# HomeTrust Bancshares, Inc. (HTB) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from HomeTrust Bancshares, Inc.'s 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/1538263/000153826322000047/htbi-20220630.htm Accession: 0001538263-22-000047 Filing date: 2022-09-12 Report date: 2022-06-30 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/HTB/ All MD&A years: /company/HTB/mda/ Previous year: /company/HTB/mda/fy2021/ (FY 2021) Next year: /company/HTB/mda/fy2023/ (FY 2023) Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations This discussion and analysis reviews our consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the Consolidated Financial Statements and notes thereto which are included in Item 8 of this Form 10-K. You should read the information in this section in conjunction with the business and financial information regarding us as provided in this Form 10-K. Financial Highlights [[GREPCENT_TABLE]] [["(Dollars in thousands)","June 30,"],["","2022","","2021","","2020"],["Selected financial condition data"],["Total assets","$","3,549,204","","","$","3,524,723","","","$","3,722,852"],["Cash and cash equivalents","105,119","","","50,990","","","121,622"],["Commercial paper, net","194,427","","","189,596","","","304,967"],["Certificates of deposit in other banks","23,551","","","40,122","","","55,689"],["Debt securities available for sale, at fair value","126,978","","","156,459","","","127,537"],["Loans, net of ACL and deferred loan costs","2,734,605","","","2,697,799","","","2,741,047"],["Deposits","3,099,761","","","2,955,541","","","2,785,756"],["Borrowings","\u2014","","","115,000","","","475,000"],["Stockholders\u2019 equity","388,845","","","396,519","","","408,263"]] [[/GREPCENT_TABLE]] 26 [[GREPCENT_TABLE]] [["(Dollars in thousands, except per share data)","Year Ended June 30,"],["","2022","","2021","","2020"],["Selected operations data"],["Total interest and dividend income","$","116,114","","","$","118,733","","","$","136,254"],["Total interest expense","5,340","","","15,411","","","32,150"],["Net interest income","110,774","","","103,322","","","104,104"],["Provision (benefit) for credit losses","(592)","","","(7,135)","","","8,500"],["Net interest income after provision (benefit) for credit losses","111,366","","","110,457","","","95,604"],["Service charges and fees on deposit accounts","9,462","","","9,083","","","9,382"],["Loan income and fees","3,185","","","2,208","","","2,494"],["Gain on sale of loans held for sale","12,876","","","17,352","","","9,946"],["BOLI income","2,000","","","2,156","","","2,246"],["Operating lease income","6,392","","","5,601","","","3,356"],["Gain on sale of debt securities","1,895","","","\u2014","","","\u2014"],["Other","3,386","","","3,421","","","2,908"],["Total noninterest income","39,196","","","39,821","","","30,332"],["Total noninterest expense","105,184","","","131,182","","","97,129"],["Income before income taxes","45,378","","","19,096","","","28,807"],["Income tax expense","9,725","","","3,421","","","6,024"],["Net income","$","35,653","","","$","15,675","","","$","22,783"],["Net income per common share"],["Basic","$","2.27","","","$","0.96","","","$","1.34"],["Diluted","$","2.23","","","$","0.94","","","$","1.30"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","At or For the Year Ended June 30,"],["","2022","","2021","","2020"],["Performance ratios"],["Return on assets (ratio of net income to average total assets)","1.01","%","","0.42","%","","0.63","%"],["Return on equity (ratio of net income to average equity)","9.00","","","3.88","","","5.54"],["Tax equivalent yield on earning assets(1)","3.58","","","3.49","","","4.13"],["Rate paid on interest-bearing liabilities","0.23","","","0.57","","","1.18"],["Tax equivalent average interest rate spread(1)","3.35","","","2.92","","","2.95"],["Tax equivalent net interest margin(1)(2)","3.42","","","3.04","","","3.17"],["Average interest-earning assets to average interest-bearing liabilities","138.30","","","128.01","","","122.10"],["Noninterest expense to average total assets","2.97","","","3.55","","","2.70"],["Efficiency ratio","70.14","","","91.64","","","72.25"],["Efficiency ratio - adjusted(3)","69.25","","","74.08","","","71.62"],["Asset quality ratios"],["Nonperforming assets to total assets(4)","0.18","%","","0.36","%","","0.44","%"],["Nonperforming loans to total loans(4)","0.22","","","0.46","","","0.58"],["Total classified assets to total assets","0.61","","","0.64","","","0.84"],["Allowance for credit losses to nonperforming loans(4)","566.83","","","281.38","","","176.30"],["Allowance for credit losses to total loans","1.25","","","1.30","","","1.01"],["Net charge-offs to average loans","(0.02)","","","0.01","","","0.07"],["Capital ratios"],["Equity to total assets at end of period","10.96","%","","11.25","%","","10.97","%"],["Tangible equity to total tangible assets(3)","10.31","","","10.59","","","10.33"],["Average equity to average assets","11.20","","","10.91","","","11.46"],["Dividend payout ratio","15.30","","","32.01","","","19.98"],["Dividends declared per common share","$","0.35","","","$","0.31","","","$","0.27"]] [[/GREPCENT_TABLE]] (1)The weighted average rate for municipal leases is adjusted for a 24% combined federal and state tax rate since the interest from these leases is tax exempt. (2)Net interest income divided by average interest-earning assets. (3)See "GAAP Reconciliation of Non-GAAP Financial Measures" section below for additional details. (4)Nonperforming assets and loans include nonaccruing loans, consisting of certain restructured loans, and REO. There were no accruing loans more than 90 days past due at the dates indicated. At June 30, 2022, there were $2.8 million of restructured loans included in nonperforming loans and $3.8 million, or 62.5%, of nonperforming loans were current on their loan payments. 27 GAAP Reconciliation of Non-GAAP Financial Measures We believe the non-GAAP financial measures included above provide useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with US GAAP; however, we acknowledge that our non-GAAP financial measures have a number of limitations. The following reconciliation tables provide detailed analyses of these non-GAAP financial measures. Set forth below is a reconciliation to US GAAP of our efficiency ratio: [[GREPCENT_TABLE]] [["(Dollars in thousands)","Year Ended June 30,"],["","2022","","2021","","2020"],["Noninterest expense","$","105,184","","","$","131,182","","","$","97,129"],["Less: branch closure and restructuring expenses","\u2014","","","1,513","","","\u2014"],["Less: officer transition agreement expense","1,795","","","\u2014","","","\u2014"],["Less: prepayment penalties on borrowings","\u2014","","","22,690","","","\u2014"],["Noninterest expense \u2013 adjusted","$","103,389","","","$","106,979","","","$","97,129"],["Net interest income","$","110,774","","","$","103,322","","","$","104,104"],["Plus: tax equivalent adjustment","1,231","","","1,267","","","1,190"],["Plus: noninterest income","39,196","","","39,821","","","30,332"],["Less: gain on sale of securities available for sale","1,895","","","\u2014","","","\u2014"],["Net interest income plus noninterest income \u2013 adjusted","$","149,306","","","$","144,410","","","$","135,626"],["Efficiency ratio","70.14","%","","91.64","%","","72.25","%"],["Efficiency ratio \u2013 adjusted","69.25","%","","74.08","%","","71.62","%"]] [[/GREPCENT_TABLE]] Set forth below is a reconciliation to US GAAP of tangible book value and tangible book value per share: [[GREPCENT_TABLE]] [["(Dollars in thousands, except per share data)","June 30,"],["","2022","","2021","","2020"],["Total stockholders' equity","$","388,845","","","$","396,519","","","$","408,263"],["Less: goodwill, core deposit intangibles, net of taxes","25,710","","","25,902","","","26,468"],["Tangible book value(1)","$","363,135","","","$","370,617","","","$","381,795"],["Common shares outstanding","15,591,466","","","16,636,483","","","17,021,357"],["Book value per share","$","24.94","","","$","23.83","","","$","23.99"],["Tangible book value per share","$","23.29","","","$","22.28","","","$","22.43"]] [[/GREPCENT_TABLE]] (1)    Tangible book value is equal to total stockholders' equity less goodwill and core deposit intangibles, net of related deferred tax liabilities. Set forth below is a reconciliation to US GAAP of tangible equity to tangible assets: [[GREPCENT_TABLE]] [["(Dollars in thousands)","","June 30,"],["","","2022","","2021","","2020"],["Tangible equity(1)","","$","363,135","","","$","370,617","","","$","381,795"],["Total assets","","3,549,204","","","3,524,723","","","3,722,852"],["Less: goodwill, core deposit intangibles, net of taxes","","25,710","","","25,902","","","26,468"],["Total tangible assets","","$","3,523,494","","","$","3,498,821","","","$","3,696,384"],["Tangible equity to tangible assets","","10.31","%","","10.59","%","","10.33","%"]] [[/GREPCENT_TABLE]] (1)    Tangible equity (or tangible book value) is equal to total stockholders' equity less goodwill and core deposit intangibles, net of related deferred tax liabilities. Overview The following discussion and analysis presents the more significant factors that affected our financial condition as of June 30, 2022 and 2021 and results of operations for each of the years in the three-year period then ended. Refer to "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K filed with the SEC on September 10, 2021 (the “2021 Form 10-K”) for a discussion and analysis of the more significant factors that affected periods prior to fiscal year 2021. 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 we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Changes in levels of interest rates affect our net interest income. A secondary source of income is noninterest income, which includes revenue we receive from providing products and services, including service charges and fees on deposit accounts, loan income and fees, gains on the sale of loans held for sale, BOLI income, and operating lease income. 28 An offset to net interest income is the provision for credit losses which is required to establish the ACL at a level that adequately provides for current expected credit losses inherent in our loan portfolio, off balance sheet commitments, and available for sale debt securities. See "Note 1 – Summary of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K 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. 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 which 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. The following represents our critical accounting policy: Allowance for Credit Losses, or ACL, on Loans.  The ACL reflects our estimate of credit losses that will result from the inability of our borrowers to make required loan payments. We charge off loans against the ACL and subsequent recoveries, if any, increase the ACL when they are recognized. We use a systematic methodology to determine our ACL for loans held for investment and certain off-balance sheet credit exposures. The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio. We consider the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The estimate of our ACL involves a high degree of judgment; therefore, our process for determining expected credit losses may result in a range of expected credit losses. Our ACL recorded on the balance sheet reflects our best estimate within the range of expected credit losses. We recognize in net income the amount needed to adjust the ACL for management’s current estimate of expected credit losses. Our ACL is calculated using collectively evaluated and individually evaluated loans. Recent Accounting Pronouncements For a discussion of recent accounting pronouncements, see “Note 1 – Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements in Item 8 of this report on Form 10-K for further discussion. Fiscal 2022 Items of Note Beginning July 1, 2021, the Bank brought its back-office SBA loan servicing process in-house to provide additional servicing fee and gain on sale income. In aggregate, our approach is designated to lead to increased profitability and franchise value over time. Fiscal 2021 Items of Note On July 1, 2020, we 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 policy 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 $13.4 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 year ended June 30, 2021. On June 15, 2021, we announced a plan to close nine branches in North Carolina, Tennessee, and Virginia. The branch closures were part of our ongoing strategic initiatives to respond to changing customer preferences and were expected to reduce operating expenses and provide additional company-wide efficiencies. The branch closure and restructuring expenses recognized for the year ended June 30, 2021 included costs associated with impacted employees, impairment of an operating lease asset, the write-down of branch facilities, and other net costs. All applicable regulatory requirements were met and the branch closures occurred on September 16, 2021. In the third and fourth quarters, the Company prepaid its remaining $475 million in long-term debt incurring a prepayment penalty of $22.7 million. No such expenses were incurred in 2022. Comparison of Results of Operations for the Years Ended June 30, 2022 and June 30, 2021 Net Income.  Net income totaled $35.7 million, or $2.23 per diluted share, for the year ended June 30, 2022 compared to $15.7 million, or $0.94 per diluted share, for the year ended June 30, 2021, an increase of $20.0 million, or 127.5%. The results for the year ended June 30, 2022 compared to the year ended June 30, 2021 were positively impacted by higher net interest income and no prepayment penalties on borrowings, partially offset by a lower benefit for credit losses. Details of the changes in the various components of net income are further discussed below. 29 Net Interest Income.  The following table presents the distribution of average assets, liabilities and equity, as well as interest income on average interest-earning assets and interest expense paid on average interest-bearing liabilities. All average balances are daily average balances. Nonaccruing loans have been included in the table as loans carrying a zero yield. [[GREPCENT_TABLE]] [["","Year Ended June 30,"],["","2022","","2021","","2020"],["(Dollars in thousands)","Average Balance Outstanding","","Interest Earned/ Paid(2)","","Yield/ Rate(2)","","Average Balance Outstanding","","Interest Earned/ Paid(2)","","Yield/ Rate(2)","","Average Balance Outstanding","","Interest Earned/ Paid(2)","","Yield/ Rate(2)"],["Assets:"],["Interest-earning assets:"],["Loans receivable (1)","$","2,809,673","","","$","110,834","","","3.94","%","","$","2,819,180","","","$","113,065","","","4.01","%","","$","2,748,124","","","$","123,364","","","4.49","%"],["Commercial paper","232,676","","","1,721","","","0.74","%","","217,457","","","1,206","","","0.55","%","","276,343","","","5,986","","","2.17","%"],["Debt securities available for sale","122,558","","","1,802","","","1.47","%","","137,863","","","2,024","","","1.47","%","","150,249","","","3,687","","","2.45","%"],["Other interest-earning assets(3)","114,458","","","2,988","","","2.61","%","","266,783","","","3,705","","","1.39","%","","150,984","","","4,407","","","2.92","%"],["Total interest-earning assets","3,279,365","","","117,345","","","3.58","%","","3,441,283","","","120,000","","","3.49","%","","3,325,700","","","137,444","","","4.13","%"],["Other assets","258,550","","","","","","","257,111","","","","","","","265,376"],["Total assets","$","3,537,915","","","","","","","$","3,698,394","","","","","","","$","3,591,076"],["Liabilities and equity:"],["Interest-bearing liabilities:"],["Interest-bearing checking accounts","$","646,370","","","$","1,378","","","0.21","%","","$","609,754","","","$","1,552","","","0.25","%","","$","457,455","","","$","1,627","","","0.36","%"],["Money market accounts","996,876","","","1,406","","","0.14","%","","882,252","","","1,699","","","0.19","%","","767,315","","","6,910","","","0.90","%"],["Savings accounts","227,452","","","163","","","0.07","%","","211,192","","","155","","","0.07","%","","166,588","","","195","","","0.12","%"],["Certificate accounts","457,186","","","2,313","","","0.51","%","","568,284","","","5,964","","","1.05","%","","764,013","","","14,105","","","1.85","%"],["Total interest-bearing deposits","2,327,884","","","5,260","","","0.23","%","","2,271,482","","","9,370","","","0.41","%","","2,155,371","","","22,837","","","1.06","%"],["Borrowings","43,376","","","80","","","0.18","%","","416,822","","","6,041","","","1.45","%","","568,377","","","9,313","","","1.64","%"],["Total interest-bearing liabilities","2,371,260","","","5,340","","","0.23","%","","2,688,304","","","15,411","","","0.57","%","","2,723,748","","","32,150","","","1.18","%"],["Noninterest-bearing deposits","724,588","","","","","","","550,265","","","","","","","365,634"],["Other liabilities","45,834","","","","","","","56,315","","","","","","","90,247"],["Total liabilities","3,141,682","","","","","","","3,294,884","","","","","","","3,179,629"],["Stockholders' equity","396,233","","","","","","","403,510","","","","","","","411,447"],["Total liabilities and stockholders' equity","$","3,537,915","","","","","","","$","3,698,394","","","","","","","$","3,591,076"],["Net earning assets","$","908,105","","","","","","","$","752,979","","","","","","","$","601,952"],["Average interest-earning assets to average interest-bearing liabilities","138.30","%","","","","","","128.01","%","","","","","","122.10","%"],["Tax-equivalent:"],["Net interest income","","","$","112,005","","","","","","","$","104,589","","","","","","","$","105,294"],["Interest rate spread","","","","","3.35","%","","","","","","2.92","%","","","","","","2.95","%"],["Net interest margin(4)","","","","","3.42","%","","","","","","3.04","%","","","","","","3.17","%"],["Non-tax-equivalent:"],["Net interest income","","","$","110,774","","","","","","","$","103,322","","","","","","","$","104,104"],["Interest rate spread","","","","","3.32","%","","","","","","2.88","%","","","","","","2.92","%"],["Net interest margin(4)","","","","","3.38","%","","","","","","3.00","%","","","","","","3.13","%"]] [[/GREPCENT_TABLE]] (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 $1.2 million, $1.3 million, and $1.2 million for fiscal years ended June 30, 2022, 2021, and 2020, respectively, calculated based on a combined federal and state tax rate of 24% for all three years. (3)    The average other interest-earning assets consists of FRB stock, FHLB stock, SBIC investments, and deposits in other banks. (4)    Net interest income divided by average interest-earning assets. 30 Total interest and dividend income for the year ended June 30, 2022 decreased $2.6 million, or 2.2%, compared to the year ended June 30, 2021, which was driven by a $2.2 million, or 2.0%, decrease in interest income on loans, a $222,000, or 11.0%, decrease in interest income on debt securities available for sale, and a $718,000, or 19.4%, decrease in interest income on other interest-earning assets, partially offset by a $515,000, or 42.7%, increase in interest income on commercial paper. The decline in interest income on loans was partially driven by a decline in PPP interest and fee income of $754,000 year-over-year. Total interest expense for the year ended June 30, 2022 decreased $10.1 million, or 65.3%, compared to the year ended June 30, 2021. The decrease was driven by a $6.0 million, or 98.7%, decrease in interest expense on borrowings and a $4.1 million, or 43.9%, decrease in interest expense on deposits compared to last year. The overall average cost of funds decreased 34 basis points compared to last year primarily due to the prepayment of long-term borrowings in the prior year and reduced market rates. The following table shows the effects that changes in average balances (volume) and average interest rates (rate) had on the interest earned on our interest-earning assets and interest-bearing liabilities: [[GREPCENT_TABLE]] [["","Years Ended June 30,"],["","2022 Compared to 2021","","2021 Compared to 2020"],["","Increase/ (Decrease) Due to","","Total Increase/ (Decrease)","","Increase/ (Decrease) Due to","","Total Increase/ (Decrease)"],["(Dollars in thousands)","Volume","","Rate","","Volume","","Rate"],["Interest-earning assets"],["Loans receivable","$","(381)","","","$","(1,850)","","","$","(2,231)","","","$","3,190","","","$","(13,489)","","","$","(10,299)"],["Commercial paper","84","","","431","","","515","","","(1,276)","","","(3,504)","","","(4,780)"],["Debt securities available for sale","(225)","","","3","","","(222)","","","(303)","","","(1,360)","","","(1,663)"],["Other interest-earning assets","(2,115)","","","1,398","","","(717)","","","3,382","","","(4,084)","","","(702)"],["Total interest-earning assets","(2,637)","","","(18)","","","(2,655)","","","4,993","","","(22,437)","","","(17,444)"],["Interest-bearing liabilities"],["Interest-bearing checking accounts","93","","","(267)","","","(174)","","","541","","","(616)","","","(75)"],["Money market accounts","221","","","(514)","","","(293)","","","1,035","","","(6,246)","","","(5,211)"],["Savings accounts","12","","","(4)","","","8","","","52","","","(92)","","","(40)"],["Certificate accounts","(1,166)","","","(2,485)","","","(3,651)","","","(3,612)","","","(4,529)","","","(8,141)"],["Borrowings","(5,412)","","","(549)","","","(5,961)","","","(2,484)","","","(788)","","","(3,272)"],["Total interest-bearing liabilities","$","(6,252)","","","$","(3,819)","","","$","(10,071)","","","$","(4,468)","","","$","(12,271)","","","$","(16,739)"],["Net decrease in tax equivalent interest income","","","","","$","7,416","","","","","","","$","(705)"]] [[/GREPCENT_TABLE]] Provision (Benefit) for Credit Losses.  The provision (benefit) for credit losses is the amount of expense that, based on our judgment, is required to maintain the ACL at an appropriate level under the CECL model. The determination of the ACL is complex and involves a high degree of judgment and subjectivity. Refer to "Note 1 – Summary of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K for detailed discussion regarding ACL methodologies for available for sale debt securities, loans held for investment and unfunded commitments. The following table presents a breakdown of the components of the provision (benefit) for credit losses: [[GREPCENT_TABLE]] [["","Year Ended June 30,","","2022 vs 2021","","2021 vs 2020"],["(Dollars in thousands)","2022","","2021","","2020","","$","","%","","$","","%"],["Provision (benefit) for credit losses"],["Loans","$","(1,473)","","","$","(7,270)","","","$","8,500","","","$","5,797","","","(80)","%","","$","(15,770)","","","(186)","%"],["Off-balance sheet credit exposure","981","","","35","","","\u2014","","","946","","","2,703","","","35","","","100"],["Commercial paper","(100)","","","100","","","\u2014","","","(200)","","","(200)","","","100","","","100"],["Total provision (benefit) for credit losses","$","(592)","","","$","(7,135)","","","$","8,500","","","$","6,543","","","(92)","%","","$","(15,635)","","","(184)","%"]] [[/GREPCENT_TABLE]] For the year ended June 30, 2022, the "loans" portion of the provision was primarily the result of a slight improvement in the economic forecast, as more clarity was gained regarding the impact of COVID-19 upon the loan portfolio. The provision for off-balance sheet credit exposures increased $946,000, or 2,703%, primarily as the result of loan growth and changes in the loan mix and qualitative adjustments. For available for sale debt securities in an unrealized loss position, the Company evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an ACL on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. At June 30, 2022 and 2021, the Company determined that noncredit-related factors were the cause those available for sale securities 31 in an unrealized loss position. Therefore, the Company carried no ACL at those respective dates and there was no credit loss expense recognized by the Company during the years ended June 30, 2022 and 2021. See further discussion in the “Allowance for Credit Losses” section below. Noninterest Income.  Noninterest income for the year ended June 30, 2022 decreased $625,000, or 1.6%, year-over-year. Changes in selected components of noninterest income are discussed below: [[GREPCENT_TABLE]] [["","Year Ended June 30,","","2022 vs 2021","","2021 vs 2020"],["(Dollars in thousands)","2022","","2021","","2020","","$","","%","","$","","%"],["Noninterest income"],["Service charges and fees on deposit accounts","$","9,462","","","$","9,083","","","$","9,382","","","$","379","","","4","%","","$","(299)","","","(3)","%"],["Loan income and fees","3,185","","","2,208","","","2,494","","","977","","","44","","","(286)","","","(11)"],["Gain on sale of loans held for sale","12,876","","","17,352","","","9,946","","","(4,476)","","","(26)","","","7,406","","","74"],["BOLI income","2,000","","","2,156","","","2,246","","","(156)","","","(7)","","","(90)","","","(4)"],["Operating lease income","6,392","","","5,601","","","3,356","","","791","","","14","","","2,245","","","67"],["Gain on sale of debt securities available for sale","1,895","","","\u2014","","","\u2014","","","1,895","","","100","","","\u2014","","","\u2014"],["Other","3,386","","","3,421","","","2,908","","","(35)","","","(1)","","","513","","","18"],["Total noninterest income","$","39,196","","","$","39,821","","","$","30,332","","","$","(625)","","","(2)","%","","$","9,489","","","31","%"]] [[/GREPCENT_TABLE]] •Loan income and fees: The increase in loan income and fees was primarily due to approximately $1.3 million in SBA servicing income, the result of bringing the servicing of these loans in-house effective July 1, 2021 as indicated in the "Fiscal 2022 Items of Note" section above. •Gain on sale of loans held for sale: The decrease in the gain on sale of loans held for sale was primarily driven by decreases in the volume of residential mortgage loans and SBA commercial loans sold during the period as a result of rising interest rates. During the year ended June 30, 2022, $263.0 million of residential mortgage loans originated for sale were sold with gains of $6.4 million compared to $406.5 million sold with gains of $10.5 million in the prior year. There were $54.7 million of sales of the guaranteed portion of SBA commercial loans with recorded gains of $5.4 million in the current year compared to $66.1 million sold with gains of $6.1 million in the prior year. The Company sold $120.0 million of HELOCs during the current year for a gain of $791,000 compared to $110.8 million sold and gains of $724,000 in the prior year. Lastly, $11.5 million of indirect auto finance loans were sold out of the held for investment portfolio during the current year for a gain of $205,000. No such sales occurred in the prior year. •Operating lease income: The increase in operating lease income year-over-year is a result of increases in lease originations and higher outstanding balances in the current year. •Gain on sale of debt securities available for sale: The increase in the gain was driven by the sale of seven trust preferred securities during the quarter ended June 30, 2022 which had previously been written down to zero through purchase accounting adjustments from a merger in a prior period. No other securities were sold during the periods presented. Noninterest Expense.  Noninterest expense for the year ended June 30, 2022 decreased $26.0 million, or 19.8%, year-over-year. Changes in selected components of noninterest expense are discussed below: [[GREPCENT_TABLE]] [["","Year Ended June 30,","","2022 vs 2021","","2021 vs 2020"],["(Dollars in thousands)","2022","","2021","","2020","","$","","%","","$","","%"],["Noninterest expense"],["Salaries and employee benefits","$","59,591","","","$","62,956","","","$","56,709","","","$","(3,365)","","","(5)","%","","$","6,247","","","11","%"],["Occupancy expense, net","9,692","","","9,521","","","9,228","","","171","","","2","","","293","","","3"],["Computer services","9,761","","","9,607","","","8,153","","","154","","","2","","","1,454","","","18"],["Telephone, postage and supplies","2,754","","","3,122","","","3,275","","","(368)","","","(12)","","","(153)","","","(5)"],["Marketing and advertising","2,583","","","1,626","","","1,872","","","957","","","59","","","(246)","","","(13)"],["Deposit insurance premiums","1,712","","","1,799","","","900","","","(87)","","","(5)","","","899","","","100"],["REO related expense, net","588","","","582","","","1,475","","","6","","","1","","","(893)","","","(61)"],["Core deposit intangible amortization","250","","","735","","","1,421","","","(485)","","","(66)","","","(686)","","","(48)"],["Branch closure and restructuring expenses","\u2014","","","1,513","","","\u2014","","","(1,513)","","","(100)","","","1,513","","","100"],["Officer transition agreement expense","1,795","","","\u2014","","","\u2014","","","1,795","","","100","","","\u2014","","","\u2014"],["Prepayment penalties on borrowings","\u2014","","","22,690","","","\u2014","","","(22,690)","","","(100)","","","22,690","","","100"],["Other","16,458","","","17,031","","","14,096","","","(573)","","","(3)","","","2,935","","","21"],["Total noninterest expense","$","105,184","","","$","131,182","","","$","97,129","","","$","(25,998)","","","(20)","%","","$","34,053","","","35","%"]] [[/GREPCENT_TABLE]] 32 •Salaries and employee benefits: As indicated in the "Fiscal 2021 Items of Note" section above, the decrease in salaries and employee benefits was primarily the result of branch closures and lower mortgage banking incentive pay as a result of the reduction of the volume of originations. •Marketing and advertising: The increase in marketing and advertising was primarily the result of less media advertising in the prior period during the pandemic. •Branch closure and restructuring expenses: See explanation in the "Fiscal 2021 Items of Note" section above. No such expenses were incurred in the other two periods presented. •Officer transition agreement expense: In May 2022, the Company entered into an amended and restated employment and transition agreement with the Company's Chairman and CEO. As part of this agreement, the full amount of the estimated separation payment was accrued in 2022. No such expenses were incurred in the other two periods presented. •Prepayment penalties on borrowings: See explanation in the "Fiscal 2021 Items of Note" section above. No such expenses were incurred in the other two periods presented. Income Taxes.  The amount of income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income, changes in the statutory rate and the effect of changes in valuation allowances maintained against deferred tax benefits. Income tax expense for the year ended June 30, 2022 increased $6.3 million, or 184.3%, to $9.7 million from $3.4 million in the prior year as a result of higher taxable income. The effective tax rate for fiscal 2022 and fiscal 2021 was 21.4% and 17.9%, respectively. The higher effective tax rate in the current year compared to the prior year was driven by a comparable amount of tax-exempt income in each period, compared to a higher pre-tax book income in fiscal 2022. For more information on income taxes and deferred taxes, see "Note 11 – Income Taxes" of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K. Comparison of Financial Condition at June 30, 2022 and June 30, 2021 Assets.  Total assets were $3.5 billion at both June 30, 2022 and 2021, an increase of $24.5 million, or 0.7%, year-over-year, the components of which are discussed below. Debt Securities Available for Sale. Debt securities available for sale decreased $29.5 million, or 18.8%, to $127.0 million at June 30, 2022. The following table illustrates the changes in the fair value of the portfolio. [[GREPCENT_TABLE]] [["","June 30,","","Change"],["(Dollars in thousands)","2022","","2021","","$","","%"],["U.S. government agencies","$","18,459","","","$","19,073","","","$","(614)","","","(3)","%"],["MBS, residential","47,233","","","43,404","","","3,829","","","9"],["Municipal bonds","5,558","","","9,551","","","(3,993)","","","(42)"],["Corporate bonds","55,728","","","84,431","","","(28,703)","","","(34)"],["Total","$","126,978","","","$","156,459","","","$","(29,481)","","","(19)","%"]] [[/GREPCENT_TABLE]] The overall year-over-year decrease in the portfolio was the result of maturities, calls, and paydowns of the underlying securities, the proceeds of which were re-invested in interest-bearing deposits. 33 The composition and contractual maturities of our debt securities portfolio as of June 30, 2022 is indicated in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. Weighted average yields were calculated using amortized cost on a fully-taxable equivalent basis. The Company did not hold any tax-exempt debt securities as of June 30, 2022. [[GREPCENT_TABLE]] [["(Dollars in thousands)","1 year or less","","Over 1 year to 5 years","","Over 5 to 10 years","","Over 10 years","","Total"],["U.S. government agencies"],["Book value","$","3,993","","","$","15,000","","","$","\u2014","","","$","\u2014","","","$","18,993"],["Fair value","3,998","","","14,461","","","\u2014","","","\u2014","","","18,459"],["Weighted average yield","2.51","%","","0.28","%","","\u2014","%","","\u2014","%","","0.75","%"],["MBS, residential"],["Book value","15,428","","","5,845","","","17,590","","","9,514","","","48,377"],["Fair value","15,363","","","5,753","","","16,955","","","9,162","","","47,233"],["Weighted average yield","2.47","%","","1.23","%","","2.02","%","","2.57","%","","2.17","%"],["Municipal bonds"],["Book value","2,007","","","2,492","","","1,046","","","\u2014","","","5,545"],["Fair value","2,013","","","2,509","","","1,036","","","\u2014","","","5,558"],["Weighted average yield","4.37","%","","3.84","%","","3.78","%","","\u2014","%","","4.02","%"],["Corporate bonds"],["Book value","29,350","","","22,833","","","5,001","","","\u2014","","","57,184"],["Fair value","28,945","","","22,048","","","4,735","","","\u2014","","","55,728"],["Weighted average yield","1.76","%","","1.18","%","","3.38","%","","\u2014","%","","1.67","%"],["Total"],["Book value","$","50,778","","","$","46,170","","","$","23,637","","","$","9,514","","","$","130,099"],["Fair value","$","50,319","","","$","44,771","","","$","22,726","","","$","9,162","","","$","126,978"],["Weighted average yield","2.14","%","","1.04","%","","2.38","%","","2.57","%","","1.82","%"]] [[/GREPCENT_TABLE]] Total Loans, Net of Deferred Loan Fees and Costs.  Loans held for investment totaled $2.8 billion at June 30, 2022 compared to $2.7 billion at June 30, 2021, an increase of $36,028 or 1.3%. The following table illustrates the changes within the portfolio. [[GREPCENT_TABLE]] [["","","","","","","","","","Percent of Total"],["","June 30,","","Change","","June 30,"],["(Dollars in thousands)","2022","","2021","","$","","%","","2022","","2021"],["Commercial real estate loans"],["Construction and land development","$","291,202","","","$","179,427","","","$","111,775","","","62","%","","11","%","","7","%"],["Commercial real estate - owner occupied","335,658","","","324,350","","","11,308","","","3","","","12","","","12"],["Commercial real estate - non-owner occupied","662,159","","","727,361","","","(65,202)","","","(9)","","","24","","","27"],["Multifamily","81,086","","","90,565","","","(9,479)","","","(10)","","","3","","","3"],["Total commercial real estate loans","1,370,105","","","1,321,703","","","48,402","","","4","","","50","","","49"],["Commercial loans"],["Commercial and industrial","192,652","","","141,341","","","51,311","","","36","","","7","","","5"],["Equipment finance","394,541","","","317,920","","","76,621","","","24","","","14","","","12"],["Municipal leases","129,766","","","140,421","","","(10,655)","","","(8)","","","5","","","5"],["PPP loans","661","","","46,650","","","(45,989)","","","(99)","","","\u2014","","","2"],["Total commercial loans","717,620","","","646,332","","","71,288","","","11","","","26","","","24"],["Residential real estate loans"],["Construction and land development","81,847","","","66,027","","","15,820","","","24","","","2","","","2"],["One-to-four family","354,203","","","406,549","","","(52,346)","","","(13)","","","13","","","15"],["HELOCs","160,137","","","169,201","","","(9,064)","","","(5)","","","6","","","6"],["Total residential real estate loans","596,187","","","641,777","","","(45,590)","","","(7)","","","21","","","23"],["Consumer loans","85,383","","","123,455","","","(38,072)","","","(31)","","","3","","","4"],["Loans, net of deferred loan fees and costs","$","2,769,295","","","$","2,733,267","","","$","36,028","","","1","%","","100","%","","100","%"]] [[/GREPCENT_TABLE]] 34 The principal categories of our loan portfolio are discussed below. Commercial Real Estate – Construction and Land Development. We originate residential construction and development loans for the construction of single-family residences, condominiums, townhouses, and residential developments. Our commercial construction development loans are for the development of business properties, including multi-family, retail, office/warehouse, and office buildings. Our land, lots, and development loans are predominately for the purchase or refinance of unimproved land held for future residential development, improved residential lots held for speculative investment purposes and for the future construction of one-to-four family (speculative and pre-sold) or commercial real estate. Our expansion into larger metro markets combined with experienced commercial real estate relationship managers, credit officers, and a construction risk management group to better manage construction risk, has resulted in the purposeful growth of this portfolio. Unfunded commitments at June 30, 2022 totaled $143.4 million compared to $131.8 million at June 30, 2021. Land acquisition and development loans are included in the construction and development loan portfolio and include completed residential lots where the borrower was not the developer, commercial improved and raw land for future development, and residential development loans. Residential development loans are made to developers for the purpose of acquiring raw land for the subsequent development and sale of residential lots. Such loans typically finance land purchase and infrastructure development of properties (i.e. roads, utilities, etc.) into residential lots for sale. The end buyer for the majority of these lots are local, regional, and national builders for the ultimate construction of residential units. The primary source of repayment is the sale of the lots or improved parcels of land, while personal guarantees may serve as secondary sources. These loans are generally secured by property in our primary market areas. In addition, these loans are secured by a first lien on the property, are generally limited to 65% of the lower of the acquisition price or the appraised value of the unimproved land and 75% of the improved land. Residential acquisition and development loans are generally paid out within three years unless there are multiple phases to the development. The Bank provides funding to a number of builders for the construction of both speculative and pre-sold 1-4 family homes. Speculative construction loans are made to home builders and are termed “speculative” because the home builder does not have, at the time of loan origination, a signed contract with a home buyer who has a commitment for permanent financing with either us or another lender for the finished home. Loans to finance the construction of speculative single-family homes are generally offered to experienced builders with a proven track record of performance. These loans require payment of interest-only during the construction phase. Unfunded commitments were $74.6 million at June 30, 2022 and $70.1 million at June 30, 2021. Commercial vertical construction loans are offered on an adjustable or fixed interest rate basis. Adjustable interest rate loans typically include a floor and ceiling interest rate and are indexed to The Wall Street Journal prime rate, plus or minus an interest rate margin. The initial construction period for owner occupied loans is generally limited to 12 to 24 months from the date of origination versus a construction and stabilization period for non-owner occupied loans of 24 to 36 months, both with amortization terms up to 25 years. Construction-to-permanent loans generally include a balloon maturity of five years or less; however, balloon maturities of greater than five years are allowed on a limited basis depending on factors such as property type, amortization term, lease terms, pricing, or the availability of credit enhancements. Construction loan proceeds are disbursed based on the percent completion of budget as documented by periodic third-party inspections. The maximum loan-to-value limit applicable to these loans is generally 80% of the appraised post-construction value. Commercial Real Estate Lending, including Multifamily. We originate commercial real estate loans, including loans secured by office buildings, retail/wholesale facilities, hotels, industrial facilities, medical and professional buildings, churches, and multifamily residential properties located primarily in our market areas. The average outstanding loan size in our commercial real estate portfolio was $796,000 as of June 30, 2022. We offer both fixed- and adjustable-rate commercial real estate loans. Our commercial real estate mortgage loans generally include a balloon maturity of five years or less. Amortization terms are generally limited to 20 years. Adjustable rate-based loans typically include a floor and ceiling interest rate and are indexed to The Wall Street Journal prime rate, the one-month LIBOR, or the one-month term SOFR, plus or minus an interest rate margin and rates generally adjust daily. The maximum loan-to-value ratio for commercial real estate loans is generally up to 80% on purchases and refinances. Commercial – Commercial and Industrial Loans. We typically offer commercial and industrial loans to businesses located in our primary market areas. These loans are primarily originated as conventional loans to business borrowers, which include lines of credit, term loans, and letters of credit. These loans are typically secured by collateral and are used for general business purposes, including working capital financing, equipment financing, capital investment, and general investments. Loan terms typically vary from one to five years. The interest rates on such loans are either fixed rate or adjustable rate indexed to The Wall Street Journal prime rate plus a margin. We originate commercial business loans made under the SBA 7(a) and USDA B&I programs to small businesses located throughout the country. Loans made by the Bank under the SBA 7(a) and USDA B&I programs generally are made to small businesses to provide working capital needs, to refinance existing debt or to provide funding for the purchase of businesses, real estate, machinery, and equipment. These loans generally are secured by a combination of assets that may include receivables, inventory, furniture, fixtures, equipment, business real property, commercial real estate and sometimes additional collateral such as an assignment of life insurance and a lien on personal real estate owned by the guarantor(s). Typical maturities for this type of loan vary up to twenty-five years and can be thirty years in some circumstances. Under the SBA 7(a) and USDA B&I loan program the loans carry a government guaranty up to 90% of the loan in some cases. SBA 7(a) and USDA B&I loans will normally be adjustable rate loans based upon The Wall Street Journal prime lending rate. Under the loan programs, we will typically sell in the 35 secondary market the guaranteed portion of these loans to generate noninterest income and retain the related unguaranteed portion of these loans. In March 2022, the Company began purchasing commercial small business loans originated by a fintech partner. At June 30, 2022, the outstanding balance of these loans totaled $17.5 million, or 0.6% of our loan portfolio. The credit risk characteristics of these loans are different from the remainder of the portfolio as they were not originated by the Company and the collateral may be located outside the Company's market area. The Company will continue to monitor the performance of these loans and adjust the allowance for credit losses as necessary. Commercial – Equipment Finance. Our Equipment Finance line of business offers companies that are purchasing equipment for their business various products to help manage tax and accounting issues, while offering flexible and customizable repayment terms. These products are primarily made up of commercial finance agreements and commercial loans for transportation, construction, healthcare, and manufacturing equipment. The loans have terms ranging from 24 to 84 months, with an average of five years and are secured by the financed equipment. Typical transaction sizes range from $25,000 to $1.0 million, with an average outstanding loan size of $130,000. Commercial – Municipal Leases. We offer ground and equipment lease financing to fire departments located primarily throughout North Carolina, South Carolina and, to a lesser extent, Virginia. Municipal leases are secured primarily by a ground lease in our name with a sublease to the borrower for a fire station or an equipment lease for fire trucks and firefighting equipment. We originate and underwrite all leases prior to funding. These leases are at a fixed rate of interest and may have a term to maturity of up to 20 years. At June 30, 2022, $44.4 million, or 34.2%, of our municipal leases were secured by fire trucks, $48.8 million, or 37.6%, were secured by fire stations, $31.7 million, or 24.5%, were secured by both, with the remaining $4.9 million, or 3.7%, secured by miscellaneous firefighting equipment and land. At June 30, 2022, the average outstanding municipal lease size was $423,000. Residential Real Estate – Construction and Land Development. We are an active originator of construction-to-permanent loans to homeowners building a residence. In addition, we originate land/lot loans predominately for the purchase or refinance of an improved lot for the construction of a residence to be occupied by the borrower. All of our construction and land/lot loans were made on properties located within our market area. At June 30, 2022, unfunded loan commitments totaled $94.9 million, compared to $75.7 million at June 30, 2021. Construction-to-permanent loans are made for the construction of a one-to-four family property which is intended to be occupied by the borrower as either a primary or secondary residence. Construction-to-permanent loans are originated to the homeowner rather than the homebuilder and are structured to be converted to a first lien fixed- or adjustable-rate permanent loan at the completion of the construction phase. During the construction phase, which typically lasts for six to 12 months, we make periodic inspections of the construction site and loan proceeds are disbursed directly to the contractors or borrowers as construction progresses. Typically, disbursements are made in monthly draws during the construction period. Loan proceeds are disbursed based on a percentage of completion. Construction-to-permanent loans require payment of interest only during the construction phase. Construction loans may be originated up to 95% of the cost or of the appraised value upon completion, whichever is less; however, we generally do not originate construction loans which exceed the lower of 80% loan to cost or appraised value without securing adequate private mortgage insurance or other form of credit enhancement such as the Federal Housing Administration or other governmental guarantee. Included in our construction and land/lot loan portfolio are land/lot loans, which are typically loans secured by developed lots in residential subdivisions located in our market areas. We originate these loans to individuals intending to construct their primary or secondary residence on the lot within one year from the date of origination. This portfolio may also include loans for the purchase or refinance of unimproved land that is generally less than or equal to five acres, and for which the purpose is to commence the improvement of the land and construction of an owner occupied primary or secondary residence within one year from the date of loan origination. Land/lot loans are typically originated in an amount up to 70% of the lower of the purchase price or appraisal, are secured by a first lien on the property, for up to a 20-year term, require payments of interest only and are structured with an adjustable rate of interest on terms similar to our one-to-four family residential mortgage loans. Residential Real Estate – One-to-Four Family. We originate loans secured by first mortgages on one-to-four family residences typically for the purchase or refinance of owner occupied primary or secondary residences located primarily in our market areas. We originate both fixed-rate loans and adjustable-rate loans; however, the majority of our one-to-four family residential loans are originated with fixed rates and have terms of 10 to 30 years. We generally originate fixed rate mortgage loans with terms greater than 10 years for sale to various secondary market investors on a servicing released basis. We also originate adjustable-rate mortgage, or ARM, loans which have interest rates that adjust annually to the yield on U.S. Treasury securities adjusted to a constant one-year maturity plus a margin. Most of our ARM loans are hybrid loans, which after an initial fixed rate period of one, five, seven, or 10 years will convert to an annual adjustable interest rate for the remaining term of the loan. Our ARM loans have terms up to 30 years. Residential Real Estate – Home Equity Lines of Credit. Our HELOCs consist primarily of adjustable-rate lines of credit. The lines of credit may be originated in amounts, together with the amount of the existing first mortgage, typically up to 85% of the value of the property securing the loan (less any prior mortgage loans) with an adjustable-rate of interest based on The Wall Street Journal prime rate plus a margin. HELOCs generally have up to a 10-year draw period and amounts may be reborrowed after payment at 36 any time during the draw period. Once the draw period has lapsed, the payment is amortized over a 15-year period based on the loan balance at that time. At June 30, 2022, unfunded commitments on these lines of credit totaled $313.0 million. Consumer Lending. Our consumer loans consist of loans secured by deposit accounts or personal property such as automobiles, boats, and motorcycles, as well as unsecured consumer debt. This portfolio includes indirect auto finance installment contracts sourced through our relationships with automobile dealerships, both manufacturer franchised dealerships and independent dealerships, who utilize our origination platform to provide automotive financing through installment contracts on new and used vehicles. At June 30, 2022, the outstanding balance of indirect auto finance loans was $79.1 million. The following table details the contractual maturity ranges of our loan portfolio without factoring in scheduled payments or potential prepayments. Loan balances do not include undisbursed loan proceeds, unearned discounts, unearned income and ACL. In addition, we have disclosed those loans with predetermined (fixed) and floating interest rates at June 30, 2022. [[GREPCENT_TABLE]] [["(Dollars in thousands)","1 Year or Less","","After 1 but Within 5 Years","","After 5 but Within 15 Years","","Over 15 Years","","Total"],["Commercial real estate loans"],["Construction and land development","$","90,315","","","$","133,645","","","$","67,242","","","$","\u2014","","","$","291,202"],["Commercial real estate - owner occupied","16,902","","","203,875","","","101,510","","","13,371","","","335,658"],["Commercial real estate - non-owner occupied","45,589","","","369,632","","","241,600","","","5,338","","","662,159"],["Multifamily","6,706","","","38,934","","","32,601","","","2,845","","","81,086"],["Total commercial real estate loans","159,512","","","746,086","","","442,953","","","21,554","","","1,370,105"],["Commercial loans"],["Commercial and industrial","43,459","","","93,289","","","54,534","","","1,370","","","192,652"],["Equipment finance","5,143","","","308,187","","","81,211","","","\u2014","","","394,541"],["Municipal leases","9,883","","","21,122","","","72,000","","","26,761","","","129,766"],["PPP loans","56","","","518","","","87","","","\u2014","","","661"],["Total commercial loans","58,541","","","423,116","","","207,832","","","28,131","","","717,620"],["Residential real estate loans"],["Construction and land development","162","","","996","","","2,202","","","78,487","","","81,847"],["One-to-four family","6,416","","","55,577","","","83,656","","","208,554","","","354,203"],["HELOCs","4,617","","","8,459","","","8,814","","","138,247","","","160,137"],["Total residential real estate loans","11,195","","","65,032","","","94,672","","","425,288","","","596,187"],["Consumer loans","1,962","","","59,619","","","23,492","","","310","","","85,383"],["Total loans","$","231,210","","","$","1,293,853","","","$","768,949","","","$","475,283","","","$","2,769,295"],["Commercial real estate loans"],["Fixed rate loans","$","37,323","","","$","484,053","","","$","89,558","","","$","2,845","","","$","613,779"],["Adjustable rate loans","122,189","","","262,033","","","353,395","","","18,709","","","756,326"],["Commercial loans"],["Fixed rate loans","17,640","","","412,046","","","170,205","","","27,980","","","627,871"],["Adjustable rate loans","40,901","","","11,070","","","37,627","","","151","","","89,749"],["Residential real estate loans"],["Fixed rate loans","2,854","","","46,852","","","62,530","","","148,472","","","260,708"],["Adjustable rate loans","8,341","","","18,180","","","32,142","","","276,816","","","335,479"],["Consumer loans"],["Fixed rate loans","1,962","","","56,535","","","23,492","","","310","","","82,299"],["Adjustable rate loans","\u2014","","","3,084","","","\u2014","","","\u2014","","","3,084"],["Total fixed rate loans","$","59,779","","","$","999,486","","","$","345,785","","","$","179,607","","","$","1,584,657"],["Total adjustable rate loans","$","171,431","","","$","294,367","","","$","423,164","","","$","295,676","","","$","1,184,638"]] [[/GREPCENT_TABLE]] Nonperforming Assets. Nonperforming assets include nonaccrual loans, TDRs that haven’t performed for a sufficient period of time, and REO. Loans are placed on nonaccrual status when the collection of principal and/or interest becomes doubtful or other factors involving the loan warrant placing the loan on nonaccrual status. TDRs are loans which have renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans. Such modifications to loan terms may include a below market interest rate, a reduction in principal balance, or a longer term to maturity. Once a nonaccruing TDR has performed according to its modified terms for six months and the collection of principal and interest under the revised terms is deemed probable, the TDR is removed from nonaccrual status. 37 Total nonperforming assets were $6.3 million, or 0.18% of total assets, at June 30, 2022, compared to $12.8 milion, or 0.36% of total assets, at June 30, 2021. The following table sets forth the composition of our nonperforming assets among our different asset categories as of June 30, 2022 and 2021. [[GREPCENT_TABLE]] [["","","June 30,"],["(Dollars in thousands)","","2022","","2021"],["Nonaccruing loans"],["Commercial real estate loans"],["Construction and land development","","$","67","","","$","482"],["Commercial real estate - owner occupied","","706","","","3,265"],["Commercial real estate - non-owner occupied","","5","","","208"],["Multifamily","","103","","","3,542"],["Total commercial real estate loans","","881","","","7,497"],["Commercial loans"],["Commercial and industrial","","1,951","","","49"],["Equipment finance","","270","","","630"],["Municipal leases","","\u2014","","","\u2014"],["PPP loans","","\u2014","","","\u2014"],["Total commercial loans","","2,221","","","679"],["Residential real estate loans"],["Construction and land development","","137","","","22"],["One-to-four family","","1,773","","","2,625"],["HELOCs","","724","","","929"],["Total residential real estate loans","","2,634","","","3,576"],["Consumer","","384","","","854"],["Total nonaccruing loans","","$","6,120","","","$","12,606"],["Total foreclosed assets","","$","200","","","188"],["Total nonperforming assets","","$","6,320","","","$","12,794"],["Total nonperforming assets as a percentage of total assets","","0.18","%","","0.36","%"]] [[/GREPCENT_TABLE]] The significant decrease from June 30, 2021 was primarily a result of the payoff of two commercial real estate loan relationships totaling $5.1 million during the period. The ratio of nonperforming loans to total loans was 0.22% at June 30, 2022 and 0.46% at June 30, 2021. Performing TDRs that were excluded from nonaccruing loans totaled $9.8 million and $11.1 million at June 30, 2022 and June 30, 2021, respectively. Allowance for Credit Losses on Loans. The ACL is a valuation account that reflects our estimation of the credit losses that will result from the inability of our borrowers to make required loan payments. The allowance is maintained through provisions for credit losses that are charged to earnings in the period they are established. We charge losses on loans against the ACL when we believe the collection of loan principal is unlikely. Recoveries on loans previously charged off are added back to the allowance. See "Note 1 – Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K for discussion of our ACL methodology on loans. 38 The following table summarizes the distribution of the allowance for credit losses by loan category at the dates indicated. [[GREPCENT_TABLE]] [["","June 30,"],["","2022","","2021"],["(Dollars in thousands)","Allocated Allowance","","% of Loan Portfolio","","ACL to Loans","","Allocated Allowance","","% of Loan Portfolio","","ACL to Loans"],["Commercial real estate loans"],["Construction and land development","$","4,402","","","11","%","","0.16","%","","$","1,801","","","7","%","","0.07","%"],["Commercial real estate - owner occupied","3,038","","","12","","","0.11","","","3,295","","","12","","","0.12"],["Commercial real estate - non-owner occupied","5,589","","","24","","","0.20","","","9,296","","","27","","","0.34"],["Multifamily","385","","","3","","","0.01","","","692","","","3","","","0.03"],["Total commercial real estate loans","13,414","","","50","","","0.48","","","15,084","","","49","","","0.56"],["Commercial loans"],["Commercial and industrial","5,083","","","7","","","0.18","","","2,592","","","5","","","0.09"],["Equipment finance","6,651","","","14","","","0.24","","","6,537","","","12","","","0.24"],["Municipal leases","302","","","5","","","0.01","","","534","","","5","","","0.02"],["PPP loans","\u2014","","","\u2014","","","\u2014","","","\u2014","","","2","","","\u2014"],["Total commercial loans","12,036","","","26","","","0.43","","","9,663","","","24","","","0.35"],["Residential real estate loans"],["Construction and land development","1,052","","","2","","","0.04","","","812","","","2","","","0.03"],["One-to-four family","4,673","","","13","","","0.17","","","5,409","","","15","","","0.20"],["HELOCs","1,886","","","6","","","0.07","","","1,964","","","6","","","0.07"],["Total residential real estate loans","7,611","","","21","","","0.28","","","8,185","","","23","","","0.30"],["Consumer loans","1,629","","","3","","","0.06","","","2,536","","","4","","","0.09"],["Total loans","$","34,690","","","100","%","","1.25","%","","$","35,468","","","100","%","","1.30","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","At or For the Year Ended June 30,"],["","2022","","2021"],["Asset quality ratios"],["Nonaccruing loans to total loans(1)","0.22","%","","0.46","%"],["ACL to nonaccruing loans(1)","566.83","","","281.38"],["Net charge-offs (recoveries) to average loans","(0.02)","","","0.01"]] [[/GREPCENT_TABLE]] (1)    At June 30, 2022, $2.8 million of restructured loans were included in nonaccruing loans and $3.8 million, or 62.5%, of nonaccruing loans were current on their loan payments. At June 30, 2021, $5.5 million of restructured loans were included in nonaccruing loans and $6.6 million, or 52.6%, of nonaccruing loans were current on their loan payments. The ACL on loans decreased $778,000, or 2.2%, between June 30, 2022 and 2021 and there was a net benefit for credit losses on loans of $1.5 million for the year ended June 30, 2022, compared to a net benefit of $7.3 million for fiscal year 2021. The net benefit on loans for the year ended June 30, 2022 was primarily the result of a slight improvement in the economic forecast, as more clarity was gained regarding the impact of COVID-19 upon the loan portfolio. 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 June 30, 2022, there were $5.3 million in loans individually evaluated compared to $8.8 million at June 30, 2021. For more information on these individually evaluated loans, see "Note 5 – Loans and Allowance for Credit Losses on Loans" of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K. The following table summarizes net charge-offs (recoveries) to average loans outstanding by loan category as of the dates indicated. [[GREPCENT_TABLE]] [["","Year Ended June 30,"],["","2022","","2021"],["(Dollars in thousands)","Net Charge-Offs (Recoveries)","","Average Loans Outstanding","","Net Charge-Off (Recovery) Ratio","","Net Charge-Offs (Recoveries)","","Average Loans Outstanding","","Net Charge-Off (Recovery) Ratio"],["Commercial real estate loans","$","(603)","","","$","1,389,895","","","(0.04)","%","","$","851","","","$","1,319,309","","","0.06","%"],["Commercial loans","737","","","707,959","","","0.10","","","(1,166)","","","647,363","","","(0.18)"],["Residential real estate loans","(849)","","","613,270","","","(0.14)","","","(121)","","","716,998","","","(0.02)"],["Consumer loans","21","","","98,549","","","0.02","","","579","","","135,510","","","0.43"],["Total","$","(694)","","","$","2,809,673","","","(0.02)","%","","$","143","","","$","2,819,180","","","0.01","%"]] [[/GREPCENT_TABLE]] 39 Liabilities. Total liabilities were $3.2 billion at June 30, 2022, compared to $3.1 billion at June 30, 2021, an increase of $32.2 million, the components of which are discussed below. Deposits. The following table summarizes the composition of our deposit portfolio as of the dates indicated. [[GREPCENT_TABLE]] [["","Year Ended June 30,","","Change"],["(Dollars in thousands)","2022","","2021","","$","","%"],["Core deposits"],["Noninterest-bearing deposits","$","745,746","","","$","636,414","","","$","109,332","","","17","%"],["Interest-bearing checking accounts","654,981","","","644,958","","","10,023","","","2"],["Money market accounts","969,661","","","975,001","","","(5,340)","","","(1)"],["Savings accounts","238,197","","","226,391","","","11,806","","","5"],["Total core deposits","$","2,608,585","","","$","2,482,764","","","$","125,821","","","5","%"],["Certificates of deposit","491,176","","","472,777","","","18,399","","","4"],["Total","$","3,099,761","","","$","2,955,541","","","$","144,220","","","5","%"]] [[/GREPCENT_TABLE]] As of June 30, 2022, we held approximately $640.4 million in uninsured deposits, including $156.6 million of uninsured time deposits. The uninsured amount is an estimate consistent with the methodology used for the Company's regulatory reporting disclosures. The following table indicates the amount of our CDs, both within and in excess of the $250,000 FDIC insurance limit, by time remaining until maturity as of June 30, 2022. [[GREPCENT_TABLE]] [["(Dollars in thousands)","3 Months or Less","","Over 3 to 6 Months","","Over 6 to 12 Months","","Over 12 Months","","Total"],["CDs less than $250,000","$","114,062","","","$","108,999","","","$","58,081","","","$","53,476","","","$","334,618"],["CDs of $250,000 or more","33,588","","","77,299","","","36,704","","","8,967","","","156,558"],["Total certificates of deposit","$","147,650","","","$","186,298","","","$","94,785","","","$","62,443","","","$","491,176"]] [[/GREPCENT_TABLE]] Borrowings. Although deposits are our primary source of funds, we may utilize borrowings to manage interest rate risk or as a cost-effective source of funds. Our borrowings typically consist of advances from the FHLB of Atlanta and FRB. We may obtain advances from the FHLB of Atlanta upon the security of certain of our commercial and residential real estate loans and/or securities as well as obtain advances from the FRB upon the security of certain of our commercial and consumer loans. These advances may be made pursuant to several different credit programs, each of which has its own interest rate, range of maturities and call features. The following tables set forth information regarding our borrowings at the end of and during the periods indicated. [[GREPCENT_TABLE]] [["","Year Ended June 30,"],["(Dollars in thousands)","2022","","2021"],["Average balances"],["FHLB advances","$","38,370","","","$","416,822"],["FRB advances","5,006","","","\u2014"],["Weighted average interest rate"],["FHLB advances","0.16","%","","1.45","%"],["FRB advances","0.38","","","\u2014"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","June 30,"],["(Dollars in thousands)","2022","","2021"],["Balance outstanding at end of period"],["FHLB advances","$","\u2014","","","$","115,000"],["Weighted average interest rate"],["FHLB advances","\u2014","%","","0.16","%"]] [[/GREPCENT_TABLE]] There were no borrowings at June 30, 2022 compared to $115.0 million at June 30, 2021 due to continual paydown of borrowings during the period. As of June 30, 2022, we had the ability to borrow an additional $277.6 million through the FHLB. In addition to FHLB advances, at June 30, 2022, we had an unused line of credit with the FRB in the amount of $68.2 million, subject to qualifying collateral, and $120.0 million available through lines of credit with three unaffiliated banks. See “Note 9 – Borrowings” of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for more information about our borrowings. Capital Resources At June 30, 2022, stockholders' equity totaled $388.8 million, compared to $396.5 million at June 30, 2021, a decrease of $7.7 million. Stockholders’ equity decreased during the period primarily due to the cost of repurchased shares of $43.3 million, offset by our net income of 40 $35.7 million. See “Business – How We are Regulated” included in Item 1 and “Note 17 – Regulatory Capital Matters” of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K for additional details on our capital requirements. Liquidity Management 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. We rely on a number of different sources in order to meet our potential liquidity demands. The primary sources are increases in deposit accounts and cash flows from loan payments and the securities portfolio. In addition to these primary sources of funds, management has several secondary sources available to meet potential funding requirements as outlined in the "Comparison of Financial Condition – Borrowings" section above. Additionally, we classify our 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, we have historically sold 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 we also utilize brokered time deposits to supplement our 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. We also utilize 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 June 30, 2022, brokered deposits totaled $26.3 million, or 0.8% of total deposits. 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 and federal funds. On a longer term basis, we maintain a strategy of investing in various lending products and debt securities, including mortgage-backed securities. On a stand-alone level we are a separate legal entity from HomeTrust Bank and must provide for our own liquidity and pay our own operating expenses. Our primary source of funds consists of dividends or capital distributions from HomeTrust Bank, although there are regulatory restrictions on the ability of HomeTrust Bank to pay dividends. At June 30, 2022, we (on an unconsolidated basis) had liquid assets of $6.9 million. At the Bank level, we use our sources of funds primarily to meet our ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments. At June 30, 2022, the total approved loan commitments and unused lines of credit outstanding amounted to $417.6 million and $485.2 million, respectively, as compared to $401.1 million and $530.5 million, respectively, as of June 30, 2021. Certificates of deposit scheduled to mature in one year or less at June 30, 2022, totaled $428.7 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 that a majority of maturing deposits will remain with us. Off-Balance Sheet Activities In the normal course of operations, we engage in a variety of financial transactions that are not recorded in our financial statements, mainly to manage customers' requests for funding. These transactions primarily take the form of loan commitments and lines of credit and involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. For further information, see “Note 16 – Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K. Asset/Liability Management and Interest Rate Risk Our Risk When Interest Rates Change.  The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market interest rates change over time. Our loans generally have longer maturities than our deposits. Accordingly, our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk. If interest rates rise, our net interest income could be reduced because interest paid on interest-bearing liabilities, including deposits and borrowings, could increase more quickly than interest received on interest-earning assets, including loans and other investments. In addition, rising interest rates may hurt our income because they may reduce the demand for loans. How We Measure Our Risk of Interest Rate Changes.  As part of our process to manage our exposure to changes in interest rates and comply with applicable regulations, we monitor our interest rate risk. In monitoring interest rate risk we continually analyze and manage assets and liabilities based on market conditions, their payment streams and interest rates, the timing of their maturities, their sensitivity to actual or potential changes in market interest rates, and interest rate sensitivities of our non-maturity deposits with respect to interest rates paid and the level of balances. The Board of Directors sets the asset and liability policy of HomeTrust Bank, which is implemented by management and an asset/liability committee whose members include certain members of senior management. The purpose of this committee is to communicate, coordinate and control asset/liability management consistent with our business plan and Board approved policies. The committee establishes and monitors the volume and mix of assets and funding sources taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The objectives are to manage assets and funding sources to produce results that are consistent with liquidity, capital adequacy, growth, risk, and profitability goals. The committee generally meets on a quarterly basis to review, among other things, economic conditions and interest rate outlook, current and projected liquidity needs and capital position, anticipated changes in the volume and mix of assets and liabilities and interest rate risk exposure limits versus current projections pursuant to net present value of portfolio equity analysis and income simulations. The committee recommends strategy changes based on this review. The committee is responsible for reviewing and reporting on the effects of the policy implementations and strategies to the Board of Directors at least quarterly. 41 Among the techniques we have used at various times to manage interest rate risk are: (i) increasing our portfolio of hybrid and adjustable-rate one-to-four family residential loans and commercial loans; (ii) maintaining a strong capital position, which provides for a favorable level of interest-earning assets relative to interest-bearing liabilities; and (iii) emphasizing less interest rate sensitive and lower-costing “core deposits.” We also maintain a portfolio of short-term or adjustable-rate assets and use fixed-rate FHLB advances and brokered deposits to extend the term to repricing of our liabilities. We consider the relatively short duration of our deposits in our overall asset/liability management process. As short-term rates increase, we have assets and liabilities that increase with the market. This is reflected in the change in our PVE when rates increase (see the table below). PVE is defined as the net present value of our existing assets and liabilities. In addition, we have historically demonstrated an ability to maintain retail deposits through various interest rate cycles. If local retail deposit rates increase dramatically, we also have access to wholesale funding through our lines of credit with the FHLB and FRB, as well as through the brokered deposit market to replace retail deposits, as needed. Depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions, and competitive factors, the committee may in the future determine to increase our interest rate risk position somewhat in order to maintain or increase our net interest margin. In particular, during certain periods of stable or declining interest rates, we believe that the increased net interest income resulting from a mismatch in the maturity of our assets and liabilities portfolios may provide high enough returns to justify increased exposure to sudden and unexpected increases in interest rates. As a result of this philosophy, our results of operations and the economic value of our equity will remain vulnerable to increases in interest rates and to declines due to differences between long- and short-term interest rates. The committee regularly reviews interest rate risk by forecasting the impact of alternative interest rate environments on net interest income and our PVE. The committee also evaluates these impacts against the potential changes in net interest income and market value of our portfolio equity that are monitored by the Board of Directors of HomeTrust Bank generally on a quarterly basis. Our asset/liability management strategy sets limits on the change in PVE given certain changes in interest rates. The table presented here, as of June 30, 2022, is forward-looking information about our sensitivity to changes in interest rates. The table incorporates data from an independent service, as it relates to maturity repricing and repayment/withdrawal of interest-earning assets and interest-bearing liabilities. Interest rate risk is measured by changes in PVE for instantaneous parallel shifts in the yield curve up and down 400 basis points. Given the current targeted federal funds rate is 1.50% to 1.75% making an immediate change of -300 or -400 basis points improbable, a PVE calculation for a decrease of greater than 200 basis points has not been prepared. An increase in rates would increase our PVE because the repricing of nonmaturing deposits tend to lag behind the increase in market rates. This positive impact is partially offset by the negative effect from our loans with interest rate floors which will not adjust until such time as a  loan’s current interest rate adjusts to an increase in market rates which exceeds the interest rate floor. Conversely, in a falling interest rate environment these interest rate floors will assist in maintaining our net interest income. As of June 30, 2022, our loans with interest rate floors totaled approximately $511.4 million, or 18.5% of our total loan portfolio, and had a weighted average floor rate of 3.70%. Of these loans, $22.3 million were at their floor rate and $17.3 million, or 77.7%, had yields that would begin floating again once prime rates increase at least 100 basis points. [[GREPCENT_TABLE]] [["June 30, 2022"],["Change in Interest Rates in","","Present Value Equity","","PVE"],["Basis Points","","Amount","","$ Change","","% Change","","Ratio"],["(Dollars in Thousands)"],["+ 400","","$","904,290","","","$","150,107","","","20","%","","27","%"],["+ 300","","878,297","","","124,114","","","16","","","26"],["+ 200","","848,331","","","94,148","","","12","","","25"],["+ 100","","807,639","","","53,456","","","7","","","23"],["Base","","754,183","","","\u2014","","","\u2014","","","22"],["- 100","","639,196","","","(114,987)","","","(15)","","","18"],["- 200","","477,864","","","(276,319)","","","(37)","","","13"]] [[/GREPCENT_TABLE]] In evaluating our exposure to interest rate movements, certain shortcomings inherent in the method of analysis presented in the foregoing table must be considered. For example, although certain assets and liabilities may have similar maturities or repricing periods, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in interest rates. Additionally, certain assets, such as adjustable rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a significant change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed above. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. We consider all of these factors in monitoring our exposure to interest rate risk. The Board of Directors and management of HomeTrust Bank believe that certain factors afford HomeTrust Bank the ability to operate successfully despite its exposure to interest rate risk. HomeTrust Bank may manage its interest rate risk by originating and retaining adjustable rate loans in its portfolio, by borrowing from the FHLB to match the duration of our funding to the duration of originated fixed rate one-to-four family and commercial loans held in portfolio and by selling on an ongoing basis certain currently originated longer term fixed rate one-to-four family real estate loans. 42