Business context and reporting period
HomeTrust Bancshares, Inc. is a bank holding company whose principal business is taking deposits and making consumer and commercial loans. This Form 10-Q covers the three months ended September 30, 2016—the first quarter of fiscal 2017—and compares results with the three months ended September 30, 2015. Unless stated otherwise, dollar amounts below are in millions.
Financial performance and condition
| Metric | Quarter ended Sept. 30, 2016 | Comparable 2015 period / prior quarter |
|---|---|---|
| Interest and dividend income | $22.8 | $22.0 in 2015 |
| Net interest income | $21.1 | $20.6 in 2015; up 2.8% |
| Net interest margin | 3.35% GAAP; 3.44% fully taxable-equivalent | 3.27% and 3.37%, respectively, in 2015 |
| Net income / diluted EPS | $3.8 / $0.22 | $2.6 / $0.14 in 2015 |
| Noninterest income / expense | $4.1 / $19.0 | $3.4 / $19.8 in 2015 |
| Total assets | $2,754.1 | $2,717.7 at June 30, 2016 |
| Net loans / deposits | $1,860.5 / $1,793.5 | $1,811.5 / $1,802.7 at June 30, 2016 |
| Borrowings / stockholders’ equity | $536.5 / $364.4 | $491.0 / $360.0 at June 30, 2016 |
| Cash and cash equivalents | $60.6 | $52.6 at June 30, 2016 |
- Average loans grew 6.9% year over year; quarter-end loans rose 2.7% from June 30. Management reported $24.0 million of organic net loan growth, excluding purchased HELOCs.
- Quarterly operating cash flow was negative $3.0 million, investing cash flow negative $25.3 million, and financing cash flow positive $36.3 million. The net cash increase was $8.0 million, supported in part by $45.5 million of additional borrowings.
- Nonperforming assets were $22.7 million, or 0.82% of assets, down from $24.5 million, or 0.90%, at June 30. Nonaccruing loans were $17.0 million. The allowance for loan losses was $21.0 million, 1.11% of loans (1.24% excluding acquired loans); no loan-loss provision was recorded in either comparison quarter.
- The Bank reported regulatory capital ratios above minimums and was classified as well-capitalized. At September 30, its common equity Tier 1 risk-based ratio was 13.35%, Tier 1 leverage ratio 10.64%, and total risk-based capital ratio 14.34%.
Material changes versus the prior comparable period
- Net income increased 49.1% year over year. Higher net interest income and noninterest income, together with lower noninterest expense, contributed to the improvement.
- Net interest income benefited from loan growth and higher acquired-loan discount accretion. Average loan yield nevertheless declined 13 basis points to 4.56%; higher borrowing costs partly offset income growth.
- Noninterest income increased 21.0%, including a $385,000 gain on sale of a closed branch building and higher mortgage banking income. Noninterest expense fell 4.4%, partly due to lower occupancy, operating, and FDIC insurance costs.
- Loans grew while deposits declined $9.2 million from June 30. Borrowings increased $45.5 million; management said funds were redeployed toward higher-yielding loans and away from lower-yielding liquid investments and higher-cost deposits.
- Net charge-offs were $341,000 versus $262,000 in 2015. The allowance declined to $21.0 million from $21.3 million at June 30, despite loan growth.
Outlook, commentary, risks and unusual items
- No specific earnings or financial forecast was provided. Management cited opportunities for organic growth and disciplined expansion in its existing markets.
- On September 21, 2016, HomeTrust agreed to acquire TriSummit Bancorp, which operates six locations in Tennessee and Virginia. The transaction was expected to close in the first calendar quarter of 2017, subject to shareholder and regulatory approvals and other customary conditions. It was expected to add approximately $246 million of loans and $288 million of deposits; consideration was approximately $31.8 million, split between cash and HomeTrust shares. The quarter included $307,000 of merger-related expense.
- Management’s adjusted, non-GAAP results excluded merger expense, state tax expense related to the reduction in North Carolina’s corporate tax rate, and the branch-sale gain. Adjusted net income was $4.3 million and adjusted diluted EPS $0.25, versus $3.1 million and $0.17 in 2015. These measures are supplemental, not substitutes for GAAP results.
- Interest-rate risks include lower yields on new and refinanced loans, rising funding costs, and $576.5 million of loans subject to interest-rate floors. Management noted that net interest income could be negatively affected in a rising-rate environment until rates exceed applicable floors.
- Liquidity sources included $15.5 million of additional FHLB borrowing capacity, a $200.5 million Federal Reserve line, and $60 million of lines with unaffiliated banks; none of the latter lines was drawn. FHLB advances outstanding were $536.5 million and had maturities under 90 days. Certificates of deposit totaling $306.4 million were scheduled to mature within one year.
- Off-balance-sheet loan commitments, construction-loan undisbursed amounts, and unused lines totaled approximately $503.0 million. The filing describes ordinary-course litigation but says management did not believe pending proceedings would materially adversely affect the Company.
- Management identified credit quality, loan-loss estimates, acquisition approval and integration, interest rates, deposit retention, regulatory actions, economic and real-estate conditions, competition, and operational or cybersecurity disruptions among the risks to results. Management said disclosure controls were effective and there were no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- TriSummit’s regulatory and shareholder approvals, closing timetable, integration costs, and realization of expected benefits.
- Whether loan growth, especially purchased HELOCs and construction and development lending, is accompanied by stable credit quality and adequate loss reserves.
- How acquired-loan discount accretion affects earnings, given management’s warning that it can be volatile between quarters.
- The sustainability of earnings growth after considering the branch-sale gain, state tax revaluation, and merger-related costs, and the difference between GAAP and adjusted results.
- Funding and liquidity trends, including short-term FHLB borrowings, deposit maturities, and the company’s stated loan and unused-credit commitments.