Hometrust Bancshares, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2017, the company’s first quarter of fiscal 2018. Unless stated otherwise, financial amounts are in U.S. dollars. HomeTrust Bancshares is a bank holding company headquartered in Asheville, North Carolina; its principal activities are deposit-taking, lending and investment. The quarter followed the January 1, 2017 acquisition of TriSummit Bancorp, so year-over-year comparisons include acquired operations.
Financial performance and position
| Metric | Quarter ended September 30, 2017 | Comparable period / reference |
|---|---|---|
| Net interest income | $24.6 million | $21.1 million in 2016; up 16.3% |
| Net income | $5.6 million | $3.8 million in 2016; up 45.6% |
| Diluted earnings per share | $0.30 | $0.22 in 2016 |
| Net interest margin | 3.37% GAAP; 3.44% tax-equivalent | 3.35% GAAP; 3.44% tax-equivalent in 2016 |
| Total assets | $3.25 billion | $3.21 billion at June 30, 2017 |
| Total loans | $2.40 billion gross; $2.37 billion net | Gross loans increased $43.6 million from June 30, 2017 |
| Deposits / borrowings | $2.10 billion / $679.8 million | Deposits up $51.9 million; borrowings down $16.7 million from June 30 |
| Stockholders’ equity | $405.5 million | $397.6 million at June 30, 2017 |
Interest income increased 22.4%, partly reflecting TriSummit and organic loan growth, while interest expense approximately doubled as borrowing balances and costs rose. Noninterest income was $4.6 million, up 7.9%; noninterest expense was $21.1 million, up 10.2%. The effective tax rate was 31.1%, versus 38.8% a year earlier. Tangible book value per share was $19.81, up from $19.37 at June 30.
Cash flow and liquidity: Operating cash flow was $7.2 million, investing cash flow was negative $50.3 million and financing cash flow was positive $35.2 million. Cash and cash equivalents declined $8.0 million to $79.0 million. The company held $199.8 million in commercial paper and $110.5 million in certificates of deposit at other banks. It reported $679.8 million of FHLB advances, all with maturities under 90 days, and additional borrowing capacity of $48.5 million at the FHLB, $111.7 million at the Federal Reserve and $60.0 million through unaffiliated-bank lines. The Bank was categorized as well-capitalized; its total risk-based capital ratio was 12.35%.
Material changes and asset quality
- Organic net loan growth was $43.2 million for the quarter, or 7.9% annualized. Commercial real estate and construction and development balances grew; commercial loans represented 49.6% of total loans at quarter-end.
- Core deposits increased $56.1 million, led by a $72.7 million rise in money market accounts. Certificates of deposit declined $4.3 million as the company managed higher-cost funding runoff.
- Nonperforming assets were approximately $20.0 million, or 0.62% of assets, broadly unchanged from June 30. Nonaccruing loans were $14.1 million; REO was $5.9 million.
- The allowance for loan losses was $22.0 million, or 0.92% of gross loans, versus $21.2 million, or 0.90%, at June 30. There was no provision for loan losses; net recoveries were $846,000, compared with net charge-offs of $341,000 in the 2016 quarter.
- Unrealized losses on available-for-sale securities totaled $609,000 at September 30. Management attributed the declines largely to higher market interest rates and reported no other-than-temporary impairment.
Management commentary, outlook and risks
Management described loan growth as supported by stronger local conditions, market expansion and lending initiatives. It expects construction lending to remain an important part of the portfolio, while stating that it intends to maintain disciplined underwriting and focus primarily on organic growth in existing markets. No quantitative earnings or balance-sheet guidance was provided.
The company’s leveraging strategy—using additional short-term FHLB borrowing to invest in liquid assets—generated approximately $245,000 of net interest income in the quarter. Management’s non-GAAP analysis estimated that excluding this strategy, tax-equivalent net interest margin would have been 3.72%, compared with 3.97% a year earlier. Lower accretion of acquired-loan purchase discounts also weighed on reported loan yields; this income can vary with repayments, credit estimates and other assumptions.
Key risks include credit deterioration, real-estate values and construction exposure, interest-rate and funding-cost changes, competition for deposits, liquidity needs, regulatory review and integration of acquisitions. Total off-balance-sheet loan commitments, construction-loan disbursements, unused lines and letters of credit were $688.6 million. Management said pending litigation in the ordinary course was not expected to have a material adverse effect. It also warned that the expected-credit-loss standard, when adopted, is expected to increase the allowance, but the amount is not yet known.
Unusual accounting items included a $680,000 cumulative-effect adjustment to retained earnings from adopting share-based payment guidance; management said the change may cause future tax-expense volatility. A $133,000 state-tax adjustment reflected the effect of North Carolina corporate tax-rate changes. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported earnings and loan growth reflects TriSummit versus organic performance, and how the acquired loan portfolio performs.
- Whether credit quality, delinquency trends and the allowance remain adequate as commercial real-estate and construction exposures grow; the filing reports delinquent loans of $17.7 million, up from $15.2 million at June 30.
- Whether deposit growth can continue without materially higher funding costs, and how short-term FHLB borrowing affects earnings and liquidity if rates change.
- The sustainability of earnings given lower acquired-loan discount accretion, higher compensation costs and the company’s leveraging strategy.
- The eventual allowance impact and implementation assumptions for the expected-credit-loss accounting standard, as well as the outcome of ordinary-course litigation and material lending commitments.