Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain matters in this Form 10-Q 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, but instead 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. The factors that could result in material differentiation include, but are not limited to: the effect of the COVID-19 pandemic, including on our 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 credit losses and provision for credit 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 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 Board of Governors of the Federal Reserve System (“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 credit 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 credit 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 our 2021 Form 10-K.
Many 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 subsidiary, HomeTrust Bank (the "Bank"), unless the context indicates otherwise.
Overview
HomeTrust Bancshares, Inc., a Maryland corporation, was formed for the purpose of becoming the holding company for HomeTrust Bank in connection with the 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, we are regulated by the Federal Reserve. As a North Carolina state-chartered bank, and member of the FRB, 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 FHLB System. Our headquarters is located in Asheville, North Carolina.
Our principal business consists of attracting deposits from the general public and investing those funds, along with borrowed funds, in commercial real estate loans, construction and development loans, commercial and industrial loans, equipment finance leases, municipal leases, loans secured by first and second mortgages on one-to-four family residences including home equity loans, construction and land/lot loans, indirect automobile loans, and other consumer loans. We also originate one-to-four family loans, SBA loans, and HELOCs to sell to third parties. In addition, we invest in debt securities issued by United States Government agencies and GSEs, corporate bonds, commercial paper and certificates of deposit in other banks insured by the FDIC.
We offer a variety of deposit accounts for individuals, businesses, and nonprofit organizations. Deposits and borrowings are our primary source of funds for our lending and investing activities.
We are significantly affected by prevailing economic conditions, as well as government policies and regulations concerning, among other things, monetary and fiscal affairs, housing and financial institutions. Deposit flows are influenced by a number of factors, including interest rates paid on competing time deposits, other investments, account maturities, and the overall level of personal income and savings. Lending activities are influenced by the demand for funds, the number and quality of lenders, and regional economic cycles.
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 is paid on our deposits and borrowings. Changes in levels of interest rates affect our net interest income. Because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures put in place to address its economic consequences are unknown, including the 150 basis point reduction in the targeted federal funds rate during 2020, until the pandemic subsides, expect our net interest income and net interest margin to be adversely affected throughout fiscal 2022 and possibly longer.
A secondary source of income is noninterest income, which includes revenue we receive from providing products and services, including service charges and fees on deposit accounts, loan income and fees, lease income, gain on the sale of loans held for sale, and gains and losses from sales of debt securities.
An offset to net interest income is the provision for credit losses which is required to establish and maintain the ACL. All financial assets measured at amortized cost and off balance sheet credit exposures, including loans, investment securities and unfunded commitments are evaluated for credit losses. See "Note 1 – Summary of Significant Accounting Policies" in Item 1 of our 2021 Form 10-K for further discussion.
Our noninterest expenses consist primarily of salaries and employee benefits, occupancy expense, and computer services. 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 obtained 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 it remains 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 September 30, 2021, we have over 30 locations in North Carolina (including the Asheville metropolitan area, the "Piedmont" region, Charlotte, and Raleigh/Cary), Upstate South Carolina (Greenville), East Tennessee (including Kingsport/Johnson City, Knoxville, and Morristown) and Southwest Virginia (including the Roanoke Valley). During the quarter ended September 30, 2021, we closed nine branches located in North Carolina, Tennessee, and Virginia.
Critical Accounting Policies and Estimates
Certain of our accounting policies are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers.
The following represent our critical accounting policies:
Allowance for Credit Losses or ACL. The ACL reflects our estimate of credit losses that will result from the inability of our borrowers to make required loan payments. We record loans charged off against the ACL and subsequent recoveries, if any, increase the ACL when they are recognized. We use a systematic methodology to determine our ACL for loans held for investment and certain off-balance-sheet credit exposures. The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio. We consider the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The estimate of our ACL involves a high degree of judgment; therefore, our process for determining expected credit losses may result in a range of expected credit losses. Our ACL recorded in the balance sheet reflects our best estimate within the range of expected credit losses. We recognize in net income the amount needed to adjust the ACL for management’s current estimate of expected credit losses. Our ACL is calculated using collectively evaluated and individually evaluated loans.
Goodwill and Intangibles. We review goodwill 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.
Reclassifications and corrections. To maintain consistency and comparability, certain amounts from prior periods have been reclassified to conform to current period presentation with no effect on net income, stockholders’ equity, or cash flows as previously reported.
Recent Accounting Pronouncements. See "Note 2 – Recent Accounting Pronouncements" in this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements including the respective dates of adoption and effects on results of operations and financial condition.
Non-GAAP Financial Measures
In addition to results presented in accordance with GAAP, this report contains certain non-GAAP financial measures, which include: tangible book value; tangible book value per share, tangible equity to tangible assets ratio; and the ratio of the ACL to total loans excluding PPP loans. Management has presented the non-GAAP financial measures in this discussion and analysis because it believes including these items provides useful and comparative information to assess trends in our core operations while facilitating comparison of the quality and composition of our earnings over time and in comparison to our competitors. However, these non-GAAP financial measures are supplemental, are not audited and are not a substitute for operating results or any analysis determined in accordance with GAAP. Where applicable, we have also presented comparable earnings information using GAAP financial measures. Because not all companies use the same calculations, our presentation may not be comparable to other similarly titled measures as calculated by other companies. See “Comparison of Results of Operations for the Three Months Ended September 30, 2021 and 2020” for more detailed information about our financial performance.
Set forth below is a reconciliation to GAAP of tangible book value and tangible book value per share:
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|
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|
|
As of
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|
(Dollars in thousands, except per share data)
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|
September 30,
|
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June 30,
|
|
September 30,
|
|
|
|
2021
|
|
2021
|
|
2020
|
|
Total stockholders' equity
|
|
$
|
396,511
|
|
|
$
|
396,519
|
|
|
$
|
400,351
|
|
|
Less: goodwill, core deposit intangibles, net of taxes
|
|
25,830
|
|
|
25,902
|
|
|
26,285
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|
|
Tangible book value (1)
|
|
$
|
370,681
|
|
|
$
|
370,617
|
|
|
$
|
374,066
|
|
|
Common shares outstanding
|
|
16,307,658
|
|
|
16,636,483
|
|
|
17,020,724
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|
|
Tangible book value per share
|
|
$
|
22.73
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|
|
$
|
22.28
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|
|
$
|
21.98
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|
|
Book value per share
|
|
$
|
24.31
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|
|
$
|
23.83
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|
|
$
|
23.52
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|
_________________________________________________________________
(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:
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|
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|
|
|
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|
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As of
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(Dollars in thousands)
|
|
September 30,
|
|
|
|
|
|
June 30,
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
|
Tangible equity (1)
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|
$
|
370,681
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|
|
|
|
|
|
$
|
370,617
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|
|
$
|
374,066
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|
|
|
|
|
|
|
|
|
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Total assets
|
|
3,481,360
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|
|
|
|
|
|
3,524,723
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|
|
3,674,034
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|
|
|
|
|
|
|
|
|
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Less: goodwill, core deposit intangibles, net of taxes
|
|
25,830
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|
|
|
|
|
|
25,902
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|
|
26,285
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|
|
|
|
|
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|
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Total tangible assets(2)
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$
|
3,455,530
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|
|
|
|
|
|
$
|
3,498,821
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|
|
$
|
3,647,749
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|
|
|
|
|
|
|
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Tangible equity to tangible assets
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|
10.73
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%
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|
|
|
|
|
10.59
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%
|
|
10.25
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%
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|
|
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|
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|
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_________________________________________________________________
(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 ACL to total loans and the allowance for credit losses as adjusted to exclude PPP loans:
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|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
September 30,
|
|
|
|
|
|
June 30,
|
|
September 30,
|
|
|
2021
|
|
|
|
|
|
2021
|
|
2020
|
|
Total loans receivable (GAAP)
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$
|
2,719,642
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|
|
|
|
|
|
$
|
2,733,267
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|
|
$
|
2,769,396
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Less: PPP loans (1)
|
28,762
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|
|
|
|
|
|
46,650
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|
|
80,816
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|
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Adjusted loans (non-GAAP)
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$
|
2,690,880
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|
|
|
|
|
|
$
|
2,686,617
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|
|
$
|
2,688,580
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|
|
|
|
|
|
|
|
|
|
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Allowance for credit losses (GAAP)
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$
|
34,406
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|
|
|
|
|
$
|
35,468
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|
|
$
|
43,132
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Allowance for credit losses / Adjusted loans (non-GAAP)
|
1.28
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%
|
|
|
|
|
|
1.32
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%
|
|
1.60
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%
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_________________________________________________________________
(1) PPP loans are fully guaranteed loans by the U.S. government.
Recent Developments: COVID-19, the CARES Act, and Our Response
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 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 purpose of the CARES Act was 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 included extensive emergency funding for hospitals and healthcare providers. On December 27, 2020, the 2021 Consolidated Appropriations Act was signed into law providing an additional $900 billion in stimulus relief. Effective February 24, 2021, the Biden Administration extended the national emergency declaration for one year due to COVID-19. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as the Consolidated Appropriations Act and regulatory relief efforts have had a material impact on our operations.
In response to the COVID-19 pandemic, we offered a variety of relief options designed to support our customers and the communities we serve. As businesses reopened and the economy started to improve, we began to see our markets return to some normalcy; however, we continue to monitor the impact of the Delta variant of COVID-19 which has prompted many public health officials and municipalities to reinstate mask mandates and reconsider lifting pandemic restrictions. While it is not possible to know the full extent of the impact as of the date of this filing, set forth (below) are potentially material items of which we are aware.
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 was to avoid as many layoffs as possible, and to encourage small businesses to maintain payrolls. As a qualified SBA lender, we were 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 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses.
During the previous quarter ended June 30, 2021, we completed our origination participation in the SBA PPP as the program came to an end. As of September 30, 2021, PPP loans totaled $28.8 million, which included $611,000 in net deferred fees that will be accreted into interest income over the remaining life of the loans. If the loans are forgiven, these fees will be accelerated into income at that time. For the three months ended September 30, 2021, we earned $424,000 in fees through accretion, including accelerated accretion resulting from loan forgiveness. During the quarter ended September 30, 2021, $18.3 million in PPP loans were forgiven as compared to $28.3 million in the prior period. We have worked with the SBA to forgive a total of $82.5 million in PPP loans for our customers during our participation in the program.
Loan Modifications. As of September 30, 2021, we had $1.0 million in loans with full principal and interest payment deferrals related to COVID-19 compared to $107,000 at June 30, 2021. The increase from June 30, 2021 resulted from small balance loans in the equipment finance and retail consumer loan categories. Substantially all loans placed on full payment deferral during the pandemic have come out of deferral and borrowers are either making regular loan payments or interest-only payments through the end of calendar year 2021. As of September 30, 2021, we had $67.8 million in commercial loan deferrals on interest-only payments compared to $78.9 million at June 30, 2021.
We believe the steps we have taken and continue to take 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.
Branch Operations and Support Personnel. Throughout the pandemic we have provided banking services with a focus on the health and safety of our customers and employees. We continue to monitor the effects of customer behavior specific to in-person branch transactions and have experienced meaningful increases in digital banking activity and online deposit account openings. Partially in response to these changes, we closed nine branches in North Carolina, Tennessee, and Virginia during the three months ended September 30, 2021. We continue to respond to the banking needs of our customers whether through physical branch locations and/or digital banking services.
Comparison of Financial Condition at September 30, 2021 and June 30, 2021
General. Total assets and liabilities both decreased by $43.4 million down to $3.5 billion and $3.1 billion, respectively, at September 30, 2021 as compared to June 30, 2021. The decrease in assets was primarily driven by a cumulative decrease of $44.9 million, or 18.1% in cash and cash equivalents, certificates of deposit in other banks, and debt securities available for sale, and a $13.6 million, or 0.5% decrease in loans receivable as the Company redirected its excess liquidity to continue paying down borrowings during the period. These decreases were partially offset by an $11.6 million, or 12.4% increase in loans held for sale primarily related to additional SBA commercial loans, one-to-four family residential mortgage loans and home equity loans originated for sale during the period, and a $7.1 million, or 3.7% increase in commercial paper.
Cash, cash equivalents, and commercial paper. Total cash and cash equivalents decreased $8.4 million, or 16.5% to $42.6 million at September 30, 2021 from $51.0 million at June 30, 2021. Commercial paper increased $7.1 million, or 3.7% to $196.7 million at September 30, 2021 from $189.6 million at June 30, 2021 as a result of the decline in debt securities available for sale during the period.
Investments. Debt securities available for sale decreased $31.9 million, or 20.4%, to $124.6 million at September 30, 2021 from $156.5 million at June 30, 2021. During the three months ended September 30, 2021, $5.3 million of securities were purchased, $33.2 million of securities matured, and $3.0 million of MBS principal payments were received. At September 30, 2021, certificates of deposit in other banks decreased $4.6 million, or 11.5% to $35.5 million compared to $40.1 million at June 30, 2021. The decrease in certificates of deposit in other banks was due to $5.6 million in maturities partially offset by $1.0 million in purchases. All certificates of deposit in other banks are fully insured by the FDIC. Management evaluates securities for impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Management does not believe that there were any credit losses at September 30, 2021; therefore, no impairment losses were recorded during the first three months of fiscal 2022. Other investments at cost decreased $2.8 million, or 11.9%, to $20.9 million at September 30, 2021 from $23.7 million at June 30, 2021. Other investments at cost included SBIC investments, FRB stock, and FHLB stock totaling $10.5 million, $7.4 million, and $3.0 million, respectively. The overall decrease was driven by a $3.2 million, or 51.8% reduction in FHLB stock as a result of the paydowns in borrowings during the current period.
Loans held for sale. Loans held for sale increased $11.6 million, or 12.4% to $105.2 million at September 30, 2021 from $93.5 million at June 30, 2021. The increase was primarily driven by a $7.2 million, or 22.5% increase in mortgage loans held for sale, a $2.5 million, or 60.2% increase in SBA loans held for sale, and a $1.9 million, or 25.9% increase in HELOCs originated for sale.
Loans. Total loans receivable decreased $13.6 million, or 0.5% to $2.7 billion at September 30, 2021 from the balance at June 30, 2021. The decrease was driven by PPP loan forgiveness of $18.3 million and a $32.7 million, or 4.3% decrease in retail consumer loans resulting from a reduction in one-to-four family loans and indirect auto finance loans. This decrease was partially offset by a $37.0 million, or 1.9% increase in commercial loans (excluding PPP loans) as the Company continues its focus on the growth of this loan segment.
Commercial and retail consumer loans consist of the following at the dates indicated:
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As of
|
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|
|
|
Percent of total
|
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(Dollars in thousands)
|
September 30,
|
|
June 30,
|
|
Change
|
|
September 30,
|
|
June 30,
|
|
|
2021
|
|
2021
|
|
$
|
|
%
|
|
2021
|
|
2021
|
|
Commercial loans:
|
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|
|
|
|
|
|
|
|
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Commercial real estate
|
$
|
1,132,764
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|
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$
|
1,142,276
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$
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(9,512)
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|
(0.8)
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%
|
|
41.7
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%
|
|
41.8
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%
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Construction and development
|
187,900
|
|
|
179,427
|
|
|
8,473
|
|
|
4.7
|
|
|
6.9
|
|
|
6.6
|
|
|
Commercial and industrial
|
153,612
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|
|
141,341
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|
|
12,271
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|
|
8.7
|
|
|
5.6
|
|
|
5.2
|
|
|
Equipment finance
|
341,995
|
|
|
317,920
|
|
|
24,075
|
|
|
7.6
|
|
|
12.6
|
|
|
11.6
|
|
|
Municipal leases
|
142,100
|
|
|
140,421
|
|
|
1,679
|
|
|
1.2
|
|
|
5.2
|
|
|
5.1
|
|
|
PPP loans
|
28,762
|
|
|
46,650
|
|
|
(17,888)
|
|
|
(38.3)
|
|
|
1.1
|
|
|
1.7
|
|
|
Total commercial loans
|
1,987,133
|
|
|
1,968,035
|
|
|
19,098
|
|
|
1.0
|
|
|
73.1
|
|
|
72.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family
|
384,901
|
|
|
406,549
|
|
|
(21,648)
|
|
|
(5.3)
|
|
|
14.2
|
|
|
14.9
|
|
|
HELOCs - originated
|
129,791
|
|
|
130,225
|
|
|
(434)
|
|
|
(0.3)
|
|
|
4.8
|
|
|
4.8
|
|
|
HELOCs - purchased
|
33,943
|
|
|
38,976
|
|
|
(5,033)
|
|
|
(12.9)
|
|
|
1.2
|
|
|
1.4
|
|
|
Construction and land/lots
|
69,835
|
|
|
66,027
|
|
|
3,808
|
|
|
5.8
|
|
|
2.6
|
|
|
2.4
|
|
|
Indirect auto finance
|
106,184
|
|
|
115,093
|
|
|
(8,909)
|
|
|
(7.7)
|
|
|
3.9
|
|
|
4.2
|
|
|
Consumer
|
7,855
|
|
|
8,362
|
|
|
(507)
|
|
|
(6.1)
|
|
|
0.3
|
|
|
0.3
|
|
|
Total retail consumer loans
|
732,509
|
|
|
765,232
|
|
|
(32,723)
|
|
|
(4.3)
|
|
|
26.9
|
|
|
28.0
|
|
|
Total loans
|
$
|
2,719,642
|
|
|
$
|
2,733,267
|
|
|
$
|
(13,625)
|
|
|
(0.5)
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Asset Quality. Our overall asset quality metrics continue to demonstrate our commitment to growing and maintaining a loan portfolio with a moderate risk profile; however, we will remain diligent in our review of the portfolio and overall economy as we continue to maneuver through the uncertainty surrounding COVID-19. See "Recent Developments: COVID-19, the CARES Act, and Our Response" above for additional information regarding our response to COVID-19.
Nonperforming assets decreased by $6.0 million, or 47.0% to $6.8 million, or 0.19% of total assets at September 30, 2021 from $12.8 million, or 0.36% of total assets at June 30, 2021. The significant decrease from June 30, 2021 was primarily a result of the payoff of two commercial real estate loan relationships totaling $5.1 million. Nonperforming assets included $6.7 million in nonaccruing loans and $45,000 in REO at September 30, 2021, compared to $12.6 million and $188,000 in nonaccruing loans and REO, respectively, at June 30, 2021. Included in nonperforming loans at September 30, 2021 are $930,000 of TDR loans of which $186,000 was current with respect to their modified payment terms. At September 30, 2021, $3.4 million, or 51.2%, of nonaccruing loans were current on their loan payments. The ratio of nonperforming loans to total loans was 0.25% at September 30, 2021 and 0.46% at June 30, 2021. Performing TDRs that were excluded from nonaccruing loans totaled $11.3 million and $11.1 million at September 30, 2021 and June 30, 2021, respectively.
The ratio of classified assets to total assets decreased to 0.65% at September 30, 2021 from 0.76% at June 30, 2021. Classified assets decreased to $22.5 million at September 30, 2021 compared to $26.7 million at June 30, 2021 primarily due to the payoff of the two commercial real estate loans discussed above.
Our individually evaluated loans are comprised of loans meeting certain thresholds, loans on nonaccrual status, and all TDRs, whether performing or on nonaccrual status under their restructured terms. Individually evaluated loans may be evaluated for reserve purposes using either the cash flow or the collateral valuation method. As of September 30, 2021, there were $4.6 million in loans individually evaluated. For more information on these individually evaluated loans, see "Note 6 - Loans and Allowance for Credit Losses on Loans" in this Quarterly Report on Form 10-Q.
Allowance for credit losses. The ACL was $34.4 million, or 1.27% of total loans at September 30, 2021 compared to $35.5 million, or 1.30% of total loans at June 30, 2021. The ACL to total gross loans excluding PPP loans was 1.28% at September 30, 2021, compared to 1.32% at June 30, 2021. The overall decrease was driven by lower expected credit losses estimated by management based on an improving economic outlook.
There was a net benefit for credit losses of $1.5 million for the three months ended September 30, 2021, compared to a $950,000 provision for the corresponding period in fiscal year 2021. Net loan recoveries totaled $273,000 for the three months ended September 30, 2021, compared to net charge-offs of $699,000 for the same period last year. Net recoveries as a percentage of average loans were (0.04)% for the three months ended September 30, 2021 compared to net charge-offs of 0.10% for the corresponding quarter last year.
The allowance as a percentage of nonaccruing loans increased to 510.63% at September 30, 2021 from 281.38% at June 30, 2021.
Management believes the ACL as of September 30, 2021 was adequate to absorb the estimated losses in the loan portfolio at that date. While management believes 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 ACL 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. Lastly, inflation and a further decline in national and local economic conditions, as a result of the COVID-19 pandemic or other factors, could result in a material increase in the ACL and may adversely affect our financial condition and results of operations.
Real estate owned. REO decreased $143,000, or 76.1% to $45,000 at September 30, 2021 entirely related to REO sales during the three months ended September 30, 2021.
Deferred income taxes. Deferred income taxes decreased $1.2 million, or 7.0%, to $15.7 million at September 30, 2021 from $16.9 million at June 30, 2021. The decrease was primarily driven by the utilization of net operating losses and reduction of the ACL.
Premises and equipment, net. Premises and equipment, net decreased $2.3 million, or 3.3% to $68.6 million at September 30, 2021 from $70.9 million at June 30, 2021. The decrease was a result of the nine branch closures that occurred mid-September.
Goodwill. Goodwill remained unchanged at $25.6 million at September 30, 2021 and June 30, 2021.
Other assets. Other assets increased $957,000, or 1.7%, to $58.4 million at September 30, 2021 from $57.5 million at June 30, 2021. The increase was primarily driven by a reclassification of assets held for sale from premises and equipment related to the nine branch closures, partially offset by lower net operating lease assets and lower current taxes receivable.
Deposits. Deposits increased $31.7 million, or 1.1% during the three months ended September 30, 2021 to $3.0 billion which was driven by a $58.9 million, or 2.4% increase as a result of our successful efforts to increase core deposits. As part of a managed runoff, certificates of deposit decreased $27.2 million, or 5.8% to $445.6 million at September 30, 2021.
The following table sets forth our deposits by type of deposit account as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
Percent of total
|
|
(Dollars in thousands)
|
September 30,
|
|
June 30,
|
|
Change
|
|
September 30,
|
|
June 30,
|
|
|
2021
|
|
2021
|
|
$
|
|
%
|
|
2021
|
|
2021
|
|
Core deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing accounts
|
$
|
711,764
|
|
|
$
|
636,414
|
|
|
$
|
75,350
|
|
|
11.8
|
%
|
|
23.8
|
%
|
|
21.5
|
%
|
|
NOW accounts
|
621,675
|
|
|
644,958
|
|
|
(23,283)
|
|
|
(3.6)
|
%
|
|
20.8
|
%
|
|
21.8
|
%
|
|
Money market accounts
|
987,650
|
|
|
975,001
|
|
|
12,649
|
|
|
1.3
|
%
|
|
33.1
|
%
|
|
33.0
|
%
|
|
Savings accounts
|
220,614
|
|
|
226,391
|
|
|
(5,777)
|
|
|
(2.6)
|
%
|
|
7.4
|
%
|
|
7.7
|
%
|
|
Core deposits
|
2,541,703
|
|
|
2,482,764
|
|
|
58,939
|
|
|
2.4
|
%
|
|
85.1
|
%
|
|
84.0
|
%
|
|
Certificates of deposit
|
445,581
|
|
|
472,777
|
|
|
(27,196)
|
|
|
(5.8)
|
%
|
|
14.9
|
%
|
|
16.0
|
%
|
|
Total
|
$
|
2,987,284
|
|
|
$
|
2,955,541
|
|
|
$
|
31,743
|
|
|
1.1
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings. Borrowings decreased $75.0 million, or 65.2% to $40.0 million at September 30, 2021 compared to $115.0 million at June 30, 2021 as excess liquidity was used to pay down borrowings. At September 30, 2021, borrowings had maturities of 30 days or less.
Equity. Stockholders' equity remained at $396.5 million at September 30, 2021 as compared to June 30, 2021. Increases within stockholders' equity including $10.5 million in net income, and $1.1 million in stock-based compensation and stock option exercises were offset by repurchases of 376,435 shares of common stock at an average cost of $27.71 per share, or approximately $10.4 million and $1.3 million related to cash dividends declared. As of September 30, 2021, the Company and the Bank were both considered "well capitalized" in accordance with the regulatory capital guidelines and exceeded all regulatory capital requirements.
Average Balances, Interest and Average Yields/Cost
The following table sets forth for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities. All average balances are daily average balances. Nonaccruing loans have been included in the table as loans carrying a zero yield.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
|
2021
|
|
2020
|
|
(Dollars in thousands)
|
Average
Balance
Outstanding
|
|
Interest
Earned/
Paid(2)
|
|
Yield/
Rate(2)
|
|
Average
Balance
Outstanding
|
|
Interest
Earned/
Paid(2)
|
|
Yield/
Rate(2)
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable(1)
|
$
|
2,819,716
|
|
|
$
|
28,205
|
|
|
3.97
|
%
|
|
$
|
2,875,432
|
|
|
$
|
28,902
|
|
|
4.02
|
%
|
|
Commercial paper and deposits in other banks
|
277,564
|
|
|
331
|
|
|
0.47
|
%
|
|
424,170
|
|
|
881
|
|
|
0.83
|
%
|
|
Securities available for sale
|
138,435
|
|
|
524
|
|
|
1.50
|
%
|
|
106,268
|
|
|
528
|
|
|
1.99
|
%
|
|
Other interest-earning assets(3)
|
21,731
|
|
|
555
|
|
|
10.13
|
%
|
|
38,946
|
|
|
448
|
|
|
4.61
|
%
|
|
Total interest-earning assets
|
3,257,446
|
|
|
29,615
|
|
|
3.61
|
%
|
|
3,444,816
|
|
|
30,759
|
|
|
3.57
|
%
|
|
Other assets
|
260,976
|
|
|
|
|
|
|
251,648
|
|
|
|
|
|
|
Total assets
|
$
|
3,518,422
|
|
|
|
|
|
|
$
|
3,696,464
|
|
|
|
|
|
|
Liabilities and equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking accounts
|
$
|
635,456
|
|
|
$
|
397
|
|
|
0.25
|
%
|
|
$
|
560,481
|
|
|
$
|
397
|
|
|
0.28
|
%
|
|
Money market accounts
|
988,990
|
|
|
367
|
|
|
0.15
|
%
|
|
825,545
|
|
|
550
|
|
|
0.27
|
%
|
|
Savings accounts
|
223,658
|
|
|
41
|
|
|
0.07
|
%
|
|
200,543
|
|
|
37
|
|
|
0.07
|
%
|
|
Certificate accounts
|
457,865
|
|
|
767
|
|
|
0.67
|
%
|
|
689,709
|
|
|
2,269
|
|
|
1.32
|
%
|
|
Total interest-bearing deposits
|
2,305,969
|
|
|
1,572
|
|
|
0.27
|
%
|
|
2,276,278
|
|
|
3,253
|
|
|
0.57
|
%
|
|
Borrowings
|
55,464
|
|
|
26
|
|
|
0.18
|
%
|
|
475,000
|
|
|
1,687
|
|
|
1.42
|
%
|
|
Total interest-bearing liabilities
|
2,361,433
|
|
|
1,598
|
|
|
0.27
|
%
|
|
2,751,278
|
|
|
4,940
|
|
|
0.72
|
%
|
|
Noninterest-bearing deposits
|
708,219
|
|
|
|
|
|
|
484,336
|
|
|
|
|
|
|
Other liabilities
|
52,305
|
|
|
|
|
|
|
59,935
|
|
|
|
|
|
|
Total liabilities
|
3,121,957
|
|
|
|
|
|
|
3,295,549
|
|
|
|
|
|
|
Stockholders' equity
|
396,465
|
|
|
|
|
|
|
400,915
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
$
|
3,518,422
|
|
|
|
|
|
|
$
|
3,696,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earning assets
|
$
|
896,013
|
|
|
|
|
|
|
$
|
693,538
|
|
|
|
|
|
|
Average interest-earning assets to
|
|
|
|
|
|
|
|
|
|
|
|
|
average interest-bearing liabilities
|
137.94
|
%
|
|
|
|
|
|
125.21
|
%
|
|
|
|
|
|
Tax-equivalent:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
$
|
28,017
|
|
|
|
|
|
|
$
|
25,819
|
|
|
|
|
Interest rate spread
|
|
|
|
|
3.34
|
%
|
|
|
|
|
|
2.85
|
%
|
|
Net interest margin(4)
|
|
|
|
|
3.41
|
%
|
|
|
|
|
|
3.00
|
%
|
|
Non-tax-equivalent:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
$
|
27,707
|
|
|
|
|
|
|
$
|
25,509
|
|
|
|
|
Interest rate spread
|
|
|
|
|
3.30
|
%
|
|
|
|
|
|
2.82
|
%
|
|
Net interest margin(4)
|
|
|
|
|
3.37
|
%
|
|
|
|
|
|
2.96
|
%
|
_________________________________________________________________
(1) The average loans receivable, net balances include loans held for sale and nonaccruing loans.
(2) Interest income used in the average interest earned and yield calculation includes the tax equivalent adjustment of $310 for the three months ended September 30, 2021
and 2020, respectively, calculated based on a combined federal and state tax rate of 24%.
(3) The average other interest-earning assets consist of FRB stock, FHLB stock, and SBIC investments.
(4) Net interest income divided by average interest-earning assets.
Rate/Volume Analysis
The following table 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2021
|
|
|
Compared to
|
|
|
Three Months Ended September 30, 2020
|
|
(Dollars in thousands)
|
Increase/
(decrease)
due to
|
|
Total
increase/(decrease)
|
|
|
Volume
|
|
Rate
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
Loans receivable(1)
|
$
|
(554)
|
|
|
$
|
(143)
|
|
|
$
|
(697)
|
|
|
Commercial paper and deposits in other banks
|
(305)
|
|
|
(245)
|
|
|
(550)
|
|
|
Debt securities available for sale
|
160
|
|
|
(164)
|
|
|
(4)
|
|
|
Other
|
(198)
|
|
|
305
|
|
|
107
|
|
|
Total interest-earning assets
|
$
|
(897)
|
|
|
$
|
(247)
|
|
|
$
|
(1,144)
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
Interest-bearing checking accounts
|
$
|
53
|
|
|
$
|
(53)
|
|
|
$
|
—
|
|
|
Money market accounts
|
109
|
|
|
(292)
|
|
|
(183)
|
|
|
Savings accounts
|
4
|
|
|
—
|
|
|
4
|
|
|
Certificate accounts
|
(763)
|
|
|
(739)
|
|
|
(1,502)
|
|
|
Borrowings
|
(1,490)
|
|
|
(171)
|
|
|
(1,661)
|
|
|
Total interest-bearing liabilities
|
(2,087)
|
|
|
(1,255)
|
|
|
(3,342)
|
|
|
Net increase (decrease) in tax equivalent interest income
|
$
|
1,190
|
|
|
$
|
1,008
|
|
|
$
|
2,198
|
|
_________________________________________________________________
(1) Interest income used in the average interest earned and yield calculation includes the tax equivalent adjustment of $310 for the three months ended September 30, 2021 and 2020, respectively, calculated based on a combined federal and state income tax rate of 24%.
Comparison of Results of Operations for the Three Months Ended September 30, 2021 and 2020
General. During the three months ended September 30, 2021, net income increased $4.8 million, or 83.0% to $10.5 million compared to $5.8 million for the three months ended September 30, 2020. Our diluted earnings per share increased to $0.65 for the three months ended September 30, 2021 compared to $0.35 for the same period in fiscal 2021. First quarter earnings were positively impacted by a $2.2 million increase in net interest income driven by lower borrowing costs, a $1.7 million increase in noninterest income, and a $1.5 million net benefit for credit losses.
Net Interest Income. Net interest income increased $2.2 million, or 8.6% to $27.7 million for the quarter ended September 30, 2021, compared to $25.5 million for the comparative quarter in fiscal 2021. Interest and dividend income decreased by $1.1 million, or 3.8%, primarily driven by lower average balances on loans and commercial paper combined with lower yields. This decrease was more than offset by a $3.3 million decrease in interest expense.
Average interest-earning assets decreased $187.4 million, or 5.4% to $3.3 billion for the quarter ended September 30, 2021. The average balance of total loans receivable decreased by $55.7 million, or 1.9% compared to the same quarter last year primarily due to the decrease in PPP loans outstanding. The average balance of commercial paper and deposits in other banks decreased $146.6 million, or 34.6% as we used excess liquidity to reduce borrowings between periods, primarily during the quarter ended June 30, 2021. The average balance of other interest-earning assets decreased $17.2 million, or 44.2% driven by a decrease in FHLB stock due to the reduction in FHLB borrowings, and an increase in SBIC investments resulting in higher rates earned for the current period. Net interest margin (on a fully taxable-equivalent basis) for the three months ended September 30, 2021 increased to 3.41% from 3.00% for the same period a year ago as all higher rate long-term borrowings were repaid during the quarter ended June 30, 2021.
Total interest and dividend income decreased $1.1 million, or 3.8% for the three months ended September 30, 2021 as compared to the same period last year, which was primarily a result of a $697,000, or 2.4% decrease in loan interest income, a $550,000, or 62.4% decrease in interest income from commercial paper and deposits in other banks, partially offset by a $107,000, or 23.9% increase in other investment income. The lower interest income in each category was driven by the decrease in average balances, discussed above. In addition, average
loan yields decreased 5 basis points to 3.97% for the quarter ended September 30, 2021 from 4.02% in the corresponding quarter last year. Average yields on commercial paper and deposits in other banks decreased 36 basis points to 0.47% for the quarter ended September 30, 2021 from 0.83% in the corresponding quarter last year. Average yields on securities available for sale decreased 49 basis points to 1.50% for the quarter ended September 30, 2021 from 1.99% in the corresponding quarter last year. Average yields on total interest-earning assets increased four basis points to 3.61% for the quarter ended September 30, 2021 from 3.57% in the corresponding quarter last year primarily as a result of the change in mix of interest-earning assets, as a result of using excess liquidity to repay long-term borrowings and reduce short-term interest-earning assets with lower yields.
Total interest expense decreased $3.3 million, or 67.7% for the three months ended September 30, 2021 compared to the same period last year. The decrease was driven by a $1.7 million, or 51.7% decrease in interest expense on deposits and a $1.7 million, or 98.5% decrease in interest expense on borrowings. Average interest-bearing deposits for the quarter ended September 30, 2021 increased $29.7 million, or 1.3%, which was more than offset by the 30 basis point decrease in the cost of deposits, down to 0.27% compared to 0.57% in the same period last year. Average borrowings for the quarter ended September 30, 2021 decreased $419.5 million, or 88.3% along with a 124 basis point decrease in the average cost of borrowings compared to the same period last year. The increase in average deposits (interest and noninterest-bearing) was due to successful deposit gathering campaigns and funds from PPP loans and other government stimulus. The decrease in the average cost of borrowings was primarily driven by the early retirement of long-term borrowings reducing the average balance and partially driven by a shift to short-term borrowings at lower rates. The overall average cost of funds decreased 45 basis points to 0.27% for the current quarter compared to 0.72% in the same quarter last year due primarily to the impact of lower rates.
Provision (Benefit) for Credit Losses. During the three months ended September 30, 2021 there was a $1.5 million net benefit for credit losses compared to a $950,000 provision for the corresponding quarter of fiscal 2021. Net loan recoveries totaled $273,000 for the three months ended September 30, 2021, compared to net charge-offs of $699,000 for the same period last year. Net recoveries as a percentage of average loans were (0.04)% for the quarter ended September 30, 2021 compared to net charge-offs of 0.10% for the corresponding quarter last year.
See "Comparison of Financial Condition - Asset Quality" for additional details.
Noninterest Income. Noninterest income increased $1.7 million, or 19.8% to $10.4 million for the three months ended September 30, 2021 from $8.6 million for the same period in the previous year primarily due to a $713,000, or 21.3% increase in gain on sale of loans, a $505,000, or 106.5% increase in loan income and fees, a $275,000, or 13.1% increase in service charges and fees on deposit accounts, and a $215,000, or 16.2% increase in operating lease income. The increase in gain on the sale of loans was driven by an increase in gains from sales of SBA loans in the current period as this line of business improves from the effects of the COVID-19 pandemic. During the quarter ended September 30, 2021, $63.8 million of residential mortgage loans originated for sale which were sold with gains of $2.1 million compared to $96.0 million sold and gains of $2.2 million in the corresponding quarter in the prior year. There were $14.4 million of the guaranteed portion of SBA commercial loans sold with gains of $1.7 million in the current quarter compared to $15.1 million sold and gains of $1.0 million in the corresponding quarter in the prior year. In addition, $47.4 million of home equity loans were sold during the quarter ended September 30, 2021 for a gain of $267,000 compared to $20.0 million sold and gains of $100,000 in the corresponding quarter. The $505,000, or 106.5% increase in loan income and fees was primarily a result of $313,000 in additional loan servicing fees from bringing our SBA loan servicing process in-house beginning July 1, 2021 and $257,000 in additional prepayment fee income from our equipment finance line of business during the current quarter. Other increases in noninterest income were primarily driven by an increase in customer spending as a result of economic recovery from the pandemic.
Noninterest Expense. Noninterest expense of $26.0 million for the three months ended September 30, 2021 was unchanged compared to the same period last year. An increase of $380,000, or 116.9% in marketing and advertising was partially offset by a decrease of $367,000, or 8.6% in other noninterest expense primarily driven by lower depreciation expense on operating lease equipment for the three months ended September 30, 2021 compared to the same period last year.
Income Taxes. Our income tax expense for the three months ended September 30, 2021 increased $1.6 million to $3.0 million from $1.4 million for the three months ended September 30, 2020 as a result of higher pre-tax book income. The higher effective tax rate in the current period compared to the prior period was driven by a comparable amount of tax-exempt income in each period with higher pre-tax book income for the three months ended September 30, 2021. The effective tax rate for September 30, 2021 and 2020 was 22.0% and 20.1%, respectively.
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, cash flows from loan payments, commercial paper, 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 September 30, 2021, the Bank had an available borrowing capacity of $278.7 million with the FHLB of Atlanta, a $77.6 million line of credit with the FRB and a line of credit with each of three unaffiliated banks totaling $100.0 million. At September 30, 2021, we had $30.0 million in FHLB advances outstanding, $10.0 million in FRB advances outstanding, and nothing outstanding under our other lines of credit. Additionally, we classify our 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 longer term
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 may 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 September 30, 2021 brokered deposits totaled $2.3 million, or 0.1% of total deposits compared to $4.3 million, or 0.2% of total deposits at June 30, 2021.
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, federal funds, and commercial paper. On a longer term basis, we maintain a strategy of investing in various lending products and investment securities, including mortgage-backed securities. HomeTrust Bancshares on a stand-alone level is a separate legal entity from the Bank and we must provide for our own liquidity and pay our own operating expenses. Our primary source of funds consists of the net proceeds retained from the Conversion. We also have the ability to receive dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends. At September 30, 2021, HomeTrust Bancshares on a stand-alone basis had liquid assets of $4.8 million.
We use our sources of funds primarily to meet our ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments. At September 30, 2021, the total approved loan commitments and unused lines of credit outstanding amounted to $289.5 million and $571.4 million, respectively, as compared to $401.1 million and $530.5 million, respectively, as of June 30, 2021. Certificates of deposit scheduled to mature in one year or less at September 30, 2021, totaled $386.2 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 a majority of our maturing deposits will remain with us.
During the first three months of fiscal 2022, cash and cash equivalents decreased $8.4 million, or 16.5%, to $42.6 million as of September 30, 2021 from $51.0 million as of June 30, 2021. Cash provided by investing activities was $49.4 million, while cash used in financing and operating activities was $54.3 million and $3.5 million, respectively. Primary sources of cash for the three months ended September 30, 2021 included $33.2 million in maturing securities available for sale, a $31.7 million increase in deposits, a $19.3 million decrease in loans, and a $5.6 million in maturities of certificates of deposit in other banks, net of purchases. Primary uses of cash during the period included a $75.0 million reduction in short-term borrowings, a $9.0 million increase in loans held for sale, $10.4 million in shares repurchased, $6.9 million in purchases of commercial paper, $5.3 million in purchases of debt securities available for sale, $2.4 million in purchases of premises and equipment, and $1.3 million in cash dividends. 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.
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 three months ended September 30, 2021, we did not engage in any 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 September 30, 2021, is as follows:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Undisbursed portion of construction loans
|
$
|
205,848
|
|
|
Commitments to make loans
|
83,616
|
|
|
Unused lines of credit
|
571,362
|
|
|
Standby letters of credit
|
9,671
|
|
|
Total loan commitments
|
$
|
870,497
|
|
Capital Resources
At September 30, 2021, stockholders' equity totaled $396.5 million. 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 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, 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.
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.
HomeTrust Bancshares, Inc. and the Bank each exceeded all regulatory capital requirements as of September 30, 2021. 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 September 30, 2021 under applicable regulatory requirements.
HomeTrust Bancshares, Inc. and the Bank's actual and required minimum capital amounts and ratios are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory Requirements
|
|
(Dollars in thousands)
|
Actual
|
|
Minimum for Capital
Adequacy Purposes
|
|
Minimum to Be
Well Capitalized
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
HomeTrust Bancshares, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
CTE1 Capital (to risk-weighted assets)
|
$
|
375,799
|
|
|
11.25
|
%
|
|
$
|
150,258
|
|
|
4.50
|
%
|
|
$
|
217,040
|
|
|
6.50
|
%
|
|
Tier I Capital (to total adjusted assets)
|
$
|
375,799
|
|
|
10.75
|
%
|
|
$
|
139,873
|
|
|
4.00
|
%
|
|
$
|
174,841
|
|
|
5.00
|
%
|
|
Tier I Capital (to risk-weighted assets)
|
$
|
375,799
|
|
|
11.25
|
%
|
|
$
|
200,344
|
|
|
6.00
|
%
|
|
$
|
267,126
|
|
|
8.00
|
%
|
|
Total Risk-based Capital (to risk-weighted assets)
|
$
|
397,997
|
|
|
11.92
|
%
|
|
$
|
267,126
|
|
|
8.00
|
%
|
|
$
|
333,907
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
CTE1 Capital (to risk-weighted assets)
|
$
|
375,320
|
|
|
11.26
|
%
|
|
$
|
149,943
|
|
|
4.50
|
%
|
|
$
|
216,584
|
|
|
6.50
|
%
|
|
Tier I Capital (to total adjusted assets)
|
$
|
375,320
|
|
|
10.29
|
%
|
|
$
|
145,915
|
|
|
4.00
|
%
|
|
$
|
182,393
|
|
|
5.00
|
%
|
|
Tier I Capital (to risk-weighted assets)
|
$
|
375,320
|
|
|
11.26
|
%
|
|
$
|
199,924
|
|
|
6.00
|
%
|
|
$
|
266,565
|
|
|
8.00
|
%
|
|
Total Risk-based Capital (to risk-weighted assets)
|
$
|
398,408
|
|
|
11.96
|
%
|
|
$
|
266,565
|
|
|
8.00
|
%
|
|
$
|
333,206
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HomeTrust Bank:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
CTE1 Capital (to risk-weighted assets)
|
$
|
363,085
|
|
|
10.87
|
%
|
|
$
|
150,258
|
|
|
4.50
|
%
|
|
$
|
217,040
|
|
|
6.50
|
%
|
|
Tier I Capital (to total adjusted assets)
|
$
|
363,085
|
|
|
10.38
|
%
|
|
$
|
139,913
|
|
|
4.00
|
%
|
|
$
|
174,891
|
|
|
5.00
|
%
|
|
Tier I Capital (to risk-weighted assets)
|
$
|
363,085
|
|
|
10.87
|
%
|
|
$
|
200,344
|
|
|
6.00
|
%
|
|
$
|
267,126
|
|
|
8.00
|
%
|
|
Total Risk-based Capital (to risk-weighted assets)
|
$
|
385,283
|
|
|
11.54
|
%
|
|
$
|
267,126
|
|
|
8.00
|
%
|
|
$
|
333,907
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
CTE1 capital (to risk-weighted assets)
|
$
|
357,767
|
|
|
10.74
|
%
|
|
$
|
149,936
|
|
|
4.50
|
%
|
|
$
|
216,575
|
|
|
6.50
|
%
|
|
Tier I Capital (to total adjusted assets)
|
$
|
357,767
|
|
|
9.81
|
%
|
|
$
|
145,933
|
|
|
4.00
|
%
|
|
$
|
182,417
|
|
|
5.00
|
%
|
|
Tier I Capital (to risk-weighted assets)
|
$
|
357,767
|
|
|
10.74
|
%
|
|
$
|
199,915
|
|
|
6.00
|
%
|
|
$
|
266,553
|
|
|
8.00
|
%
|
|
Total Risk-based Capital (to risk-weighted assets)
|
$
|
380,855
|
|
|
11.43
|
%
|
|
$
|
266,553
|
|
|
8.00
|
%
|
|
$
|
333,192
|
|
|
10.00
|
%
|
In addition to the minimum CET1, Tier 1 and total risk-based capital ratios, both HomeTrust Bancshares, Inc. and the Bank have to maintain a capital conservation buffer consisting of additional CET1 capital of more than 2.5% 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. At September 30, 2021, the conservation buffer was 3.92% and 3.54% for HomeTrust Bancshares, Inc. and the Bank, respectively.
Impact of Inflation
The effects of price changes and inflation can vary substantially for most financial institutions. While management believes that inflation affects the growth of total assets, it believes that it is difficult to assess the overall impact. Management believes this to be the case due to the fact that generally neither the timing nor the magnitude of the inflationary changes in the CPI coincides with changes in interest rates. The price of one or more of the components of the CPI may fluctuate considerably and thereby influence the overall CPI without having a corresponding effect on interest rates or upon the cost of those goods and services normally purchased by us. In years of high inflation and
high interest rates, intermediate and long-term interest rates tend to increase, thereby adversely impacting the market values of investment securities, mortgage loans and other long-term fixed rate loans. In addition, higher short-term interest rates caused by inflation tend to increase the cost of funds. In other years, the opposite may occur.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
There has not been any material change in the market risk disclosures contained in our 2021 Form 10-K.
Item 4. Controls and Procedures
An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Act")) as of September 30, 2021, 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. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures in effect as of September 30, 2021, 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. In addition, on July 1, 2020, the Company adopted the CECL accounting standard. In connection with the adoption of CECL, the Company implemented relevant changes and enhancements to its internal control environment and processes related to estimating credit losses in accordance with the standard. There were no other changes in the Company's internal control over financial reporting that occurred during the three months ended September 30, 2021 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all errors and all 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 can occur because of simple error or mistake. Additionally, controls may be circumvented by the individual acts of some persons, by collusion of two or more people, or by override of the control. The design of any control procedure also 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 may 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.