Hometrust Bancshares, Inc. annual report, FY2023

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Hometrust Bancshares, Inc. — FY2023 Form 10-K

Reporting period: Fiscal year ended June 30, 2023, with comparisons to fiscal 2022. This is an annual report, not a filing for calendar-year 2022 Q4.

Business context

HomeTrust is a bank holding company operating through HomeTrust Bank, a community bank serving North Carolina, South Carolina, Tennessee, Virginia and Georgia. Its lending includes commercial real estate, commercial and industrial, equipment finance, residential, municipal lease and consumer loans. The company completed its merger with Quantum Capital Corp. on February 12, 2023, expanding its Atlanta presence.

Financial results and condition

  • Profit: Net income was $44.6 million, up 25.1% from $35.7 million; diluted EPS was $2.80 versus $2.23.
  • Interest income and margins: Interest and dividend income was $187.1 million, up 61.2%. Net interest income rose 42.1% to $157.4 million. Net interest margin increased to 4.38% from 3.38%; average yield on earning assets rose to 5.20% from 3.54%, while the average cost of interest-bearing liabilities increased to 1.17% from 0.23%.
  • Other income and expenses: Noninterest income declined 20.6% to $31.1 million, notably as gains on loan sales fell. Noninterest expense rose 10.3% to $115.9 million, including $5.5 million of Quantum merger costs.
  • Credit costs and asset quality: Provision for credit losses was $15.4 million, compared with a $0.6 million benefit in FY2022. The loan allowance rose to $47.2 million, or 1.29% of loans, from $34.7 million, or 1.25%. Nonperforming assets were $8.3 million, 0.18% of assets, versus $6.3 million, also 0.18%, a year earlier. Net charge-offs were $3.3 million.
  • Balance sheet: Total assets grew 29.8% to $4.61 billion; loans, net of allowance, were $3.61 billion; deposits were $3.60 billion; and stockholders’ equity was $471.2 million. Growth primarily reflected the Quantum acquisition.
  • Liquidity and funding: Cash and cash equivalents were $303.5 million, compared with $105.1 million. Deposits increased 16.2%; brokered deposits were $232.5 million, or 6.5% of deposits. Uninsured deposits were $913.2 million, or 25.4%, including $341.9 million of collateralized municipal deposits. Certificates of deposit totaling $642.8 million mature within one year.
  • Debt: Borrowings were $457.3 million at year-end, versus none at June 30, 2022, including $180.0 million of FHLB advances, $257.0 million of FRB advances and $20.3 million drawn on a bank line. The company also reported $10.0 million of junior subordinated debt.
  • Cash flow: Operating cash flow was negative $42.4 million; investing cash flow was negative $121.1 million; financing cash flow was positive $361.9 million. Cash increased $198.4 million. Operating cash flow included substantial loan originations for sale.
  • Capital and shareholder returns: The Bank was classified as well capitalized; its CET1, Tier 1 risk-based and total risk-based capital ratios were 11.14%, 11.14% and 12.10%, respectively. The company declared $0.39 per share in dividends, up from $0.35. No shares were repurchased during FY2023.

Material changes versus FY2022

  • Quantum added approximately $656.6 million of assets, including $561.9 million of loans and $570.6 million of deposits, as recorded after purchase-accounting adjustments. The merger issued approximately 1.37 million HomeTrust shares and generated $8.5 million of goodwill and a $12.2 million core deposit intangible.
  • Net interest income benefited from higher market rates, loan growth and Quantum’s acquired loan portfolio. Funding costs also rose sharply, with total interest expense increasing to $29.7 million from $5.3 million.
  • Loan-sale gains declined to $5.6 million from $12.9 million, chiefly due to lower residential mortgage and SBA sales amid rising rates. The prior year also included a $1.9 million gain on securities sales.
  • The allowance and credit-loss provision increased, reflecting Quantum, loan growth and mix, fintech portfolio risk and updated economic assumptions. Net charge-offs shifted to $3.3 million from net recoveries of $0.7 million.
  • Year-end equity increased 21.2% to $471.2 million. Tangible equity to tangible assets decreased to 9.39% from 10.31%, in part reflecting acquisition-related goodwill and intangibles.

Outlook, risks and unusual items

  • The filing provides no specific earnings, growth or margin guidance. Management said it believes liquidity is adequate for loan demand and normal deposit runoff, and described its funding sources as deposits, loan and securities cash flows, and wholesale borrowing capacity.
  • Management identifies rising deposit costs, competition for deposits, interest-rate and yield-curve changes, recession and inflation, and borrowers’ repayment capacity as material risks. The portfolio is concentrated in commercial real estate: CRE loans were $1.87 billion, 51.5% of loans. Regulatory disclosures place certain CRE measures near supervisory concentration criteria; the filing uses more than one measure and denominator.
  • Other significant risks include construction and development lending, equipment finance and indirect auto credit, reliance on mortgage/SBA secondary markets, acquisition integration, cyber and third-party service disruptions, and fair-value or credit-loss estimation uncertainty. Management reported no USD LIBOR-linked loans at June 30, 2023; the acquired floating-rate subordinated debt transitioned to a SOFR-based benchmark beginning July 2023.
  • Available-for-sale securities had $5.3 million of gross unrealized losses at year-end. Management reported no credit-loss allowance was necessary and said it did not intend, and was not more likely than not required, to sell the securities before recovery.
  • The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. However, both management’s control assessment and the auditor’s control audit excluded Quantum, which represented 14.3% of consolidated assets at year-end. The audit identified the loan allowance and Quantum acquired-loan/core-deposit-intangible valuations as critical audit matters.
  • The filing reports no pending litigation expected by management to have a material adverse effect and no goodwill impairment for FY2023.

Important facts for investors to verify

  • Track deposit retention, uninsured and brokered deposit levels, CD maturities, and the cost and availability of wholesale funding.
  • Assess whether the higher net interest margin can persist as deposit costs reprice and acquired loans run off.
  • Review CRE and construction concentration measures, criticized and nonperforming loans, charge-offs, and allowance assumptions—especially for acquired and fintech-originated portfolios.
  • Monitor Quantum integration, realization of expected benefits, final purchase-accounting adjustments and integration costs; verify remediation and integration of Quantum into financial controls.
  • Consider liquidity and capital sensitivity to further rate changes, including securities valuation effects and the disclosed rate-shock analysis.