Hometrust Bancshares, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2021, the company’s first quarter of fiscal 2022 (fiscal year ends June 30). Comparisons of quarterly results are to the three months ended September 30, 2020; balance-sheet changes are generally versus June 30, 2021. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
- Earnings: Net income was $10.5 million, up 83% from $5.8 million. Diluted EPS was $0.65 versus $0.35. Pretax income was $13.5 million; income tax expense was $3.0 million, for a 22.0% effective tax rate.
- Interest income and margins: Net interest income rose 8.6% to $27.7 million, despite interest and dividend income declining 3.8% to $29.3 million. Lower funding costs drove the improvement: interest expense fell 67.7% to $1.6 million. Tax-equivalent net interest margin increased to 3.41% from 3.00% (GAAP margin: 3.37% versus 2.96%).
- Other income and expenses: Noninterest income grew 19.8% to $10.4 million, including $4.1 million of loan-sale gains. Noninterest expense was essentially unchanged at $26.0 million.
- Credit costs and asset quality: The company recorded a $1.5 million benefit for credit losses, versus a $0.95 million provision a year earlier; net loan recoveries were $0.27 million. The allowance for credit losses was $34.4 million, 1.27% of loans (1.28% excluding PPP loans). Nonperforming assets fell to $6.8 million, or 0.19% of assets, from $12.8 million, mainly after repayment of two commercial real estate relationships.
- Balance sheet: Total assets were $3.48 billion, down from $3.52 billion at June 30. Loans were $2.72 billion, down 0.5%; commercial loans excluding PPP grew 1.9%, while retail consumer loans declined 4.3%. Deposits rose 1.1% to $2.99 billion, with core deposits increasing 2.4%. Borrowings declined $75.0 million to $40.0 million. Stockholders’ equity was $396.5 million.
- Liquidity and capital: Cash and cash equivalents were $42.6 million; commercial paper was $196.7 million. The company reported $278.7 million of available FHLB borrowing capacity, a $77.6 million FRB line, and $100.0 million of credit lines with three unaffiliated banks; $40.0 million of advances were outstanding. The company and Bank were reported as well capitalized. Tangible equity to tangible assets was 10.73%.
- Cash flow and shareholder returns: Operating activities used $3.5 million; investing activities provided $49.4 million; financing activities used $54.3 million. Cash and cash equivalents declined $8.4 million during the quarter. The company repurchased 376,435 shares for approximately $10.4 million and declared $0.08 per share in dividends.
Material changes and business developments
- Compared with the prior-year quarter, earnings benefited from $2.2 million higher net interest income, $1.7 million higher noninterest income, and the $1.5 million credit-loss benefit. Lower borrowing costs were a major contributor to the net interest income increase.
- Loan-sale gains increased to $4.1 million, supported by SBA and home-equity loan sales. SBA loan servicing was brought in-house beginning July 1, 2021.
- During the quarter, the company closed nine branches in North Carolina, Tennessee, and Virginia, citing changes in customer banking behavior and increased digital activity.
- PPP loans outstanding were $28.8 million at quarter-end; $18.3 million was forgiven during the quarter. The company ended PPP originations in the prior quarter.
Outlook, risks, and contingencies
- No specific earnings or financial guidance is provided. Management said net interest income and net interest margin could remain adversely affected through fiscal 2022 and possibly longer, citing the pandemic and the 2020 reduction in the federal funds rate.
- Management continued to monitor COVID-19, including the Delta variant. At September 30, $1.0 million of loans had full principal-and-interest deferrals and $67.8 million of commercial loans were on interest-only deferrals. Most pandemic deferrals had ended.
- Key risks identified include borrower credit deterioration, economic and real-estate conditions, interest-rate and funding changes, deposit retention, securities valuation, regulatory actions, cybersecurity and third-party service disruptions, and effects of COVID-19. Management cautioned that credit-loss estimates are judgmental and future provisions could increase.
- Loan commitments, undisbursed construction loans, unused credit lines, and standby letters of credit totaled $870.5 million. Management said commitments do not necessarily represent future cash requirements. No pending litigation was identified as likely to have a material adverse effect.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether lower funding costs and the improved net interest margin persist, given management’s warning about continued pressure on net interest income and margin.
- Whether credit quality remains stable and the $34.4 million allowance remains adequate as pandemic-related borrower relief winds down.
- Loan and deposit trends, especially commercial loan growth, retail loan contraction, core deposit growth, and certificate-of-deposit maturities.
- The sustainability of loan-sale gains and other noninterest income, including SBA activity after PPP originations ended and the transition to in-house SBA servicing.
- Liquidity and capital after borrowings paydowns, share repurchases, dividends, and funding of outstanding commitments.