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, 2020
OR
For the Transition Period From __________________ To __________________
Commission File Number 1-35593
HOMETRUST BANCSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
Maryland
(State or Other Jurisdiction of Incorporation or Organization)
10 Woodfin Street, Asheville, North Carolina
(Address of Principal Executive Offices)
45-5055422
(I.R.S. Employer Identification No.)
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
Trading Symbol
HTBI
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 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 [ ]
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 8, 2020, there were issued and outstanding 17,021,357 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, 2019, was $457.8 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).
Part III of Form 10-K - Portions of the Proxy Statement for the 2020 Annual Meeting of Stockholder.
Documents Incorporated By Reference
HOMETRUST BANCSHARES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2020
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
Quantitative and Qualitative Disclosures About Market Risk
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
Exhibits and Financial Statement Schedules
Form 10-K Summary
Signatures
PART IV
2
Item 1
Item 1A.
Item 1B.
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Item 7A.
Item 8
Item 9
Item 9A.
Item 9B.
Item 10
Item 11
Item 12
Item 13
Item 14
Item 15
Item 16
Page
6
37
48
49
49
49
49
51
52
67
68
119
119
119
120
120
120
120
120
121
124
124
Glossary of Defined Terms
The following items may be used throughout this Form 10-K, including the Notes to Consolidated Financial Statements in Item 8 and Management's Discussion and Analysis of
Financial Condition and Results of Operations in Item 7 of this Form 10-K.
Term
AFS
AICPA
AMT
ASC
ASU
BHCA
BOLI
CARES Act
CD
CECL
CET1
CFPB
CBLR
CRA
COVID-19
CPI
DTA
Dodd-Frank Act
EPS
ESOP
Exchange Act
FASB
FDIC
Federal Reserve
FHFA
Definition
Available-For-Sale
American Institute of Certified Public Accountants
Alternative Minimum Tax
Accounting Standard Codification
Accounting Standard Update
Bank Holding Company Act
Bank Owned Life Insurance
Coronavirus Aid, Relief, and Economic Security Act of 2020
Certificates of Deposit
Current Expected Credit Loss
Common Equity Tier 1
Consumer Financial Protection Bureau
Community Bank Leverage Ratio
Community Reinvestment Act
Coronavirus Disease 2019
Consumer Price Index
Deferred Tax Asset
Dodd-Frank Wall Street Reform and Consumer Protection Act
Earnings Per Share
Employee Stock Ownership Plan
Securities Exchange Act of 1934, as amended
Financial Accounting Standards Board
Federal Deposit Insurance Corporation
Board of Governors of the Federal Reserve System
Federal Housing Finance Agency
FHLB or FHLB of Atlanta
Federal Home Loan Bank
FRB
GAAP
GSE
HELOC
IRC
KSOP
LIBOR
LPO
MBS
MSA
Federal Reserve Bank of Richmond
Generally Accepted Accounting Principles in the United States
Government-Sponsored Enterprises
Home Equity Line of Credit
Internal Revenue Code
HomeTrust Bank KSOP Plan
London Interbank Offered Rate
Loan Production Office
Mortgage-Backed Security
Metropolitan Statistical Area
NOL
NCCOB
OTTI
PCI
PPP
Net Operating Loss
North Carolina Office of the Commissioner of Banks
Other Than Temporary Impairment
Purchase Credit Impaired
Paycheck Protection Program
3
PVE
REO
ROA
ROE
ROU
SAS
SBA
SBIC
SEC
SOX Act
Tax Act
TDR
USDA B&I
WNCSC
Present Value of Equity
Real Estate Owned
Return on Assets
Return on Equity
Right of Use
Statement of Auditing Standards
U.S. Small Business Administration
Small Business Investment Companies
Securities and Exchange Commission
Sarbanes-Oxley Act of 2002
Tax Cuts and Jobs Act
Troubled Debt Restructuring
United States Department of Agriculture Business & Industry
Western North Carolina Service Corporation
4
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 effect of the COVID-19 pandemic, including on the Company’ credit quality
and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the
extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate customers, including economic activity, employment levels and
market liquidity; 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; uncertainty regarding the future of the LIBOR, and the potential transition away from LIBOR toward new interest rate benchmarks; 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 Federal Reserve, the 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, 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
including the CARES Act; and the other risks detailed from time to time in our filings with the 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.
5
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, 2020, the Company had consolidated total assets of $3.7 billion, total deposits of $2.8 billion and stockholders’
equity of $408.3 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 FDIC. The Bank is a member of the FHLB of Atlanta, which is one of the 12 regional banks in the Federal Home Loan Bank
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. These included:
•
•
•
•
•
•
•
•
•
•
•
BankGreenville Financial Corporation - one office in Greenville, South Carolina (acquired in July 2013)
Jefferson Bancshares, Inc. - nine offices across East Tennessee (acquired in May 2014)
Commercial 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. - municipal lease company headquartered in Fletcher, North Carolina (acquired in December 2016)
TriSummit Bancorp, Inc. - six offices in East Tennessee (acquired in January 2017)
Began origination and sales of SBA loans through our new SBA line of business (September 2017)
De novo branch in Cary, North Carolina (opened in March 2018)
Began equipment finance line of business (May 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, SBA loans, equipment finance leases, indirect automobile loans, and municipal leases. We also work with a third party to originate HELOCs
which are pooled and sold. In addition, we 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.
6
Market Areas
HomeTrust Bank operates in nine MSAs: Asheville, NC, with a population of 463,000 as of June 2019; Charlotte-Concord-Gastonia, NC-SC, with a population of 2.6 million as
of June 2019; Greenville-Anderson-Mauldin, SC, with a population of 921,000 as of June 2019; Johnson City, TN, with a population of 204,000 as of June 2019; Kingsport-
Bristol-Bristol, TN-VA, with a population of 307,000 as of June 2019; Knoxville, TN, with a population of 869,000 as of June 2019; Morristown, TN, with a population of
143,000 as of June 2019; Roanoke, VA, with a population of 313,000 as of June 2019; and Raleigh, NC, with a population of 1.4 million as of June 2019 according to the United
State Census Bureau.
Unemployment data remains one of the most informative indicators of our local economies and has been dramatically affected by COVID-19. 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
Raleigh
South Carolina
Greenville
Tennessee
Morristown
Johnson City
Kingsport-Bristol
Knoxville
Virginia
Roanoke
As of June 30,
2020
11.2%
7.6%
8.9%
8.4%
7.2%
8.7%
9.7%
9.7%
9.4%
8.9%
9.2%
8.2%
8.4%
8.2%
2019
3.8%
4.2%
3.6%
4.1%
4.0%
3.4%
3.3%
3.5%
4.5%
4.4%
4.2%
3.9%
2.9%
3.0%
See Item 1A, “Risk Factors" for additional details on the Company's risk factors related to COVID-19.
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 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. We also maintain a significant commitment to technological resources,
which has expanded our customer service capabilities and increased efficiencies in our lending process.
7
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
___________________________________________________________________
(1) Source: FDIC data as of June 30, 2019
18th
5th
17th
19th
61st
17th
48th
3rd
4th
6th
16th
61st
9th
5th
0.40%
10.15%
0.03%
0.20%
0.07%
0.72%
0.30%
18.88%
8.42%
4.31%
0.47%
0.10%
5.67%
3.39%
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.
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.
8
Lending Activities
The following table presents information concerning the composition of our loan portfolio in dollar amounts and in percentages (before deductions for deferred fees/costs and
allowances for losses) at the dates indicated.
2020
2019
At June 30,
2018
2017
2016
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
(Dollars in thousands)
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
Equipment
finance (1)
Municipal
leases
Paycheck
Protection
Program
Total
commercial
loans
$
473,693
17.11% $
660,591
24.42% $ 664,289
26.29% $
684,089
29.08% $
623,701
34.04%
137,447
71,781
81,859
132,303
10,259
4.96
2.59
2.96
4.78
0.37
139,435
116,972
80,602
153,448
11,416
5.16
4.32
2.98
5.67
0.42
137,564
166,276
65,601
173,095
12,379
5.44
6.58
2.60
6.85
0.49
157,068
162,407
50,136
140,879
7,900
6.68
6.90
2.13
5.99
0.34
163,293
144,377
38,102
108,478
4,635
8.91
7.88
2.08
5.92
0.25
907,342
32.77%
1,162,464
42.97%
1,219,204
48.25%
1,202,479
51.12%
1,082,586
59.08%
1,052,906
38.03%
927,261
34.28%
857,315
33.93%
730,408
31.04%
486,561
26.55%
215,934
154,825
229,239
127,987
7.80
5.59
8.28
4.62
210,916
160,471
132,058
112,016
7.80
5.93
4.88
4.14
192,102
135,336
13,487
109,172
7.60
5.36
0.54
4.32
197,966
120,387
8.42
5.12
86,840
73,289
—
—
—
4.74
4.00
—
101,175
4.30
103,183
5.63
80,697
2.91
—
—
—
—
—
—
—
—
1,861,588
67.23%
1,542,722
57.03%
1,307,412
51.75%
1,149,936
48.88%
749,873
Total loans
2,768,930
100.00%
2,705,186
100.00%
2,526,616
100.00%
2,352,415
100.00%
1,832,459
Less:
Deferred costs
(fees), net
Allowance for
losses
Total loans
receivable, net
189
(28,072)
4
(21,429)
(764)
(21,060)
(945)
(21,151)
372
(21,292)
$ 2,741,047
$ 2,683,761
$ 2,504,792
$ 2,330,319
$ 1,811,539
_____________________________________________
(1) Equipment finance line of business began operations in May 2018.
9
40.92%
100.00%
The following table shows the fixed- and variable-rate composition of our loan portfolio in dollar amounts and in percentages (before deductions for deferred fees/costs 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
Equipment finance
Municipal leases
Paycheck Protection Program
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
Municipal leases
Total adjustable-rate loans
Total loans
Less:
Deferred costs (fees), net
Allowance for losses
Total loans receivable, net
2020
At June 30,
2019
2018
Amount
Percent
Amount
Percent
Amount
Percent
(Dollars in thousands)
$
193,001
1,004
77,973
132,303
4,323
526,680
33,994
73,610
229,239
127,406
80,697
7.0% $
—
2.8
4.8
0.2
19.0
1.2
2.7
8.3
4.6
2.9
293,537
446
74,989
153,448
12,583
491,683
34,837
81,238
132,058
112,016
—
1,480,230
53.5%
1,386,835
280,692
136,443
71,781
3,886
5,936
526,226
181,940
81,215
581
1,288,700
2,768,930
189
(28,072)
10.2%
4.9
2.6
0.1
0.2
19.0
6.6
2.9
—
46.5%
100.0%
367,054
130,649
116,972
5,613
7,173
435,578
176,079
79,233
—
1,318,351
2,705,186
4
(21,429)
10.8% $
333,986
13.2%
—
2.8
5.7
0.5
18.2
1.3
3.0
4.9
4.1
—
51.3%
13.6%
4.8
4.3
0.2
0.3
16.1
6.5
2.9
—
48.7%
100.0%
163
59,283
173,095
6,457
441,796
55,682
74,081
13,487
109,172
—
—
2.3
6.9
0.3
17.5
2.2
3.0
0.5
4.3
—
1,267,202
50.2%
13.1%
5.4
6.6
0.3
0.2
16.4
5.4
2.4
—
49.8%
100.0%
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)
$
2,741,047
$
2,683,761
$
2,504,792
For further discussion, see "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of this report.
10
Loan Maturity. The following tables set forth certain information at June 30, 2020 regarding the dollar amount of loans maturing in our portfolio based on their contractual
terms to maturity, but do not include scheduled payments or potential prepayments. Loan balances do not include undisbursed loan proceeds, unearned discounts, unearned
income and allowance for loan losses.
Retail Consumer
Due During Years Ending June 30,
2021
2022
2023
2024 to 2025 2026 to 2027 2028 to 2032
2033 and
following
Total
(Dollars in thousands)
$
14,037
12,574
11,828
31,497
15,401
54,834
333,522
$
473,693
4.41%
4.35%
4.52%
4.78%
4.42%
4.07%
4.12%
4.19%
$
3,604
5,857
7,803
10,418
5,354
7,779
96,632
$
137,447
5.22%
4.79%
3.93%
3.87%
4.35%
4.00%
4.07%
4.11%
$
$
—
—%
—
—%
—
—%
—
—%
—
—%
—
—%
71,781
$
71,781
2.96%
2.96%
263
91
237
866
2,049
2,831
75,522
$
81,859
7.09%
6.49%
8.23%
5.94%
5.51%
5.87%
3.76%
3.92%
$
1,178
7,397
17,059
66,084
40,409
176
— $
132,303
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
3.18%
3.23%
3.53%
4.53%
4.86%
5.56%
—%
4.42%
Consumer
Amount
$
118
382
622
7,882
728
26
501
$
10,259
Weighted Average Rate
5.84%
4.51%
5.60%
5.79%
6.17%
3.54%
16.38%
6.27%
Commercial Loans
Due During Years Ending June 30,
2021
2022
2023
2024 to 2025 2026 to 2027 2028 to 2032
2033 and
following
Total
(Dollars in thousands)
Commercial real estate
Amount
$
125,537
115,494
148,999
313,365
109,660
189,793
50,058
$
1,052,906
Weighted Average Rate
3.69%
3.65%
3.84%
3.84%
3.04%
2.90%
4.03%
3.56%
Construction and development
Amount
$
78,204
32,569
24,265
49,190
10,800
18,721
2,185
$
215,934
Weighted Average Rate
Commercial and industrial
4.10%
3.56%
3.44%
3.40%
3.53%
2.83%
3.86%
3.64%
Amount
$
30,427
28,042
30,880
23,423
19,814
19,498
2,741
$
154,825
Weighted Average Rate
4.68%
3.32%
4.77%
4.67%
4.51%
5.62%
5.12%
4.55%
Equipment finance
Amount
Weighted Average Rate
Municipal leases(1)
Amount
Weighted Average Rate
Paycheck Protection Program
Amount
Weighted Average Rate
$
$
$
3,026
7,158
24,970
148,118
45,811
156
— $
229,239
4.70%
5.60%
5.54%
5.25%
5.10%
5.98%
—%
5.26%
1,244
13,494
6,425
11,813
9,904
38,850
46,257
$
127,987
3.44%
2.37%
3.21%
4.07%
5.11%
4.83%
4.83%
4.42%
—
—%
80,697
1.00%
—
—%
11
—
—%
—
—%
—
—%
— $
—%
80,697
1.00%
Due During Years Ending June 30,
2021
2022
2023
2024 to 2025
2026 to 2027
2028 to 2032
2033 and following
Total
Total
Weighted
Average
Rate
Amount
(Dollars in thousands)
$
257,638
303,755
273,088
662,656
259,930
332,664
679,199
3.86%
2.94
4.12
4.37
4.18
3.51
3.98
$
2,768,930
3.93%
_________________________________________________________
(1) The weighted average rate of municipal loans is adjusted for a 24% 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, 2021, which have predetermined interest rates is $1.2 billion, while the total amount of loans which have adjustable interest rates is
$1.3 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
Operating Officer, Chief Credit Officer, Chief Risk Officer, and the Commercial Banking Group Executive. 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 Credit Officer (Senior
Credit Officer may substitute) and the Commercial Banking Group Executive (Chief Operating Officer may substitute). Any loan submitted for Senior Loan Committee approval
must have the prior approval of the Relationship Manager, the Market President (Commercial Banking Group Executive may substitute) 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 Operating Officer,
Commercial Banking Group Executive, Chief Credit Officer and a Senior Credit Officer not involved with the credit. A quorum consists 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 in a single loan or group of loans to related
borrowers exceeding 60% of the Bank’s legal lending limit must be approved by the Bank's board of directors.
At June 30, 2020, the maximum amount under federal regulation that we could lend to any one borrower and the borrower’s related entities was approximately $58.7 million.
Our five largest lending relationships are with commercial borrowers and totaled $136.7 million in the aggregate, or 4.9% of our $2.7 billion loan portfolio at June 30, 2020.
The largest lending relationship at June 30, 2020 consisted of fourteen loans totaling approximately $32.7 million to 12 borrowers based in Florida. The largest loan in this
relationship had an outstanding balance of $5.9 million as of June 30, 2020 and was secured by a non-owner-occupied office property located in Greensboro, NC. The remaining
relationship exposure consisted of thirteen loans secured by various non-owner-occupied industrial, retail, and medical office properties. The properties are located in the various
eastern Tennessee cities, as well as in Rocky Mount and Greensboro, NC, Dublin, VA, Rome, GA, Sunrise, FL, and Greenbelt, MD. As of June 30, 2020, all loans to these
borrowers were performing in accordance with their original repayment terms.
The second largest lending relationship at June 30, 2020 was approximately $27.3 million consisting of one loan secured by an assisted living property located in Savannah, GA.
As of June 30, 2020, this loan was performing in accordance with its original repayment terms.
The third largest lending relationship at June 30, 2020 was $26.5 million consisting of six loans to four borrowers in North Carolina. The largest loan in the relationship at June
30, 2020 had an outstanding balance of $6.5 million and was secured by a hotel property located in Greensboro, NC. The remaining exposure consisted of loans secured by hotel
properties in Fayetteville, NC, Wake Forest, NC, and Clinton, SC. As of June 30, 2020, payments on all these loans had been deferred in accordance with the Company’s loan
payment deferral program related to COVID-19 but were considered performing loans and not adversely classified.
The fourth largest lending relationship at June 30, 2020 was $26.2 million consisting of 22 loans to 13 borrowers in Tennessee. The largest loan in the relationship at June 30,
2020 had an outstanding balance of approximately $13.3 million and was secured by a multifamily property in Sevierville, TN. The remaining relationship exposure was secured
by non-owner-occupied industrial flex-space, retail, office, and single-family properties, as well as all business assets. The properties are located in Jonesborough, TN and
Johnson City, TN. As of June 30, 2020, payments on two of these loans totaling approximately $824,000 had been deferred in accordance with the Company’s loan payment
deferral program related to COVID-19 but were considered performing loans and not adversely classified. All other loans to these borrowers were performing in accordance with
their original repayment terms.
12
The fifth largest lending relationship at June 30, 2020 was approximately $24.0 million consisting of three loans to three North Carolina borrowers. The largest loan in the
relationship at June 30, 2020 had an outstanding balance of $11.8 million and was secured by a non-owner-occupied medical office located in Covington, LA. The remaining
two loans were secured by non-owner-occupied office properties located in Rome, GA and Gastonia, NC. As of June 30, 2020, all loans to these borrowers were performing in
accordance with their original repayment terms.
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 generally originate one-to-four family residential mortgage loans through referrals from real
estate agents, builders, and from existing customers. Walk-in customers are also important sources of loan originations. At June 30, 2020, $473.7 million, or 17.1%, 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, 2020 our one-to-four family residential loan
portfolio included $193.0 million in 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 $136,827 at June 30, 2020.
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 $350.7 million at June 30, 2020, including $191.8 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, 2020, $4.4 million of our one-to-four family loans were interest-only all of which served as
collateral for commercial purpose loans. In connection with the new rules issued by the 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, 2020, $80.1 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
13
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 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 HELOCs consist primarily of adjustable-rate lines of credit. At June 30, 2020, HELOCs-originated totaled $137.4 million or 5.0%
of our loan portfolio. 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, 2020, unfunded commitments on these lines of credit totaled $245.0 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, 2020, HELOCs-purchased totaled $71.8 million, or 2.6% of
our loan portfolio. Unfunded commitments on these lines of credit were $25.8 million at June 30, 2020. 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. 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, 2020, our construction and land/lot loan portfolio was $81.9 million compared to $80.6 million at June 30, 2019. At June 30, 2020, unfunded loan commitments
totaled $32.0 million, compared to $65.4 million at June 30, 2019. 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, 2020, our construction-to-permanent loans totaled $74.1 million, or 3.0% of
our loan portfolio and the average loan size was $244,871. 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, 2020, the largest construction-to-permanent loan had an outstanding balance of $1.7 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.
14
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, 2020, our
land/lot loans totaled $7.8 million and the average land/lot loan size was $43,000. At June 30, 2020, the largest land/lot loan had an outstanding balance of $378,000 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-to-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, 2020, our indirect auto finance installment contracts totaled $132.3 million, or 4.8% of our 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, 2020, we worked with 66 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 91.0%
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, utilizing 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, 2020, consisted of 9,437 installment loan contracts with an average FICO credit score of 743, and an average loan to value ratio of 100.9%
based on wholesale dealer invoice on new cars and the NADA Official Used Car Guide for used cars. Approximately 85% were originated through manufacturer franchised
dealerships and approximately 15% were originated through independent dealerships; 35% were contracts on new vehicles and 65% were contracts on used vehicles. The
average loan term at origination was 70 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 deposit accounts or personal property such as automobiles, boats, and motorcycles, as well as unsecured
consumer debt. At June 30, 2020, our consumer loans totaled $10.3 million, or 0.4% 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.
15
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 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, 2020, $1.1 billion or 38.0% of our total
loan portfolio was secured by commercial real estate property, including multifamily loans totaling $90.3 million, or 3.3% of our total loan portfolio. Of the remaining amount,
$316.1 million was identified as owner occupied commercial real estate, and $646.5 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 $832,000 as of June 30, 2020. 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, 2020, the largest commercial real estate loan in our portfolio was for $27.3 million
secured by an assisted living property located in Savannah, GA. Our largest multi-family loan as of June 30, 2020 was a 60 unit apartment complex in Sanford, NC with an
outstanding balance of $5.1 million. Both of these loans were performing according to their original repayment terms as of June 30, 2020.
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 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 focused effort to grow the construction and development portfolio.
At June 30, 2020, our construction and development loans totaled $215.9 million, or 7.8% of our total loan portfolio. At June 30, 2020, $145.7 million, or 67.8% 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, 2020 totaled $85.0 million compared to $123.1 million at June 30, 2019. 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 to 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, 2020, our land acquisition and development loans in our commercial construction and development portfolio totaled $58.0 million. The largest land acquisition and
development loan had an outstanding balance at June 30, 2020 of $3.5 million and was performing according to its repayment terms. The subject loan is secured by a 53
16
lot residential development in Raleigh, NC. At June 30, 2020, 7 land acquisition and development loans totaling $465,000 were classified as nonaccruing.
Part of our land acquisition and development portfolio consists of speculative construction loans for homes. These homes typically have an average price ranging from $250,000
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, 2020, loans for the speculative construction of single family properties totaled $47.7 million compared to $46.0
million at June 30, 2019. At June 30, 2020, we had two borrowers each with an aggregate outstanding loan balance over $1.0 million which together comprise 5.1% of the total
balance for the speculative construction of single family properties and secured by properties located in our market areas. At June 30, 2020, no speculative construction loans
were classified as nonaccruing. Unfunded commitments were $32.0 million at June 30, 2020 and $31.4 million at June 30, 2019.
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. At June 30, 2020, we had $110.2 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 typically vary from 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.
17
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 local or regional businesses that operate in our market areas.
At June 30, 2020, commercial and industrial loans totaled $154.8 million, which represented 5.6% 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 to originate commercial business loans made under the SBA 7(a) and 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,
2020, we originated $48.3 million and sold participating interests of $38.1 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.
Equipment Finance. Our Equipment Finance line of business first began operations in May 2018 and offers companies that are purchasing equipment for their business various
products to help manage tax and accounting issues, while offering flexible and customizable repayment terms. These products are primarily made up of commercial finance
agreements and commercial loans for transportation, construction, and manufacturing equipment. The loans have terms ranging from 24 to 84 months, with an average of five
years and are secured by the financed equipment. Typical transaction sizes range from $25,000 to $1.0 million, with an average size of approximately $150,000. At June 30,
2020, equipment finance loans totaled $229.2 million, which represented 8.3% of our total loan portfolio.
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, 2020, municipal leases totaled $128.0 million, which represented 4.6% of our total loan portfolio. At that date, $40.7 million, or 31.8% of our municipal leases were
secured by fire trucks, $36.4 million, or 28.4%, were secured by fire stations, $34.7 million or 27.1%, were secured by both, with the remaining $16.2 million or 12.7% secured
by miscellaneous firefighting equipment and land. At June 30, 2020, the average outstanding municipal lease size was $390,000.
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, 2020, $25.8 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
18
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, 2020 and 2019, we sold $458.9 million and $ 168.0 million, respectively, of predominantly one-to-four family loans and SBA 7(a) loans to the
secondary market. We generally release the servicing of one-to-four family loans we sell into the secondary market, and retain the servicing on SBA 7(a) loans sold. Loans are
generally sold on a non-recourse basis.
Beginning in fiscal year 2019, we started originating HELOCs through a third party which are then pooled and sold to other investors. During the years ended June 30, 2020 and
2019, we originated $105.5 million and $6.2 million, respectively, of these HELOCs and sold $62.0 million during the year ended June 30, 2020. There were no sales of these
HELOCS during the year ended June 30, 2019.
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
Paycheck Protection Program
Equipment finance
Municipal leases
Total loans originated
Purchases:
Retail consumer:
Home equity - purchased
Commercial loans:
Commercial real estate
Total loans purchased or acquired
Sales and repayments:
Retail consumer:
One-to-four family
Home equity - originated
Commercial loans:
Commercial real estate
Construction and development
Commercial and industrial
Total sales
Principal repayments
Total reductions
Net increase
Years Ended June 30,
2020
2019
2018
(In thousands)
279,469 $
193,520
99,767
50,380
1,432
230,456
172,618
80,928
80,732
164,018
27,458
182,483 $
70,532
106,933
55,610
9,096
186,907
173,904
78,089
—
147,225
22,748
189,562
57,018
100,421
99,558
3,100
257,494
234,102
57,643
—
20,228
21,038
1,380,778 $
1,033,527 $
1,040,164
— $
702
702 $
358,852 $
61,959
15,824
—
22,256
458,891
799,658
1,258,549 $
122,931 $
— $
1,005
1,005 $
121,158 $
—
28,759
—
18,124
168,041
674,851
842,892 $
191,640 $
60,371
790
61,161
125,830
—
—
116
13,244
139,190
787,487
926,677
174,648
$
$
$
$
$
$
$
________________________________________________
(1)
Originations include one-to-four family loans, HELOCs, SBA 7(a) loans, and USDA B&I loans originated for sale of $399.1 million, $190.9 million, and $143.8 million for years ended June 30, 2020, 2019, and 2018, respectively.
19
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, 2020.
Loans Delinquent For:
30-89 Days
90 Days and Over
Number
Amount
Percent of
Loan
Category
Number
Amount
Percent of
Loan
Category
(Dollars in thousands)
Total Loans Delinquent
30 Days or More
Number
Amount
Percent of
Loan
Category
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
Equipment finance
28 $
1,679
0.35%
42 $
3,147
0.66%
70 $
4,826
1.02%
8
2
—
47
12
4
3
—
2
442
214
—
756
30
4,528
293
—
303
0.32
—
—
0.57
0.29
0.43
0.14
—
0.13
7
1
3
53
10
10
9
32
10
310
47
252
285
25
2,892
341
91
498
0.23
—
0.31
0.22
0.24
0.26
0.16
0.06
0.22
15
3
3
100
22
14
12
32
12
752
261
252
1,041
55
7,420
634
91
801
0.55
—
0.31
0.79
0.54
0.70
0.29
0.06
0.35
Total
106 $
8,245
0.31%
177 $
7,888
0.29%
283 $
16,133
0.60%
Nonperforming Assets. Nonperforming assets were $16.3 million, or 0.44% of total assets at June 30, 2020, compared to $13.3 million, or 0.38%, at June 30, 2019.
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. 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. During the fiscal year ended June 30, 2020, 15 loans for $1.8 million were modified
from their original terms and were classified as a TDR. This compares to 29 loans for $7.3 million that were modified in the fiscal year ended June 30, 2019. As of June 30,
2020, the outstanding balance of TDR loans was $20.6 million, comprised of 250 loans as compared to $27.9 million comprised of 303 loans at June 30, 2019.
20
Once a nonaccruing TDR 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 TDR is removed from nonaccrual status. At June 30, 2020, $6.3 million of TDRs were classified as nonaccrual, including $536,000 of construction and development loans.
As of June 30, 2020, $13.1 million, or 63.6% of the restructured loans have a current payment status as compared to $23.1 million, or 82.8% at June 30, 2019. Performing TDRs
decreased $10.0 million, or 43.1%, from June 30, 2019 to June 30, 2020. See "Recent Developments: COVID-19, the CARES Act, and Our Response" under Item 7,
“Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 5 of the Notes to the Consolidated Financial Statements included in Item 8
of this Form 10-K for additional details on the Company's loan modifications related to COVID-19.
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
Equipment finance
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
2020
2019
2018
2017
2016
At June 30,
$
3,582
$
3,223
$
4,308
$
6,453
$
(Dollars in thousands)
531
662
37
668
49
8,869
465
259
801
348
666
6
463
45
3,559
1,357
307
384
—
—
656
187
165
255
321
2,863
2,045
114
—
—
15,923
10,358
10,914
97
—
106
57
77
337
756
281
358
1,237
297
2,929
801
197
498
1,730
458
3,684
1,291
192
245
1
29
2,756
1,766
827
—
106
13,666
990
45
690
2,736
1,857
6,318
9,192
1,026
—
188
20
15
3,222
1,417
3,019
—
419
18,518
794
30
846
1,211
3,075
5,956
$
16,260
$
13,287
$
14,598
$
19,984
$
24,474
Total nonperforming assets as a percentage of total assets
0.44%
0.38%
0.44%
0.62%
0.90%
Performing TDRs
_______________________________________
(1) PCI loans totaling $965 at June 30, 2020, $1,344 at June 30, 2019, $3,353 at June 30, 2018, $6,664 at June 30, 2017, and $6,607 at June 30, 2016 are excluded from nonaccruing loans due
23,116
13,679
21,251
28,263
27,043
$
$
$
$
$
to the accretion of discounts established in accordance with the acquisition method of accounting for business combinations.
For the years ended June 30, 2020 and 2019, gross interest income which would have been recorded had the nonaccruing loans been current in accordance with their original
terms amounted to $643,000 and $578,000, respectively. The amount that was included in interest income on such loans was $602,000 and $679,000, respectively. At June 30,
2020, $14.5 million in impaired loans were individually evaluated for impairment; $1.3 million 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. TDRs 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.
21
Within our nonaccruing loans, as of June 30, 2020, we had three nonaccrual lending relationships with aggregate loan exposure in excess of $1.0 million, or 44.8% of our total
nonaccruing loans. The single largest relationship was $4.0 million at that date. Our nonaccruing loan exposures in excess of $1.0 million are as follows (dollars in thousands):
Amount
Percent of Total
Nonaccruing Loans
Collateral Securing the Indebtedness
Geographic Location
$
$
4,407
1,572
1,156
7,135
27.7% 1st lien on mixed use multifamily and retail commercial building
9.9
7.2
1st lien on medical office building
1st lien on 30 acres with single family home and other improvements
44.8%
Campbell County, VA
Knox County, TN
Jefferson County, TN
We record 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, 2020 and
2019, we recognized $206,000 and $295,000, respectively, of REO impairment charges.
At June 30, 2020, we had $337,000 of REO, the two largest of which had a book value of $75,000 and $68,000 and are related to land located in Arden, NC. The third largest
REO property at June 30, 2020 consists of a one-to-four family property, located in Lexington, NC with a book value of $63,000. At June 30, 2020 all other REO properties have
individual book values of less than $55,000.
REO decreased $2.6 million, to $337,000 at June 30, 2020 primarily due to the $2.1 million in sales of REO and $536,000 in writedowns and losses on the sale of REO, which
were partially offset by $46,000 in transfers from loans. The total balance of REO included $183,000 in land, construction and development projects (both residential and
commercial), $57,000 in commercial real estate, and $97,000 in single-family homes at June 30, 2020.
In fiscal 2020, we liquidated $4.9 million in REO based on contractual loan values at the time of foreclosure, realizing $2.1 million in net proceeds, or 43.3%, of the foreclosed
contractual loan balances. As of June 30, 2020, 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 11.8%.
Other Loans of Concern. In addition to the nonperforming assets set forth in the table above, as of June 30, 2020, there were 339 accruing classified loans totaling $50.8 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.”
22
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, 2020, our classified assets (consisting of $30.8 million of loans and $337,000 of REO) totaled $31.1 million, or 0.84%, of our
assets, of which $15.9 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,
2020
2019
$
(In thousands)
19 $
207
15,311
15,256
30,793
337
31,130
36,010
Total classified assets and special mention loans
$
67,140 $
35
388
17,443
10,129
27,995
2,929
30,924
15,119
46,043
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 aggressively resolving troubled assets has been and will continue to be
a primary focus for us. At June 30, 2020, our nonaccruing loans increased to $15.9 million as compared to $10.4 million at June 30, 2019. At June 30, 2020, $2.8 million, or
17.6%, of our total nonaccruing loans were current on their loan payments as compared to $4.1 million, or 39.6%, of total nonaccruing loans at June 30, 2019. During fiscal
2020, classified assets increased $206,000, or 0.7%, to $31.1 million and delinquent loans (loans delinquent 30 days or more) increased $6.1 million, or 60.3%, to $16.1 million
at June 30, 2020. There were $1.9 million and $5.3 million in net loan charge-offs during the fiscal years ended June 30, 2020 and 2019, respectively. There was a $8.5 million
provision for loan losses during fiscal 2020 compared to a $5.7 million provision in 2019. The increase in the current year provision included significant adjustments relating to
COVID-19 as a result of changes in qualitative factors based on increased risk in loan sub-categories, which include: lodging, restaurants, shopping centers, other retail
businesses, and equipment finance. The provision in the prior year primarily related to one commercial loan relationship. For more information on this loan relationship, see Item
7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Allowance for loan losses."
At June 30, 2020, our allowance for loan losses was $28.1 million, or 1.01%, of our total loan portfolio, and 176.3% of total nonaccruing loans. Excluding loans acquired, which
have been recorded at fair value with an appropriate credit discount, and PPP loans, the allowance for loan losses was 1.11% of total loans at June 30, 2020. 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.
See "Recent Accounting Developments" in Note 1 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K for further discussion of the
adoption of CECL.
23
The following table summarizes the distribution of the allowance for loan losses by loan category at the dates indicated.
2020
2019
At June 30,
2018
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
(Dollars in thousands)
Amount
2017
2016
Percent
of loans
in each
category
to total
loans
Amount
Percent
of loans
in each
category
to total
loans
Amount
Allocated at end of period to:
Retail consumer loans:
One-to-four family
$
2,469
17.11% $
2,511
24.42% $
3,360
26.29% $
4,476
29.08% $
6,595
34.04%
Home equity - originated
Home equity - purchased
Construction and land/lots
Indirect auto finance
Consumer
Commercial loans:
1,344
430
1,442
1,136
135
4.96
2.59
2.96
4.78
0.37
Commercial real estate
11,805
38.03
Construction and development
Commercial and industrial
Equipment finance
Municipal leases
Paycheck Protection Program
3,608
2,199
2,807
697
—
7.80
5.59
8.28
4.62
2.91
1,030
518
1,265
927
230
8,036
3,196
1,976
1,305
435
—
5.16
4.32
2.98
5.67
0.42
34.28
7.80
5.93
4.88
4.14
—
1,123
795
1,153
1,126
68
8,195
3,346
1,476
—
418
—
5.44
6.58
2.60
6.85
0.49
33.92
7.60
5.36
—
4.32
—
1,384
838
977
881
57
7,351
3,166
1,524
—
497
—
6.68
6.90
2.13
5.99
0.34
31.04
8.42
5.12
—
4.30
—
1,997
558
1,344
1,016
61
6,430
1,908
721
—
662
—
0.01
0.01
—
0.01
—
0.03
—
—
—
0.01
—
Total loans
$ 28,072
100.00% $ 21,429
100.00% $ 21,060
100.00% $ 21,151
100.00% $ 21,292
100.00%
24
The following table sets forth an analysis of our allowance for loan losses at the dates and for the periods indicated.
Balance at beginning of period:
$
21,429
$
21,060
$
21,151
$
21,292
$
22,374
Years Ended June 30,
2020
2019
2018
2017
2016
(Dollars in thousands)
Provision for loan losses
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
Equipment finance
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
Equipment finance
Municipal leases
Total commercial loans
Total recoveries
Net charge-offs
Balance at end of period
8,500
5,700
—
—
—
164
30
99
499
538
9
—
—
—
2
639
20
855
1,005
102
101
1,753
1
509
28
1,136
—
50
6,037
186
—
—
2,961
3,816
1,160
63
141
80
35
6,273
7,409
555
556
57
54
50
1,479
1,272
170
57
252
1
—
480
1,959
1,857
74
226
506
—
—
806
2,078
5,331
2
578
15
1,142
282
381
842
—
—
1,505
2,647
411
307
173
39
60
990
107
81
1,378
—
—
1,566
2,556
91
439
18
48
165
531
18
1,219
139
21
1,171
—
—
1,331
2,550
181
231
487
122
63
1,084
58
539
728
—
—
1,325
2,409
141
799
94
—
321
281
168
1,663
200
259
1,582
—
—
2,041
3,704
683
157
44
58
292
1,234
883
265
240
—
—
1,388
2,622
1,082
$
28,072
$
21,429
$
21,060
$
21,151
$
21,292
Net charge-offs during the period to average loans outstanding during the
period
Net charge-offs during the period to average non-performing assets
0.07%
12.30%
0.20%
50.00%
—%
0.53%
0.01%
0.67%
Allowance as a percentage of nonperforming assets
172.64%
161.28%
144.27%
105.84%
Allowance as a percentage of total loans(1)
1.01%
0.79%
0.83%
0.90%
0.06%
3.77%
87.00%
1.16%
______________
(1) Excluding loans acquired, which have been recorded at fair value with an appropriate credit discount, and PPP loans, the allowance for loan losses was 1.11%, 0.85%, 0.91%, 1.03%, and
1.32% of total loans at June 30, 2020, 2019, 2018, 2017, and 2016, respectively.
25
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, 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, 2020, our $127.5 million securities portfolio
consisted primarily of MBSs, municipal bonds, and corporate bonds, 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 $2.6 million more than total amortized cost as of June 30, 2020.
For more information, please see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Asset/Liability Management” and Note 2 of
the Notes to Consolidated Financial Statements contained in Item 8 in this report.
The Company also purchases commercial paper to take advantage of higher short-term returns with relatively low credit risk, yet remaining highly liquid. The commercial paper
balance at June 30, 2020 was $305.0 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, 2020 and June 30, 2019.”
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 $23.3 million in stock of the FHLB of Atlanta at June 30, 2020. For the years ended June 30, 2020 and 2019, we received $1.6
million and $2.0 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 FRB. At
June 30, 2020 we had $7.4 million in FRB stock. For the years ended June 30, 2020 and 2019, we received $441,000 and $439,000, respectively, in dividends from the FRB.
The Company also maintains equity investments in SBIC, which are considered equity securities without a readily determinable fair value. At June 30, 2020, we had $8.3 million
in SBIC investments. For the years ended June 30, 2020 and 2019, we received $642,000 and $1.1 million, respectively, in earnings from the SBIC investments.
26
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, 2020, 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.
2020
At June 30,
2019
2018
Book
Value
Fair
Value
Book
Value
Fair
Value
Book
Value
Fair
Value
(In thousands)
Securities available for sale:
U.S. government agencies
Residential MBS of U.S. government agencies
and GSEs
Municipal bonds
Corporate bonds
Equity securities
Total debt securities available for sale
FHLB stock
FRB stock
SBIC investments
Total securities
$
3,957 $
4,173 $
15,099 $
15,210 $
48,025 $
47,542
46,629
16,090
58,242
—
124,918
23,309
7,368
8,269
48,355
16,631
58,378
—
127,537
23,309
7,368
8,269
74,778
24,896
6,061
—
120,834
31,969
7,335
6,074
75,180
25,312
6,084
—
121,786
31,969
7,335
6,074
71,949
30,865
6,166 $
63
157,068
29,907
7,307
4,717
70,599
30,766
6,023
63
154,993
29,907
7,307
4,717
$
163,864 $
166,483 $
166,212 $
167,164 $
198,999 $
196,924
The composition and contractual maturities of our investment securities portfolio as of June 30, 2020, excluding SBIC investments, FHLB stock, 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
Residential MBS of U.S. government agencies and GSEs
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
Weighted average yield
Sources of Funds
June 30, 2020
1 year or less
Over 1 year to 5
years
Over 5 to 10 years Over 10 years
Total
(Dollars in thousands)
$
— $
—
—%
39
40
3,957
$
4,173
2.51%
— $
—
—%
— $
—
—%
4,196
4,273
20,372
21,378
22,022
22,664
1.58%
1.80%
2.26%
2.21%
4,546
4,568
7,326
7,644
2,434
2,630
1,784
1,789
2.88%
3.21%
3.56%
2.87%
24,644
24,680
33,598
33,698
1.13%
2.10%
—
—
—%
—
—
—%
3,957
4,173
2.51%
46,629
48,355
2.19%
16,090
16,631
3.13%
58,242
58,378
1.69%
$
$
29,229
29,288
$
$
49,077
49,788
$
$
22,806
24,008
$
$
23,806
24,453
$
$
124,918
127,537
1.40%
2.28%
2.40%
2.26%
2.09%
General. Our sources of funds are primarily deposits, borrowings, payments of principal and interest on loans, and funds provided from operations. Deposits increased $458.4
million, or 19.7%, to $2.8 billion at June 30, 2020 as compared to $2.3 billion at June 30, 2019.
27
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 CDs. We solicit deposits primarily in our market areas. At June 30, 2020, 2019 and 2018, we had $143.2 million, $176.8 million, and $108.9 million
in brokered deposits, respectively. As of June 30, 2020, core deposits, which we define as our non-certificate or non-time deposit accounts, represented approximately 73.5% 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 26.5% 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, are 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.
The following table sets forth our deposit flows during the periods indicated.
(Dollars in thousands)
Beginning balance
Net deposit increase
Interest credited
Ending balance
Net increase
Percent increase
Years Ended June 30,
2020
2019
2018
2,327,257
$
2,196,253
$
435,592
22,907
2,785,756
458,499
$
$
19.70%
115,322
15,682
2,327,257
131,004
$
$
5.96%
2,048,451
141,048
6,754
2,196,253
147,802
7.22%
$
$
$
The following table sets forth the dollar amount of deposits in the various types of deposit programs offered by us at the dates indicated.
2020
2019
2018
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
(Dollars in thousands)
Transaction and Savings Deposits:
Interest-bearing accounts
Noninterest-bearing accounts
Savings accounts
Money market accounts
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
$
$
$
$
$
582,299
429,901
197,676
836,738
20.90% $
15.43
7.10
30.04
452,295
294,322
177,278
691,172
19.43% $
12.65
7.62
29.70
471,364
317,822
213,250
677,665
2,046,614
73.47% $
1,615,067
69.40% $
1,680,101
285,916
229,972
215,518
3,388
4,346
2
739,142
2,785,756
10.26% $
8.26
7.74
0.12
0.16
—
134,813
122,803
441,911
8,246
4,415
2
5.79% $
5.28
18.99
0.35
0.19
—
273,087
197,875
35,707
5,066
4,415
2
26.53% $
712,190
30.60% $
516,152
100.00% $
2,327,257
100.00% $
2,196,253
21.46%
14.47
9.71
30.86
76.50%
12.43%
9.01
1.63
0.23
0.20
—
23.50%
100.00%
28
The following table shows rate and maturity information for our CDs at June 30, 2020.
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, 2020
December 31, 2020
March 31, 2021
June 30, 2021
September 30, 2021
December 31, 2021
March 31, 2022
June 30, 2022
September 30, 2022
December 31, 2022
March 31, 2023
June 30, 2023
Thereafter
Total
$
38,032
$
144,650
$
49,495
$
— $
— $
2
$
232,179
163,248
28,379
14,850
18,188
6,021
2,554
3,960
2,308
2,244
2,280
2,468
1,384
38,607
25,942
8,182
1,852
690
416
312
910
2,067
1,076
820
4,448
45,220 —
17,639
24,512
22,192
24,702
8,585
5,631
6,614
1,459
451
1,777
7,241
$
285,916
$
229,972
$
215,518
$
19
—
—
—
356
30
—
—
—
—
31
2,952
3,388
—
—
—
2,018
—
—
—
2,328
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
247,094
71,960
47,544
44,250
31,769
11,585
9,903
12,160
5,770
3,807
5,096
16,025
31.4%
33.4
9.7
6.4
6.0
4.3
1.6
1.3
1.6
0.8
0.5
0.7
2.2
$
4,346
$
2
$
739,142
100.0%
Percent of total
38.7%
31.1%
29.1%
0.5%
0.6%
—%
100.0%
The following table indicates the amount of our CDs by time remaining until maturity as of June 30, 2020.
3 Months
or Less
Over
3 to 6
Months
Maturity
Over 6 to 12
Months
(In thousands)
Over
12 Months
Total
$
$
73,508 $
77,532 $
56,934 $
66,064 $
139,142
19,529
160,591
8,971
50,885
11,685
72,249
2,052
232,179 $
247,094 $
119,504 $
140,365 $
274,038
422,867
42,237
739,142
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.
We may obtain advances from the FHLB of Atlanta upon the security of certain of our real estate 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, 2020, we had $475.0 million in FHLB advances outstanding and the ability to borrow an additional $186.2 million. In
addition to FHLB advances, at June 30, 2020 we had a $109.2 million line of credit with the FRB, subject to qualifying collateral, and $70.0 million available through lines of
credit with three unaffiliated banks, none of which was outstanding at June 30, 2020. See Note 11 of the Notes to Consolidated Financial Statements included in Item 8 of this
Form 10-K for more information about our borrowings.
29
The following tables set forth information regarding our borrowings at the end of and during the periods indicated.
Maximum balance:
FHLB advances
Average balances:
FHLB advances
Weighted average interest rate:
FHLB advances
Balance outstanding at end of period:
FHLB advances
Weighted average interest rate:
FHLB advances
Subsidiary and Other Activities
Year ended June 30,
2020
2019
2018
(Dollars in thousands)
$
$
$
708,000
$
720,000
$
699,000
568,377
$
672,186
$
658,240
1.64%
2.18%
1.41%
2020
At June 30,
2019
(Dollars in thousands)
2018
475,000
$
680,000
$
635,000
1.39%
2.10%
1.95%
HomeTrust Bank has one operating subsidiary, 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, 2020 was $815,000.
Employees
At June 30, 2020, we had a total of 539 full-time employees and 51 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.htb.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 regulate 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 this conversion of the Bank, HomeTrust Bancshares, Inc. changed
from a savings and loan holding company to a bank holding company, regulated under the 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.
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
30
and regulations. Legislation is introduced from time to time in the United States Congress and the North Carolina legislature 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
CBLR. In September 2019, the regulatory agencies, including the NCCOB and FRB, adopted a final rule, effective January 1, 2020, creating the CBLR for institutions with total
consolidated assets of less than $10 billion and that meet other qualifying criteria. The CBLR provides for a simple measure of capital adequacy for qualifying institutions.
According to the final rule, qualifying institutions that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied
the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules, and to have met the capital requirements for the well capitalized
category under the agencies' prompt corrective action framework. In April 2020, the federal bank regulatory agencies announced the issuance of two interim final rules, effective
immediately, to provide temporary relief to community banking organizations. Under the interim final rules, the CBLR requirement is minimum of 8% for the remainder of
calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter. The Bank has not elected to adopt the CBLR framework at June 30, 2020, but may consider that election in
the future.
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 $58.7 million as of June 30, 2020. 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”). 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. Banks with total consolidated assets of $10 billion or less and total consolidated trading assets and liabilities equal to 5% or less of total consolidated
assets, such as the Bank's are not subject to the Volcker Rule.
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.
31
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%
stockholders (“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 on 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, mandated an additional capital conservation buffer over the minimum 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 leverage ratio (the ratio of Tier 1 capital to average total consolidated assets) 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 were 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, 2020 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 that ended 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 increased each year until fully implemented to an amount more than 2.5% of risk-weighted assets on January 1,
2019. To meet the minimum capital ratios and the capital conservation buffer requirements, the capital ratios applicable to the Company and the Bank are (i) a CETI capital ratio
greater than 7.0%; (ii) a Tier 1 capital ratio greater than 8.5%; (iii) a total capital ratio greater than 10.5%; and (iv) a Tier 1 leverage ratio greater than 4.0%. As of June 30, 2020,
the conservation buffer for HomeTrust Bank was 3.8%.
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, 2020, 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, 2020, see Note 19 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 FHFA and each FHLB serves as a reserve or central bank for its
members within its assigned region. The Federal Home Loan Banks are funded primarily
32
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, 2020, the Bank held $23.3 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, 2020.
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, 2020, HomeTrust Bank’s aggregate recorded loan balances for construction, land development and land loans were
69.8% of regulatory capital. In addition, at June 30, 2020, HomeTrust Bank’s commercial real estate loans, as defined by the guidance, were 277.4% 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 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 a
"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 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.
33
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 19 of the Notes to Consolidated Financial Statements included in Item 8 in this report.
At June 30, 2020, 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 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.
Sarbanes-Oxley Act. The SOX Act 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 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 the ability of HomeTrust Bancshares, Inc. and the Bank to pay
dividends.
34
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 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 IRC to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Tax Act reduced 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 became 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 in fiscal 2018, the net 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 13
"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.
Minimum Tax. Prior to the enactment of the Tax Act, the 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. 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, 2020, we
had $21.5 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 65% 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.
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.
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Any cash dividends, in excess of a certain exempt amount, that would be paid with respect to HomeTrust Bancshares common stock to a stockholder (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
2020 and 2019 the tax rate was 5.0%.
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 2020 and 2019. 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 2020 and 2019.
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.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Name
Dana L. Stonestreet
C. Hunter Westbrook
Tony J. VunCannon
Marty Caywood
Keith Houghton
Paula C. Labian
Parrish Little
___________________
(1) As of June 30, 2020.
Age(1)
Position
66
57
55
48
58
62
52
Chairman, President and Chief Executive Officer
Senior Executive Vice President and Chief Operating Officer
Executive Vice President, Chief Financial Officer, Corporate Secretary, and Treasurer
Executive Vice President and Chief Information Officer
Executive Vice President and Chief Credit Officer
Executive Vice President and Chief Human Resources 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 31 years of service, Mr. Stonestreet has overseen ten acquisitions and the growth of the Bank from $300
million to $3.7 billion in assets at June 30, 2020. 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 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 31 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.
C. Hunter Westbrook, Senior Executive Vice President and Chief Operating Officer. Mr. Westbrook joined HomeTrust Bank in June 2012 as our Chief Banking Officer and was
promoted to Chief Operating Officer in October 2018. 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 prior to joining HomeTrust
Bank, 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.
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
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joining the Bank, Mr. VunCannon worked as an auditor in KPMG’s Charlotte office where his focus was in the community banking sector. He is also a Certified Public
Accountant.
Marty Caywood, Executive Vice President and Chief Information Officer. Mr. Caywood joined HomeTrust Bank in 1995 as the Bank’s first Network Administrator and worked
in various roles including Information Security Officer and most recently as Senior Vice President and Director of Information Technology. Mr. Caywood was promoted to
Executive Vice President and Chief Information Officer in April 2019.
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 18 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.
Paula C.Labian, Executive Vice President and Chief Human Resources Officer. Ms. Labian joined HomeTrust Bank in January 2019 as Executive Vice President and Chief
Human Resources Officer. Ms. Labian brings more than 25 years of broad based industry experience in human resource development, strategy, and leadership. She began her
career in financial services in Southern California with Bank of Coronado and Guild Mortgage Company, managing human resources and administering loan officer
compensation as well as training. Ms. Labian has served in numerous senior level positions with brand name companies such as Blue Cross Blue Shield of Florida, Whole Foods
Market, Alterra Mountain Company, and CoBiz Bank. She has significant expertise in employee relations, total rewards, benefit administration, executive compensation, talent
acquisition and development, and mergers and acquisitions.
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
COVID-19 Pandemic
The COVID-19 pandemic has adversely impacted our ability to conduct business and has adversely impacted our financial results and those of our customers. The ultimate
impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by
governmental authorities in response to the pandemic.
The COVID-19 pandemic has significantly adversely affected our operations and the way we provide banking services to businesses and individuals, most of whom are currently
under government issued modified stay-at-home orders. As an essential business, we continue to provide banking and financial services to our customers with drive-thru access
available at the majority of our branch locations and in-person services available by appointment. In addition, we continue to provide access to banking and financial services
through online banking, ATMs and by telephone. If the COVID-19 pandemic worsens it could limit or disrupt our ability to provide banking and financial services to our
customers.
In response to the stay-at-home orders, many of our employees currently are working remotely to enable us to continue to provide banking services to our customers. Heightened
cybersecurity, information security and operational risks may result from these remote work-from-home arrangements. We also could be adversely affected if key personnel or a
significant number of employees were to become unavailable due to the effects and restrictions of the COVID-19 pandemic. We also rely upon our third-party vendors to
conduct business and to process, record and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our
ability to serve our customers. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.
There is pervasive uncertainty surrounding the future economic conditions that will emerge in the months and years following the start of the pandemic. As a result, management
is confronted with a significant and unfamiliar degree of uncertainty in estimating the impact of the pandemic on credit quality, revenues and asset values. To date, the COVID-
19 pandemic has resulted in declines in loan demand and loan originations (other than through government sponsored programs such as the Payroll Protection Program), deposit
availability, market interest rates and negatively impacted many of our business and consumer borrower’s ability to make their loan payments. Because the length of the
pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including recent reductions in the targeted
federal funds rate, until the pandemic subsides, we expect our net interest income and net interest margin will be adversely affected in the near term, if not longer. Many of our
borrowers have become unemployed or may face unemployment, and certain businesses are at risk of insolvency as their revenues decline precipitously, especially in businesses
related to travel, hospitality, leisure and physical personal services. Businesses are reopening at lower capacities and there continues to be a significant level of uncertainty
regarding the level of economic activity
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that will return to our markets over time, the impact of governmental assistance, the speed of economic recovery, the resurgence of COVID-19 in subsequent seasons and
changes to demographic and social norms that will take place.
The impact of the pandemic is expected to continue to adversely affect us during 2021 and possibly longer as the ability of many of our customers to make loan payments has
been significantly affected. Although the Company makes estimates of loan losses related to the pandemic as part of its evaluation of the allowance for loan losses, such
estimates involve significant judgment and are made in the context of significant uncertainty as to the impact the pandemic will have on the credit quality of our loan portfolio. It
is likely that increased loan delinquencies, adversely classified loans and loan charge-offs will increase in the future as a result of the pandemic. Consistent with guidance
provided by banking regulators, we have modified loans by providing various loan payment deferral options to our borrowers affected by the COVID-19 pandemic.
Notwithstanding these modifications, these borrowers may not be able to resume making full payments on their loans once the COVID-19 pandemic is resolved. Any increases
in the allowance for credit losses will result in a decrease in net income and, most likely, capital, and may have a material negative effect on our financial condition and results of
operations. See "Recent Developments: COVID-19, the CARES Act, and Our Response" under Item 7, “Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 5 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K for additional details on the Company's loan
modifications related to COVID-19.
The PPP loans made by the Bank are guaranteed by the SBA and, if used by the borrower for authorized purposes, may be fully forgiven. However, in the event of a loss
resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded or serviced by the
Bank, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if it has already made payment under the guaranty, seek recovery of any loss
related to the deficiency from the Bank. In addition, since the commencement of the PPP, several larger banks have been subject to litigation regarding their processing of PPP
loan applications. The Bank may be exposed to the risk of similar litigation, from both customers and non-customers that approached the Bank seeking PPP loans. PPP lenders,
including the Bank, may also be subject to the risk of litigation in connection with other aspects of the PPP, including but not limited to borrowers seeking forgiveness of their
loans. If any such litigation is filed against the Bank, it may result in significant financial or reputational harm to us.
In accordance with GAAP, we record assets acquired and liabilities assumed at their fair value with the excess of the purchase consideration over the net assets acquired resulting
in the recognition of goodwill. If adverse economic conditions or the recent decrease in our stock price and market capitalization as a result of the pandemic were to be deemed
sustained rather than temporary, it may significantly affect the fair value of our goodwill and may trigger impairment charges. Any impairment charge could have a material
adverse effect on our results of operations and financial condition.
Even after the COVID-19 pandemic subsides, the U.S. economy will likely require some time to recover from its effects, the length of which is unknown, and during which we
may experience a recession. As a result, we anticipate our business may be materially and adversely affected during this recovery. To the extent the effects of the COVID-19
pandemic adversely impact our business, financial condition, liquidity or results of operations, it may also have the effect of heightening many of the other risks described in this
section. Goodwill has been evaluated for impairment as of our annual evaluation date, April 1, 2020, as well as for triggering events at June 30, 2020 and it was determined that
no impairment was required.
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, 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, 2020, the most significant portion of our loans located outside of our primary market areas was HELOCs-purchased totaling $71.8 million, or 2.6% 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
38
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.
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, 2020, $682.9 million, or 24.7% of our total loan portfolio, was secured by liens on one-to-four family residential loans. 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 with 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 residential 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 $350.7 million at June 30, 2020, including $191.8 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
declines in prior years 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, 2020, $80.1 million, or 16.9%, of our one-to-four family loans and 2.9% 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 depends 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, 2020, construction and land/lot loans in our retail consumer loan portfolio was $81.9 million, or 3.0%, 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, 2020, totaled $215.9 million, or 7.8%, 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. This type of lending also typically involves higher loan principal amounts and is often concentrated with a small number of builders. For these
reasons, 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, 2020, $47.7 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, 2020, commercial real estate loans were $1.1 billion, or 38.0% of our total loan portfolio, including multifamily loans
totaling $90.3 million or 3.3% 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, 2020, commercial real estate loans that were nonperforming totaled $8.9 million, or 55.7% 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/non-
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residential 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 277.4% of total risk-based capital at June 30, 2020. 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, 2020, $132.3 million, or 4.8%, 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, 2020, municipal leases were $128.0 million, or 4.6%, 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, 2020, $25.8 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:
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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:
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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 FASB has adopted a new accounting standard that will be effective for our fiscal year beginning July 1, 2020.
This standard, referred to as 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 $16.3 million, or 0.44%, of total assets at June 30, 2020, compared to $13.3 million, or 0.38% of
total assets, and $14.6 million, or 0.44% of total assets, at June 30, 2019 and 2018, respectively. Our nonperforming assets adversely affect our net income in various ways:
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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 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 $13.2 million in loans as
performing TDRs at June 30, 2020.
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. In addition, our securities portfolio is evaluated
periodically 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. Our stockholders' equity adjusts by the amount of change in the estimated fair value of the available-for-sale securities, net of
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taxes. There can be no assurance that declines in market value will not result in OTTI 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 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. Our commercial business loan originations made under SBA
and USDA B&I programs are also subject to these risks.
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 the lower of cost or fair market value less estimated costs to sell 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 dropped interest rates low through its targeted Fed Funds rate. The targeted federal funds rate is currently at 0.00% to 0.25% at June 30, 2020. In addition, the
Federal Reserve announced in August 2020 a new policy approach of “average inflation” targeting in which inflation will run moderately above the Federal Reserve’s 2% target
“for some time.” This new shift in policy is expected to keep rates lower for longer.
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 stockholders' equity, and our ability to
realize gains from the sale of such 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 (generally, if
rates increase) or by reducing our margins and profitability (generally, if rates decrease). 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 will 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.
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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, 2020, we had $598.8 million in
certificates of deposit that mature within one year and $2.0 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, 2020, our loans
with interest rate floors totaled approximately $586.8 million or 21.2% of our total loan portfolio and had a weighted average floor rate of 4.02%. At that date, $446.5 million of
these loans were at their floor rate, of which $404.6 million, or 90.6%, 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. As of
June 30, 2020, there were $354.8 million loans in our portfolio tied to LIBOR.
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, 2020, brokered deposits totaled $143.2 million or 5.1% of total
deposits, with remaining maturities of one to 26 months. 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 our Bank
deposit products 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
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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 have implemented a strategy of supplementing organic growth by acquiring other financial institutions or other 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;
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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 to the extent expected or 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 stockholders;
• We have completed five acquisitions during the past seven 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 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 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
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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 stockholders. These regulations may sometimes impose significant limitations on operations. The significant federal and state banking regulations that affect
us are described under the heading "Business-How We Are Regulated” 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,
the Regulatory Relief 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 CBLR. In
September 2019, the regulatory agencies, including the NCCOB and FRB, adopted a final rule, effective January 1, 2020, creating the CBLR for institutions with total
consolidated assets of less than $10 billion and that meet other qualifying criteria. The CBLR provides for a simple measure of capital adequacy for qualifying institutions.
According to the final rule, qualifying institutions that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied
the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules, and to have met the capital requirements for the well capitalized
category under the agencies' prompt corrective action framework. In April 2020, the federal bank regulatory agencies announced the issuance of two interim final rules, effective
immediately, to provide temporary relief to community banking organizations. Under the interim final rules, the CBLR requirement is minimum of 8% for the remainder of
calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter. The Bank has not elected to adopt the CBLR framework at June 30, 2020, but may consider that election in
the future.
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
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
46
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 Company 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 Company 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 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 Company 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.
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
47
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.
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 stockholders’ equity and
financial results and could cause a decline in our stock price.
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. 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 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.
48
Item 2. Properties
We maintain our administrative office, which is owned by us, in Asheville, North Carolina. In total, as of June 30, 2020, we have 41 locations, which 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).
Of those offices, 11 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 6 and 12 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 18 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.” As of the close of business on September 8, 2020, there were 17,021,357 shares
of common stock outstanding held by 1,158 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 Company began paying its first cash dividends during the second fiscal quarter of 2019. 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.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information about repurchases of common stock by the Company during the quarter ended June 30, 2020:
Period
April 1 - April 30, 2020
May 1 - May 31, 2020
June 1 - June 30, 2020
Total
Total Number
Of Shares
Purchased
Average
Price Paid per Share
Total Number Of
Shares Purchased
as Part of Publicly
Announced Plans
81,873 $
—
—
81,873 $
15.41
—
—
15.41
81,873
—
—
81,873
Maximum
Number of
Shares that May
Yet Be Purchased
Under Publicly
Announced Plans
889,123
889,123
889,123
889,123
On April 2, 2020, the Company announced that its Board of Directors had authorized the repurchase of up to 889,123 shares of the Company's common stock, representing 5%
of the Company's outstanding shares at the time of the announcement. The shares may be purchased in the open market or in privately negotiated transactions, from time to time
depending upon market conditions and other factors.
Equity Compensation Plans
The equity compensation plan information presented under Part III, Item 12 of this report is incorporated herein by reference.
49
Shareholder Return Performance Graph Presentation
The performance graph below compares the Company’s cumulative shareholder return on its common stock since June 30, 2015 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, 2015, 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, 2015.
HomeTrust Bancshares, Inc.
NASDAQ Bank Index
NASDAQ Composite
Year Ended June 30,
2017
145.58
130.28
123.13
2018
167.96
143.37
150.60
2019
150.00
121.67
160.55
2020
95.47
92.47
201.71
2015
100.00
100.00
100.00
2016
110.38
94.84
97.11
50
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, 2020, 2019 and 2018 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
Commercial paper
Certificates of deposit in other banks
Securities available for sale, at fair value
Other investments, at cost
Deposits
Borrowings
Stockholders’ equity
Selected Operations Data:
Total interest and dividend income
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Service charges and fees on deposit accounts
Loan income and fees
Gain on sale of loans held for sale
Bank owned life insurance income
Gain on sale of securities
Gain from sale of premises and equipment
Other, net
Total noninterest income
Total noninterest expense
Income before income taxes
Income tax expense
Net income
Per Share Data:
Net income per common share:
Basic
Diluted
2020
2019
At June 30,
2018
(In thousands)
2017
2016
$
3,722,852 $
3,476,178 $
3,304,169 $
3,206,533 $
2,741,047
2,683,761
2,504,792
2,330,319
28,072
304,967
55,689
127,537
38,946
21,429
241,446
52,005
121,786
45,378
21,060
229,070
66,937
154,993
41,931
21,151
149,863
132,274
199,667
39,355
2,717,677
1,811,539
21,292
229,859
161,512
200,652
29,486
2,785,756
2,327,257
2,196,253
2,048,451
1,802,696
475,000
408,263
680,000
408,896
635,000
409,242
696,500
397,647
491,000
359,976
Years Ended June 30,
2020
2019
2018
2017
2016
(In thousands)
$
136,254 $
137,214 $
117,402 $
99,436 $
32,150
104,104
8,500
95,604
9,382
2,494
9,946
2,246
—
—
6,264
30,332
97,129
28,807
6,024
30,383
106,831
5,700
101,131
9,611
1,422
6,218
2,103
—
—
3,586
22,940
90,134
33,937
6,791
16,072
101,330
—
101,330
8,802
1,176
4,276
2,117
—
164
2,437
18,972
85,331
34,971
26,736
8,245
91,191
—
91,191
7,709
971
2,674
2,088
22
385
2,258
16,107
90,259
17,039
5,192
22,783 $
27,146 $
8,235 $
11,847 $
1.34 $
1.30 $
1.52 $
1.46 $
0.45 $
0.44 $
0.66 $
0.65 $
51
$
$
$
87,747
6,040
81,707
—
81,707
7,469
1,426
1,643
1,874
—
10
1,869
14,291
79,641
16,357
4,901
11,456
0.65
0.65
At or For the
Years Ended June 30,
2020
2019
2018
2017
2016
Selected Financial Ratios and Other Data:
Performance ratios:
Return on assets (ratio of net income to average total assets)
0.63%
0.80%
0.25%
0.40%
0.42%
Return on equity (ratio of net income to average equity)
Tax equivalent yield on earning assets(2)
Rate paid on interest-bearing liabilities
Tax equivalent average interest rate spread(2)
Tax equivalent net interest margin(2)(3)
Noninterest expense to average total assets
Average interest-earning assets to average interest-bearing liabilities
Efficiency ratio
Efficiency ratio - adjusted(4)
Asset quality ratios:
Nonperforming assets to total assets(5)
Nonaccruing loans to total loans(5)
Total classified assets to total assets
Allowance for loan losses to nonaccruing loans(5)
Allowance for loan losses to total loans
Net charge-offs to average loans
Capital ratios:
Equity to total assets at end of period
Average equity to average assets
Dividend payout ratio
Dividends declared per common share
5.54
4.13
1.18
2.95
3.17
2.70
122.10
72.25
71.62
6.62
4.39
1.16
3.23
3.43
2.65
120.39
69.46
68.83
2.05
4.00
0.65
3.35
3.46
2.63
120.77
70.93
70.12
3.14
3.79
0.37
3.42
3.49
3.04
120.26
84.12
75.48
0.44%
0.38%
0.44%
0.62%
0.58
0.84
176.30
1.01
0.07
0.38
0.89
206.90
0.79
0.20
10.97%
11.76%
11.46
19.98
$
0.27
$
12.06
11.70
0.18
0.43
1.00
192.96
0.83
—
12.39%
12.41
—
—
0.58
1.57
154.77
0.90
0.01
12.40%
12.80
—
—
3.16
3.62
0.29
3.33
3.37
2.88
119.25
82.96
80.43
0.90%
1.01
2.17
114.98
1.16
0.06
13.25%
13.24
—
—
_____________________
(1) Net of allowances for loan losses and deferred loan costs.
(2) For the years ended June 30, 2020 and 2019 the weighted average rate for municipal leases is adjusted for a 24% combined federal and state tax rate since the interest from these leases is
tax exempt.For 2018 it was adjusted at 30% and all other years were at 37%.
(3) Net interest income divided by average interest-earning assets.
(4) See Part II, Item 7 - "Non-GAAP Financial Measures" for additional details.
(5) Nonperforming assets include nonaccruing loans including certain restructured loans and real estate owned. At June 30, 2020, there were $6.3 million of restructured loans included in
nonaccruing loans and $2.8 million, or 17.6%, 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, SBA loans, equipment finance leases, indirect automobile loans, and municipal leases. We also work with a third party to originate HELOCs
which are pooled and sold. In addition, we 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
52
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.
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, gains on the sale of loans held for sale, 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.
Our geographic footprint includes seven markets accessed through numerous strategic acquisitions as well as two de novo commercial loan offices. Looking forward, we believe
opportunities currently exist within our market areas to grow our franchise. While COVID-19 has dampened our growth activities, we believe as the local and global economy
returns to normalcy we remain in a position to create organic growth through marketing efforts. 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, 2020, we had 41 locations in North Carolina (including the Asheville metropolitan area, 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).
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, 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."
Since our Conversion in 2012, we have been busy implementing new lines of business, adding new markets, improving processes, and updating our systems. We now have the
lines of business and markets necessary to continue our growth. Our focus over the next few years will be on maturing our lines of business and operating environment. Maturing
these lines of business will allow us to deepen current customer relationships and further penetrate our newer robust markets. The focus on the operating environment will be
designed to maximize our new systems and create efficient scalable processes. This two-pronged approach will lead to increased profitability and franchise value over time.
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.
53
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.
The Company will be adopting the new CECL standard as of July 1, 2020, the first quarter of fiscal 2021. While management continues to finalize documentation on the
methodologies utilized as well as the controls, processes, policies, and disclosures, we estimate the allowance for credit losses will be in a range of $42 million to $48 million.
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.
Non-GAAP Financial Measures
In addition to results presented in accordance with 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; and the ratio of the allowance for loan losses to total loans excluding PPP loans and acquired loans. The Company believes
these non-GAAP financial measures and ratios as presented are useful for both investors and management to understand the effects of certain items and provide an alternative
view of the Company's performance over time and in comparison to the Company's 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 from sale of premises and equipment
Less realized gain on sale of securities
2020
2019
Year Ended
June 30,
2018
2017
2016
$
97,129
$
90,134
$
85,331
$
90,259
$
79,641
—
—
—
—
—
—
7,805
—
—
400
$
97,129
$
90,134
$
85,331
$
82,454
$
79,241
$
104,104
$
106,831
$
101,330
$
91,191
$
30,332
1,190
—
—
22,940
1,173
—
—
18,972
1,559
164
—
16,107
2,354
385
22
81,647
14,351
2,537
10
—
Net interest income plus noninterest income – as adjusted
$
135,626
$
130,944
$
121,697
$
109,245
$
98,525
Efficiency ratio
Efficiency ratio (without adjustments)
71.62%
72.25%
68.83%
69.46%
70.12%
70.93%
75.48%
84.12%
80.43%
82.96%
54
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)
At June 30,
Total stockholders' equity
$
408,263 $
408,896 $
409,242 $
397,647 $
359,976
Less: goodwill, core deposit intangibles, net of taxes
26,468
27,562
29,125
30,157
17,169
2020
2019
2018
2017
2016
Tangible book value (1)
Common shares outstanding
Tangible book value per share
$
$
$
381,795 $
381,334 $
380,117 $
367,490 $
342,807
17,021,357
17,984,105
19,041,668
18,967,875
17,998,750
22.43 $
23.99 $
21.20 $
22.74 $
19.96 $
21.49 $
19.37 $
20.96 $
19.05
20.00
Book value per share
_________________________________________________________________
(1)
Tangible book value is equal to total stockholders' equity less goodwill and core deposit intangibles, net of related deferred tax liabilities.
Set forth below is a reconciliation to GAAP of tangible equity to tangible assets:
(Dollars in thousands)
Tangible equity(1)
Total assets
Less: goodwill, core deposit intangibles, net of taxes
Total tangible assets(2)
Tangible equity to tangible assets
At June 30,
2020
$
381,795
$
3,722,852
26,468
2019
381,334
3,476,178
27,562
$
3,696,384
$
3,448,616
10.33%
11.06%
_________________________________________________________________
(1) Tangible equity (or tangible book value) is equal to total stockholders' 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.
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
Less: PPP 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)
Recent Developments: COVID-19, the CARES Act, and Our Response
$
$
$
As of
June 30, 2020
June 30, 2019
2,768,930
$
2,705,186
168,266
80,697
214,046
—
2,519,967
$
2,491,140
28,072
$
182
27,890
21,429
201
21,228
1.11%
0.85%
The COVID-19 pandemic has caused economic and social disruption on an unprecedented scale. While some industries have been impacted more severely than others, all
businesses have been impacted to some degree. This disruption has resulted in business closures across the country, significant job loss, and aggressive measures by the federal
government.
Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the CARES Act (Coronavirus Aid, Relief,
and Economic Security Act of 2020) was signed into law on March 27, 2020 as a $2.2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic
downturn through various measures, including direct financial aid to families and economic stimulus to significantly impacted industry sectors. The package also includes
extensive emergency funding for hospitals and healthcare providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent
legislative and regulatory relief efforts are expected to have a material impact on our operations. While it is not possible to know the full extent of the impact as of the date of this
filing, we are disclosing potentially material items of which we are aware.
In response to the COVID-19 pandemic, the Company is offering a variety of relief options designed to support our customers and the communities we serve.
55
Paycheck Protection Program Participation. The CARES Act authorized the SBA to temporarily guarantee loans under the new PPP loan program. The goal of the PPP is to
avoid as many layoffs as possible, and to encourage small businesses to maintain payrolls. As a qualified SBA lender, the Company was automatically authorized to originate
PPP loans upon commencement of the program in April 2020. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest
payments deferred for six months from the date of disbursement. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the
borrower’s PPP loan, including any accrued interest, is eligible to be forgiven and repaid by the SBA so long as employee and compensation levels of the business are
maintained and 75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used for other qualifying expenses.
As of June 30, 2020, we had originated $80.7 million PPP loans for 285 customer applications totaling $82.2 million. Net origination fees on these loans are approximately $2.1
million which will be deferred and amortized into interest income over the life of the loans. Due to demand exceeding our capacity, we partnered with a third party to process
and fund an additional $30.4 million PPP loans for almost 900 customers. With the recent approval by Congress of additional funds for this program, applications will continue
to be processed through our third party relationship.
Loan Modifications. The Company is closely monitoring the effects of COVID-19 on our loan portfolio and will continue to monitor all the associated risks to minimize any
potential losses. HomeTrust Bank is offering payment and financial relief programs for borrowers impacted by COVID-19. These programs include loan payment deferrals for
up to 90 days, waived late fees, and suspension of foreclosure proceedings and repossessions. We have received numerous requests from borrowers for some type of payment
relief. The breakout by loan type is as follows:
Payment Deferrals by Loan Types (1)
(dollars in thousands)
March 31, 2020
June 30, 2020
August 31, 2020
$ Deferral
Percent of Total
Loan Portfolio
$ Deferral
Percent of Total
Loan Portfolio
$ Deferral
Percent of Total
Loan Portfolio
Lodging
26,815
1.0%
108,171
4.0%
64,686
2.4%
Other commercial real estate, construction and
development, and commercial and industrial
Equipment finance
One-to-four family
Other consumer loans
Total
116,198
19,443
10,802
3,546
4.4
0.7
0.4
0.1
367,443
33,693
36,821
5,203
13.7
1.3
1.4
0.2
43,056
4,547
2,360
589
1.6
0.2
0.1
—
$
176,804
6.6% $
551,331
20.5% $
115,238
4.3%
(1) Modified loans are not included in classified assets or nonperforming asset.
In addition, the Company’s management has evaluated its loan portfolio and identified the following loan categories as potentially the most impacted by the COVID-19
pandemic:
Payment Deferrals In Higher Risk Loan Sub-Categories as of June 30, 2020
(dollars in thousands)
Lodging
Restaurants
Shopping centers
Other retail businesses
Equipment finance
Total
Total
Deferrals
Total Balance
Percent of
Dollars in
Deferral
Percent of Total
Loan Portfolio
$
108,171 $
118,729
91.1%
3.9%
28,044
53,337
36,101
33,693
45,560
89,285
150,229
229,239
61.6
59.7
24.0
14.7
1.0
1.9
1.3
1.2
$
259,346 $
633,042
41.0%
9.3%
The Company does not have any exposure to oil/gas or credit cards at June 30, 2020.
We believe the steps we are taking are necessary to effectively manage our portfolio and assist our customers through the ongoing uncertainty surrounding the duration, impact
and government response to the COVID-19 pandemic. In addition, we will continue to work with our customers to determine the best option for repayment of accrued interest on
the deferred payments.
Allowance for Loan Losses. The Company recorded a provision for loan losses of $8.5 million for the year ended June 30, 2020, compared to a $5.7 million provision in the year
ended June 30, 2019. Approximately $4.3 million of the provision for the current year reflects probable credit losses related to COVID-19 based upon the conditions that existed
as of June 30, 2020, including consideration for the recent downturn in certain leading economic indicators, such as the weaker stock market, lower manufacturing activity and
retail sales, consumer confidence, and increases
56
in unemployment with the remaining provision being driven by increased charge-offs and impairments in our commercial and equipment finance portfolios. The provision
during the previous year was primarily related to one commercial customer relationship.
Branch Operations and Support Personnel. We have taken various steps to ensure the safety of our customers and our team members by continuing to limit branch activities to
appointment only and use of our drive-up facilities, and by encouraging the use of our digital and electronic banking channels, all the while adjusting for evolving State and
Federal guidelines. Many of our employees are continuing to work remotely or have flexible work schedules, and we have established protective measures within our offices to
help ensure the safety of those employees who must work on-site.
Capital. At June 30, 2020, the Company’s tangible equity to total tangible assets ratio was 10.33% and HomeTrust Bank’s capital was well in excess of all regulatory
requirements. Our strong capital level positions us well in the face of the challenges of the COVID-19 pandemic.
Accounting and Reporting Considerations. The CARES Act provides that a financial institution may elect to suspend (1) the requirements under GAAP for certain loan
modifications that would otherwise be categorized as a TDR and (2) any determination that such loan modifications would be considered a TDR, including the related
impairment for accounting purposes. The Bank has elected this as a policy change.
Also in response to the COVID-19 pandemic, the Federal Reserve, the FDIC, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the
Consumer Financial Protection Bureau, in consultation with the state financial regulators (collectively, the “agencies”) issued a joint interagency statement (issued March 22,
2020; revised statement issued April 7, 2020). Some of the provisions applicable to the Company include, but are not limited to: (i) loan modifications that do not meet the
conditions of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. The agencies confirmed with FASB staff that short-term
modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months)
modifications such as payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payment. (ii) with regard to loans not otherwise reportable as past
due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed by
the due date stipulated in the legal agreement. If a financial institution agrees to a payment deferral, these loans would not be considered past due during the period of the
deferral. (iii) while short-term COVID-19 modifications are in effect, these loans generally should not be reported as nonaccrual or as classified.
See "Risk Factors" under Part I, Item 1A for additional risks related to COVID-19.
Comparison of Financial Condition at June 30, 2020 and June 30, 2019
General. Total assets increased $246.7 million, or 7.1% to $3.7 billion at June 30, 2020 from $3.5 billion at June 30, 2019. Total liabilities increased $247.3 million, or 8.1% to
$3.3 billion at June 30, 2020 from $3.1 billion at June 30, 2019. Deposit growth of $458.5 million, or 19.7% was used to pay down $205.0 million, or 30.1% of borrowings and
fund the increase in total assets for fiscal 2020. The increase in loans held for sale primarily relates to home equity loans originated for sale during the period. Deferred income
taxes decreased $5.6 million, or 21.0% to $20.9 million at June 30, 2020 from $26.5 million at June 30, 2019 due to the use of net operating loss carryforwards and increases in
deferred tax liabilities from bonus depreciation during the year.
As of July 1, 2019, the Company adopted the new lease accounting standard, which drove several changes on the balance sheet. Land totaling $2.1 million related to the
Company's one finance lease (f/k/a capital lease) was reclassed from premises and equipment, net to other assets as a ROU asset and the corresponding liability was reclassed
from a separate line on the balance sheet to other liabilities as a lease liability. As of June 30, 2020, the Company has $4.6 million in ROU assets and corresponding lease
liabilities, which are maintained in other assets and other liabilities, respectively.
Cash, cash equivalents, and commercial paper. Total cash and cash equivalents increased $50.6 million, or 71.2%, to $121.6 million at June 30, 2020 from $71.0 million at
June 30, 2019. The commercial paper balance increased $63.5 million, or 26.3% to $305.0 million at June 30, 2020 from $241.4 million at June 30, 2019. Our investments in
commercial paper have short-term maturities and limited exposure of $15.0 million or less per each highly-rated company.
Investments. Securities available for sale increased $5.8 million, or 4.7%, to $127.5 million at June 30, 2020 compared to $121.8 million at June 30, 2019. During fiscal year
2020, $77.2 million of securities were purchased (primarily shorter term corporate bonds) partially offset by $57.9 million of securities which matured and $14.5 million of MBS
principal payments which were received. The overall increase in shorter-term corporate bonds provides the Company with higher yields compared to MBS and agency securities
while remaining within our investment policy. At June 30, 2020, certificates of deposit in other banks increased $3.7 million, or 7.1% to $55.7 million compared to $52.0 million
at June 30, 2019. The increase in certificates of deposit in other banks was due to $32.9 million in CD purchases partially offset by $29.3 million in maturities. All certificates of
deposit in other banks are fully insured by the FDIC. We evaluate individual investment securities quarterly for other-than-temporary declines in market value. We do not believe
that there were any other-than-temporary impairments at June 30, 2020; therefore, no impairment losses were recorded during fiscal year 2020. Other investments at cost
decreased $6.4 million, or 14.2% to $38.9 million at June 30, 2020 from $45.4 million at June 30, 2019. Other investments at cost included FHLB stock, FRB stock, and SBIC
investments totaling $23.3 million, $7.4 million, and $8.3 million, respectively. The overall decrease was driven by a $8.7 million, or 27.1% reduction in FHLB stock as a result
of $205.0 million in borrowings paid down during fiscal year 2020.
Loans held for sale. Loans held for sale increased to $77.2 million at June 30, 2020 from $18.2 million at June 30, 2019. The $59.0 million increase was primarily from
HELOCs originated for sale.
57
Loans. Net loans receivable increased $57.3 million, or 2.1%, to $2.7 billion at June 30, 2020 driven by $183.3 million in net organic loan growth (which excludes one-to-four
family loans transferred to held for sale, PPP loans, and purchases of home equity lines of credit) partially offset by $154.9 million of one-to-four family loans moved to held for
sale and sold.
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
Equipment finance
Municipal leases
Paycheck Protection Program
Total commercial loans
Total loans
June 30,
2020
June 30,
2019
Change
June 30,
June 30,
$
%
2020
2019
Percent of total
$
473,693 $
660,591 $ (186,898)
(28.3)%
17.1%
24.4%
137,447
139,435
(1,988)
71,781
81,859
132,303
10,259
116,972
(45,191)
80,602
1,257
153,448
(21,145)
11,416
(1,157)
907,342
1,162,464
(255,122)
1,052,906
927,261
125,645
215,934
154,825
229,239
127,987
80,697
210,916
160,471
132,058
112,016
—
5,018
(5,646)
97,181
15,971
80,697
1,861,588
1,542,722
318,866
(1.4)
(38.6)
1.6
(13.8)
(10.1)
(21.9)
13.6
2.4
(3.5)
73.6
14.3
100.0
20.7
5.0
2.6
3.0
4.8
0.4
32.8
38.0
7.8
5.6
8.3
4.6
2.9
67.2
$
2,768,930 $
2,705,186 $
63,744
2.4 %
100.0%
5.2
4.3
3.0
5.7
0.4
43.0
34.3
7.8
5.9
4.9
4.1
—
57.0
100.0%
Total equipment finance loans at June 30, 2020, were $229.2 million, an increase of $97.2 million from June 30, 2019. Our Equipment Finance line of business first began
operations in May 2018 and offers companies that are purchasing equipment for their business flexible and customizable repayment terms while managing related tax and
accounting issues. These products are primarily made up of commercial finance agreements and commercial loans for transportation, construction, and manufacturing
equipment. The loans have terms ranging from 24 to 84 months, with an average of five years and are secured by the financed equipment. Typical transaction sizes range from
$25,000 to $1.0 million, with an average size of approximately $150,000.
Asset Quality. Nonperforming assets increased by $3.0 million, or 22.4% to $16.3 million, or 0.44% of total assets, at June 30, 2020 compared to $13.3 million, or 0.38% of total
assets at June 30, 2019. Nonperforming assets included $15.9 million in nonaccruing loans and $337,000 in REO at June 30, 2020, compared to $10.4 million and $2.9 million,
in nonaccruing loans and REO, respectively, at June 30, 2019. The increase in nonaccruing loans primarily relates to one commercial loan relationship totaling $4.4 million that
was moved to nonaccrual during the second fiscal quarter. Included in nonperforming loans are $6.3 million of loans restructured from their original terms totaling $6.3 million,
of which $293,000 were current at June 30, 2020, with respect to their modified payment terms. Purchased impaired loans aggregating $965,000 obtained through 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 was 0.58% at June 30, 2020 and 0.38% at June 30, 2019.
The ratio of classified assets to total assets decreased to 0.84% at June 30, 2020 from 0.89% at June 30, 2019 due to the increase in total assets during fiscal 2020. Classified
assets increased slightly to $31.1 million at June 30, 2020 compared to $30.9 million at June 30, 2019. Delinquent loans (loans delinquent 30 days or more) at June 30, 2020
were $16.1 million, or 0.6% of total loans compared to $10.1 million, or 0.4% of total loans at June 30, 2019.
As of June 30, 2020, impaired loans decreased to $30.2 million from $33.0 million at June 30, 2019. 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 5 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 type. See "Critical Accounting Policies – Allowance for Loan Losses" for a description of the manner in which the provision for loan
losses is established.
The allowance for loan losses was $28.1 million, or 1.01% of total loans, at June 30, 2020 compared to $21.4 million, or 0.79% of total loans, at June 30, 2019, which was
primarily driven by additional allowance stemming from the Company's assessment of COVID-19 on the loan
58
portfolio. The allowance for loan losses to total gross loans excluding PPP loans and acquired loans was 1.11% at June 30, 2020, compared to 0.85% at June 30, 2019. The
Company recorded these acquired 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, 2020 was $182,000
compared to $201,000 at June 30, 2019.
There was a $8.5 million provision for loan losses for the year ended June 30, 2020, compared to $5.7 million for the corresponding period in fiscal year 2019. The increase in
the current year provision included significant adjustments relating to COVID-19 as a result of changes in qualitative factors based on increased risk in loan sub-categories,
which include: lodging, restaurants, shopping centers, other retail businesses, and equipment finance. The provision in the prior year primarily related to one commercial loan
relationship. Net loan charge offs totaled $1.9 million for the year ended June 30, 2020, compared to $5.3 million for fiscal year 2019. Net charge-offs as a percentage of average
loans were 0.07% and 0.20% for the year ended June 30, 2020 and 2019, respectively.
We believe that the allowance for loan losses as of June 30, 2020 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.
See "Recent Accounting Developments" in Note 1 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K for further discussion of the
adoption of CECL.
Real estate owned. REO decreased $2.6 million, to $337,000 at June 30, 2020 primarily due to $2.1 million in sales of REO and $536,000 in writedowns and losses on the sales
of REO. The total balance of REO included $97,000 in single-family homes and $240,000 in land, construction and development projects (both residential and commercial) at
June 30, 2020.
Deferred income taxes. Deferred income taxes decreased $10.2 million, or 38.4%, to $16.3 million at June 30, 2020 from $26.5 million at June 30, 2019. The decrease was
primarily driven by a reclassification of the remaining AMT credit to other assets, bonus depreciation taken on our equipment finance assets, the increase in our allowance for
loan losses, and from the realization of net operating losses through increases in taxable income.
Other assets. Other assets increased $21.8 million, or 93.9%, to $44.9 million at June 30, 2020 from $23.2 million at June 30, 2019. The increase was driven by the previously
mentioned ROU assets on our finance and operating leases and a $11.6 million increase in operating leases from our newer equipment finance line of business.
Deposits. Total deposits increased $458.5 million, or 19.7%, to $2.8 billion at June 30, 2020 from $2.3 billion at June 30, 2019. The increase was primarily due to deposit
growth initiatives which led to a $431.5 million increase in core deposits as well as a $27.0 million increase in certificates of deposit.
Borrowings. Borrowings, comprised of FHLB advances, decreased to $475.0 million at June 30, 2020 from $680.0 million at June 30, 2019. At June 30, 2020 all FHLB
advances had maturities of seven years or more (but callable in less than two years) with a weighted average interest rate of 1.39%.
Equity. Stockholders’ equity at June 30, 2020 decreased to $408.3 million from $408.9 million at June 30, 2019. Changes within stockholders' equity included $22.8 million in
net income and $2.5 million in stock-based compensation, offset by 1,114,094 shares of common stock repurchased at an average cost of $21.98, or approximately $24.5 million
in total, and $4.6 million related to cash dividends declared. The Company has not repurchased any stock since April 1, 2020. As of June 30, 2020, HomeTrust Bank and the
Company were considered "well capitalized" in accordance with their regulatory capital guidelines and exceeded all regulatory capital requirements. Tangible book value per
share increased $1.24, or 5.6% to $22.43 as of June 30, 2020 compared to $21.20 at June 30, 2019.
59
Average Balances, Interest and Average Yields/Cost
The following table sets forth the average balance sheet, interest income and expense, and average yields and costs for the years indicated. All average balances are daily average
balances. Nonaccruing loans have been included in the table as loans carrying a zero yield.
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable (1)
Commercial paper and deposits in other banks
Securities available for sale
Other interest-earning assets(3)
Total interest-earning assets
Other assets
Total Assets
Liabilities and equity:
Interest-bearing liabilities:
Interest-bearing checking accounts
Money market accounts
Savings accounts
Certificate accounts
Total interest-bearing deposits
Borrowings
Total interest-bearing liabilities
Noninterest-bearing deposits
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and stockholders' equity
Net earning assets
Average interest-earning assets to average interest-bearing
liabilities
Tax-equivalent:
Net interest income
Interest rate spread
Net interest margin(4)
Non-tax-equivalent:
Net interest income
Interest rate spread
Net interest margin(4)
Years Ended June 30,
Average
Balance
Outstanding
2020
Interest
Earned/
Paid(2)
Yield/
Rate(2)
Average
Balance
Outstanding
2019
Interest
Earned/
Paid(2)
Yield/
Rate(2)
Average
Balance
Outstanding
2018
Interest
Earned/
Paid(2)
Yield/
Rate(2)
$2,748,124
$ 123,364
4.49% $2,633,298
$ 123,076
4.67% $2,418,946
$ 106,641
385,208
150,249
42,119
3,325,700
265,376
3,591,076
457,455
767,315
166,588
764,013
2,155,371
568,377
2,723,748
365,634
90,247
3,179,629
411,447
3,591,076
$ 601,952
122.10%
7,699
3,687
2,694
2.00%
2.45%
6.40%
326,035
145,344
46,360
8,278
3,443
3,590
2.54%
2.37%
7.74%
346,982
172,461
37,873
5,939
3,668
2,713
137,444
4.13% 3,151,037
138,387
4.39% 2,976,262
118,961
245,859
3,396,896
267,399
3,243,661
1,627
6,910
195
14,105
22,837
0.36%
0.90%
0.12%
1.85%
462,933
689,946
194,635
596,727
1.06% 1,944,241
9,313
1.64%
672,186
32,150
1.18% 2,616,427
1,251
5,102
245
9,159
15,757
14,626
30,383
0.27%
0.74%
0.13%
1.53%
473,880
644,331
224,582
463,306
0.81% 1,806,099
2.18%
658,240
970
2,442
295
3,051
6,758
9,314
1.16% 2,464,339
16,072
307,420
63,229
2,987,076
409,820
3,396,896
$ 534,610
311,210
65,489
2,841,038
402,623
3,243,661
$ 511,923
120.43%
120.77%
$ 105,294
$ 108,004
$ 102,889
2.95%
3.17%
3.23%
3.43%
$ 104,104
$ 106,831
$ 101,330
2.92%
3.13%
3.19%
3.39%
4.41%
1.71%
2.13%
7.16%
4.00%
0.20%
0.38%
0.13%
0.66%
0.37%
1.41%
0.65%
3.35%
3.46%
3.29%
3.40%
(1)
(2)
(3)
(4)
The average loans receivable, net balances include loans held for sale and nonaccruing loans.
Interest income used in the average interest/earned and yield calculation includes the tax equivalent adjustment of $1.2 million, $1.2 million, and $1.6 million for fiscal years ended June 30, 2020, 2019, and 2018, respectively, calculated based on a combined
federal and state tax rate of 24%, 24%, and 30%, respectively.
The average other interest-earning assets consists of FRB stock, FHLB stock, and SBIC investments.
Net interest income divided by average interest-earning assets.
60
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
Years Ended
June 30,
2020 vs. 2019
Years Ended
June 30,
2019 vs. 2018
Increase/
(decrease)
due to
Volume
Rate
Total
increase/
(decrease)
Increase/
(decrease)
due to
Volume
Rate
$
5,367 $
(5,079) $
288 $
9,450 $
6,985 $
1,502
116
(328)
6,657
(2,081)
128
(568)
(7,600)
(579)
244
(896)
(943)
(359)
(577)
608
2,698
352
269
9,122
10,304
19,426
Total
increase/
(decrease)
16,435
2,339
(225)
877
$
$
(15) $
391 $
376 $
(22) $
303 $
572
(35)
2,568
(2,258)
1,236
(15)
2,378
(3,055)
1,808
(50)
4,946
(5,313)
173
(39)
879
198
2,487
(11)
5,229
5,114
281
2,660
(50)
6,108
5,312
832 $
935 $
1,767 $
1,189 $
13,122 $
14,311
Net increase (decrease) in tax equivalent interest income
$
(2,710)
$
5,115
Comparison of Results of Operations for the Years Ended June 30, 2020 and June 30, 2019
General. During 2020, net income totaled $22.8 million, or $1.30 per diluted share for the year ended June 30, 2020, compared to $27.1 million, or $1.46 per diluted share for
fiscal year 2019. Earnings during the year ended June 30, 2020 were negatively impacted by a significant increase in the provision for loan losses based on the Company's
assessment of COVID-19 on various macroeconomic factors. In addition, the decrease in interest rates over the past year has negatively affected the Company's net interest
margin.
Net Interest Income. Net interest income for 2020 was $104.1 million, compared to $106.8 million for 2019. The $2.7 million, or 2.6% decrease was due to a $960,000 decrease
in interest and dividend income primarily driven by a decrease in yields and a $1.8 million increase in interest expense.
During 2020, average interest-earning assets increased $174.7 million, or 5.5% to $3.3 billion compared to $3.2 billion in the prior year. For the year ended June 30, 2020, the
average balance of total loans receivable increased $114.8 million, or 4.4% compared to last year primarily due to organic loan growth. The average balance of commercial paper
and deposits in other banks increased $59.2 million, or 18.1% between the years driven by increases in commercial paper investments. These increases were primarily funded by
the $165.5 million, or 5.7% increase in average interest-bearing liabilities and noninterest-bearing deposits, as compared to last year. Net interest margin (on a fully taxable-
equivalent basis) for the year ended June 30, 2020 decreased to 3.17% from 3.43% for the year ended June 30, 2019.
Interest Income. Total interest and dividend income for 2020 decreased $960,000, or 0.7%, compared to 2019, which was driven by a $896,000, or 25.0% decrease in interest
income on other interest-earning assets and a $579,000, or 7.0% decrease in interest income from commercial paper and interest-bearing deposits in other banks. The reduced
income was a result of lower interest rates on commercial paper and other investments as well as lower interest earned on FHLB stock as borrowings were paid down during the
year. The overall decreases were partially offset by a $271,000, or 0.2% increase in loan interest income and a $244,000, or 7.1% increase in interest income from securities
available for sale. The additional loan interest income was driven by the increase in the average balance of loans receivable offset by a decrease in loan interest yield compared to
the prior year. Average loan yields decreased by 18 basis points to 4.49% for the year ended June 30, 2020 from 4.67% last year. For the years ended June 30, 2020 and 2019,
average loan yields included six and eight basis points, respectively, from the accretion of purchase discounts on acquired loans. 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
61
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.
Interest Expense. Total interest expense in 2020 increased $1.8 million, or 5.8%, compared to 2019. The increase was driven by a $7.1 million, or 44.9% increase in deposit
interest expense partially offset by a $5.3 million, or 36.3% decrease in interest expense on borrowings. The additional deposit interest expense was a result of a $211.1 million,
or 10.9% increase in the average balance of interest-bearing deposits along with a 25 basis point increase in the average cost of those deposits for the year ended June 30, 2020 as
compared to last year. Average borrowings for the year ended June 30, 2020 decreased $103.8 million, or 15.4% along with a 54 basis point decrease in the average cost of
borrowings compared to last year. The overall cost of funds increased two basis points to 1.18% for the year ended June 30, 2020 compared to 1.16% last year.
Provision for Loan Losses. During 2020, there was an $8.5 million provision for loan losses, compared to a $5.7 million in 2019. As discussed earlier, the current year
provision was driven by COVID-19 and increased charge-offs compared to prior year's provision which primarily related to one commercial relationship. See "Comparison of
Financial Condition at June 30, 2020 and 2019 - Asset Quality and Allowance for Loan Losses" for additional details.
Noninterest Income. Noninterest income in 2020 increased $7.4 million, or 32.2% to $30.3 million from $22.9 million in 2019 primarily due to a $3.7 million, or 60.0%
increase in the gain on sale of loans held for sale, a $2.7 million, or 74.7% increase in other noninterest income, and a $1.1 million, or 75.4% increase in loan income and fees.
The increase in the gain on sale of loans held for sale was a result of the one-to-four family loans sold during the period which resulted in a non-recurring $1.3 million gain. In
addition to this non-recurring gain, $203.9 million of residential mortgage loans were sold with gains of $5.4 million for the year ended June 30, 2020, compared to $120.6
million sold with gains of $2.8 million in the prior year. During the year ended June 30, 2020, $38.1 million of SBA commercial loans were sold with recorded gains of $2.8
million compared to $47.4 million sold and gains of $3.4 million in the prior year. In addition, $71.1 million of home equity loans were sold during the year for a gain of
$415,000. The increase in other noninterest income primarily related to a $2.4 million increase in operating lease income from the equipment finance line of business. The
increase in loan income and fees is primarily a result of our adjustable rate conversion program and prepayment fees on equipment finance loans.
Noninterest Expense. Noninterest expense for 2020 increased $7.0 million, or 7.8% to $97.1 million compared to $90.1 million in 2019. The increase was primarily due to a
$4.4 million, or 8.4% increase in salaries and employee benefits; a $3.0 million, or 27.4% increase in other expenses, mainly driven by depreciation from our equipment finance
line of business and expenses related to our core conversion; a $489,000, or 6.4% increase in computer services; a $235,000, or 7.7% increase in telephone, postage, and
supplies; and a $162,000, or 12.3% increase in REO-related expenses. Partially offsetting these increases was a $608,000, or 30.0% decrease in core deposit intangible
amortization; a decrease of $526,000, or 36.9% in deposit insurance premiums related to credit from the FDIC; and a $226,000, or 2.4% decrease in net occupancy expenses for
the year ended June 30, 2020 compared to the last year.
Income Taxes. Income tax expense for 2020 decreased $767,000, or 11.3% to $6.0 million from $6.8 million in 2019 as a result of lower taxable income. The effective tax rate
for the years ended June 30, 2020 and 2019 was 20.9% and 20.0%, respectively. For more information on income taxes and deferred taxes, see Note 13 of the Notes to the
Consolidated Financial Statements included in Item 8 of this Form 10-K.
Comparison of Results of Operation for the Year Ended June 30, 2019 and June 30, 2018
General. During 2019, net income totaled $27.1 million, or $1.46 per diluted share for the year ended June 30, 2019, compared to $8.2 million, or $0.44 per diluted share for
fiscal year 2018. Earnings during the year ended June 30, 2019 were negatively impacted by a $5.7 million provision for loan losses primarily related to the previously
mentioned commercial lending relationship, which was fully charged off. 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 2019.
Net Interest Income. Net interest income for 2019 was $106.8 million, a $5.5 million, or 5.4% increase from $101.3 million in 2018. The increase in net interest income for the
year ended June 30, 2019 reflects a $19.8 million increase in interest and dividend income due primarily to an increase in average interest-earning assets, partially offset by a
$14.3 million increase in interest expense.
During 2019, average interest-earning assets increased $174.8 million, or 5.9% to $3.1 billion compared to $3.0 billion for 2018. The $214.4 million, or 8.9% increase in average
balance of total loans receivable for the year ended June 30, 2019 was primarily due to organic loan growth. The average balance of other interest-earning assets increased $8.5
million, or 22.5% between the periods primarily due to increases in FHLB stock. These increases were mainly funded by the cumulative decrease of $48.4 million, or 9.3% in
average commercial paper and securities available for sale, and an increase in average interest-bearing liabilities of $152.1 million, or 6.2%. Net interest margin (on a fully
taxable-equivalent basis) for the year ended June 30, 2019 decreased three basis points to 3.43% from 3.46% for last year.
Interest Income. Total interest and dividend income for 2019 was $137.2 million, compared to $117.4 million for 2018, an increase of $19.8 million, or 16.9%. The increase
was primarily driven by a $16.8 million, or 16.0% increase in loan interest income and a $2.3 million, or 39.4% increase in interest income from commercial paper and deposits
in other banks, partially offset by a $225,000, or 6.1% 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 $1.1 million decrease in the accretion of purchase discounts on acquired loans to $2.1 million
for the year ended June 30, 2019 from $3.2 million for fiscal year 2018. Average loan yields increased 26 basis points to 4.67% for the year ended June 30, 2019 from 4.41% last
year. For the year ended June 30, 2019 and 2018, average loan yields included eight and 14 basis points, respectively, from the accretion of purchase discounts on acquired loans.
62
Interest Expense. Total interest expense was $30.4 million in 2019, a $14.3 million, or 89.0% increase from $16.1 million in 2018. The increase was primarily related to the the
44 basis point increase in the average cost of deposits and to a lesser extent the $138.1 million, or 7.7% increase in average interest-bearing deposits, resulting in additional
deposit interest expense of $9.0 million for the year ended June 30, 2019 as compared to the year ended June 30, 2018. In addition, there was an increase of 77 basis points in the
average cost of borrowings and a $13.9 million, or 2.1% increase in average borrowings, resulting in additional interest expense of $5.3 million for the year ended June 30, 2019
as compared to the year ended June 30, 2018. The overall cost of funds increased 51 basis points to 1.16% for the year ended June 30, 2019 compared to 0.65% last year.
Provision for Loan Losses. During 2019, there was a $5.7 million provision for loan losses, which primarily related to the previously mentioned $6.0 million commercial
lending relationship that was fully charged off, compared to no provision for 2018. The provision for loan losses reflects the amount required to maintain the allowance for losses
at an appropriate 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 $22.9 million for 2019 compared to $19.0 million for 2018. The $3.9 million, or 20.9% increase was primarily due to a $1.9
million, or 45.4% increase in gain on sale of loans primarily due to originations and sales of SBA commercial loans; a $1.1 million, or 47.1% increase in other noninterest
income primarily related to operating lease income; an $809,000, or 9.2% increase in service charges on deposit accounts as a result of an increase in deposit accounts and
related fees; and a $246,000, or 20.9% increase in loan income and fees. There was also no gain from the sale of premises and equipment for the year ended June 30, 2019 as
compared to $164,000 last year.
Noninterest Expense. Noninterest expense was $90.1 million in 2019, a $4.8 million, or 5.6% increase from $85.3 million in 2018. The increase was primarily due to a $4.1
million, or 8.6% increase in salaries and employee benefits; a $1.2 million, or 19.0% increase in computer services; a $375,000, or 25.4% increase in marketing and advertising;
and a $121,000, or 10.2% increase in REO-related expenses. The $4.1 million increase in salaries and benefits was primarily related to additional personnel in our new SBA and
equipment finance lines of business. Partially offsetting these increases was a $616,000, or 23.3% decrease in core deposit intangible amortization; a $235,000, or 2.4% decrease
in net occupancy expense; and a $193,000, or 11.9% decrease in deposit insurance premiums as a result of lower nonaccrual loans during the year ended June 30, 2019 compared
to last year.
Income Taxes. The provision for income taxes was $6.8 million for fiscal 2019 as compared to $26.7 million in 2018. The Company’s corporate federal income tax rate for the
years ended June 30, 2019 and 2018 was 21% and 27.5%, respectively. In the quarter ended December 31, 2017, following a revaluation of net deferred tax assets due to the Tax
Act, the Company wrote down deferred tax assets of $17.9 million, which were reflected as an adjustment through income tax expense.
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 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 have used at various times 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.
63
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 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, during certain periods of stable or
declining interest rate, we believe that the increased net interest income resulting from a mismatch in the maturity of our assets and liabilities portfolios may 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
evaluates 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, 2020, is forward-looking
information about our sensitivity to changes in interest rates. The table incorporates data from an independent 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 0.00% to 0.25% making an immediate change of -200, -300 and -400 basis points
improbable, a PVE calculation for a decrease of greater than 100 basis points has not been prepared. An increase in rates would 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, 2020, our loans with interest rate floors totaled approximately $586.8
million or 21.2% of our total loan portfolio and had a weighted average floor rate of 4.02%, $446.5 million of these loans were at their floor rate, of which $404.6 million, or
90.6%, had yields that would begin floating again once prime rates increase at least 200 basis points.
Change in Interest Rates in
June 30, 2020
Present Value Equity
Basis Points
Amount
$ Change
% Change
(Dollars in Thousands)
PVE
Ratio
+ 400
+ 300
+ 200
+ 100
Base
- 100
$
638,703 $
617,786
588,487
549,435
486,320
362,682
152,383
131,466
102,167
63,115
—
(123,638)
31 %
27
21
13
—
(25)
18%
18
16
15
13
10
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.
64
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, 2020, HomeTrust
Bank had an additional borrowing capacity of $186.2 million with the FHLB of Atlanta, a $109.2 million line of credit with the FRB, and three lines of credit with three
unaffiliated banks totaling $100.0 million. At June 30, 2020, we had $475.0 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, 2020, brokered deposits totaled $143.2 million or 5.1% 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 Bank and must provide for its own liquidity and pay its own operating expenses. The
Company’s primary source of funds consists of dividends or capital distributions from HomeTrust Bank, although there are regulatory restrictions on the ability of HomeTrust
Bank to pay dividends. At June 30, 2020, the Company (on an unconsolidated basis) had liquid assets of $3.9 million.
At the Bank level, 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, 2020, the total approved loan commitments and unused lines of credit outstanding amounted to $199.4 million and $398.8 million, respectively, as compared to $274.9
million and $353.7 million, respectively, as of June 30, 2019. Certificates of deposit scheduled to mature in one year or less at June 30, 2020, totaled $598.8 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 2020, cash and cash equivalents increased $50.6 million, or 71.2%, from $71.0 million as of June 30, 2019 to $121.6 million as of June 30, 2020. Cash provided by
financing activities of $217.6 million was partially offset by cash used in investing activities of $124.9 million and operating activities of $42.1 million. Primary sources of cash
for the year ended June 30, 2020 included a $458.5 million increase in deposits, $154.9 million in loans not initially originated for sale were sold, $57.9 million in maturing
securities available for sale, $14.5 million in principal repayments from MBSs, and $6.4 million in net redemptions of other investments. Primary uses of cash during the year
included a $205.0 million decrease in borrowings, an increase in loans of $205.7 million, a net increase in commercial paper of $57.5 million, $77.2 million in purchases of debt
securities available for sale, $3.7 million in purchases of certificates of deposit in other banks, net of maturities, $14.0 million in purchases of operating lease equipment, $4.6
million in cash dividends, and $24.5 million in common stock repurchases. All sources and uses of cash reflect our cash management strategy to increase our higher yielding
investments and loans by increasing lower costing borrowings and reducing our holdings of lower yielding investments.
During fiscal 2019, cash and cash equivalents increased $297,000, or 0.4%, from $70.7 million as of June 30, 2018 to $71.0 million as of June 30, 2019. Cash provided by
operating activities of $7.6 million and financing activities of $143.2 million was partially offset by cash used in investing activities of $150.5 million. Primary sources of cash
for the year ended June 30, 2019 included proceeds from maturities of investment securities of $38.4 million, maturities of certificates of deposit in other banks, net of purchases,
of $14.9 million, principal repayments of MBS of $31.6 million, a $45.0 million increase in borrowings, and a $131.0 million increase in net deposits. Primary uses of cash
during the period included an increase in portfolio loans of $173.8 million, a $34.7 million increase in the purchase of investment securities, a $16.6 million increase in operating
lease equipment and other assets, $30.6 million in common stock repurchases, the purchase of commercial paper, net of maturities, of $5.8 million, and $3.2 million in cash
dividends paid on common stock.
Contractual Obligations
The following table presents the Company's significant contractual obligations at June 30, 2020 (in thousands):
Borrowings
Capital lease
Operating leases
Total contractual obligations
1 Year or Less
Over 1 to 3
Years
Over 3 to 5
Years
More Than 5
Years
Total
$
$
— $
134
1,242
— $
— $
475,000 $
475,000
268
2,178
291
880
1,848
676
2,541
4,976
1,376 $
2,446 $
1,171 $
477,524 $
482,517
65
Off-Balance Sheet Activities
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, 2020, 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, 2020, 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
$
141,557
57,798
398,781
7,766
$
605,902
At June 30, 2020, stockholders' equity totaled $408.3 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 Federal Reserve. As a bank holding company, we are
subject to capital adequacy requirements of the Federal Reserve under the BHCA 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 NCCOB and is subject to minimum
capital requirements applicable to state member banks established by the Federal Reserve that are calculated in the same manner as 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, 2020, 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, 2020, 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 10.91%, 10.91%, 11.77%, and 9.94%, respectively. As of
June 30, 2019, Common Equity Tier 1, Tier 1 Risk-Based, Total Risk-Based, and Tier 1 Leverage capital ratios were 11.59%, 11.59%, 12.30%, and 10.34%, respectively.
As of June 30, 2020, 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 11.26%, 11.26%, 12.12%, and 10.26%, respectively. As of June 30, 2019, Common Equity Tier 1, Tier 1 Risk-Based, Total Risk-Based, and Tier 1
Leverage capital ratios were 12.20%, 12.20%, 12.91%, and 10.89%, respectively.
See Item 1, “Business-How We are Regulated,” and Note 19 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.
66
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.
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.
67
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, 2020 and 2019
Consolidated Statements of Income for the Years Ended June 30, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income for the Years Ended June 30, 2020, 2019 and 2018
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended June 30, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the Years Ended June 30, 2020, 2019 and 2018
Notes to Consolidated Financial Statements for the Years Ended June 30, 2020, 2019 and 2018
68
Page
69
70
71
72
73
74
75
77
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, 2020 and 2019, and the related
consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2020, 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, 2020 and 2019, and the result of their operations and their cash flows for each of the three years in the period ended June 30,
2020, 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, 2020, 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 11, 2020 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 11, 2020
69
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, 2020, 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, 2020, 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, 2020 and 2019, and for each of the years in the three years ended June 30, 2020, and our report dated September 11,
2020, 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 11, 2020
70
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 costs
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
Other liabilities
Total liabilities
Stockholders’ Equity
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
June 30,
2020
2019
$
31,908 $
89,714
121,622
304,967
55,689
127,537
38,946
77,177
2,769,119
(28,072)
2,741,047
58,462
12,312
337
16,334
92,187
25,638
1,078
49,519
40,909
30,134
71,043
241,446
52,005
121,786
45,378
18,175
2,705,190
(21,429)
2,683,761
61,051
10,533
2,929
26,523
90,254
25,638
2,499
23,157
3,722,852 $
3,476,178
$
$
2,785,756 $
475,000
53,833
3,314,589
—
170
169,648
242,776
(6,348)
2,017
408,263
2,327,257
680,000
60,025
3,067,282
—
180
190,315
224,545
(6,877)
733
408,896
3,476,178
$
3,722,852 $
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, 17,021,357 shares issued and outstanding at June 30,
2020; 17,984,105 at June 30, 2019
Additional paid in capital
Retained earnings
Unearned Employee Stock Ownership Plan (ESOP) shares
Accumulated other comprehensive income
Total stockholders’ equity
Total Liabilities and Stockholders’ Equity
The accompanying notes are an integral part of these consolidated financial statements.
71
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Dollars in thousands, except per share data)
2020
June 30,
2019
2018
$
122,174 $
121,903 $
7,699
3,687
2,694
136,254
22,837
9,313
32,150
104,104
8,500
95,604
9,382
2,494
9,946
2,246
—
6,264
30,332
56,709
9,228
8,153
3,275
1,872
900
536
939
1,421
14,096
97,129
28,807
6,024
8,278
3,443
3,590
137,214
15,757
14,626
30,383
106,831
5,700
101,131
9,611
1,422
6,218
2,103
—
3,586
22,940
52,291
9,454
7,664
3,040
1,853
1,426
439
874
2,029
11,064
90,134
33,937
6,791
22,783 $
27,146 $
1.34 $
1.30 $
1.52 $
1.46 $
105,082
5,939
3,668
2,713
117,402
6,758
9,314
16,072
101,330
—
101,330
8,802
1,176
4,276
2,117
164
2,437
18,972
48,170
9,689
6,440
2,958
1,478
1,619
127
1,065
2,645
11,140
85,331
34,971
26,736
8,235
0.45
0.44
Interest and Dividend Income
Loans
Commercial paper and interest-bearing deposits
Securities available for sale
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
Gain on sale of loans held for sale
BOLI income
Gain from sale of premises and equipment
Other, net
Total noninterest income
Noninterest Expense
Salaries and employee benefits
Net occupancy expense
Computer services
Telephone, postage, and supplies
Marketing and advertising
Deposit insurance premiums
Loss on sale and impairment of REO
REO expense
Core deposit intangible amortization
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
The accompanying notes are an integral part of these consolidated financial statements.
16,729,056
17,292,239
17,692,493
18,393,184
18,028,854
18,726,431
$
$
$
72
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)
Total other comprehensive income (loss)
Comprehensive Income
The accompanying notes are an integral part of these consolidated financial statements.
$
$
$
$
73
2020
June 30,
2019
2018
22,783 $
27,146 $
8,235
1,667 $
(383)
1,284 $
24,067 $
3,027 $
(696)
2,331 $
29,477 $
(2,489)
618
(1,871)
6,364
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
Comprehensive
Income (Loss)
Accumulated Other
Total
Stockholders’
Equity
Balance at June 30, 2017
18,967,875 $
190 $
213,459 $
191,660 $
(7,935) $
Net income
—
—
—
8,235
—
273
$
—
397,647
8,235
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
—
680
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
529
—
Balance at June 30, 2018
19,041,668 $
191 $
217,480 $
200,575 $
(7,406) $
Net income
Cash dividends declared on common
stock, $0.18/common share
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
—
—
(1,149,785)
23,625
(4,300)
(7,414)
80,311
—
—
—
—
—
—
(11)
—
—
—
—
—
—
—
—
27,146
—
(3,176)
(30,627)
—
—
(205)
1,173
736
865
893
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
529
—
Balance at June 30, 2019
17,984,105 $
180 $
190,315 $
224,545 $
(6,877) $
Net income
Cash dividends declared on common
stock, $0.27/common share
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
—
—
(1,114,094)
56,306
(3,400)
(8,474)
106,914
—
—
—
—
—
—
(12)
—
—
—
2
—
—
—
—
—
22,783
—
(4,552)
(24,472)
—
—
(222)
1,539
717
1,105
666
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
529
—
—
—
—
—
—
—
—
—
(1,871)
(1,598)
$
—
—
—
—
—
—
—
—
—
2,331
733
$
—
—
—
—
—
—
—
—
—
—
1,284
680
—
—
(494)
651
1,758
1,269
1,367
(1,871)
409,242
27,146
(3,176)
(30,638)
—
—
(205)
1,173
736
865
1,422
2,331
408,896
22,783
(4,552)
(24,484)
—
—
(222)
1,541
717
1,105
1,195
1,284
Balance at June 30, 2020
17,021,357 $
170 $
169,648 $
242,776 $
(6,348) $
2,017
$
408,263
The accompanying notes are an integral part of these consolidated financial statements.
74
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 (used in) operating activities:
2020
June 30,
2019
2018
$
22,783 $
27,146 $
8,235
Provision for loan losses
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 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
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 (used in) operating activities
Investing Activities:
Purchase of securities available for sale
Proceeds from maturities of securities available for sale
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
Proceeds from sale of loans not originated for sale
Net increase in loans
Purchase of BOLI
Proceeds from redemption of BOLI
Purchase of equipment for operating leases and other assets
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.
Net cash used in investing activities
8,500
5,856
5,196
(5,352)
—
536
(2,246)
(9,946)
(377,741)
313,967
(187)
(4,584)
1,421
1,195
1,822
(3,280)
(42,060)
(77,228)
57,894
(57,535)
(32,949)
29,265
14,512
6,432
154,870
(205,693)
(164)
477
(13,993)
(2,925)
—
—
2,102
—
5,700
4,243
5,346
(6,828)
—
439
(2,103)
(6,218)
(190,870)
174,973
(768)
(4,835)
2,029
1,422
1,601
(3,649)
7,628
(34,675)
38,430
(5,824)
(18,154)
33,086
31,627
(3,447)
—
(173,754)
(137)
14
(16,578)
(2,124)
—
—
1,047
—
—
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
(36)
31,319
—
20,675
(75,202)
(17,201)
82,538
20,471
2,141
—
(168,602)
(76)
146
—
(3,458)
923
(30)
3,883
(225)
(124,935)
(150,489)
(134,017)
75
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (continued)
(Dollars in thousands)
Financing Activities:
Net increase in deposits
Net increase (decrease) in borrowings
Common stock repurchased
Cash dividends paid
Retired stock
Exercised stock options
Net cash provided by 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 from loans held for sale to total loans held for investment
Transfers of loans to held for sale from loans held for investment
New ROU asset and lease liabilities from adoption of new lease accounting standard
Transfer of land from property & equipment to other assets for new finance lease
accounting
The accompanying notes are an integral part of these consolidated financial statements.
76
2020
June 30,
2019
2018
450,291
(205,000)
(24,484)
(4,552)
(222)
1,541
217,574
50,579
71,043
131,004
45,000
(30,638)
(3,176)
(205)
1,173
143,158
297
70,746
121,622 $
71,043 $
2020
June 30,
2019
2018
33,315 $
1,686
28,997 $
1,549
1,284
46
98,288
240,453
5,296
2,052
2,331
731
—
5,794
—
—
147,802
(61,500)
—
—
(494)
651
86,459
(16,239)
86,985
70,746
15,716
887
(1,871)
1,346
—
—
—
—
$
$
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,
East Tennessee
Charlotte,
(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.
Upstate South Carolina (Greenville),
Greensboro/"Piedmont" region,
and Raleigh/Cary),
Operating, Accounting and Reporting Considerations Related to COVID-19
The COVID-19 pandemic has negatively impacted the global economy. In response to this crisis, the CARES Act was passed by Congress and signed into law on March 27,
2020. The CARES Act provides an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the economy by supporting individuals and businesses through loans,
grants, tax changes, and other types of relief. Some of the provisions applicable to the Company include, but are not limited to:
• Accounting for Loan Modifications - The CARES Act provides that a financial institution may elect to suspend (1) the requirements under GAAP for certain loan modifications
that would otherwise be categorized as a TDR and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for
accounting purposes. The Bank has elected this as a policy change.
• PPP - The CARES Act established the PPP, an expansion of the SBA's 7(a) loan program and the Economic Injury Disaster Loan Program, administered directly by the SBA.
Also in response to the COVID-19 pandemic, the Federal Reserve, the FDIC, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the
Consumer Financial Protection Bureau, in consultation with the state financial regulators (collectively, the “agencies”) issued a joint interagency statement (issued March 22,
2020; revised statement issued April 7, 2020). Some of the provisions applicable to the Company include, but are not limited to:
• Accounting for Loan Modifications - Loan modifications that do not meet the conditions of the CARES Act may still qualify as a modification that does not need to be
accounted for as a TDR. The agencies confirmed with FASB staff that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were
current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or
insignificant delays in payment.
• Past Due Reporting - With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-
19 as past due because of the deferral. A loan’s payment date is governed by the due date stipulated in the legal agreement. If a financial institution agrees to a payment
deferral, these loans would not be considered past due during the period of the deferral.
• Nonaccrual Status and Charge-offs - While short-term COVID-19 modifications are in effect, these loans generally should not be reported as nonaccrual or as classified.
See Note 5 Loans for more information on COVID-19 specific loans that have been modified or in deferral.
If the negative impact of COVID-19 is sustained into future quarters and years, the Company will be adversely affected. As such, we will maintain our heightened sense of
awareness during our review of triggering events that could lead to goodwill impairment.
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, WNCSC at or for the years ended June 30,
2020, 2019, and 2018. 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.
77
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
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 $15,000 per issuer.
Debt Securities
The Company classifies debt 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.
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.
78
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
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 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. From time to time, 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 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.
79
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
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.
Equipment finance is primarily made up of commercial finance agreements and commercial loans and leases provided by our new Equipment Finance line of business, and
primarily for transportation, construction, and manufacturing equipment. The loans have terms on average of five years or less and are secured by the financed equipment.
PPP loans are an expansion of the SBA's 7(a) loan program and the Economic Injury Disaster Loan Program, administered directly by the SBA and as a result of the
CARES Act passed by Congress in response to the COVID-19 pandemic. The PPP loans are low interest notes to small business customers to cover payroll expenses and to
a lesser extent other various expense ranging from interest on mortgage obligations, rent, utilities, and interest on outstanding debt. The loans are intended to be forgivable if
the borrower maintains employees and complies with the CARES Act.
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
Residential mortgages held for sale are valued at the lower of cost or fair value as determined by outstanding commitments from investors on a “best efforts” basis or current
investor yield requirements, calculated on the aggregate loan basis.
The Company originates loans guaranteed by the 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 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 adjusted to fair value and reclassified total loans, net of deferred
costs (loans held for investment). The net value of the retained loans is included in the appropriate loan classification for disclosure purposes.
Beginning in fiscal year 2019, the Company began originating HELOCs through a third party. These loans are originated in various states outside the Company's geographic
footprint, but are underwritten to the Company's underwriting guidelines. The loans are held for sale by the Company over a 90 to 180 day period and are serviced by the third
party. The loans are marketed by the third party to investors in pools and once sold the Company recognizes a gain or loss on the sale.
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.
80
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
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. See "Recent Accounting Pronouncements" for details on the adoption of
CECL.
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 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 net realizable value or fair value less costs to sell, 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,
81
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
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 charge-offs of 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 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 FHLB of Atlanta and the FRB. These investments are carried at cost due to the redemption provisions of these
entities and the restricted nature of the securities. SBICs are considered equity securities without a readily determinable fair value. Prior to the adoption of ASU 2016-01 in the
first quarter of fiscal 2019, SBICs were maintained in other assets. Beginning July 1, 2018, the SBIC investments are accounted for at cost less impairment, plus or minus
changes resulting from observable price changes. Management reviews the investments for impairment based on the ultimate recoverability of their cost basis.
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.
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 the reporting unit. The Company uses a combination of the market and income approaches to
estimate the fair value of its reporting unit when the quantitative impairment approach is chosen or required. All inputs are evaluated by management at the evaluation date of
April 1st and reviewed again each reporting period for triggering events to ensure no significant changes occurred that could indicate impairment. Subsequent reversal of
goodwill impairment losses is not permitted.
82
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Core Deposit Intangibles
Core deposit intangibles represent 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 13 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, 2020 and
2019, 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 2016.
Employee Benefit Plans
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. 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 are reallocated among other participants in the Plan. At the discretion of the Bank, cash dividends, when paid on allocated shares, are 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 are 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. 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.
See Note 14 for additional information.
Equity Incentive Plan
The Company issues restricted stock, restricted stock units, 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 FASB 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.
83
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Net Income Per Share
Per the provisions of ASC 260, Earnings Per Share, basic EPS 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 EPS 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 EPS pursuant to the two-class method. The two-class method is an earnings allocation formula that
determines EPS 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 EPS 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 16 for further discussion on the Company’s EPS.
Adoption of Lease Accounting Standard
On July 1, 2019, the Company adopted ASU 2016-02, Leases (“Topic 842”), and subsequent related ASUs. The new leasing standard modifies the accounting, presentation, and
disclosures for both lessees and lessors. The Company elected the modified retrospective transition option which allows for application of the Topic 842 guidance at the adoption
date. Therefore, comparative prior period financial information was not adjusted and will continue to be reported under the previous accounting guidance of ASC 840, Leases
(ASC 840). No cumulative-effect adjustment to retained earnings as of July 1, 2019 was necessary as a result of adopting the new standard. The Company elected the “package of
practical expedients” permitted under the transition guidance which allows the Company not to reassess its prior conclusions regarding lease identification, classification of
existing leases, and treatment of initial direct costs on existing leases. Any lease arrangements and significant modifications entered into subsequent to the adoption date are
accounted for in accordance with the new standard.
Lessee Topic 842 Accounting
The new leasing standard requires recognition of operating leases on the consolidated balance sheets as ROU assets and lease liabilities. ROU assets represent our right to use
underlying assets for the lease terms and lease liabilities represent our obligation to make lease payments arising from the leases. ROU assets and lease liabilities are recognized
at the lease commencement date based on the estimated present value of lease payments over the lease term. We use our estimated incremental borrowing rate in determining the
present value of lease payments for operating leases and the implicit rate in the lease for our one finance lease.
For operating leases, the Company recognized lease liabilities, with corresponding ROU assets, based on the present value of unpaid lease payments for existing operating leases
longer than twelve months as of July 1, 2019. The ROU assets were adjusted per Topic 842 transition guidance for existing lease-related balances of accrued and prepaid rent,
and unamortized lease incentives provided by lessors. As a result, the Company recognized ROU assets of approximately $5,300 in other assets and corresponding lease
liabilities of approximately $5,300 in other liabilities as of July 1, 2019. The July 1, 2019 incremental borrowing rates determined on a collateralized basis for the remaining
lease terms were utilized when determining the present value of lease payments at the date of initial adoption.
For our finance lease, the Company leases land for one of its retail locations. Upon adoption of Topic 842, the Company reclassed $2,100 from land to ROU assets in other
assets. In addition, the corresponding liability of $1,900, which was disclosed separately on the balance sheet was reclassified to other liabilities.
The Company elected the lessee practical expedient to not separate lease and non-lease components. The Company also elected the short-term lease recognition exemption and
will not recognize ROU assets or lease liabilities for leases with a term less than 12 months.
Operating lease cost is recognized as a single lease cost on a straight-line basis over the lease term and is recorded in net occupancy expense. Variable lease payments for
common area maintenance, property taxes and other operating expenses are recognized as expense in the period when the changes in facts and circumstances on which the
variable lease payments are based occur.
Finance lease cost is recognized as a single lease cost using the effective interest method and is recorded in net occupancy expense.
Lessee Accounting Prior to Adoption of Topic 842
Prior to the adoption of ASC 842, the Company applied the guidance of ASC 840. Under ASC 840, operating lease arrangements were off-balance sheet and ROU assets and
lease liabilities were not recognized. Operating lease rent expense was recognized on a straight-line basis over the lease term and recorded in net occupancy expense. Common
area maintenance, property taxes, and other operating expenses related to leased premises were also recognized in net occupancy expenses, consistent with similar costs for
owned locations.
Lessor Topic 842 Accounting
Prior to the adoption of Topic 842, we determined the lease classification at commencement date. Leases not classified as sales-type or direct financing leases are classified as
operating leases. The primary accounting criteria we use for lease classification are (i) review to determine if the lease transfers ownership of the underlying asset to the lessee
by the end of the lease term, (ii) review to determine if the lease grants the lessee a purchase option that the lessee is reasonably certain to exercise, (iii) determine if the lease
term is for a major part of the remaining economic life of the underlying asset and (iv) determine if the present value of the sum of the lease payments and any residual value
guarantees
84
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
equals or exceeds substantially all of the fair value of the underlying asset. We do not lease equipment of such a specialized nature that it is expected to have no alternative use to
the lessor at the end of the lease term.
The Company elected a lessor accounting policy to exclude from revenue and expenses sales taxes and other similar taxes assessed by a governmental authority on lease
revenue-producing transactions and collected by the lessor from a lessee.
Operating Leases - Assets leased under an operating lease are carried at cost less accumulated depreciation. These assets are depreciated to their estimated residual value using
the straight-line method over the lesser of the lease term or estimated useful life of the asset. Assets received at the end of the lease, which are intended to be sold, are marked to
the lower of cost or fair value less selling costs with the adjustment recorded in other noninterest income.
At the inception of each operating lease, we record a residual value for the leased equipment based on our estimate of the future value of the equipment at the end of the lease
term or end of the equipment’s estimated useful life as indicated by industry data. Operating leases have higher risk because a smaller percentage of the equipment's value is
covered by contractual cash flows over the term of the lease. If the market value of leased equipment under operating leases decreases at a rate greater than we projected, whether
due to rapid technological or economic obsolescence, unusual wear and tear on the equipment, excessive use of the equipment, recession or other adverse economic conditions,
or other factors, it could adversely affect the current values or the residual values of such equipment. The Company seeks to mitigate these risks by maintaining a relatively
young fleet of leased assets with wide operator bases, which can facilitate attractive lease and utilization rates. The Company manages and evaluates residual values by
performing periodic reviews of estimated residual values and monitoring levels of residual realizations. A change in estimated operating lease residual values would result in a
change in future depreciation expense. Any impairments are recognized at the time a change is identified.
Rental revenue on operating leases is recognized on a straight-line basis over the lease term and is included in other noninterest income.
Finance Leases - The Company’s finance leases are classified as direct financing leases under ASC 842. The Company’s finance lease activity primarily relates to leasing of new
equipment with the equipment purchase price equal to fair value and therefore there is no selling profit or loss at lease commencement. When there is no selling profit or loss,
initial direct costs are deferred at the commencement date and included in the measurement of the net investment in the lease.
A lease receivable is recorded for finance leases at present value discounted using the rate implicit in the lease. The lease receivable includes lease payments not yet paid and the
guarantee of the residual value by the lessee or unrelated third party, as applicable. Interest income is recognized over the lease term at a constant periodic discount rate on the
remaining balance of the lease net investment using the rate implicit in the lease. After the commencement date, lease payments collected are applied to reduce net investment
and recognize interest income.
The recognition of interest income is suspended, and an account is placed on non-accrual status when, in the opinion of management, full collection of all principal and interest
due is doubtful. All future interest income accruals, as well as amortization of deferred fees, costs, and purchase premiums or discounts are suspended. Subsequent lease
payments received are applied to the outstanding net investment balance until such time as the account is collected, charged-off or returned to accrual status. Finance leases that
are nonaccrual do not accrue interest income; however, payments designated by the borrower as interest payments may be recorded as interest income. To qualify for this
treatment, the remaining recorded investment in the lease must be deemed fully collectible.
The recognition of interest income on finance leases is suspended, and all previously accrued but uncollected revenue is reversed, when lease payments are contractually
delinquent for 90 days or more. Accounts, including accounts that have been modified, are returned to accrual status when, in the opinion of management, collection of
remaining lease receivables are reasonably assured, and there is a sustained period of repayment performance, generally for a minimum of six months.
Certain finance leases also have residual values at the inception of the lease which are based on our estimate of the future value of the equipment at the end of the lease term or
end of the equipment’s estimated useful life as indicated by industry data. Finance leases bear the least risk because contractual payments usually cover approximately 90% of
the equipment's cost at the inception of the lease. A change in estimated finance lease residual values during the lease term may impact the loss allowance as a decrease in the
residual value may cause an impairment to be recorded on the finance lease.
Lessor Accounting Prior to Adoption of Topic 842
Lessor accounting was not fundamentally changed by Topic 842 and remains similar to the prior accounting model, with updates to align with certain changes to the lessee
model (e.g., certain definitions, such as initial direct costs, have been updated) and the new revenue recognition standard. The new rules did not have a significant impact on our
classification of leases as finance or operating. The new lease guidance has a narrower definition of initial direct costs that may be capitalized and allocated internal costs and
professional fees to negotiate and arrange the lease agreement that would have been incurred regardless of lease execution no longer qualify as initial direct cost.
Recent Accounting Pronouncements
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 annual periods, and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted
for all entities beginning after December 15, 2018, including
85
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
interim periods within those fiscal years. The Company has not early adopted. The Company has selected a third-party vendor to provide ongoing support under the new
methodology to apply vendor credit models to its portfolios. The Company has evaluated the impact of the current expected credit loss methodology to identify the necessary
modifications in accordance with this standard which will require 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 incurred loss methodology. Management does not expect the standard to
have a material impact on its commercial paper and investment securities portfolios at adoption. Management has determined that peer loss experience provides the best basis for
its assessment of expected credit losses to determine its allowance and has run parallel model results in preparation for adopting the new standard on July 1, 2020. Management
continues to finalize documentation on the methodologies utilized as well as the controls, processes, policies, and disclosures. The Company will recognize a cumulative-effect
adjustment to the opening retained earnings as of the adoption date. Management currently estimates the allowance for credit losses will be in a range of $42,000 to $48,000,
increasing the allowance by approximately $14,000 to $20,000. Management also currently estimates a liability for unfunded commitments in a range of $1,500 to $3,000. The
estimated decline in equity, net of tax, will range from $12,000 to $18,000. The actual impact will depend on a number of internal and external factors including: outstanding
balances, characteristics of our loan and securities portfolios, macroeconomic conditions, forecast information, and management's judgment. Additionally, adoption of the new
ASU could result in higher volatility in our quarterly credit loss provision than the current reserve process and could adversely impact the Company's ongoing earnings.
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 Company adopted this ASU on July 1, 2019. The adoption did not have a material effect on the
Company's Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value
Measurement." The amendments in this ASU removes, modifies, and adds certain disclosure requirements related to fair value measurements in ASC 820. The amendments in
this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019 and early adoption is permitted. The adoption of
ASU No. 2018-13 is not expected to have a material impact on the Company's Consolidated Financial Statements.
In November 2018, the FASB issued ASU 2018-19, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses." This update clarifies that receivables
arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance
with Topic 842, Leases. The effective date and transition requirements for this ASU are the same as ASU 2016-13. The adoption of ASU No. 2018-19 is not expected to have a
material impact on the Company's Consolidated Financial Statements.
In December 2018, the FASB issued ASU 2018-20, "Leases (Topic 842): Narrow-Scope Improvements for Lessors." The amendments in this update permit lessors, as an
accounting policy election, to not evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs. Instead, those lessors will account for those costs as
if they are lessee costs. A lessor making this election will exclude from the consideration in the contract and from variable payments not included in the consideration in the
contract all collections from lessees of taxes within the scope of the election and will provide certain disclosures. For certain lessor costs, the lessor must exclude from variable
payments, and therefore revenue, lessor costs paid by lessees directly to third parties from variable payments. In addition, the lessor must account for costs excluded from the
consideration of a contract that are paid by the lessor and reimbursed by the lessee as variable payments. A lessor will record those reimbursed costs as revenue. The amendments
in this ASU related to recognizing variable payments for contracts with lease and nonlease components require lessors to allocate (rather than recognize as currently required)
certain variable payments to the lease and nonlease components when the changes in facts and circumstances on which the variable payment is based occur. After the allocation,
the amount of variable payments allocated to the lease components will be recognized as income in profit or loss in accordance with Topic 842, while the amount of variable
payments allocated to nonlease components will be recognized in accordance with other Topics, such as Topic 606. The Company adopted this ASU on July 1, 2019. The
adoption did not have a material effect on the Company's Consolidated Financial Statements.
In March 2019, the FASB issued ASU 2019-01, "Leases (Topic 842): Codification Improvements." The amendments in this update include the following items: i) determining
the fair value of the underlying asset by lessors that are not manufacturers or dealers; ii) requiring cash received from lessors from sales-type and direct financing leases to be
presented in the cash flow statement within investing activities; and iii) clarifying interim disclosure requirements. The Company adopted this ASU on July 1, 2019. The
adoption did not have a material effect on the Company's Consolidated Financial Statements.
In April 2019, the FASB issued ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic
825, Financial Instruments." The amendments in this update are part of the FASB's ongoing project to improve codification and correcting unintended application. The items
within this ASU are not expected to have significant effect on current accounting practice. The effective date and transition requirements for the amendments to Financial
Instruments (ASU 2016-01) are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019 and early adoption is permitted.
The effective date and transition requirements for the amendments to Financial Instruments-Credit Losses (ASU 2016-13) are the same as ASU 2016-13 noted above. The
effective date and transition requirements for the amendments to Derivatives and Hedging (ASU 2017-12) are the
86
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
same as ASU 2017-12 noted above.The adoption of ASU No. 2019-04 is not expected to have a material impact on the Company's Consolidated Financial Statements.
In May 2019, the FASB issued ASU 2019-05, "Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief." The amendments in this update allow companies
to irrevocably elect, upon the adoption of ASU 2016-13, the fair value option for financial instruments that i) were previously recorded at amortized cost and ii) are within the
scope of the credit losses guidance in ASC 326-20, iii) are eligible for the fair value option under ASC 825-10, and iv) are not held-to-maturity debt securities. The effective date
and transition requirements for this ASU is the same as ASU 2016-13. The adoption of ASU No. 2019-05 is not expected to have a material impact on the Company's
Consolidated Financial Statements.
In July 2019, the FASB issued ASU 2019-07, "Codification Updates to SEC Sections." This ASU amends certain paragraphs in the ASC to reflect the issuance of SEC final rules
on Disclosure Update and Simplification and Investment Company Reporting Modernization and other miscellaneous updates. The amendments became effective upon issuance.
The adoption did not have a material effect on the Company's Consolidated Financial Statements.
In November 2019, the FASB issued ASU 2019-11, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses." This ASU clarifies certain aspects of the
amendments in ASU 2016-13 and is part of the FASB's ongoing project to improve codification and correcting unintended application. The items within this ASU are not
expected to have a significant effect on current accounting practice. The effective date and transition requirements for this ASU is the same as ASU 2016-13. The adoption of
ASU No. 2019-11 is not expected to have a material impact on the Company's Consolidated Financial Statements.
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." This ASU is part of the FASB's simplification
initiative to reduce complexity in accounting standards. The items within this ASU are not expected to have a significant effect on current accounting practice. The effective date
and transition requirements for the first and second items of this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December
15, 2020 and early adoption is permitted. The adoption of ASU No. 2019-12 is not expected to have a material impact on the Company's Consolidated Financial Statements.
In January 2020, the FASB issued ASU 2020-01, "Investment—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives
and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815." This ASU clarified the interaction of the accounting for equity securities
under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options
accounted for under Topic 815. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15,
2021 and early adoption is permitted. The adoption of ASU No. 2020-01 is not expected to have a material impact on the Company's Consolidated Financial Statements.
In March 2020, the FASB issued ASU 2020-03, "Codification Improvements to Financial Instruments." This ASU makes certain narrow-scope amendments to the following: i)
clarified that all entities are required to provide fair value option disclosures; ii) clarified the applicability of the portfolio exception in ASC 820 to nonfinancial items; iii) aligned
disclosures for depository and lending institutions (Topic 942) with guidance in Topic 320; iv) added cross-references to guidance in ASC 470-50 on line-of-credit or revolving-
debt arrangements; v) added cross-references to net asset value practical expedient in ASC 820-10; vi) clarified the interaction between ASC 842 and ASC 326; and vii) clarified
the interaction between ASC 326 and ASC 860-20. The amendments for issues i, ii, iv, and v became effective upon issuance and did not have a material effect on the
Company's Consolidated Financial Statements. The amendment related to issue iii has the same effective date and transition requirements as ASU 2019-04 and is not expected to
have a material impact on the Company's Consolidated Financial Statements. The amendments related to issues vi and vii have the same effective date and transition
requirements as ASU 2016-13 and is not expected to have a material impact on the Company's Consolidated Financial Statements.
2. Debt Securities
Securities available for sale consist of the following at the dates indicated:
U.S. government agencies
Residential MBS of U.S. government agencies and GSEs
Municipal bonds
Corporate bonds
Total
Amortized
Cost
June 30, 2020
Gross
Unrealized
Gains
Gross
Unrealized
Losses
3,957 $
216 $
— $
46,629
16,090
58,242
1,776
541
270
(50)
—
(134)
Estimated
Fair
Value
4,173
48,355
16,631
58,378
124,918 $
2,803 $
(184)
$
127,537
$
$
87
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
U.S. government agencies
Residential MBS of U.S. government agencies and GSEs
Municipal bonds
Corporate bonds
Equity securities
Total
Amortized
Cost
June 30, 2019
Gross
Unrealized
Gains
Gross
Unrealized
Losses
15,099 $
122 $
(11)
$
74,778
24,896
6,061
—
586
423
43
—
120,834 $
1,174 $
(184)
(7)
(20)
(222)
$
$
$
$
Estimated
Fair
Value
15,210
75,180
25,312
6,084
—
121,786
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
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
June 30, 2020
Amortized
Cost
Estimated
Fair Value
29,190 $
44,881
2,434
1,784
46,629
124,918 $
29,247
45,516
2,630
1,789
48,355
127,537
June 30, 2019
Amortized
Cost
Estimated
Fair Value
5,350 $
30,526
5,538
4,642
74,778
120,834 $
5,359
30,784
5,798
4,665
75,180
121,786
$
$
$
$
The Company had no sales of securities available for sale during the years ended June 30, 2020, 2019, and 2018. There were no gross realized gains or losses for the years ended
June 30, 2020, 2019, and 2018.
Securities available for sale with amortized costs totaling $82,888 and $94,337 and market values of $84,456 and $94,876 at June 30, 2020 and June 30, 2019, 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, 2020 and June 30, 2019 were as follows:
Residential MBS of U.S. government agencies and GSEs
Corporate bonds
Total
June 30, 2020
Less than 12 Months
12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$
$
227 $
11,779
12,006 $
(10)
$
2,435 $
(134)
—
(40)
$
—
2,662 $
11,779
(144)
$
2,435 $
(40)
$
14,441 $
(50)
(134)
(184)
88
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
U.S. government agencies
Residential MBS of U.S. government agencies and GSEs
Municipal bonds
Corporate bonds
Total
June 30, 2019
Less than 12 Months
12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$
$
$
— $
1,144
—
393 $
1,537 $
— $
6,988 $
(11)
$
6,988 $
(3)
—
(5)
(8)
$
$
24,242
4,895
3,630 $
39,755 $
(181)
(7)
(15)
(214)
$
$
25,386
4,895
4,023 $
41,292 $
(11)
(184)
(7)
(20)
(222)
The total number of securities with unrealized losses at June 30, 2020, and June 30, 2019 were 24 and 100, 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 increase in fair value was largely due to decreases in market interest rates. The Company had no other than
temporary impairment losses during the years ended June 2020, 2019 or 2018.
3. Other Investments
Other investments, at cost consist of the following at the dates indicated:
FHLB of Atlanta stock
FRB stock
SBIC investments
Total
June 30, 2020
June 30, 2019
$
$
23,309 $
7,368
8,269
38,946 $
31,969
7,335
6,074
45,378
As a requirement for membership, the Bank invests in the stock of both the FHLB of Atlanta and the FRB. No ready market exists for these securities so carrying value
approximates their fair value based on the redemption provisions of the FHLB of Atlanta and the FRB, respectively. SBIC investments are equity securities without a readily
determinable fair value.
4. Loans Held For Sale
Loans held for sale as of the dates indicated consist of the following:
One-to-four family
SBA
HELOCs
Total
89
June 30, 2020
June 30, 2019
$
$
28,152 $
1,240
47,785
77,177 $
8,196
3,746
6,233
18,175
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
5. 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
Equipment finance
Municipal leases
Paycheck Protection Program
Total commercial loans
Total loans
Deferred loan costs, net
Total loans, net of deferred loan costs
Allowance for loan and lease losses
Net loans
June 30,
2020
June 30,
2019
$
473,693 $
137,447
71,781
81,859
132,303
10,259
907,342
1,052,906
215,934
154,825
229,239
127,987
80,697
1,861,588
2,768,930
189
2,769,119
(28,072)
660,591
139,435
116,972
80,602
153,448
11,416
1,162,464
927,261
210,916
160,471
132,058
112,016
—
1,542,722
2,705,186
4
2,705,190
(21,429)
$
2,741,047 $
2,683,761
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 $1,498 and $1,800 at June 30, 2020 and 2019, respectively. In relation to these loans are unfunded commitments that totaled approximately $54 and $118
at June 30, 2020 and 2019, respectively.
90
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 follows:
June 30, 2020
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
Equipment finance
Municipal leases
Paycheck Protection Program
Pass
Special
Mention
Substandard
Doubtful
Loss
Total
$
458,248 $
134,697
71,119
81,112
130,975
9,894
1,028,709
212,370
130,202
228,288
127,706
80,697
1,724 $
902
—
—
—
4
7,580
2,723
20,439
150
281
—
9,042 $
1,848
662
402
1,328
361
10,779
250
2,622
801
—
—
206 $
— $
—
—
—
—
—
1
—
—
—
—
—
—
—
—
—
16
—
—
—
—
—
469,220
137,447
71,781
81,514
132,303
10,259
1,047,084
215,344
153,263
229,239
127,987
80,697
Total loans
$
2,694,017 $
33,803 $
28,095 $
207 $
16 $
2,756,138
June 30, 2019
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
Equipment finance
Municipal leases
Total loans
Pass
Special
Mention
Substandard
Doubtful
Loss
Total
$
644,159 $
137,001
116,306
79,995
152,393
11,375
901,214
207,827
157,325
131,674
111,721
2,089 $
766
—
71
13
1
8,066
790
877
—
295
8,072 $
1,434
666
164
1,042
33
10,306
1,357
600
384
—
384 $
19 $
—
—
—
3
—
1
—
—
—
9
—
—
—
4
—
—
—
—
—
654,723
139,210
116,972
80,230
153,448
11,416
919,586
209,975
158,802
132,058
112,016
$
2,650,990 $
12,968 $
24,058 $
388 $
32 $
2,688,436
The Company’s total PCI loans by segment, class, and risk grade at the dates indicated follows:
Pass
Special
Mention
Substandard
Doubtful
Loss
Total
June 30, 2020
Retail consumer loans:
One-to-four family
Construction and land/lots
Commercial loans:
Commercial real estate
Construction and development
Commercial and industrial
$
2,994 $
108
465 $
—
1,014 $
237
3,181
271
1,556
1,742
—
—
899
319
3
Total loans
$
8,110 $
2,207 $
2,472 $
— $
—
—
—
—
— $
— $
—
—
—
3
3 $
4,473
345
5,822
590
1,562
12,792
91
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, 2019
Retail consumer loans:
One-to-four family
HELOCs - originated
Construction and land/lots
Commercial loans:
Commercial real estate
Construction and development
Commercial and industrial
$
4,124 $
248 $
1,496 $
225
142
4,503
453
1,666
—
—
1,903
—
—
—
230
1,300
488
—
Total loans
$
11,113 $
2,151 $
3,514 $
The Company’s total loans by segment, class, and delinquency status at the dates indicated follows:
— $
—
—
—
—
—
— $
— $
—
—
—
—
3
3 $
5,868
225
372
7,706
941
1,669
16,781
Total
Loans
473,693
137,447
71,781
81,859
132,303
10,259
30-89 Days
Past Due
90 Days+
Total
Current
$
1,679 $
3,147 $
4,826 $
468,867 $
442
214
—
756
30
310
47
252
285
25
752
261
252
1,041
55
136,695
71,520
81,607
131,262
10,204
4,528
2,892
7,420
1,045,486
1,052,906
293
—
303
—
—
341
91
498
—
—
634
91
801
—
—
215,300
154,734
228,438
127,987
80,697
215,934
154,825
229,239
127,987
80,697
$
8,245 $
7,888 $
16,133 $
2,752,797 $
2,768,930
30-89 Days
Past Due
90 Days+
Total
Current
Total
Loans
$
1,615 $
1,389 $
3,004 $
657,587 $
226
—
138
459
6
2,279
—
207
649
—
231
485
6
237
8
516
1,133
99
384
—
457
485
144
696
14
2,795
1,133
306
1,033
—
138,978
116,487
80,458
152,752
11,402
924,466
209,783
160,165
131,025
112,016
660,591
139,435
116,972
80,602
153,448
11,416
927,261
210,916
160,471
132,058
112,016
$
5,579 $
4,488 $
10,067 $
2,695,119 $
2,705,186
June 30, 2020
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
Equipment finance
Municipal leases
Paycheck Protection Program
Total loans
June 30, 2019
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
Equipment finance
Municipal leases
Total loans
92
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
follows:
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
Equipment finance
Total loans
June 30, 2020
June 30, 2019
Nonaccruing
90 Days + &
still accruing
Nonaccruing
90 Days + &
still accruing
$
3,582 $
— $
3,223 $
531
662
37
668
49
8,869
465
259
801
—
—
—
—
—
—
—
—
—
372
666
6
463
21
3,559
1,357
307
384
$
15,923 $
— $
10,358 $
—
—
—
—
—
—
—
—
—
—
—
PCI loans totaling $965 at June 30, 2020 and $1,344 at June 30, 2019 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 follows:
Performing TDRs included in impaired loans
An analysis of the allowance for loan losses by segment for the periods shown is as follows:
June 30, 2020
June 30, 2019
$
13,153 $
23,116
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
$
$
$
$
PCI
Retail
Consumer
201 $
(19)
—
—
182 $
June 30, 2020
6,419 $
(137)
(855)
1,479
6,906 $
June 30, 2019
Commercial
Total
14,809 $
8,656
(2,961)
480
20,984 $
PCI
Retail
Consumer
Commercial
Total
7,527 $
(1,244)
(1,136)
1,272
6,419 $
13,050 $
7,226
(6,273)
806
14,809 $
483 $
(282)
—
—
201 $
93
21,429
8,500
(3,816)
1,959
28,072
21,060
5,700
(7,409)
2,078
21,429
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
PCI
Retail
Consumer
Commercial
Total
June 30, 2018
$
$
727 $
228
(472)
—
483 $
8,585 $
(906)
(1,142)
990
7,527 $
11,839 $
678
(1,033)
1,566
13,050 $
21,151
—
(2,647)
2,556
21,060
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
$
17 $
52 $
2,400 $
2,469 $
4,473 $
4,304 $
464,916 $
—
—
33
—
—
113
4
15
—
—
—
—
—
—
—
—
961
5
31
209
—
—
1,344
430
1,409
1,136
135
1,344
430
1,442
1,136
135
10,731
11,805
3,599
2,153
2,598
697
—
3,608
2,199
2,807
697
—
—
—
345
—
—
5,822
590
1,562
—
—
—
Total
473,693
137,447
71,781
81,859
132,303
10,259
—
—
296
10
—
137,447
71,781
81,218
132,293
10,259
7,924
1,039,160
1,052,906
299
852
801
—
—
215,045
152,411
228,438
127,987
80,697
215,934
154,825
229,239
127,987
80,697
$
182 $
1,258 $
26,632 $
28,072 $
12,792 $
14,486 $
2,741,652 $
2,768,930
$
62 $
74 $
2,375 $
2,511 $
5,868 $
5,318 $
649,405 $
—
—
—
—
—
118
4
17
—
—
7
—
—
—
4
28
5
2
—
—
1,023
518
1,265
927
226
7,890
3,187
1,957
1,305
435
1,030
518
1,265
927
230
8,036
3,196
1,976
1,305
435
225
—
372
—
—
7,706
941
1,669
—
—
7
—
323
—
4
8,692
1,397
2
—
—
139,203
116,972
79,907
153,448
11,412
910,863
208,578
158,800
132,058
112,016
660,591
139,435
116,972
80,602
153,448
11,416
927,261
210,916
160,471
132,058
112,016
June 30, 2020
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
Equipment finance
Municipal leases
Paycheck Protection Program
Total
June 30, 2019
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
Equipment finance
Municipal leases
Total
$
201 $
120 $
21,108 $
21,429 $
16,781 $
15,743 $
2,672,662 $
2,705,186
94
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
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 is 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.
The Company’s impaired loans and the related allowance, by segment and class, excluding PCI loans that were not individually evaluated for impairment, at the dates indicated
follows:
Total Impaired Loans
Recorded Investment
Unpaid
Principal
Balance
With a
Recorded
Allowance
With No
Recorded
Allowance
Total
Related
Recorded
Allowance
June 30, 2020
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
Equipment finance
Total impaired loans
June 30, 2019
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
Equipment finance
Total impaired loans
$
$
$
16,560 $
10,805 $
3,374 $
14,179 $
2,087
662
1,585
1,075
297
10,401
1,785
9,782
2,631
1,585
662
749
486
38
8,062
818
1,058
303
53
—
296
241
27
1,068
80
26
498
1,638
662
1,045
727
65
9,130
898
1,084
801
46,865 $
24,566 $
5,663 $
30,229 $
412
43
3
13
5
2
976
11
34
209
1,708
18,302 $
12,461 $
3,152 $
15,613 $
472
2,410
666
1,917
601
379
10,127
2,574
10,173
462
564
—
957
353
7
1,219
666
323
137
41
6,434
3,404
940
354
—
791
768
384
1,783
666
1,280
490
48
9,838
1,731
1,122
384
$
47,611 $
22,070 $
10,885 $
32,955 $
46
—
26
2
6
36
7
6
—
601
The table above includes $15,743 and $17,212 of recorded investments in impaired loans that were not individually evaluated at June 30, 2020 and June 30, 2019, respectively,
because these loans did not meet the Company’s threshold for individual impairment evaluation. The recorded allowance above includes $450 and $481 related to these loans
that were not individually evaluated at June 30, 2020 and June 30, 2019, respectively.
95
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 follows:
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
Equipment finance
Municipal leases
Total loans
June 30, 2020
Year Ended
June 30, 2019
June 30, 2018
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
$
14,796 $
687 $
17,319 $
950 $
23,257 $
1,170
1,698
533
1,149
547
194
8,661
1,218
868
652
—
99
41
83
53
7
336
54
236
29
—
1,005
320
1,441
373
1,328
5,026
1,779
315
192
—
63
13
94
29
67
466
65
249
37
—
2,304
189
1,575
256
43
6,496
2,703
1,205
—
75
104
15
109
23
17
209
56
60
—
—
$
30,316 $
1,625 $
29,098 $
2,033 $
38,103 $
1,763
A summary of changes in the accretable yield for PCI loans for the periods indicated follows:
Accretable yield, beginning of period
Reclass from nonaccretable yield (1)
Other changes, net (2)
Interest income
Accretable yield, end of period
______________________________
(1)
(2)
Represents changes attributable to expected losses assumptions.
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
96
Year Ended June 30,
2020
Year Ended June
30, 2019
$
$
$
$
5,259 $
458
(316)
(1,496)
3,905 $
5,734
576
1,018
(2,069)
5,259
June 30, 2020
June 30, 2019
12,792 $
15,581 $
16,750
20,141
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 for the periods indicated below:
Year Ended June 30, 2020
Year Ended June 30, 2019
Year Ended June 30, 2018
Pre Modification
Outstanding
Recorded
Investment
Number of
Loans
Post
Modification
Outstanding
Recorded
Investment
Pre Modification
Outstanding
Recorded
Investment
Number of
Loans
Post
Modification
Outstanding
Recorded
Investment
Pre Modification
Outstanding
Recorded
Investment
Number of
Loans
Post
Modification
Outstanding
Recorded
Investment
Below market interest rate:
Retail consumer:
One-to-four family
Commercial:
Commercial real estate
Total
Extended payment terms:
Retail consumer:
One-to-four family
Construction and land/lots
Consumer
Commercial:
Commercial and industrial
Total
Other TDRs:
Retail consumer:
One-to-four family
HELOCs - originated
Construction and land/lots
Indirect auto finance
Consumer
Commercial:
Commercial real estate
Construction and
development
Total
Total
1 $
1 $
2 $
—
—
1
3 $
5 $
1
—
3
—
1
1
11 $
15 $
— $
— $
—
86
86
61
—
—
826
887
502
27
—
49
—
1 $
85 $
84
— $
— $
— $
1 $
1 $
—
2
—
3 $
18 $
—
1
1
1
—
85 $
34 $
—
34
— $
68 $
—
84
34
—
33
—
67
1,452 $
—
29
33
2
1,433
—
28
26
2
— $
— $
4 $
1
—
—
5 $
25 $
—
—
—
1
—
— $
514 $
36
—
— $
550 $
3,646 $
—
—
—
2
88 $
88 $
70 $
—
—
826
896 $
511 $
27
—
63
—
30
21
3
5,440
5,427
—
—
182
813 $
1,797 $
79
678
1,651
1
25 $
29 $
182
7,138 $
7,291 $
182
7,098
7,249
—
26 $
31 $
—
3,648 $
4,198 $
97
—
—
—
502
32
—
—
534
3,747
—
—
—
2
—
—
3,749
4,283
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 periods indicated below:
Other TDRs:
Retail consumer:
One-to-four family
Consumer
Commercial:
Construction and development
Total Other TDRs
Total
Year Ended June 30, 2020
Year Ended June 30, 2019
Year Ended June 30, 2018
Number of
Loans
Recorded
Investment
Number of
Loans
Recorded
Investment
Number of
Loans
Recorded
Investment
— $
—
1
1 $
1 $
—
—
79
79
79
1 $
1
—
2 $
2 $
72
2
—
74
74
5 $
—
—
5 $
5 $
277
—
—
277
277
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.
Modifications and deferrals in response to COVID-19
Beginning in March 2020, the Company began offering short-term loan modifications to assist borrowers during the COVID-19 pandemic. The CARES Act along with a joint
agency statement issued by banking agencies and confirmed by FASB staff that short-term modifications made in response to COVID-19 are not TDRs. Accordingly, the
Company does not account for such loan modifications as TDRs. As of June 30, 2020, modifications totaling $42,000 and $509,300 had been granted in retail consumer loans
and commercial loans, respectively.
HomeTrust Bank is offering payment and financial relief programs for borrowers impacted by COVID-19. These programs include loan payment deferrals for up to 90 days
(which can be renewed for another 90 days under certain circumstances) waived late fees, and suspension of foreclosure proceedings and repossessions. We have received
numerous requests from borrowers for some type of payment relief. The breakout by loan type is as follows:
Payment Deferrals by Loan Types (1)
March 31, 2020
June 30, 2020
August 31, 2020
$ Deferral
Percent of Total
Loan Portfolio
$ Deferral
Percent of Total
Loan Portfolio
$ Deferral
Percent of Total
Loan Portfolio
Lodging
26,815
1.0%
108,171
4.0%
64,686
2.4%
Other commercial real estate, construction and
development, and commercial and industrial
Equipment finance
One-to-four family
Other consumer loans
Total
116,198
19,443
10,802
3,546
4.4
0.7
0.4
0.1
367,443
33,693
36,821
5,203
13.7
1.3
1.4
0.2
43,056
4,547
2,360
589
1.6
0.2
0.1
—
$
176,804
6.6% $
551,331
20.5% $
115,238
4.3%
(1) Modified loans are not included in classified assets or nonperforming asset.
See Note 1 Summary of Significant Accounting Policies for more details.
98
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
6. Premises and Equipment
Premises and equipment as of the dates indicated consist of the following:
Land
Land held under capital lease(1)
Office buildings
Furniture, fixtures and equipment
Total
Less accumulated depreciation
Premises and equipment, net
June 30,
2020
2019
20,785 $
—
59,333
15,724
95,842
(37,380)
58,462 $
19,730
2,052
58,952
15,918
96,652
(35,601)
61,051
$
$
(1) Land held under capital lease was reclassed to other assets upon the adoption of ASC 842. See additional details in footnote 1 and 12.
7. Accrued Interest Receivable
Accrued interest receivable as of the dates indicated consists of the following:
Loans
Securities available for sale
Other
Total
8. Real Estate Owned
The activity within REO for the periods shown is as follows:
Balance at beginning of period
Transfers from loans
Sales, net of gain/loss
Writedowns
Balance at end of period
June 30,
2020
2019
11,360 $
710
242
12,312 $
9,433
690
410
10,533
Year Ended
June 30,
2020
2019
2,929 $
46
(2,432)
(206)
337 $
3,684
731
(1,191)
(295)
2,929
$
$
$
$
At June 30, 2020 and 2019, the Bank had $97 and $1,018, 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 $1,318 and $243 for June 30, 2020 and 2019, respectively.
9. Goodwill and Core Deposit Intangibles
The carrying amount of the Company's goodwill was $25,638 as of June 30, 2020 and 2019.
Amortization expense related to core deposit intangibles was $1,421, $2,029, and $2,645 for the years ended June 30, 2020, 2019, and 2018, respectively.
As of June 30, 2020, estimated amortization expense for each of the next five years is as follows:
2021
2022
2023
2024
2025
Total
$
$
734
251
90
3
—
1,078
99
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
10. Deposit Accounts
Deposit accounts at the dates indicated consist of the following:
Noninterest-bearing accounts
NOW accounts
Money market accounts
Savings accounts
Certificates of deposit
Total
June 30,
Weighted Average
Interest Rates
June 30,
2020
2019
2020
2019
$
429,901 $
582,299
836,738
197,676
739,142
294,322
452,295
691,172
177,278
712,190
$
2,785,756 $
2,327,257
—%
0.10%
0.46%
0.07%
1.45%
0.54%
—%
0.15%
0.89%
0.12%
1.99%
0.91%
Deposits received from executive officers and directors and their associates totaled approximately $4,307 and $4,448 at June 30, 2020 and 2019, respectively. As part of our
system conversion, certain escrow and official check accounts are now included in noninterest-bearing accounts. As of June 30, 2019, these accounts totaled $8,208 and were
included in other liabilities.
As of June 30, 2020, maturities of certificates of deposit are as follows:
2021
2022
2023
2024
2025
Thereafter
Total
$
$
598,777
97,507
26,833
11,207
4,818
—
739,142
Certificates of deposit with balances of $250 or greater totaled $118,308 and $93,654 at June 30, 2020 and 2019, respectively. Generally, deposit amounts in excess of $250 are
not federally insured.
Interest expense on deposits at the dates indicated consists of the following:
NOW accounts
Money market accounts
Savings accounts
Certificates of deposit
Total
11. Borrowings
Borrowings consist of the following at the dates indicated:
2020
June 30,
2019
2018
1,251 $
5,102
245
9,159
15,757 $
970
2,442
295
3,051
6,758
$
$
1,627 $
6,910
195
14,105
22,837 $
June 30,
FHLB Advances
$
475,000
1.39% $
680,000
2.10%
2020
2019
Balance
Weighted Average
Rate
Balance
Weighted Average
Rate
100
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The scheduled maturity dates, call dates, and related interest rates on FHLB advances at June 30, 2020:
Maturity Date
Interest Rate
3/6/2028
3/22/2028
6/5/2028
9/13/2028
11/24/2028
11/24/2028
7/23/2029
8/8/2029
2/27/2030
3/4/2030
1.73%
1.82%
1.87%
1.76%
2.07%
1.79%
0.99%
0.92%
0.63%
0.72%
Call Date
9/8/2020
9/22/2020
9/8/2020
9/14/2020
8/26/2020
8/26/2020
7/23/2020
8/10/2020
2/26/2021
3/4/2022
$
$
Outstanding Amount
100,000
50,000
50,000
25,000
25,000
25,000
50,000
50,000
50,000
50,000
475,000
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, 2020 and 2019, the Company had the ability to borrow $186,222 and $89,499, respectively, in additional FHLB advances. At June 30, 2020 and 2019, the Company
had an unused line of credit with the FRB for $109,242 and $130,036, respectively. At June 30, 2020 and 2019, the Company had unused lines of credit with three unaffiliated
banks for $100,000 and $70,000, respectively.
12. Leases
As Lessee - Operating Leases
Company operating leases primarily include office space and bank branches. Certain leases include one or more options to renew, with renewal terms that can extend the lease
term up to 15 additional years. The exercise of lease renewal options is at our sole discretion. When it is reasonably certain that we will exercise our option to renew or extend
the lease term, that option is included in estimating the value of the ROU and lease liability. At June 30, 2020, we did not have any leases that had not yet commenced for which
we had created a ROU asset and a lease liability. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. Most of our lease
agreements include periodic rate adjustments for inflation. The depreciable life of ROU assets and leasehold improvements are limited to the shorter of the useful life or the
expected lease term. Leases with an initial term of 12 months or less are not recorded on our Consolidated Balance Sheets; we recognize lease expenses for these leases over the
lease term.
The following tables present supplemental balance sheet information related to operating leases. ROU assets are included in other assets and lease liabilities are included in other
liabilities.
Supplemental Balance Sheet Information:
ROU assets
Lease liabilities
Weighted-average remaining lease terms
Weighted-average discount rate
The following schedule summarizes aggregate future minimum lease payments under these operating leases at June 30, 2020:
Fiscal year ending June 30:
2021
2022
2023
2022
2023
Thereafter
Total of future minimum payments
101
June 30, 2020
4,601
4,590
5.02
2.97%
1,242
1,115
1,063
593
287
676
4,976
$
$
$
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following table presents components of operating lease expense for the year ended June 30, 2020:
Operating lease cost (included in occupancy expense)
Sublease income (included in other, net noninterest income)
Total operating lease expense, net
As Lessee - Finance Lease
Year Ended June 30, 2020
$
1,821
(242)
1,579
The Company currently leases land for one of its branch office locations under a finance lease. The ROU asset for the finance lease totaled $2,052 at June 30, 2020 and is
included in other assets. As of June 30, 2019, the amount was recorded in premises and equipment, net. The corresponding lease liability totaled $1,843 at June 30, 2020 and is
included in other liabilities. For the year ended June 30, 2020, interest expense on the lease liability totaled $97. The finance lease has a maturity date of July 2028 and a discount
rate of 5.18%. Upon adoption of ASC 842, the capital lease obligation for June 30, 2019 was also reclassified to other liabilities.
The following schedule summarizes aggregate future minimum lease payments under this finance lease obligation at June 30, 2020:
Fiscal year ending June 30:
2021
2022
2023
2023
2024
Thereafter
Total minimum lease payments
Less: amount representing interest
Present value of net minimum lease payments
Supplemental lease cash flow information for the year ended June 30, 2020:
ROU assets - noncash additions (operating leases)
ROU assets - noncash addition (finance lease)
Cash paid for amounts included in the measurement of lease liabilities (operating leases)
Cash paid for amounts included in the measurement of lease liabilities (finance leases)
As Lessor - General
$
$
$
134
134
134
145
146
1,848
2,541
(698)
1,843
5,296
2,052
2,142
134
The Company leases equipment to commercial end users under operating and finance lease arrangements. Our equipment finance leases consist mainly of construction,
transportation, medical, and manufacturing equipment. Many of our operating and finance leases offer the lessee the option to purchase the equipment at fair value or for a
nominal fixed purchase option; and most of the leases that do not have a nominal purchase option include renewal provisions resulting in some leases continuing beyond initial
contractual terms. Our leases do not include early termination options, and continued rent payments are due if leased equipment is not returned at the end of the lease.
As Lessor - Operating Leases
Operating lease income is recognized as a component of noninterest income on a straight-line basis over the lease term. Lease terms range from 1 to 5 years. Assets related to
operating leases are included in other assets and the corresponding depreciation expense is recorded on a straight-line basis as a component of other noninterest expense. The net
book value of leased assets totaled $21,595 and $9,995 with a residual value of $12,370 and $5,800 as of June 30, 2020 and 2019, respectively. For the years ended June 30,
2020 and 2019, equipment finance operating lease income totaled $3,356 and $936, respectively. For the years ended June 30, 2020 and 2019, depreciation expense totaled
$2,394 and $633, respectively.
102
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The following schedule summarizes aggregate future minimum operating lease payments to be received at June 30, 2020:
Fiscal year ending June 30:
2021
2022
2023
2024
2025
Thereafter
Total of future minimum payments
As Lessor - Finance Leases
$
4,732
3,643
2,061
649
104
—
$
11,189
Finance lease income is recognized as a component of loan interest income over the lease term. The finance leases are included as a component of the equipment finance class of
financing receivables under the commercial loan segment. For the years ended June 30, 2020 and 2019, total interest income on equipment finance leases totaled $1,595 and
$775, respectively.
The following table presents components of finance lease net investment included within equipment finance class of financing receivables:
Lease receivables
The following schedule summarizes aggregate future minimum finance lease payments to be received at June 30, 2020:
Fiscal year ending June 30:
2021
2022
2023
2024
2025
Thereafter
Total minimum payments
Less: amount representing interest
Total
13. Income Taxes
Income tax expense as of the dates indicated consisted of:
Current:
Federal
State
Total current expense (benefit)
Deferred:
Federal
State
Adjustment due to the Tax Act
Total deferred expense
Total income tax expense
June 30, 2020
44,927
$
$
$
11,453
11,054
10,697
8,813
4,848
2,667
49,532
(4,605)
44,927
291
324
615
7,909
625
17,587
26,121
26,736
2020
June 30,
2019
2018
80 $
748
828
5,184
12
—
5,196
6,024 $
755 $
690
1,445
5,404
267
(325)
5,346
6,791 $
$
$
103
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
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:
Tax at federal income tax rate
$
6,049
21 % $
7,127
21 % $
9,617
2020
Year Ended June 30,
2019
2018
$
Rate
$
Rate
$
Rate
Increase (decrease) resulting from:
Tax exempt income
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
(872)
—
600
—
247
(3)%
— %
2 %
— %
1 %
(855)
(325)
756
—
88
(2)%
(1,075)
(1)%
2 %
— %
— %
87
688
17,587
(168)
26,736
$
6,024
21 % $
6,791
20 % $
28 %
(3)%
— %
2 %
50 %
(1)%
76 %
The sources and tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) at June 30, 2020 and 2019 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
Stock compensation plans
Other
Total gross 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,
2020
2019
$
— $
6,456
8,637
18
198
2,207
4,513
2,192
2,279
1,256
27,756
(6,017)
(603)
(89)
(602)
(4,111)
(11,422)
$
16,334 $
4,799
4,685
8,988
18
461
2,232
5,092
2,373
2,162
1,140
31,950
(1,089)
(520)
(89)
(219)
(3,510)
(5,427)
26,523
The enactment of the Tax Act and subsequent Internal Revenue Service guidelines reduced the statutory federal corporate income tax rate to 21% effective January 1, 2018,
requiring the Company to revalue its DTA. The resulting $17,600 in adjustments were reflected as an increase to the Company's income tax expense with an additional $325 in
income tax expense during the fiscal year ended June 30, 2018 to establish a tax valuation allowance on our AMT credits. The valuation allowance of $325 was reversed during
the year ended June 30, 2019 and the remaining AMT credit of $4,601 was reclassed to other assets from deferred taxes during the year ended June 30, 2020 based on clarifying
guidance released by the Internal Revenue Service. In addition, our June 30, 2018 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 had federal NOL carry forwards of $21,488 and $24,248 as of June 30, 2020 and June 30, 2019, respectively, with a recorded tax benefit of $4,513 and $5,092
included in deferred tax assets. The majority of these NOLs will expire for federal tax purposes from 2028 through 2036, if not previously used.
104
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Retained earnings at June 30, 2020 and 2019 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 2016.
14. Employee Benefit Plans
The HomeTrust Bank KSOP Plan 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 $782, $810, and $737 for the years ended June 30, 2020, 2019, and 2018, respectively. The Company's expense
related to the ESOP for the fiscal year ended June 30, 2020, 2019, and 2018 was $1,195, $1,422, and $1,367, respectively.
Shares held by the ESOP at the dates indicated 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,
2020
2019
634,800
370,300
52,900
1,058,000
10,157 $
687,700
317,400
52,900
1,058,000
17,289
$
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 IRC. Plan expense for the years ended June 30, 2020, 2019, and 2018 was $260, $210, and $224, respectively. Total accrued expenses related to this plan
included in other liabilities were $5,301 and $5,289, respectively, as of June 30, 2020 and 2019.
15. 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, 2020, 2019, and 2018 were $398, $410, and $417, respectively. Total
accrued expenses related to these plans included in other liabilities were $7,895 and $8,268, respectively, as of June 30, 2020 and 2019.
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 at the time of the director’s death. For the years ended June 30, 2020, 2019, and 2018 deferred
compensation expense was $21, $28, and $32, respectively.
The net cash surrender value of the related life insurance policies and deferred compensation liability as of the dates indicated are detailed below:
Net cash surrender value of life insurance, related to deferred compensation
Deferred compensation liability, included in other liabilities
June 30,
2020
2019
$
$
7,463 $
771 $
7,413
956
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 death. Plan expenses for the years ended June 30, 2020, 2019,
and 2018 were $783, $771, and $519, respectively. Total accrued expenses related to these plans included in other liabilities were $18,743 and $19,499, as of June 30, 2020 and
2019, 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,
2020, 2019, and 2018 were $208, $223, and $205, respectively. The total deferred compensation plan payable included in other liabilities was $4,779 and $4,966, respectively as
of June 30, 2020 and 2019.
105
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
16. 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 as of the dates indicated:
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
2020
June 30,
2019
2018
$
$
$
$
$
22,783 $
27,146 $
(194)
(189)
22,589 $
26,957 $
6
7
22,595 $
26,964 $
8,235
(60)
8,175
2
8,177
16,729,056
17,692,493
18,028,854
563,183
700,691
697,577
17,292,239
18,393,184
18,726,431
1.34 $
1.30 $
1.52 $
1.46 $
0.45
0.44
There were 511,800 and 455,800 outstanding stock options that were anti-dilutive as of June 30, 2020 and 2019, respectively.
17. 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 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, 2020, 2019, and 2018 was $1,822, $1,601, and
$3,027, respectively, before the related tax benefit of $428, $376, and $908, 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
Weighted-
average
exercise price
Remaining
contractual life
(years)
Aggregate
Intrinsic
Value
Options outstanding at June 30, 2017
Granted
Exercised
Forfeited
Expired
Options outstanding at June 30, 2018
Exercisable at June 30, 2018
Granted
Exercised
Forfeited
Expired
Options outstanding at June 30, 2019
Exercisable at June 30, 2019
Granted
Exercised
Forfeited
Options outstanding at June 30, 2020
Exercisable at June 30, 2020
Non-vested at June 30, 2020
1,470,043
360,400
44,200
24,700
43,273
1,718,270 $
1,223,470 $
40,500
80,311
20,300
945
1,657,214 $
1,279,614 $
66,000
106,914
800
1,615,500 $
1,298,000 $
317,500 $
15.22
26.01
14.72
14.43
23.82
17.29
14.51
27.51
14.62
23.30
23.82
17.59
15.39
25.46
14.41
17.35
18.12
16.27
25.67
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 (1)
Risk-free interest rate
Expected life (years)
2020
2019
25.60%
1.05%
1.43%
6.5
Weighted-average fair value of options granted
$
5.88
$
(1) The Company began paying a cash dividend during the second quarter of fiscal 2019.
At June 30, 2020, the Company had $1,701 of unrecognized compensation expense related to 317,500 stock options originally scheduled to vest over a five-year vesting
period. The weighted average period over which compensation cost related to non-vested awards is expected to be recognized was 1.8 years at June 30, 2020. At June 30, 2019,
the Company had $2,133 of unrecognized compensation expense related to 377,600 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 1.9 years at June 30, 2019. All unexercised options expire
ten years after the grant date.
107
5.8 $
13,533
—
—
—
—
—
—
—
—
5.9 $
18,664
—
—
—
—
—
—
—
—
5.0 $
12,909
—
—
—
4.4 $
3.5 $
7.9 $
—
—
—
1,711
1,701
105
17.84%
0.87%
2.52%
6.5
6.62
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:
Non-vested at June 30, 2017
Granted
Vested
Forfeited
Non-vested at June 30, 2018
Granted
Vested
Forfeited
Non-vested at June 30, 2019
Granted
Vested
Forfeited
Non-vested at June 30, 2020
Restricted
stock awards
Weighted-
average grant
date fair value
Aggregate
Intrinsic
Value
185,630 $
55,200
100,820
6,600
133,410 $
34,000
39,310
4,300
123,800 $
67,556
38,925
8,385
144,046 $
17.46 $
25.89
15.14
14.37
22.85 $
27.51
21.64
19.08
24.65 $
26.39
23.02
24.88
25.89 $
3,419
—
—
—
3,755
—
—
—
2,258
—
—
—
2,305
The table above includes performance-based restrictive stock units totaling 11,250 and 5,190 which were granted during the years ended June 30, 2020 and 2019, respectively.
These stock units are scheduled to vest over 3.0 years assuming certain performance metrics are met.
At June 30, 2020, unrecognized compensation expense was $3,048 related to 144,046 shares of restricted stock originally scheduled to vest over three- and five-year vesting
periods. The weighted average period over which compensation cost related to non-vested awards is expected to be recognized was 1.8 years at June 30, 2020. At June 30, 2019,
unrecognized compensation expense was $2,547 related to 123,800 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 1.9 years at June 30, 2019.
18. 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, 2020 and June 30, 2019, respectively, loan commitments (excluding $141,557 and $181,477 of undisbursed
portions of construction loans) totaled $57,798 and $93,432 of which $10,678 and $34,631 were variable rate commitments and $47,120 and $58,801 were fixed rate
commitments. The fixed rate loans had interest rates ranging from 1.74% to 8.54% at June 30, 2020 and 2.69% to 8.59% at June 30, 2019, 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 $398,781 and $353,663 at June 30, 2020
and 2019, 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, 2020 or June 30, 2019.
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 equipment financing throughout the eastern United States and 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
In response to COVID-19, the FRB reduced the reserve requirements to zero on March 15, 2020. Prior to this change the Bank was required by regulation to maintain a varying
cash reserve balance with the FRB. The daily average calculated cash reserve required as of June 30, 2020 and 2019 was $0, and $2,633, respectively, which was satisfied by
vault cash and balances held at the FRB.
108
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
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 30, 2020 and 2019 were $7,766 and $9,460, respectively. There was no liability recorded for these
letters of credit at June 30, 2020 or June 30, 2019.
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.
19. Capital
At June 30, 2020, stockholder's equity totaled $408,263. 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 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, 2020, 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, 2020 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:
Actual
Minimum for Capital
Adequacy Purposes
Minimum to Be
Well Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
Regulatory Requirements
HomeTrust Bancshares, Inc.
As of June 30, 2020
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)
As of June 30, 2019
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)
HomeTrust Bank:
As of June 30, 2020
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)
As of June 30, 2019
Common Equity Tier I Capital (to Risk-weighted Assets)
Tier I Capital (to Total Adjusted Assets)
Tier I Capital (to Risk-weighted Assets)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
374,437
374,437
374,437
402,964
374,729
374,729
374,729
396,613
11.26% $
10.26% $
11.26% $
12.12% $
149,614
146,047
199,485
265,980
12.20% $
10.89% $
12.20% $
12.91% $
138,226
137,649
184,301
245,734
4.50% $
4.00% $
6.00% $
8.00% $
4.50% $
4.00% $
6.00% $
8.00% $
216,109
182,559
265,980
332,476
199,659
172,062
245,734
307,168
362,841
362,841
362,841
391,368
10.91% $
9.94% $
10.91% $
11.77% $
149,608
146,010
199,477
265,969
4.50% $
4.00% $
6.00% $
8.00% $
216,100
182,512
265,969
332,461
355,759
355,759
355,759
11.59% $
10.34% $
11.59% $
138,153
137,590
184,204
4.50% $
4.00% $
6.00% $
199,555
171,988
245,606
6.50%
5.00%
8.00%
10.00%
6.50%
5.00%
8.00%
10.00%
6.50%
5.00%
8.00%
10.00%
6.50%
5.00%
8.00%
Total Risk-based Capital (to Risk-weighted Assets)
___________________________________
In addition to the minimum CET1, Tier 1 and total risk-based capital ratios, HomeTrust Bancshares, Inc. and the Bank have to maintain a capital conservation buffer consisting
of additional CET1 capital of more than 2.50% 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. As of June 30, 2020, the conservation buffer was 4.12% and 3.77%
for HomeTrust Bancshares, Inc. and the Bank, respectively.
10.00%
$
12.30% $
377,639
245,606
307,007
8.00% $
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 as of the dates indicated follows:
Total stockholders' equity under US GAAP
Accumulated other comprehensive income, net of tax
Investment in nonincludable subsidiary
Disallowed deferred tax assets
Disallowed goodwill and other disallowed intangible assets
Tier I Capital and CET1
Allowable portion of allowance for loan losses and loan commitments
Total Risk-based Capital
20. Parent Company Financial Information
June 30,
2020
2019
408,263 $
(2,017)
(815)
(4,526)
(26,468)
374,437
28,527
402,964 $
408,896
(733)
(780)
(5,092)
(27,562)
374,729
21,884
396,613
$
$
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
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,
2020
June 30,
2019
$
3,888 $
—
—
—
—
143
396,667
6,918
731
8,481
746
1,243
(4)
1,239
621
389,926
7,412
510
$
$
408,347 $
408,935
84
408,263
408,347 $
39
408,896
408,935
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
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:
Recovery of loan losses
Loss on sale and impairment of REO
Decrease (increase) in other assets
Equity in undistributed income of Bank
ESOP compensation expense
Restricted stock and stock option expense
Decrease (increase) in other liabilities
Net cash provided by operating activities
Investing Activities:
Maturities of certificates of deposit in other banks
Repayment of loans
Increase in investment in Bank subsidiary
Dividend from subsidiary
ESOP principal payments received
Proceeds from sale of REO
Net cash provided by investing activities
Financing Activities:
Common stock repurchased
Cash dividends paid
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
June 30,
2020
June 30,
2019
June 30,
2018
$
217 $
1
23,522
23,740
399
5
249
(4)
258
907
22,833
50
329 $
54
27,287
27,670
407
11
114
(259)
251
524
27,146
—
$
22,783 $
27,146 $
456
44
8,427
8,927
385
34
158
(131)
246
692
8,235
—
8,235
June 30,
2020
June 30,
2019
June 30,
2018
$
22,783 $
27,146 $
8,235
(4)
249
(221)
(259)
114
52
(23,522)
(27,287)
1,195
1,822
45
2,347
746
1,243
(1,380)
19,445
494
229
1,422
1,601
—
2,789
248
2,796
(1,556)
13,454
484
70
20,777
15,496
(24,484)
(4,552)
(222)
1,541
(27,717)
(4,593)
8,481
(30,638)
(3,176)
(205)
1,173
(32,846)
(14,561)
23,042
$
3,888 $
8,481 $
(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
112
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
21. 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. The Company measures
the fair value of loans receivable under the exit price notion. The fair value of nonperforming loans is based on the underlying value of the collateral.
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 MBS and debentures issued by GSEs, municipal bonds, and
corporate debt securities. The Company has no Level 3 securities.
Impaired 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 two ways, which include collateral 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.
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 on commitments on hand from investors or, if commitments have not yet been obtained, what
investors are currently offering for loans with similar characteristics. 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 MBS of U.S. government agencies and GSE
Municipal bonds
Corporate bonds
Total
Description
U.S government agencies
Residential MBS of U.S. government agencies and GSE
Municipal bonds
Corporate bonds
Total
June 30, 2020
Total
Level 1
Level 2
Level 3
4,173 $
— $
4,173 $
48,355
16,631
58,378
—
—
—
48,355
16,631
58,378
127,537 $
— $
127,537 $
Total
Level 1
Level 2
Level 3
June 30, 2019
15,210 $
75,180
25,312
6,084
121,786 $
— $
15,210 $
—
—
—
75,180
25,312
6,084
— $
121,786 $
—
—
—
—
—
—
—
—
—
—
$
$
$
$
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, 2020
9,168 $
97
9,265 $
— $
—
— $
June 30, 2019
— $
—
— $
Total
Level 1
Level 2
Level 3
9,071 $
1,804
10,875 $
— $
—
— $
— $
—
— $
9,168
97
9,265
9,071
1,804
10,875
$
$
$
$
Quantitative information about Level 3 fair value measurements during the period ended June 30, 2020 is shown in the table below:
Fair Value at June
30, 2020
Valuation
Techniques
Unobservable
Input
Range
Weighted
Average
Nonrecurring measurements:
Impaired loans, net
REO
$
$
9,168
Discounted appraisals and
discounted cash flows
Collateral discounts: Discount
spread:
0% - 63% 2% -
3%
97 Discounted Appraisals
Collateral discounts
8%
27%
8%
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, 2020 and June 30, 2019, are summarized below:
Carrying
Value
Fair
Value
Level 1
Level 2
Level 3
June 30, 2020
Assets:
Cash and interest-bearing deposits
$
121,622 $
121,622 $
Commercial paper
Certificates of deposit in other banks
Securities available for sale
Loans, net
Loans held for sale
FHLB stock
FRB stock
SBIC investments
Accrued interest receivable
Liabilities:
304,967
55,689
127,537
304,967
55,689
127,537
2,741,047
2,692,265
77,177
23,309
7,368
8,269
12,312
78,129
23,309
7,368
8,269
12,312
Noninterest-bearing and NOW deposits
1,012,200
1,012,200
Money market accounts
Savings accounts
Certificates of deposit
Borrowings
Accrued interest payable
836,738
197,676
739,142
475,000
1,087
836,738
197,676
745,078
511,529
1,087
121,622 $
304,967
—
—
—
—
23,309
7,368
—
208
—
—
—
—
—
—
— $
—
55,689
127,537
—
—
—
—
—
744
1,012,200
836,738
197,676
745,078
511,529
1,087
Carrying
Value
Fair
Value
Level 1
Level 2
Level 3
June 30, 2019
Assets:
Cash and interest-bearing deposits
$
71,043 $
71,043 $
Commercial paper
Certificates of deposit in other banks
Securities available for sale
Loans, net
Loans held for sale
FHLB stock
FRB stock
SBIC investments
Accrued interest receivable
Liabilities:
Noninterest-bearing and NOW deposits
Money market accounts
Savings accounts
Certificates of deposit
Borrowings
Accrued interest payable
241,446
52,005
121,786
241,446
52,005
121,786
2,683,761
2,604,827
18,175
31,969
7,335
6,074
10,533
746,617
691,172
177,278
712,190
680,000
2,252
18,591
31,969
7,335
6,074
10,533
746,617
691,172
177,278
712,485
688,418
2,252
71,043 $
241,446
—
—
—
—
31,969
7,335
—
350
—
—
—
—
—
—
— $
—
52,005
121,786
—
—
—
—
—
750
746,617
691,172
177,278
712,485
688,418
2,252
—
—
—
—
2,692,265
78,129
—
—
8,269
11,360
—
—
—
—
—
—
—
—
—
—
2,604,827
18,591
—
—
6,074
9,433
—
—
—
—
—
—
The Company had off-balance sheet financial commitments, which include approximately $598,136 and $628,572 of commitments to originate loans, undisbursed portions of
interim construction loans, and unused lines of credit at June 30, 2020 and June 30, 2019 (see Note 18). 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.
115
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Commercial paper – The stated amounts approximate fair value due to the short-term nature of these investments.
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.
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. A liquidity
premium assumption is used as an estimate for the additional return required by an investor of assets that are potentially considered illiquid.
Loans held for sale – The fair value of mortgage 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. The fair value of SBA loans and HELOCs held for sale is based on what investors are currently offering for loans with
similar characteristics.
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.
SBIC – No ready market exists for these investments and they have no quoted market value. SBIC investments are valued at cost, less any impairment, plus or minus changes
resulting from observable price changes in orderly transactions of identical or similar investments. 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, 2020 and June 30, 2019. 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.
22. Revenue
On July 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” and all subsequent ASUs that modified ASC 606. The adoption of
the new standard did not have a material impact on the measurement or recognition of revenue. Results for years ended June 30, 2020 and 2019 are presented under Topic 606,
while the year ended June 30, 2018 reflects an offset of $660 of interchange costs against interchange income.
Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as
fees associated with mortgage servicing rights, financial guarantees, and certain credit card fees are also not in scope of the guidance. Topic 606 is applicable to noninterest
revenue streams such as deposit related fees, interchange fees, merchant income, and various other service fees. However, the recognition of these revenue streams did not
change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. The Company has made no significant
judgments in applying the revenue guidance prescribed in Topic 606 that affect the determination of the amount and timing of revenue streams with customers.
116
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The table below presents the Company's sources of noninterest income, segregated by in-scope and out-of-scope revenue streams of Topic 606 for the periods indicated:
In-scope of Topic 606:
Service charges on deposit accounts
Fees, interchange, and other service charges
Other
Noninterest income (in-scope of Topic 606)
Noninterest income (out-of-scope of Topic 606)
Total noninterest income
The following is a description of revenue streams accounted for under Topic 606:
Service charges on deposit accounts
Year Ended June 30,
2020
2019
2018
$
3,772 $
3,978 $
6,332
470
10,574
19,758
6,377
775
11,130
11,810
$
30,332 $
22,940 $
3,674
5,576
909
10,159
8,813
18,972
Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, nonsufficient
fund fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied,
and the related revenue recognized, over the period in which the service is provided. Nonsufficient fund fees, check orders and other deposit account related fees are largely
transactional based, and therefore, the Company’s performance obligation is satisfied and related revenue recognized, at a point in time. Payment for service charges on deposit
accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Fees, interchange, and other service charges
Fees, interchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and
credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa.
ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income
mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue
from processing wire transfers, cashier’s checks, and other services. The Company’s performance obligation for fees, interchange, and other service charges are largely satisfied,
and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
Other
Other noninterest income consists of safety deposit box rental fees and other miscellaneous revenue streams. Safe deposit box rental fees are charged to the customer on an
annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a
basis consistent with the duration of the performance obligation.
117
HOMETRUST BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
23. Unaudited Interim Financial Information
The unaudited statements of income for each of the quarters during the fiscal years ended June 30, 2020 and 2019 are summarized below:
Three months ended
June 30,
2020
March 31, 2020
December 31, 2019 September 30, 2019
$
31,074 $
33,037 $
35,896 $
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 income taxes
Income tax expense
Net income
Net income per common share:
Basic
Diluted
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 income taxes
Income tax expense
Net income
Net income per common share:
Basic
Diluted
6,386
24,688
2,700
21,988
7,223
24,652
4,559
964
7,728
25,309
5,400
19,909
6,375
24,903
1,381
188
8,862
27,034
400
26,634
9,074
24,041
11,667
2,476
3,595 $
1,193 $
9,191 $
0.22 $
0.22 $
0.07 $
0.07 $
0.54 $
0.52 $
36,247
9,174
27,073
—
27,073
7,660
23,533
11,200
2,396
8,804
0.51
0.49
Three months ended
June 30,
2019
March 31, 2019
December 31, 2018 September 30, 2018
35,820 $
34,714 $
34,400 $
8,931
26,889
200
26,689
6,846
23,415
10,120
2,107
8,145
26,569
5,500
21,069
5,396
22,978
3,487
185
7,299
27,101
—
27,101
5,085
21,858
10,328
2,287
8,013 $
3,302 $
8,041 $
0.45 $
0.44 $
0.19 $
0.18 $
0.45 $
0.43 $
32,280
6,008
26,272
—
26,272
5,613
21,883
10,002
2,212
7,790
0.43
0.41
$
$
$
$
$
$
$
118
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, 2020 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, 2020, 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, 2020 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, 2020.
Changes in Internal Controls There have been no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2020 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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.
119
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 16, 2020, 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 “Information About Our Executive Officers” in Part I of this Form 10-K, and is
incorporated herein by this reference.
Delinquent Section 16(a) Reports 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 16, 2020, 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.htb.com.
Nominating Procedures There have been no material changes to the procedures by which shareholders may recommend nominees to our Board of Directors since last disclosed
to shareholders.
Audit Committee and Audit Committee Financial Experts 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 16, 2020, 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 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 16, 2020, 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 required by this item is incorporated herein by reference from our definitive proxy
statement for our Annual Meeting of Shareholders being held on November 16, 2020, 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. Management is not aware of any arrangements, including any pledge by any person of securities of the Company, the operation of which
may at a subsequent date result in a change in control of the Company. The information concerning our equity incentive plan required by this item is set forth below.
Plan Category
Number of securities
to be issued upon
exercise of
outstanding options,
warrants, and rights
Weighted-average
exercise price of
outstanding options,
warrants, and rights
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a))
(a)
(b)
(c)
Equity compensation plans approved by security holders
1,615,500 $
18.12
236,344
(1)
(1) 132,444 securities remain for issuance of restricted stock and 103,900 securities remain for issuance of stock options.
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 16, 2020, 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 16, 2020, 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.
120
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
4.4
10.1
10.2
10.3
10.3A
10.4
10.5
10.6
10.7
10.7A
10.7B
10.7C
10.7D
10.7E
10.7F
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
Description of HomeTrust Bancshares, Inc. Securities Registered Pursuant to Section 12 of the Securities Exchange Act
of 1934.
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
Amendment No. 1 to 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
121
(a)
(b)
(c)
(d)
(e)
(f)
(e)
(o)
(t)
4.4
(s)
(g)
(g)
(u)
(g)
(g)
(d)
(d)
(d)
(d)
(d)
(d)
(d)
(d)
10.7G
10.7H
10.7I
10.8
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
10.31
10.32
21.0
23.0
31.1
31.2
32.0
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
HomeTrust Bank Director Emeritus Plan (“Director Emeritus Plan”)
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
Reserved
Reserved
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
Change in Control Severance Agreement between HomeTrust Bancshares, Inc. and Marty Caywood
Change in Control Severance Agreement between HomeTrust Bancshares, Inc. and Paula C. Labian
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
122
(d)
(d)
(i)
(d)
(d)
(d)
(d)
(d)
(d)
(d)
(d)
(d)
(d)
(d)
(r)
(j)
(k)
(k)
(k)
(k)
(k)
(n)
(n)
(n)
(n)
(n)
(n)
(p)
(p)
(g)
(v)
(w)
(x)
21.0
23.0
31.1
31.2
32.0
101
The following materials from HomeTrust Bancshares’ Annual Report on Form 10-K for the year ended June 30, 2020,
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.
101
_________________
(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)
(s)
(t)
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).
Filed as an exhibit to HomeTrust Bancshares's Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 (File No. 001-35593).
Filed as an exhibit to HomeTrust Bancshares’s Current Report on Form 8-K filed on August 21, 2018 (File No. 001-35593).
(u) Filed as an exhibit to HomeTrust Bancshares’s Current Report on Form 8-K filed on September 25, 2018 (File No. 001-35593.
(v) Filed as an exhibit to HomeTrust Bancshares's Annual Report on Form 10-K for the fiscal year ended June 30, 2018 (File No. 001-35593).
(w) Filed as an exhibit to HomeTrust Bancshares's Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 (File No. 001-35593).
(x) Filed as an exhibit to HomeTrust Bancshares's Quarterly Report on Form 10-Q for the quarter ended December 31, 2018 (File No. 001-35593.
123
Item 16. Form 10-K Summary
None.
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 11, 2020
HOMETRUST BANCSHARES, INC.
By:
/s/ Dana L. Stonestreet
Dana L. Stonestreet
Chairman of the Board,
President, and Chief Executive Officer
124
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
Tony J. VunCannon
/s/ Sidney A. Biesecker
Sidney A. Biesecker
/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/ Rebekah Lowe
Rebekah Lowe
/s/ F.K. McFarland, III
F.K. McFarland, III
/s/ John A. Switzer
John A. Switzer
/s/ Richard T. Williams
Richard T. Williams
Chairman of the Board, President and Chief Executive Officer
September 11, 2020
(Principal Executive Officer)
Executive Vice President, Chief Financial Officer, Corporate Secretary and
Treasurer
September 11, 2020
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
125
September 11, 2020
September 11, 2020
September 11, 2020
September 11, 2020
September 11, 2020
September 11, 2020
September 11, 2020
September 11, 2020
September 11, 2020
Exhibit 4.4
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
General
The Company’s authorized capital stock currently consists of:
60,000,000 shares of common stock, $0.01 par value per share; and
10,000,000 shares of preferred stock, $0.01 value per share.
•
•
No shares of our preferred stock are currently outstanding. The Company’s common stock is traded on NASDAQ under the symbol “HTBI.”
Common Stock
The following description of our common stock is a summary and does not purport to be complete. It is subject to and qualified in its entirety by reference to our Charter (the
“Charter”) and our Amended and Restated Bylaws (the “Bylaws”), each of which is incorporated by reference as an exhibit to the Annual Report on Form 10-K of which this
Exhibit 4.4 is a part. We encourage you to read our Charter, our Bylaws and the applicable provisions of Maryland General Corporation Law, for additional information.
Each share of our common stock has the same relative rights and is identical in all respects with each other share of our common stock. The Company’s common stock
represents non-withdrawable capital, is not of an insurable type and is not insured by the FDIC or any other government agency.
Subject to any prior rights of the holders of any preferred or other stock of the Company then outstanding, holders of our common stock are entitled to receive such dividends as
are declared by the board of directors of the Company out of funds legally available for dividends.
Except with respect to greater than 10% shareholders, full voting rights are vested in the holders of our common stock and each share is entitled to one vote. Subject to any prior
rights of the holders of any of our preferred stock then outstanding, in the event of a liquidation, dissolution or winding up of the Company, holders of shares of our common
stock will be entitled to receive, pro rata, any assets distributable to shareholders in respect of shares held by them. Holders of shares of Company common stock do not have any
preemptive rights to subscribe for any additional securities which may be issued by the Company, nor do they have cumulative voting rights.
In addition to the foregoing, provisions in our Charter and Bylaws may discourage attempts to acquire HomeTrust Bancshares, pursue a proxy contest for control of HomeTrust
Bancshares, assume control of HomeTrust Bancshares by a holder of a larger block of common stock, and remove HomeTrust Bancshares’ management, all of which
shareholders might think are in their best interests.
These provisions include:
•
•
•
•
•
an 80% shareholder vote requirement for certain business combinations not approved by disinterested directors, for amendments to some provisions of the articles of
incorporation and for any amendment of the bylaws by shareholders;
the election of directors to staggered terms of three years;
provisions requiring advance notice of shareholder proposals and director nominations;
a requirement that the calling of a special meeting by shareholders requires the written request of shareholders entitled to vote at least a majority of all votes entitled to vote
at the meeting; and
the removal of directors only for cause and by a vote of a majority of the outstanding shares of common stock.
Federal banking law also restricts acquisitions of control of savings and loan holding companies such as HomeTrust Bancshares. In addition, the business corporation law of
Maryland, the state where HomeTrust Bancshares is incorporated, provides for certain restrictions on acquisition of HomeTrust Bancshares.
Preferred Share Purchase Rights
The following description of our preferred share purchase rights (the “Rights”) is a summary and does not purport to be complete. It is subject to and qualified in its entirety by
reference to our Articles Supplementary to our Charter (“Articles Supplementary”) and our Tax Benefits Preservation Plan (the “Plan”), each of which is incorporated by
reference as an exhibit to the Annual Report
1
on Form 10-K of which this Exhibit 4.4 is a part. We encourage you to read our Articles Supplementary and the Plan, for additional information.
On September 25, 2012, the Board of Directors of the Company declared a dividend of one Right for each share its common stock outstanding at the close of business on
October 9, 2012 (the “Rights Record Date”), and to become outstanding between the Record Date and the earlier of the Distribution Date and the Expiration Date (each as
defined below). The Rights will be issued pursuant to the Plan, dated as of September 25, 2012, as amended on August 31, 2015 and August 21, 2018, between the Company
and Computershare Trust Company, as rights agent (the “Rights Agent”). Each Right represents the right to purchase, upon the terms and subject to the conditions set forth in
the Plan, 1/1,000th of a share of Junior Participating Preferred Stock, Series A, par value $0.01 per share (“Preferred Share”), for $22.63 (the “Purchase Price”), subject to
adjustment as provided in the Plan.
The purpose of the Plan is to protect the Company’s ability to use certain tax assets, including net operating loss carryforwards (the “Tax Benefits”), to offset future taxable
income. The Company’s use of the Tax Benefits in the future would be substantially limited if it experiences an “ownership change” for purposes of Section 382 of the Internal
Revenue Code of 1986, as amended (the “Code”). In general, an ownership change will occur if the Company’s “5-percent shareholders,” as defined in Section 382 of the Code,
collectively increase their ownership in the Company by more than 50 percentage points over a rolling three-year period.
The Plan is designed to reduce the likelihood that the Company will experience an ownership change by discouraging any person from becoming a beneficial owner of 4.99% or
more of the then outstanding common stock (a “Threshold Holder”). There is no guarantee, however, that the Plan will prevent the Company from experiencing an ownership
change. A corporation that experiences an ownership change will generally be subject to an annual limitation on certain of its pre-ownership change tax assets in an amount
equal to the fair market value of the corporation’s outstanding stock immediately prior to the ownership change, multiplied by the long-term tax-exempt rate.
Distribution Date. Initially, the Rights will be attached to all shares of our common stock then outstanding, and no separate Right certificates will be distributed. On or after the
Distribution Date, the Rights will separate from the shares of common stock and become exercisable.
The “Distribution Date” will occur on the earlier of (i) the close of business on the tenth business day after a Shares Acquisition Date (as defined below) and (ii) the close of
business on the tenth business day (or such later day as may be designated prior to a Shares Acquisition Date by the Company’s Board of Directors) after the date of the
commencement of a tender or exchange offer by any person if, upon consummation of the offer, such person would or could be an Acquiring Person (as defined below).
A “Shares Acquisition Date” is the date of the first public announcement by the Company or an Acquiring Person indicating that an Acquiring Person has become such.
An “Acquiring Person” means any person who or which, together with its affiliates, beneficially owns 4.99% or more of the Company’s common stock (or any other securities of
the Company then outstanding that would be treated as “stock” under Section 382 of the Code), other than (i) the U.S. Government; (ii) the Company or any subsidiary or
employee benefit plan or compensation arrangement of the Company; (iii) any person or entity who or which, together with its affiliates, was on the Rights Record Date, the
beneficial owner of 4.99% or more of the Company’s common stock, unless that person or entity subsequently increases their beneficial ownership percentage (other than as a
result of any stock dividend, stock split or similar transaction or stock repurchase by the Company); (iv) any person or entity who or which the Company’s Board of Directors
determines, in its sole discretion, has inadvertently become a 4.99% or greater stockholder so long as such person or entity promptly divests sufficient shares to no longer be a
4.99% or greater stockholder; (v) any person or entity who or which has become the beneficial owner of 4.99% or more of the Company’s common stock as a result of an
acquisition of shares of common stock by the Company which, by reducing the number of shares outstanding, increased the proportionate number of shares beneficially owned
by that person or entity, provided that the person or entity does not acquire any additional shares other than as a result of any stock dividend, stock split or similar transaction;
and (vi) any person or entity who or which has become a 4.99% or greater stockholder if the Company’s Board of Directors in good faith determines that the attainment of such
status has not jeopardized or endangered the Company’s utilization of the Tax Benefits.
Flip-In. From and after a Shares Acquisition Date, (i) Rights owned by the Acquiring Person and its affiliates and certain of their transferees will automatically be void; and (ii)
each other Right will automatically become a Right to buy, for the Purchase Price, in lieu of Series A Preferred Stock, that number of shares of the Company’s common stock
equal to (a) the Purchase Price multiplied by the number of 1/1000ths of a share of Series A Preferred Stock for which the Right is then exercisable divided by (b) 50% of the
then-current per share market price of the Company’s common stock.
Exchange. At any time after a Shares Acquisition Date the Company’s Board of Directors may, at its option, exchange all or part of the then outstanding and exercisable Rights
for shares of common stock at an exchange ratio of one share of common stock per Right, subject to adjustments and limitations described in the Plan. The Board may enter into
a trust agreement pursuant to which the Company would deposit into a trust shares of common stock that would be distributable to stockholders (excluding the Acquiring Person
and its affiliates) in the event the exchange is implemented. This feature is intended to facilitate a more orderly distribution of shares of common stock in the event that a Shares
Acquisition Date occurs.
2
Redemption. At any time prior to the Distribution Date, the Company’s Board of Directors may, at its option, redeem all, but not fewer than all, of the then outstanding Rights at
a redemption price of $0.0001 per Right.
Amendments. the Company may from time to time before the Distribution Date supplement or amend the Plan without the approval of any holders of Rights.
After the Distribution Date, the Plan may not be amended in any manner that would adversely affect the interests of the holders of Rights.
Expiration. The Rights will expire on the earliest of (i) August 21, 2021, (ii) the time at which all Rights have been redeemed by the Company, (iii) the time at which all Rights
have been exchanged by the Company, (iv) such time as the Company’s Board of Directors determines, in its sole discretion, that the Rights and the Plan are no longer necessary
for the preservation of existence of the Tax Benefits, and (v) a date prior to a Shares Acquisition Date on which the Board determines, in its sole discretion, that the Rights and
the Plan are no longer in the best interests of the Company and its stockholders.
Anti-Takeover Impact. The Plan could have an anti-takeover effect because it will restrict the ability of a person, entity or group to accumulate 4.99% or more of our common
stock, and the ability of persons, entities or groups owning 4.99% or more of our common stock prior to the adoption of the Plan, from acquiring additional shares of our
common stock without the approval of the Company’s Board of Directors. The Plan also could have an anti-takeover effect because an Acquiring Person’s ownership may be
diluted substantially upon the occurrence of a triggering event. Accordingly, the overall effects of the Tax Benefits Preservation Plan may be to render more difficult, or
discourage, a merger, tender offer, proxy contest or assumption of control by a substantial holder of Company stock.
3
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Parent
HomeTrust Bancshares, Inc.
HomeTrust Bank
Subsidiary
HomeTrust Bank
Western North Carolina Service Corporation
Percentage of
Ownership
State of Incorporation or
Organization
100%
100%
North Carolina
North Carolina
Exhibit 23
Consent Of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors
HomeTrust Bancshares, Inc. and Subsidiary
We consent to the incorporation by reference in the registration statements No. 333-182635, 333-186666 and 333-210167 on Forms S-8 of HomeTrust Bancshares, Inc. and
Subsidiary (the "Company"), of our reports dated September 11, 2020, with respect to the consolidated financial statements of the Company and the effectiveness of internal
control over financial reporting, which reports appear in the Company's 2019 Annual Report on Form 10-K.
/s/ DIXON HUGHES GOODMAN LLP
Asheville, North Carolina
September 11, 2020
I, Dana L. Stonestreet, certify that:
1.
I have reviewed this annual report on Form 10-K of HomeTrust Bancshares, Inc.;
Exhibit 31.1
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c)evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and
the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and report financial information; and
b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: September 11, 2020
/s/ Dana L. Stonestreet
Dana L. Stonestreet
Chairman of the Board,
President and Chief Executive Officer
I, Tony J. VunCannon, certify that:
1.
I have reviewed this annual report on Form 10-K of HomeTrust Bancshares, Inc.;
Exhibit 31.2
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c)evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and
the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and report financial information; and
b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: September 11, 2020
/s/ Tony J. VunCannon
Tony J. VunCannon
Executive Vice President, Chief Financial
Officer, Corporate Secretary and Treasurer
Exhibit 32
CERTIFICATION UNDER SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned certifies in the capacity indicated below that this Annual Report on Form 10-K of
HomeTrust Bancshares, Inc. (the “Company”) for the year ended June 30, 2020 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as
amended, and that information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates
and for the periods presented in the financial statements included in such report.
Date: September 11, 2020
Date: September 11, 2020
/s/ Dana L. Stonestreet
Chairman of the Board, President and
Chief Executive Officer
/s/ Tony J. VunCannon
Tony J. VunCannon
Executive Vice President, Chief Financial
Officer, Corporate Secretary and Treasurer
This certification accompanies this periodic report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended.