and Chief Information Officer in 1997.
C. Hunter Westbrook, Executive Vice President and Chief Banking Officer. Mr. Westbrook joined HomeTrust Bank in June 2012 as our Chief
Banking Officer. He began his career in banking with TCF Bank in Minneapolis and later joined TCF National Bank Illinois as Senior Vice
President of Finance. In 2004 he was promoted to Executive Vice President of Retail Banking for Illinois, Wisconsin and Indiana markets that
included 250 branches and $4 billion in deposits. He also served as President and Chief Executive Officer of First Community Bancshares in
Texas, from 2006 to 2008, where he was responsible for repositioning the bank’s retail operating model and implemented the bank’s retail and
corporate lending product offerings. In his most recent role, Mr. Westbrook served as President and Chief Executive Officer of Second Federal
Savings and Loan Association of Chicago, from 2010 to 2012, where he significantly grew core operating revenue, net checking account balances,
and repositioned the bank’s entire product line.
Keith Houghton, Executive Vice President and Chief Credit Officer. Mr. Houghton joined HomeTrust Bank in March of 2014 as our Chief Credit
Officer. Mr. Houghton has more than 30 years of experience in the banking industry. For nearly 17 years, he held a variety of senior positions
in the credit and lending areas with StellarOne Corporation, a Charlottesville, VA-based bank holding company with approximately $3 billion
in assets, and its predecessors, until the sale of StellarOne to another bank in January 2014. The most recent of those positions was Chief Credit
Risk Officer, which Mr. Houghton held since 2007.
Parrish Little, Executive Vice President and Chief Risk Officer. Mr. Little joined HomeTrust Bank in March 2015 as our Chief Risk Officer. Prior
to joining HomeTrust Bank, Mr. Little served as Senior Vice President, Director of Risk Management from 2008 to 2013 and Chief Audit
Executive in 2014 for First Citizens Bank and Trust, Columbia, South Carolina. From 1997 to 2007, he served in several leadership roles with
Bank of America in the areas of internal audit and risk management.
Item 1A. Risk Factors
An investment in our common stock is subject to risks inherent in our business. Before making an investment decision, you should carefully
consider the risks and uncertainties described below together with all of the other information included in this report. In addition to the risks
and uncertainties described below, other risks and uncertainties not currently known to us or that we currently deem to be immaterial also
may materially and adversely affect our business, financial condition and results of operations. The value or market price of our common
stock could decline due to any of these identified or other risks, and you could lose all or part of your investment.
Risks Related to Our Business
Adverse economic conditions in the market areas we serve could adversely impact our earnings and could increase the credit risk
associated with our loan portfolio.
Our primary market areas are concentrated in North Carolina (including the Asheville metropolitan area, Greensboro / “Piedmont” region,
Charlotte, and Raleigh/Cary), South Carolina (Greenville), East Tennessee (including Kingsport/Johnson City/Bristol, Knoxville, and
Morristown) and the Roanoke Valley area of Virginia. Adverse economic conditions in our market areas can reduce our rate of growth, affect
our customers’ ability to repay loans and adversely impact our financial condition and earnings. General economic conditions, including inflation,
unemployment and money supply fluctuations, also may affect our profitability adversely.
While real estate values and unemployment rates have recently improved, deterioration in economic conditions, particularly within our primary
market areas could result in the following consequences, among others, any of which could materially hurt our business:
loan delinquencies, problem assets and foreclosures may increase;
•
• we may increase our allowance for loan losses;
•
the slowing of sales of foreclosed assets;
•
demand for our products and services may decline, possibly resulting in a decrease in our total loans or assets;
•
collateral for loans made may decline further in value, exposing us to increased risk of loss on existing loans and reducing customers’
borrowing power;
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and
the amount of our deposits may decrease and the composition of our deposits may be adversely affected.
•
•
At June 30, 2018, the most significant portion of our loans located outside of our primary market areas was HELOCs-purchased totaling $166.3
million, or 6.5% of our loan portfolio, secured by one-to-four family properties located primarily in several western states. As a result, our
financial condition and results of operations will be subject to general economic conditions and the real estate conditions prevailing in the markets
in which the underlying properties securing these loans are located, as well as the conditions in our primary market areas. If economic conditions
or if the real estate market declines in the areas in which these properties are located, we may suffer decreased net income or losses associated
with higher default rates and decreased collateral values on our existing portfolio. Further, because of their geographical diversity, these loans
can be more difficult to oversee than loans in our market areas in the event of delinquency.
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A decline in economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial
institutions whose real estate loan portfolios are more geographically diverse. Many of the loans in our portfolio are secured by real estate.
Deterioration in the real estate markets where collateral for a mortgage loan is located could negatively affect the borrower’s ability to repay the
loan and the value of the collateral securing the loan. Real estate values are affected by various other factors, including changes in general or
regional economic conditions, governmental rules or policies and natural disasters. If we are required to liquidate a significant amount of collateral
during a period of reduced real estate values, our financial condition and profitability could be adversely affected.
Our business may be adversely affected by credit risk associated with residential property.
At June 30, 2018, $661.7 million, or 26.2% of our total loan portfolio, was secured by first liens on one-to-four family residential loans. In
addition, at June 30, 2018, our home equity lines of credit totaled $303.8 million or 12.0% of our total loan portfolio, including $69.7 million
secured by a first lien on the residential property. These types of loans are generally sensitive to regional and local economic conditions that
significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. A decline in residential
real estate values resulting from a downturn in the housing market may reduce the value of the real estate collateral securing these types of loans
and increase our risk of loss if borrowers default on their loans. Recessionary conditions or declines in the volume of real estate sales and/or the
sales prices coupled elevated unemployment rates may result in higher than expected loan delinquencies or problem assets, and a decline in
demand for our products and services. These potential negative events may cause us to incur losses, adversely affect our capital and liquidity,
and damage our financial condition and business operations. Further, the Tax Act enacted in December 2017 could negatively impact our customers
because it lowers the existing caps on mortgage interest deductions and limits the state and local tax deductions. These changes could make it
more difficult for borrowers to make their loan payments, and could also negatively impact the housing market, which could adversely affect
our business and loan growth.
A majority of our loans are “non-conforming” because they are adjustable rate mortgages which contain interest rate floors or do not satisfy
credit or other requirements due to personal and financial reasons (i.e. divorce, bankruptcy, length of time employed, etc.), conforming loan
limits (i.e. jumbo mortgages), and other requirements, imposed by secondary market purchasers. Some of these borrowers have higher debt-to-
income ratios, or the loans are secured by unique properties in rural markets for which there are no sales of comparable properties to support the
value according to secondary market requirements. We may require additional collateral or lower loan-to-value ratios to reduce the risk of these
loans. We believe that these loans satisfy a need in our local market areas. As a result, subject to market conditions, we intend to continue to
originate these types of loans. Total non-conforming loans were $373.2 million at June 30, 2018, including $101.6 million of jumbo one- to four-
family residential loans which may also expose us to increased risk because of their larger balances.
High loan-to-value ratios on a portion of our residential mortgage loan portfolio exposes us to greater risk of loss.
Many of our one-to-four family loans and home equity lines of credit are secured by liens on mortgage properties in which the borrowers have
little or no equity because of these declines in home values in our market areas. Residential loans with high combined loan-to-value ratios will
be more sensitive to declining property values than those with lower combined loan-to-value ratios and therefore may experience a higher
incidence of default and severity of losses. In addition, if the borrowers sell their homes, they may be unable to repay their loans in full from the
sale. Further, the majority of our home equity lines of credit consist of second mortgage loans. For those home equity lines secured by a second
mortgage, it is unlikely that we will be successful in recovering all or a portion of our loan proceeds in the event of default unless we are prepared
to repay the first mortgage loan and such repayment and the costs associated with a foreclosure are justified by the value of the property. For
these reasons, we may experience higher rates of delinquencies, defaults and losses.
Our non-owner-occupied real estate loans may expose us to increased credit risk.
At June 30, 2018, $86.1 million, or 13.6%, of our one-to-four family loans and 4.0% of our total loan portfolio, consisted of loans secured by
non-owner-occupied residential properties. Loans secured by non-owner-occupied properties generally expose a lender to greater risk of non-
payment and loss than loans secured by owner-occupied properties because repayment of such loans depend primarily on the tenant’s continuing
ability to pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability
to repay the loan without the benefit of a rental income stream. In addition, the physical condition of non-owner-occupied properties is often
below that of owner-occupied properties due to lax property maintenance standards, which has a negative impact on the value of the collateral
properties. Furthermore, some of our non-owner-occupied residential loan borrowers have more than one loan outstanding with HomeTrust Bank
which may expose us to a greater risk of loss compared to an adverse development with respect to an owner-occupied residential mortgage loan.
Our construction and development loans and construction and land/lot loans have a higher risk of loss than residential or commercial
real estate loans.
At June 30, 2018, construction and land/lot loans in our retail consumer loan portfolio was $65.6 million, or 2.6%, of our total loan portfolio,
and consists primarily of construction to permanent loans to homeowners building a residence or developing lots in residential subdivisions
intending to construct a residence within one year. Construction and development loans in our commercial loan portfolio at June 30, 2018, totaled
$192.1 million, or 7.6%, of our total loan portfolio, and consists of loans to contractors and builders primarily to finance the construction of
single and multi-family homes, subdivisions, as well as commercial properties. We originate these loans whether or not the collateral property
underlying the loan is under contract for sale.
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Construction and development lending generally involves additional risks because funds are advanced upon estimates of costs in relation to
values associated with the completed project. Construction and development lending involves additional risks when compared with permanent
residential lending because funds are advanced upon the collateral for the project based on an estimate of costs that will produce a future value
at completion. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the complete project and the
effects of governmental regulation on real property, it is relatively difficult to evaluate accurately the total funds required to complete a project
and the completed project loan-to-value ratio. Changes in demand for new housing and higher than anticipated building costs, may cause actual
results to vary significantly from those estimated. For these reasons, this type of lending also typically involves higher loan principal amounts
and is often concentrated with a small number of builders. A downturn in housing, or the real estate market, could increase loan delinquencies,
defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. Some of the
builders we deal with have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit
relationship can expose us to a significantly greater risk of loss.
In addition, during the term of some of our construction and development loans, no payment from the borrower is required since the accumulated
interest is added to the principal of the loan through an interest reserve. As a result, these loans often involve the disbursement of funds with
repayment substantially dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain
permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of
a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of
the project and may incur a loss. Because construction loans require active monitoring of the building process, including cost comparisons and
on-site inspections, these loans are more difficult and costly to monitor. Increases in market rates of interest may have a more pronounced effect
on construction loans by rapidly increasing the end-purchasers' borrowing costs, thereby reducing the overall demand for the project. Properties
under construction are often difficult to sell and typically must be completed in order to be successfully sold which also complicates the process
of working out problem construction loans. This may require us to advance additional funds and/or contract with another builder to complete
construction and assume the market risk of selling the project at a future market price, which may or may not enable us to fully recover unpaid
loan funds and associated construction and liquidation costs. Furthermore, in the case of speculative construction loans, there is the added risk
associated with identifying an end-purchaser for the finished project. At June 30, 2018, $48.7 million of our construction and development loans
were for speculative construction loans and none were classified as nonaccruing.
Loans on land under development or held for future construction as well as lot loans made to individuals for the future construction of a residence
also pose additional risk because the length of time from financing to completion of a development project is significantly longer than for a
traditional construction loan, which makes them more susceptible to declines in real estate values, declines in overall economic conditions which
may delay the development of the land and changes in the political landscape that could affect the permitted and intended use of the land being
financed, and the potential illiquid nature of the collateral. In addition, during this long period of time from financing to completion, the collateral
often does not generate any cash flow to support the debt service.
Our commercial real estate loans involve higher principal amounts than other loans and repayment of these loans may be dependent on
factors outside our control or the control of our borrowers.
While commercial real estate lending may potentially be more profitable than single-family residential lending, it is generally more sensitive to
regional and local economic conditions, making loss levels more difficult to predict. Collateral evaluation and financial statement analysis in
these types of loans require a more detailed analysis at the time of loan underwriting and on an ongoing basis. At June 30, 2018, commercial
real estate loans were $857.3 million, or 33.9% of our total loan portfolio, including multifamily loans totaling $106.7 million or 4.0% of our
total loan portfolio. These loans typically involve higher principal amounts than other types of loans and some of our commercial borrowers
have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can
expose us to a significantly greater risk of loss compared to an adverse development with respect to a one-to-four family residential mortgage
loan. Repayment of these loans is dependent upon income being generated from the property securing the loan in amounts sufficient to cover
operating expenses and debt service, which may be adversely affected by changes in the economy or local market conditions. Commercial real
estate loans also expose a lender to greater credit risk than loans secured by one-to-four family residential real estate because the collateral
securing these loans typically cannot be sold as easily as residential real estate. In addition, many of our commercial real estate loans are not
fully amortizing and contain large balloon payments upon maturity. Such balloon payments may require the borrower to either sell or refinance
the underlying property in order to make the payment, which may increase the risk of default or non-payment. At June 30, 2018, commercial
real estate loans that were nonperforming were $2.9 million, or 26.2% of our total nonperforming loans.
A secondary market for most types of commercial real estate loans is not readily available, so we have less opportunity to mitigate credit risk
by selling part or all of our interest in these loans. As a result of these characteristics, if we foreclose on a commercial real estate loan, our holding
period for the collateral typically is longer than for one-to-four family residential loans because there are fewer potential purchasers of the
collateral. Accordingly, charge-offs on commercial real estate loans may be larger on a per loan basis than those incurred with our residential
and consumer loan portfolios.
The level of our commercial real estate loan portfolio may subject us to additional regulatory scrutiny.
The FDIC, the Federal Reserve Board and the Office of the Comptroller of the Currency have promulgated joint guidance on sound risk
management practices for financial institutions with concentrations in commercial real estate lending. Under this guidance, a financial institution
that, like us, is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial
institution may have a concentration in commercial real estate lending if, among other factors (i) total reported loans for construction, land
development, and other land represent 100% or more of total capital, or (ii) total reported loans secured by multifamily and non-farm residential
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properties, loans for construction, land development and other land, and loans otherwise sensitive to the general commercial real estate market,
including loans to commercial real estate related entities, represent 300% or more of total capital. Based on the criteria, the Bank has a concentration
in commercial real estate lending as total loans for multifamily, non-farm/non-residential, construction, land development and other land
represented 247.6% of total risk-based capital at June 30, 2018. The particular focus of the guidance is on exposure to commercial real estate
loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be at greater risk to conditions in the
commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). The
purpose of the guidance is to guide banks in developing risk management practices and capital levels commensurate with the level and nature
of real estate concentrations. The guidance states that management should employ heightened risk management practices including board and
management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis
and stress testing. While we believe we have implemented policies and procedures with respect to our loan portfolio consistent with this guidance,
bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may
result in additional costs to us.
Our auto finance lending increases our exposure to lending risks.
At June 30, 2018, $173.1 million, or 6.9%, of our total loan portfolio consisted of indirect auto finance loans originated by us. Indirect auto
finance loans are inherently risky as they are secured by assets that depreciate rapidly. In some cases, repossessed collateral for a defaulted
automobile loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency may not warrant further
substantial collection efforts against the borrower. Automobile loan collections depend on the borrower’s continuing financial stability, and
therefore, are more likely to be adversely affected by job loss, divorce, illness, or personal bankruptcy. In addition, our ability to originate loans
is reliant on our relationships with automotive dealers. In particular, our automotive finance operations depend in large part upon our ability to
establish and maintain relationships with reputable automotive dealers that direct customers to our offices or originate loans at the point-of-sale.
Although we have relationships with certain automotive dealers, none of our relationships are exclusive and any may be terminated at any time.
If our existing dealer base experiences decreased sales we may experience decreased loan volume in the future, which may have an adverse
effect on our business, results of operations, and financial condition.
Repayment of our municipal leases is dependent on the fire department receiving tax revenues from the county/municipality.
At June 30, 2018, municipal leases were $109.2 million, or 4.3%, of our total loan portfolio. We offer ground and equipment lease financing to
fire departments located throughout North Carolina and, to a lesser extent, South Carolina. Repayment of our municipal leases is often dependent
on the tax revenues collected by the county/municipality on behalf of the fire department. Although a municipal lease does not constitute a general
obligation of the county/municipality for which the county/municipality's taxing power is pledged, a municipal lease is ordinarily backed by the
county/municipality's covenant to budget for, appropriate and pay the tax revenues to the fire department. However, certain municipal leases
contain "non-appropriation" clauses which provide that the municipality has no obligation to make lease or installment purchase payments in
future years unless money is appropriated for that purpose on a yearly basis. In the case of a "non-appropriation" lease, our ability to recover
under the lease in the event of non-appropriation or default will be limited solely to the repossession of the leased property, without recourse to
the general credit of the lessee, and disposition or releasing of the property might prove difficult. At June 30, 2018, $11.6 million of our municipal
leases contained a non-appropriation clause.
Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.
Lending money is a substantial part of our business and each loan carries a certain risk that it will not be repaid in accordance with its terms, or
that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things:
•
•
•
•
•
cash flow of the borrower and/or the project being financed;
the changes and uncertainties as to the future value of the collateral, in the case of a collateralized loan;
the duration of the loan;
the character and creditworthiness of a particular borrower; and
changes in economic and industry conditions.
We maintain an allowance for loan losses, which we believe is an appropriate reserve to provide for probable losses in our loan portfolio. The
allowance is funded by provisions for loan losses charged to expense. The amount of this allowance is determined by our management through
periodic reviews and consideration of several factors, including, but not limited to:
•
•
•
our general reserve, based on our historical default and loss experience, certain macroeconomic factors, and management’s expectations
of future events;
our specific reserve, based on our evaluation of nonaccruing loans and their underlying collateral; and
an unallocated reserve to provide for other credit losses inherent in our portfolio that may not have been contemplated in the other loss
factors.
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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 for loan losses through the provision for losses on loans which is charged against income.
Additionally, pursuant to our growth strategy, management recognizes that significant new growth in loan portfolios, new loan products and the
refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform in a historical or projected manner and
will increase the risk that our allowance may be insufficient to absorb losses without significant additional provisions. Further, the Financial
Accounting Standards Board has adopted a new accounting standard that will be effective for our fiscal year beginning July 1, 2020. 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 credit losses. This will change the current method of providing
allowances for credit losses that are probable, which may require us to increase our allowance for loan losses, and may greatly increase the types
of data we would need to collect and review to determine the appropriate level of the allowance for credit losses. In addition, bank regulatory
agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition
of further loan charge-offs, based on judgments different than those of management. If charge-offs in future periods exceed the allowance for
loan losses, we will need additional provisions to replenish the allowance for loan losses. Any additional provisions will result in a decrease in
net income and possibly capital, and may have a material adverse effect on our financial condition and results of operations.
If our nonperforming assets increase, our earnings will be adversely affected.
Our nonperforming assets (which consist of nonaccruing loans and REO) were $14.6 million, or 0.4%, of total assets at June 30, 2018, compared
to $20.0 million, or 0.62% of total assets, and $24.5 million, or 0.9% of total assets, at June 30, 2017 and 2016, respectively. Our nonperforming
assets adversely affect our net income in various ways:
• we record interest income only on a cash basis for nonaccrual loans and any nonperforming investment securities; and do not record
interest income for REO;
• we must provide for probable loan losses through a current period charge to the provision for loan losses;
•
•
•
noninterest expense increases when we write down the value of properties in our REO portfolio to reflect changing market values or
recognize other-than-temporary impairment (“OTTI”) on nonperforming investment securities;
there are legal fees associated with the resolution of problem assets, as well as, carrying costs, such as taxes, insurance, and maintenance
fees related to our REO; and
the resolution of nonperforming assets requires the active involvement of management, which can distract them from more profitable
activity.
If additional borrowers become delinquent and do not pay their loans and we are unable to successfully manage our nonperforming assets, our
losses and troubled assets could increase significantly, which could have a material adverse effect on our financial condition and results of
operations. We have also classified $21.3 million in loans as performing troubled debt restructurings at June 30, 2018.
To meet our growth objectives we may originate or purchase loans outside of our market areas which could affect the level of our net
interest margin and nonperforming loans.
In order to achieve our desired loan portfolio growth, we opportunistically purchase loans outside of our primary market areas either individually,
through participations, or in bulk or “pools”. We perform certain due diligence procedures and may re-underwrite these loans to our underwriting
standards prior to purchase, and anticipate acquiring loans subject to customary limited indemnities, however, we may be exposed to a greater
risk of loss as we acquire loans of a type or in geographic areas where management may not have substantial prior experience and which may
be more difficult for us to monitor. During the years ended June 30, 2018, 2017 and 2016 we purchased $61.2 million, $345.0 million and $120.6
million of loans, respectively. Loan pools purchased in the past three years consisted primarily of home equity loans secured by single family
residential properties located in several western states, most of which are still in our loan portfolio. When determining the purchase price we are
willing to pay to acquire loans, management will make certain assumptions about, among other things, if and how much borrowers will prepay
their loans, the real estate market and our ability to collect loans successfully and, if necessary, when and how to dispose of any real estate that
may be acquired through foreclosure. To the extent that our underlying assumptions prove to be inaccurate or the basis for those assumptions
change (such as an unanticipated decline in the real estate market), the purchase price paid may prove to have been excessive, resulting in a
lower yield or a loss of some or all of the loan principal. Our success in increasing our loan portfolio through loan purchases will depend on our
ability to price the loans properly and on general economic conditions in the geographic areas where the underlying properties or collateral for
the loans acquired are located. Inaccurate estimates or declines in economic conditions or real estate values in the markets where we purchase
loans could significantly adversely affect the level of our nonperforming loans and our results of operations.
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If our REO is not properly valued or sufficiently reserved to cover actual losses, or if we are required to increase our valuation reserves,
our earnings could be reduced.
We obtain updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed and the property taken in as
REO and at certain other times during the asset’s holding period. Our net book value (“NBV”) in the loan at the time of foreclosure and thereafter
is compared to the updated market value of the foreclosed property less estimated selling costs (fair value). A charge-off is recorded for any
excess in the asset’s NBV over its fair value. If our valuation process is incorrect, or if property values decline, the fair value of our REO may
not be sufficient to recover our carrying value in such assets, resulting in the need for additional charge-offs.
Significant charge-offs to our REO could have a material adverse effect on our financial condition and results of operations.
In addition, bank regulators periodically review our REO and may require us to recognize further charge-offs. Any increase in our charge-offs
may have a material adverse effect on our financial condition and results of operations.
Our securities portfolio may be negatively impacted by fluctuations in market value and interest rates.
Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/
or earnings. Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited investor
demand. Our securities portfolio is evaluated for OTTI. If this evaluation shows impairment to the actual or projected cash flows associated
with one or more securities, a potential loss to earnings may occur. Changes in interest rates can also have an adverse effect on our financial
condition, as our available-for-sale securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest rates.
We increase or decrease our shareholders' equity by the amount of change in the estimated fair value of the available-for-sale securities, net of
taxes. There can be no assurance that the declines in market value will not result in other-than-temporary impairments of these assets, which
would lead to accounting charges that could have a material adverse effect on our net income and capital levels.
An increase in interest rates, change in the programs offered by governmental sponsored entities (“GSE”) or our ability to qualify for
such programs may reduce our mortgage revenues, which would negatively impact our noninterest income.
Our mortgage banking operations provide a significant portion of our noninterest income. We generate mortgage revenues primarily from gains
on the sale of single-family residential loans pursuant to programs currently offered by Fannie Mae, Freddie Mac, Ginnie Mae and other investors
on a servicing released basis. These entities account for a substantial portion of the secondary market in residential mortgage loans. Any future
changes in these programs, significant impairment of our eligibility to participate in such programs, the criteria for loans to be accepted or laws
that significantly affect the activity of such entities could, in turn, result in a lower volume of corresponding loan originations or increase other
administrative costs which may materially adversely affect our results of operations.
We have experienced historically low interest rates in recent years but interest rates have been increasing. Mortgage production, especially
refinancing, generally declines in rising interest rate environments resulting in fewer loans that are available to be sold to investors. When interest
rates rise, or even if they do not, there can be no assurance that our mortgage production will continue at current levels. The profitability of our
mortgage banking operations depends in large part upon our ability to aggregate a high volume of loans and sell them in the secondary market
at a gain. Thus, in addition to the interest rate environment, our mortgage business is dependent upon (i) the existence of an active secondary
market and (ii) our ability to profitably sell loans into that market. The loans in our held for sale portfolio are carried at fair market value with
changes recognized in our statement of operations. Carrying the loans at fair value may also increase the volatility in our earnings.
In addition, our results of operations are affected by the amount of noninterest expense associated with mortgage banking activities, such as
salaries and employee benefits, occupancy, equipment and data processing expense and other operating costs. During periods of reduced loan
demand, our results of operations may be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline
in loan originations. In addition, although we sell loans into the secondary market without recourse, we are required to give customary
representations and warranties about the loans to the buyers. If we breach those representations and warranties, the buyers may require us to
repurchase the loans and we may incur a loss on the repurchase.
Fluctuating interest rates can adversely affect our profitability.
Our earnings and cash flows are largely dependent upon our net interest income. Interest rates are highly sensitive to many factors that are
beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the
Federal Reserve. In an attempt to help the overall economy, the Federal Reserve has kept interest rates low through its targeted Fed Funds rate.
The Federal Reserve has steadily increased the targeted federal funds rate over the last three fiscal years to a range of 1.75% to 2.00% at June
30, 2018 and indicated further increases in the targeted federal funds rate in the future, subject to economic conditions. As the Federal Reserve
increases the targeted Fed Funds rate, overall interest rates will likely rise, which may negatively impact the housing markets by reducing
refinancing activity and new home purchases 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 collateral securing
loans, which could negatively affect our financial performance.
We principally manage interest rate risk by managing our volume and mix of our earning assets and funding liabilities. Changes in monetary
policy, including changes in interest rates, could influence not only the interest we receive on loans and investments and the amount of interest
we pay on deposits and borrowings, but these changes could also affect (i) our ability to originate loans and obtain deposits, (ii) the fair value
of our financial assets and liabilities, which could negatively impact shareholders' equity, and our ability to realize gains from the sale of such
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assets; (iii) our ability to obtain and retain deposits in competition with other available investment alternatives; (iv) the ability of our borrowers
to repay adjustable or variable rate loans; and (v) the average duration of our investment securities portfolio and other interest-earning assets.
If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments,
our net interest income, and therefore earnings, could be adversely affected. In a changing interest rate environment, we may not be able to
manage this risk effectively. If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations
could be materially affected.
Changes in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current
loan obligations or by reducing our margins and profitability. Our net interest margin is the difference between the yield we earn on our assets
and the interest rate we pay for deposits and our other sources of funding. Changes in interest rates-up or down-could adversely affect our net
interest margin and, as a result, our net interest income. Although the yield we earn on our assets and our funding costs tend to move in the same
direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract.
Our liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when
interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract until the
yields on interest-earning assets catch up. Changes in the slope of the “yield curve”, or the spread between short-term and long-term interest
rates-could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term
rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience
pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets. Also, interest rate decreases can
lead to increased prepayments of loans and mortgage-backed securities as borrowers refinance their loans to reduce borrowing costs. Under
these circumstances, we are subject to reinvestment risk as we may have to redeploy such repayment proceeds into lower yielding investments,
which would likely hurt our income.
A sustained increase in market interest rates could adversely affect our earnings. As a result of the exceptionally low interest rate environment,
an increasing percentage of our deposits have been comprised of deposits bearing no or a relatively low rate of interest and having a shorter
duration than our assets. At June 30, 2018, we had $385.7 million in certificates of deposit that mature within one year and $1.7 billion in checking,
savings, and money market accounts. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates
received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected.
In addition, a substantial amount of our loans have adjustable interest rates. As a result, these loans may experience a higher rate of default in a
rising interest rate environment. Further, a significant portion of our adjustable rate loans have interest rate floors below which the loan’s
contractual interest rate may not adjust. As of June 30, 2018, our loans with interest rate floors totaled approximately $611.5 million or 24.2%
of our total loan portfolio and had a weighted average floor rate of 4.00%. At that date, $71.3 million of these loans were at their floor rate, of
which $57.0 million, or 79.9%, had yields that would begin floating again once prime rates increase at least 200 basis points. The inability of
our loans to adjust downward can contribute to increased income in periods of declining interest rates, although this result is subject to the risks
that borrowers may refinance these loans during periods of declining interest rates. Also, when loans are at their floors, there is a further risk
that our interest income may not increase as rapidly as our cost of funds during periods of increasing interest rates which could have a material
adverse effect on our results of operations.
Changes in interest rates also affect the value of our interest-earning assets and in particular our securities portfolio. Generally, the fair value of
fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available for sale are reported
as a separate component of equity, net of tax. Decreases in the fair value of securities available for sale resulting from increases in interest rates
could have an adverse effect on stockholders’ equity.
Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes
in interest rates on our results of operations, any substantial, unexpected or prolonged change in market interest rates could have a material
adverse effect on our financial condition, liquidity and results of operations. Also, our interest rate risk modeling techniques and assumptions
likely may not fully predict or capture the impact of actual interest rate changes on our consolidated balance sheet or projected operating results.
For further discussion of how changes in interest rates could impact us, see "Part II, Item 7A. Quantitative and Qualitative Disclosures About
Market Risk" for additional information about our interest rate risk management.
Uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR may adversely affect our results of operations.
On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it intends
to stop persuading or compelling banks to submit rates for the calibration of LIBOR to the administrator of LIBOR after 2021. The announcement
indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. It is impossible to predict whether
and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to
LIBOR may be enacted in the United Kingdom or elsewhere. At this time, no consensus exists as to what rate or rates may become acceptable
alternatives to LIBOR and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based securities and variable rate
loans, subordinated debentures, or other securities or financial arrangements, given LIBOR's role in determining market interest rates globally.
Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR
rates and the value of LIBOR-based loans and securities in our portfolio, and may impact the availability and cost of hedging instruments and
borrowings. If LIBOR rates are no longer available, and we are required to implement substitute indices for the calculation of interest rates under
our loan agreements with our borrowers, we may incur significant expenses in effecting the transition, and may be subject to disputes or litigation
with customers over the appropriateness or comparability to LIBOR of the substitute indices, which could have an adverse effect on our results
of operations.
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If limitations arise in our ability to utilize the national brokered deposit market or to replace short-term deposits, our ability to replace
maturing deposits on acceptable terms could be adversely impacted.
HomeTrust Bank utilizes the national brokered deposit market for a portion of our funding needs. At June 30, 2018, brokered deposits totaled
$107.5 million or 4.89% of total deposits, with remaining maturities of one month to four years. Under FDIC regulations, in the event we are
deemed to be less than well-capitalized, we would be subject to restrictions on our use of brokered deposits and the interest rate we can offer on
our deposits. If this happens, our use of brokered deposits and the rates we would be allowed to pay on deposits may significantly limit our ability
to use deposits as a funding source. If we are unable to participate in this market for any reason in the future, our ability to replace these deposits
at maturity could be adversely impacted.
Further, there may be competitive pressures to pay higher interest rates on deposits, which would increase our funding costs. If deposit clients
move money out of the Bank deposits and into other investments (or into similar products at other institutions that may provide a higher rate of
return), we could lose a relatively low cost source of funds, increasing our funding costs and reducing our net interest income and net income.
Additionally, any such loss of funds could result in reduced loan originations, which could materially negatively impact our growth strategy and
results of operations.
Conditions in the financial markets may limit our access to additional funding to meet our liquidity needs.
Liquidity is essential to our business. We rely on a number of different sources in order to meet our potential liquidity demands. Our primary
sources of liquidity are increases in deposit accounts, cash flows from loan payments and our securities portfolio. Borrowings also provide us
with a source of funds to meet liquidity demands. An inability to raise funds through deposits, borrowings, the sale of loans or investment
securities and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance
our activities or on terms which are acceptable to us could be impaired by factors that affect us specifically, or the financial services industry or
economy in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity
as a result of a downturn in the North Carolina, South Carolina, Virginia, and/or Tennessee markets in which our loans are concentrated or adverse
regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial
markets or negative views and expectations about the prospects for the financial services industry or deterioration in credit markets. In particular,
our liquidity position could be significantly constrained if we are unable to access funds from the FHLB Atlanta or other wholesale funding
sources, or if adequate financing is not available at acceptable interest rates. Finally, if we are required to rely more heavily on more expensive
funding sources, our revenues may not increase proportionately to cover our costs. Any decline in available funding could adversely impact our
ability to originate loans, invest in securities, meet our expenses, or fulfill obligations such as repaying our borrowings or meeting deposit
withdrawal demands, any of which could, in turn, have a material adverse effect on our business, financial condition and results of operations.
Our strategy of pursuing acquisitions exposes us to financial, execution and operational risks that could adversely affect us.
We are implementing a strategy of supplementing organic growth by acquiring other financial institutions or their businesses that we believe
will help us fulfill our strategic objectives and enhance our earnings. There are risks associated with this strategy, however, including the following:
• We may be exposed to potential asset quality issues or unknown or contingent liabilities of the banks, businesses, assets and liabilities we
acquire. If these issues or liabilities exceed our estimates, our results of operations and financial condition may be materially negatively
affected;
•
Prices at which future acquisitions can be made may not be acceptable to us;
• Our growth initiatives may require us to recruit experienced personnel to assist in such initiatives. The failure to identify and retain such
personnel would place significant limitations on our ability to execute our growth strategy;
• Our strategic efforts may divert resources or management’s attention from ongoing business operations and may subject us to additional
regulatory scrutiny;
•
The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity into our company
to make the transaction economically successful. This integration process is complicated and time consuming and can also be disruptive to
the customers of the acquired business. If the integration process is not conducted successfully and with minimal effect on the acquired
business and its customers, we may not realize the anticipated economic benefits of particular acquisitions within the expected time frame,
and we may lose customers or employees of the acquired business. We may also experience greater than anticipated customer losses even
if the integration process is successful;
•
To finance a future acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or raise additional
capital, which could dilute the interests of our existing shareholders;
• We have completed four mergers during the past four fiscal years that enhanced our rate of growth. We may not be able to continue to
sustain our past rate of growth or to grow at all in the future; and
• We expect our net income will increase following our acquisitions, however, we also expect our general and administrative expenses and
consequently our efficiency rates will also increase. Ultimately, we would expect our efficiency ratio to improve; however, if we are not
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successful in our integration process, this may not occur, and our acquisitions or branching activities may not be accretive to earnings in
the short or long-term.
The required accounting treatment of loans we acquire through acquisitions, including purchase credit impaired loans, could result in
higher net interest margins and interest income in current periods and lower net interest margins and interest income in future periods.
Under U.S. Generally Accepted Accounting Principles ("GAAP"), we are required to record loans acquired through acquisitions, including
purchase credit impaired loans, at fair value. Estimating the fair value of such loans requires management to make estimates based on available
information and facts and circumstances as of the acquisition date. Actual performance could differ from management's initial estimates. If these
loans outperform our original fair value estimates, the difference between our original estimate and the actual performance of the loan (the
“discount”) is accreted into net interest income. Thus, our net interest margins may initially increase due to the discount. We expect the yields
on our loans to decline as our acquired loan portfolio pays down or matures and the discount decreases, and we expect downward pressure on
our interest income to the extent that the runoff on our acquired loan portfolio is not replaced with comparable high-yielding loans. This could
result in higher net interest margins and interest income in current periods and lower net interest rate margins and lower interest income in future
periods.
The financial services market is undergoing rapid technological changes, and if we are unable to stay current with those changes, we
will not be able to effectively compete.
The financial services market, including banking services, is undergoing rapid changes with frequent introductions of new technology-driven
products and services. Our future success will depend, in part, on our ability to keep pace with the technological changes and to use technology
to satisfy and grow customer demand for our products and services and to create additional efficiencies in our operations. We expect that we will
need to make substantial investments in our technology and information systems to compete effectively and to stay current with technological
changes. Some of our competitors have substantially greater resources to invest in technological improvements and will be able to invest more
heavily in developing and adopting new technologies, which may put us at a competitive disadvantage. We may not be able to effectively
implement new technology-driven products and services or be successful in marketing these products and services to our customers. As a result,
our ability to effectively compete to retain or acquire new business may be impaired, and our business, financial condition or results of operations
may be adversely affected.
We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations.
The financial services industry is extensively regulated. Federal and state banking regulations are designed primarily to protect the deposit
insurance funds and consumers, not to benefit a company’s shareholders. These regulations may sometimes impose significant limitations on
operations. The significant federal and state banking regulations that affect us are described under the heading “Item 1. Business-Regulation”
in Item I of this Form 10-K. These regulations, along with the currently existing tax, accounting, securities, insurance, and monetary laws,
regulations, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic
initiatives and tax compliance, and govern financial reporting and disclosures. New proposals for legislation continue to be introduced in the
U.S. Congress that could further alter the regulation of the bank and non-bank financial services industries and the manner in which firms within
the industry conduct business. In this regard, in May 2018 the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Act”),
was enacted to reduce the application of certain financial reform regulations, including the Dodd-Frank Act, on community banks such as us.
The Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and simplifies the
regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing
the federal banking regulators to establish a single “Community Bank Leverage Ratio” of between 8 and 10 percent to replace the leverage and
risk-based regulatory capital ratios. It is difficult at this time to predict when or how any new standards under the Act will ultimately be applied
to us or what specific impact the Act and the yet to be written implementing rules and regulations will have on community banks. However, it
is expected that they may impact the profitability of our business activities and enhance our ability to originate residential loans while reducing
our operating and compliance costs. In addition to this new legislation, federal and state regulatory agencies also frequently adopt changes to
their regulations or change the manner in which existing regulations are applied. Future changes in federal policy and at regulatory agencies are
expected to occur over time through policy and personnel changes, which could lead to changes involving the level of oversight and focus on
the financial services industry. These changes may require us to invest significant management attention and resources to make any necessary
changes to operations to comply and could have an adverse effect on our business, financial condition and results of operations. Further, changes
in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent
registered public accounting firm. These accounting changes could materially impact, potentially even retroactively, how we report our financial
condition and results of our operations as could our interpretation of those changes.
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions and
limit our ability to get regulatory approval of acquisitions.
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 and limit our ability to get regulatory approval of acquisitions. Recently 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
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with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these
laws and regulations.
Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is
needed or the cost of that capital may be very high.
We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. Currently, we believe our capital
resources satisfy our capital requirements for the foreseeable future. However, we may at some point need to raise additional capital to support
our growth.
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside of our control,
and on our financial condition and performance. Accordingly, we cannot make assurances that we will be able to raise additional capital if needed
on terms that are acceptable to us, or at all. If we cannot raise additional capital when needed, our ability to further expand our operations could
be materially impaired and our financial condition and liquidity could be materially and adversely affected. In addition, any additional capital
we obtain may result in the dilution of the interests of existing holders of our common stock. Further, if we are unable to raise additional capital
when required by our bank regulators, we may be subject to adverse regulatory action.
We are subject to certain risks in connection with our use of technology.
Our security measures may not be sufficient to mitigate the risk of a cyber attack. Communications and information systems are essential to the
conduct of our business, as we use such systems to manage our customer relationships, our general ledger and virtually all other aspects of our
business. Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems
and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer
systems, software, and networks may be vulnerable to breaches, fraudulent or unauthorized access, denial or degradation of service attacks,
misuse, computer viruses, malware or other malicious code and cyber-attacks that could have a security impact. If one or more of these events
occur, this could jeopardize our or our customers' confidential and other information processed and stored in, and transmitted through, our
computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our customers or
counterparties. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate
vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered
through any insurance maintained by us. We could also suffer significant reputational damage.
Further, our cardholders use their debit and credit cards to make purchases from third parties or through third party processing services. As such,
we are subject to risk from data breaches of such third party’s information systems or their payment processors. Such a data security breach could
compromise our account information. The payment methods that we offer also subject us to potential fraud and theft by criminals, who are
becoming increasingly more sophisticated, seeking to obtain unauthorized access to or exploit weaknesses that may exist in the payment systems.
If we fail to comply with applicable rules or requirements for the payment methods we accept, or if payment-related data is compromised due
to a breach or misuse of data, we may be liable for losses associated with reimbursing our clients for such fraudulent transactions on clients’ card
accounts, as well as costs incurred by payment card issuing banks and other third parties or may be subject to fines and higher transaction fees,
or our ability to accept or facilitate certain types of payments may be impaired. We may also incur other costs related to data security breaches,
such as replacing cards associated with compromised card accounts. In addition, our customers could lose confidence in certain payment types,
which may result in a shift to other payment types or potential changes to our payment systems that may result in higher costs.
Breaches of information security also may occur through intentional or unintentional acts by those having access to our systems or our clients’
or counterparties’ confidential information, including employees. The Corporation is continuously working to install new and upgrade its existing
information technology systems and provide employee awareness training around phishing, malware, and other cyber risks to further protect the
Corporation against cyber risks and security breaches.
There continues to be a rise in electronic fraudulent activity, security breaches and cyber-attacks within the financial services industry, especially
in the commercial banking sector due to cyber criminals targeting commercial bank accounts. We are regularly the target of attempted cyber and
other security threats and must continuously monitor and develop our information technology networks and infrastructure to prevent, detect,
address and mitigate the risk of unauthorized access, misuse, computer viruses and other events that could have a security impact. Insider or
employee cyber and security threats are increasingly a concern for companies, including ours. We are not aware that we have experienced any
material misappropriation, loss or other unauthorized disclosure of confidential or personally identifiable information as a result of a cyber-
security breach or other act, however, some of our clients may have been affected by these breaches, which could increase their risks of identity
theft, credit card fraud and other fraudulent activity that could involve their accounts with us.
Security breaches in our internet banking activities could further expose us to possible liability and damage our reputation. Increases in criminal
activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third party technologies (including
browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that
we use to prevent fraudulent transactions and to protect data about us, our clients and underlying transactions. Any compromise of our security
could deter customers from using our internet banking services that involve the transmission of confidential information. We rely on standard
internet security systems to provide the security and authentication necessary to effect secure transmission of data. Although we have developed
and continue to invest in systems and processes that are designed to detect and prevent security breaches and cyber-attacks and periodically test
our security, these precautions may not protect our systems from compromises or breaches of our security measures, and could result in losses
to us or our customers, our loss of business and/or customers, damage to our reputation, the incurrence of additional expenses, disruption to our
45
business, our inability to grow our online services or other businesses, additional regulatory scrutiny or penalties, or our exposure to civil litigation
and possible financial liability, any of which could have a material adverse effect on our business, financial condition and results of operations.
Our security measures may not protect us from system failures or interruptions. While we have established policies and procedures to prevent
or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be adequately
addressed if they do. In addition, we outsource certain aspects of our data processing and other operational functions to certain third-party
providers. While the Corporation selects third-party vendors carefully, it does not control their actions. If our third-party providers encounter
difficulties including those resulting from breakdowns or other disruptions in communication services provided by a vendor, failure of a vendor
to handle current or higher transaction volumes, cyber-attacks and security breaches or if we otherwise have difficulty in communicating with
them, our ability to adequately process and account for transactions could be affected, and our ability to deliver products and services to our
customers and otherwise conduct business operations could be adversely impacted. Replacing these third-party vendors could also entail significant
delay and expense. Threats to information security also exist in the processing of customer information through various other vendors and their
personnel. We cannot assure you that such breaches, failures or interruptions will not occur or, if they do occur, that they will be adequately
addressed by us or the third parties on which we rely. We may not be insured against all types of losses as a result of third party failures and
insurance coverage may be inadequate to cover all losses resulting from breaches, system failures or other disruptions. If any of our third-party
service providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them,
we may be required to identify alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable
to us, or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if at
all. Further, the occurrence of any systems failure or interruption could damage our reputation and result in a loss of customers and business,
could subject us to additional regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could have a material adverse
effect on our financial condition and results of operations.
The board of directors oversees the risk management process, including the risk of cybersecurity, and engages with management on cybersecurity
issues.
Our operations rely on numerous external vendors.
We rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day operations. Accordingly,
our operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements under service level
agreements. The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements because
of changes in the vendor’s organizational structure, financial condition, support for existing products and services or strategic focus or for any
other reason, could be disruptive to our operations, which in turn could have a material negative impact on our financial condition and results
of operations. We also could be adversely affected to the extent such an agreement is not renewed by a third party vendor or is renewed on terms
less favorable to us. Additionally, the bank regulatory agencies expect financial institutions to be responsible for all aspects of our vendors’
performance, including aspects which they delegate to third parties. Disruptions or failures in the physical infrastructure or operating systems
that support our business and clients, or cyber-attacks or security breaches of the networks, systems or devices that our clients use to access our
products and services could result in client attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other
compensation costs, and/or additional compliance costs, any of which could materially adversely affect our results of operations or financial
condition.
Our framework for managing risks may not be effective in mitigating risk and loss to us.
We have established processes and procedures intended to identify measure, monitor, report, analyze and control the types of risk to which we
are subject. These risks include liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and compliance risk, and reputational
risk, among others. We also maintain a compliance program to identify, measure, assess, and report on our adherence to applicable laws, policies
and procedures. While we assess and improve these programs on an ongoing basis, there can be no assurance that our risk management or
compliance programs, along with other related controls, will effectively mitigate all risk and limit losses in our business. As with any risk
management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that
we have not appropriately anticipated or identified. If our risk management framework proves ineffective, we could suffer unexpected losses
which could have a material adverse effect on our financial condition and results of operations.
Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.
As a bank, we are susceptible to fraudulent activity that may be committed against us or our clients, which may result in financial losses or
increased costs to us or our clients, disclosure or misuse of our information or our client information, misappropriation of assets, privacy breaches
against our clients, litigation or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud,
wire fraud, phishing, social engineering and other dishonest acts. 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, there can be no assurance that such losses will not occur.
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Managing reputational risk is important to attracting and maintaining customers, investors and employees.
Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices,
employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities
of our customers. We have policies and procedures in place to protect our reputation and promote ethical conduct, but these policies and procedures
may not be fully effective. Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of
customers, investors and employees, costly litigation, a decline in revenues and increased governmental regulation.
We may experience future goodwill impairment.
In accordance with GAAP, we record assets acquired and liabilities assumed at their fair value, and, as such, acquisitions typically result in
recording goodwill. We perform a goodwill evaluation at least annually to test for goodwill impairment. As part of its testing, the Company first
assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
If the Company determines the fair value of a reporting unit is less than its carrying amount using these qualitative factors, the Company then
compares the fair value of goodwill with its carrying amount, and then measures impairment loss by comparing the implied fair value of goodwill
with the carrying amount of that goodwill. Adverse conditions in our business climate, including a significant decline in future operating cash
flows, a significant change in our stock price or market capitalization, or a deviation from our expected growth rate and performance may
significantly affect the fair value of our goodwill and may trigger additional impairment losses, which could be materially adverse to our operating
results and financial position.
We cannot provide assurance that we will not be required to take an impairment charge in the future. Any impairment charge has an adverse
effect on our results of shareholders’ equity and financial results and could cause a decline in our stock price.
Our net operating loss carryforwards could be substantially limited if we experience an ownership change as defined in the Internal
Revenue Code.
As of June 30, 2018, we had approximately $40.8 million of federal net operating losses (“NOLs”). The majority of these NOLs will expire for
federal tax purposes from 2024 through 2036. Our ability to use our NOLs and other pre-ownership change losses (collectively, “Pre-Change
Losses”) to offset future taxable income will be limited if we experience an “ownership change” as defined in Section 382 of the Internal Revenue
Code of 1986, as amended from time to time (the “Code”). In general, an ownership change occurs if, among other things, the shareholders (or
specified groups of shareholders) who own or have owned, directly or indirectly, 5% or more of a corporation’s common stock or are otherwise
treated as 5% shareholders under Section 382 and U.S. Treasury regulations promulgated thereunder increase their aggregate percentage ownership
of that corporation’s stock by more than 50 percentage points over the lowest percentage of the stock owned by these shareholders over a rolling
three-year period. If we experience an ownership change our Pre-Change Losses will be subject to an annual limitation on their use, which is
generally equal to the fair market value of our outstanding stock immediately before the ownership change multiplied by the long-term tax-
exempt rate, which was 2.09% for ownership changes occurring in June 2018. Depending on the size of the annual limitation (which is in part
a function of our market capitalization at the time of the ownership change) and the remaining carryforward period for our Pre-Change Losses
(U.S. federal net operating losses generally may be carried forward for a period of 20 years), we could realize a permanent loss of some or all
of our Pre-Change Losses, which could have a material adverse effect on our results of operations and financial condition.
In September 2012, we adopted a shareholder rights plan (the “Rights Plan”), which provides an economic disincentive for any person or group
to become an owner, for relevant tax purposes, of 4.99% or more of our stock. While adoption of the Rights Plan should reduce the likelihood
that future transactions in our stock will result in an ownership change under Section 382, there can be no assurance that the Rights Plan will be
effective to deter a shareholder from increasing its ownership interests beyond the limits set by the Rights Plan or that an ownership change will
not occur in the future.
We rely on dividends from the Bank for substantially all of our revenue at the holding company level.
We are an entity separate and distinct from our principal subsidiary, HomeTrust Bank, and derive substantially all of our revenue at the holding
company level in the form of dividends from that subsidiary. Accordingly, we are, and will be, dependent upon dividends from the Bank to pay
the principal of and interest on our indebtedness, to satisfy our other cash needs and to pay dividends on our common stock, if desired. HomeTrust
Bank’s ability to pay dividends is subject to its ability to earn net income and to meet certain regulatory requirements. In the event the Bank is
unable to pay dividends to us, we may not be able to pay dividends on our common stock when desired or continue stock repurchases. Also, our
right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s
creditors.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We maintain our administrative office, which is owned by us, in Asheville, North Carolina. In total, as of June 30, 2018, we have 43 locations,
which include: North Carolina (including the Asheville metropolitan area, Greensboro / "Piedmont" region, Charlotte, and Raleigh/Cary), Upstate
South Carolina (Greenville), East Tennessee (including Kingsport/Johnson City/Bristol, Knoxville, and Morristown) and Southwest Virginia
(including the Roanoke Valley).
47
Of those offices, ten are leased facilities. We also own an operations center located in Asheville, North Carolina. We lease additional space, which
is adjacent to the facility we own, for administrative and operations personnel. The lease terms for our branch offices, operations center and other
offices are not individually material. Lease expirations range from one to five years. In the opinion of management, all properties are adequately
covered by insurance, are in a good state of repair and are appropriately designed for their present and future use. See Notes 5 and 11 in the Notes
to the Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information.
We maintain depositor and borrower customer files on an online basis, utilizing a telecommunications network, portions of which are leased.
Management has a disaster recovery plan in place with respect to the data processing system, as well as our operations as a whole.
Item 3. Legal Proceedings
The "Litigation" section of Note 17 to the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K is incorporated
herein by reference.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company’s common stock is listed on the Nasdaq Global Market under the symbol “HTBI.” The common stock was issued at a price of
$10.00 per share in connection with the Conversion. The Conversion was completed on July 10, 2012 and the Company’s common stock
commenced trading on the Nasdaq Global Market on July 11, 2012. As of the close of business on September 10, 2018, there were 19,015,568
shares of common stock outstanding held by 1,264 holders of record. Certain shares 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
information for the Company’s common stock for the year ended June 30, 2018 and 2017.
First quarter
Second quarter
Third quarter
Fourth quarter
Year Ended June 30,
2018
2017
High
Low
High
Low
$
26.50
$
21.40
$
19.41
$
28.00
28.00
29.60
24.41
24.20
25.88
27.05
26.30
25.73
17.28
18.00
21.80
22.90
The Company did not declare any dividends on its common stock during the fiscal years ended June 30, 2018 or 2017. The timing and amount
of cash dividends paid depends on our earnings, capital requirements, financial condition and other relevant factors. We also have the ability to
receive dividends or capital distributions from HomeTrust Bank, our wholly owned subsidiary. There are regulatory restrictions on the ability
of HomeTrust Bank to pay dividends. See Item 1, “Business—How We Are Regulated,” for more information regarding the restrictions on the
Company’s and the Bank’s abilities to pay dividends.
Unregistered Sales of Equity Securities and Use of Proceeds
The Company has periodically repurchased shares of its common stock as authorized by our Board of Directors.
On November 19, 2014, the Company announced that its Board of Directors had authorized the repurchase of up to 1,023,266 shares of the
Company’s common stock, representing 5% of the Company’s outstanding shares. We completed this stock repurchase program during the first
fiscal quarter of 2016 at an average price of $15.93 per share.
On July 1, 2015, the Company announced that its Board of Directors had authorized the repurchase of up to 971,271 shares of the Company's
common stock, representing 5% of the Company's outstanding shares. We completed this stock repurchase program during the second fiscal
quarter of 2016 at an average price of $18.62 per share.
On December 15, 2015, the Company announced that its Board of Directors had authorized the repurchase of up to 922,855 shares of the
Company's common stock, representing 5% of the Company's outstanding shares, of which 443,155 remain available for repurchase at June 30,
2018. There were no shares repurchased during the year ended June 30, 2018 and during the year ended June 30, 2017, 479,700 of the shares
approved on December 15, 2015 were repurchased at an average price of $18.00.
Since its Conversion in July 2012, as of June 30, 2018, the Company has repurchased a total of 5,351,065 shares of common stock at an average
price of $16.63.
48
Equity Compensation Plans
The equity compensation plan information presented under Part III, Item 12 of this report is incorporated herein by reference.
Shareholder Return Performance Graph Presentation
The performance graph below compares the Company’s cumulative shareholder return on its common stock since June 30, 2013 to the cumulative
total return of the Nasdaq Composite, and the Nasdaq Bank Index for the periods indicated. The information presented below assumes $100 was
invested on June 30, 2013, in the Company’s common stock and in each of the indices and assumes the reinvestment of all dividends. Historical
stock price performance is not necessarily indicative of future stock price performance. Total return assumes the reinvestment of all dividends
and that the value of common stock and each index was $100 on June 30, 2013.
HomeTrust Bancshares, Inc.
NASDAQ Bank Index
NASDAQ Composite
2013
100.00
100.00
100.00
2014
92.98
117.83
152.64
Year Ended June 30,
2016
2015
109.08
98.82
123.63
130.36
167.68
172.68
2017
143.87
169.83
212.62
2018
165.98
186.90
260.05
49
Item 6. Selected Financial and Other Data.
The summary information presented below under “Selected Financial Condition Data” and “Selected Operations Data” for the years ended
June 30, 2018, 2017 and 2016 are derived in part from the audited consolidated financial statements that appear in this annual report. The following
information is only a summary and you should read it in conjunction with “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” under Item 7 of this report and “Financial Statements and Supplementary Data” under Item 8 of this report below.
Selected Financial Condition Data:
Total assets
Loans receivable, net(1)
Allowance for loan losses
Certificates of deposit in other banks
Securities available for sale, at fair value
FHLB and FRB stock(2)
Deposits
Borrowings
Stockholders’ equity
Selected Operations Data:
Total interest and dividend income
Total interest expense
Net interest income
Provision for (recovery of) loan losses
Net interest income after provision for (recovery
of) loan losses
Service charges and fees on deposit accounts
Mortgage banking income and fees
Bank owned life insurance income
Gain on sale of securities
Gain on sale of fixed assets
Other noninterest income
Total noninterest income
Total noninterest expense
Income before provision for income taxes
Income tax expense
Net income
Per Share Data:
Net income per common share:
Basic
Diluted
$
$
$
$
$
2018
2017
At June 30,
2016
(In thousands)
2015
2014
$
3,304,169
2,504,792
21,060
66,937
154,993
37,214
2,196,253
635,000
409,242
$
3,206,533
2,330,319
21,151
132,274
199,667
39,355
2,048,451
696,500
397,647
$
2,717,677
1,811,539
21,292
161,512
200,652
29,486
1,802,696
491,000
359,976
$
2,783,114
1,663,333
22,374
210,629
257,606
28,711
1,872,126
475,000
371,050
2,074,454
1,473,529
23,429
163,780
168,774
3,697
1,583,047
50,000
377,151
2018
2017
2016
2015
2014
Years Ended June 30,
(In thousands)
99,436
8,245
91,191
—
91,191
7,709
3,645
2,088
22
385
2,258
16,107
90,259
17,039
5,192
11,847
0.66
0.65
$
$
$
$
87,747
6,040
81,707
—
81,707
7,469
3,069
1,643
—
10
2,101
14,291
79,641
16,357
4,901
11,456
0.65
0.65
$
$
$
$
85,156
5,390
79,766
150
79,616
5,930
2,989
1,651
61
—
1,888
12,519
81,552
10,583
2,558
8,025
0.42
0.42
$
$
$
$
60,281
5,432
54,849
(6,300)
61,149
2,783
3,218
1,484
10
—
1,243
8,738
55,032
14,855
4,513
10,342
0.54
0.54
116,702
16,072
100,630
—
100,630
8,802
5,452
2,117
—
164
3,137
19,672
85,331
34,971
26,736
8,235
0.45
0.44
$
$
$
$
50
Selected Financial Ratios and Other Data:
Performance ratios:
Return on assets (ratio of net income to average total assets)
0.25%
0.40%
0.42%
0.32%
0.62%
At or For the
Years Ended June 30,
2018
2017
2016
2015
2014
Return on equity (ratio of net income to average equity)
Tax equivalent yield on earning assets(3)
Rate paid on interest-bearing liabilities
Tax equivalent average interest rate spread(3)
Tax equivalent net interest margin(3)(4)
Noninterest expense to average total assets
2.05
3.97
0.65
3.32
3.43
2.63
Average interest-earning assets to average interest-bearing liabilities
120.77
3.14
3.79
0.37
3.42
3.49
3.04
120.26
84.12
75.48
3.16
3.62
0.29
3.33
3.37
2.88
119.25
82.96
80.43
2.12
3.88
0.29
3.59
3.64
3.25
120.61
88.37
79.78
2.86
4.15
0.46
3.69
3.79
3.29
130.20
86.55
78.50
70.93
70.12
Efficiency ratio
Efficiency ratio - adjusted(5)
Asset quality ratios:
Nonperforming assets to total assets(6)
Nonaccruing loans to total loans(6)
Total classified assets to total assets
Allowance for loan losses to nonaccruing loans(6)
Allowance for loan losses to total loans
Net charge-offs (recoveries) to average loans
Capital ratios:
Equity to total assets at end of period
Average equity to average assets
Dividend payout to common shareholders
0.44%
0.62%
0.90%
1.15%
2.53%
0.43
1.00
0.58
1.57
1.01
2.17
192.96
154.77
114.98
0.83
—
0.90
0.01
1.16
0.06
1.47
2.92
90.02
1.33
0.07
2.53
4.51
61.79
1.56
0.19
12.39%
12.40%
13.25%
13.33%
18.18%
12.41
—
12.80
—
13.24
—
15.11
—
21.62
—
_____________________
(1) Net of allowances for loan losses, loans in process and deferred loan fees.
(2)
(3)
FRB stock was first purchased as part of membership requirements in fiscal year 2015.
For the year ended June 30, 2018 the weighted average rate for municipal leases is adjusted for a 30% combined federal and state tax rate since the interest from these leases is
tax exempt. All other periods were at 37%.
(4) Net interest income divided by average interest-earning assets.
(5)
(6) Nonperforming assets include nonaccruing loans including certain restructured loans and real estate owned. At June 30, 2018, there were $4.2 million of restructured loans included
See Part II, Item 7 - "Non-GAAP Financial Measures" for additional details.
in nonaccruing loans and $5.6 million, or 51.6%, of nonaccruing loans were current on their loan payments.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis reviews our consolidated financial statements and other relevant statistical data and is intended to enhance your
understanding of our financial condition and results of operations. The information in this section has been derived from the Consolidated
Financial Statements and notes thereto, which are included in Item 8 of this Form 10-K. You should read the information in this section in
conjunction with the business and financial information regarding us as provided in this Form 10-K.
Overview
Our principal business consists of attracting deposits from the general public and investing those funds, along with borrowed funds, in loans
secured by first and second mortgages on one-to-four family residences, including home equity loans and construction and land/lot loans,
commercial real estate loans, construction and development loans, commercial and industrial loans, U.S. Small Business Administration ("SBA")
loans, equipment finance leases, indirect automobile loans, and municipal leases. We also purchase investment securities consisting primarily
of securities issued by United States Government agencies and government-sponsored enterprises, as well as, commercial paper and certificates
of deposit insured by the FDIC.
We offer a variety of deposit accounts for individuals, businesses, and nonprofit organizations. Deposits and borrowings are our primary source
of funds for our lending and investing activities.
We are significantly affected by prevailing economic conditions, as well as, government policies and regulations concerning, among other things,
monetary and fiscal affairs, housing and financial institutions. Deposit flows are influenced by a number of factors, including interest rates paid
on competing time deposits, other investments, account maturities, and the overall level of personal income and savings. Lending activities are
influenced by the demand for funds, the number and quality of lenders, and regional economic cycles.
51
Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income, which is the income
that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Changes in
levels of interest rates affect our net interest income. A secondary source of income is noninterest income, which includes revenue we receive
from providing products and services, including service charges on deposit accounts, loan income and fees, and gains and losses from sales of
securities.
An offset to net interest income is the provision for loan losses which is required to establish the allowance for loan losses at a level that adequately
provides for probable losses inherent in our loan portfolio. As a loan's risk rating improves, property values increase, or recoveries of amounts
previously charged off are received, a recapture of previously recognized provision for loan losses may be added to net interest income.
Our noninterest expenses consist primarily of salaries and employee benefits, expenses for occupancy, marketing and computer services, and
FDIC deposit insurance premiums. Salaries and benefits consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses
for retirement and other employee benefits. Occupancy expenses, which are the fixed and variable costs of buildings and equipment, consist
primarily of lease payments, property taxes, depreciation charges, maintenance and costs of utilities.
In recent years, we have expanded our geographic footprint into seven additional markets through strategic acquisitions as well as three de novo
commercial loan offices. Looking forward, we believe opportunities currently exist within our market areas to grow our franchise. We anticipate
organic growth as the local economy and loan demand strengthens, through our marketing efforts and as a result of the opportunities being created
as a result of the consolidation of financial institutions occurring in our market areas. We may also seek to expand our franchise through the
selective acquisition of individual branches, loan purchases and, to a lesser degree, whole bank transactions that meet our investment and market
objectives. We will continue to be disciplined as it pertains to future expansion focusing primarily on organic growth in our current market areas.
At June 30, 2018, we had 43 locations in North Carolina (including the Asheville metropolitan area, Greensboro/"Piedmont" region, Charlotte,
and Raleigh/Cary), Upstate South Carolina (Greenville), East Tennessee (including Kingsport/Johnson City/Bristol, Knoxville, and Morristown)
and Southwest Virginia (including the Roanoke Valley).
Recent Merger, Acquisition, and Consolidation Activity
On March 29, 2018, the Company opened a de novo branch office in Cary, North Carolina.
On August 1, 2017, the Company opened a commercial loan production office in Greensboro, North Carolina.
On January 1, 2017, the Company completed its acquisition of TriSummit Bancorp, Inc. ("TriSummit") pursuant to an Agreement and Plan of
Merger, dated as of September 20, 2016, under which TriSummit merged with and into HomeTrust with HomeTrust as the surviving corporation
in the Merger. Immediately following the Merger, TriSummit's wholly owned subsidiary bank, TriSummit Bank, merged with and into the Bank.
TriSummit had seven offices throughout the East Tennessee market. The acquisition added approximately $258.0 million in loans and $280.0
million in deposits.
On December 31, 2016, the Bank acquired United Financial of North Carolina, Inc. ("United Financial"), a municipal lease company headquartered
in Fletcher, North Carolina that specializes in providing financing for fire departments and municipalities for the purchase of fire trucks and
related equipment as well as the construction of fire stations and other municipal buildings across the Carolinas and other southeastern states.
United Financial underwrites and originates these municipal leases and then sells them to HomeTrust and other financial institutions. Beginning
January 1, 2017, United Financial has conducted business under the name United Financial, a division of HomeTrust Bank.
On October 30, 2015, the Bank consolidated six branch offices located in North Carolina and Tennessee. The closures were the result of a review
of customer banking preferences and the current branch network. The Company had a nonrecurring impairment charge of $400,000 for the year
ended June 30, 2016 in relation to the consolidation of these offices.
Business and Operating Strategy and Goals
Our primary objective is to continue to operate and grow HomeTrust Bank as a well-capitalized, profitable, independent, community banking
organization. Our mission is to create stockholder value by building relationships with our employees, customers, and communities in our primary
markets in North Carolina (including the Asheville metropolitan area, Greensboro / "Piedmont" region, Charlotte, and Raleigh/Cary), Upstate
South Carolina (Greenville), East Tennessee (including Kingsport/Johnson City/Bristol, Knoxville, and Morristown) and Southwest Virginia
(including the Roanoke Valley) through exceptional service and helping our customers every day to be "Ready For What’s Next" in their financial
lives. We will also need to continue providing our employees with the tools necessary to effectively deliver our products and services to customers
in order to compete effectively with other financial institutions operating in our market areas and to fulfill our "Commitment to the Customer
Experience."
Continuing to originate residential and commercial real estate loans and municipal leases. Our primary lending focus has been, and will
continue to be, on operating as a residential and commercial mortgage lender. We originate both fixed and adjustable-rate residential and
commercial mortgage loans. Most of the long term fixed-rate residential mortgage loans that we originate are sold into the secondary market
with servicing released, while most of the residential adjustable rate mortgages and fixed rate mortgages with terms to maturity of 15 years or
less, all commercial real estate loans, and all municipal leases that we originate, are retained in our portfolio. We intend to continue to emphasize
these lending activities particularly in the larger attractive markets we have added in the past several years.
52
Expanding our lines of businesses. In our commitment to sound and profitable organic growth, we continuously focus on enhancing our lines
of businesses. During fiscal year 2018, we added 13 additional commercial market presidents/relationship managers primarily throughout our
seven metro markets to further expand our commercial and industrial lending, as well as our knowledge of the growing markets. During fiscal
2018, we implemented a new loan decision platform and overhauled our home equity lines of credit ("HELOCs") origination process resulting
in 75% increase in branch originations and a 68% decrease in the amount of time to close the loan. Commercial loan originations for the years
ended June 30, 2018, 2017, 2016 were $590.5 million, $532.5 million, and $325.5 million, respectively. Fiscal year 2018 marked the fourth full
year of our indirect auto finance line of business, which serves automobile dealerships, its owners, and consumers buying automobiles from
these dealerships throughout western North Carolina and upstate South Carolina. Our focus on working with strong dealerships affords us the
opportunity to expand into additional market areas and to actively deepen relationships through cross-selling opportunities, while building a
strong reputation. Indirect auto loans grew to $173.1 million at June 30, 2018 from $140.9 million at June 30, 2017.
Building on the momentum we have generated, we opened a de novo branch in Cary, North Carolina in March 2018 and a new Commercial LPO
in Greensboro, North Carolina in August 2017. In addition, we began operations for our new SBA 7(a) loan program and equipment finance line
of business. As we look forward, we will continue to focus on organic loan growth through both established and new lines of business as well
as refocusing on business banking and consumer lending through branches.
Disciplined franchise expansion. We believe opportunities currently exist within our new market areas to grow our franchise as illustrated by
84% of our commercial loan originations in fiscal year 2018 were originated by commercial relationship managers located in market areas we
entered subsequent to 2012. We anticipate organic growth as the local economy and loan demand strengthens, through our marketing efforts and
as a result of the opportunities being created as a result of the consolidation of financial institutions occurring in our market areas. We may also
seek to expand our franchise through the selective acquisition of individual branches, loan purchases and, to a lesser degree, whole bank transactions
that meet our investment and market objectives. We will continue to be disciplined as it pertains to future expansion focusing primarily on organic
growth in our current market areas.
Maintaining and improving asset quality. The Company believes that strong asset quality is a key to long-term financial success. The percentage
of nonperforming loans to total loans was 0.43% and 0.58% for June 30, 2018 and 2017, respectively. The Company’s percentage of nonperforming
assets to total assets at June 30, 2018 was 0.44% compared to 0.62% at June 30, 2017. The Company has actively managed the delinquent loans
and nonperforming assets by aggressively pursuing the collection of consumer debts and marketing saleable properties upon foreclosure or
repossession, work-outs of classified assets and loan charge-offs. In the past several years, the Company has applied more conservative and
stringent underwriting practices to new loans, including, among other things, an increased emphasis on a borrower’s ongoing ability to repay a
loan by requiring lower debt to income ratios, higher credit scores and lower loan to value ratios than our previous lending policies had required.
Although the Company intends to grow the commercial loan portfolio by expanding commercial real estate and commercial and industrial
lending, the Company intends to manage credit exposures through the use of experienced bankers in this area, internal concentration limits, and
a conservative approach to lending.
Emphasizing lower cost core deposits to manage the funding costs of our loan growth. We offer personal checking, savings and money-market
accounts, which generally are lower-cost sources of funds than certificates of deposit and are less sensitive to withdrawal when interest rates
fluctuate. To build our core deposit base, over the past several years, we have sought to reduce our dependence on traditional higher cost deposits
in favor of stable lower cost demand deposits. We have utilized additional product offerings, technology and a focus on customer service in
working toward this goal. In addition, we intend to increase demand deposits by growing business banking relationships through a recently
expanded product line tailored to our target business customers’ needs. We are also pursuing a number of strategies that include enhancing our
online and mobile banking platform, including improvements to online account opening and sales promotions on money market and checking
accounts to encourage the growth of lower cost deposits. As a result, core deposits (which we define as our non-certificate or non-time deposit
accounts) have increased 6% during fiscal 2018 and were 77% of total deposits at June 30, 2018.
Improving profitability through customer growth and balance sheet management. We are continuing to focus significant efforts on creating
brand awareness, offering competitive products and employing a strong and experienced workforce. In order to deepen the relationships with
our customers and increase individual customer profitability, we have continued our cross-marketing program, which allows us to better identify
lending opportunities and services for customers when a new account is opened. In addition, we have targeted our direct mail campaigns to take
advantage of competitor mergers and/or branch closures to acquire new customer core deposits. We believe these initiatives have positioned us
well to implement a strategy focused on improving revenue growth and noninterest income.
Hiring and retaining experienced employees with a customer service focus. We have been successful in attracting and retaining banking
professionals with strong community relationships and significant knowledge of our markets, through both individual hires and business
combinations, which is central to our business strategy. Exceptional service, local involvement and timely decision-making are integral parts of
our business strategy, and we continue to seek additional highly qualified and motivated individuals. We believe that by focusing on experienced
bankers who are established in their communities, we enhance our market position and add profitable growth opportunities. Our compensation
and incentive systems are aligned with our strategies to grow core deposits and our loan portfolio as the economy improves, while improving
asset quality. We have a strong corporate culture based on personal accountability and high ethical standards with an emphasis on "character"
and "competence" across all our business lines and locations.
53
Critical Accounting Policies
Certain of our accounting policies are important to the portrayal of our financial condition, since they require management to make difficult,
complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are
susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments
include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of
borrowers.
The following represent our critical accounting policies:
Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the
loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining
the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish
the allowance are: loss exposure at default; the amount and timing of future cash flows on impaired loans; value of collateral; and determination
of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management
reviews the level of the allowance quarterly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss
experience, current economic conditions, and other factors related to the collectability of the loan portfolio. Although we believe that we use the
best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other
conditions differ substantially from the assumptions used in making the evaluation. In addition, bank regulators, as an integral part of their
examination process, periodically review our allowance for loan losses and may require us to recognize adjustments to the allowance based on
their judgments about information available to them at the time of their examination. A large loss could deplete the allowance and require increased
provisions to replenish the allowance, which would adversely affect earnings.
Business Combinations and Acquired Loans. We use the acquisition method of accounting for all business combinations. The acquisition
method of accounting requires us as acquirer to recognize the fair value of assets acquired and liabilities assumed at the acquisition date, as well
as, recognize goodwill or a gain from a bargain purchase, if appropriate. Any acquisition-related costs and restructuring costs are recognized as
period expenses as incurred.
We account for purchased performing loans acquired in business combinations using the contractual cash flows method of recognizing discount
accretion based on the acquired loans’ contractual cash flows. We record purchased performing loans at fair value, including a credit discount.
The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. We do not establish any allowance for loan
losses for purchased performing loans, however we will record a provision for loan losses for any further deterioration in these loans subsequent
to the acquisition.
We consider loans purchased with evidence of credit deterioration and for which it is probable that all contractually required payments will not
be collected as purchased credit-impaired (“PCI”) loans. Evidence of credit quality deterioration as of the purchase date may include the internal
loan risk grade, delinquent and nonaccrual status, recent credit scores, and recent loan-to-value percentages. We initially record PCI loans at fair
value, which includes estimated future credit losses expected to be incurred over the life of the loan. Thus, we do not establish any allowance
for loan losses for PCI loans. We estimate the cash flows expected to be collected at the purchase date using specific credit reviews of certain
loans and quantitative models incorporating credit risk, prepayment assumptions, and various other factors. These estimates require significant
judgment given the impact of real estate prices, changing loss estimates, prepayment assumptions, and other relevant factors. The excess of cash
flows expected to be collected over the estimated fair value is the accretable yield and is recognized in interest income over the remaining life
of the loan. The difference between the contractually required payments and the cash flows expected to be collected at the purchase date,
considering the impact of prepayments, is the nonaccretable difference and is available to absorb future loan chargeoffs.
Real Estate Owned (“REO”). REO represents real estate acquired as a result of customers’ loan defaults. At the time of foreclosure, REO is
recorded at fair value less costs to sell, which becomes the property’s new basis. Any write-downs based on the asset’s fair value at the date of
acquisition are charged to the allowance for loan losses. After foreclosure, management periodically performs valuations such that the real estate
is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Revenue and expenses from operations and subsequent
valuation adjustments to the carrying amount of the property are included in noninterest expense in the consolidated statements of income. In
some instances, we may make loans to facilitate the sales of REO. Management reviews all sales for which it is the lending institution for
compliance with sales treatment under provisions established by Accounting Standards Codification ("ASC") Topic 360, “Accounting for Sales
of Real Estate.” Any gains related to sales of REO may be deferred until the buyer has a sufficient initial and continuing investment in the
property.
Goodwill and Intangibles. Goodwill is reviewed for potential impairment on an annual basis during the fourth quarter, or more often if events
or circumstances indicate there may be impairment. In testing goodwill for impairment, we have the option to assess either qualitative or
quantitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the
estimated fair value of a reporting unit is less than its carrying amount. If we elect to perform a qualitative assessment and determine that an
impairment is more likely than not, we are then required to perform a quantitative impairment test, otherwise no further analysis is required.
Under the quantitative impairment test, the evaluation involves comparing the current fair value of each reporting unit to its carrying value,
including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the
carrying value exceeds estimated fair value an impairment charge is recognized for the difference, but limited by the amount of goodwill allocated
to that reporting unit. Other identifiable intangible assets are evaluated for impairment if events or changes in circumstances indicate a possible
impairment.
54
Deferred Tax Assets. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation
allowance when it is more likely than not that some portion of the deferred tax asset will not be realized. We exercise significant judgment in
evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of
future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed
on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record a
valuation allowance against our deferred tax assets. See Note 12 in the Notes to the Consolidated Financial Statements included in Item 8 of this
Form 10-K for additional information.
Non-GAAP Financial Measures
In addition to results presented in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"), this Form 10-K contains certain
non-GAAP financial measures, which include: efficiency ratio; tangible book value per share; tangible equity to tangible assets ratio; net interest
income and net interest margin as adjusted to exclude additional Federal Home Loan Bank ("FHLB") borrowings and proceeds from such
borrowings; net income, earnings per share ("EPS"), return on assets ("ROA"), and return on equity ("ROE") excluding merger-related expenses,
certain state tax expense, adjustments for the change in federal tax law, and gain from the sale of premises and equipment; and the ratio of the
allowance for loan losses to total loans excluding acquired loans.
Management elected to utilize short-term FHLB borrowings beginning in November 2014 as part of a leverage strategy to increase net interest
income. The Company believes that showing the effects of these borrowings on net interest income and net interest margin is useful to both
management and investors as these measures are commonly used to measure financial institution's performance and against peers.
The Company believes these measures facilitate comparison of the quality and composition of the Company's capital and earnings ability over
time and in comparison to its competitors. These non-GAAP measures have inherent limitations, are not required to be uniformly applied and
are not audited. They should not be considered in isolation or as a substitute for total stockholders' equity or operating results determined in
accordance with GAAP. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies.
Set forth below is a reconciliation to GAAP of our efficiency ratio:
(Dollars in thousands)
Noninterest expense
Less merger-related expenses
Less impairment charge for branch consolidations
Noninterest expense – as adjusted
Net interest income
Plus noninterest income
Plus tax equivalent adjustment
Less gain on sale of fixed assets
Less realized gain on securities
Net interest income plus noninterest income – as adjusted
Efficiency ratio
Efficiency ratio (without adjustments)
2018
2017
$ 85,331
—
—
$ 85,331
$ 100,630
19,672
1,559
164
—
$ 121,697
$ 90,259
7,805
—
$ 82,454
$ 91,191
16,107
2,354
385
22
$ 109,245
Year Ended
June 30,
2016
$ 79,641
—
400
$ 79,241
$ 81,707
14,291
2,537
10
—
$ 98,525
2015
2014
$ 81,552
5,417
375
$ 75,760
$ 79,766
12,519
2,736
—
61
$ 94,960
$ 55,032
2,708
—
$ 52,324
$ 54,849
8,738
3,076
—
10
$ 66,653
70.12%
70.93%
75.48%
84.12%
80.43%
82.96%
79.78%
88.37%
78.50%
86.55%
Set forth below is a reconciliation to GAAP of tangible book value and tangible book value per share:
(Dollars in thousands, except per share data)
Total stockholders' equity
Less: goodwill, core deposits intangibles, net of taxes
Tangible book value (1)
Common shares outstanding
Tangible book value per share
Book value per share
$
2018
409,242
29,125
$
380,117
19,041,668
19.96
$
21.49
$
$
2017
397,647
30,157
$
367,490
18,967,875
19.37
$
20.96
$
$
At June 30,
2016
359,976
17,169
$
342,807
17,998,750
19.05
$
20.00
$
2015
$ 371,050
19,000
$ 352,050
19,488,449
18.06
$
19.04
$
2014
$ 377,151
12,344
$ 364,807
20,632,008
17.68
$
18.28
$
55
Set forth below is a reconciliation to GAAP of tangible equity to tangible assets:
(Dollars in thousands)
Tangible book value(1)
Total assets
Less: goodwill, core deposit intangibles, net of taxes
Total tangible assets(2)
Tangible equity to tangible assets
_________________________________________________________________
(1) Tangible book value is equal to total shareholders' equity less goodwill and core deposit intangibles, net of related deferred tax liabilities.
(2) Total tangible assets is equal to total assets less goodwill and core deposit intangibles, net of related deferred tax liabilities.
$
$
At June 30,
2018
380,117
3,304,169
29,125
$
2017
367,490
3,206,533
30,157
3,275,044
$
3,176,376
11.61%
11.57%
Set forth below is a reconciliation to GAAP net interest income and net interest margin as adjusted to exclude additional FHLB borrowings
and proceeds from such borrowings:
Year Ended June 30, 2018
Year Ended June 30, 2017
Average
Balance
Outstanding
$ 2,976,262
Interest
Earned /
Paid
$ 118,261
Yield/
Rate
Average
Balance
Outstanding
3.97 % $ 2,683,956
Interest
Earned /
Paid
$ 101,790
Yield/
Rate
3.79 %
Interest-earning assets
Less: Interest-earning assets funded by additional
FHLB borrowings (1)
Interest-earning assets - adjusted
213,750
$ 2,762,512
4,069
$ 114,192
1.90 %
318,000
4.13 % $ 2,365,956
Interest-bearing liabilities
Additional FHLB borrowings
Interest-bearing liabilities - adjusted
$ 2,464,339
213,750
$ 2,250,589
$
$
16,072
2,971
13,101
0.65 % $ 2,231,759
1.39 %
318,000
0.58 % $ 1,913,759
Net interest income and net interest margin
Net interest income and net interest margin - adjusted
Difference
$ 102,189
101,091
3.43 %
3.66 %
$
1,098
(0.23)%
3,640
98,150
8,245
1,856
6,389
93,545
91,762
1,783
$
$
$
$
$
1.14 %
4.15 %
0.37 %
0.58 %
0.33 %
3.49 %
3.88 %
(0.39)%
_________________________________________________________________________________
(1)
Proceeds from the additional borrowings were invested in various interest-earning assets including: deposits with the Federal Reserve Bank of Richmond ("FRB"), FHLB stock,
certificates of deposit in other banks, and commercial paper.
56
Set forth below is a reconciliation to GAAP net income, ROA, ROE, and EPS as adjusted to exclude merger-related expenses, certain state tax
expense, adjustments for the change in federal tax law, gain on sale of premises and equipment, and impairment charges for branch
consolidation:
(Dollars in thousands, except per share data)
Merger-related expenses
State tax expense adjustment (1)
Change in federal tax law adjustment (2)
Gain on sale of premises and equipment
Impairment charges for branch consolidation
Provision/(recovery) of loan losses (3)
Total adjustments
Tax effect (4)
Total adjustments, net of tax
Net income (GAAP)
Net income (non-GAAP)
Per Share Data
Average shares outstanding - basic
Average shares outstanding - diluted
Basic EPS
EPS (GAAP)
Non-GAAP adjustment
EPS (non-GAAP)
Diluted EPS
EPS (GAAP)
Non-GAAP adjustment
EPS (non-GAAP)
Average Balances
Average assets
Average equity
ROA
ROA (GAAP)
Non-GAAP adjustment
ROA (non-GAAP)
ROE
ROE (GAAP)
Non-GAAP adjustment
ROE (non-GAAP)
2018
2017
Year Ended
June 30,
2016
2015
2014
$
— $
7,805
$
— $
5,417
$
2,708
(142)
17,908
(164)
—
N/A
17,602
49
17,651
490
—
(385)
—
N/A
7,910
(2,646)
5,264
526
—
(10)
400
N/A
916
(144)
772
—
—
—
374
(150)
5,641
(1,882)
3,759
—
—
—
—
(6,300)
(3,592)
1,506
(2,086)
8,235
11,847
11,456
8,025
10,342
$
25,886
$
17,111
$
12,228
$
11,784
$
8,256
18,028,854
18,726,431
17,379,487
17,956,443
17,417,046
17,606,689
19,038,098
19,117,902
18,630,744
18,715,669
$
$
$
$
0.45
0.99
1.44
0.44
0.94
1.38
$
$
$
$
0.66
0.30
0.96
0.65
0.29
0.94
$ 3,243,661
$ 2,945,365
$
402,605
$
376,970
$
$
$
$
$
$
0.65
0.05
0.70
0.65
0.05
0.70
2,741,188
362,916
$
$
$
$
$
$
0.42
0.19
0.61
0.42
0.19
0.61
$
$
$
$
0.54
(0.10)
0.44
0.54
(0.10)
0.44
2,510,296
$ 1,673,267
379,316
$
361,727
0.25%
0.55%
0.80%
2.05%
4.38%
6.43%
0.40%
0.18%
0.58%
3.14%
1.40%
4.54%
0.42%
0.03%
0.45%
3.16%
0.21%
3.37%
0.32%
0.15%
0.47%
2.12%
0.99%
3.11%
0.62 %
(0.13)%
0.49 %
2.86 %
(0.58)%
2.28 %
_______________________________________________________
(1)
(2)
(3)
(4)
State tax adjustment is a result of various revaluations of state deferred tax assets.
Revaluation of net deferred tax assets due to the Tax Cuts and Jobs Act.
Tax amounts have been adjusted for certain nondeductible merger-related expenses.
Beginning in fiscal 2016, the Provision/(recovery) of loan losses was no longer included in this calculation.
57
Set forth below is a reconciliation to GAAP of the allowance for loan losses to total loans and the allowance for loan losses as adjusted to exclude
loans acquired through business combinations:
(Dollars in thousands)
Total gross loans receivable (GAAP)
Less: acquired loans
Adjusted loans (non-GAAP)
Allowance for loan losses (GAAP)
Less: allowance for loan losses on acquired loans
Adjusted allowance for loan losses
Allowance for loan losses / Adjusted loans (non-GAAP)
As of
June 30,
2018
June 30,
2017
$
2,526,616
$
2,352,415
271,801
374,538
$
2,254,815
$
1,977,877
$
21,060
$
21,151
483
20,577
727
20,424
0.91%
1.03%
Comparison of Financial Condition at June 30, 2018 and June 30, 2017
General. Total assets increased $97.6 million, or 3.0% to $3.3 billion at June 30, 2018 from $3.2 billion at June 30, 2017. Total liabilities
increased $86.0 million, or 3.1% to $2.9 billion at June 30, 2018 from $2.8 billion at June 30, 2017. Deposit growth of $147.8 million, or 7.2%
and the cumulative decrease of $126.3 million, or 30.1% in cash and cash equivalents, certificates of deposit in other banks and investment
securities during the year ended June 30, 2018 were used to partially fund the $174.4 million, or 7.4% increase in total loans receivable, the
$79.2 million, or 52.9% increase in commercial paper, and reduce borrowings by $61.5 million, or 8.8%. We continue to utilize our leveraging
strategy, where designated short-term FHLB borrowings are invested in various short-term liquid assets to generate additional net interest income,
as well as the required purchase of additional FHLB stock which generates increased dividend income; however, we have reduced the amount
of assets purchased and liabilities assumed as part of the leveraging strategy during the past year and expect to continue reducing these amounts
commensurate with anticipated organic loan growth.
Cash, cash equivalents, and commercial paper. Total cash and cash equivalents decreased $16.2 million, or 18.7%, to $70.7 million at June
30, 2018 from $87.0 million at June 30, 2017. In conjunction with our leveraging strategy, we purchase commercial paper to take advantage of
higher returns with relatively low risk while remaining highly liquid. The commercial paper balance increased $79.2 million, or 52.9% to $229.1
million at June 30, 2018 from $149.9 million at June 30, 2017.
Investments. Securities available for sale decreased $44.7 million, to $155.0 million at June 30, 2018 compared to $199.7 million at June 30,
2017. At June 30, 2018, certificates of deposit in other banks totaled $66.9 million compared to $132.3 million at June 30, 2017. All of the
certificates of deposit in other banks are fully insured by the FDIC. The Company has reduced its liquidity position in order to fund recent loan
growth. We evaluate individual investment securities quarterly for other-than-temporary declines in market value. We do not believe that there
are any other-than-temporary impairments at June 30, 2018; therefore, no impairment losses have been recorded for fiscal 2018. Other investments
include FHLB and FRB stock. FHLB stock decreased $2.2 million, to $29.9 million over the last fiscal year as a result of required redemptions
of FHLB stock due to reduced FHLB borrowings. As a member of the Federal Reserve System, the Bank is required to own FRB stock, which
totaled $7.3 million as of June 30, 2018 and 2017. In addition, we held in other assets, $5.2 million of equity securities in small business investment
companies.
Loans. Net loans receivable increased $174.4 million, or 7.4%, to $2.5 billion at June 30, 2018 compared to $2.3 billion at June 30, 2017,
primarily due to $170.5 million in net organic loan growth.
For fiscal year 2018, the retail loan segment portfolio originations increased to $323.6 million, or 5.9%, from $305.4 million the previous fiscal
year. The commercial loan segment portfolio originations increased to $590.5 million, or 9.0%, from $541.5 million the previous fiscal year.
58
Retail consumer and commercial loans consist of the following at the dates indicated:
Retail consumer loans:
One-to-four family
HELOCs - originated
HELOCs - purchased
Construction and land/lots
Indirect auto finance
Consumer
Total retail consumer loans
Commercial loans:
Commercial real estate
Construction and development
Commercial and industrial
Municipal leases
Total commercial loans
Total loans
June 30,
2018
June 30,
2017
Change
$
%
Percent of total
June 30,
2018
June 30,
2017
$
664,289
137,564
166,276
65,601
173,095
12,379
1,219,204
$
684,089
157,068
162,407
50,136
140,879
7,900
1,202,479
$ (19,800)
(19,504)
3,869
15,465
32,216
4,479
16,725
857,315
192,102
148,823
109,172
1,307,412
$ 2,526,616
730,408
197,966
120,387
101,175
1,149,936
$ 2,352,415
126,907
(5,864)
28,436
7,997
157,476
$ 174,201
(2.9)%
(12.4)
2.4
30.8
22.9
56.7
1.4
17.4
(3.0)
23.6
7.9
13.7
7.4 %
26.3%
5.4
6.6
2.6
6.9
0.5
48.3
33.9
7.6
5.9
4.3
51.7
100.0%
29.1%
6.7
6.9
2.1
6.0
0.3
51.1
31.0
8.4
5.1
4.3
48.9
100.0%
Recently, our expansion into larger metro markets as well as in-market acquisitions combined with improvements in the economy, employment
rates, stronger real estate prices, and a general lack of new housing inventory in certain markets have led to us significantly increasing originations
of construction loans for properties located in our market areas. We have hired experienced commercial real estate relationship managers, credit
officers, and developed a construction risk management group to better manage construction risk, as part of our efforts to grow the construction
portfolio. We will continue to take a disciplined approach in our construction and land development lending by concentrating our efforts on
smaller one-to-four residential loans to builders known to us and developers of commercial real estate and multifamily properties with proven
success in this type of construction. At June 30, 2018, construction and land/lots totaled $65.6 million including $52.8 million of one-to-four
family construction loans that will roll over to permanent loans upon completion of the construction period. Undisbursed construction and land/
lots loan commitments at June 30, 2018 totaled $58.9 million. Total construction and development loans at June 30, 2018, were $192.1 million,
excluding unfunded loan commitments of $209.7 million, of which $74.5 million was for non-residential commercial real estate construction,
$64.5 million was for land development, $48.7 million was for speculative construction of single family properties, and $4.8 million was for
multi-family construction. Undisbursed construction and development loan commitments at June 30, 2018 included $108.0 million of commercial
real estate projects, multi-family residential projects of $12.4 million and $30.5 million for the speculative construction of one- to four-family
residential properties.
Asset Quality. Our overall asset quality metrics continue to demonstrate our commitment to growing and maintaining a loan portfolio with a
moderate risk profile. Nonperforming assets decreased 27.0% to $14.6 million, or 0.44% of total assets, at June 30, 2018, compared to $20.0
million, or 0.62% of total assets, at June 30, 2017. Nonperforming assets included $10.9 million in nonaccruing loans and $3.7 million in REO
at June 30, 2018, compared to $13.7 million and $6.3 million, in nonaccruing loans and REO, respectively, at June 30, 2017. Included in
nonperforming loans are $4.2 million of loans restructured from their original terms of which $2.6 million were current with respect to their
modified payment terms. The decrease in nonaccruing loans was primarily due to continued improvements in credit quality throughout the loan
portfolio and loans returning to performing status as payment history and the borrower's financial status improved. At June 30, 2018, $5.6 million,
or 51.6%, of nonaccruing loans were current on their required loan payments. Purchased impaired loans aggregating $3.4 million acquired from
prior acquisitions are excluded from nonaccruing loans due to the accretion of discounts established in accordance with the acquisition method
of accounting for business combinations. Nonperforming loans to total loans decreased to 0.43% at June 30, 2018 from 0.58% at June 30, 2017.
The ratio of classified assets to total assets decreased to 1.00% at June 30, 2018 from 1.57% at June 30, 2017. Classified assets decreased 34.2%
to $33.1 million at June 30, 2018 compared to $50.2 million at June 30, 2017. Delinquent loans (loans delinquent 30 days or more) at June 30,
2018 were $9.8 million, or 0.4% of total loans compared to $15.2 million, or 0.6% of total loans at June 30, 2017.
As of June 30, 2018, impaired loans decreased to $31.4 million from $39.0 million at June 30, 2017. Our impaired loans are comprised of loans
on non-accrual status and all TDRs, whether performing or on non-accrual status under their restructured terms. Impaired loans may be evaluated
for reserve purposes using either a specific impairment analysis or on a collective basis as part of homogeneous pools. For more information on
these impaired loans, see Note 4 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.
Allowance for loan losses. We establish an allowance for loan losses by charging amounts to the loan provision at a level required to reflect
estimated credit losses in the loan portfolio. In evaluating the level of the allowance for loans losses, management considers, among other factors,
historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect borrowers’ ability
to repay, estimated value of any underlying collateral, prevailing economic conditions and current risk factors specifically related to each loan
59
type. See "Critical Accounting Policies – Allowance for Loan Losses" for a description of the manner in which the provision for loan losses is
established.
Our allowance for loan losses at June 30, 2018 was $21.1 million, or 0.83% of total loans, compared to $21.2 million, or 0.90% of total loans at
June 30, 2017. The allowance for loan losses was 0.91% of gross loans at June 30, 2018, excluding acquired loans from the allowance for loan
losses in accordance with the acquisition method of accounting for business combinations, as compared to 1.03% at June 30, 2017. The Company
recorded these loans at fair value, which includes a credit discount, therefore, no allowance for loan losses is established for these loans at the
time of acquisition. Any subsequent deterioration in credit quality will result in a provision for loan losses. The allowance for our acquired loans
at June 30, 2018 was $483,000 compared to $727,000 at June 30, 2017. There was no provision for loan losses for the years ended June 30, 2018
and 2017 as the allowance for loan losses required by our loan growth was offset by continued improvements in our asset quality. Net loan
charge-offs decreased to $91,000 for the year ended June 30, 2018 from $141,000 for fiscal 2017. Net charge-offs as a percentage of average
loans decreased to 0.00% for the year ended June 30, 2018 from 0.01% for last fiscal year. The allowance as a percentage of nonaccruing loans
increased to 192.96% at June 30, 2018, compared to 154.77% a year earlier.
We believe that the allowance for loan losses as of June 30, 2018 was adequate to absorb the known and inherent risks of loss in the loan portfolio
at that date. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, there
can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions
will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial
condition and results of operations. In addition, the determination of the amount of the allowance for loan losses is subject to review by bank
regulators as part of the routine examination process, which may result in the establishment of additional reserves based upon their judgment of
information available to them at the time of their examination.
Real estate owned. REO decreased $2.6 million, to $3.7 million at June 30, 2018 primarily due to $3.9 million in sales of REO, which were
partially offset by $1.3 million in transfers from foreclosed loans. The total balance of REO included $1.7 million in commercial real estate,
$998,000 in single-family homes and $956,000 in land, construction and development projects (both residential and commercial) at June 30,
2018.
Deferred income taxes. Deferred income taxes decreased $24.8 million, or 43.3%, to $32.6 million at June 30, 2018 from $57.4 million at June
30, 2017. The decrease was primarily driven by the revaluation of deferred tax assets as a result of the Tax Cuts and Jobs Act of 2017 (the “Tax
Act”) enacted on December 22, 2017, the realization of net operating losses through increases in taxable income, and to a lesser extent, the
revaluation of various state deferred tax assets, as discussed below. For more information on the Tax Act's impact on the Company's deferred
income taxes, see Note 12 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.
Deposits. Total deposits increased $147.8 million, or 7.2%, to $2.2 billion at June 30, 2018 from $2.0 billion at June 30, 2017. The increase was
primarily due to $93.8 million increase in our core deposits, in particular a $108.1 million or 19.0% increase in money market accounts, from
marketing initiatives and a $54.0 million increase in certificates of deposit, which related to additional brokered deposits. At June 30, 2018 and
2017, we had $108.9 million and $16.8 million in brokered deposits, respectively.
Borrowings. Borrowings, comprised of FHLB advances, decreased to $635.0 million at June 30, 2018 from $696.5 million at June 30, 2017.
At June 30, 2018 there were $255.0 million in FHLB advances with maturities less than 90 days and $150.0 million in convertible FHLB advances
with maturities greater than one year; together with a weighted average interest rate of 1.95%.
Equity. Stockholders’ equity at June 30, 2018 increased to $409.2 million from $397.6 million at June 30, 2017. The increase was primarily
driven by $8.2 million in net income, $3.0 million in stock-based compensation, and $680,000 in a cumulative adjustment for the adoption of
Accounting Standard Update 2016-09, "Improvements to Employee Share-Based Payment Accounting," partially offset by a $1.9 million decrease
in other comprehensive income representing unrealized losses on investment securities, net of tax. Tangible book value per share increased $0.59,
or 3.0% to $19.96 as of June 30, 2018 compared to $19.37 at June 30, 2017.
60
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Rate/Volume Analysis
The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and that due to the changes in interest
rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes
in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due
to volume and the change due to rate.
(Dollars in thousands)
Interest-earning assets:
Loans receivable
Deposits in other financial institutions
Investment securities
Other
Total interest-earning assets
Interest-bearing liabilities:
Interest-bearing checking accounts
Money market accounts
Savings accounts
Certificate accounts
Borrowings
Total interest-bearing liabilities
Net increase in tax equivalent interest income
Years Ended
June 30,
2018 vs. 2017
Years Ended
June 30,
2017 vs. 2016
Increase/
(decrease)
due to
Volume
Rate
Total
increase/
(decrease)
Increase/
(decrease)
due to
Volume
Rate
Total
increase/
(decrease)
$
$
$
15,036
(435)
(597)
391
14,395
77
269
(6)
43
508
891
$
$
$
(818) $
469
282
2,143
2,076
14,218
34
(315)
2,534
16,471
121
768
(7)
905
5,149
6,936
$
$
$
198
1,037
(13)
948
5,657
7,827
8,644
$
$
$
14,515
(327)
(479)
(734)
12,975
62
86
17
(255)
298
208
$
$
$
(3,066) $
253
301
1,044
(1,468)
11,449
(74)
(178)
310
11,507
129
207
2
(191)
1,849
1,996
$
$
$
191
293
19
(446)
2,147
2,204
9,303
Comparison of Results of Operations for the Years Ended June 30, 2018 and June 30, 2017
General. During 2018, we had net income of $8.2 million, a $3.6 million or 30.5% decrease compared to net income of $11.8 million earned
in 2017. The Company's diluted earnings per share was $0.44 for the year ended June 30, 2018 compared to $0.65 for the year ended June 30,
2017. Earnings for the year ended June 30, 2018 included a $17.9 million write-down of deferred tax assets following a deferred tax revaluation
resulting from enactment of the Tax Act with no comparable charge in fiscal year 2017, which was partially offset by the absence of merger-
related expenses, which totaled $7.8 million in fiscal year 2017.
For the year ended June 30, 2018 and before the write-down of deferred tax assets from the change in the federal tax rate, merger-related expenses,
certain state income tax expenses, and gains from the sale of premises and equipment (non-GAAP) net income was $25.9 million, or $1.38 in
diluted earnings per share compared to $17.1 million, or $0.94 in diluted earnings per share for the year ended June 30, 2017.
Net Interest Income. Net interest income for 2018 was $100.6 million, a $9.4 million, or 10.4% increase from $91.2 million in 2017. The
increase in net interest income for the year ended June 30, 2018 reflects a $17.3 million increase in interest and dividend income due primarily
to an increase in average interest-earning assets, partially offset by a $7.8 million increase in interest expense.
During 2018, average interest-earning assets increased $292.3 million, or 10.9% to $3.0 billion compared to $2.7 billion for 2017. The $338.5
million, or 16.3% increase in average balance of total loans receivable for the year ended June 30, 2018 was due to a full year's impact of the
TriSummit acquisition and increased organic loan growth. This increase was mainly funded by the cumulative decrease of $46.2 million, or 7.6%
in all other average interest-earning assets, an increase in average interest-bearing deposits of $152.2 million, or 9.2%, and an $80.4 million, or
13.9% increase in average borrowings, consisting entirely of FHLB advances.
Net interest margin (on a fully taxable-equivalent basis) for the year ended June 30, 2018 decreased six basis points to 3.43% from 3.49% for
last year. For the year ended June 30, 2018, our leveraging strategy produced an additional $4.1 million in interest and dividend income at an
average yield of 1.90%, while the average cost of the borrowings was 1.39%, resulting in approximately $1.1 million in net interest income. Our
leveraging strategy produced an additional $3.6 million in interest and dividend income at an average yield of 1.14% during fiscal year 2017,
while the average cost of the borrowings was 0.58%, resulting in approximately $1.8 million in net interest income. Excluding the effects of the
leveraging strategy, the tax equivalent net interest margin would be 3.66% and 3.88% for the years ended June 30, 2018 and 2017, respectively.
62
Interest Income. Total interest and dividend income for 2018 was $116.7 million, compared to $99.4 million for 2017, an increase of $17.3
million, or 17.4%. The increase was primarily driven by a $15.0 million, or 16.7% increase in loan interest income, a $2.2 million, or 59.4%
increase in certificates of deposit and other interest-bearing deposits, and a $354,000, or 21.3% increase in other investment income partially
offset by a $315,000, or 7.9% decrease in interest income from securities available for sale. The additional loan interest income was primarily
due to the increase in the average balance of loans receivable, which was partially offset by a $3.0 million decrease in the accretion of purchase
discounts on acquired loans to $3.2 million for the year ended June 30, 2018 from $6.1 million for fiscal year 2017, resulting from the full
repayments of several loans with large discounts in the previous year. This decrease caused average loan yields to decrease three basis points to
4.41% for the year ended June 30, 2018 from 4.44% in fiscal 2017. The accretion on purchase discounts on acquired loans stems from the discount
established at the time these loan portfolios were acquired and the related impact of prepayments on purchased loans. Each quarter, the Company
analyzes the cash flow assumptions on loan pools purchased and, at least semi-annually, the Company updates loss estimates, prepayment speeds,
and other variables when analyzing cash flows. In addition to this accretion income, which is recognized over the estimated life of the loans
pools, if a loan is removed from a pool due to payoff or foreclosure, the unaccreted discount in excess of losses is recognized as an accretion
gain in interest income. As a result, income from loan pools can be volatile from quarter to quarter as well as year over year. Excluding the effects
of the accretion on purchase discounts on acquired loans, loan yields increased 13 basis points to 4.28% for the year ended June 30, 2018 compared
to 4.15% in fiscal 2017.
Due to a significant number of adjustable-rate loans in the loan portfolio with interest rate floors below which the loans' contractual interest rate
may not adjust, net interest income will be negatively impacted in a rising interest rate environment until such time as the current rate exceeds
these interest rate floors. As of June 30, 2018, our loans with interest rate floors totaled approximately $611.5 million or 16.1% of our total loan
portfolio and had a weighted average floor rate of 4.00%; $71.3 million of these loans were at their floor rate, of which $57.0 million, or 79.9%,
had yields that would begin floating again once prime rates increase at least 200 basis points.
Interest Expense. Total interest expense was $16.1 million in 2018, a $7.8 million, or 94.9% increase from $8.2 million in 2017. The increase
was primarily related to the increase in average interest-bearing deposits and borrowings coupled with the increased cost of nine and 78 basis
points for the years ended June 30, 2018 and 2017, respectively. The overall cost of funds increased 28 basis points to 0.65% for the year ended
June 30, 2018 compared to 0.37% in the last fiscal year primarily due to the impact of the recent increases in the target federal funds rate on the
cost of our borrowings.
Provision for Loan Losses. During 2018 and 2017, there was no provision for loan losses reflecting the decline in our required provision loan
losses due to the continued improvements in our asset quality outpacing the additional provision otherwise required due to our loan growth. The
provision for loan losses reflects the amount required to maintain the allowance for losses at an appropriated level based upon management's
evaluation of the adequacy of general and specific loss reserves, trends in delinquencies and net charge-offs and current economic conditions.
See "Comparison of Financial Condition at June 30, 2018 and 2017 - Asset Quality and Allowance for Loan Losses" for additional details.
Noninterest Income. Noninterest income was $19.7 million for 2018 compared to $16.1 million for 2017. The $3.6 million, or 22.1% increase
was primarily due to a $1.1 million, or 14.2% increase in service charges on deposit accounts as a result of the increase in deposit accounts and
related fees; a $1.8 million, or 49.6% increase in loan income from the gain on sale of mortgage loans and various commercial loan-related fees
driven by the commencing of originations and sales of the guaranteed portion of U.S Small Business Administration (“SBA”) commercial loans;
and an $879,000, or 38.9% increase in other noninterest income mainly from investments in small business investment companies. Partially
offsetting these increases was a $221,000, or 57.4% decrease in gains from the sale of premises and equipment for the year ended June 30, 2018
compared to last fiscal year.
Noninterest Expense. Noninterest expense was $85.3 million in 2018, a $4.9 million, or 5.5% decrease from $90.3 million in 2017. The decrease
was primarily driven by the absence of the previously mentioned $7.8 million of merger-related expenses; a $192,000, or 11.5% decrease in
marketing and advertising; a $210,000, or 3.2% decrease in computer services; and a $222,000, or 15.7% decrease in real estate owned ("REO")
related expenses primarily as a result of fewer REO properties held. Partially offsetting these decreases were the additional expenses related to
the TriSummit acquisition, a new commercial loan production office in Greensboro, NC, new SBA and equipment finance lines of business, and
the opening of a de novo branch in Cary, NC as shown in the cumulative increase of $3.4 million, or 5.0% in salaries and employee benefits;
net occupancy expense; telephone, postage, and supplies; and other expenses for the year ended June 30, 2018 compared to last year. Deposit
insurance premiums increased $241,000, or 17.5% as the net asset base has increased.
Income Taxes. The provision for income taxes was $26.7 million for fiscal 2018 as compared to $5.2 million in 2017. The increase was mainly
driven by the Tax Act's reduction in the federal corporate tax rate, which required the Company to revalue net deferred tax assets and establish
the tax valuation allowance on a portion of our alternative minimum tax ("AMT") credits in accordance with Internal Revenue Service guidelines,
resulting in a $17.9 million adjustment through income tax expense; and to a lesser extent higher pre-tax income. In addition, for the year ended
June 30, 2018, the Company had a benefit of $142,000 as compared to a charge of $490,000 for the year ended June 30, 2017 related to the
revaluation of various state deferred tax assets. In addition, our June 30 fiscal year end required the use of a blended federal income tax rate as
prescribed by the Internal Revenue Code. The blended federal income tax rate of 27.5% was retroactively effective July 1, 2017 and was used
for the entire fiscal year ended June 30, 2018. For more information on income taxes and deferred taxes, see Note 12 of the Notes to the
Consolidated Financial Statements included in Item 8 of this Form 10-K.
63
Comparison of Results of Operation for the Year Ended June 30, 2017 and June 30, 2016
General. During 2017, we had net income of $11.8 million, a $391,000 or 3.4% increase compared to net income of $11.5 million earned in
2016. The Company's diluted earnings per share were $0.65 for both years ended June 30, 2017 and 2016. The leading factors in the increase of
net income for both periods ended June 30, 2017 were an increase in net interest income from organic loan growth and the acquisition of
TriSummit, which outpaced all merger-related expenses. The Company's earnings per share were impacted by the issuance of 765,277 new
common shares in conjunction with the TriSummit acquisition on January 1, 2017.
Net Interest Income. Net interest income for 2017 was $91.2 million, a $9.5 million, or 11.6% increase from $81.7 million in 2016. During
2017, average interest-earning assets increased $187.5 million, or 7.5% to $2.7 billion compared to $2.5 billion for 2016. The $316.3 million,
or 17.9% increase in average balance of loan receivables for 2017 was due to the TriSummit acquisition and increased organic loan growth,
which was mainly funded by the cumulative decrease of $128.8 million, or 17.6% in average interest-earning deposits with banks, securities
available for sale, and other interest-earning assets and an increase in average FHLB borrowings of $95.3 million, or 19.7%.
Net interest margin (on a fully taxable-equivalent basis) for 2017 increased 12 basis points to 3.49% from 3.37% for last year. During 2017, our
leveraging strategy produced an additional $3.6 million in interest income at an average yield of 1.14%, while the average cost of the borrowings
was 0.58%, resulting in approximately $1.8 million in net interest income. Our leveraging strategy produced an additional $3.3 million in interest
income at an average yield of 0.81% during 2016, while the average cost of the borrowings was 0.31%, resulting in approximately $2.0 million
in net interest income. Excluding the effects of the leveraging strategy, the net interest margin would have decreased five basis points to 3.88%
for 2017 compared to 3.93% for 2016.
Interest Income. Total interest and dividend income for 2017 was $99.4 million, compared to $87.7 million for 2016, an increase of $11.7
million, or 13.3%.The increase was primarily driven by an $11.6 million, or 14.8% increase in loan interest income and a $196,000, or 13.4%
increase in other investment income, which were partially offset by a $178,000, or 4.3% decrease in interest from securities available for sale.
The additional loan interest income was due to the increase in the average balance of loans receivable and a $1.6 million increase in the accretion
of purchase discounts on acquired loans to $6.1 million for 2017 from $4.5 million for 2016, as a result of early prepayments. Net interest margin
is enhanced by the amortization of purchase accounting discounts on purchased loans and certificates of deposit received in recent acquisitions,
which is accreted into net interest income. This additional income stems from the discount established at the time these loan portfolios were
acquired and the related impact of prepayments on purchased loans. Each quarter, the Company analyzes the cash flow assumptions on loan
pools purchased and, at least semi-annually, the Company updates loss estimates, prepayment speeds, and other variables when analyzing cash
flows. In addition to this accretion income, which is recognized over the estimated life of the loans pools, if a loan is removed from a pool due
to payoff or foreclosure, the unaccreted discount in excess of losses is recognized as an accretion gain in interest income. As a result, income
from loan pools can be volatile from quarter to quarter as well as year over year.
Average loan yields decreased 15 basis points to 4.44% for the year ended June 30, 2017 from 4.59% in fiscal 2016. For the years ended June
30, 2017 and 2016, the average loan yields included 29 and 26 basis points, respectively, from the accretion of purchase discounts on acquired
loans.
Due to a significant number of adjustable-rate loans in the loan portfolio with interest rate floors below which the loans' contractual interest rate
may not adjust, net interest income will be negatively impacted in a rising interest rate environment until such time as the current rate exceeds
these interest rate floors. As of June 30, 2017, our loans with interest rate floors totaled approximately $633.8 million or 27.0% of our total loan
portfolio and had a weighted average floor rate of 4.00%; $192.6 million of these loans were at their floor rate, of which $148.0 million, or
76.9%, had yields that would begin floating again once prime rates increase at least 200 basis points.
Interest Expense. Total interest expense was $8.2 million in 2017, a $2.2 million, or 36.5% increase from $6.0 million in 2016. The increase
was primarily due to a 32 basis point increase in the average cost of borrowings increasing interest expense on borrowings by $2.1 million to
$3.7 million for 2017 as compared to $1.5 million in 2016. In addition, average borrowings increased by $95.3 million to $577.8 million to
partially fund the increase in total loans and to provide funds for the TriSummit acquisition and our leveraging strategy. The TriSummit acquisition
was the leading factor for the $298.6 million increase in the average balance of interest-bearing deposits. The overall average cost of funds
increased eight basis points to 0.37% for 2017 compared to 0.29% for 2016 primarily due to the impact of the recent increases in the federal
funds rate on our borrowings.
Provision for Loan Losses. During 2017 and 2016, there was no provision for loan losses reflecting the decline in our required provision loan
losses due to the continued improvements in our asset quality outpacing the additional provision otherwise required due to our loan growth. The
provision for loan losses reflects the amount required to maintain the allowance for losses at an appropriated level based upon management's
evaluation of the adequacy of general and specific loss reserves, trends in delinquencies and net charge-offs and current economic conditions.
Noninterest Income. Noninterest income was $16.1 million for 2017 compared to $14.3 million for 2016. The $1.8 million, or 12.7% increase
was primarily due to a $576,000, or 18.8% increase in loan income and fees from increases in originations of mortgage loans held for sale, a
$445,000, or 27.1% increase in BOLI income, and a $385,000 gain on the sale of a previously closed branch office building. In addition, service
charges on deposit accounts increased $362,000, or 5.4%, reflecting the increase in deposit accounts from the TriSummit acquisition.
Noninterest Expense. Noninterest expense was $90.3 million in 2017, a $10.6 million, or 13.3% increase from $79.6 million in 2016. The
overall increase was primarily due to $7.8 million of merger-related expenses related to the TriSummit acquisition. Salaries and employee benefits
expense increased $3.9 million, or 9.3% as a result of the TriSummit acquisition and an increase in stock-based compensation expense primarily
driven by the increase in the Company's stock price. As a result of management's continued commitment to reduce operating expenses and the
64
consolidation of six branches during the second quarter of 2016, there was a cumulative decrease of $773,000, or 5.4% in net occupancy expense;
marketing and advertising; and telephone, postage, and supplies. This decrease was offset by an $837,000, or 14.4% increase in computer services
as a result of the TriSummit acquisition. In addition, deposit insurance premiums decreased $607,000, or 30.6% due to a decline in the rates
charged by the FDIC that occurred during the first quarter of fiscal 2017. REO-related expenses decreased $385,000 as a result of a $234,000
decrease in writedowns and net losses on the sale of REO properties and a $151,000 decrease in REO expenses.
Income Taxes. The provision for income taxes was $5.2 million for fiscal 2017, representing an effective tax rate of 30.5%, as compared to $4.9
million and an effective tax rate of 30.0% in 2016, as a result of higher income before taxes. During 2017 and 2016, the Company incurred a
charge of $490,000 and $526,000, respectively, which related to the decrease in value of our deferred tax assets based on recent decreases in
North Carolina's corporate tax rate. The rate was reduced to 4.0% in August 2015 and to 3.0% in August 2016 once certain state revenue triggers
were achieved.
Asset/Liability Management
Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are established contractually for
a period of time. Market interest rates change over time. Our loans generally have longer maturities than our deposits. Accordingly, our results
of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our assets and
liabilities. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is our most
significant market risk. If interest rates rise, our net interest income could be reduced because interest paid on interest-bearing liabilities, including
deposits and borrowings, could increase more quickly than interest received on interest-earning assets, including loans and other investments.
In addition, rising interest rates may hurt our income because they may reduce the demand for loans.
How We Measure Our Risk of Interest Rate Changes. As part of our process to manage our exposure to changes in interest rates and comply
with applicable regulations, we monitor our interest rate risk. In monitoring interest rate risk we continually analyze and manage assets and
liabilities based on market conditions, their payment streams and interest rates, the timing of their maturities, their sensitivity to actual or potential
changes in market interest rates, and interest rate sensitivities of the Company's non-maturity deposits with respect to interest rates paid and the
level of balances. The board of directors sets the asset and liability policy of HomeTrust Bank, which is implemented by management and an
asset/liability committee whose members include certain members of senior management.
The purpose of this committee is to communicate, coordinate and control asset/liability management consistent with our business plan and board
approved policies. The committee establishes and monitors the volume and mix of assets and funding sources taking into account relative costs
and spreads, interest rate sensitivity and liquidity needs. The objectives are to manage assets and funding sources to produce results that are
consistent with liquidity, capital adequacy, growth, risk, and profitability goals.
The committee generally meets on a quarterly basis to review, among other things, economic conditions and interest rate outlook, current and
projected liquidity needs and capital position, anticipated changes in the volume and mix of assets and liabilities and interest rate risk exposure
limits versus current projections pursuant to net present value of portfolio equity analysis and income simulations. The committee recommends
appropriate strategy changes based on this review. The committee is responsible for reviewing and reporting on the effects of the policy
implementations and strategies to the board of directors at least quarterly.
Among the techniques we use to manage interest rate risk are: (i) increasing our portfolio of hybrid and adjustable-rate one-to-four family
residential loans and commercial loans; (ii) maintaining a strong capital position, which provides for a favorable level of interest-earning assets
relative to interest-bearing liabilities; and (iii) emphasizing less interest rate sensitive and lower-costing “core deposits.” We also maintain a
portfolio of short-term or adjustable-rate assets and use fixed-rate FHLB advances and brokered deposits to extend the term to repricing of our
liabilities.
We consider the relatively short duration of our deposits in our overall asset/liability management process. As short-term rates increase, we have
assets and liabilities that increase with the market. This is reflected in the change in our present value equity (“PVE”) when rates increase (see
the table below). PVE is defined as the net present value of our existing assets and liabilities. In addition, we have historically demonstrated an
ability to maintain retail deposits through various interest rate cycles. If local retail deposit rates increase dramatically, we also have access to
wholesale funding through our lines of credit with the FHLB and FRB, as well as through the brokered deposit market to replace retail deposits,
as needed.
Depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive
factors, the committee may in the future determine to increase our interest rate risk position somewhat in order to maintain or increase our net
interest margin. In particular, we believe that the increased net interest income resulting from a mismatch in the maturity of our assets and
liabilities portfolios can, during periods of stable or declining interest rates, provide high enough returns to justify increased exposure to sudden
and unexpected increases in interest rates. As a result of this philosophy, our results of operations and the economic value of our equity will
remain vulnerable to increases in interest rates and to declines due to differences between long- and short-term interest rates.
The committee regularly reviews interest rate risk by forecasting the impact of alternative interest rate environments on net interest income and
our PVE. The committee also valuates these impacts against the potential changes in net interest income and market value of our portfolio equity
that are monitored by the board of directors of HomeTrust Bank generally on a quarterly basis.
Our asset/liability management strategy sets limits on the change in PVE given certain changes in interest rates. The table presented here, as of
June 30, 2018, is forward-looking information about our sensitivity to changes in interest rates. The table incorporates data from an independent
65
service, as it relates to maturity repricing and repayment/withdrawal of interest-earning assets and interest-bearing liabilities. Interest rate risk
is measured by changes in PVE for instantaneous parallel shifts in the yield curve up and down 400 basis points. Given the current targeted
federal funds rate is 1.75% to 2.00% making an immediate change of -200 and -300 basis points improbable, a PVE calculation for a decrease
of greater than 100 basis points has not been prepared. An increase in rates would slightly increase our PVE because the repricing of nonmaturing
deposits tend to lag behind the increase in market rates. This positive impact is partially offset by the negative effect from our loans with interest
rate floors which will not adjust until such time as a loan’s current interest rate adjusts to an increase in market rates which exceeds the interest
rate floor. Conversely, in a falling interest rate environment these interest rate floors will assist in maintaining our net interest income. As of
June 30, 2018, our loans with interest rate floors totaled approximately $611.5 million or 16.1% of our total loan portfolio and had a weighted
average floor rate of 4.00%, $71.3 million of these loans were at their floor rate, of which $57.0 million, or 79.9%, had yields that would begin
floating again once prime rates increase at least 200 basis points.
Change in Interest Rates
in
June 30, 2018
Present Value Equity
Basis Points
Amount
$ Change
% Change
(Dollars in Thousands)
PVE
Ratio
+ 400
+ 300
+ 200
+ 100
Base
- 100
$
744,049
$
742,932
738,771
730,437
715,822
668,983
28,227
27,110
22,949
14,615
—
(46,839)
4%
4
3
2
—
(7)
24%
24
23
23
22
20
In evaluating our exposure to interest rate movements, certain shortcomings inherent in the method of analysis presented in the foregoing table
must be considered. For example, although certain assets and liabilities may have similar maturities or repricing periods, they may react in
different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag behind changes in interest rates. Additionally, certain assets, such as
adjustable rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in
the event of a significant change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed
above. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. We consider all of these
factors in monitoring our exposure to interest rate risk.
The board of directors and management of HomeTrust Bank believe that certain factors afford HomeTrust Bank the ability to operate successfully
despite its exposure to interest rate risk. HomeTrust Bank may manage its interest rate risk by originating and retaining adjustable rate loans in
its portfolio, by borrowing from the FHLB to match the duration of our funding to the duration of originated fixed rate one-to-four family and
commercial loans held in portfolio and by selling on an ongoing basis certain currently originated longer term fixed rate one-to-four family real
estate loans.
Liquidity
Management maintains a liquidity position that it believes will adequately provide funding for loan demand and deposit run-off that may occur
in the normal course of business. We rely on a number of different sources in order to meet our potential liquidity demands. The primary sources
are increases in deposit accounts and cash flows from loan payments and the securities portfolio.
In addition to these primary sources of funds, management has several secondary sources available to meet potential funding requirements. As
of June 30, 2018, HomeTrust Bank had an additional borrowing capacity of $79.3 million with the FHLB of Atlanta, a $132.3 million line of
credit with the FRB, and three lines of credit with three unaffiliated banks totaling $60.0 million. At June 30, 2018, we had $635.0 million in
FHLB advances outstanding. Additionally, the Company classifies its securities portfolio as available for sale, providing an additional source of
liquidity. Management believes that our security portfolio is of high quality and the securities would therefore be marketable. In addition, we
have historically sold fixed-rate mortgage loans in the secondary market to reduce interest rate risk and to create still another source of liquidity.
From time to time we also utilize brokered time deposits to supplement our other sources of funds. Brokered time deposits are obtained by
utilizing an outside broker that is paid a fee. This funding requires advance notification to structure the type of deposit desired by us. Brokered
deposits can vary in term from one month to several years and have the benefit of being a source of longer-term funding. We also utilize brokered
deposits to help manage interest rate risk by extending the term to repricing of our liabilities, enhance our liquidity and fund asset growth.
Brokered deposits are typically from outside our primary market areas, and our brokered deposit levels may vary from time to time depending
on competitive interest rate conditions and other factors. At June 30, 2018, brokered deposits totaled $108.9 million or 4.96% of total deposits.
Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term
investments, such as overnight deposits and federal funds. On a longer term basis, we maintain a strategy of investing in various lending products
and investment securities, including mortgage-backed securities. The Company on a stand-alone level is a separate legal entity from HomeTrust
66
Bank and must provide for its own liquidity and pay its own operating expenses. The Company’s primary source of funds consists of the net
proceeds retained by the Company from the Conversion. We also have the ability to receive dividends or capital distributions from HomeTrust
Bank, although there are regulatory restrictions on the ability of HomeTrust Bank to pay dividends. At June 30, 2018, the Company (on an
unconsolidated basis) had liquid assets of $23.0 million.
We use our sources of funds primarily to meet our ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan
commitments. At June 30, 2018, the total approved loan commitments and unused lines of credit outstanding amounted to $259.7 million and
$491.6 million, respectively, as compared to $202.1 million and $414.4 million, respectively, as of June 30, 2017. Certificates of deposit scheduled
to mature in one year or less at June 30, 2018, totaled $385.7 million. It is management's policy to manage deposit rates that are competitive
with other local financial institutions. Based on this management strategy, we believe that a majority of maturing deposits will remain with us.
During fiscal 2018, cash and cash equivalents decreased $16.2 million, or 18.7%, from $87.0 million as of June 30, 2017 to $70.7 million as of
June 30, 2018. Cash provided by operating activities of $31.3 million and financing activities of $86.4 million was partially offset by cash used
in investing activities of $134.0 million. Primary sources of cash for the year ended June 30, 2018 included proceeds from maturities of investment
securities of $20.7 million, maturities of certificates of deposit in other banks, net of purchases, of $65.3 million, principal repayments of mortgage-
backed securities of $20.5 million, and a $147.8 million increase in net deposits. Primary uses of cash during the period included an increase in
portfolio loans of $168.6 million, a $3.5 million increase in fixed asset purchases, a decrease in borrowings of $61.5 million, and the purchase
of commercial paper, net of maturities, of $75.2 million. All sources and uses of cash reflect our cash management strategy to increase our amount
of higher yielding investments and loans, reducing our holdings in lower yielding investments and increasing our lower costing deposits.
During fiscal 2017, cash and cash equivalents increased $34.4 million, or 65.4%, from $52.6 million as of June 30, 2016 to $87.0 million as of
June 30, 2017 primarily due to the increase in borrowings to partially fund the increase in total loans, and to provide funds for the TriSummit
acquisition and our leveraging strategy. Cash provided by operating activities of $15.1 million and financing activities of $126.0 million was
partially offset by cash used in investing activities of $106.8 million. Primary sources of cash for the year ended June 30, 2017 included proceeds
from an increase in borrowings of $158.0 million, maturities and sales of investment securities of $46.4 million, maturities of commercial paper,
net of purchases, of $81.0 million, maturities of certificates of deposit in other banks, net of purchases, of $29.5 million, and principal repayments
of mortgage-backed securities of $23.9 million. Primary uses of cash during the period included, the purchase of securities available for sale of
$15.1 million, a $34.5 million decrease in net deposits, an increase in portfolio loans of $255.9 million, a $2.8 million increase in fixed asset
purchases, and $10.6 million for the TriSummit acquisition, net of cash received.
Contractual Obligations
The following table presents the Company's significant contractual obligations at June 30, 2018 (in thousands):
Borrowings
Capital lease
Operating leases
Total contractual obligations
Off-Balance Sheet Activities
$
$
1 Year or
Less
435,000 $
133
1,661
$
436,794
Over 1 to 3
Years
Over 3 to 5
Years
More Than
5 Years
— $
402
2,413
2,815
$
— $
423
1,902
2,325
$
200,000
1,849
1,543
203,392
$
$
Total
635,000
2,807
7,519
645,326
In the normal course of operations, we engage in a variety of financial transactions that are not recorded in our financial statements. These
transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage
customers’ requests for funding and take the form of loan commitments and lines of credit. For the year ended June 30, 2018, we engaged in no
off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows.
A summary of our off-balance sheet commitments to extend credit at June 30, 2018, is as follows (in thousands):
Undisbursed portion of construction loans
Commitments to make loans
Unused lines of credit
Unused letters of credit
Total loan commitments
Capital Resources
$ 209,726
49,949
491,649
8,227
$ 759,551
At June 30, 2018, equity totaled $409.2 million. Management monitors the capital levels of the Company to provide for current and future
business opportunities and to ensure HomeTrust Bank meets regulatory guidelines for “well-capitalized” institutions.
HomeTrust Bancshares, Inc. is a bank holding company and a financial holding company subject to regulation by the Board of Governors of the
Federal Reserve System (“Federal Reserve”). As a bank holding company, we are subject to capital adequacy requirements of the Federal Reserve
67
under the Bank Holding Company Act and the regulations of the Federal Reserve. Our subsidiary, the Bank, an FDIC-insured, North Carolina
state-chartered bank and a member of the Federal Reserve System, is supervised and regulated by the Federal Reserve and the North Carolina
Office of the Commissioner of Banks and is subject to minimum capital requirements applicable to state member banks established by the Federal
Reserve that are calculated in the same manner to those applicable to bank holding companies.
HomeTrust Bancshares, Inc. and the Bank are required to maintain specified levels of regulatory capital under federal banking regulations. The
capital adequacy requirements are quantitative measures established by regulation that require HomeTrust Bancshares, Inc. and the Bank to
maintain minimum amounts and ratios of capital. HomeTrust Bancshares, Inc.’s and the Bank’s capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings and other factors. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by bank regulators that, if undertaken, could have a direct material
effect on the Company's financial statements. At June 30, 2018, HomeTrust Bancshares, Inc. and the Bank each exceeded all regulatory capital
requirements.
Consistent with our goals to operate a sound and profitable organization, our policy is for the Bank to maintain a “well-capitalized” status under
the regulatory capital categories of the Federal Reserve. As of June 30, 2018, the Bank was considered "well capitalized" in accordance with its
regulatory capital guidelines and exceeded all regulatory capital requirements with Common Equity Tier 1, Tier 1 Risk-Based, Total Risk-Based,
and Tier 1 Leverage capital ratios of 11.70%, 11.70%, 12.45%, and 10.33%, respectively. As of June 30, 2017, Common Equity Tier 1, Tier 1
Risk-Based, Total Risk-Based, and Tier 1 Leverage capital ratios were 11.68%, 11.68%, 12.50%, and 9.97%, respectively.
As of June 30, 2018, HomeTrust Bancshares, Inc. exceeded all regulatory capital requirements with Common Equity Tier 1, Tier 1 Risk-Based,
Total Risk-Based, and Tier 1 Leverage capital ratios of 12.97%, 12.97%, 13.72%, and 11.45%, respectively. As of June 30, 2017, Common
Equity Tier 1, Tier 1 Risk-Based, Total Risk-Based, and Tier 1 Leverage capital ratios were 13.07%, 13.07%, 13.89%, and 11.13%, respectively.
See Item 1, “Business-How We are Regulated,” and Note 18 of the Notes to the Consolidated Financial Statements included in Item 8 of this
Form 10-K for additional details on the Company's capital requirements.
Impact of Inflation
The Consolidated Financial Statements and related financial data presented herein have been prepared in accordance with accounting principles
generally accepted in the United States of America. These principles generally require the measurement of financial position and operating results
in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. The primary impact of
inflation is reflected in the increased cost of our operations. As a result, interest rates generally have a more significant impact on a financial
institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent
as the prices of goods and services. In a period of rapidly rising interest rates, the liquidity and maturity structures of our assets and liabilities
are critical to the maintenance of acceptable performance levels.
The principal effect of inflation on earnings, as distinct from levels of interest rates, is in the area of noninterest expense. Expense items such as
employee compensation, employee benefits, and occupancy and equipment costs may be subject to increases as a result of inflation. An additional
effect of inflation is the possible increase in dollar value of the collateral securing loans that we have made. Our management is unable to
determine the extent, if any, to which properties securing loans have appreciated in dollar value due to inflation.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 1 of the Notes to the Consolidated Financial Statements included in Item 8 of
this Form 10-K for additional details on the Company's capital requirements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises principally from interest rate risk inherent
in our lending, investing, deposit and borrowings activities. Management actively monitors and manages its interest rate risk exposure. In addition
to other risks that we manage in the normal course of business, such as credit quality and liquidity, management considers interest rate risk to
be a significant market risk that could have a potentially material effect on our financial condition and result of operations. The information
contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset Liability Management”
in this Form 10-K is incorporated herein by reference.
68
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Consolidated Balance Sheets, June 30, 2018 and 2017
Consolidated Statements of Income for the Years Ended June 30, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income for the Years Ended June 30, 2018, 2017 and 2016
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended June 30, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the Years Ended June 30, 2018, 2017 and 2016
Notes to Consolidated Financial Statements for the Years Ended June 30, 2018, 2017 and 2016
Page
70
71
72
73
74
75
76
78
69
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors
HomeTrust Bancshares, Inc. and Subsidiary
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of HomeTrust Bancshares, Inc. and Subsidiary (the “Company”) as of June 30,
2018 and 2017, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for
each of the years in the three-year period ended June 30, 2018, and the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company
as of June 30, 2018 and 2017, and the result of their operations and their cash flows for each of the three years in the period ended June 30, 2018,
in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the
Company’s internal control over financial reporting as of June 30, 2018, based on criteria established in Internal Control- Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 13, 2018 expressed
an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the 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 audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud,
and performing procedures that 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. We believe that our audits provide
a reasonable basis for our opinion.
/s/ DIXON HUGHES GOODMAN LLP
We have served as the Company's auditor since 2005.
Asheville, North Carolina
September 13, 2018
70
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors
HomeTrust Bancshares, Inc. and Subsidiary
Opinion on Internal Control Over Financial Reporting
We have audited HomeTrust Bancshares, Inc. and Subsidiary (the “Company”)’s internal control over financial reporting as of June 30, 2018,
based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. In our opinion, HomeTrust Bancshares, Inc. and Subsidiary maintained, in all material respects, effective internal control
over financial reporting as of June 30, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the
consolidated financial statements of HomeTrust Bancshares, Inc. and Subsidiary as of June 30, 2018 and 2017, and for each of the years in the
three years ended June 30, 2018, and our report dated September 13, 2018, expressed an unqualified opinion on those consolidated financial
statements.
Basis for Opinion
The Company's management is responsible 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’s report on internal control over financial
reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a
public accounting firm registered with the 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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 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.
/s/ DIXON HUGHES GOODMAN LLP
Asheville, North Carolina
September 13, 2018
71
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
June 30,
2018
2017
$
$
$
45,222
25,524
70,746
229,070
66,937
154,993
37,214
5,873
2,525,852
(21,060)
2,504,792
62,537
9,344
3,684
32,565
88,028
25,638
4,528
8,220
3,304,169
2,196,253
635,000
1,914
61,760
2,894,927
41,982
45,003
86,985
149,863
132,274
199,667
39,355
5,607
2,351,470
(21,151)
2,330,319
63,648
8,758
6,318
57,387
85,981
25,638
7,173
7,560
3,206,533
2,048,451
696,500
1,937
61,998
2,808,886
—
—
191
217,480
200,575
(7,406)
(1,598)
409,242
3,304,169
$
190
213,459
191,660
(7,935)
273
397,647
3,206,533
$
$
$
$
Assets
Cash
Interest-bearing deposits
Cash and cash equivalents
Commercial paper
Certificates of deposit in other banks
Securities available for sale, at fair value
Other investments, at cost
Loans held for sale
Total loans, net of deferred loan fees
Allowance for loan losses
Net loans
Premises and equipment, net
Accrued interest receivable
Real estate owned (REO)
Deferred income taxes
Bank owned life insurance (BOLI)
Goodwill
Core deposit intangibles
Other assets
Total Assets
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Borrowings
Capital lease obligations
Other liabilities
Total liabilities
Stockholders’ Equity
Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued or outstanding
Common stock, $0.01 par value, 60,000,000 shares authorized, 19,041,668, shares issued and
outstanding at June 30, 2018; 18,967,875 at June 30, 2017
Additional paid in capital
Retained earnings
Unearned Employee Stock Ownership Plan (ESOP) shares
Accumulated other comprehensive income (loss)
Total stockholders’ equity
Total Liabilities and Stockholders’ Equity
The accompanying notes are an integral part of these consolidated financial statements.
72
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Dollars in thousands, except per share data)
2018
June 30,
2017
Interest and Dividend Income
Loans
Securities available for sale
Certificates of deposit and other interest-bearing deposits
Other investments
Total interest and dividend income
Interest Expense
Deposits
Borrowings
Total interest expense
Net Interest Income
Provision for Loan Losses
Net Interest Income after Provision for Loan Losses
Noninterest Income
Service charges and fees on deposit accounts
Loan income and fees
BOLI income
Gain from sale of premises and equipment
Gain from sales of securities available for sale
Other, net
Total noninterest income
Noninterest Expense
Salaries and employee benefits
Net occupancy expense
Marketing and advertising
Telephone, postage, and supplies
Deposit insurance premiums
Computer services
Loss on sale and impairment of REO
REO expense
Core deposit intangible amortization
Merger-related expenses
Impairment charges for branch consolidation
Other
Total noninterest expense
Income Before Income Taxes
Income Tax Expense
Net Income
Per Share Data:
Net income per common share:
Basic
Diluted
Average shares outstanding:
Basic
Diluted
$
$
$
$
105,082
3,668
5,939
2,013
116,702
6,758
9,314
16,072
100,630
—
100,630
8,802
5,452
2,117
164
—
3,137
19,672
48,170
9,689
1,478
2,958
1,619
6,440
127
1,065
2,645
—
—
11,140
85,331
34,971
26,736
8,235
0.45
0.44
$
$
$
$
90,069
3,983
3,725
1,659
99,436
4,588
3,657
8,245
91,191
—
91,191
7,709
3,645
2,088
385
22
2,258
16,107
46,446
9,121
1,670
2,732
1,378
6,650
300
1,114
2,823
7,805
—
10,220
90,259
17,039
5,192
11,847
0.66
0.65
2016
$
$
$
$
78,437
4,161
3,686
1,463
87,747
4,531
1,509
6,040
81,707
—
81,707
7,469
3,069
1,643
10
—
2,101
14,291
42,491
9,106
2,037
3,153
1,985
5,813
534
1,265
2,907
—
400
9,950
79,641
16,357
4,901
11,456
0.65
0.65
18,028,854
18,726,431
17,379,487
17,956,443
17,417,046
17,606,689
The accompanying notes are an integral part of these consolidated financial statements.
73
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Net Income
Other Comprehensive Income (Loss)
Unrealized holding gains (losses) on securities available for sale
Gains (losses) arising during the period
Deferred income tax benefit (expense)
Reclassification of securities gains recognized in net income
Deferred income tax expense
Total other comprehensive income (loss)
Comprehensive Income
$
$
$
$
2018
June 30,
2017
2016
8,235
$
11,847
$
11,456
(2,489) $
618
—
—
(1,871) $
$
6,364
(3,113) $
1,058
(22)
7
(2,070) $
$
9,777
2,233
(760)
—
—
1,473
12,929
The accompanying notes are an integral part of these consolidated financial statements.
74
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands)
Common Stock
Shares
Amount
Additional
Paid In
Capital
Retained
Earnings
Unearned
ESOP
Shares
Balance at June 30, 2015
19,488,449
$
195
$
210,621
$ 168,357
$
Net income
Stock repurchased
Granted restricted stock
Forfeited restricted stock
Retired stock
Exercised stock options
Stock option expense
Restricted stock expense
ESOP shares allocated
Other comprehensive income
—
(1,510,994)
34,500
(2,550)
(12,855)
2,200
—
—
—
—
—
(15)
—
—
—
—
—
—
—
—
—
11,456
(27,719)
—
—
(223)
32
1,512
1,427
454
—
—
—
—
—
—
—
—
—
—
Accumulated
Other
Comprehensive
Income (Loss)
870
(8,993) $
—
—
—
—
—
—
—
—
529
—
—
—
—
—
—
—
—
—
—
1,473
Total
Stockholders’
Equity
$
371,050
11,456
(27,734)
—
—
(223)
32
1,512
1,427
983
1,473
Balance at June 30, 2016
17,998,750
$
180
$
186,104
$ 179,813
$
(8,464) $
2,343
$
359,976
Net income
Granted restricted stock
Forfeited restricted stock
Retired stock
Exercised stock options
Shares issued for TriSummit
Bancorp, Inc. merger
Stock option expense
Restricted stock expense
ESOP shares allocated
Other comprehensive loss
—
47,500
(6,000)
(22,794)
185,142
765,277
—
—
—
—
—
—
—
3
7
—
—
—
—
—
—
—
(569)
3,065
20,036
2,627
1,539
657
—
11,847
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
529
—
—
—
—
—
—
—
—
—
(2,070)
11,847
—
—
(569)
3,068
20,043
2,627
1,539
1,186
(2,070)
Balance at June 30, 2017
18,967,875
$
190
$
213,459
$ 191,660
$
(7,935) $
273
$
397,647
Net income
Cumulative-effect adjustment
on the change in accounting
for share-based payments
Granted restricted stock
Forfeited restricted stock
Retired stock
Exercised stock options
Stock option expense
Restricted stock expense
ESOP shares allocated
Other comprehensive loss
—
—
55,200
(6,600)
(19,007)
44,200
—
—
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
—
(494)
650
1,758
1,269
838
—
8,235
680
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
529
—
—
—
—
—
—
—
—
—
—
8,235
680
—
—
(494)
651
1,758
1,269
1,367
(1,871)
(1,871)
Balance at June 30, 2018
19,041,668
$
191
$
217,480
$ 200,575
$
(7,406) $
(1,598) $
409,242
The accompanying notes are an integral part of these consolidated financial statements.
75
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in thousands)
Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
2018
June 30,
2017
2016
$
8,235
$
11,847
$
11,456
activities:
Depreciation
Deferred income tax expense
Net amortization and accretion
Gain on sale of premises and equipment
Loss on sale and impairment of REO
BOLI income
Gain from sales of securities available for sale
Gain on sale of loans held for sale
Origination of loans held for sale
Proceeds from sales of loans held for sale
Increase (decrease) in deferred loan fees, net
Decrease (increase) in accrued interest receivable and other assets
Core deposit intangible amortization
ESOP compensation expense
Restricted stock and stock option expense
Increase in other liabilities
Net cash provided by operating activities
Investing Activities:
Purchase of securities available for sale
Proceeds from sales of securities available for sale
Proceeds from maturities of securities available for sale
Maturities (purchase) of commercial paper, net
Purchase of certificates of deposit in other banks
Maturities of certificates of deposit in other banks
Principal repayments of mortgage-backed securities
Net redemptions (purchases) of other investments
Net increase in loans
Purchase of BOLI
Proceeds from redemption of BOLI
Purchase of premises and equipment
Proceeds from sale of premises and equipment
Capital improvements to REO
Proceeds from sale of REO
Acquisition of United Financial of North Carolina, Inc.
Acquisition of TriSummit Bancorp, Inc., net of cash received
Net cash used in investing activities
76
3,810
26,121
(5,950)
(164)
127
(2,117)
—
(4,276)
(143,755)
143,350
181
(1,246)
2,645
1,367
3,027
(13)
31,342
—
—
20,675
(75,202)
(17,201)
82,538
20,471
2,141
3,816
4,947
(6,658)
(385)
300
(2,088)
(22)
(2,674)
(134,258)
137,108
(1,317)
(2,727)
2,823
1,186
4,166
(949)
15,115
(15,082)
19,279
27,145
81,821
(41,988)
71,476
23,919
(7,255)
4,035
4,581
(3,986)
(10)
534
(1,643)
—
(1,643)
(91,963)
93,697
(349)
8,295
2,907
983
2,939
(912)
28,921
(66,000)
—
100,836
28,004
(49,638)
98,755
24,165
(775)
(168,602)
(255,853)
(147,586)
(76)
146
(3,458)
923
(30)
3,883
(225)
—
(134,017)
(273)
—
(2,821)
395
(11)
3,277
(200)
(10,585)
(106,756)
(4,481)
3,620
(801)
69
(99)
2,822
—
—
(11,109)
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (continued)
(Dollars in thousands)
Financing Activities:
Net increase (decrease) in deposits
Net increase (decrease) in borrowings
Common stock repurchased
Retired stock
Stock options exercised
Decrease in capital lease obligations
Net cash provided by (used in) financing activities
Net Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Period
Cash and Cash Equivalents at End of Period
Supplemental Disclosures:
Cash paid during the period for:
Interest
Income taxes
Noncash transactions:
Unrealized gain (loss) in value of securities available for sale, net of income
taxes
Transfers of loans to REO
Transfers of loans held for sale to loans held for investment
Business Combinations:
Assets acquired
Liabilities assumed
Net assets acquired
2018
June 30,
2017
2016
147,802
(61,500)
—
(494)
651
(23)
86,436
(16,239)
86,985
(34,479)
158,031
—
(569)
3,068
(21)
126,030
34,389
52,596
70,746
$
86,985
$
(69,430)
16,000
(27,734)
(223)
32
(21)
(81,376)
(63,564)
116,160
52,596
2018
June 30,
2017
2016
$
15,716
887
$
7,980
383
(1,871)
1,346
4,415
—
—
—
(2,070)
2,417
—
364,504
328,378
36,126
6,468
428
1,473
2,189
—
—
—
—
$
$
The accompanying notes are an integral part of these consolidated financial statements.
77
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
1. Summary of Significant Accounting Policies
Business
The consolidated financial statements presented in this report include the accounts of HomeTrust Bancshares, Inc., a Maryland corporation
(“HomeTrust”), and its wholly-owned subsidiary, HomeTrust Bank (the “Bank”). As used throughout this report, the term the “Company” refers
to HomeTrust and its consolidated subsidiary, unless the context otherwise requires. HomeTrust is a bank holding company primarily engaged
in the business of planning, directing, and coordinating the business activities of the Bank. The Bank is a North Carolina state chartered bank
and provides a wide range of retail and commercial banking products within its geographic footprint, which includes: North Carolina (the
Asheville metropolitan area, Greensboro/"Piedmont" region, Charlotte, and Raleigh/Cary), Upstate South Carolina (Greenville), East Tennessee
(Kingsport/Johnson City/Bristol, Knoxville, and Morristown) and Southwest Virginia (the Roanoke Valley). The Bank operates under a single
set of corporate policies and procedures and is recognized as a single banking segment for financial reporting purposes.
Accounting Principles
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States (“US GAAP”).
Principles of Consolidation and Subsidiary Activities
The accompanying consolidated financial statements include the accounts of HomeTrust, the Bank, and its wholly-owned subsidiary, Western
North Carolina Service Corporation (“WNCSC”) at or for the years ended June 30, 2018, 2017, and 2016. WNCSC owns office buildings in
Asheville, North Carolina that are leased to the Bank. All intercompany items have been eliminated.
Reclassifications
Certain amounts reported in prior periods’ consolidated financial statements have been reclassified to conform to the current presentation. Such
reclassifications had no effect on previously reported cash flows, stockholders’ equity or net income.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash and interest-bearing deposits with initial terms to maturity of 90 days or less.
Commercial Paper
Commercial paper includes highly liquid short-term debt of investment graded corporations with maturities less than 270 days. These instruments
are typically purchased at a discount based on prevailing interest rates and do not exceed $10.0 million per issuer.
Securities
The Company classifies investment securities as trading, available for sale, or held to maturity.
Securities available for sale are carried at fair value. These securities are used to execute asset/liability management strategies, manage liquidity,
and leverage capital, and therefore may be sold prior to maturity. Adjustments for unrealized gains or losses, net of the income tax effect, are
made to accumulated other comprehensive income, a separate component of total stockholders’ equity.
Securities held to maturity are stated at cost, net of unamortized balances of premiums and discounts. When these securities are purchased, the
Company intends to and has the ability to hold such securities until maturity.
Declines in the fair value of individual securities available for sale or held to maturity below their cost that are other-than-temporary result in
write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses. In estimating
other-than-temporary impairment losses, the Company considers among other things, (i) the length of time and the extent to which the fair value
has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain
its investment in the issuer for a period of time sufficient to allow for any anticipated recovery of the unrealized loss, and in the case of debt
securities, whether it is more likely than not that the Company will be required to sell the security prior to a recovery.
Premiums and discounts are amortized or accreted over the life of the security as an adjustment to yield. Dividend and interest income are
recognized when earned. Gains or losses on the sale of securities are recognized on a specific identification, trade date basis.
78
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Loans
Portfolio loans are carried at their outstanding principal amount, less unearned income and deferred nonrefundable loan fees, net of certain
origination costs. Interest income is recorded as earned on an accrual basis based on the contractual rate and the outstanding balance, except for
nonaccruing loans where interest is recorded as earned on a cash basis. Net deferred loan origination fees/costs are deferred and amortized to
interest income over the life of the related loan.
Acquired Loans
Purchased loans are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore,
an allowance for loan and lease losses is not recorded at the acquisition date. Acquired loans are evaluated upon acquisition and classified as
either purchased impaired or purchased non-impaired. Purchased impaired loans reflect credit deterioration since origination such that it is
probable at acquisition that the Company will be unable to collect all contractually required payments.
The cash flows expected to be received over the life of the loans were estimated by management. These cash flows were provided to third party
analysts to calculate carrying values of the loans, book yields, effective interest income and impairment, if any, based on actual and projected
events. Default rates, loss severity, and prepayment speed assumptions will be periodically reassessed to update our expectation of future cash
flows. The excess of the cash flows expected to be collected over a loan's carrying value is considered to be the accretable yield and is recognized
as interest income over the estimated life of the loan using the effective yield method. The accretable yield may change due to changes in the
timing and amounts of expected cash flows. Changes in the accretable yield are disclosed quarterly.
The excess of the undiscounted contractual balances due over the cash flows expected to be collected is considered to be the nonaccretable
difference. The nonaccretable difference represents our estimate of the credit losses expected to occur and was considered in determining the
fair value of the loans as of the acquisition date. Subsequent to the acquisition date, any increases in expected cash flows over those expected at
purchase date in excess of fair value are adjusted through a change to the accretable yield on a prospective basis. Any subsequent decreases in
expected cash flows attributable to credit deterioration are recognized by recording a provision for loan losses. The purchased impaired loans
acquired are and will continue to be subject to the Company's internal and external credit review and monitoring.
For purchased non-impaired loans, the difference between the fair value and unpaid principal balance of the loan at the acquisition date is
amortized or accreted to interest income over the life of the loans.
Loan Segments and Classes
The Company’s loan portfolio is grouped into two segments (retail consumer loans and commercial loans) and into various classes within each
segment. The Company originates, services, and manages its loans based on these segments and classes. The Company’s portfolio segments and
classes within those segments are subject to risks that could have an adverse impact on the credit quality of the loan portfolio. Management
identified the risks described below as significant risks that are generally similar among the loan segments and classes.
Retail Consumer loan segment
The Company underwrites its retail consumer loans using automated credit scoring and analysis tools. These credit scoring tools take into
account factors such as payment history, credit utilization, length of credit history, types of credit currently in use, and recent credit inquiries.
To the extent that the loan is secured by collateral, the value of the collateral is also evaluated. Common risks to each class of retail consumer
loans include general economic conditions within the Company’s markets, such as unemployment and potential declines in collateral values,
and the personal circumstances of the borrowers. In addition to these common risks for the Company’s retail consumer loans, various retail
consumer loan classes may also have certain risks specific to them.
One-to-four family and construction and land/lot loans are to individuals and are typically secured by one-to-four family residential property,
undeveloped land, and partially developed land in anticipation of pending construction of a personal residence. Significant and rapid declines
in real estate values can result in residential mortgage loan borrowers having debt levels in excess of the current market value of the collateral,
which can lead to higher levels of foreclosures. Construction and land/lot loans may experience delays in completion and cost overruns that
exceed the borrower’s financial ability to complete the project. Such cost overruns can result in foreclosure of partially completed and
unmarketable collateral.
Originated home equity lines of credit ("HELOCs") are often secured by second liens on residential real estate, thereby making such loans
particularly susceptible to declining collateral values. A substantial decline in collateral value could render the Company’s second lien
position to be effectively unsecured. Additional risks include lien perfection inaccuracies and disputes with first lien holders that may further
weaken collateral positions. Further, the open-end structure of these loans creates the risk that customers may draw on the lines in excess
of the collateral value if there have been significant declines since origination. In addition, the Company purchases certain HELOCs from
a third party. The credit risk characteristics are different for these loans since they were not originated by the Company and the collateral
is located outside the Company’s market area, primarily in several western states. The Company established an allowance for loan losses
based on the historical losses of the portfolio. The Company monitors the performance of these loans and adjusts the allowance for loan
losses as necessary.
Indirect auto finance loans are primarily for new and used personal automobiles originated by franchised and independent auto dealers
within the Company's geographic footprint. The bank-dealer relationship is governed by contract, which provides warranties and
79
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
representations, payment schedules, and rights and remedies upon breach. The underwriting process and standards are maintained by the
Company and implemented via an automated decision tool, which incorporates the borrower's credit score, loan to value ratio, and terms
of the loan to determine the borrower's creditworthiness.
Consumer loans include loans secured by deposit accounts or personal property such as automobiles, boats, and motorcycles, as well as
unsecured consumer debt. The value of underlying collateral within this class is especially volatile due to potential rapid depreciation in
values since date of loan origination in excess of principal repayment.
Commercial loan segment
The Company’s commercial loans are centrally underwritten based primarily on the customer’s ability to generate the required cash flow
to service the debt in accordance with the contractual terms and conditions of the loan agreement. The Company’s commercial lenders and
underwriters work to understand the borrower’s businesses and management experiences. The majority of the Company’s commercial loans
are secured by collateral, so collateral values are important to the transaction. In commercial loan transactions where the principals or other
parties provide personal guarantees, the Company’s commercial lenders and underwriters analyze the relative financial strength and liquidity
of each guarantor. Risks that are common to the Company’s commercial loan classes include general economic conditions, demand for the
borrowers’ products and services, the personal circumstances of the principals, and reductions in collateral values. In addition to these
common risks for the Company’s commercial loans, the various commercial loan classes also have certain risks specific to them.
Construction and development loans are highly dependent on the supply and demand for commercial real estate in the Company’s markets
as well as the demand for the newly constructed residential and commercial properties and lots being developed by the Company’s commercial
loan customers. Prolonged deterioration in demand could result in significant decreases in the underlying collateral values and make
repayment of the outstanding loans more difficult for the Company’s commercial borrowers.
Commercial real estate and commercial and industrial loans are primarily dependent on the ability of the Company’s commercial loan
customers to achieve business results consistent with those projected at loan origination resulting in cash flow sufficient to service the debt.
To the extent that a borrower’s actual business results significantly underperform the original projections, the ability of that borrower to
service the Company’s loan on a basis consistent with the contractual terms may be at risk. While these loans and leases are generally
secured by real property, personal property, or business assets such as inventory or accounts receivable, it is possible that the liquidation of
the collateral will not fully satisfy the obligation.
Municipal leases are primarily made to volunteer fire departments and depend on the tax revenues received from the county or
municipality. These leases are mainly secured by vehicles, fire stations, land, or equipment. The underwriting of the municipal leases is
based on the cash flows of the fire department as well as projections of future income.
Credit Quality Indicators
Loans are monitored for credit quality on a recurring basis and the composition of the loans outstanding by credit quality indicator is provided
below. Loan credit quality indicators are developed through review of individual borrowers on an ongoing basis. Generally, loans are monitored
for performance on a quarterly basis with the credit quality indicators adjusted as needed. The indicators represent the rating for loans as of the
date presented based on the most recent assessment performed. These credit quality indicators are defined as follows:
Pass—A pass rated asset is not adversely classified because it does not display any of the characteristics for adverse classification.
Special Mention—A special mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, such
potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention assets
are not adversely classified and do not warrant adverse classification.
Substandard—A substandard asset is inadequately protected by the current net worth and paying capacity of the obligor, or of the collateral
pledged, if any. Assets classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of
the debt. These assets are characterized by the distinct possibility of loss if the deficiencies are not corrected.
Doubtful—An asset classified doubtful has all the weaknesses inherent in an asset classified substandard with the added characteristic that
the weaknesses make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions,
and values.
Loss—Assets classified loss are considered uncollectible and of such little value that their continuing to be carried as an asset is not warranted.
This classification is not necessarily equivalent to no potential for recovery or salvage value, but rather that it is not appropriate to defer a
full write-off even though partial recovery may be effected in the future.
Loans Held for Sale
Loans held for sale are residential mortgages and are valued at the lower of cost or fair value less estimated costs to sell as determined by
outstanding commitments from investors on a “best efforts” basis or current investor yield requirements, calculated on the aggregate loan
basis. Loans sold are generally sold at par value and with servicing released.
80
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Beginning in fiscal year 2018, the Company began providing loans guaranteed by the U.S. Small Business Administration ("SBA") for the
purchase of businesses, business startups, business expansion, equipment, and working capital. All SBA loans are underwritten and documented
as prescribed by the SBA. SBA loans are generally fully amortizing and have maturity dates and amortizations of up to 25 years. SBA loans
originated that are guaranteed and intended for sale on the secondary market are classified as held for sale and are carried at the lower of cost or
fair value. The guaranteed portion of the loan is sold and the servicing rights are retained. At the time of the sale, an asset is recorded for the
value of the servicing rights and is amortized over the remaining life of the loan on the effective interest method. The servicing asset is included
in other assets and the corresponding servicing fees are recorded in noninterest income. A gain is recorded for any premium received in excess
of the carrying value of the net assets transferred in the sale and is also included in noninterest income. The portion of SBA loans that are retained
are also adjusted for a retained discount to reflect the effective interest rate on the retained unguaranteed portion of the loans. The net value of
the retained loans is included in the appropriate loan classification for disclosure purposes. SBA loans are classified as commercial and industrial
loans.
Allowance for Loan Losses
The allowance for loan losses is management’s estimate of probable credit losses that are inherent in the Company’s loan portfolios at the balance
sheet date. The allowance increases when the Company provides for loan losses through charges to operating earnings and when the Company
recovers amounts from loans previously written down or charged off. The allowance decreases when the Company writes down or charges off
loan amounts that are deemed uncollectible.
Management determines the allowance for loan losses based on periodic evaluations that are inherently subjective and require substantial judgment
because the evaluations require the use of material estimates that are susceptible to significant change. The Company generally uses two allowance
methodologies that are primarily based on management’s determination as to whether or not a loan is considered to be impaired.
All classified loans above a certain threshold meeting certain criteria are evaluated for impairment on a loan-by-loan basis and are considered
impaired when it is probable, based on current information, that the borrower will be unable to pay contractual interest or principal as required
by the loan agreement. Impaired loans below the threshold are evaluated as a pool with additional adjustments to the allowance for loan losses.
Loans that experience insignificant payment delays and payment shortfalls are not necessarily considered impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding
the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment history, and the amount of
the shortfall relative to the principal and interest owed. Impaired loans are measured at their estimated net realizable value based on either the
value of the loan’s expected future cash flows discounted at the loan’s effective interest rate or on the collateral value, net of the estimated costs
of disposal, if the loan is collateral dependent. For loans considered impaired, an individual allowance for loan losses is recorded when the loan
principal balance exceeds the estimated net realizable value.
For loans not considered impaired, management determines the allowance for loan losses based on estimated loss percentages that are determined
by and applied to the various classes of loans that comprise the segments of the Company’s loan portfolio. The estimated loss percentages by
loan class are based on a number of factors that include by class (i) average historical losses over the past two years, (ii) levels and trends in
delinquencies, impairments, and net charge-offs, (iii) trends in the volume, terms, and concentrations, (iv) trends in interest rates, (v) effects of
changes in the Company’s risk tolerance, underwriting standards, lending policies, procedures, and practices, and (vi) national and local business
and economic conditions.
Future material adjustments to the allowance for loan losses may be necessary due to changing economic conditions or declining collateral values.
In addition, bank regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan
losses and may require the Company to make adjustments to the allowance for loan losses based upon judgments that differ significantly from
those of management.
Nonperforming Assets
Nonperforming assets can include loans that are past due 90 days or more based on the loan’s contractual terms and continue to accrue interest,
loans on which interest is not being accrued, and REO.
Loans Past Due 90 Days or More, Nonaccruing, Impaired, or Restructured
The Company’s policies related to when loans are placed on nonaccruing status conform to guidelines prescribed by bank regulatory authorities.
Generally, the Company suspends the accrual of interest on loans (i) that are maintained on a cash basis because of the deterioration of the
financial condition of the borrower, (ii) for which payment in full of principal or interest is not expected (impaired loans), or (iii) on which
principal or interest has been in default for a period of 90 days or more, unless the loan is both well secured and in the process of collection.
Under the Company’s cost recovery method, interest income is subsequently recognized only to the extent cash payments are received in excess
of principal due. Loans are returned to accruing status when all principal and interest amounts contractually due are brought current and concern
no longer exists as to the future collectability of principal and interest, which is generally confirmed when the loan demonstrates performance
for six consecutive months or payment cycles.
Restructured loans to borrowers who are experiencing financial difficulty, and on which the Company has granted concessions that modify the
terms of the loan, are accounted for as troubled debt restructurings (“TDRs”). These loans remain as TDRs until the loan has been paid in full,
modified to its original terms, or charged off. The Company may place these loans on accrual or nonaccrual status depending on the individual
facts and circumstances of the borrower. Generally, these loans are put on nonaccrual status until there is adequate performance that evidences
81
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
the ability of the borrower to make the contractual payments. This period of performance is normally at least six months, and may include
performance immediately prior to or after the modification, depending on the specific facts and circumstances of the borrower.
Loan Charge-offs
The Company charges off loan balances, in whole or in part to fair market value, when available, verifiable, and documentable information
confirms that specific loans, or portions of specific loans, are uncollectible or unrecoverable. For unsecured loans, losses are confirmed when it
can be determined that the borrower, or any guarantors, are unwilling or unable to pay the amounts as agreed. When the borrower, or any guarantor,
is unwilling or unable to pay the amounts as agreed on a loan secured by collateral and any recovery will be realized upon the sale of the collateral,
the loan is deemed to be collateral dependent. Repayments or recoveries for collateral dependent loans are directly affected by the value of the
collateral at liquidation. As such, loan repayment can be affected by factors that influence the amount recoverable, the timing of the recovery,
or a combination of the two. Such factors include economic conditions that affect the markets in which the loan or its collateral is sold, bankruptcy,
repossession and foreclosure laws, and consumer banking regulations. Losses are also confirmed when the loan, or a portion of the loan, is
classified as loss resulting from loan reviews conducted by the Company or its bank regulatory examiners.
Charge-offs of loans in the commercial loan segment are recognized when the uncollectibility of the loan balance and the inability to recover
sufficient value from the sale of any collateral securing the loan is confirmed. The uncollectibility of the loan balance is evidenced by the inability
of the commercial borrower to generate cash flows sufficient to repay the loan as agreed causing the loan to become delinquent. For collateral
dependent commercial loans, the Company determines the net realizable value of the collateral based on appraisals, current market conditions,
and estimated costs to sell the collateral. For collateral dependent commercial loans where the loan balance, including any accrued interest, net
deferred fees or costs, and unamortized premiums or discounts, exceeds the net realizable value of the collateral securing the loan, the deficiency
is identified as unrecoverable, is deemed to be a confirmed loss, and is charged off.
Charge-offs of loans in the retail consumer loan segment are generally confirmed and recognized in a manner similar to loans in the commercial
loan segment. Secured retail consumer loans that are identified as uncollectible and are deemed to be collateral dependent are confirmed as loss
to the extent the net realizable value of the collateral is insufficient to recover the loan balance. Consumer loans not secured by real estate that
become 90 days past due are charged off to the extent that the fair value of any collateral, less estimated costs to sell the collateral, is insufficient
to recover the loan balance. Consumer loans secured by real estate that become 120 days past due are charged off to the extent that the fair value
of the real estate securing the loan, less estimated costs to sell the collateral, is insufficient to recover the loan balance. Loans to borrowers in
bankruptcy are subject to modification by the bankruptcy court and are charged off to the extent that the fair value of any collateral securing the
loan, less estimated costs to sell the collateral, is insufficient to recover the loan balance, unless the Company expects repayment is likely to
occur. Such loans are charged off within 60 days of the receipt of notification from a bankruptcy court or when the loans become 120 days past
due, whichever is shorter.
Real Estate Owned
REO consists of real estate acquired as a result of customers’ loan defaults. REO is stated at the fair value of the property net of the estimated
costs of disposal with a charge to the allowance for loan losses upon foreclosure, if necessary. Any write-downs subsequent to foreclosure are
charged against operating earnings. To the extent recoverable, costs relating to the development and improvement of property are capitalized,
whereas those costs relating to holding the property are charged to expense.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the 150% declining balance and the
straight-line method over the estimated useful lives. Leasehold improvements are amortized over the lives of the respective leases or the estimated
useful life of the leasehold improvement, whichever is less. Maintenance and repair costs are expensed as incurred. Capitalized leases are
amortized using the same methods as premises and equipment over the estimated useful lives or lease terms, whichever is less. Obligations under
capital leases are amortized using the interest method to allocate payments between principal reduction and interest expense.
Other Investments, at cost
As a requirement for membership, the Bank invests in stock of the Federal Home Loan Bank of Atlanta ("FHLB") and the Federal Reserve Bank
of Richmond ("Federal Reserve Bank"). These investments are carried at cost due to the redemption provisions of these entities and the restricted
nature of the securities. Management reviews for impairment based on the ultimate recoverability of the cost basis of these stocks. Our investments
in these stocks are maintained in "other investments, at cost" on our balance sheet.
Business Combinations
The Company uses the acquisition method of accounting for all business combinations. An acquirer must be identified for each business
combination, and the acquisition date is the date the acquirer achieves control. The acquisition method of accounting requires the Company as
acquirer to recognize the fair value of assets acquired and liabilities assumed at the acquisition date as well as recognize goodwill or a gain from
a bargain purchase, if appropriate. Any acquisition-related costs and restructuring costs are recognized as period expenses as incurred.
82
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Goodwill
Goodwill represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets
acquired less the estimated fair value of the liabilities assumed in a business combination. Goodwill has an indefinite useful life and is evaluated
for impairment annually in the fourth quarter or more frequently if events and circumstances indicate that the asset might be impaired. An
impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.
In testing goodwill for impairment, we have the option to assess either qualitative or quantitative factors to determine whether the existence of
events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its
carrying amount. If we elect to perform a qualitative assessment and determine that an impairment is more likely than not, we are then required
to perform a quantitative impairment test, otherwise no further analysis is required.
Under the quantitative impairment test, the evaluation involves comparing the current fair value of each reporting unit to its carrying value,
including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the
carrying value exceeds estimated fair value an impairment charge is recognized for the difference, but limited by the amount of goodwill allocated
to that reporting unit. The Company uses a combination of the market and income approaches to estimate the fair value of its reporting unit. All
inputs are evaluated by management at the evaluation date of April 1st and reviewed again at year end to ensure no significant changes occurred
that could indicate impairment. Subsequent reversal of goodwill impairment losses is not permitted.
Core Deposit Intangibles
Core deposit intangibles represents the estimated value of long-term deposit relationships acquired in business combinations. These core deposit
premiums are amortized using an accelerated method over the estimated useful lives of the related deposits typically between five and ten years.
The estimated useful lives are periodically reviewed for reasonableness.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized 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 operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using 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. Deferred tax assets are
reduced, if necessary, by the amount of such benefits that are not expected to be realized based upon available evidence. See Note 12 for additional
information.
The Company recognizes interest and penalties accrued relative to unrecognized tax benefits in its respective federal or state income taxes
accounts. As of June 30, 2018 and 2017, there were no accruals for uncertain tax positions and no accruals for interest and penalties. The Company
is no longer subject to examination for federal and state purposes for tax years prior to 2014.
Employee Stock Ownership Plan
In connection with the conversion from a mutual to a stock form of organization in July 2012, the Bank established an ESOP for the benefit of
all of its eligible employees. Full-time employees of the Company and the Bank who have been credited with at least 1000 hours of service
during a 12-month period and who have attained age 21 are eligible to participate in the ESOP. Shares released are allocated to each eligible
participant based on the ratio of each participant’s compensation, as defined in the ESOP, to the total compensation of all eligible plan participants.
Forfeited shares shall be reallocated among other participants in the Plan. At the discretion of the Bank, cash dividends, when paid on allocated
shares, will be distributed to participants’ accounts, paid in cash to the participants, or used to repay the principal and interest on the ESOP loan
used to acquire Company stock on which dividends were paid. Cash dividends on unallocated shares will be used to repay the outstanding debt
of the ESOP.
It is anticipated that the Bank will make contributions to the ESOP in amounts necessary to amortize the ESOP loan payable to the Company
over a 20-year period.
Unearned ESOP shares are shown as a reduction of stockholders’ equity. Dividends on unearned ESOP shares, if paid, will be considered to be
compensation expense. The Company recognizes compensation expense equal to the fair value of the Company’s ESOP shares during the periods
in which they become committed to be released. To the extent that the fair value of the Company’s ESOP shares differs from the cost of such
shares, the differential is recognized as additional paid in capital. The Company recognizes a tax deduction equal to the cost of the shares
released. Because the ESOP is internally leveraged through a loan from the Company to the ESOP, the loan receivable by the Company from
the ESOP is not reported as an asset nor is the debt of the ESOP shown as a liability in the consolidated financial statements.
As of July 1, 2015, the ESOP and the HomeTrust Bank 401(k) Plan was combined to form the HomeTrust Bank KSOP Plan. See Note 13 for
additional information.
83
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Equity Incentive Plan
The Company issues restricted stock and stock options under the HomeTrust Bancshares, Inc. 2013 Omnibus Incentive Plan (“2013 Omnibus
Incentive Plan”) to key officers and outside directors. In accordance with the requirements of the Financial Accounting Standards Board (the
"FASB") Accounting Standards Codification (“ASC”) 718, Compensation – Stock Compensation, the Company has adopted a fair value based
method of accounting for employee stock compensation plans, whereby compensation cost is measured based on the fair value of the award as
of the grant date and recognized over the vesting period. The Company accounts for forfeitures as they occur.
Comprehensive Income
Comprehensive income consists of net income and net unrealized gains (losses) on securities available for sale and is presented in the consolidated
statements of comprehensive income.
Derivative Instruments and Hedging
The Company recognizes all derivatives as either assets or liabilities in the balance sheet, and measures those instruments at fair value. Changes
in the fair value of those derivatives are reported in current earnings or other comprehensive income depending on the purpose for which the
derivative is held and whether the derivative qualifies for hedge accounting. Loan commitments related to the origination or acquisition of
mortgage loans that will be held for sale must be accounted for as derivative instruments. The Company enters into commitments to originate
loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). The Company also enters into forward sales
commitments for the mortgage loans underlying the rate lock commitments. The fair values of these two derivative financial instruments are
collectively insignificant to the consolidated financial statements.
Net Income Per Share
Per the provisions of ASC 260, Earnings Per Share, basic earnings per share are computed by dividing net income by the weighted-average
number of common shares outstanding for the year, less the average number of nonvested restricted stock awards. Diluted earnings per share
reflect the potential dilution from the issuance of additional shares of common stock caused by the exercise of stock options and restricted stock
awards. In addition, nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are considered
participating securities and are included in the computation of earnings per share pursuant to the two-class method. The two-class method is an
earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends
declared (or accumulated) and participation rights in undistributed earnings. ESOP shares are considered outstanding for basic and diluted earnings
per share when the shares are committed to be released.
Net income is allocated between the common stock and participating securities pursuant to the two-class method, based on their rights to receive
dividends, participate in earnings, or absorb losses. See Note 15 for further discussion on the Company’s earnings per share.
Recent Accounting Pronouncements
In August 2015, the Financial Accounting Standards Board ("FASB") issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic
606)”, which defers the effective date of Accounting Standard Update ("ASU") No. 2014-09 one year. ASU No. 2014-09 created Topic 606 and
supersedes Topic 605, Revenue Recognition. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. In general, the new guidance requires companies to use more judgment and make more estimates than under current guidance,
including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price
and allocating the transaction price to each separate performance obligation. In May 2016, the FASB issued ASU No. 2016-12, Revenue from
Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides clarifying guidance in certain
narrow areas and adds some practical expedients, but does not change the core revenue recognition principle in Topic 606. For financial reporting
purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified
retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative
effect of initially applying the standard recognized at the date of initial application. Management adopted the new guidance on July 1, 2018.
Management has completed its identification of all revenue streams included in the financial statements (excluding interest income, which is
outside of the scope of the pronouncement) and identified which revenue streams are within the scope of the pronouncement. Management is
finalizing its evaluation on whether the implementation of this ASU will result in any accounting changes for the revenue streams within the
scope of this ASU. Management does not expect the adoption of this ASU to have a material impact on the Company’s Consolidated Financial
Statements other than reclassification of expenses from noninterest expense to noninterest income and additional disclosure requirements.
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments (Subtopic 825-10) Recognition and Measurement of Financial Assets
and Financial Liabilities." The ASU amends the guidance in GAAP on the classification and measurement of financial instruments. The ASU
includes the following changes: i) equity investments (except those accounted for under the equity method of accounting, or those that result in
consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (ii) requires the use of exit price
notion when measuring the fair value of financial instruments for disclosure purposes; (iii) require separate presentation of financial assets and
financial liabilities by measurement category and form of financial asset (i.e. securities or loans and receivables) on the balance sheet or the
accompanying notes to the financial statements; (iv) allows an equity investment that does not have readily determinable fair values, to be
measured at cost minus impairment (if any), plus or minus changes resulting from observable price changes in orderly transactions for the identical
or a similar investment of the same issuer; (v) eliminates the requirement to disclose the method(s) and significant assumptions used to estimate
84
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, and requires a reporting
organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a
change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair
value in accordance with the fair value option for financial instruments; (vi) requires separate presentation of financial assets and financial
liabilities by measurement category and form of financial asset (i.e. securities or loans and receivables) on the balance sheet or in the accompanying
notes to the financial statements; and (vii) clarifies that a valuation allowance on a deferred tax asset related to available-for-sale securities should
be evaluated in combination with the organization’s other deferred tax assets. Exit price is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the measurement date. Management adopted the new guidance
on July 1, 2018. The adoption of ASU No. 2016-01 is not expected to have a material impact on the Company's Consolidated Financial Statements.
Management is finalizing the processes and procedures to comply with the disclosures requirements of this ASU, which could impact the
disclosures the Company makes related to fair value of its loan portfolios.
In February 2016, the FASB issued ASU 2016-02, "Leases (Accounting Standards Codification ("ASC") 842)." The guidance in this ASU requires
most leases to be recognized on the balance sheet as a right-of-use asset and a lease liability. It will be critical to identify leases embedded in a
contract to avoid misstating the lessee’s balance sheet. For income statement purposes, the FASB retained a dual model, requiring leases to be
classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting,
but without explicit bright lines. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods,
beginning after December 15, 2018. The Company is currently evaluating the impact of this guidance on its Consolidated Financial Statements
and the timing of adoption. The Company will compile an inventory of all leased assets to determine the impact of ASU 2016-02 on its financial
condition and results of operations. Once adopted, the Company expects to report higher assets and liabilities on its Consolidated Balance Sheets
as a result of including right-of-use assets and lease liabilities related to certain banking offices and certain equipment under noncancelable
operating lease agreements, which currently are not reflected in its Consolidated Balance Sheets. The Company does not expect the guidance to
have a material impact on the Consolidated Statements of Income or the Consolidated Statements of Changes in Stockholders' Equity.
In March 2016, the FASB issued ASU 2016-09, "Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting." The ASU changes the accounting for certain aspects of share-based payments to employees. The guidance requires the
recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid in
capital pools. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without
triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an
estimated basis. We have elected to account for forfeitures of stock-based awards as they occur. The Company adopted the amendments in this
ASU during the year ended June 30, 2018. Upon the adoption of this ASU, the Company had a cumulative adjustment to retained earnings of
$680. In accordance with the transition guidance outlined in this ASU, the adoption had no effect on net income or shareholder's equity in any
previously issued periods. Going forward, the Company expects this ASU to create some volatility in its reported income tax expense related to
the excess tax benefits for employee stock-based transactions, however, the actual amounts recognized will be dependent on the amount of
employee stock-based transactions and the stock price at the time of exercise or vesting.
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments." The ASU significantly changes the impairment model for most financial assets that are measured at amortized cost and certain
other instruments from an incurred loss model to an expected loss model. This ASU is effective for interim and annual reporting periods beginning
after December 15, 2019. Early adoption is permitted for all entities beginning after December 15, 2018, including interim periods within those
fiscal years. The Company is evaluating our current expected loss methodology of our loan and investment portfolios to identify the necessary
modifications in accordance with this standard and expects a change in the processes and procedures to calculate the allowance for loan losses,
including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice
that utilizes the incurred loss model. A valuation adjustment to our allowance for loan losses or investment portfolio that is identified in this
process will be reflected as a one-time adjustment in equity rather than earnings. The Company is in the process of compiling historical data that
will be used to calculate expected credit losses on its loan portfolio to ensure it is fully compliant with the ASU at the adoption date and is
evaluating the potential impact adoption of this ASU will have on its consolidated financial statements. Once adopted, the Company expects its
allowance for loan losses to increase, however, until its evaluation is complete the magnitude of the increase will be unknown.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments." The ASU amends the guidance on the classification of certain cash receipts and payments in the statement of cash flows and is
intended to reduce the diversity in practice. Management adopted the new guidance on July 1, 2018. The adoption of ASU No. 2016-15 is not
expected to have a material impact on the Company’s Consolidated Financial Statements.
In January 2017, FASB issued ASU 2017-03, "Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint
Ventures (Topic 323)." The ASU amends the Codification for SEC staff announcements made at recent Emerging Issues Task Force (EITF)
meetings. The SEC guidance that specifically relates to our Consolidated Financial Statements was from the September 2016 meeting, where
the SEC staff expressed their expectations about the extent of disclosures registrants should make about the effects of the new FASB guidance
as well as any amendments issued prior to adoption, on revenue (ASU 2014-09), leases (ASU 2016-02) and credit losses on financial instruments
(ASU 2016-13) in accordance with SAB Topic 11.M. Registrants are required to disclose the effect that recently issued accounting standards
will have on their financial statements when adopted in a future period. In cases where a registrant cannot reasonably estimate the impact of the
adoption, then additional qualitative disclosures should be considered. The ASU incorporates these SEC staff views into ASC 250 and adds
references to that guidance in the transition paragraphs of each of the three new standards. The Company has adopted the amendments in this
ASU and appropriate disclosures have been included in this Note for each recently issued accounting standard.
85
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
In January 2017, FASB issued ASU 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment."
The ASU removes the requirement to compare the implied fair value of goodwill with its carrying value as required in Step 2 of the goodwill
impairment test. Under the ASU, registrants would perform their goodwill impairment test and recognize an impairment charge for any amount
the carrying value exceeds the reporting unit's fair value, but limited by the amount of goodwill allocated to that reporting unit. The Company
early adopted this ASU during the year ended June 30, 2018, and the adoption did not have a material effect on the Company's Consolidated
Financial Statements.
In March 2017, FASB issued ASU 2017-08, "Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on
Purchased Callable Debt Securities." The ASU requires entities to amortize the premium on certain purchased callable debt securities to the
earliest call date, which more closely aligns the amortization period of premiums and discounts to expectations incorporated in the market prices.
Entities will no longer recognize a loss in earnings upon the debtor's exercise of a call on a purchased debt security held at a premium. The ASU
does not require any accounting change for debt securities held at a discount, therefore the discount will continue to be amortized as an adjustment
of yield over the contractual life of the investment. This ASU is effective for interim and annual reporting periods beginning after December 15,
2018. Early adoption is permitted for all entities. The adoption of ASU No. 2017-08 is not expected to have a material impact on the Company's
Consolidated Financial Statements.
In May 2017, the FASB issued ASU 2017-09, "Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting." This ASU
provides clarity on the guidance related to stock compensation when there have been changes to the terms or conditions of a share-based payment
award to which an entity would be required to apply modification accounting under ASC 718. The ASU provides the three following criteria
must be met in order to not account for the effect of the modification of terms or conditions: the fair value, the vesting conditions and the
classification as an equity or liability instrument of the modified award is the same as the original award immediately before the original award
is modified. Management adopted the new guidance on July 1, 2018. The adoption of ASU No. 2017-09 is not expected to have a material impact
on the Company's Consolidated Financial Statements.
In August 2017, FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging
Activities." This ASU improves the transparency and understandability of disclosures in the financial statements regarding the entities risk
management activities and reduces the complexity of hedge accounting. The amendments in this ASU permit hedge accounting for hedging
relationships involving nonfinancial risk and interest rate risk by removing certain limitations in cash flow and fair value hedging relationships.
In addition, the ASU requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which
the earnings effect of the hedged item is reported. The amendments in this ASU are effective for annual periods, and interim periods within those
annual periods, beginning after December 15, 2018 and early adoption is permitted. The adoption of ASU No. 2017-12 is not expected to have
a material impact on the Company's Consolidated Financial Statements.
In February 2018, FASB issued ASU 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain
Tax Effects from Accumulated Other Comprehensive Income." The ASU allows a reclassification from accumulated other comprehensive income
to retained earnings for stranded tax effects resulting from the revaluation of the Company’s net deferred tax assets (“DTA”) to the new corporate
federal income tax rate of 21% as a result of the Tax Cuts and Jobs Act (‘Tax Act”). The Company elected to early adopt this ASU during the
year ended June 30, 2018. The affected amount for the Company was immaterial and did not have an effect on the Company's Consolidated
Financial Statements.
In March 2018, FASB issued ASU No. 2018-05, "Income Taxes (Topic 740)." This ASU was issued to provide guidance on the income tax
accounting implications of the Tax Act and allows for entities to report provisional amounts for specific income tax effects of the Act for which
the accounting under Topic 740 was not yet complete, but a reasonable estimate could be determined. A measurement period of one-year is
allowed to complete the accounting effects under Topic 740 and revise any previous estimates reported. Any provisional amounts or subsequent
adjustments included in an entity’s financial statements during the measurement period should be included in income from continuing operations
as an adjustment to tax expense in the reporting period the amounts are determined. The Company adopted this ASU with the provisional
adjustments as reported in the Company's Consolidated Financial Statements in the Form 10-Q for the quarter ended December 31, 2017. As of
June 30, 2018, the Company did not incur any material adjustments to the provisional recognition.
In June 2018, the FASB issued ASU No. 2018-07, "Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-
Based Payment Accounting." This ASU was issued to expand the scope of Topic 718 to include share-based payment transactions for acquiring
goods and services from nonemployees. Previously, these awards were recorded at the fair value of consideration received or the fair value of
the equity instruments issued and was measured at the earlier of the commitment date or the date performance was completed. The amendments
in this ASU require nonemployee share-based payment awards to be measured at the grant-date fair value of the equity instrument. This ASU is
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, but no
earlier than an entity's adoption of Topic 606. The adoption of ASU No. 2018-07 is not expected to have a material impact on the Company's
Consolidated Financial Statements.
2. Business Combinations
All business combinations are accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed
and consideration exchanged were recorded at acquisition date fair values. Fair values are preliminary and subject to refinement for up to one
year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available.
86
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
United Financial of North Carolina, Inc.
On December 31, 2016, the Bank acquired United Financial of North Carolina, Inc. ("United Financial"), a municipal lease company headquartered
in Fletcher, North Carolina that specializes in providing financing for fire departments and municipalities for the purchase of fire trucks and
related equipment as well as the construction of fire stations and other municipal buildings across the Carolinas and other southeastern states.
United Financial underwrites and originates these municipal leases and then sells them to HomeTrust and other financial institutions. Beginning
January 1, 2017, United Financial has conducted business under the name United Financial, a division of HomeTrust Bank.
The total consideration paid by the Bank in the United Financial acquisition was $425. Per the merger agreement, a cash payment of $200 was
paid on the acquisition date with an additional $225 due in the third quarter of fiscal 2018; all of which was allocated to goodwill.
TriSummit Bancorp. Inc.
On January 1, 2017, HomeTrust completed its acquisition of TriSummit Bancorp, Inc., (“TriSummit”) pursuant to an Agreement and Plan of
Merger, dated as of September 20, 2016, under which TriSummit merged with and into HomeTrust (the “Merger”) with HomeTrust as the
surviving corporation in the Merger. Immediately following the Merger, TriSummit's wholly owned subsidiary bank, TriSummit Bank, merged
with and into the Bank (together with the Merger, the “TriSummit Merger”).
Pursuant to the Merger Agreement, each share of the common stock of TriSummit and each share of Series A Preferred Stock of TriSummit
issued and outstanding immediately prior to the Merger (on an as converted basis to a share of TriSummit common stock) was converted into
the right to receive $4.40 in cash and .2099 shares of HomeTrust common stock, with cash paid in lieu of fractional share interests. At the Merger
date, 50% of outstanding options granted by TriSummit were canceled. The remaining options were assumed by HomeTrust and converted into
options to purchase 86,185 shares of HomeTrust Common Stock. In addition, TriSummit’s $7,222 Series B, Series C and Series D TARP preferred
stock (all held by private shareholders) was redeemed in connection with the closing of the merger.
The total consideration paid by HomeTrust in the TriSummit Merger approximates $36,126. The total number of HomeTrust shares issued was
765,277 shares. HomeTrust paid aggregate cash consideration of approximately $16,083.
87
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following table presents the consideration paid by the Company in the acquisition of TriSummit and the assets acquired and liabilities
assumed as of January 1, 2017:
Consideration Paid:
Cash paid including cash in lieu of fractional shares
Fair value of HomeTrust common stock at $25.90 per share
Total consideration
Assets:
Cash and cash equivalents
Certificates of deposit in other banks
Investment securities
Other investments, at cost
Loans, net
Premises and equipment, net
REO
Deferred income taxes
Bank owned life insurance
Core deposit intangibles
Other assets
Total assets acquired
Liabilities:
Deposits
Borrowings
Other liabilities
Total liabilities assumed
Net identifiable assets acquired over liabilities assumed
Goodwill
As Recorded
by TriSummit
Fair Value and
Other Merger
Related
Adjustments
As Recorded
by the
Company
$
$
$
5,498
$
— $
250
58,728
2,614
261,926
12,841
1,633
2,653
3,762
1,285
1,453
—
(203)
—
(3,867)
(2,419)
(122)
4,462
—
1,575
(105)
16,083
20,043
36,126
5,498
250
58,525
2,614
258,059
10,422
1,511
7,115
3,762
2,860
1,348
$
$
$
$
352,643
$
(679) $
351,964
279,647
$
47,453
675
327,775
24,868
$
$
587
16
—
280,234
47,469
675
603
$
328,378
(1,282) $
$
23,586
12,540
The carrying amount of acquired loans from TriSummit as of January1, 2017 consisted of purchased performing loans and Purchase Credit
Impaired ("PCI") loans as detailed in the following table:
Retail Consumer Loans:
One-to-four family
HELOCs
Construction and land/lots
Consumer
Commercial:
Commercial real estate
Construction and development
Commercial and industrial
Total
Purchased
Performing
PCI
Total
Loans
$
$
75,179
6,479
15,591
1,686
107,880
15,253
28,295
250,363
$
$
3,753
2
—
17
3,494
142
288
7,696
$
$
78,932
6,481
15,591
1,703
111,374
15,395
28,583
258,059
88
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following table presents the performing loans receivable purchased from TriSummit at January 1, 2017, the acquisition date:
Contractually required principal payments receivable
Adjustment for credit, interest rate, and liquidity
Balance of purchased loans receivable
The following table presents the PCI loans acquired from TriSummit at January 1, 2017, the acquisition date:
Contractually required principal and interest payments receivable
Amounts not expected to be collected - nonaccretable difference
Estimated payments expected to be received
Accretable yield
Fair value of PCI loans
3. Securities Available for Sale
Securities available for sale consist of the following at the dates indicated:
$
$
$
$
255,852
5,489
250,363
11,474
2,490
8,984
1,288
7,696
U.S. Government Agencies
Residential Mortgage-backed Securities of U.S. Government Agencies
and Government-Sponsored Enterprises
Municipal Bonds
Corporate Bonds
Equity Securities
Total
June 30, 2018
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
48,025
$
1
$
(484) $
47,542
71,949
30,865
6,166
63
157,068
$
$
88
127
25
—
241
$
(1,438)
(226)
(168)
—
(2,316) $
70,599
30,766
6,023
63
154,993
June 30, 2017
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
U.S. Government Agencies
$
65,947
$
184
$
(301) $
65,830
Residential Mortgage-backed Securities of U.S. Government Agencies
and Government-Sponsored Enterprises
Municipal Bonds
Corporate Bonds
Equity Securities
Total
92,841
34,135
6,267
63
411
403
114
—
(281)
(28)
(88)
$
92,971
34,510
6,293
63
$
199,253
$
1,112
$
(698) $
199,667
Debt securities available for sale by contractual maturity at the dates indicated are shown below. Mortgage-backed securities are not included
in the maturity categories because the borrowers in the underlying pools may prepay without penalty; therefore, it is unlikely that the securities
will pay at their stated maturity schedule.
Due within one year
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed securities
Total
89
June 30, 2018
Amortized
Cost
Estimated
Fair Value
$
$
28,728
41,273
5,749
9,306
71,949
157,005
$
$
28,573
40,663
5,829
9,266
70,599
154,930
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
June 30, 2017
Amortized
Cost
Estimated
Fair Value
Due within one year
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed securities
Total
$
$
1,430
75,025
19,535
10,359
92,841
199,190
Gross proceeds and gross realized gains and losses from sales of securities recognized in net income follow:
Gross proceeds from sales of securities
Gross realized gains from sales of securities
Gross realized losses from sales of securities
2018
$
June 30,
2017
— $
—
—
19,279
70
(48)
$
$
$
1,430
74,949
19,828
10,426
92,971
199,604
2016
—
—
—
Securities available for sale with costs totaling $136,914 and $156,592 with market values of $135,313 and $154,264 at June 30, 2018 and
June 30, 2017, respectively, were pledged as collateral to secure various public deposits and borrowings.
The gross unrealized losses and the fair value for securities available for sale aggregated by the length of time that individual securities have
been in a continuous unrealized loss position as of June 30, 2018 and June 30, 2017 were as follows:
June 30, 2018
Less than 12 Months
12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
U.S. Government Agencies
$
10,962
$
(93) $
35,605
$
(391) $
46,567
$
(484)
Residential Mortgage-backed Securities of U.S.
Government Agencies and Government-Sponsored
Enterprises
Municipal Bonds
Corporate Bonds
Total
39,238
19,795
—
(827)
(208)
—
21,297
1,446
3,566
(611)
(18)
(168)
60,535
21,241
3,566
(1,438)
(226)
(168)
$
69,995
$
(1,128) $
61,914
$
(1,188) $
131,909
$
(2,316)
Less than 12 Months
12 Months or More
Total
June 30, 2017
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
U.S. Government Agencies
$
46,767
$
(222) $
6,921
$
(79) $
53,688
$
(301)
Residential Mortgage-backed Securities of U.S.
Government Agencies and Government-Sponsored
Enterprises
Municipal Bonds
Corporate Bonds
Total
42,921
9,153
3,734
102,575
$
$
$
$
(240)
(28)
3,970
—
(41)
—
(88) $
— $
— $
46,891
9,153
3,734
(578) $
10,891
$
(120) $
113,466
$
$
(281)
(28)
(88)
(698)
The total number of securities with unrealized losses at June 30, 2018, and June 30, 2017 were 218 and 136, respectively. Unrealized losses on
securities have not been recognized in income because management has the intent and ability to hold the securities for the foreseeable future,
and has determined that it is not more likely than not that the Company will be required to sell the securities prior to a recovery in value. The
decline in fair value was largely due to increases in market interest rates. The Company had no other than temporary impairment losses during
the years ended June 2018, 2017 or 2016.
90
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
As a requirement for membership, the Bank invests in stock of the FHLB and the Federal Reserve Bank. No ready market exists for these stocks
and the carrying value approximates its fair value based on the redemption provisions of the FHLB and the Federal Reserve Bank.
4. Loans
Loans consist of the following at the dates indicated:
Retail consumer loans:
One-to-four family
HELOCs - originated
HELOCs - purchased
Construction and land/lots
Indirect auto finance
Consumer
Total retail consumer loans
Commercial loans:
Commercial real estate
Construction and development
Commercial and industrial
Municipal leases
Total commercial loans
Total loans
Deferred loan fees, net
Total loans, net of deferred loan fees
Allowance for loan and lease losses
Net loans
June 30,
2018
June 30,
2017
$
$
664,289
137,564
166,276
65,601
173,095
12,379
1,219,204
857,315
192,102
148,823
109,172
1,307,412
2,526,616
(764)
2,525,852
(21,060)
2,504,792
$
$
684,089
157,068
162,407
50,136
140,879
7,900
1,202,479
730,408
197,966
120,387
101,175
1,149,936
2,352,415
(945)
2,351,470
(21,151)
2,330,319
All qualifying one-to-four family first mortgage loans, HELOCs, commercial real estate loans, and FHLB Stock are pledged as collateral by a
blanket pledge to secure outstanding FHLB advances.
Loans are made to the Company's executive officers and directors and their associates during the ordinary course of business. The aggregate
amount of loans to related parties totaled approximately $409 and $338 at June 30, 2018 and 2017, respectively. In relation to these loans are
unfunded commitments that totaled approximately $287 and $750 at June 30, 2018 and 2017, respectively.
91
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The Company’s total non-purchased and purchased performing loans by segment, class, and risk grade at the dates indicated follow:
Pass
Special
Mention
Substandard
Doubtful
Loss
Total
June 30, 2018
Retail consumer loans:
One-to-four family
HELOCs - originated
HELOCs - purchased
Construction and land/lots
Indirect auto finance
Consumer
Commercial loans:
Commercial real estate
Construction and development
Commercial and industrial
Municipal leases
$
$
643,077
135,336
166,089
64,823
172,675
11,723
835,485
187,187
145,177
108,864
$
3,576
113
—
23
—
85
5,804
621
1,279
308
$
10,059
1,735
187
257
420
558
6,787
2,067
414
—
$
746
150
—
54
2
—
—
—
—
Total loans
$
2,470,436
$
11,809
$
22,484
$
952
$
14
6
—
—
—
11
—
—
—
—
31
$
657,472
137,340
166,276
65,157
173,095
12,379
848,076
189,875
146,870
109,172
$
2,505,712
Pass
Special
Mention
Substandard
Doubtful
Loss
Total
June 30, 2017
Retail consumer loans:
One-to-four family
HELOCs - originated
HELOCs - purchased
Construction and land/lots
Indirect auto finance
Consumer
Commercial loans:
Commercial real estate
Construction and development
Commercial and industrial
Municipal leases
$
$
655,424
153,676
162,215
48,728
140,780
7,828
700,060
192,025
113,923
99,811
$
4,715
809
—
479
—
12
5,847
992
883
1,258
$
14,769
2,100
192
341
97
34
7,118
2,320
2,954
106
$
1,101
188
—
60
1
—
—
—
—
—
Total loans
$
2,274,470
$
14,995
$
30,031
$
1,350
$
The Company’s total PCI loans by segment, class, and risk grade at the dates indicated follow:
11
7
—
—
1
8
—
—
1
—
28
$
676,020
156,780
162,407
49,608
140,879
7,882
713,025
195,337
117,761
101,175
$
2,320,874
June 30, 2018
Retail consumer loans:
One-to-four family
HELOCs - originated
Construction and land/lots
Commercial loans:
Commercial real estate
Construction and development
Commercial and industrial
Pass
Special
Mention
Substandard
Doubtful
Loss
Total
$
$
4,620
224
444
4,718
547
1,894
$
388
—
—
2,162
—
—
$
1,809
—
—
2,359
1,680
59
— $
—
—
—
—
—
— $
—
—
—
—
—
6,817
224
444
9,239
2,227
1,953
Total loans
$
12,447
$
2,550
$
5,907
$
— $
— $
20,904
92
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Pass
Special
Mention
Substandard
Doubtful
Loss
Total
June 30, 2017
Retail consumer loans:
One-to-four family
HELOCs - originated
Construction and land/lots
Consumer
Commercial loans:
Commercial real estate
Construction and development
Commercial and industrial
$
$
3,115
258
487
4
8,909
338
2,460
$
1,129
—
—
14
2,299
—
44
$
3,615
30
41
—
6,175
2,291
122
$
210
—
—
—
—
—
—
— $
—
—
—
—
—
—
Total loans
$
15,571
$
3,486
$
12,274
$
210
$
— $
The Company’s total loans by segment, class, and delinquency status at the dates indicated follows:
8,069
288
528
18
17,383
2,629
2,626
31,541
Total
Loans
664,289
137,564
166,276
65,601
173,095
12,379
857,315
192,102
148,823
109,172
Past Due
30-89 Days
90 Days+
Total
Current
$
$
3,001
98
—
44
335
238
169
260
15
—
$
1,756
268
—
54
127
39
1,412
1,928
69
—
$
4,757
366
—
98
462
277
1,581
2,188
84
—
$
659,532
137,198
166,276
65,503
172,633
12,102
855,734
189,914
148,739
109,172
$
4,160
$
5,653
$
9,813
$ 2,516,803
$ 2,526,616
Past Due
30-89 Days
90 Days+
Total
Current
$
$
3,496
1,037
—
132
96
5
809
385
37
—
$
3,990
274
—
129
—
14
3,100
887
831
—
$
7,486
1,311
—
261
96
19
3,909
1,272
868
—
$
676,603
155,757
162,407
49,875
140,783
7,881
726,499
196,694
119,519
101,175
Total
Loans
684,089
157,068
162,407
50,136
140,879
7,900
730,408
197,966
120,387
101,175
$
5,997
$
9,225
$
15,222
$ 2,337,193
$ 2,352,415
93
June 30, 2018
Retail consumer loans:
One-to-four family
HELOCs - originated
HELOCs - purchased
Construction and land/lots
Indirect auto finance
Consumer
Commercial loans:
Commercial real estate
Construction and development
Commercial and industrial
Municipal leases
Total loans
June 30, 2017
Retail consumer loans:
One-to-four family
HELOCs - originated
HELOCs - purchased
Construction and land/lots
Indirect auto finance
Consumer
Commercial loans:
Commercial real estate
Construction and development
Commercial and industrial
Municipal leases
Total loans
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The Company’s recorded investment in loans, by segment and class that are not accruing interest or are 90 days or more past due and still accruing
interest at the dates indicated follow:
Retail consumer loans:
One-to-four family
HELOCs - originated
HELOCs - purchased
Construction and land/lots
Indirect auto finance
Consumer
Commercial loans:
Commercial real estate
Construction and development
Commercial and industrial
Municipal leases
Total loans
June 30, 2018
June 30, 2017
Nonaccruing
90 Days + &
still accruing Nonaccruing
90 Days + &
still accruing
$
$
4,308
656
187
165
255
321
2,863
2,045
114
—
10,914
$
$
— $
—
—
—
—
—
—
—
—
—
— $
6,453
1,291
192
245
1
29
2,756
1,766
827
106
13,666
$
$
—
—
—
—
—
—
—
—
—
—
—
PCI loans totaling $3,353 at June 30, 2018 and $6,664 at June 30, 2017 are excluded from nonaccruing loans due to the accretion of discounts
established in accordance with the acquisition method of accounting for business combinations.
TDRs are loans which have renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans. Such modifications
to loan terms may include a lower interest rate, a reduction in principal, or a longer term to maturity. Additionally, all TDRs are considered
impaired.
The Company’s loans that were performing under the payment terms of TDRs that were excluded from nonaccruing loans above at the dates
indicated follow:
Performing TDRs
An analysis of the allowance for loan losses by segment for the periods shown is as follows:
June 30, 2018
June 30, 2017
$
21,251
$
27,043
Balance at beginning of period
Provision for (recovery of) loan losses
Charge-offs
Recoveries
Balance at end of period
Balance at beginning of period
Provision for (recovery of) loan losses
Charge-offs
Recoveries
Balance at end of period
$
$
$
$
June 30, 2018
PCI
Retail
Consumer
Commercial
Total
727
228
(472)
—
483
$
$
11,839
678
(1,033)
1,566
13,050
$
$
8,585
(906)
(1,142)
990
7,527
$
$
June 30, 2017
PCI
Retail
Consumer
Commercial
Total
11,549
(2,829)
(1,219)
1,084
8,585
$
$
9,382
2,463
(1,331)
1,325
11,839
$
$
361
366
—
—
727
$
$
94
21,151
—
(2,647)
2,556
21,060
21,292
—
(2,550)
2,409
21,151
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Balance at beginning of period
Provision for (recovery of) loan losses
Charge-offs
Recoveries
Balance at end of period
June 30, 2016
PCI
Retail
Consumer
Commercial
Total
$
$
401
(40)
—
—
361
$
$
12,575
(597)
(1,663)
1,234
11,549
$
$
9,398
637
(2,041)
1,388
9,382
$
$
22,374
—
(3,704)
2,622
21,292
The Company’s ending balances of loans and the related allowance, by segment and class, at the dates indicated follows:
Allowance for Loan Losses
Total Loans Receivable
Loans
individually
evaluated
for
impairment
Loans
Collectively
Evaluated
PCI
Total
PCI
Loans
individually
evaluated
for
impairment
Loans
Collectively
Evaluated
Total
98
—
—
—
—
—
138
229
18
—
$
125
$
3,137
$
3,360
$
6,817
$
7,104
$
650,368
$
664,289
6
—
19
—
11
28
8
—
—
1,117
795
1,134
1,126
57
1,123
795
1,153
1,126
68
224
—
444
—
—
452
—
583
—
11
136,888
166,276
64,574
173,095
12,368
137,564
166,276
65,601
173,095
12,379
8,029
8,195
9,239
3,511
844,565
857,315
3,109
1,458
418
3,346
1,476
418
2,227
1,953
—
2,223
—
—
187,652
146,870
109,172
192,102
148,823
109,172
$
483
$
197
$
20,380
$ 21,060
$ 20,904
$
13,884
$ 2,491,828
$ 2,526,616
June 30, 2018
Retail consumer loans:
One-to-four family
$
HELOCs - originated
HELOCs - purchased
Construction and land/lots
Indirect auto finance
Consumer
Commercial loans:
Commercial real estate
Construction and
development
Commercial and industrial
Municipal leases
Total
June 30, 2017
Retail consumer loans:
One-to-four family
$
HELOCs - originated
HELOCs - purchased
Construction and land/lots
Indirect auto finance
Consumer
Commercial loans:
Commercial real estate
Construction and
development
Commercial and industrial
Municipal leases
28
—
—
—
—
—
512
171
16
—
$
863
$
3,585
$
4,476
$
8,069
$
10,305
$
665,715
$
684,089
44
—
88
1
8
239
13
287
—
1,340
1,384
838
889
880
49
838
977
881
57
288
—
528
—
18
12
—
634
1
8
156,768
162,407
48,974
140,878
7,874
157,068
162,407
50,136
140,879
7,900
6,600
7,351
17,383
6,284
706,741
730,408
2,982
1,221
497
3,166
1,524
497
2,629
2,626
—
2,184
1,514
—
193,153
116,247
101,175
197,966
120,387
101,175
Total
$
727
$
1,543
$
18,881
$ 21,151
$ 31,541
$
20,942
$ 2,299,932
$ 2,352,415
Loans acquired from acquisitions are initially excluded from the allowance for loan losses in accordance with the acquisition method of accounting
for business combinations. The Company records these loans at fair value, which includes a credit discount, therefore, no allowance for loan
losses are established for these acquired loans at acquisition. A provision for loan losses is recorded for any further deterioration in these acquired
loans subsequent to the acquisition.
95
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The Company’s impaired loans and the related allowance, by segment and class, excluding PCI loans, at the dates indicated follows:
June 30, 2018
Retail consumer loans:
One-to-four family
HELOCs - originated
HELOCs - purchased
Construction and land/lots
Indirect auto finance
Consumer
Commercial loans:
Commercial real estate
Construction and development
Commercial and industrial
Municipal leases
Total impaired loans
June 30, 2017
Retail consumer loans:
One-to-four family
HELOCs - originated
HELOCs - purchased
Construction and land/lots
Indirect auto finance
Consumer
Commercial loans:
Commercial real estate
Construction and development
Commercial and industrial
Municipal leases
Total impaired loans
Total Impaired Loans
Unpaid
Principal
Balance
Recorded Investment
With No
Recorded
Allowance
With a
Recorded
Allowance
Total
Related
Recorded
Allowance
$
$
$
$
23,295
2,544
187
2,348
395
501
5,343
3,166
4,898
—
42,677
26,032
3,746
192
2,817
22
552
7,144
2,956
7,757
400
51,618
$
$
$
$
16,035
1,017
—
1,098
122
12
2,862
828
235
—
22,209
16,557
2,036
—
1,310
—
15
4,721
935
845
106
26,525
$
$
$
$
4,140
737
187
446
133
46
2,246
1,217
—
—
9,152
6,338
736
192
468
1
27
2,131
1,021
1,231
294
12,439
$
$
$
$
20,175
1,754
187
1,544
255
58
5,108
2,045
235
—
31,361
22,895
2,772
192
1,778
1
42
6,852
1,956
2,076
400
38,964
$
$
$
$
554
9
—
53
1
11
42
14
3
—
687
719
49
—
88
1
8
253
16
288
—
1,422
The table above includes $19,926 and $22,023 of impaired loans that were not individually evaluated at June 30, 2018 and June 30, 2017,
respectively, because these loans did not meet the Company’s threshold for individual impairment evaluation. The recorded allowance above
includes $595 and $41 related to these loans that were not individually evaluated at June 30, 2018 and June 30, 2017, respectively.
96
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The Company’s average recorded investment and interest income recognized on impaired loans as of the dates indicated below:
Retail consumer loans:
One-to-four family
HELOCs - originated
HELOCs - purchased
Construction and land/lots
Indirect auto finance
Consumer
Commercial loans:
Commercial real estate
Construction and development
Commercial and industrial
Municipal leases
June 30, 2018
Year Ended
June 30, 2017
June 30, 2016
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
$
23,257
$
1,170
$
25,256
$
1,147
$
28,479
$
1,477
2,304
189
1,575
256
43
6,496
2,703
1,205
75
38,103
$
104
15
109
23
17
209
56
60
—
1,763
$
2,548
48
1,734
106
35
7,771
2,450
2,737
406
43,091
$
152
12
139
2
20
272
58
125
18
1,945
$
3,593
—
1,787
7
55
8,506
3,469
4,379
452
50,727
$
200
—
135
2
23
440
84
155
22
2,538
Total loans
$
A summary of changes in the accretable yield for PCI loans at the dates indicated below:
Accretable yield, beginning of period
Addition from TriSummit acquisition
Reclass from nonaccretable yield (1)
Other changes, net (2)
Interest income
Accretable yield, end of period
Year Ended
June 30, 2018
7,080
$
—
513
393
(2,252)
5,734
$
Year Ended
June 30, 2017
9,532
$
1,288
1,537
(427)
(4,850)
7,080
$
______________________________
(1) Represents changes attributable to expected losses assumptions.
(2) Represents changes in cash flows expected to be collected due to the impact of modifications, changes in prepayment assumptions, and changes in interest rates.
The following table presents carrying values and unpaid principal balances for PCI loans at the dates indicated below:
Carrying value of PCI loans
Unpaid principal balance of PCI loans
June 30, 2018
June 30, 2017
$
$
20,904
25,746
$
$
31,541
37,955
97
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following table presents a breakdown of the types of concessions made on TDRs by loan class:
Year Ended June 30, 2018
Year Ended June 30, 2017
Year Ended June 30, 2016
Pre
Modification
Outstanding
Recorded
Investment
Post
Modification
Outstanding
Recorded
Investment
Number
of Loans
Pre
Modification
Outstanding
Recorded
Investment
Post
Modification
Outstanding
Recorded
Investment
Number
of Loans
Pre
Modification
Outstanding
Recorded
Investment
Post
Modification
Outstanding
Recorded
Investment
Number
of Loans
$
288
$
285
5
$
234
$
238
79
—
—
—
Below market interest
rate:
Retail consumer:
One-to-four family
Construction and land/
lots
Commercial:
Commercial real
estate
Total
Extended payment
terms:
Retail consumer:
One-to-four family
HELOCs - originated
Construction and land/
lots
Consumer
Commercial:
Commercial real
estate
Construction and
development
Commercial and
industrial
Total
Other TDRs:
Retail consumer:
One-to-four family
HELOCs - originated
Construction and land/
lots
Consumer
Commercial:
Commercial real
estate
Construction and
development
Commercial and
industrial
Total
Total
$
$
—
1
—
—
—
—
5
25
—
—
1
—
—
—
26
31
80
—
368
$
— $
5
$
$
186
$
— $
— $
—
—
— $
— $
— $
— $
4
$
514
$
—
36
—
—
—
—
550
$
—
—
—
—
502
—
32
—
—
—
—
534
3
2
5
1
1
2
—
1
2
12
$
1,005
$
$
3,646
$
3,747
13
$
525
$
37
280
11
—
439
52
33
404
—
—
364
179
37
264
11
—
439
50
980
517
31
318
—
—
—
2
—
—
—
—
—
2
—
—
—
$
$
3,648
4,198
$
$
3,749
4,283
2
4
—
3
—
2
24
41
98
578
816
147
25
—
—
284
128
155
739
2,498
227
—
1
—
371
$
$
$
1
6
5
2
—
—
1
1
2
11
$
590
824
$
142
$
28
—
—
286
128
164
748
$
$
30
$
2,890
$
228
—
2
—
386
4
—
1
—
2
1
38
55
2,349
2,035
—
231
3,542
4,915
$
$
—
227
3,128
4,472
$
$
997
4,503
6,075
$
$
957
4,054
5,609
$
$
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following table presents loans that were modified as TDRs within the previous 12 months and for which there was a payment default during
the years ended June 30, 2018 and 2017.
Year Ended June 30, 2018 Year Ended June 30, 2017
Recorded
Number of
Investment
Loans
Recorded
Investment
Number of
Loans
Year Ended June 30, 2016
Recorded
Number of
Investment
Loans
Below market interest rate:
Retail consumer:
One-to-four family
Total
Extended payment terms:
Retail consumer:
One-to-four family
Total
Other TDRs:
Retail consumer:
One-to-four family
HELOCs - originated
Construction and land/lots
Commercial:
Construction and development
Total Other TDRs
Total
— $
— $
— $
— $
5
—
—
—
5
5
$
$
$
—
—
—
—
277
—
—
—
277
277
— $
— $
— $
— $
2
—
1
—
3
3
$
$
$
—
—
—
—
27
—
19
—
46
46
2
2
2
2
11
1
—
2
14
18
$
$
$
$
$
$
$
63
63
43
43
529
8
—
371
908
1,014
Other TDRs include TDRs that have a below market interest rate and extended payment terms. The Company does not typically forgive principal
when restructuring troubled debt.
In the determination of the allowance for loan losses, management considers TDRs for all loan classes, and the subsequent nonperformance in
accordance with their modified terms, by measuring impairment on a loan-by-loan basis based on either the value of the loan’s expected future
cash flows discounted at the loan’s original effective interest rate or on the collateral value, net of the estimated costs of disposal, if the loan is
collateral dependent.
5. Premises and Equipment
Premises and equipment consist of the following:
Land
Land held under capital lease
Office buildings
Furniture, fixtures and equipment
Total
Less accumulated depreciation
Premises and equipment, net
June 30,
2018
2017
$
$
19,934
2,052
57,873
15,582
95,441
(32,904)
62,537
$
$
20,148
2,052
56,765
14,877
93,842
(30,194)
63,648
99
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
6. Accrued Interest Receivable
Accrued interest receivable consists of the following:
Loans
Securities available for sale
Other
Total
7. Real Estate Owned
The activity within REO for the periods shown is as follows:
Balance at beginning of period
Transfers from loans
Acquired through mergers
Sales, net of gain/loss
Writedowns
Capital improvements
Balance at end of period
June 30,
2018
2017
8,164
776
404
9,344
$
$
7,349
880
529
8,758
June 30,
2018
2017
6,318
1,346
—
(3,471)
(539)
30
3,684
$
$
5,956
2,417
1,511
(3,285)
(292)
11
6,318
$
$
$
$
At June 30, 2018 and 2017, the Bank had $998 and $1,015, respectively, of foreclosed residential real estate property in REO. The recorded
investment in consumer mortgage loans collateralized by residential real estate in the process of foreclosure totaled $395 and $2,230 for June
30, 2018 and 2017, respectively.
8. Goodwill and Core Deposit Intangibles
The changes in the carrying amount of the Company's goodwill are as follows:
Balance, June 30, 2016
Additions
Balance, June 30, 2017
Additions
Balance, June 30, 2018
Goodwill
$
$
$
12,673
12,965
25,638
—
25,638
During 2017, the Company recorded $12,965 in goodwill as a result of the United Financial and TriSummit acquisitions. See Note 2 for more
details regarding these acquisitions.
The Company added $2,860 in core deposit intangibles during 2017 related to TriSummit. Amortization expense related to core deposit intangibles
was $2,645, $2,823, and $2,907 for the years ended June 30, 2018, 2017, and 2016, respectively.
100
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Estimated amortization expense for each of the next five years and thereafter is as follows:
2019
2020
2021
2022
2023
Thereafter
Total
9. Deposit Accounts
Deposit accounts consist of the following:
Noninterest-bearing accounts
NOW accounts
Money market accounts
Savings accounts
Certificates of deposit
Total
June 30,
2018
2,029
1,414
741
251
90
3
4,528
$
$
June 30,
2018
317,822
471,364
677,665
213,250
516,152
2,196,253
$
$
2017
310,172
469,377
569,607
237,149
462,146
2,048,451
$
$
Weighted Average
Interest Rates
June 30,
2018
2017
—%
0.11%
0.48%
0.13%
1.01%
0.42%
—%
0.08%
0.27%
0.13%
0.60%
0.24%
Deposits received from executive officers and directors and their associates totaled approximately $5,692 and $4,408 at June 30, 2018 and 2017,
respectively.
Maturities of certificates of deposit are as follows:
2019
2020
2021
2022
2023
Thereafter
Total
June 30, 2018
385,736
72,055
25,878
13,835
18,431
217
516,152
$
$
Certificates of deposit with balances of $250 or greater totaled $70,553 and $53,893 at June 30, 2018 and 2017, respectively. Generally, deposit
amounts in excess of $250 are not federally insured.
Interest expense on deposits consists of the following:
NOW accounts
Money market accounts
Savings accounts
Certificates of deposit
Total
2018
June 30,
2017
2016
$
$
970
2,442
295
3,051
6,758
$
$
772
1,405
308
2,103
4,588
$
$
581
1,112
289
2,549
4,531
101
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
10. Borrowings
Borrowings consist of the following at the dates indicated:
June 30,
2018
2017
Balance
Weighted Average
Rate
Balance
Weighted Average
Rate
FHLB Advances
$
635,000
1.95% $
696,500
1.13%
The scheduled maturity dates, call dates, and related interest rates on FHLB advances at June 30, 2018:
Maturity Date
Interest Rate
Call Date
Outstanding Amount
7/2/2018
7/11/2018
7/25/2018
7/30/2018
3/6/2028
3/22/2028
6/5/2028
Total FHLB Advances
1.93%
2.04%
2.04%
2.00%
1.73%
1.82%
1.87%
—
—
—
—
3/6/2019
3/22/2019
6/5/2019
$
$
10,000
200,000
180,000
45,000
100,000
50,000
50,000
635,000
All qualifying one-to-four family first mortgage loans, HELOCs, commercial real estate loans, FHLB Stock, and certain investment securities
were pledged as collateral to secure the FHLB advances.
At June 30, 2018 and 2017, the Company had the ability to borrow $79,226 and $22,300, respectively, in additional FHLB advances. At June
30, 2018 and 2017, the Company had an unused line of credit with the FRB for $132,349 and $105,500, respectively. At June 30, 2018 and 2017,
the Company had unused lines of credit with three unaffiliated banks for $60,000.
11. Leases
The Company leases certain real property under long-term operating lease agreements. Rent expense under operating leases was $1,829, $1,583,
and $1,361 for the years ended June 30, 2018, 2017, and 2016, respectively.
The following schedule summarizes aggregate future minimum lease payments under these operating leases at June 30, 2018.
Fiscal year ending:
2019
2020
2021
2022
2022
Thereafter
Total of future minimum payments
June 30,
1,661
1,381
1,032
965
937
1,543
7,519
$
$
The Company currently leases land for one of its retail office locations under a capital lease. Leases that meet the criteria for capitalization are
recorded as assets and the related obligations are reflected as capital lease obligations on the accompanying balance sheets, because the lease
has been deemed to have a bargain purchase option. Included in premises and equipment at June 30, 2018 and June 30, 2017 is $2,052 as the
capitalized cost of the leased land.
102
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Aggregate future minimum lease payments due under this capital lease obligation are as follows:
Fiscal year ending:
2019
2020
2021
2022
2023
2024-2030
Total minimum lease payments
Less: amount representing interest
Present value of net minimum lease payments
12. Income Taxes
Income tax expense consists of:
Current:
Federal
State
Total current expense
Deferred:
Federal
State
Adjustment due to the Tax Act
Total deferred expense
Total income tax expense
June 30,
133
134
134
134
134
2,138
2,807
(893)
1,914
$
$
2018
June 30,
2017
2016
$
$
291
324
615
7,909
625
17,587
26,121
26,736
$
$
191
54
245
4,561
386
—
4,947
5,192
$
$
266
54
320
4,038
543
—
4,581
4,901
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax
rate to income before income taxes as a result of the following differences for the periods indicated:
2018
Year Ended June 30,
2017
2016
$
Rate
$
Rate
$
Rate
Tax at federal income tax rate
$
9,617
28 % $
5,793
34 % $
5,561
Increase (decrease) resulting from:
Tax exempt income
Nondeductible merger expenses
Change in valuation allowance for
deferred tax assets, allocated to
income tax expense
State tax, net of federal benefit
Change in deferred tax assets due to the
Tax Act
Other
Total
(1,075)
—
87
688
17,587
(168)
26,736
$
(3)%
— %
— %
2 %
50 %
(1)%
76 % $
(1,391)
91
(327)
290
—
736
5,192
(8)%
1 %
(2)%
2 %
— %
4 %
31 % $
(1,486)
—
(459)
394
—
891
4,901
34 %
(9)%
— %
(3)%
2 %
— %
6 %
30 %
103
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The sources and tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) at June 30, 2018
and 2017 are presented below:
Deferred tax assets:
Alternative minimum tax credit
Allowance for loan losses
Deferred compensation and post-retirement benefits
Accrued vacation and sick leave
Impairments on real estate owned
Other than temporary impairment on investments
Net operating loss carryforward
Discount from business combination
Unrealized loss on securities held for sale
Stock compensation plans
Other
Total gross deferred tax assets
Less valuation allowance
Deferred tax assets
Deferred tax (liabilities):
Depreciable basis of fixed assets
Deferred loan fees
FHLB stock, book basis in excess of tax
Unrealized gain on securities available for sale
Other
Total gross deferred tax liabilities
Net deferred tax assets
June 30,
2018
2017
$
$
4,920
4,637
9,400
18
495
2,254
8,635
2,605
477
2,271
1,562
37,274
(325)
36,949
(566)
(453)
(89)
—
(3,276)
(4,384)
32,565
$
$
4,418
7,452
16,055
29
1,337
3,617
21,443
3,645
—
2,884
2,687
63,567
(238)
63,329
(670)
(493)
(143)
(152)
(4,484)
(5,942)
57,387
The decrease in net deferred tax assets was primarily due to the enactment of the Tax Act and subsequent Internal Revenue Service guidelines,
which among other things reduced the statutory federal corporate income tax rate to 21% effective January 1, 2018 requiring the Company to
revalue its DTA. The resulting estimated $17.6 million in adjustments were reflected as an increase to the Company's income tax expense with
an additional $325,000 in income tax expense during the fiscal year ended June 30, 2018 to establish a tax valuation allowance on our alternative
minimum tax ("AMT") credits. In addition, our June 30 fiscal year end required the use of a blended federal income tax rate as prescribed by
the Internal Revenue Code. The blended federal income tax rate of 27.5% was retroactively effective July 1, 2017 and was used for the entire
fiscal year ended June 30, 2018. The Company's preliminary estimate of the impact of the Tax Act is based on currently available information
and interpretation of its provisions. We do not anticipate additional updates to our estimate, however actual results may differ from the current
estimate due to, among other things, further guidance that may be issued by U.S. tax authorities or regulatory bodies and/or changes in
interpretations and assumptions that the Company has preliminarily made. The Company's evaluation of the impact of the Tax Act is subject to
refinement for up to one year after enactment.
The Company had federal net operating loss ("NOL") carry forwards of $40,780 and $62,368 as of June 30, 2018 and June 30, 2017, respectively,
with a recorded tax benefit of $8,635 and $21,443 included in deferred tax assets. The majority of these NOLs will expire for federal tax purposes
from 2024 through 2036.
The Company also adjusted its net deferred tax asset as a result of additional reductions in the North Carolina corporate income tax rates that
were enacted July 23, 2013, and effective January 1, 2014 through 2017. The lower corporate income tax rate resulted in a reduction in the
deferred tax assets as of June 30, 2018 and June 30, 2017 and an increase in the current period income tax expense for the years ended June 30,
2018 and June 30, 2017.
The valuation allowance for deferred tax assets as of June 30, 2018 and 2017 was $325 and $238, respectively. The net increase in the total
valuation allowance was $87 for the year ended June 30, 2018 which relates to the valuation allowance established on our AMT credits mentioned
above. The net decrease in the total valuation allowance for the years ended June 30, 2017 and 2016 was $315 and $459, respectively, which
relates to North Carolina state income taxes due to limitations on state net operating loss carry forwards. 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 performed a robust evaluation of the Company’s deferred tax assets at June 30, 2018 and June 30,
2017. Management considered all available positive and negative evidence including the possibility of future reversals of existing taxable
temporary differences, projected future taxable income, tax planning strategies, and recent financial performance in making this assessment.
104
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Based upon this evaluation, management believes there is more positive evidence than negative evidence and it is more likely than not the
Company will realize the benefits of these deductible differences, net of the existing valuation allowances at June 30, 2018 and June 30, 2017.
The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if negative trends occur with credit quality
and earnings during the carryforward period.
Retained earnings at June 30, 2018 and 2017 include $19,570 representing pre-1988 tax bad debt reserve base year amounts for which no deferred
tax liability has been provided since these reserves are not expected to reverse and may never reverse. Circumstances that would require an
accrual of a portion or all of this unrecorded tax liability are a failure to meet the definition of a bank, dividend payments in excess of current
year or accumulated earnings and profits, or other distributions in dissolution or liquidation of the Bank. The Company is no longer subject to
examination for federal and state purposes for tax years prior to 2014.
13. Employee Benefit Plans
Effective July 1, 2015, the Bank established the HomeTrust Bank KSOP Plan ("KSOP") by combining the existing HomeTrust Bank 401(k) Plan
and the ESOP. The KSOP is comprised of two components, the 401(k) Plan and the ESOP. The KSOP benefits employees with at least 1000
hours of service during a 12-month period and who have attained age 21. Under the 401(k), the Company matches employee contributions at
50% of employee deferrals up to 6% of each employee’s compensation. The Company may also make discretionary profit sharing contributions
for the benefit of all eligible participants as long as total contributions do not exceed applicable limitations. Employees become fully vested in
the Company’s contributions after six years of service. Under the ESOP, the amount of the Bank's annual contribution is discretionary, however
it must be sufficient to pay the annual loan payment to the Company.
The Company’s expense for 401(k) contributions to this plan was $737, $450, and $583 for the years ended June 30, 2018, 2017, and 2016,
respectively. The Company's expense related to the ESOP for the fiscal year ended June 30, 2018, 2017, and 2016 was $1,367, $1,186, and $983,
respectively.
Shares held by the ESOP include the following:
Unallocated ESOP shares
Allocated ESOP shares
ESOP shares committed to be released
Total ESOP shares
Fair value of unallocated ESOP shares
June 30,
2018
2017
740,600
264,500
52,900
1,058,000
20,848
$
793,500
211,600
52,900
1,058,000
19,361
$
Post-retirement health care benefits are provided to certain key officers under the Company’s Executive Medical Care Plan (“EMCP”). The
EMCP is unfunded and is not qualified under the Internal Revenue Code ("IRC"). Plan expense for the years ended June 30, 2018, 2017, and
2016 was $224, $135, and $224, respectively. Total accrued expenses related to this plan included in other liabilities were $5,237 and $5,156,
respectively, as of June 30, 2018 and 2017.
14. Deferred Compensation Agreements
The Company’s Director Emeritus Plans (“Plans”) provide certain benefits to Emeritus Directors for providing current advisory services to the
Company. The Plans are unfunded and are not qualified under the IRC. Plan benefits vary by participant and are payable to a designated beneficiary
in the event of death. The Company records an expense based on the present value of expected future benefits. Plan expenses for the years ended
June 30, 2018, 2017, and 2016 were $417, $419, and $489, respectively. Total accrued expenses related to these plans included in other liabilities
were $8,542 and $9,225, respectively, as of June 30, 2018 and 2017.
The Company has deferred compensation agreements with certain members of the Company’s Board of Directors. The future payments related
to these agreements are to be funded with life insurance contracts which are payable to the Company in the event of the director’s death. For the
years ended June 30, 2018, 2017, and 2016 deferred compensation expense was $32, $34, and $41, respectively.
The net cash surrender value of the related life insurance policies and deferred compensation liability are detailed below:
Net cash surrender value of life insurance, related to deferred compensation
Deferred compensation liability, included in other liabilities
June 30,
2018
2017
$
$
7,142
1,075
$
$
7,096
1,229
Long term deferred compensation and supplemental retirement plans are provided to certain key current and former officers. These plans are
unfunded and are not qualified under the IRC. The benefits will vary by participant and are payable to a designated beneficiary in the event of
105
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
death. Plan expenses for the years ended June 30, 2018, 2017, and 2016 were $519, $1,253, and $826, respectively. Total accrued expenses
related to these plans included in other liabilities were $20,257 and $20,785, as of June 30, 2018 and 2017, respectively.
In addition, the Company has a deferred compensation plan provided to certain officers and directors. The plan allows the participants to defer
any of their annual compensation, including bonus payments, up to the maximum allowed for each participant. The plan is unfunded and is not
qualified under the IRC. Plan expenses for the years ended June 30, 2018, 2017, and 2016 were $205, $197, and $199, respectively. The total
deferred compensation plan payable included in other liabilities was $5,274 and $5,832, respectively as of June 30, 2018 and 2017.
15. Net Income per Share
The following is a reconciliation of the numerator and denominator of basic and diluted net income per share of common stock:
Numerator:
Net income
Allocation of earnings to participating securities
Numerator for basic EPS - Net income available to common stockholders
Effect of dilutive securities:
Dilutive effect to participating securities
Numerator for diluted EPS
Denominator:
Weighted-average common shares outstanding - basic
Effect of dilutive shares
Weighted-average common shares outstanding - diluted
Net income per share - basic
Net income per share - diluted
2018
June 30,
2017
2016
8,235
(60)
8,175
$
$
11,847
(125)
11,722
$
$
11,456
(161)
11,295
2
4
1
8,177
$
11,726
$
11,296
18,028,854
697,577
18,726,431
0.45
0.44
17,379,487
576,956
17,956,443
0.66
0.65
$
$
17,417,046
189,643
17,606,689
0.65
0.65
$
$
$
$
$
$
$
There were 420,800 and 60,500 outstanding stock options that were anti-dilutive for the years ended June 30, 2018 and 2017, respectively.
16. Equity Incentive Plan
The Company provides stock-based awards through the 2013 Omnibus Incentive Plan which provides for awards of restricted stock, restricted
stock units, stock options, stock appreciation rights, and cash awards to directors, emeritus directors, officers, employees, and advisory directors.
The cost of equity-based awards under the 2013 Omnibus Incentive Plan generally is based on the fair value of the awards on their grant date.
The maximum number of shares that may be utilized for awards under the plan is 2,962,400, including 2,116,000 for stock options and stock
appreciation rights and 846,400 for awards of restricted stock and restricted stock units.
Shares of common stock issued under the 2013 Omnibus Incentive Plan may be authorized but unissued shares or, in the case of restricted stock
awards, may be repurchased shares. As of June 30, 2013, the Company had repurchased all 846,400 shares on the open market for issuance under
the 2013 Omnibus Incentive Plan, for $13,297, at an average cost of $15.71 per share.
Share based compensation expense related to stock options and restricted stock recognized for the fiscal year ended June 30, 2018, 2017, and
2016 was $3,027, $4,166, and $2,939, respectively, before the related tax benefit of $908, $1,541, and $1,087, respectively.
106
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The table below presents stock option activity and related information:
Options outstanding at June 30, 2015
Granted
Exercised
Forfeited
Expired
Options outstanding at June 30, 2016
Exercisable at June 30, 2016
Granted
Granted, TriSummit acquisition
Exercised
Forfeited
Expired
Options outstanding at June 30, 2017
Exercisable at June 30, 2017
Granted
Exercised
Forfeited
Expired
Options outstanding at June 30, 2018
Exercisable at June 30, 2018
Non-vested at June 30, 2018
Options
1,498,000
46,500
2,200
13,000
—
1,529,300
829,400
$
$
60,500
86,185
185,142
19,000
1,800
1,470,043
1,033,943
360,400
44,200
24,700
43,273
1,718,270
1,223,470
494,800
$
$
$
$
$
Weighted-
average
exercise price
Remaining
contractual life
(years)
Aggregate
Intrinsic
Value
14.41
17.35
14.37
14.37
—
14.50
14.40
24.95
23.82
16.56
14.53
14.37
15.22
14.82
26.01
14.72
14.43
23.82
17.29
14.51
24.16
$
7.7
—
—
—
—
6.8
$
—
—
—
—
—
5.8
—
—
—
—
5.9
4.7
8.9
$
$
$
$
3,519
—
—
—
—
6,117
—
—
—
—
—
13,533
—
—
—
—
18,664
16,691
1,973
The fair value of each option is estimated on the date of grant using the Black-Scholes-Merton option pricing model. Assumptions used for grants
were as follows:
Assumptions in Estimating Option Values
Weighted-average volatility
Expected dividend yield
Risk-free interest rate
Expected life (years)
Weighted-average fair value of options granted
2018
2017
17.69%
—%
2.67%
6.5
6.62
$
16.69%
—%
2.36%
6.5
7.76
$
At June 30, 2018, the Company had $2,705 of unrecognized compensation expense related to 494,800 stock options originally scheduled to vest
over five- and seven-year vesting periods. The weighted average period over which compensation cost related to non-vested awards is expected
to be recognized was 2.3 years at June 30, 2018. At June 30, 2017, the Company had $1,526 of unrecognized compensation expense related to
436,100 stock options originally scheduled to vest over five- and seven-year vesting periods. The weighted average period over which
compensation cost related to non-vested awards is expected to be recognized was 1.2 years at June 30, 2017. All unexercised options expire ten
years after the grant date.
107
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The table below presents restricted stock award activity and related information:
Restricted
stock awards
Weighted-
average grant
date fair value
Aggregate
Intrinsic
Value
310,470
$
14.40
$
5,203
34,500
93,670
2,550
17.35
14.39
14.37
Non-vested at June 30, 2015
Granted
Vested
Forfeited
—
—
—
4,602
—
—
—
3,419
—
—
—
3,755
Non-vested at June 30, 2016
248,750
$
14.81
$
Granted
Vested
Forfeited
Non-vested at June 30, 2017
Granted
Vested
Forfeited
Non-vested at June 30, 2018
47,500
104,620
6,000
185,630
55,200
100,820
6,600
133,410
$
$
24.70
14.58
15.07
17.46
25.89
15.14
14.37
22.85
$
$
At June 30, 2018, unrecognized compensation expense was $2,570 related to 133,410 shares of restricted stock originally scheduled to vest over
five- and seven-year vesting periods. The weighted average period over which compensation cost related to non-vested awards is expected to
be recognized was 2.1 years at June 30, 2018. At June 30, 2017, unrecognized compensation expense was $2,493 related to 185,630 shares of
restricted stock originally scheduled to vest over five- and seven-year vesting periods. The weighted average period over which compensation
cost related to non-vested awards is expected to be recognized was 1.6 years at June 30, 2017.
17. Commitments and Contingencies
Loan Commitments
Legally binding commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many
commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. In
the normal course of business, there are various outstanding commitments to extend credit that are not reflected in the consolidated financial
statements. At June 30, 2018 and June 30, 2017, respectively, loan commitments (excluding $209,726 and $158,380 of undisbursed portions of
construction loans) totaled $49,949 and $43,730 of which $19,812 and $21,221 were variable rate commitments and $30,137 and $22,509 were
fixed rate commitments. The fixed rate loans had interest rates ranging from 2.10% to 6.15% at June 30, 2018 and 1.95% to 6.25% at June 30,
2017, and terms ranging from three to 30 years. Pre-approved but unused lines of credit (principally second mortgage home equity loans and
overdraft protection loans) totaled $491,649 and $414,373 at June 30, 2018 and 2017, respectively. These amounts represent the Company’s
exposure to credit risk, and in the opinion of management have no more than the normal lending risk that the Company commits to its borrowers. The
Company has two types of commitments related to loans held for sale: rate lock commitments and forward loan sale commitments. Rate lock
commitments are commitments to extend credit to a customer that has an interest rate lock and are considered derivative instruments. The rate
lock commitments do not qualify for hedge accounting. In order to mitigate the risk from interest rate fluctuations, we enter into forward loan
sale commitments on a “best efforts” basis, which do not meet the definition of a derivative instrument. The fair value of these commitments
was not material at June 30, 2018 or June 30, 2017.
The Company grants construction and permanent loans collateralized primarily by residential and commercial real estate to customers throughout
its primary market area. In addition, the Company grants municipal leases to customers throughout North and South Carolina. The Company’s
loan portfolio can be affected by the general economic conditions within these market areas. Management believes that the Company has no
significant concentration of credit in the loan portfolio.
Restrictions on Cash
The Bank is required by regulation to maintain a varying cash reserve balance with the Federal Reserve System. The daily average calculated
cash reserve required as of June 30, 2018 and 2017 was $2,304, and $2,152, respectively, which was satisfied by vault cash and balances held
at the Federal Reserve Bank.
Guarantees
Standby letters of credit obligate the Company to meet certain financial obligations of its customers, if, under the contractual terms of the
agreement, the customers are unable to do so. The financial standby letters of credit issued by the Company are irrevocable and payment is only
guaranteed upon the borrower’s failure to perform its obligations to the beneficiary. Total commitments under standby letters of credit as of June
108
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
30, 2018 and 2017 were $8,227 and $5,164, respectively. There was no liability recorded for these letters of credit at June 30, 2018 or June 30,
2017.
Litigation
The Company is involved in several litigation matters in the ordinary course of business. These proceedings and the associated legal claims are
often contested and the outcome of individual matters is not always predictable. These claims and counter claims typically arise during the course
of collection efforts on problem loans or with respect to actions to enforce liens on properties in which the Company holds a security interest. There
can be no assurance that loan workouts and other activities will not expose the Company to additional legal actions, including lender liability or
environmental claims. Therefore, the Company may be exposed to substantial liabilities, which could adversely affect its results of operations
and financial condition. Moreover, the expenses of legal proceedings will adversely affect its results of operations until they are resolved. The
Company is not a party to any pending legal proceedings that management believes would have a material adverse effect on the Company’s
financial condition or results of operations.
18. Capital
At June 30, 2018, stockholder's equity totaled $409,242. HomeTrust Bancshares, Inc. is a bank holding company subject to regulation by the
Federal Reserve. As a bank holding company, we are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding
Company Act of 1956, as amended and the regulations of the Federal Reserve. Our subsidiary, the Bank, an FDIC-insured, North Carolina state-
chartered bank and a member of the Federal Reserve System, is supervised and regulated by the Federal Reserve and the North Carolina
Commissioner of Banks ("NCCOB") and is subject to minimum capital requirements applicable to state member banks established by the Federal
Reserve that are calculated in a manner similar to those applicable to bank holding companies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by bank regulators that, if undertaken, could have a direct material
effect on the Company's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
At June 30, 2018, HomeTrust Bancshares, Inc. and the Bank each exceeded all regulatory capital requirements as of that date. Consistent with
our goals to operate a sound and profitable organization, our policy is for the Bank to maintain a “well-capitalized” status under the regulatory
capital categories of the Federal Reserve. The Bank was categorized as "well-capitalized" at June 30, 2018 under applicable regulatory
requirements.
109
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
HomeTrust Bancshares, Inc. and the Bank's actual and required minimum capital amounts and ratios are as follows:
Regulatory Requirements
Actual
Minimum for Capital
Adequacy Purposes
Minimum to Be
Well Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
HomeTrust Bancshares, Inc.
As of June 30, 2018
Common Equity Tier I Capital (to Risk-weighted Assets) $ 372,188
12.97% $
129,109
4.50% $
186,491
Tier I Capital (to Total Adjusted Assets)
$ 372,188
11.45% $
130,032
4.00% $
162,539
Tier I Capital (to Risk-weighted Assets)
$ 372,188
12.97% $
172,145
6.00% $
229,527
6.50%
5.00%
8.00%
Total Risk-based Capital (to Risk-weighted Assets)
$ 393,703
13.72% $
229,527
8.00% $
286,909
10.00%
As of June 30, 2017
Common Equity Tier I Capital (to Risk-weighted Assets) $ 342,664
13.07% $
118,024
4.50% $
170,478
Tier I Capital (to Total Adjusted Assets)
$ 342,664
11.13% $
123,149
4.00% $
153,936
Tier I Capital (to Risk-weighted Assets)
$ 342,664
13.07% $
157,365
6.00% $
209,820
6.50%
5.00%
8.00%
Total Risk-based Capital (to Risk-weighted Assets)
$ 364,269
13.89% $
209,820
8.00% $
262,275
10.00%
HomeTrust Bank:
As of June 30, 2018
Common Equity Tier I Capital (to Risk-weighted Assets) $ 335,152
11.70% $
128,889
4.50% $
186,173
Tier I Capital (to Total Adjusted Assets)
$ 335,152
10.33% $
129,769
4.00% $
162,211
Tier I Capital (to Risk-weighted Assets)
$ 335,152
11.70% $
171,852
6.00% $
229,136
6.50%
5.00%
8.00%
Total Risk-based Capital (to Risk-weighted Assets)
$ 356,603
12.45% $
229,136
8.00% $
286,421
10.00%
6.50%
5.00%
8.00%
As of June 30, 2017
Common Equity Tier I Capital (to Risk-weighted Assets) $ 305,216
11.68% $
117,560
4.50% $
169,809
Tier I Capital (to Total Adjusted Assets)
$ 305,216
9.97% $
122,453
4.00% $
153,066
Tier I Capital (to Risk-weighted Assets)
Total Risk-based Capital (to Risk-weighted Assets)
$ 305,216
$ 326,635
11.68% $
156,747
6.00% $
208,996
12.50% $
208,996
8.00% $
261,245
10.00%
___________________________________
In addition to the minimum common equity Tier 1 ("CET1"), Tier 1 and total capital ratios, HomeTrust Bancshares, Inc. and the Bank now have
to maintain a capital conservation buffer consisting of additional CET1 capital above the required minimum levels in order to avoid limitations
on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that
could be utilized for such actions. This new capital conservation buffer requirement began to be phased in starting in January 2016 at an amount
more than 0.625% of risk-weighted assets and will increase each year until fully implemented to an amount more than 2.5% of risk-weighted
assets in January 2019. As of June 30, 2018, the CET1 capital of HomeTrust Bancshares, Inc. and the Bank exceeded the required conservation
buffer of more than 1.875%.
2018 Regulatory Reform
In May 2018 the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Act”), was enacted to modify or remove certain
financial reform rules and regulations, including some of those implemented under the Dodd-Frank Wall Street Reform and Consumer Protection
Act (“Dodd-Frank Act”). While the Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects
of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than
$50 billion. Many of these changes could result in meaningful regulatory relief for community banks such as HomeTrust Bank.
The Act, among other matters, simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated
assets of less than $10 billion by instructing the federal banking regulators to establish a single “Community Bank Leverage Ratio” of between
8 and 10 percent. Any qualifying depository institution or its holding company that exceeds the “community bank leverage ratio” will be considered
to have met applicable leverage and risk-based regulatory capital requirements and any qualifying depository institution that exceeds the new
ratio will be considered to be “well capitalized” under the prompt corrective action rules.
110
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
A reconciliation of HomeTrust Bancshares, Inc.'s stockholders' equity under US GAAP and regulatory capital amounts follows:
Total stockholders' equity under US GAAP
Accumulated other comprehensive income (loss), net of tax
Investment in nonincludable subsidiary
Disallowed deferred tax assets
Disallowed goodwill and other disallowed intangible assets
Tier I Capital
Allowable portion of allowance for loan losses
Total Risk-based Capital
19. Parent Company Financial Information
June 30,
2018
2017
$
$
409,242
1,598
(826)
(8,701)
(29,125)
372,188
21,515
393,703
$
$
397,647
(273)
(881)
(24,576)
(29,253)
342,664
21,605
364,269
The Company’s principal asset is its investment in its subsidiary, the Bank. The following tables present condensed financial information of the
Company:
Condensed balance sheet
Assets:
Cash and equivalents
Certificates of deposit in other banks
Other securities
Total loans
Allowance for loan losses
Net loans
REO
Investment in bank subsidiary
ESOP loan receivable
Other assets
Total Assets
Liabilities and Stockholders’ Equity:
Other liabilities
Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
June 30,
2018
June 30,
2017
$
$
$
23,042
994
63
3,840
(64)
3,776
805
372,206
7,896
499
409,281
39
409,242
409,281
$
$
$
11,078
7,211
63
5,345
(186)
5,159
1,462
363,603
8,368
790
397,734
87
397,647
397,734
111
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Condensed statement of income
Income:
Interest income
Other income
Equity earnings in Bank subsidiary
Total income
Expense:
Management fee expense
REO expense
Loss on sale and impairment of REO
Provision for (recovery of) loan losses
Other expense
Total expense
Income Before Income Taxes
Income Tax Expense
Net Income
Condensed statement of cash flows
Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for (recovery of) loan losses
Loss on sale and impairment of REO
Decrease (increase) in accrued interest receivable and other assets
Equity in undistributed income of Bank
ESOP compensation expense
Restricted stock and stock option expense
Decrease in other liabilities
Net cash provided by operating activities
Investing Activities:
Purchase of certificates of deposit in other banks
Maturities of certificates of deposit in other banks
Repayment of loans
Capital improvements to REO
Increase in investment in Bank subsidiary
Dividend from subsidiary
ESOP principal payments received
Proceeds from sale of REO
Acquisition of TriSummit Bancorp, Inc.
Net cash provided by (used in) investing activities
Financing Activities:
Common stock repurchased
Retired stock
Exercised stock options
Net cash provided by (used in) financing activities
Net Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Period
Cash and Cash Equivalents at End of Period
$
112
June 30,
2018
June 30,
2017
June 30,
2016
$
$
456
44
8,427
8,927
385
34
158
(131)
246
692
8,235
—
8,235
$
$
565
1
12,003
12,569
354
62
39
90
177
722
11,847
—
11,847
$
$
716
—
11,284
12,000
317
71
115
(275)
166
394
11,606
150
11,456
June 30,
2018
June 30,
2017
June 30,
2016
$
8,235
$
11,847
$
11,456
(131)
158
291
(8,427)
1,367
3,027
(48)
4,472
—
6,217
1,514
—
(1,367)
—
472
499
—
7,335
—
(494)
651
157
11,964
11,078
23,042
$
90
39
(30)
(12,003)
1,186
4,166
(260)
5,035
—
1,245
2,176
—
(3,408)
10,291
462
61
(13,862)
(3,035)
—
(569)
3,068
2,499
4,499
6,579
11,078
$
(275)
115
1,799
(11,284)
983
2,939
(774)
4,959
(996)
2,487
3,024
—
(982)
7,952
450
496
—
12,431
(27,734)
(223)
32
(27,925)
(10,535)
17,114
6,579
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
20. Fair Value of Financial Instruments
The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Securities
available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair
value other assets on a nonrecurring basis, such as impaired loans. These nonrecurring fair value adjustments typically involve application of
lower of cost or market accounting or write-downs of individual assets.
Fair Value Hierarchy
The Company groups assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions
used to determine fair value. These levels are:
Level 1:
Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2:
Level 3:
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.
Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market.
These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset.
Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
Following is a description of valuation methodologies used for assets recorded at fair value. The Company does not have any liabilities recorded
at fair value.
Investment Securities Available for Sale
Securities available for sale are valued on a recurring basis at quoted market prices where available. If quoted market prices are not available,
fair values are based on quoted prices of comparable securities. Level 1 securities include those traded on an active exchange, such as the New
York Stock Exchange or U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market
funds. Level 2 securities include mortgage-backed securities and debentures issued by government sponsored enterprises, municipal bonds, and
corporate debt securities.
Loans
The Company does not record loans at fair value on a recurring basis. From time to time, however, a loan is considered impaired and an allowance
for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the
contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, the fair value is estimated
using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash
flows. The Company reviews all impaired loans each quarter to determine if an allowance is necessary. Those impaired loans not requiring an
allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.
The fair value of impaired loans is estimated in one of two ways, which include collateral value and discounted cash flows. Loans are considered
collateral dependent if repayment is expected solely from the collateral. For these collateral dependent impaired loans, the Company obtains
updated appraisals at least annually. These appraisals are reviewed for appropriateness and then discounted for estimated closing costs to determine
if an allowance is necessary. As part of the quarterly review of impaired loans, the Company reviews these appraisals to determine if any additional
discounts to the fair value are necessary. If a current appraisal is not obtained, the Company determines whether a discount is needed to the value
from the original appraisal based on the decline in value of similar properties with recent appraisals. For loans that are not collateral dependent,
estimated fair value is based on the present value of expected future cash flows using the interest rate implicit in the original agreement. Impaired
loans where a charge-off has occurred or an allowance is established during the period being reported require classification in the fair value
hierarchy. The Company records such impaired loans as a nonrecurring Level 3 in the fair value hierarchy.
Loans Held for Sale
Loans held for sale are adjusted to lower of cost or fair value. Fair value is based upon investor pricing. The Company considers all loans held
for sale carried at fair value as nonrecurring Level 3.
Real Estate Owned
REO is considered held for sale and is adjusted to fair value less estimated selling costs upon transfer of the loan to foreclosed assets. Fair value
is based upon independent market prices, appraised value of the collateral or management’s estimation of the value of the collateral. The Company
considers all REO that has been charged off or received an allowance during the period as nonrecurring Level 3.
113
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Financial Assets Recorded at Fair Value on a Recurring Basis
The following table presents financial assets measured at fair value on a recurring basis at the dates indicated:
Description
U.S Government Agencies
Residential Mortgage-backed Securities of U.S. Government Agencies
and Government sponsored Enterprises
Municipal Bonds
Corporate Bonds
Equity Securities
Total
Description
U.S Government Agencies
Residential Mortgage-backed Securities of U.S. Government Agencies
and Government sponsored Enterprises
Municipal Bonds
Corporate Bonds
Equity Securities
Total
June 30, 2018
Total
Level 1
Level 2
Level 3
$
47,542
$
— $
47,542
$
70,599
30,766
6,023
63
154,993
$
$
—
—
—
—
— $
70,599
30,766
6,023
63
154,993
$
June 30, 2017
Total
Level 1
Level 2
Level 3
$
65,830
$
— $
65,830
$
92,971
34,510
6,293
63
199,667
$
$
—
—
—
—
— $
92,971
34,510
6,293
63
199,667
$
—
—
—
—
—
—
—
—
—
—
—
—
Financial Assets Recorded at Fair Value on a Nonrecurring Basis
The following table presents financial assets measured at fair value on a non-recurring basis at the dates indicated:
Description
Impaired loans
REO
Total
Description
Impaired loans
REO
Total
Total
Level 1
Level 2
Level 3
June 30, 2018
$
$
$
$
8,423
2,104
10,527
Total
9,156
4,044
13,200
$
$
$
$
— $
—
— $
— $
—
— $
8,423
2,104
10,527
June 30, 2017
Level 1
Level 2
Level 3
— $
—
— $
— $
—
— $
9,156
4,044
13,200
Quantitative information about Level 3 fair value measurements during the period ended June 30, 2018 is shown in the table below:
Fair Value at
June 30, 2018
Valuation
Techniques
Unobservable
Input
Range
Weighted
Average
Nonrecurring measurements:
Impaired loans, net
REO
$
$
Discounted appraisals and
8,423
discounted cash flows
2,104 Discounted Appraisals
Collateral discounts:
Discount spread:
Collateral discounts
3% - 56%
1% - 3%
10% - 15%
4%
11%
114
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The stated carrying value and estimated fair value amounts of financial instruments as of June 30, 2018 and June 30, 2017, are summarized
below:
Cash and interest-bearing deposits
Commercial paper
Certificates of deposit in other banks
Securities available for sale
Loans, net
Loans held for sale
FHLB stock
FRB stock
Accrued interest receivable
Noninterest-bearing and NOW deposits
Money market accounts
Savings accounts
Certificates of deposit
Borrowings
Accrued interest payable
Cash and interest-bearing deposits
Commercial paper
Certificates of deposit in other banks
Securities available for sale
Loans, net
Loans held for sale
FHLB stock
FRB stock
Accrued interest receivable
Noninterest-bearing and NOW deposits
Money market accounts
Savings accounts
Certificates of deposit
Borrowings
Accrued interest payable
$
$
Carrying
Value
Fair
Value
Level 1
Level 2
Level 3
June 30, 2018
$
70,746
229,070
66,937
154,993
2,504,792
5,873
29,907
7,307
9,344
789,186
677,665
213,250
516,152
635,000
805
$
70,746
229,070
66,937
154,993
2,414,647
5,990
29,907
7,307
9,344
789,186
677,665
213,250
509,924
635,187
805
$
70,746
229,070
—
—
—
—
29,907
7,307
297
—
—
—
—
—
—
— $
—
66,937
154,993
—
—
—
—
883
789,186
677,665
213,250
509,924
635,187
805
—
—
—
—
2,414,647
5,990
—
—
8,164
—
—
—
—
—
—
Carrying
Value
Fair
Value
Level 1
Level 2
Level 3
June 30, 2017
$
86,985
149,863
132,274
199,667
2,330,319
5,607
32,071
7,284
8,758
779,549
569,607
237,149
462,146
696,500
512
$
86,985
149,863
132,274
199,667
2,230,683
5,719
32,071
7,284
8,758
779,549
569,607
237,149
458,818
696,500
512
$
86,985
149,863
—
—
—
—
32,071
7,284
331
—
—
—
—
—
—
— $
—
132,274
199,667
—
—
—
—
1,078
779,549
569,607
237,149
458,818
696,500
512
—
—
—
—
2,230,683
5,719
—
—
7,349
—
—
—
—
—
—
The Company had off-balance sheet financial commitments, which include approximately $751,324 and $616,483 of commitments to originate
loans, undisbursed portions of interim construction loans, and unused lines of credit at June 30, 2018 and June 30, 2017 (see Note 17). Since
these commitments are based on current rates, the carrying amount approximates the fair value.
Estimated fair values were determined using the following methods and assumptions:
Cash and interest-bearing deposits – The stated amounts approximate fair values as maturities are less than 90 days.
Commercial paper – The stated amounts approximate fair value due to the short-term nature of these investments. Commercial paper values are
based on broker quotes that utilize observable market inputs at the time of purchase.
Certificates of deposit in other banks – The stated amounts approximate fair values.
Securities available for sale – Fair values are based on quoted market prices where available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments.
115
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Loans, net – Fair values for loans are estimated by segregating the portfolio by type of loan and discounting scheduled cash flows using current
market interest rates for loans with similar terms and credit quality. A prepayment assumption is used as an estimate of the portion of loans that
will be repaid prior to their scheduled maturity. Both the carrying value and estimated fair value amounts are shown net of the allowance for
loan losses and purchase discounts.
Loans held for sale - The fair value of loans held for sale is determined by outstanding commitments from investors on a “best efforts” basis or
current investor yield requirements, calculated on the aggregate loan basis.
FHLB and FRB stock – No ready market exists for these stocks and they have no quoted market value. However, redemption of these stocks
has historically been at par value. Accordingly, cost is deemed to be a reasonable estimate of fair value.
Deposits – Fair values for demand deposits, money market accounts, and savings accounts are the amounts payable on demand as of June 30,
2018 and June 30, 2017. The fair value of certificates of deposit is estimated by discounting the contractual cash flows using current market
interest rates for accounts with similar maturities.
Borrowings – The fair value of advances from the FHLB is estimated based on current rates for borrowings with similar terms.
Accrued interest receivable and payable – The stated amounts of accrued interest receivable and payable approximate the fair value.
Limitations – Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire
holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair
value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered financial instruments. For example, a significant asset not considered
a financial asset is premises and equipment. In addition, tax ramifications related to the realization of the unrealized gains and losses can have
a significant effect on fair value estimates and have not been considered in any of the estimates.
21. Unaudited Interim Financial Information
The unaudited statements of income for each of the quarters during the fiscal years ended June 30, 2018 and 2017 are summarized below:
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Net income before provision for income taxes
Income tax expense
Net income (loss)
Net income per common share:
Basic
Diluted
Three months ended
June 30,
2018
March 31,
2018
December 31,
2017
September 30,
2017
30,693
5,103
25,590
—
25,590
5,382
21,754
9,218
2,011
7,207
0.40
0.38
$
$
$
$
29,265
4,036
25,229
—
25,229
4,926
21,321
8,834
2,707
6,127
0.34
0.32
$
$
$
$
$
28,848
3,618
25,230
—
25,230
4,787
21,175
8,842
19,508
(10,666) $
(0.59) $
(0.59) $
27,896
3,315
24,581
—
24,581
4,577
21,081
8,077
2,510
5,567
0.31
0.30
$
$
$
$
116
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Net income before provision for income taxes
Income tax expense
Net income
Net income per common share:
Basic
Diluted
Three months ended
June 30,
2017
March 31,
2017
December 31,
2016
September 30,
2016
$
$
$
$
27,291
2,724
24,567
—
24,567
4,059
21,660
6,966
2,200
4,766
0.26
0.25
$
$
$
$
27,291
2,219
25,072
—
25,072
3,538
28,661
(51)
(325)
274
0.01
0.01
$
$
$
$
22,063
1,648
20,415
—
20,415
3,767
20,306
3,876
893
2,983
0.17
0.17
$
$
$
$
22,791
1,654
21,137
—
21,137
4,076
18,965
6,248
2,424
3,824
0.22
0.22
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures An evaluation of the Company’s disclosure controls and procedures (as defined in Section
13a-15(e) of the Securities Exchange Act of 1934 (the “Act”)) was carried out under the supervision and with the participation of the Company’s
Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management as of the end of the period
covered by this report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls
and procedures as of June 30, 2018 were effective in ensuring that the information required to be disclosed by the Company in the reports it files
or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief
Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules
and forms.
Report of Management on Internal Control over Financial Reporting The management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting. The internal control process has been designed under our supervision to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external
reporting purposes in accordance with accounting principles generally accepted in the United States of America.
Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2018, utilizing
the framework established in Internal Control – Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO"). Based on this assessment, management has determined that the Company’s internal control over financial reporting as
of June 30, 2018 was effective.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly
reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as
necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States; (2)
receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3)
unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements
are prevented or timely detected.
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.
Dixon Hughes Goodman LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in
this Annual Report and has issued a report on the effectiveness of our internal control over financial reporting, which report is included in Item
8 of this Form 10-K. The audit report expresses an unqualified opinion on the effectiveness of the Company's internal control over financial
reporting as of June 30, 2018.
Changes in Internal Controls There have been no changes in the Company’s internal control over financial reporting during the quarter ended
June 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
117
The Company intends to continually review and evaluate the design and effectiveness of its disclosure controls and procedures and to improve
its controls and procedures over time and to correct any deficiencies that it may discover in the future. The goal is to ensure that senior management
has timely access to all material financial and non-financial information concerning the Company's business. While the Company believes the
present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company
to modify its disclosure controls and procedures. The Company does not expect that its disclosure controls and procedures and internal control
over financial reporting will prevent every error or instance of fraud. A control procedure, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all
control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the
Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns
in controls or procedures can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is based in part
upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions; over time, controls become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to
error or fraud may occur and not be detected.
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Directors and Executive Officers The information concerning our directors required by this item is incorporated herein by reference from our
definitive proxy statement for our Annual Meeting of Shareholders being held on November 26, 2018, a copy of which will be filed with the
Securities and Exchange Commission not later than 120 days after the end of our fiscal year. Information required by this item regarding the
audit committee of the Company’s Board of Directors, including information regarding the audit committee financial expert serving on the audit
committee, is incorporated herein by reference from our definitive proxy statement for our Annual Meeting of Shareholders being held on
November 26, 2018, a copy of which will be filed with the Securities and Exchange Commission not later than 120 days after the end of our
fiscal year. Information about our executive officers is contained under the caption “Executive Officers” in Part I of this Form 10-K, and is
incorporated herein by this reference.
Section 16(a) Beneficial Ownership Reporting Compliance The information concerning compliance with the reporting requirements of Section
16(a) of the Securities Exchange Act of 1934 by our directors, officers and ten percent shareholders required by this item is incorporated herein
by reference from our definitive proxy statement for our Annual Meeting of Shareholders being held on November 26, 2018, a copy of which
will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year.
Code of Ethics We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting
officer, and persons performing similar functions, and to all of our other employees and our directors. A copy of our code of ethics is available
on our Internet website address, http://www.hometrustbancshares.com.
Item 11. Executive Compensation
The information concerning compensation required by this item is incorporated herein by reference from our definitive proxy statement for our
Annual Meeting of Shareholders being held on November 26, 2018, a copy of which will be filed with the Securities and Exchange Commission
not later than 120 days after the end of our fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information concerning security ownership of certain beneficial owners and management and our equity incentive plan required by this item
is incorporated herein by reference from our definitive proxy statement for our Annual Meeting of Shareholders being held on November 26,
2018, a copy of which will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information concerning certain relationships and related transactions and director independence required by this item is incorporated herein
by reference from our definitive proxy statement for our Annual Meeting of Shareholders being held on November 26, 2018, a copy of which
will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year.
Item 14. Principal Accountant Fees and Services
The information concerning principal accountant fees and services is incorporated herein by reference from our definitive proxy statement for
our Annual Meeting of Shareholders being held on November 26, 2018, a copy of which will be filed with the Securities and Exchange Commission
not later than 120 days after the end of our fiscal year.
118
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements: See Part II--Item 8. Financial Statements and Supplementary Data.
PART IV
(a)(2) Financial Statement Schedules: All financial statement schedules have been omitted as the information is not required under the related
instructions or is not applicable.
(a)(3) Exhibits: See Exhibit Index.
(b) Exhibits: The following exhibits are filed as part of this Form 10-K and this list constitutes the Exhibit Index.
Regulation S-K
Exhibit Number
Document
Reference to Prior
Filing or Exhibit
Number Attached
Hereto
2.1
2.2
2.3
3.1
3.2
3.3
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.7A
10.7B
10.7C
10.7D
10.7E
10.7F
10.7G
10.7H
10.7I
Agreement and Plan of Merger, dated as of September 20, 2016, by and between HomeTrust
Bancshares, Inc. and TriSummit Bancorp, Inc.
Purchase and Assumption Agreement, dated as of June 9, 2014, between Bank of America, National
Association and HomeTrust Bank
Agreement and Plan of Merger, dated as of January 22, 2014, by and between HomeTrust
Bancshares, Inc. and Jefferson Bancshares, Inc.
Charter of HomeTrust Bancshares, Inc.
Articles Supplementary to the Charter of HomeTrust Bancshares, Inc. for HomeTrust Bancshares,
Inc.’s Junior Participating Preferred Stock, Series A
Amended and Restated Bylaws of HomeTrust Banchshares, Inc.
Tax Benefits Preservation Plan, dated as of September 25, 2012, between HomeTrust Bancshares,
Inc. and Computershare Trust Company, N.A., as successor rights agent to Registrar and Transfer
Company
Amendment No. 1, dated as of August 31, 2015, to Tax Benefits Preservation Plan, dated as of
September 25, 2012, between HomeTrust Bancshares, Inc. and Computershare Trust Company,
N.A., as successor rights agent to Registrar and Transfer Company
Amendment No. 2, dated as of August 21, 2018, to Tax Benefits Preservation Plan, dated as of
September 25, 2012, between HomeTrust Bancshares, Inc. and Computershare Trust Company,
N.A., as successor rights agent to Registrar and Transfer Company
HomeTrust Bancshares, Inc. Strategic Operating Committee Incentive Plan
Amended and Restated Employment Agreement entered into between HomeTrust Bancshares,
Inc. and Dana L. Stonestreet
Amended and Restated Employment Agreement entered into between HomeTrust Bancshares,
Inc. and C. Hunter Westbrook
Amended and Restated Employment Agreement entered into between HomeTrust Bancshares,
Inc. and Tony J. VunCannon
Employment Agreement between HomeTrust Bancshares, Inc. and Howard L. Sellinger
Employment Agreement between HomeTrust Bank and Sidney A. Biesecker
HomeTrust Bank Executive Supplemental Retirement Income Master Agreement (“SERP”)
SERP Joinder Agreement for F. Edward Broadwell, Jr.
SERP Joinder Agreement for Dana L. Stonestreet
SERP Joinder Agreement for Tony J. VunCannon
SERP Joinder Agreement for Howard L. Sellinger
SERP Joinder Agreement for Stan Allen
SERP Joinder Agreement for Sidney A. Biesecker
SERP Joinder Agreement for Peggy C. Melville
SERP Joinder Agreement for William T. Flynt
Amended and Restated Supplemental Income Agreement between HomeTrust Bank, as successor
to Industrial Federal Savings Bank, and Sidney Biesecker
10.8
HomeTrust Bank Director Emeritus Plan (“Director Emeritus Plan”)
119
(a)
(b)
(c)
(d)
(e)
(f)
(e)
(o)
(t)
(s)
(g)
(g)
(g)
(g)
(d)
(d)
(d)
(d)
(d)
(d)
(d)
(d)
(d)
(d)
(i)
(d)
10.8A
10.8B
10.8C
10.8D
10.8E
10.8F
10.8G
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
21.0
23.0
31.1
31.2
32.0
101
Director Emeritus Plan Joinder Agreement for William T. Flynt
Director Emeritus Plan Joinder Agreement for J. Steven Goforth
Director Emeritus Plan Joinder Agreement for Craig C. Koontz
Director Emeritus Plan Joinder Agreement for Larry S. McDevitt
Director Emeritus Plan Joinder Agreement for F.K. McFarland, III
Director Emeritus Plan Joinder Agreement for Peggy C. Melville
Director Emeritus Plan Joinder Agreement for Robert E. Shepherd, Sr.
HomeTrust Bank Defined Contribution Executive Medical Care Plan
HomeTrust Bank 2005 Deferred Compensation Plan
HomeTrust Bank Pre-2005 Deferred Compensation Plan
HomeTrust Bancshares, Inc. Strategic Operating Committee Incentive Plan
HomeTrust Bancshares, Inc. 2013 Omnibus Incentive Plan (“Omnibus Incentive Plan”)
Form of Incentive Stock Option Award Agreement under Omnibus Incentive Plan
Form of Non-Qualified Stock Option Award Agreement under Omnibus Incentive Plan
Form of Stock Appreciation Right Award Agreement under Omnibus Incentive Plan
Form of Restricted Stock Award Agreement under Omnibus Incentive Plan
Form of Restricted Stock Unit Award Agreement under Omnibus Incentive Plan
Fully Restated Employment Agreement between HomeTrust Bank and Anderson L. Smith
Amended and Restated Jefferson Federal Bank Supplemental Executive Retirement Plan
Money Purchase Deferred Compensation Agreement, dated as of September 1, 1987, between
HomeTrust Bank and F. Edward Broadwell, Jr.
Retirement Payment Agreement, dated as of September 1, 1987, between HomeTrust Bank and
F. Edward Broadwell, Jr., as amended
Retirement Payment Agreement, dated as of September 1, 1987, between HomeTrust Bank and
Larry S. McDevitt, as amended
Retirement Payment Agreement, dated as of September 1, 1987, between HomeTrust Bank and
Peggy C. Melville, as amended
Retirement Payment Agreement, dated as of August 1, 1988, between HomeTrust Bank and
Robert E. Shepherd, Sr., as amended
Retirement Payment Agreement, dated as of May 1, 1991, between HomeTrust Bank and
William T. Flynt, as amended
Offer Letter between HomeTrust Bank and Keith J. Houghton
Form of Relocation Repayment Agreement between HomeTrust Bank and Keith J. Houghton
Amended and Restated Change in Control Severance Agreement between HomeTrust
Bancshares, Inc. and Keith J. Houghton
Amended and Restated Change in Control Severance Agreement between HomeTrust
Bancshares, Inc. and R. Parrish Little
Subsidiaries of the Registrant
Consent of Dixon Hughes Goodman LLP
Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a)
and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a)
and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
The following materials from HomeTrust Bancshares’ Annual Report on Form 10-K for the year
ended June 30, 2018, formatted in Extensible Business Reporting Language (XBRL): (a)
Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements
of Comprehensive Income; (d) Consolidated Statements of Changes in Stockholders' Equity; (e)
Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements.
(d)
(d)
(d)
(d)
(d)
(d)
(d)
(d)
(d)
(d)
(r)
(j)
(k)
(k)
(k)
(k)
(k)
(l)
(m)
(n)
(n)
(n)
(n)
(n)
(n)
(p)
(p)
(g)
10.30
21.0
23.0
31.1
31.2
32.0
101
_________________
120
(a) Attached as Appendix A to the proxy statement/prospectus filed by HomeTrust Bancshares on November 2, 2016 pursuant to Rule 424(b) of the Securities
Act of 1933.
(b) Filed as an exhibit to HomeTrust Bancshares’s Current Report on Form 8-K filed on June 10, 2014 (File No. 001-35593).
(c) Attached as Appendix A to the joint proxy statement/prospectus filed by HomeTrust Bancshares on April 28, 2014 pursuant to Rule 424(b) of the
Securities Act of 1933.
(d) Filed as an exhibit to HomeTrust Bancshares’s Registration Statement on Form S-1 (File No. 333-178817) filed on December 29, 2011.
(e) Filed as an exhibit to HomeTrust Bancshares’s Current Report on Form 8-K filed on September 25, 2012 (File No. 001-35593).
(f) Filed as an exhibit to HomeTrust Bancshares’s Current Report on Form 8-K filed on May 1, 2018 (File No. 001-35593).
(g) Filed as an exhibit to HomeTrust Bancshares’s Current Report on Form 8-K filed on September 11, 2018 (File No. 001-35593).
(h) Reserved
(i) Filed as an exhibit to Amendment No. One to HomeTrust Bancshares’s Registration Statement on Form S-1 (File No. 333-178817) filed on March 9,
2012.
(j) Attached as Appendix A to HomeTrust Bancshares’s definitive proxy statement filed on December 5, 2012 (File No. 001-35593).
(k) Filed as an exhibit to HomeTrust Bancshares’s Registration Statement on Form S-8 (File No. 333-186666) filed on February 13, 2013.
(l) Filed as an exhibit to HomeTrust Bancshares’s Current Report on Form 8-K filed on June 3, 2014 (File No. 001-35593).
(m) Filed as an exhibit to Jefferson Bancshares's, Inc.’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2008 (File No. 000-50347).
(n) Filed as an exhibit to HomeTrust Bancshares's Annual Report on Form 10-K for the fiscal year ended June 30, 2014 (File No. 001-35593).
(o) Filed as an exhibit to HomeTrust Bancshares’s Current Report on Form 8-K filed on August 31, 2015 (File No. 001-35593).
(p) Filed as an exhibit to HomeTrust Bancshares's Annual Report on Form 10-K for the fiscal year ended June 30, 2015 (File No. 001-35593).
(q) Reserved
(r) Filed as an exhibit to HomeTrust Bancshares's Annual Report on Form 10-K for the fiscal year ended June 30, 2016 (File No. 001-35593).
(s) Filed as an exhibit to HomeTrust Bancshares's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 (File No. 000-50347).
(t) Filed as an exhibit to HomeTrust Bancshares’s Current Report on Form 8-K filed on August 21, 2018 (File No. 001-35593).
121
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: September 13, 2018
HOMETRUST BANCSHARES, INC.
By:
/s/ Dana L. Stonestreet
Dana L. Stonestreet
Chairman of the Board,
President, and Chief Executive Officer
122
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Dana L. Stonestreet
Dana L. Stonestreet
/s/ Tony J. VunCannon
Chairman of the Board, President and Chief Executive Officer
September 13, 2018
(Principal Executive Officer)
Executive Vice President, Chief Financial Officer, Corporate
Secretary and Treasurer
September 13, 2018
Tony J. VunCannon
(Principal Financial and Accounting Officer)
September 13, 2018
September 13, 2018
September 13, 2018
September 13, 2018
September 13, 2018
September 13, 2018
September 13, 2018
September 13, 2018
September 13, 2018
/s/ Sidney A. Biesecker
Sidney A. Biesecker
/s/ Robert G. Dinsmore, Jr.
Robert G. Dinsmore, Jr.
/s/ J. Steven Goforth
J. Steven Goforth
/s/ Robert E. James
Robert E. James
/s/ Laura C. Kendall
Laura C. Kendall
/s/ Craig C. Koontz
Craig C. Koontz
/s/ F.K. McFarland, III
F.K. McFarland, III
/s/ Peggy C. Melville
Peggy C. Melville
/s/ Richard T. Williams
Richard T. Williams
Director
Director
Director
Director
Director
Director
Director
Director
Director
123
SELECTED FINANCIAL DATA
AT OR FOR THE YEARS ENDED JUNE 30
(in thousands, except per share data)
SELECTED FINANCIAL CONDITION DATA:
2018 2017 2016 2015 2014
Total assets
Loans receivable, net
Deposits
Stockholders’ equity
$3,304,169
$3,206,533
$2,717,677
$2,783,114 $2,074,454
2,504,792
2,196,253
409,242
2,330,319
2,048,451
397,647
1,811,539
1,802,696
359,976
1,663,333
1,872,126
371,050
1,473,529
1,583,047
377,151
SELECTED OPERATIONS DATA:
Net income
Net income (adjusted)*
Net interest income
PER SHARE DATA:
Earnings per share - basic
Earnings per share - basic (adjusted)*
Earnings per share - diluted
Earnings per share - diluted (adjusted)*
Market price - close
Book value - common
Tangible book value - common *
SELECTED FINANCIAL RATIOS:
Performance ratios:
Return on assets
Return on assets (adjusted)*
Return on equity
Return on equity (adjusted)*
Tax equivalent net interest margin
Efficiency ratio (adjusted)*
Asset quality ratios:
$8,235
25,886
100,630
$11,847
$11,456
17,111
91,191
12,228
81,707
$8,025
11,784
79,766
$10,342
8,256
54,849
$0.45
$1.44
$0.44
$1.38
$28.15
$21.49
$19.96
0.25%
0.80%
2.05%
6.43%
3.43%
$0.66
$0.96
$0.65
$0.94
$24.40
$20.96
$19.37
0.40%
0.58%
3.14%
4.54%
3.49%
$0.65
$0.70
$0.65
$0.70
$18.50
$20.00
$19.05
0.42%
0.45%
3.16%
3.37%
3.37%
70.12%
75.48%
80.43%
$0.42
$0.61
$0.42
$0.61
$16.76
$19.04
$18.06
0.32%
0.47%
2.12%
3.11%
3.64%
79.68%
1.15%
90.02%
0.07%
$0.54
$0.44
$0.54
$0.44
$15.77
$18.28
$17.68
0.62%
0.49%
2.86%
2.28%
3.79%
78.50%
2.53%
61.79%
0.19%
Nonperforming assets to total assets
Allowance for loan losses to nonaccruing loans
Net charge-offs to average loans
0.44%
192.96%
—
0.62%
154.77%
0.01%
0.90%
114.98%
0.06%
Capital ratios:
Common Equity Tier I Capital
(to Risk-weighted assets)
Tier I Capital (to Total adjusted assets)
Tier I Capital (to Risk-weighted assets)
Total Risk-based Capital (to Risk-weighted assets)
12.97%
13.07%
14.39%
15.92%
N/A
11.45%
12.97%
13.72%
11.13%
13.07%
13.89%
11.78%
14.39%
15.38%
11.91%
15.92%
17.03%
18.03%
20.87%
22.12%
NONFINANCIAL DATA:
Common shares outstanding
Branch offices
Full time equivalent employees
19,041,668
18,967,875
17,998,750
19,488,449
20,632,008
43
520
41
486
38
448
43
475
34
456
*Non-GAAP measure. For further information, see the Non-GAAP Financial Measures section of MD&A.
hometrustbancshares.com
CORPORATE HEADQUARTERS
HomeTrust Bancshares, Inc.
10 Woodfin Street
Asheville, NC 28801
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Dixon Hughes Goodman, LLP
Certified Public Accountants and Advisors
500 Ridgefield Court
Asheville, NC 28806
SPECIAL COUNSEL
Silver, Freedman, Taff and Tiernan LLP
3299 K Street, NW, Suite 100
Washington, DC 20007
STOCK LISTING
HomeTrust Bancshares, Inc. common stock
trades on the NASDAQ Global Select market,
under the symbol HTBI.
STOCK REGISTRAR AND TRANSFER AGENT
Computershare
PO Box 30170
College Station, TX 77842-3170
(800) 368-5948
www.computershare.com
Inquiries related to stock transfer, address
or registration changes and lost certificates
should be directed to Computershare.
ABOUT THE COMPANY
HomeTrust Bancshares, Inc. is the holding company
for HomeTrust Bank. As of June 30, 2018, the Company
had assets of $3.3 billion. The Bank, founded in 1926,
is a North Carolina state chartered, community-focused
financial
institution committed to providing value
added relationship banking through 43 locations as well
as online/mobile channels. Locations include: North
Carolina (including the Asheville metropolitan area,
the “Piedmont” region, Charlotte, and Raleigh/Cary),
Upstate South Carolina (Greenville), East Tennessee
(including Kingsport/Johnson City/Bristol, Knoxville,
and Morristown) and Southwest Virginia (including
the Roanoke Valley). The Bank is the second largest
community bank headquartered in North Carolina.
hometrustbancshares.com