Hometrust Bancshares, Inc. quarterly report, Q1 FY2016

Full document

Hometrust Bancshares, Inc. — Form 10-Q Summary

Reporting period: Three months ended September 30, 2015, the first quarter of fiscal 2016 (not calendar 2015 Q1). Comparative results are for the three months ended September 30, 2014; balance-sheet comparisons are with June 30, 2015. Dollar amounts are in U.S. dollars.

Business context and financial position

HomeTrust is a bank holding company whose subsidiary operates primarily in North Carolina, South Carolina, Tennessee, and Virginia. Its core business is gathering deposits and using deposits and borrowings to fund consumer and commercial lending and investments. The company reported 45 locations at quarter-end.

  • Total assets were $2.726 billion, down $57.1 million (2.1%) from June 30. Net loans were $1.720 billion, up $56.8 million (3.4%); growth included $26.5 million of organic growth and $30.3 million in purchased home equity lines, net of repayments.
  • Deposits were $1.820 billion, down $52.2 million (2.8%), largely from the managed runoff of $40.3 million in higher-cost certificates of deposit. Other borrowings were $476.0 million, nearly unchanged. Outstanding FHLB advances had maturities under 90 days and a 0.21% weighted average rate.
  • Stockholders’ equity was $368.1 million, down from $371.1 million. The Bank was categorized as well-capitalized; its CET1 ratio was 13.17% and total risk-based capital ratio was 14.24%.

Results, margins, and cash flow

  • Net income was $2.6 million, or $0.14 per basic and diluted share, versus $2.3 million, or $0.12 per share, a year earlier. Comprehensive income was $3.4 million, including $876,000 of after-tax unrealized gains on available-for-sale securities.
  • Interest and dividend income was $22.0 million and interest expense was $1.4 million, producing net interest income of $20.6 million, up $2.0 million (10.6%). Noninterest income was $3.4 million; noninterest expense was $19.8 million.
  • Net interest margin was 3.27% on a non-tax-equivalent basis and 3.37% on a fully taxable-equivalent basis, down from 3.85% and 3.99%, respectively, a year earlier. Management attributed the contraction principally to its short-term leveraged investment strategy: average additional FHLB borrowings of $446 million funded short-term assets. The strategy contributed approximately $433,000 of quarterly net interest income; management’s adjusted taxable-equivalent margin excluding it was 4.02%.
  • Operating cash flow was $11.5 million, investing cash outflow $18.9 million, and financing cash outflow $58.5 million. Cash and cash equivalents decreased $65.9 million to $50.2 million. Uses included loan growth, deposit runoff, and $7.4 million of share repurchases. Commercial paper, separately reported from cash equivalents, totaled $242.9 million.
  • The allowance for loan losses was $22.1 million, or 1.27% of total loans (1.52% excluding acquired loans). There was no loan-loss provision in the quarter, versus a $250,000 recovery in the prior-year quarter. Net charge-offs were $262,000 versus $99,000.

Material changes and unusual items

  • Compared with the prior-year quarter, net interest income rose $2.0 million and noninterest income rose $600,000. Noninterest expense increased $1.3 million, partly offset by the absence of $1.4 million in prior-year merger-related expenses.
  • A nonrecurring $526,000 tax charge reflected the reduced value of deferred tax assets after North Carolina lowered its corporate tax rate. The reported effective tax rate was 37.5%, versus 27.7% a year earlier.
  • Management’s non-GAAP net income, excluding merger costs, the tax charge, and loan-loss recovery, was $3.1 million versus $3.0 million; adjusted diluted EPS was $0.17 versus $0.16. These measures are supplemental and not substitutes for GAAP results.
  • Purchase-accounting discount accretion on acquired loans was $1.3 million, versus $661,000 a year earlier. Management noted that acquired-loan income can vary from quarter to quarter as cash-flow and prepayment assumptions change.
  • Nonperforming assets were $31.5 million, or 1.2% of assets, compared with $31.9 million at June 30. Delinquent loans 30 days or more rose to $34.2 million from $29.8 million, while classified assets declined to $74.2 million from $81.1 million. Impaired loans were $50.6 million, down from $57.9 million.
  • The company repurchased 414,362 shares for approximately $7.4 million at an average $17.79 per share. The filing’s repurchase table and narrative give inconsistent share totals and remaining authorization (see investor verification items).

Outlook, risks, and contingencies

No numerical earnings or revenue guidance is provided. Management cited opportunities for organic growth as local economies and loan demand strengthen, while saying future expansion would remain disciplined and focused primarily on existing markets. Six branch consolidations announced in July were completed October 30, 2015. Management believes the allowance is adequate, but cautions that estimates may prove inaccurate and that regulatory review could require additional reserves.

  • Key risks include borrower credit deterioration, real-estate market and economic conditions, interest-rate and funding-cost changes, deposit retention, regulatory requirements, acquisition integration, competition, litigation, technology and cybersecurity, and valuation assumptions.
  • Interest-rate sensitivity includes approximately $589.2 million of loans with rate floors averaging 4.25%; management said income could be negatively affected in a rising-rate environment until rates exceed applicable floors.
  • Available liquidity sources included $20.7 million of additional FHLB capacity, a $168.1 million Federal Reserve line, and $35.0 million of lines at two unaffiliated banks; none of the latter lines was drawn. Certificates of deposit totaling $388.7 million were scheduled to mature within one year. Loan commitments and unused lines totaled $420.3 million.
  • A lawsuit seeking $12.5 million in compensatory damages plus punitive treble damages was considered resolved after plaintiffs dropped their appeal on September 25, 2015. The company remains exposed to other ordinary-course legal matters, including potential borrower claims.
  • Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It reported no material change in market-risk disclosures or previously disclosed risk factors.

Important facts for investors to verify

  • Reconcile the share-repurchase disclosures: the monthly table totals 414,362 shares and $7.4 million, while the narrative says 354,339 shares purchased under the plan and 616,932 remaining from a 971,271-share authorization.
  • Assess the sustainability of earnings and margins apart from the $446 million short-term borrowing strategy and the $1.3 million of acquired-loan discount accretion.
  • Track deposit runoff, short-term FHLB funding, cash and commercial-paper balances, and upcoming certificate maturities alongside loan growth and commitments.
  • Monitor delinquency trends, nonaccruals, classified and impaired loans, charge-offs, and reserve adequacy, particularly in real-estate-related portfolios.
  • Confirm subsequent effects of the October branch consolidations and the approximately $484,000 contingent payment made October 27, 2015, related to an earlier acquisition.