IT Certification

HOMETRUST BANCSHARES : Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)


Forward-Looking Statements
Certain matters in this Form 10-Q constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements relate to our financial condition, results of operations, plans,
objectives, future performance or business. Forward-looking statements are not
statements of historical fact, are based on certain assumptions and are
generally identified by use of the words "believes," "expects," "anticipates,"
"estimates," "forecasts," "intends," "plans," "targets," "potentially,"
"probably," "projects," "outlook" or similar expressions or future or
conditional verbs such as "may," "will," "should," "would," and "could."
Forward-looking statements include statements with respect to our beliefs,
plans, objectives, goals, expectations, assumptions, and statements about future
economic performance and projections of financial items. These forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors that could cause actual results to differ materially from the results
anticipated or implied by our forward-looking statements, including, but not
limited to: the effect of the COVID-19 pandemic, including on the Company'
credit quality and business operations, as well as its impact on general
economic and financial market conditions and other uncertainties resulting from
the COVID-19 pandemic, such as the extent and duration of the impact on public
health, the U.S. and global economies, and consumer and corporate customers,
including economic activity, employment levels and market liquidity; the credit
risks of lending activities, including changes in the level and trend of loan
delinquencies and write offs and changes in our allowance for credit losses and
provision for credit losses that may be impacted by deterioration in the housing
and commercial real estate markets; changes in general economic conditions,
either nationally or in our market areas; changes in the levels of general
interest rates, and the relative differences between short and long term
interest rates, deposit interest rates, our net interest margin and funding
sources; uncertainty regarding the future of LIBOR, and the potential transition
away from LIBOR toward new interest rate benchmarks; fluctuations in the demand
for loans, the number of unsold homes, land and other properties and
fluctuations in real estate values in our market areas; decreases in the
secondary market for the sale of loans that the Company originates; results of
examinations of us by the Board of Governors of the Federal Reserve System
("Federal Reserve"), the NCCOB, or other regulatory authorities, including the
possibility that any such regulatory authority may, among other things, require
us to increase our allowance for credit losses, write-down assets, change our
regulatory capital position or affect our ability to borrow funds or maintain or
increase deposits, which could adversely affect our liquidity and earnings;
legislative or regulatory changes that adversely affect our business including
the effect of Dodd-Frank Wall Street Reform and Consumer Protection Act, changes
in laws or regulations, changes in regulatory policies and principles or the
application or interpretation of laws and regulations by regulatory agencies and
tax authorities, including changes in deferred tax asset and liability activity,
or the interpretation of regulatory capital or other rules, including as a
result of Basel III; our ability to attract and retain deposits; management's
assumptions in determining the adequacy of the allowance for credit losses; our
ability to control operating costs and expenses, especially costs associated
with our operation as a public company; the use of estimates in determining fair
value of certain assets, which estimates may prove to be incorrect and result in
significant declines in valuation; difficulties in reducing risks associated
with the loans on our balance sheet; staffing fluctuations in response to
product demand or the implementation of corporate strategies that affect our
workforce and potential associated charges; disruptions, security breaches, or
other adverse events, failures or interruptions in, or attacks on, our
information technology systems or on the third-party vendors who perform several
of our critical processing functions; our ability to retain key members of our
senior management team; costs and effects of litigation, including settlements
and judgments; our ability to successfully integrate any assets, liabilities,
customers, systems, and management personnel the Company may in the future
acquire into its operations and our ability to realize related revenue synergies
and cost savings within expected time frames and any goodwill charges related
thereto; increased competitive pressures among financial services companies;
changes in consumer spending, borrowing and savings habits; the availability of
resources to address changes in laws, rules, or regulations or to respond to
regulatory actions; adverse changes in the securities markets; inability of key
third-party providers to perform their obligations to us; changes in accounting
principles, policies or guidelines and practices, as may be adopted by the
financial institution regulatory agencies, the Public Company Accounting
Oversight Board or the Financial Accounting Standards Board; and other economic,
competitive, governmental, regulatory, and technological factors affecting our
operations, pricing, products and services including the CARES Act; and the
other risks detailed from time to time in our filings with the SEC, including
our 2020 Form 10-K.
Many of the forward-looking statements are based upon management's beliefs and
assumptions at the time they are made. The Company undertakes no obligation to
publicly update or revise any forward-looking statements included in this report
or to update the reasons why actual results could differ from those contained in
such statements, whether as a result of new information, future events or
otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking statements discussed in this report might not occur and you
should not put undue reliance on any forward-looking statements.
As used throughout this report, the terms "our", "us", "HomeTrust Bancshares" or
the "Company" refer to HomeTrust Bancshares, Inc. and its consolidated
subsidiary, including HomeTrust Bank (the "Bank") unless the context indicates
otherwise.
Overview
HomeTrust Bancshares, Inc., a Maryland corporation, was formed for the purpose
of becoming the holding company for HomeTrust Bank in connection with HomeTrust
Bank's conversion from mutual to stock form, which was completed on July 10,
2012 (the "Conversion"). As a bank holding company and financial holding
company, HomeTrust Bancshares, Inc. is regulated by the Federal Reserve. As a
North Carolina state-chartered bank, and member of the FRB, the Bank's primary
regulators are the NCCOB and the Federal Reserve. The Bank's deposits are
federally insured up to applicable limits by the FDIC. The Bank is a member of
the FHLB of Atlanta, which is one of the 12 regional banks in the FHLB System.
Our headquarters is located in Asheville, North Carolina.
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Our principal business consists of attracting deposits from the general public
and investing those funds, along with borrowed funds, in loans secured by first
and second mortgages on one-to-four family residences, including home equity
loans and construction and land/lot loans, commercial real estate loans,
construction and development loans, commercial and industrial loans, SBA loans,
equipment finance leases, indirect automobile loans, and municipal finance
agreements. The Company also works with a third party to originate HELOCs which
are pooled and sold. In addition, the Company purchases investment securities
consisting primarily of securities issued by United States Government agencies
and GSEs, as well as corporate bonds, commercial paper, and FDIC insured
certificates of deposit.
The Company offers a variety of deposit accounts for individuals, businesses,
and nonprofit organizations. Deposits and borrowings are our primary source of
funds for our lending and investing activities.
The Company is significantly affected by prevailing economic conditions, as well
as government policies and regulations concerning, among other things, monetary
and fiscal affairs, housing and financial institutions. Deposit flows are
influenced by a number of factors, including interest rates paid on competing
time deposits, other investments, account maturities, and the overall level of
personal income and savings. Lending activities are influenced by the demand for
funds, the number and quality of lenders, and regional economic cycles.
Our primary source of pre-tax income is net interest income. Net interest income
is the difference between interest income, which is the income that the Company
earns on its loans and investments, and interest expense, which is the interest
that is paid on our deposits and borrowings. Changes in levels of interest rates
affect our net interest income. Because the length of the COVID-19 pandemic and
the efficacy of the extraordinary measures being put in place to address its
economic consequences are unknown, including the 150 basis point reduction in
the targeted federal funds rate during 2020, until the pandemic subsides, the
Company expects its net interest income and net interest margin will be
adversely affected throughout fiscal 2021 and possibly longer.
A secondary source of income is noninterest income, which includes revenue we
receive from providing products and services, including service charges on
deposit accounts, loan income and fees, lease income, gain on sale of loans, and
gains and losses from sales of securities.
An offset to net interest income is the provision for credit losses which is
required to establish the ACL. Under the new CECL standard all financial assets
measured at amortized cost and off balance sheet credit exposures, including
loans, investment securities and unfunded commitments are evaluated for credit
losses. See Note 1 - Summary of Significant Accounting Policies for further
discussion.
Our noninterest expenses consist primarily of salaries and employee benefits,
expenses for occupancy, marketing and computer services, and FDIC deposit
insurance premiums. Salaries and benefits consist primarily of the salaries and
wages paid to our employees, payroll taxes, expenses for retirement and other
employee benefits. Occupancy expenses, which are the fixed and variable costs of
buildings and equipment, consist primarily of lease payments, property taxes,
depreciation charges, maintenance and costs of utilities.
Our geographic footprint includes seven markets obtained through numerous
strategic acquisitions as well as two de novo commercial loan offices. Looking
forward, the Company believes opportunities currently exist within our market
areas to grow our franchise. While COVID-19 has dampened our growth activities,
the Company believes as the local and global economy returns to normalcy it
remains in a position to create organic growth through marketing efforts. The
Company may also seek to expand its franchise through the selective acquisition
of individual branches, loan purchases and, to a lesser degree, whole bank
transactions that meet our investment and market objectives. The Company will
continue to be disciplined as it pertains to future expansion focusing primarily
on organic growth in our current market areas.
At December 31, 2020, the Company had 41 locations in North Carolina (including
the Asheville metropolitan area, the "Piedmont" region, Charlotte, and
Raleigh/Cary), Upstate South Carolina (Greenville), East Tennessee (including
Kingsport/Johnson City/Bristol, Knoxville, and Morristown) and Southwest
Virginia (including the Roanoke Valley).
Critical Accounting Policies and Estimates
Certain of our accounting policies are important to the portrayal of our
financial condition, since they require management to make difficult, complex or
subjective judgments, some of which may relate to matters that are inherently
uncertain. Estimates associated with these policies are susceptible to material
changes as a result of changes in facts and circumstances. Facts and
circumstances which could affect these judgments include, but are not limited
to, changes in interest rates, changes in the performance of the economy, and
changes in the financial condition of borrowers. These policies relate to (i)
the determination of the provision for credit losses and the ACL, and (ii) the
valuation of goodwill and other intangible assets. The ACL reflects management's
estimate of losses that will result from the inability of our borrowers to make
required loan payments. Management uses a systematic methodology to determine
its ACL for loans held for investment and certain off-balance-sheet credit
exposures. Management considers the effects of past events, current conditions,
and reasonable and supportable forecasts on the collectability of the loan
portfolio. The Company's estimate of its ACL involves a high degree of judgment;
therefore, management's process for determining expected credit losses may
result in a range of expected credit losses. It is possible that others, given
the same information, may at any point in time reach a different reasonable
conclusion. The Company's ACL recorded in the balance sheet reflects
management's best estimate within the range of expected credit losses. The
Company recognizes in net income the amount needed to adjust the ACL for
management's estimate of current expected credit losses. See Note 1 - Summary of
Significant Accounting Policies and Note 6 - Loans and Allowance for Credit
Losses on Loans in this Quarterly Report on Form 10-Q for further detailed
descriptions of our estimation process and methodology related to the ACL. The
valuation of goodwill and other intangible assets policy is described in further
detail in Part II, Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 1, Summary of Significant
Accounting Policies in the Company's 2020 Form 10-K.
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Reclassifications and corrections. To maintain consistency and comparability,
certain amounts from prior periods have been reclassified to conform to current
period presentation with no effect on net income, shareholders' equity, or cash
flows as previously reported.
Recent Accounting Pronouncements. See Note 2 of Notes to Consolidated Financial
Statements under Item 1 of this report for a description of recent accounting
pronouncements including the respective dates of adoption and effects on results
of operations and financial condition.
Non-GAAP Financial Measures

In addition to results presented in accordance with GAAP, this report contains
certain non-GAAP financial measures, which include: tangible book value;
tangible book value per share, tangible equity to tangible assets ratio; and the
ratio of the ACL to total loans excluding PPP loans. Management has presented
the non-GAAP financial measures in this discussion and analysis because it
believes including these items is more indicative of and provides useful and
comparative information to assess trends in our core operations while
facilitating comparison of the quality and composition of the Company's earnings
over time and in comparison to its competitors. However, these non-GAAP
financial measures are supplemental, are not audited and are not a substitute
for operating results or any analysis determined in accordance with GAAP. Where
applicable, the Company has also presented comparable earnings information using
GAAP financial measures. Because not all companies use the same calculations,
our presentation may not be comparable to other similarly titled measures as
calculated by other companies. See "Comparison of Results of Operations for the
Three Months and Six Months Ended December 31, 2020 and 2019" for more detailed
information about our financial performance.

Set forth below is a reconciliation to GAAP of tangible book value and tangible
book value per share:
                                                                                          As of
                                                               December 31,           September 30,           December 31,
(Dollars in thousands, except per share data)                      2020                   2020                    2019
Total stockholders' equity                                   $     404,724$      400,351$     416,995
Less: goodwill, core deposit intangibles, net of taxes              26,130                  26,285                 26,959
Tangible book value (1)                                      $     378,594$      374,066$     390,036
Common shares outstanding                                       16,791,027              17,020,724             17,664,384
Tangible book value per share                                $       22.55$        21.98$       22.08
Book value per share                                         $       24.10$        23.52$       23.61



Set forth below is a reconciliation to GAAP of tangible equity to tangible
assets:
                                                                        As of
                                                             December 31,                     September 30,         December 31,
(Dollars in thousands)                                           2020                             2020                  2019
Tangible book value (1)                                     $   378,594$    374,066$   390,036
Total assets                                                  3,679,971                         3,674,034            3,470,232
Less: goodwill, core deposit intangibles, net of
taxes                                                            26,130                            26,285               26,959
Total tangible assets(2)                                    $ 3,653,841$  3,647,749$ 3,443,273
Tangible equity to tangible assets                                10.36  %                          10.25  %             11.33  %


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(1) Tangible book value is equal to total stockholders’ equity less goodwill
and core deposit intangibles, net of related deferred tax liabilities.
(2) Total tangible assets is equal to total assets less goodwill and core
deposit intangibles, net of related deferred tax liabilities.

Set forth below is a reconciliation to GAAP of the ACL to total loans (excluding
net deferred loan costs) and the allowance for credit losses as adjusted to
exclude PPP loans:

                                                     As of
   (Dollars in thousands)                   December 31,                  

September 30, December 31,

                                                2020                          2020               2019
   Total gross loans receivable (GAAP)     $ 2,678,624                   $  

2,769,396 $ 2,553,455

   Less: PPP loans (1)                          64,845                         80,816                 -
   Adjusted gross loans (non-GAAP)         $ 2,613,779                   $  

2,688,580 $ 2,553,455

   ACL                                     $    39,844$     43,132$    22,031
   ACL / Adjusted gross loans (non-GAAP)          1.52  %                        1.60  %           0.86  %

_________________________________________________________________

(1) PPP loans are fully guaranteed loans by the U.S, government and became
available with the CARES Act.

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Recent Developments: COVID-19, the CARES Act, and Our Response
The COVID-19 pandemic has caused economic and social disruption on an
unprecedented scale. While some industries have been impacted more severely than
others, all businesses have been impacted to some degree. This disruption has
resulted in business closures across the country, significant job loss, and
aggressive measures by the federal government.
Congress, the President, and the Federal Reserve have taken several actions
designed to cushion the economic fallout. Most notably, the CARES Act was signed
into law on March 27, 2020 as a $2.2 trillion legislative package. The goal of
the CARES Act is to prevent a severe economic downturn through various measures,
including direct financial aid to families and economic stimulus to
significantly impacted industry sectors. The package also includes extensive
emergency funding for hospitals and healthcare providers. In addition to the
general impact of COVID-19, certain provisions of the CARES Act as well as other
recent legislative and regulatory relief efforts are expected to have a material
impact on our operations. While it is not possible to know the full extent of
these impacts as of the date of this filing, the Company is disclosing
potentially material items of which it is aware.
On December 27, 2020, the 2021 Consolidated Appropriations Act was signed into
law including $900 billion in stimulus relief for the COVID-19 pandemic. The
legislation extends certain relief provisions from the March CARES Act that were
set to expire at the end of 2020. This new legislation extends the relief to
financial institutions to suspend TDR assessment and reporting requirements
under GAAP for loan modifications to the earlier of 60 days after the national
emergency termination date or January 1, 2022. The legislation includes
additional funding for businesses that did not receive PPP funds under the CARES
Act, especially minority- and women-owned businesses. In addition, it allows
businesses another opportunity to borrow PPP funds if they can show losses of
25% or more in 2020 based on their 2019 revenue. The Company expects a smaller
number of applications to be made by its customers for these additional PPP
funds.
In response to the COVID-19 pandemic, the Company is offering a variety of
relief options designed to support our customers and communities served.
Paycheck Protection Program Participation. The CARES Act authorized the SBA to
temporarily guarantee loans under the new PPP loan program. The goal of the PPP
was to avoid as many layoffs as possible, and to encourage small businesses to
maintain payrolls. As a qualified SBA lender, the Company was automatically
authorized to originate PPP loans upon commencement of the program in April
2020. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year loan term to
maturity; and (c) principal and interest payments deferred for six months from
the date of disbursement. The SBA guarantees 100% of the PPP loans made to
eligible borrowers. The entire principal amount of the borrower's PPP loan,
including any accrued interest, is eligible to be forgiven and repaid by the SBA
so long as employee and compensation levels of the business are maintained and
60% of the loan proceeds are used for payroll expenses, with the remaining 40%
of the loan proceeds used for other qualifying expenses.
As of December 31, 2020, the Company had originated $80.8 million of PPP loans
for 290 customers. Total net origination fees deferred on these loans were
approximately $2.1 million which are being accreted into interest income over
the life of the loans. For the three months ended December 31, 2020, the Company
earned $488,000 in fees through accretion including some accelerated accretion
resulting from loan forgiveness. At December 31, 2020 the Company had $1.1
million of deferred PPP loan fees remaining which are expected to be recognized
over the next several quarters as loan forgiveness accelerates. Additional PPP
loans were processed and funded through a third party provider due to demand
exceeding the Bank's capacity, which, as of December 31, 2020 totaled $32.1
million for almost 1,000 customers. The Company also continues to work with its
clients to assist them with accessing other borrowing options, including other
government sponsored lending programs, as appropriate. The Bank originated $12.5
million under the Main Street Lending Program before the program ended on
January 8, 2021.
Loan Modifications. The Company continues to closely monitor the effects of
COVID-19 on its loan portfolio and all the associated risks to minimize any
potential losses. HomeTrust Bank is offering payment and financial relief
programs for borrowers impacted by COVID-19. These programs include loan payment
deferrals for up to 90 days, waived late fees, and suspension of foreclosure
proceedings and repossessions. For the quarter ended December 31, 2020, the Bank
experienced a significant decline in requests by borrowers for payment and
financial relief programs; however, it will continue to work with individual
borrowers in order to minimize the impact to both the Bank and its customers.
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The breakout of loans deferred by loan type as of the dates indicated is as
follows:
Principal and Interest Payment Deferrals by Loan Types (1) (2)

                                                      December 31, 2020                        September 30, 2020                             June 30, 2020
                                                                Percent of Total                          Percent of Total                              Percent of Total
                                               Deferral          Loan Portfolio          Deferral          Loan Portfolio            Deferral            Loan Portfolio
Lodging                                      $       -                      -  %       $  60,782                    2.2  %       $     108,171                    4.0  %
Other commercial real estate,
construction and development, and
commercial and industrial                        4,018                    0.2             27,169                    1.0                367,443                   13.7
Equipment finance                                2,196                    0.1              2,187                    0.1                 33,693                    1.3
One-to-four family                                 822                      -                684                      -                 36,821                    1.4
Other consumer loans                               832                      -                422                      -                  5,203                    0.2
   Total                                     $   7,868                    0.3  %       $  91,244                    3.3  %       $     551,331                   20.6  %

__________________________

(1) Modified loans are not included in classified assets or nonperforming
assets.
(2) Principal and interest is being deferred


A majority of loans placed on principal and interest payment deferral during the
pandemic came out of deferral as of December 31, 2020. However, the Company has
allowed for continued relief to borrowers in the form of interest-only payments
for certain loans recently coming out of full deferral. At December 31, 2020,
the Company had $75.8 million in commercial loans on interest-only payments for
a period of time no greater than 12 months before being required to return to
their original contractual payments.
All loans modified due to COVID-19 are separately monitored and any request for
continuation of relief beyond the initial modification will be reassessed at
that time to determine if a further modification should be granted and if a
downgrade in risk rating is appropriate. The deferrals are short-term
modifications made on a good faith basis in response to COVID-19 to borrowers
who were current as of December 31, 2019 and are not considered TDRs.
The Company believes the steps it has taken and is taking are necessary to
effectively manage the loan portfolio and assist customers through the ongoing
uncertainty surrounding the duration, impact and government response to the
COVID-19 pandemic. In addition, the Company will continue to work with its
customers to determine the best option for repayment of accrued interest on the
deferred payments.
Branch Operations. Since the beginning of the pandemic, the Company has taken
various steps to ensure the safety of our customers and our team members by
limiting branch activities to appointment only and use of our drive-up
facilities, and by encouraging the use of our digital and electronic banking
channels, all the while adjusting for evolving State and Federal guidelines. On
October 13, 2020, the Company reopened the lobbies of all its branches across
its four state footprint with appropriate protective measures to help ensure the
safety of its customers and retail banking employees.
Comparison of Financial Condition at December 31, 2020 and June 30, 2020
General.  Total assets and liabilities remained at $3.7 billion and $3.3
billion, respectively, at December 31, 2020 as compared to June 30, 2020. The
cumulative increase of $130.7 million, or 52.5% in cash and cash equivalents and
securities held for sale was offset by the cumulative decrease of $128.2
million, or 35.6% in commercial paper and deposits in other banks as the Company
repositioned its liquidity due to maturities and lower short-term rates during
the period. The $41.3 million, or 53.5% increase in loans held for sale
primarily relates to additional 1-4 family and home equity loans originated for
sale during the period.
On July 1, 2020, the Company adopted the CECL accounting standard in accordance
with ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instruments." The cumulative effect adjustment
from this change in accounting standard resulted in an increase in our ACL for
loans of $14.8 million, additional deferred tax assets of $3.9 million,
additional reserve for unfunded loan commitments of $2.3 million, and a
reduction to retained earnings of $13.2 million. In addition, an ACL for
commercial paper was established for $250,000 with a deferred tax asset of
$58,000. The adoption of this ASU did not have an effect on available for sale
debt securities for the six months ended December 31, 2020.
Cash, cash equivalents, and commercial paper.  Total cash and cash equivalents
increased $104.7 million, or 86.1%, to $226.3 million at December 31, 2020 from
$121.6 million at June 30, 2020. Commercial paper decreased $121.2 million, or
39.7% to $183.8 million at December 31, 2020 from $305.0 million at June 30,
2020 as a result of the lower interest rate environment. Our investments in
commercial paper have short-term maturities and limited exposure of $15.0
million or less per each highly-rated company.
Investments.  Debt securities available for sale increased $26.0 million, or
20.4%, to $153.5 million at December 31, 2020 from $127.5 million at June 30,
2020. During the six months ended December 31, 2020, $73.7 million of securities
were purchased, $38.7 million of securities matured, and $8.2 million of MBS
principal payments were received. At December 31, 2020, certificates of deposit
in other banks decreased $7.1 million, or 12.7% to $48.6 million compared to
$55.7 million at June 30, 2020. The decrease in certificates of deposit in other
banks was due to $8.3 million in maturities partially offset by $1.2 million in
purchases. All certificates of deposit in other banks are fully
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insured by the FDIC. Management evaluates securities for impairment where there
has been a decline in fair value below the amortized cost basis of a security to
determine whether there is a credit loss associated with the decline in fair
value on at least a quarterly basis, and more frequently when economic or market
concerns warrant such evaluation. Management does not believe that there were
any credit losses at December 31, 2020; therefore, no impairment losses were
recorded during the first six months of fiscal 2021. Other investments at cost
increased $626,000, or 1.6%, to $39.6 million at December 31, 2020 from $38.9
million at June 30, 2020. Other investments at cost included FHLB stock, FRB
stock, and SBIC investments totaling $23.3 million, $7.4 million, and $8.9
million, respectively.
Loans held for sale. Loans held for sale increased to $118.4 million at December
31, 2020 from $77.2 million at June 30, 2020. The increase was primarily driven
by a $16.3 million, or 34.2% increase in HELOCs originated for sale, as well as
a 63.4% increase in mortgage loans originated for sale of $17.8 million and an
increase in SBA loans held for sale of $7.1 million, or 570.8% increase.
Loans.  Total loans receivable decreased $90.5 million, or 3.3% to $2.7 billion
at December 31, 2020 from $2.8 billion at June 30, 2020. The decrease was driven
by two large commercial relationship payoffs totaling $52.8 million, PPP loan
forgiveness of $15.9 million, and the continued payoff of purchased HELOCs of
$13.1 million.
Commercial and retail consumer loans consist of the following at the dates
indicated:
                                                    As of                                                                       Percent of total
                                      December 31,            June 30,                      Change                     December 31,             June 30,
(Dollars in thousands)                    2020                  2020                 $                  %                  2020                   2020
Commercial loans:
Commercial real estate               $  1,056,971$ 1,052,906$   4,065               0.4  %                 39.5  %               38.0  %
Construction and development              172,892              215,934            (43,042)            (19.9)                    6.5                  

7.8

Commercial and industrial                 138,761              154,825            (16,064)            (10.4)                    5.2                   5.6
Equipment finance                         272,761              229,239             43,522              19.0                    10.2                   8.3
Municipal leases                          128,549              127,987                562               0.4                     4.8                   4.6
PPP loans                                  64,845               80,697            (15,852)            (19.6)                    2.4                   2.9
Total commercial loans                  1,834,779            1,861,588            (26,809)             (1.4)                   68.6                  67.2

Retail consumer loans:
One-to-four family                        452,421              473,693            (21,272)             (4.5)                   16.9                  17.1
HELOCs - originated                       125,397              137,447            (12,050)             (8.8)                    4.7                   5.0
HELOCs - purchased                         58,640               71,781            (13,141)            (18.3)                    2.2                   2.6
Construction and land/lots                 75,108               81,859             (6,751)             (8.2)                    2.8                   3.0
Indirect auto finance                     122,947              132,303             (9,356)             (7.1)                    4.6                   4.8
Consumer                                    9,332               10,259               (927)             (9.0)                    0.3                   0.4
Total retail consumer loans               843,845              907,342            (63,497)             (7.0)                   31.4                  32.8
Total loans                          $  2,678,624$ 2,768,930$ (90,306)             (3.3) %                100.0  %              100.0  %


Asset Quality. Our overall asset quality metrics continue to demonstrate our
commitment to growing and maintaining a loan portfolio with a moderate risk
profile; however, the Company will remain diligent in its review of the
portfolio and overall economy as it continues to maneuver through the
uncertainty surrounding COVID-19. See "Recent Developments: COVID-19, the CARES
Act, and Our Response" on page 44 for additional information regarding our
response to COVID-19.
Nonperforming assets decreased by $1.5 million, or 9.2% to $14.8 million, or
0.40% of total assets at December 31, 2020 from $16.3 million, or 0.44% of total
assets at June 30, 2020. Nonperforming assets included $14.5 million in
nonaccruing loans and $252,000 in REO at December 31, 2020, compared to $15.9
million and $337,000 in nonaccruing loans and REO, respectively, at June 30,
2020. Included in nonperforming loans at December 31, 2020 are $5.9 million of
TDR loans of which $4.1 million were current with respect to their modified
payment terms. At December 31, 2020, $7.0 million, or 48.3%, of nonaccruing
loans were current on their loan payments. The ratio of nonperforming loans to
total loans was 0.54% at December 31, 2020 and 0.58% at June 30, 2020.
The ratio of classified assets to total assets decreased to 0.74% at December
31, 2020 from 0.84% at June 30, 2020. Classified assets decreased to $27.2
million at December 31, 2020 compared to $31.1 million at June 30, 2020
primarily due to $3.1 million in payoffs and $1.5 million in charge-offs during
the six month period ended December 31, 2020.
Our individually evaluated loans are comprised of loans meeting certain
thresholds, on nonaccrual status, and all TDRs, whether performing or on
nonaccrual status under their restructured terms. Individually evaluated loans
may be evaluated for reserve purposes using either the cash flow or the
collateral valuation method. As of December 31, 2020, there were $11.4 million
loans individually evaluated. For more information on these individually
evaluated loans, see Note 6 of the Notes to Consolidated Financial Statements
under Item 1 of this report.
                                       45
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Allowance for credit losses.  On July 1, 2020, the Company adopted the CECL
accounting standard in accordance with ASU 2016-13, "Financial
Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments." See "Note 1 - Summary of Significant Accounting Policies" and
"Note 6 - Loans" for additional details related to the adoption of CECL.
The ACL was $39.8 million, or 1.49% of total loans at December 31, 2020 compared
to $28.1 million, or 1.01% of total loans at June 30, 2020. The ACL to gross
loans excluding PPP loans was 1.52% at December 31, 2020, compared to 1.04% at
June 30, 2020. The overall increase was driven by the additional allowance
stemming from the Company's adoption of the new CECL accounting standard.
There was a net benefit of $2.1 million for the provision for credit losses for
the six months ended December 31, 2020, compared to a $400,000 provision for the
corresponding period in fiscal year 2020. The net benefit of provision was
primarily driven by changes in the economic forecast which improved in outlook
since the adoption of the standard and a decline in the balance of total loans.
Net loan charge-offs totaled $637,000 for the six months ended December 31,
2020, compared to net recoveries of $202,000 for the same period last year. Net
charge-offs as a percentage of average loans were 0.04% for the six months ended
December 31, 2020 compared to net recoveries of (0.01)% for the corresponding
period in fiscal year 2020.
The allowance as a percentage of nonaccruing loans increased to 274.05% at
December 31, 2020 from 176.30% at June 30, 2020.
Management believes the ACL as of December 31, 2020 was adequate to absorb the
estimated losses in the loan portfolio at that date. While management believes
the estimates and assumptions used in our determination of the adequacy of the
allowance are reasonable, there can be no assurance that such estimates and
assumptions will not be proven incorrect in the future, or that the actual
amount of future provisions will not exceed the amount of past provisions or
that any increased provisions that may be required will not adversely impact our
financial condition and results of operations. In addition, the determination of
the amount of the ACL is subject to review by bank regulators as part of the
routine examination process, which may result in the establishment of additional
reserves based upon their judgment of information available to them at the time
of their examination. Lastly, a further decline in national and local economic
conditions, as a result of the COVID-19 pandemic or other factors, could result
in a material increase in the ACL and may adversely affect the Company's
financial condition and results of operations.
Real estate owned. REO decreased $85,000, or 25.2% to $252,000 at December 31,
2020 due to $193,000 in REO sales partially offset by $108,000 in transfers from
loans during the six months ended December 31, 2020.
Deferred income taxes. Deferred income taxes increased $2.3 million, or 14.0%,
to $18.6 million at December 31, 2020 from $16.3 million at June 30, 2020. The
increase was primarily driven by the the adoption of the CECL standard which
resulted in an increase of $3.9 million, which was partially offset by the
realization of net operating losses.
Premises and equipment, net. Premises and equipment, net increased $11.6
million, or 19.9% to $70.1 million at December 31, 2020 from $58.5 million at
June 30, 2020. The increase was a result of the purchase of an office building
in Charlotte, N.C. for use as a future branch location and other Bank office
space.
Goodwill. Goodwill remained unchanged at $25.6 million at both December 31, 2020
and June 30, 2020.
Other assets. Other assets increased $3.0 million, or 6.0%, to $52.5 million at
December 31, 2020 from $49.5 million at June 30, 2020. The increase was
primarily driven by operating leases from our equipment finance line of
business.
Deposits.  Deposits decreased $42.5 million, or 1.5% during the six months ended
December 31, 2020 to $2.7 billion from $2.8 billion at June 30, 2020 which was
driven by our focused effort to realign the deposit mix. As part of a managed
runoff, certificates of deposit and brokered deposits decreased $212.9 million,
or 28.8% to $526.2 million at December 31, 2020. This decrease was partially
offset by successful efforts to increase core deposits which increased $170.4
million, 8.3%.
The following table sets forth our deposits by type of deposit account as of the
dates indicated:
                                                           As of                                                                         Percent of total
                                             December 31,            June 30,                       Change                      December 31,             June 30,
(Dollars in thousands)                           2020                  2020                 $                   %                   2020                   2020

Core deposits:

   Noninterest-bearing accounts             $    469,998$   429,901$  40,097                 9.3  %                17.1  %                15.4  %
   NOW accounts                                  654,960              582,299             72,661                12.5  %                23.9  %                20.9  %
   Money market accounts                         882,366              836,738             45,628                 5.5  %                32.2  %                30.0  %
   Savings accounts                              209,699              197,676             12,023                 6.1  %                 7.7  %                 7.1  %
Core deposits                                  2,217,023            2,046,614            170,409                 8.3  %                80.8  %                73.5  %
Certificates of deposit                          526,246              739,142           (212,896)              (28.8) %                19.2  %                26.5  %
Total                                       $  2,743,269$ 2,785,756$ (42,487)               (1.5) %               100.0  %               100.0  %


                                       46
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Borrowings.  Borrowings remained at $475.0 million at December 31, 2020 compared
to June 30, 2020. At December 31, 2020 all FHLB advances had maturities of seven
years or more (but were callable in less than two years) with a weighted average
interest rate of 1.39%.
Equity.  Stockholders' equity at December 31, 2020 decreased $3.5 million, or
0.9% to $404.7 million from $408.3 million at June 30, 2020. Changes within
stockholders' equity included $15.2 million in net income and $2.2 million in
stock-based compensation, ESOP shares allocated, and stock option exercises,
offset by $13.4 million related to the adoption of the new CECL accounting
standard, 277,122 shares of common stock being repurchased at an average cost of
$18.69 per share, or approximately $5.2 million in total, and $2.5 million
related to cash dividends declared. As of December 31, 2020, the Bank and the
Company were considered "well capitalized" in accordance with their regulatory
capital guidelines and exceeded all regulatory capital requirements.
                                       47
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Average Balances, Interest and Average Yields/Cost
The following table sets forth for the periods indicated, information regarding
average balances of assets and liabilities as well as the total dollar amounts
of interest income from average interest-earning assets and interest expense on
average interest-bearing liabilities, resultant yields, interest rate spread,
net interest margin (otherwise known as net yield on interest-earning assets),
and the ratio of average interest-earning assets to average interest-bearing
liabilities. All average balances are daily average balances. Nonaccruing loans
have been included in the table as loans carrying a zero yield.
                                                                          

For the Three Months Ended December 31,

                                                             2020                                                         2019
                                       Average            Interest                                  Average            Interest
                                       Balance             Earned/             Yield/               Balance             Earned/             Yield/
                                     Outstanding           Paid(2)             Rate(2)            Outstanding           Paid(2)             Rate(2)
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable(1)                 $ 2,826,133$ 28,648                  4.05  %       $ 2,782,412$ 32,409                  4.66  %
Commercial paper and deposits in
other banks                             417,401               614                  0.59  %           346,376             1,912                  2.21  %
Securities available for sale           133,856               504                  1.50  %           165,577             1,093                  2.64  %
Other interest-earning assets(3)         39,290               696                  7.08  %            44,398               772                  6.95  %
Total interest-earning assets         3,416,680            30,462                  3.57  %         3,338,763            36,186                  4.34  %
Other assets                            257,572                                                      269,679
Total assets                        $ 3,674,252$ 3,608,442
Liabilities and equity:
Interest-bearing deposits:
Interest-bearing checking accounts  $   584,530$    353                  0.24  %       $   455,747$    375                  0.33  %
Money market accounts                   848,760               414                  0.20  %           785,374             2,083                  1.06  %
Savings accounts                        206,205                38                  0.07  %           168,022                50                  0.12  %
Certificate accounts                    576,078             1,542                  1.07  %           778,664             3,813                  1.96  %
Total interest-bearing deposits       2,215,573             2,347                  0.42  %         2,187,807             6,321                  1.16  %
Borrowings                              475,000             1,688                  1.42  %           605,489             2,541                  1.68  %
 Total interest-bearing liabilities   2,690,573             4,035                  0.60  %         2,793,296             8,862                  1.27  %
Noninterest-bearing deposits            523,488                                                      334,732
Other liabilities                        57,813                                                       65,812
Total liabilities                     3,271,874                                                    3,193,840
Stockholders' equity                    402,378                                                      414,602
Total liabilities and stockholders'
equity                              $ 3,674,252$ 3,608,442

Net earning assets                  $   726,107$   545,467
Average interest-earning assets to
average interest-bearing
liabilities                              126.99  %                                                    119.53  %
Tax-equivalent:
Net interest income                                      $ 26,427$ 27,324
Interest rate spread                                                               2.97  %                                                      3.07  %
Net interest margin(4)                                                             3.09  %                                                      3.27  %
Non-tax-equivalent:
Net interest income                                      $ 26,122$ 27,034
Interest rate spread                                                               2.93  %                                                      3.03  %
Net interest margin(4)                                                             3.06  %                                                      3.24  %


(1) The average loans receivable, net balances include loans held for sale and
nonaccruing loans.
(2) Interest income used in the average interest earned and yield calculation
includes the tax equivalent adjustment of $305 and $290 for the three months
ended December 31, 2020
and 2019, respectively, calculated based on a combined federal and state tax
rate of 24%.
(3) The average other interest-earning assets consist of FRB stock, FHLB stock,
and SBIC investments.
(4) Net interest income divided by average interest-earning assets.
                                       48
--------------------------------------------------------------------------------

For the Six Months Ended December 31,

                                                             2020                                                         2019
                                       Average            Interest                                  Average            Interest
                                       Balance             Earned/             Yield/               Balance             Earned/             Yield/
                                     Outstanding           Paid(2)             Rate(2)            Outstanding           Paid(2)             Rate(2)
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable(1)                 $ 2,850,783$ 57,550                  4.04  %       $ 2,766,022$ 64,960                  4.70  %
Commercial paper and deposits in
other banks                             420,785             1,495                  0.71  %           354,750             4,165                  2.35  %
Securities available for sale           120,062             1,032                  1.72  %           152,143             1,989                  2.61  %
Other interest-earning assets(3)         39,118             1,144                  5.85  %            45,054             1,604                  7.12  %
Total interest-earning assets         3,430,748            61,221                  3.57  %         3,317,969            72,718                  4.38  %
Other assets                            254,610                                                      267,028
Total assets                        $ 3,685,358$ 3,584,997
Liabilities and equity:
Interest-bearing liabilities:
Interest-bearing checking accounts  $   572,505$    750                  0.26  %       $   448,636$    694                  0.31  %
Money market accounts                   837,153               964                  0.23  %           752,178             3,844                  1.02  %
Savings accounts                        203,374                75                  0.07  %           170,207               103                  0.12  %
Certificate accounts                    632,894             3,811                  1.20  %           761,810             7,533                  1.98  %
Total interest-bearing deposits       2,245,926             5,600                  0.50  %         2,132,831            12,174                  1.14  %
Borrowings                              475,000             3,375                  1.42  %           644,451             5,862                  1.82  %
Total interest-bearing liabilities    2,720,926             8,975                  0.66  %         2,777,282            18,036                  1.30  %
Noninterest-bearing deposits            507,087                                                      330,418
Other liabilities                        55,699                                                       64,456
Total liabilities                     3,283,712                                                    3,172,156
Stockholders' equity                    401,646                                                      412,841
Total liabilities and stockholders'
equity                              $ 3,685,358$ 3,584,997

Net earning assets                  $   709,822$   540,687
Average interest-earning assets to
average interest-bearing
liabilities                              126.09  %                                                    119.47  %
Tax-equivalent:
Net interest income                                      $ 52,246$ 54,682
Interest rate spread                                                               2.91  %                                                      3.08  %
Net interest margin(4)                                                             3.05  %                                                      3.30  %
Non-tax-equivalent:
Net interest income                                      $ 51,631$ 54,107
Interest rate spread                                                               2.87  %                                                      3.05  %
Net interest margin(4)                                                             3.01  %                                                      3.26  %


(1) The average loans receivable, net balances include loans held for sale and
nonaccruing loans.
(2) Interest income used in the average interest earned and yield calculation
includes the tax equivalent adjustment of $615 and $575 for the six months ended
December 31, 2020
and 2019, respectively, calculated based on a combined federal and state tax
rate of 24%.
(3) The average other interest-earning assets consist of FRB stock, FHLB stock,
and SBIC investments.
(4) Net interest income divided by average interest-earning assets.
                                       49
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Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and that due to the changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
                                                                        

Three Months Ended December 31, 2020

Compared to

Three Months Ended December 31, 2019

                                                                       Increase/
                                                                      (decrease)
                                                                        due to                              Total
(Dollars in thousands)                                         Volume               Rate             increase/(decrease)

Interest-earning assets:

 Loans receivable(1)                                       $        508$ (4,269)         $             (3,761)
Commercial paper and deposits in other banks                        392            (1,690)                       (1,298)
Securities available for sale                                      (209)             (380)                         (589)
 Other interest-earning assets                                      (89)               13                           (76)
  Total interest-earning assets                            $        602$ (6,326)         $             (5,724)

Interest-bearing liabilities:

 Interest-bearing checking accounts                        $        106$   (128)         $                (22)
 Money market accounts                                              168            (1,837)                       (1,669)
 Savings accounts                                                    12               (24)                          (12)
 Certificate accounts                                              (992)           (1,279)                       (2,271)
 Borrowings                                                        (548)             (305)                         (853)
  Total interest-bearing liabilities                             (1,254)           (3,573)                       (4,827)

Net increase (decrease) in tax equivalent interest income $ 1,856

     $ (2,753)         $               (897)



                                                                        

Six Months Ended December 31, 2020

Compared to

Six Months Ended December 31, 2019

                                                                       Increase/
                                                                      (decrease)
                                                                        due to                              Total
(Dollars in thousands)                                         Volume               Rate             increase/(decrease)

Interest-earning assets:

 Loans receivable(1)                                       $     1,991$  (9,401)         $             (7,410)
Commercial paper and deposits in other banks                       775             (3,445)                       (2,670)
Securities available for sale                                     (419)              (538)                         (957)
 Other interest-earning assets                                    (212)              (248)                         (460)
  Total interest-earning assets                            $     2,135$ (13,632)         $            (11,497)

Interest-bearing liabilities:

 Interest-bearing checking accounts                        $       191$    (135)         $                 56
 Money market accounts                                             434             (3,314)                       (2,880)
 Savings accounts                                                   20                (48)                          (28)
 Certificate accounts                                           (1,275)            (2,447)                       (3,722)
 Borrowings                                                     (1,540)              (947)                       (2,487)
  Total interest-bearing liabilities                            (2,170)            (6,891)                       (9,061)

Net increase (decrease) in tax equivalent interest income $ 4,305

     $  (6,741)         $             (2,436)


__________

(1) Interest income used in the average interest earned and yield calculation
includes the tax equivalent adjustment of $305 and $290 for the three months
ended December 31, 2020 and 2019, respectively, calculated based on a combined
federal and state income tax rate of 24%. Interest income used in the average
interest earned and yield calculation includes the tax equivalent adjustment of
$615 and $575 for the six months ended December 31, 2020 and 2019, respectively,
calculated based on a combined federal and state income tax rate of 24%.
                                       50
--------------------------------------------------------------------------------

Comparison of Results of Operations for the Three Months Ended December 31, 2020
and 2019
General.  During the three months ended December 31, 2020, net income increased
2.9% to $9.5 million compared to $9.2 million for the three months ended
December 31, 2019. The Company's diluted earnings per share increased to $0.57
for the three months ended December 31, 2020 compared to $0.52 for the same
period in fiscal 2020. First quarter earnings continue to be negatively impacted
by an economy weakened by COVID-19 as well as a lower interest rate margin due
to the decrease in interest rates over the past year. Despite the lower net
interest income for the quarter, the increase in earnings for the three months
ended December 31, 2020 as compared to the same period a year ago was driven by
a net benefit in the provision for credit losses due to improvement in the
economic forecast since adoption of the new accounting standard to measure
current expected credit losses.
Net Interest Income. Net interest income decreased to $26.1 million for the
quarter ended December 31, 2020, compared to $27.0 million for the comparative
quarter in fiscal 2020. The $912,000, or 3.4% decrease was due to a $5.7 million
decrease in interest and dividend income, primarily driven by lower rates on
loans and commercial paper as a result of lower federal funds and other market
interest rates. This decrease was partially offset by a $4.8 million decrease in
interest expense.
Average interest-earning assets increased $77.9 million, or 2.3% to $3.4 billion
for the quarter ended December 31, 2020. The average balance of total loans
receivable increased by $43.7 million, or 1.6% compared to the same quarter last
year due to organic loan growth and PPP loan originations. The average balance
of commercial paper and deposits in other banks increased $71.0 million, or
20.5% driven by increases in commercial paper investments as a result of the
Company's increased liquidity between the periods. The Company's investments in
commercial paper have short-term maturities and limited exposure of $15.0
million or less per each highly-rated company. The overall increase in
interest-earning assets was primarily funded by a $188.8 million, or 56.4%
increase in average noninterest-bearing deposits partially offset by a $102.7
million, or 3.7% decrease in average interest-bearing liabilities as compared to
the same quarter last year. Net interest margin (on a fully taxable-equivalent
basis) for the three months ended December 31, 2020 decreased to 3.09% from
3.27% for the same period a year ago.
Total interest and dividend income decreased $5.7 million, or 16.0% for the
three months ended December 31, 2020 as compared to the same period last year,
which was primarily driven by a $3.8 million, or 11.8% decrease in loan interest
income, a $1.3 million, or 67.9% decrease in interest income from commercial
paper and deposits in other banks, and a $589,000, or 53.9% decrease in interest
income on securities available for sale. The lower interest income in each
category was driven by the decrease in yields caused by the significant
reduction in current market rates compared to the same quarter last year.
Average loan yields decreased 61 basis points to 4.05% for the quarter ended
December 31, 2020 from 4.66% in the corresponding quarter last year. Average
yields on commercial paper and deposits in other banks decreased 162 basis
points to 0.59% for the quarter ended December 31, 2020 from 2.21% in the
corresponding quarter last year. Average yields on securities available for sale
decreased 114 basis points to 1.50% for the quarter ended December 31, 2020 from
2.64% in the corresponding quarter last year.
Total interest expense decreased $4.8 million, or 54.5% for the quarter ended
December 31, 2020 compared to the same period last year. The decrease was driven
by a $4.0 million, or 62.9% decrease in interest expense on deposits and a
$853,000, or 33.6% decrease in interest expense on borrowings. Average
interest-bearing deposits for the quarter ended December 31, 2020 increased
$27.8 million, or 1.3%, but was more than offset by the 74 basis point decrease
in cost of deposits, down to 0.42% compared to 1.16% in the same period in
fiscal 2020. Average borrowings for the quarter ended December 31, 2020
decreased $130.5 million, or 21.6% along with a 26 basis point decrease in the
average cost of borrowings compared to the same period last year. The increase
in average deposits (interest and noninterest-bearing) was due to successful
deposit gathering campaigns and funds from PPP loans and other government
stimulus. The decrease in the average cost of borrowing was driven by the lower
federal funds rate during the current quarter compared to the prior year. The
overall average cost of funds decreased 67 basis points to 0.60% for the current
quarter compared to 1.27% in the same quarter last year due primarily to the
impact of the lower amount of borrowings and rates.
Provision (Benefit) for Credit Losses. During the three months ended December
31, 2020 there was a $3.0 million net benefit of the provision for credit losses
compared to a $400,000 provision for the corresponding quarter of fiscal 2020.
The net benefit of provision relates to the previously discussed changes in the
economic forecast since September 30, 2020 and the decline in the balance of
total loans. Net loan recoveries totaled $62,000 for the three months ended
December 31, 2020, compared to $317,000 for the same period last year. Net
recoveries as a percentage of average loans were 0.01% and 0.05% for the quarter
ended December 31, 2020 and 2019, respectively.
See "Comparison of Financial Condition - Asset Quality" for additional details.
Noninterest Income. Noninterest income increased $270,000, or 3.0% to $9.3
million for the three months ended December 31, 2020 from $9.1 million for the
same period in the previous year primarily due to a $830,000, or 63.2% increase
in other noninterest income, partially offset by a $302,000, or 34.7% decrease
in loan income and fees, a $189,000, or 7.3% decrease in service charges and
fees on deposit accounts, and a $71,000, or 1.9% decrease in gain of sale of
loans. The increase in other noninterest income primarily related to operating
lease income from the continued growth in the equipment finance line of
business. The decrease in loan income and fees is primarily a result of lower
fees from our adjustable rate conversion program and servicing fees. The
decrease in service charges on deposit accounts was a result of fewer
transactions as customers have decreased spending during the pandemic. The
decrease in gain on the sale of loans was driven by a decrease in gains from the
sale of SBA loans, partially offset by an increase in sales of mortgage loans
and home equity loans. During the quarter ended December 31, 2020, $9.3 million
of the guaranteed portion of SBA commercial loans were sold with gains of
$778,000 compared to $16.5 million sold and gains of $1.0 million in the
corresponding quarter in the prior year. There were $108.9 million of
residential mortgage loans originated for sale which were sold with gains of
$2.8 million compared to $57.8 million sold and gains of $1.4
                                       51
--------------------------------------------------------------------------------

million in the corresponding quarter in the prior year. Included in the prior
year's gain on sale of loans was an additional $1.3 million non-recurring gain
related to one-to-four family loans of $154.9 million that were sold during the
quarter. In addition, $23.2 million of home equity loans were sold during the
quarter ended December 31, 2020 for a gain of $158,000.
Noninterest Expense.  Noninterest expense for the three months ended December
31, 2020 increased $2.4 million, or 10.0% to $26.4 million compared to $24.0
million for the three months ended December 31, 2019. The increase was primarily
due to a $1.5 million, or 10.8% increase in salaries and employee benefits as a
result of new positions, mortgage loan origination incentives, and annual salary
increases; a $892,000, or 26.9% increase in other expenses, mainly driven by
depreciation from our equipment finance line of business; a $475,000 increase in
deposit insurance premiums as a result of credits issued by the FDIC being
utilized in the prior year period, and a $235,000, or 11.8% increase in computer
services. Partially offsetting these increases was a cumulative decrease of
$608,000, or 17.9% in net occupancy expense; marketing and advertising expense;
and core deposit intangible amortization for the three months ended December 31,
2020 compared to the same period last year. In addition, there was a $195,000,
54.2% decrease in REO-related expenses as a result of fewer properties held and
no post-foreclosure writedowns.
Income Taxes. The Company's income tax expense for the three months ended
December 31, 2020 increased $116,000, or 4.7% to $2.6 million from $2.5 million.
The effective tax rate for the three months ended December 31, 2020 and 2019 was
21.5% and 21.2%, respectively.
Comparison of Results of Operations for the Six Months Ended December 31, 2020
and 2019
General.  During the six months ended December 31, 2020, net income decreased by
$2.8 million, or 15.5% to $15.2 million from $18.0 million for the six months
ended December 31, 2019. Diluted earnings per share decreased to $0.92 for the
six months ended December 31, 2020 compared to $1.01 in the same period in
fiscal 2020. Offsetting the decrease in net income for the six months ended
December 31, 2020 as compared to the prior comparable six-month period was a net
benefit in the provision for credit losses due to improvement in the economic
forecast since adoption of the new accounting standard to measure current
expected credit losses. The net benefit in the provision nearly offset the
decline in net interest income for the period as compared to the same period
ended December 31, 2019. The overall decline in net income resulted from an
increase in total noninterest expense.
Net Interest Income. Net interest income decreased to $51.6 million for the six
months ended December 31, 2020, compared to $54.1 million for the comparative
period in fiscal 2020. The $2.5 million, or 4.6% decrease was due to a $11.5
million decrease in interest and dividend income partially offset by a $9.1
million decrease in interest expense, both of which were driven by the lower
rate environment in the current period.
Average interest-earning assets increased $112.8 million, or 3.4% to $3.4
billion for the six months ended December 31, 2020 compared to $3.3 billion in
the corresponding prior period. The average balance of total loans receivable
increased by $84.8 million, or 3.1% compared to the same period last year. The
average balance of commercial paper and deposits in other banks increased $66.0
million, or 18.6% between the periods. These increases were funded by a $32.1
million, or 21.1% decrease in securities available for sale and a $176.7
million, or 53.5% increase in average noninterest-bearing deposits partially
offset by a $56.4 million, or 2.0% decrease in average interest-bearing
liabilities as compared to the same period last year. Net interest margin (on a
fully taxable-equivalent basis) for the six months ended December 31, 2020
decreased to 3.05% from 3.30% for the same period a year ago.
Total interest and dividend income decreased $11.5 million, or 16.0% for the six
months ended December 31, 2020 as compared to the same period last year, which
was primarily driven by a $7.5 million, or 11.6% decrease in loan interest
income, a $2.7 million, or 64.1% decrease in interest income from commercial
paper and deposits in other banks, a $957,000, or 48.1% decrease in interest
income on securities available for sale, and a $460,000, or 28.7% decrease in
interest income on other interest-earning assets. The lower interest income was
driven by the decrease in market yields compared to the prior year period.
Average loan yields decreased 66 basis points to 4.04% for the six months ended
December 31, 2020 from 4.70% in the corresponding period last year. Average
yields on commercial paper and deposits in other banks decreased 164 basis
points to 0.71% for the six months ended December 31, 2020 from 2.35% in the
corresponding period last year. Average yields on securities available for sale
decreased 89 basis points to 1.72% for the six months ended December 31, 2020
from 2.61% in the corresponding period last year.
Total interest expense decreased $9.1 million, or 50.2% for the six months ended
December 31, 2020 compared to the same period last year. The decrease was driven
by a $6.6 million, or 54.0% decrease in interest expense on deposits and a $2.5
million, or 42.4% decrease in interest expense on borrowings. The $113.1
million, or 5.3% increase in average interest-bearing deposits for the six
months ended December 31, 2020 was more than offset by the 64 basis point
decrease down to 0.50% in the corresponding cost of funds compared to 1.14%.
Average borrowings for the six months ended December 31, 2020 decreased $169.5
million, or 26.3% along with a 40 basis point decrease in the average cost of
borrowings compared to the same period last year. The overall average cost of
funds decreased 64 basis points to 0.66% for the six month period compared to
1.30% in the same period last year due primarily to the impact of the lower
amount of borrowings and rates.
Provision (Benefit) for Loan Losses.  During the six months ended December 31,
2020 there was a $2.1 million net benefit of the provision for credit losses
compared to a $400,000 provision for the corresponding period of fiscal 2020.
The net benefit of provision relates to the previously discussed changes in the
economic forecast since the adoption of CECL and the decline in the balance of
total loans. Net loan charge-offs totaled $637,000 for the six months ended
December 31, 2020, compared to net recoveries of $202,000 for the same period
last year. Net charge-offs as a percentage of average loans were 0.04% and
(0.01%) for the six months ended December 31, 2020 and 2019, respectively.
See "Comparison of Financial Condition - Asset Quality" for additional details.
                                       52
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Noninterest Income.  Noninterest income increased $1.2 million, or 7.5%, to
$18.0 million for the six months ended December 31, 2020 from $16.7 million for
the six months ended December 31, 2019, primarily due to a $1.7 million, or
63.4% increase in other noninterest income and a $974,000, or 16.0% increase in
gain of sale of loans, partially offset by a $710,000, or 40.5% decrease in loan
income and fees and a $535,000, or 10.6% decrease in service charges and fees on
deposit accounts. The increase in other noninterest income primarily related to
an increase in operating lease income from the equipment finance line of
business. The increase in gain on the sale of loans was driven by an increase in
sales of mortgage loans and home equity loans, partially offset by a decrease in
gains from the sale of SBA loans. There were $190.7 million of residential
mortgage loans originated for sale which were sold with gains of $5.0 million
compared to $103.2 million sold and gains of $2.7 million in the corresponding
period in the prior year. As previously mentioned, the prior period's gain on
sale of loans included an additional $1.3 million non-recurring gain related to
one-to-four family loans. During the six months ended December 31, 2020, $39.7
million of the guaranteed portion of SBA commercial loans were sold with gains
of $1.8 million compared to $29.2 million sold and gains of $2.1 million in the
corresponding period in the prior year. In addition, $42.1 million of home
equity loans were sold during the six months ended December 31, 2020 for a gain
of $258,000. The decrease in loan income and fees is primarily a result of lower
fees from our adjustable rate conversion program and other loan servicing fees.
The decrease in service charges on deposit accounts was a result of fewer
transactions as customers have decreased spending during the pandemic.
Noninterest Expense.  Noninterest expense for the six months ended December 31,
2020 increased $4.9 million, or 10.2%, to $52.4 million compared to $47.6
million for the six months ended December 31, 2019. The increase was primarily
due to a $2.8 million, or 10.1% increase in salaries and employee benefits; a
$2.0 million, or 31.2% increase in other expenses, driven by depreciation from
our equipment finance line of business; a $986,000 increase in deposit insurance
premiums, and a $518,000, or 12.9% increase in computer services. Partially
offsetting these increases was a cumulative decrease of $1.5 million, or 16.3%
in net occupancy expense; marketing and advertising expense; telephone, postage
and supplies, core deposit intangible amortization, and REO-related expenses for
the six months ended December 31, 2020 compared to the same period last year.
Income Taxes.  For the six months ended December 31, 2020, the Company's income
tax expense decreased $835,000, or 17.1% to $4.0 million from $4.9 million as a
result of lower taxable income. The effective tax rate for the six months ended
December 31, 2020 and 2019 was 21.0% and 21.3%, respectively.
Liquidity
Management maintains a liquidity position that it believes will adequately
provide funding for loan demand and deposit run-off that may occur in the normal
course of business. The Company relies on a number of different sources in order
to meet its potential liquidity demands. The primary sources are increases in
deposit accounts, cash flows from loan payments, commercial paper, and the
securities portfolio.
In addition to these primary sources of funds, management has several secondary
sources available to meet potential funding requirements. As of December 31,
2020, the Bank had an available borrowing capacity of $66.1 million with the
FHLB of Atlanta, a $99.7 million line of credit with the FRB and a line of
credit with each of three unaffiliated banks totaling $100.0 million. At
December 31, 2020, the Company had $475.0 million in FHLB advances outstanding
and nothing outstanding under our other lines of credit. Additionally, the
Company classifies its securities portfolio as available for sale, providing an
additional source of liquidity. Management believes that our security portfolio
is of high quality and the securities would therefore be marketable. In
addition, the Company has historically sold longer term fixed-rate mortgage
loans in the secondary market to reduce interest rate risk and to create still
another source of liquidity. From time to time the Company also utilizes
brokered time deposits to supplement its other sources of funds. Brokered time
deposits are obtained by utilizing an outside broker that is paid a fee. This
funding requires advance notification to structure the type of deposit desired
by us. Brokered deposits can vary in term from one month to several years and
have the benefit of being a source of longer-term funding. The Company also
utilizes brokered deposits to help manage interest rate risk by extending the
term to repricing of our liabilities, enhance our liquidity and fund asset
growth. Brokered deposits are typically from outside our primary market areas,
and our brokered deposit levels may vary from time to time depending on
competitive interest rate conditions and other factors. At December 31, 2020
brokered deposits totaled $4.6 million, or 0.2% of total deposits compared to
$143.2 million, or 5.1% of total deposits at June 30, 2020.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments,
such as overnight deposits, federal funds, and commercial paper. On a longer
term basis, the Company maintains a strategy of investing in various lending
products and investment securities, including mortgage-backed securities.
HomeTrust Bancshares on a stand-alone level is a separate legal entity from the
Bank and must provide for its own liquidity and pay its own operating expenses.
Its primary source of funds consists of the net proceeds retained from the
Conversion. It also has the ability to receive dividends or capital
distributions from the Bank, although there are regulatory restrictions on the
ability of the Bank to pay dividends. At December 31, 2020, HomeTrust Bancshares
on a stand-alone level had liquid assets of $5.0 million.
The Company uses its sources of funds primarily to meet its ongoing commitments,
pay maturing deposits and fund withdrawals, and to fund loan commitments. At
December 31, 2020, the total approved loan commitments and unused lines of
credit outstanding amounted to $232.8 million and $465.2 million, respectively,
as compared to $199.4 million and $398.8 million, respectively, as of June 30,
2020. Certificates of deposit scheduled to mature in one year or less at
December 31, 2020, totaled $460.6 million. It is management's policy to manage
deposit rates that are competitive with other local financial institutions.
Based on this management strategy, we believe a majority of our maturing
deposits will remain with us.
                                       53
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During the first six months of fiscal 2021, cash and cash equivalents increased
$104.7 million, or 86.1%, to $226.3 million as of December 31, 2020 from $121.6
million as of June 30, 2020. Cash provided by investing activities was $185.6
million while cash used in financing and operating activities was $49.3 million
and $31.5 million, respectively. Primary sources of cash for the six months
ended December 31, 2020 included a $121.0 million in net principal repayments of
commercial paper, $38.7 million in maturing securities available for sale, a
decrease in loans of $105.2 million, $8.2 million in principal repayments from
mortgage-backed securities, and $7.0 million in maturities of certificates of
deposit in other banks, net of purchases. Primary uses of cash during the period
included a $73.7 million in purchases of securities available for sale, $41.3
million increase in loans held for sale, $42.5 million decrease in deposits,
$13.4 million in purchases of premises and equipment, $6.9 million in purchases
of operating lease equipment, $5.2 million in shares repurchased, and $2.5
million in cash dividends. All sources and uses of cash reflect our cash
management strategy to increase our higher yielding investments and loans by
increasing lower costing borrowings and reducing our holdings of lower yielding
investments.
Off-Balance Sheet Activities
In the normal course of operations, the Company engages in a variety of
financial transactions that are not recorded in our financial statements. These
transactions involve varying degrees of off-balance sheet credit, interest rate
and liquidity risks. These transactions are used primarily to manage customers'
requests for funding and take the form of loan commitments and lines of
credit. For the six months ended December 31, 2020, the Company engaged in no
off-balance sheet transactions likely to have a material effect on its financial
condition, results of operations or cash flows.
A summary of our off-balance sheet commitments to extend credit at December 31,
2020, is as follows (in thousands):
Undisbursed portion of construction loans    $ 146,181
Commitments to make loans                       86,648
Unused lines of credit                         465,200
Unused letters of credit                         7,936
Total loan commitments                       $ 705,965


Capital Resources
At December 31, 2020, stockholders' equity totaled $404.7 million. HomeTrust
Bancshares, Inc. is a bank holding company and a financial holding company
subject to regulation by the Federal Reserve. As a bank holding company, the
Company is subject to capital adequacy requirements of the Federal Reserve under
the Bank Holding Company Act of 1956, as amended and the regulations of the
Federal Reserve. Our subsidiary, the Bank, an FDIC-insured, North Carolina
state-chartered bank and a member of the Federal Reserve, is supervised and
regulated by the Federal Reserve and the NCCOB and is subject to minimum capital
requirements applicable to state member banks established by the Federal Reserve
that are calculated in a manner similar to those applicable to bank holding
companies.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
HomeTrust Bancshares, Inc. and the Bank each exceeded all regulatory capital
requirements as of December 31, 2020. Consistent with our goals to operate a
sound and profitable organization, our policy is for the Bank to maintain a
"well-capitalized" status under the regulatory capital categories of the Federal
Reserve. The Bank was categorized as "well-capitalized" at December 31, 2020
under applicable regulatory requirements.
                                       54
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HomeTrust Bancshares, Inc. and the Bank’s actual and required minimum capital
amounts and ratios are as follows (dollars in thousands):

                                                                                                               Regulatory Requirements
                                                                                          Minimum for Capital                            Minimum to Be
                                                        Actual                             Adequacy Purposes                           Well Capitalized
                                              Amount              Ratio                Amount               Ratio                 Amount                 Ratio
HomeTrust Bancshares, Inc.

As of December 31, 2020Common Equity Tier I Capital to
Risk-Weighted Assets                       $ 384,255                11.86  %       $   145,826                4.50  %       $       210,638                 6.50  %
Tier I Capital (to Total Adjusted Assets)  $ 384,255                10.52  %       $   146,128                4.00  %       $       182,660                 5.00  %
Tier I Capital (to Risk-weighted Assets)   $ 384,255                11.86  %       $   194,435                6.00  %       $       259,246                 8.00  %
Total Risk-based Capital (to Risk-weighted
Assets)                                    $ 410,744                12.68  %       $   259,246                8.00  %       $       324,058                10.00  %

As of June 30, 2020
Common Equity Tier I Capital to
Risk-Weighted Assets                       $ 374,437                11.26  %       $   149,614                4.50  %       $       216,109                 6.50  %
Tier I Capital (to Total Adjusted Assets)  $ 374,437                10.26  %       $   146,047                4.00  %       $       182,559                 5.00  %
Tier I Capital (to Risk-weighted Assets)   $ 374,437                11.26  %       $   199,485                6.00  %       $       265,980                 8.00  %
Total Risk-based Capital (to Risk-weighted
Assets)                                    $ 402,964                12.12  %       $   265,980                8.00  %       $       332,476                10.00  %

HomeTrust Bank

As of December 31, 2020Common Equity Tier I Capital to
Risk-Weighted Assets                       $ 371,075                11.45  %       $   145,820                4.50  %       $       210,629                 6.50  %
Tier I Capital (to Total Adjusted Assets)  $ 371,075                10.16  %       $   146,144                4.00  %       $       182,680                 5.00  %
Tier I Capital (to Risk-weighted Assets)   $ 371,075                11.45  %       $   194,427                6.00  %       $       259,236                 8.00  %
Total Risk-based Capital (to Risk-weighted
Assets)                                    $ 397,564                12.27  %       $   259,236                8.00  %       $       324,045                10.00  %

As of June 30, 2020
Common Equity Tier I Capital to
Risk-Weighted Assets                       $ 362,841                10.91  %       $   149,608                4.50  %       $       216,100                 6.50  %
Tier I Capital (to Total Adjusted Assets)  $ 362,841                 9.94  %       $   146,010                4.00  %       $       182,512                 5.00  %
Tier I Capital (to Risk-weighted Assets)   $ 362,841                10.91  %       $   199,477                6.00  %       $       265,969                 8.00  %
Total Risk-based Capital (to Risk-weighted
Assets)                                    $ 391,368                11.77  %       $   265,969                8.00  %       $       332,461                10.00  %


In addition to the minimum CET1, Tier 1 and total risk-based capital ratios,
both HomeTrust Bancshares, Inc. and the Bank have to maintain a capital
conservation buffer consisting of additional CET1 capital of more than 2.5%
above the required minimum levels in order to avoid limitations on paying
dividends, engaging in share repurchases, and paying discretionary bonuses based
on percentages of eligible retained income that could be utilized for such
actions. At December 31, 2020, the conservation buffer was 4.68% and 4.27% for
HomeTrust Bancshares, Inc. and the Bank, respectively.
Impact of Inflation
The effects of price changes and inflation can vary substantially for most
financial institutions. While management believes that inflation affects the
growth of total assets, it believes that it is difficult to assess the overall
impact. Management believes this to be the case due to the fact that generally
neither the timing nor the magnitude of the inflationary changes in the CPI
coincides with changes in interest rates. The price of one or more of the
components of the CPI may fluctuate considerably and thereby influence the
overall CPI without having a corresponding effect on interest rates or upon the
cost of those goods and services normally purchased by the Company. In years of
high inflation and high interest rates, intermediate and long-term interest
rates tend to increase, thereby adversely impacting the market values of
investment securities, mortgage loans and other long-term fixed rate loans. In
addition, higher short-term interest rates caused by inflation tend to increase
the cost of funds. In other years, the opposite may occur.
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