HomeTrust Bancshares, Inc. - Quarter Report: 2019 December (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2019

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to ________

Commission file number: 001-35593

HOMETRUST BANCSHARES, INC.

(Exact name of registrant as specified in its charter)



Maryland		45-5055422
(State or other jurisdiction of incorporation of organization)		(I.R.S. Employer Identification No.)

10 Woodfin Street, Asheville, North Carolina 28801

(Address of principal executive offices; Zip Code)

(828) 259-3939

(Registrant's telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $.01 per share	HTBI	The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 and 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer [ ]				Accelerated filer [X]

Non-accelerated filer [ ]				Smaller reporting company [ ]

Emerging growth company [ ]



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.	[ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

There were 17,543,498 shares of common stock, par value of $.01 per share, issued and outstanding as of February 4, 2020.

HOMETRUST BANCSHARES, INC. AND SUBSIDIARIES

10-Q

TABLE OF CONTENTS



			Page Number
PART I FINANCIAL INFORMATION

Item 1.	Financial Statements

		Consolidated Balance Sheets (Unaudited) at December 31, 2019 and June 30, 2019	3

		Consolidated Statements of Income (Unaudited) for the Three and Six Months Ended December 31, 2019 and 2018	4

		Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended December 31, 2019 and 2018	5

		Consolidated Statements of Changes in Stockholders' Equity (Unaudited) for the Three and Six Months Ended December 31, 2019 and 2018	6

		Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended December 31, 2019 and 2018	8

		Notes to Consolidated Financial Statements	10

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		34

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		48

Item 4.	Controls and Procedures		48

PART II OTHER INFORMATION

Item 1.	Legal Proceedings		48

Item 1A.	Risk Factors		48

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		48

Item 3.	Defaults Upon Senior Securities		49

Item 4.	Mine Safety Disclosures		49

Item 5	Other Information		49

Item 6.	Exhibits		49

SIGNATURES			52

Glossary of Defined Terms

The following items may be used throughout this Form 10-Q, including the Notes to Consolidated Financial Statements in Item 1 and Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of this Form 10-Q.



Term		Definition
AFS		Available-For-Sale
ASC		Accounting Standard Codification
ASU		Accounting Standard Update
BOLI		Bank Owned Life Insurance
CD		Certificates of Deposit
CET1		Common Equity Tier 1
CPI		Consumer Price Index
EPS		Earnings Per Share
ESOP		Employee Stock Ownership Plan
FASB		Financial Accounting Standards Board
FDIC		Federal Deposit Insurance Corporation
FHLB		Federal Home Loan Bank
FRB		Federal Reserve Bank of Richmond
GAAP		Generally Accepted Accounting Principles in the United States
GSE		Government-Sponsored Enterprises
HELOC		Home Equity Line of Credit
MBS		Mortgage-Backed Security
NCCOB		North Carolina Office of the Commissioner of Banks
PCI		Purchase Credit Impaired
REO		Real Estate Owned
ROU		Right of Use
SEC		Securities and Exchange Commission
SBA		Small Business Administration
SBIC		Small Business Investment Companies
TDR		Troubled Debt Restructuring

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Consolidated Balance Sheets

(Dollars in thousands, except per share data)



	(Unaudited)
	December 31, 2019			June 30, 2019 ⁽¹⁾
Assets
Cash	$	47,213		$	40,909
Interest-bearing deposits	41,705			30,134
Cash and cash equivalents	88,918			71,043
Commercial paper	253,794			241,446
Certificates of deposit in other banks	47,628			52,005
Debt securities available for sale, at fair value	146,022			121,786
Other investments, at cost	36,898			45,378
Loans held for sale	118,055			18,175
Total loans, net of deferred loan costs	2,554,541			2,705,190
Allowance for loan losses	(22,031		)	(21,429		)
Net loans	2,532,510			2,683,761
Premises and equipment, net	58,020			61,051
Accrued interest receivable	9,714			10,533
REO	1,451			2,929
Deferred income taxes	22,066			26,523
BOLI	91,048			90,254
Goodwill	25,638			25,638
Core deposit intangibles	1,715			2,499
Other assets	36,755			23,157
Total Assets	$	3,470,232		$	3,476,178
Liabilities and Stockholders' Equity
Liabilities
Deposits	$	2,557,769		$	2,327,257
Borrowings	435,000			680,000
Other liabilities	60,468			60,025
Total liabilities	3,053,237			3,067,282
Stockholders' Equity
Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued or outstanding	—			—
Common stock, $0.01 par value, 60,000,000 shares authorized, 17,664,384 shares issued and outstanding at December 31, 2019; 17,984,105 at June 30, 2019	177			180
Additional paid in capital	182,366			190,315
Retained earnings	240,312			224,545
Unearned ESOP shares	(6,612		)	(6,877		)
Accumulated other comprehensive income	752			733
Total stockholders' equity	416,995			408,896
Total Liabilities and Stockholders' Equity	$	3,470,232		$	3,476,178

(1) Derived from audited financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Income

(Dollars in thousands, except per share data)



	(Unaudited)
	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2019		2018		2019		2018
Interest and Dividend Income
Loans	$	32,119	$	30,544	$	64,385	$	59,272
Commercial paper and interest-bearing deposits in other banks	1,912		1,966		4,165		3,823
Securities available for sale	1,093		876		1,989		1,732
Other investments	772		1,014		1,604		1,853
Total interest and dividend income	35,896		34,400		72,143		66,680
Interest Expense
Deposits	6,321		3,607		12,174		6,357
Borrowings	2,541		3,692		5,862		6,950
Total interest expense	8,862		7,299		18,036		13,307
Net Interest Income	27,034		27,101		54,107		53,373
Provision for Loan Losses	400		—		400		—
Net Interest Income after Provision for Loan Losses	26,634		27,101		53,707		53,373
Noninterest Income
Service charges and fees on deposit accounts	2,605		2,577		5,048		4,978
Loan income and fees	871		295		1,753		623
Gain on sale of loans held for sale	3,775		944		6,074		2,614
BOLI income	509		520		1,206		1,056
Other, net	1,314		749		2,653		1,427
Total noninterest income	9,074		5,085		16,734		10,698
Noninterest Expense
Salaries and employee benefits	14,170		12,857		28,082		25,542
Net occupancy expense	2,384		2,425		4,726		4,751
Computer services	1,985		1,895		4,009		3,744
Telephone, postage, and supplies	798		743		1,600		1,512
Marketing and advertising	641		402		1,320		819
Deposit insurance premiums	12		335		12		639
Loss on sale and impairment of REO	122		75		103		254
REO expense	238		173		496		348
Core deposit intangible amortization	373		526		784		1,092
Other	3,318		2,427		6,442		5,040
Total noninterest expense	24,041		21,858		47,574		43,741
Income Before Income Taxes	11,667		10,328		22,867		20,330
Income Tax Expense	2,476		2,287		4,872		4,499
Net Income	$	9,191	$	8,041	$	17,995	$	15,831
Per Share Data:
Net income per common share:
Basic	$	0.54	$	0.45	$	1.05	$	0.88
Diluted	$	0.52	$	0.43	$	1.01	$	0.84
Average shares outstanding:
Basic	16,906,457		17,797,553		17,002,052		17,961,465
Diluted	17,567,680		18,497,334		17,660,687		18,689,584

The accompanying notes are an integral part of these consolidated financial statements.

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

(Dollars in thousands)



	(Unaudited)
	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2019			2018			2019			2018
Net Income	$	9,191		$	8,041		$	17,995		$	15,831
Other Comprehensive Income (Loss)
Unrealized holding gains (losses) on securities available for sale
Gains (losses) arising during the period	(270		)	1,126			25			748
Deferred income tax benefit (expense)	62			(259		)	(6		)	(172		)
Total other comprehensive income (loss)	$	(208	)	$	867		$	19		$	576
Comprehensive Income	$	8,983		$	8,908		$	18,014		$	16,407

The accompanying notes are an integral part of these consolidated financial statements.

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders' Equity

(Dollars in thousands)



	Three Months Ended December 31, 2019
	Common Stock					Additional Paid In Capital			Retained Earnings			Unearned ESOP Shares			Accumulated Other Comprehensive Income (loss)			Total Stockholders' Equity
	Shares		Amount			Additional Paid In Capital			Retained Earnings			Unearned ESOP Shares			Accumulated Other Comprehensive Income (loss)			Total Stockholders' Equity
Balance at September 30, 2019	17,818,145		$	178		$	186,359		$	232,315		$	(6,744	)	$	960		$	413,068
Net income	—		—			—			9,191			—			—			9,191
Cash dividends declared on common stock, $0.07/common share	—		—			—			(1,194		)	—			—			(1,194		)
Stock repurchased	(207,261	)	(2		)	(5,417		)	—			—			—			(5,419		)
Exercised stock options	53,500		1			768			—			—			—			769
Stock option expense	—		—			190			—			—			—			190
Restricted stock expense	—		—			250			—			—			—			250
ESOP shares allocated	—		—			216			—			132			—			348
Other comprehensive loss	—		—			—			—			—			(208		)	(208		)
Balance at December 31, 2019	17,664,384		$	177		$	182,366		$	240,312		$	(6,612	)	$	752		$	416,995


	Six Months Ended December 31, 2019
	Common Stock					Additional Paid In Capital			Retained Earnings			Unearned ESOP Shares			Accumulated Other Comprehensive Income			Total Stockholders' Equity
	Shares		Amount			Additional Paid In Capital			Retained Earnings			Unearned ESOP Shares			Accumulated Other Comprehensive Income			Total Stockholders' Equity
Balance at June 30, 2019	17,984,105		$	180		$	190,315		$	224,545		$	(6,877	)	$	733		$	408,896
Net income	—		—			—			17,995			—			—			17,995
Cash dividends declared on common stock, $0.13/common share	—		—			—			(2,228		)	—			—			(2,228		)
Stock repurchased	(396,421	)	(4		)	(10,215		)	—			—			—			(10,219		)
Forfeited restricted stock	(3,200	)	—			—			—			—			—			—
Granted restricted stock	13,000		—			—			—			—			—			—
Exercised stock options	66,900		1			962			—			—			—			963
Stock option expense	—		—			388			—			—			—			388
Restricted stock expense	—		—			495			—			—			—			495
ESOP shares allocated	—		—			421			—			265			—			686
Other comprehensive income	—		—			—			—			—			19			19
Balance at December 31, 2019	17,664,384		$	177		$	182,366		$	240,312		$	(6,612	)	$	752		$	416,995

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders' Equity (Continued)

(Dollars in thousands)



	Three Months Ended December 31, 2018
	Common Stock					Additional Paid In Capital			Retained Earnings			Unearned ESOP Shares			Accumulated Other Comprehensive Income (loss)			Total Stockholders' Equity
	Shares		Amount			Additional Paid In Capital			Retained Earnings			Unearned ESOP Shares			Accumulated Other Comprehensive Income (loss)			Total Stockholders' Equity
Balance at September 30, 2018	18,939,280		$	190		$	214,803		$	208,365		$	(7,274	)	$	(1,889	)	$	414,195
Net income	—		—			—			8,041			—			—			8,041
Cash dividends declared on common stock, $0.06/common share	—		—			—			(1,117		)	—			—			(1,117		)
Stock repurchased	(431,455	)	(5		)	(11,917		)	—			—			—			(11,922		)
Forfeited restricted stock	(700	)	—			—			—			—			—			—
Retired stock	—		—			(17		)	—			—			—			(17		)
Exercised stock options	13,700		—			198			—			—			—			198
Stock option expense	—		—			174			—			—			—			174
Restricted stock expense	—		—			198			—			—			—			198
ESOP shares allocated	—		—			221			—			132			—			353
Other comprehensive income	—		—			—			—			—			867			867
Balance at December 31, 2018	18,520,825		$	185		$	203,660		$	215,289		$	(7,142	)	$	(1,022	)	$	410,970


	Six Months Ended December 31, 2018
	Common Stock					Additional Paid In Capital			Retained Earnings			Unearned ESOP Shares			Accumulated Other Comprehensive Income (loss)			Total Stockholders' Equity
	Shares		Amount			Additional Paid In Capital			Retained Earnings			Unearned ESOP Shares			Accumulated Other Comprehensive Income (loss)			Total Stockholders' Equity
Balance at June 30, 2018	19,041,668		$	191		$	217,480		$	200,575		$	(7,406	)	$	(1,598	)	$	409,242
Net income	—		—			—			15,831			—			—			15,831
Cash dividends declared on common stock, $0.12/common share	—		—			—			(1,117		)	—			—			(1,117		)
Stock repurchased	(559,755	)	(6		)	(15,640		)	—			—			—			(15,646		)
Forfeited restricted stock	(2,700	)	—			—			—			—			—			—
Retired stock	(588	)	—			(17		)	—			—						(17		)
Exercised stock options	42,200		—			608			—			—			—			608
Stock option expense	—		—			359			—			—			—			359
Restricted stock expense	—		—			397			—			—			—			397
ESOP shares allocated	—		—			473			—			264			—			737
Other comprehensive income	—		—			—			—			—			576			576
Balance at December 31, 2018	18,520,825		$	185		$	203,660		$	215,289		$	(7,142	)	$	(1,022	)	$	410,970

The accompanying notes are an integral part of these consolidated financial statements.

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Dollars in thousands)



	(Unaudited)
	Six Months Ended December 31,
	2019			2018
Operating Activities:
Net income	$	17,995		$	15,831
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	400			—
Depreciation	2,564			2,144
Deferred income tax expense	4,451			3,860
Net amortization and accretion	(2,991		)	(3,611		)
Loss on sale and impairment of REO	103			254
Gain on sale of loans held for sale	(6,074		)	(2,614		)
Origination of loans held for sale	(156,416		)	(79,420		)
Proceeds from sales of loans held for sale	138,457			78,998
Increase in deferred loan costs, net	(1,082		)	(265		)
Decrease in accrued interest receivable and other assets	(670		)	(2,816		)
Amortization of core deposit intangibles	784			1,092
BOLI income	(1,206		)	(1,056		)
ESOP compensation expense	686			737
Restricted stock and stock option expense	883			756
Decrease in other liabilities	(4,853		)	(7,614		)
Net cash provided by (used in) operating activities	(6,969		)	6,276
Investing Activities:
Purchase of securities available for sale	(56,430		)	(15,750		)
Proceeds from maturities of securities available for sale	24,860			11,565
Net purchases of commercial paper	(9,187		)	(7,204		)
Purchase of certificates of deposit in other banks	(8,616		)	(6,709		)
Maturities of certificates of deposit in other banks	12,993			21,710
Principal repayments of mortgage-backed securities	7,090			9,668
Net redemptions (purchases) of other investments	8,480			(2,927		)
Proceeds from sale of loans not originated for sale	154,870			—
Net increase in loans	(78,731		)	(108,995		)
Purchase of BOLI	(65		)	(79		)
Proceeds from redemption of BOLI	477			7
Purchase of premises and equipment	(777		)	(692		)
Purchase of operating lease equipment	(5,569		)	(5,525		)
Proceeds from sale of REO	1,421			571
Net cash provided by (used in) investing activities	50,816			(104,360		)
Financing Activities:
Net increase in deposits	230,512			61,816
Net increase (decrease) in other borrowings	(245,000		)	53,000
Common stock repurchased	(10,219		)	(15,646		)
Cash dividends paid	(2,228		)	(1,117		)
Retired stock	—			(17		)
Exercised stock options	963			608
Net cash provided by (used in) financing activities	(25,972		)	98,644
Net Increase in Cash and Cash Equivalents	17,875			560
Cash and Cash Equivalents at Beginning of Period	71,043			70,746
Cash and Cash Equivalents at End of Period	$	88,918		$	71,306

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows (continued)

(Dollars in thousands)



	(Unaudited)
Supplemental Disclosures:	Six Months Ended December 31,
	2019		2018
Cash paid during the period for:
Interest	$	18,771	$	12,534
Income taxes	1,300		277
Noncash transactions:
Unrealized gain in value of securities available for sale, net of income taxes	19		576
Transfer of loans to REO	46		96
Transfer of loans held for sale to total loans	9,736		5,794
Transfer of one-to-four family loans to held for sale	240,453		1,608
Transfer of land from property and equipment to other assets for new finance lease accounting	2,052		—
New ROU asset and lease liabilities from adoption of new lease accounting standard	5,296		—

The accompanying notes are an integral part of these consolidated financial statements.

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)


1.	Summary of Significant Accounting Policies

The consolidated financial statements presented in this report include the accounts of HomeTrust Bancshares, Inc., a Maryland corporation ("HomeTrust"), and its wholly-owned subsidiary, HomeTrust Bank (the "Bank"). As used throughout this report, the term the "Company" refers to HomeTrust and the Bank, its consolidated subsidiary, unless the context otherwise requires.

The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the SEC. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. It is recommended that these unaudited interim consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended June 30, 2019 ("2019 Form 10-K") filed with the SEC on September 13, 2019. The results of operations for the three and six months ended December 31, 2019 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2020.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements. Various elements of the Company's accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions, and other subjective assessments. In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's financial statements. These policies relate to (i) the determination of the provision and the allowance for loan losses, (ii) the valuation of goodwill and other intangible assets, and (iii) the valuation of or recognition of deferred tax assets and liabilities. These policies and judgments, estimates and assumptions are described in greater detail in subsequent notes to the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations (Critical Accounting Policies) in our 2019 Form 10-K. Management believes that the judgments, estimates and assumptions used in the preparation of the financial statements are appropriate based on the factual circumstances at the time. However, given the sensitivity of the financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in the Company's results of operations or financial condition. Further, subsequent changes in economic or market conditions could have a material impact on these estimates and the Company's financial condition and operating results in future periods.

Certain amounts reported in prior periods' consolidated financial statements have been reclassified to conform to the current presentation. Such reclassifications had no effect on previously reported cash flows, stockholders' equity or net income.

Adoption of Lease Accounting Standard

On July 1, 2019, the Company adopted ASU 2016-02, Leases (“Topic 842”), and subsequent related ASUs. The new leasing standard modifies the accounting, presentation, and disclosures for both lessees and lessors. The Company elected the modified retrospective transition option which allows for application of the Topic 842 guidance at the adoption date. Therefore, comparative prior period financial information was not adjusted and will continue to be reported under the previous accounting guidance of ASC 840, Leases (“ASC 840”). No cumulative-effect adjustment to retained earnings as of July 1, 2019 was necessary as a result of adopting the new standard. The Company elected the “package of practical expedients” permitted under the transition guidance which allows the Company not to reassess its prior conclusions regarding lease identification, classification of existing leases, and treatment of initial direct costs on existing leases. Any lease arrangements and significant modifications entered into subsequent to the adoption date are accounted for in accordance with the new standard.

Lessee Topic 842 Accounting

The new leasing standard requires recognition of operating leases on the consolidated balance sheets as ROU assets and lease liabilities. ROU assets represent our right to use underlying assets for the lease terms and lease liabilities represent our obligation to make lease payments arising from the leases. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. We use our estimated incremental borrowing rate in determining the present value of lease payments for operating leases and the implicit rate in the lease for our one finance lease.

For operating leases, the Company recognized lease liabilities, with corresponding ROU assets, based on the present value of unpaid lease payments for existing operating leases longer than twelve months as of July 1, 2019. The ROU assets were adjusted per Topic 842 transition guidance for existing lease-related balances of accrued and prepaid rent, and unamortized lease incentives provided by lessors. As a result, the Company recognized ROU assets of approximately $5.3 million in other assets and corresponding lease liabilities of approximately $5.3 million in other liabilities as of July 1, 2019. The July 1, 2019 incremental borrowing rates determined on a collateralized basis for the remaining lease terms were utilized when determining the present value of lease payments at the date of initial adoption.

For our finance lease, the Company leases land for one of its retail locations. Upon adoption of Topic 842, the Company reclassed $2.1 million from land to ROU assets in other assets. In addition, the corresponding liability of $1.9 million, which was disclosed separately on the balance sheet was reclassified to other liabilities.

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

The Company elected the lessee practical expedient to not separate lease and non-lease components. The Company also elected the short-term lease recognition exemption and will not recognize ROU assets or lease liabilities for leases with a term less than 12 months.

Operating lease cost is recognized as a single lease cost on a straight-line basis over the lease term and is recorded in net occupancy expense. Variable lease payments for common area maintenance, property taxes and other operating expenses are recognized as expense in the period when the changes in facts and circumstances on which the variable lease payments are based occur.

Finance lease cost is recognized as a single lease cost using the effective interest method and is recorded in net occupancy expense.

Lessee Accounting Prior to Adoption of Topic 842

Prior to the adoption of ASC 842, the Company applied the guidance of ASC 840. Under ASC 840, operating lease arrangements were off-balance sheet and ROU assets and lease liabilities were not recognized. Operating lease rent expense was recognized on a straight-line basis over the lease term and recorded in net occupancy expense. Common area maintenance, property taxes, and other operating expenses related to leased premises were also recognized in net occupancy expenses, consistent with similar costs for owned locations.

Lessor Topic 842 Accounting

Prior to the adoption of Topic 842, we determined the lease classification at commencement date. Leases not classified as sales-type or direct financing leases are classified as operating leases. The primary accounting criteria we use for lease classification are (i) review to determine if the lease transfers ownership of the underlying asset to the lessee by the end of the lease term, ii) review to determine if the lease grants the lessee a purchase option that the lessee is reasonably certain to exercise, (iii) determine if the lease term is for a major part of the remaining economic life of the underlying asset and (iv) determine if the present value of the sum of the lease payments and any residual value guarantees equals or exceeds substantially all of the fair value of the underlying asset. We do not lease equipment of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.

The Company elected a lessor accounting policy to exclude from revenue and expenses sales taxes and other similar taxes assessed by a governmental authority on lease revenue-producing transactions and collected by the lessor from a lessee.

Operating Leases - Assets leased under an operating lease are carried at cost less accumulated depreciation. These assets are depreciated to their estimated residual value using the straight-line method over the lesser of the lease term or estimated useful life of the asset. Assets received at the end of the lease, which are intended to be sold, are marked to the lower of cost or fair value less selling costs with the adjustment recorded in other noninterest income.

At the inception of each operating lease, we record a residual value for the leased equipment based on our estimate of the future value of the equipment at the end of the lease term or end of the equipment’s estimated useful life as indicated by industry data. Operating leases have higher risk because a smaller percentage of the equipment's value is covered by contractual cash flows over the term of the lease. If the market value of leased equipment under operating leases decreases at a rate greater than we projected, whether due to rapid technological or economic obsolescence, unusual wear and tear on the equipment, excessive use of the equipment, recession or other adverse economic conditions, or other factors, it could adversely affect the current values or the residual values of such equipment. The Company seeks to mitigate these risks by maintaining a relatively young fleet of leased assets with wide operator bases, which can facilitate attractive lease and utilization rates. The Company manages and evaluates residual values by performing periodic reviews of estimated residual values and monitoring levels of residual realizations. A change in estimated operating lease residual values would result in a change in future depreciation expense. Any impairments are recognized at the time a change is identified.

Rental revenue on operating leases is recognized on a straight-line basis over the lease term and is included in other noninterest income.

Finance Leases - The Company’s finance leases are classified as direct financing leases under ASC 842. The Company’s finance lease activity primarily relates to leasing of new equipment with the equipment purchase price equal to fair value and therefore there is no selling profit or loss at lease commencement. When there is no selling profit or loss, initial direct costs are deferred at the commencement date and included in the measurement of the net investment in the lease.

A lease receivable is recorded for finance leases at present value discounted using the rate implicit in the lease. The lease receivable includes lease payments not yet paid and the guarantee of the residual value by the lessee or unrelated third party, as applicable. Interest income is recognized over the lease term at a constant periodic discount rate on the remaining balance of the lease net investment using the rate implicit in the lease. After the commencement date, lease payments collected are applied to reduce net investment and recognize interest income.

The recognition of interest income is suspended, and an account is placed on non-accrual status when, in the opinion of management, full collection of all principal and interest due is doubtful. All future interest income accruals, as well as amortization of deferred fees, costs, and purchase premiums or discounts are suspended. Subsequent lease payments received are applied to the outstanding net investment balance until such time as the account is collected, charged-off or returned to accrual status. Finance leases that are nonaccrual do not accrue interest income; however, payments designated by the borrower as interest payments may be recorded as interest income. To qualify for this treatment, the remaining recorded investment in the lease must be deemed fully collectible.

The recognition of interest income on finance leases is suspended, and all previously accrued but uncollected revenue is reversed, when lease payments are contractually delinquent for 90 days or more. Accounts, including accounts that have been modified, are returned to accrual status

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

when, in the opinion of management, collection of remaining lease receivables are reasonably assured, and there is a sustained period of repayment performance, generally for a minimum of six months.

Certain finance leases also have residual values at the inception of the lease which are based on our estimate of the future value of the equipment at the end of the lease term or end of the equipment’s estimated useful life as indicated by industry data. Finance leases bear the least risk because contractual payments usually cover approximately 90% of the equipment's cost at the inception of the lease. A change in estimated finance lease residual values during the lease term may impact the loss allowance as a decrease in the residual value may cause an impairment to be recorded on the finance lease.

Lessor Accounting Prior to Adoption of Topic 842

Lessor accounting was not fundamentally changed by Topic 842 and remains similar to the prior accounting model, with updates to align with certain changes to the lessee model (e.g., certain definitions, such as initial direct costs, have been updated) and the new revenue recognition standard. The new rules did not have a significant impact on our classification of leases as finance or operating. The new lease guidance has a narrower definition of initial direct costs that may be capitalized and allocated internal costs and professional fees to negotiate and arrange the lease agreement that would have been incurred regardless of lease execution no longer qualify as initial direct cost.


2.	Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The ASU significantly changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted for all entities beginning after December 15, 2018, including interim periods within those fiscal years. The Company has selected a third-party vendor to provide ongoing support under the new methodology. The Bank's project team is currently evaluating our current expected loss methodology of our loan and investment portfolios to identify the necessary modifications in accordance with this standard and expects a change in the processes and procedures to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. In addition, the Bank is also in the process of compiling historical data that will be used to calculate expected credit losses on its loan portfolio and intends to run parallel models during the latter part of fiscal year 2020 to ensure it is fully compliant with the ASU at the adoption date. A valuation adjustment to our allowance for loan losses or investment portfolio that is identified in this process will be reflected as a one-time adjustment in equity rather than earnings. Once adopted, the Company expects its allowance for loan losses to increase, however, until its evaluation is complete the magnitude of the increase will be unknown.

In August 2017, FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." This ASU improves the transparency and understandability of disclosures in the financial statements regarding the entities risk management activities and reduces the complexity of hedge accounting. The amendments in this ASU permit hedge accounting for hedging relationships involving nonfinancial risk and interest rate risk by removing certain limitations in cash flow and fair value hedging relationships. In addition, the ASU requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 and early adoption is permitted. The Company adopted this ASU on July 1, 2019. The adoption did not have a material effect on the Company's Consolidated Financial Statements.

In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement." The amendments in this ASU removes, modifies, and adds certain disclosure requirements related to fair value measurements in ASC 820. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019 and early adoption is permitted. The adoption of ASU No. 2018-13 is not expected to have a material impact on the Company's Consolidated Financial Statements.

In November 2018, the FASB issued ASU 2018-19, "Codification Improvements to Topic 326, Financial Instruments—Credit Losses." This update clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. The effective date and transition requirements for this ASU are the same as ASU 2016-13. The adoption of ASU No. 2018-19 is not expected to have a material impact on the Company's Consolidated Financial Statements.

In December 2018, the FASB issued ASU 2018-20, "Leases (Topic 842): Narrow-Scope Improvements for Lessors." The amendments in this update permit lessors, as an accounting policy election, to not evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs. Instead, those lessors will account for those costs as if they are lessee costs. A lessor making this election will exclude from the consideration in the contract and from variable payments not included in the consideration in the contract all collections from lessees of taxes within the scope of the election and will provide certain disclosures. For certain lessor costs, the lessor must exclude from variable payments, and therefore revenue, lessor costs paid by lessees directly to third parties from variable payments. In addition, the lessor must account for costs excluded from the consideration of a contract that are paid by the lessor and reimbursed by the lessee as variable payments. A lessor will record those reimbursed costs as revenue. The amendments in this ASU related to recognizing variable payments for contracts with lease and nonlease components require lessors to allocate (rather than recognize as currently required) certain variable payments to the lease and nonlease components when the changes in facts and circumstances on which the variable payment is based occur. After the allocation, the amount of variable payments allocated to the lease components will be recognized as income in profit or loss in accordance with Topic 842, while the

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

amount of variable payments allocated to nonlease components will be recognized in accordance with other Topics, such as Topic 606. The Company adopted this ASU on July 1, 2019. The adoption did not have a material effect on the Company's Consolidated Financial Statements.

In March 2019, the FASB issued ASU 2019-01, "Leases (Topic 842): Codification Improvements." The amendments in this update include the following items: i) determining the fair value of the underlying asset by lessors that are not manufacturers or dealers; ii) requiring cash received from lessors from sales-type and direct financing leases to be presented in the cash flow statement within investing activities; and iii) clarifying interim disclosure requirements. The Company adopted this ASU on July 1, 2019. The adoption did not have a material effect on the Company's Consolidated Financial Statements.

In April 2019, the FASB issued ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments." The amendments in this update are part of the FASB's ongoing project to improve codification and correcting unintended application. The items within this ASU are not expected to have a significant effect on current accounting practice. The effective date and transition requirements for the amendments to Financial Instruments (ASU 2016-01) are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019 and early adoption is permitted. The effective date and transition requirements for the amendments to Financial Instruments-Credit Losses (ASU 2016-13) are the same as ASU 2016-13 noted above. The effective date and transition requirements for the amendments to Derivatives and Hedging (ASU 2017-12) are the same as ASU 2017-12 noted above.The adoption of ASU No. 2019-04 is not expected to have a material impact on the Company's Consolidated Financial Statements.

In May 2019, the FASB issued ASU 2019-05, "Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief." The amendments in this update allow companies to irrevocably elect, upon the adoption of ASU 2016-13, the fair value option for financial instruments that i) were previously recorded at amortized cost and ii) are within the scope of the credit losses guidance in ASC 326-20, iii) are eligible for the fair value option under ASC 825-10, and iv) are not held-to-maturity debt securities. The effective date and transition requirements for this ASU is the same as ASU 2016-13. The adoption of ASU No. 2019-05 is not expected to have a material impact on the Company's Consolidated Financial Statements.

In July 2019, the FASB issued ASU 2019-07, "Codification Updates to SEC Sections." This ASU amends certain paragraphs in the ASC to reflect the issuance of SEC final rules on Disclosure Update and Simplification and Investment Company Reporting Modernization and other miscellaneous updates. The amendments became effective upon issuance. The adoption did not have a material effect on the Company's Consolidated Financial Statements.

In November 2019, the FASB issued ASU 2019-11, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses." This ASU clarifies certain aspects of the amendments in ASU 2016-13 and is part of the FASB's ongoing project to improve codification and correcting unintended application. The items within this ASU are not expected to have a significant effect on current accounting practice. The effective date and transition requirements for this ASU is the same as ASU 2016-13. The adoption of ASU No. 2019-11 is not expected to have a material impact on the Company's Consolidated Financial Statements.

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 326): Simplifying the Accounting for Income Taxes." This ASU is part of the FASB's simplification initiative to reduce complexity in accounting standards. The items within this ASU are not expected to have a significant effect on current accounting practice. The effective date and transition requirements for the first and second items of this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2020 and early adoption is permitted. The adoption of ASU No. 2019-12 is not expected to have a material impact on the Company's Consolidated Financial Statements.

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)


3.	Debt Securities

Securities available for sale consist of the following at the dates indicated:



	December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Government Agencies	$	8,126	$	142	$	—		$	8,268
Residential MBS of U.S. Government Agencies and GSEs	54,163		565		(157		)	54,571
Municipal Bonds	22,750		416		(2		)	23,164
Corporate Bonds	60,007		53		(41		)	60,019
Total	$	145,046	$	1,176	$	(200	)	$	146,022



	June 30, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Government Agencies	$	15,099	$	122	$	(11	)	$	15,210
Residential MBS of U.S. Government Agencies and GSEs	74,778		586		(184		)	75,180
Municipal Bonds	24,896		423		(7		)	25,312
Corporate Bonds	6,061		43		(20		)	6,084
Total	$	120,834	$	1,174	$	(222	)	$	121,786

Debt securities available for sale by contractual maturity at December 31, 2019 are shown below. MBS are not included in the maturity categories because the borrowers in the underlying pools may prepay without penalty; therefore, it is unlikely that the securities will pay at their stated maturity schedule.



	December 31, 2019
	Amortized Cost		Estimated Fair Value
Due within one year	$	33,965	$	33,983
Due after one year through five years	48,933		49,214
Due after five years through ten years	5,895		6,155
Due after ten years	2,090		2,099
Mortgage-backed securities	54,163		54,571
Total	$	145,046	$	146,022

The Company had no sales of securities available for sale during the three and six months ended December 31, 2019 and 2018. There were no gross realized gains or losses for the three and six months ended December 31, 2019 and 2018.

Securities available for sale with costs totaling $85,057 and $94,337 and market values of $85,686 and $94,876 at December 31, 2019 and June 30, 2019, respectively, were pledged as collateral to secure various public deposits and other borrowings.

The gross unrealized losses and the fair value for securities available for sale aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2019 and June 30, 2019 were as follows:



	December 31, 2019
	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Residential MBS of U.S. Government Agencies and GSEs	$	7,954	$	(63	)	$	9,458	$	(94	)	$	17,412	$	(157	)
Municipal Bonds	1,867		(2		)	—		—			1,867		(2		)
Corporate Bonds	40,997		(41		)	—		—			40,997		(41		)
Total	$	50,818	$	(106	)	$	9,458	$	(94	)	$	60,276	$	(200	)

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)



	June 30, 2019
	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Government Agencies	$	—	$	—		$	6,988	$	(11	)	$	6,988	$	(11	)
Residential MBS of U.S. Government Agencies and GSEs	1,144		(3		)	24,242		(181		)	25,386		(184		)
Municipal Bonds	—		—			4,895		(7		)	4,895		(7		)
Corporate Bonds	393		(5		)	3,630		(15		)	4,023		(20		)
Total	$	1,537	$	(8	)	$	39,755	$	(214	)	$	41,292	$	(222	)

The total number of securities with unrealized losses at December 31, 2019, and June 30, 2019 were 72 and 100, respectively. Unrealized losses on securities have not been recognized in income because management has the intent and ability to hold the securities for the foreseeable future, and has determined that it is not more likely than not that the Company will be required to sell the securities prior to a recovery in value. The decline in fair value was largely due to increases in market interest rates subsequent to the purchase dates of the securities. The Company had no other-than-temporary impairment losses during the six months ended December 31, 2019.


4.	Other Investments

Other investments, at cost consist of the following at the dates indicated:



	December 31, 2019		June 30, 2019
FHLB of Atlanta stock	$	21,556	$	31,969
FRB stock	7,353		7,335
SBIC investments	7,989		6,074
Total	$	36,898	$	45,378

As a requirement for membership, the Bank invests in the stock of both the FHLB of Atlanta and the FRB. No ready market exists for these securities so carrying value approximates their fair value based on the redemption provisions of the FHLB of Atlanta and the FRB, respectively. SBIC investments are equity securities without a readily determinable fair value.

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)


5.	Loans

Loans consist of the following at the dates indicated:



	December 31, 2019			June 30, 2019
Retail consumer loans:
One-to-four family	$	417,255		$	660,591
HELOCs - originated	142,989			139,435
HELOCs - purchased	92,423			116,972
Construction and land/lots	71,901			80,602
Indirect auto finance	142,533			153,448
Consumer	11,102			11,416
Total retail consumer loans	878,203			1,162,464
Commercial loans:
Commercial real estate	998,019			927,261
Construction and development	223,839			210,916
Commercial and industrial	152,727			160,471
Equipment finance	185,427			132,058
Municipal finance	115,240			112,016
Total commercial loans	1,675,252			1,542,722
Total loans	2,553,455			2,705,186
Deferred loan costs, net	1,086			4
Total loans, net of deferred loan costs	2,554,541			2,705,190
Allowance for loan losses	(22,031		)	(21,429		)
Loans, net	$	2,532,510		$	2,683,761

All qualifying one-to-four family first mortgage loans, HELOCs, commercial real estate loans, and FHLB Stock are pledged as collateral by a blanket pledge to secure any outstanding FHLB advances.

The Company's total non-purchased and purchased performing loans by segment, class, and risk grade at the dates indicated follows:



	Pass		Special Mention		Substandard		Doubtful		Loss		Total
December 31, 2019
Retail consumer loans:
One-to-four family	$	402,896	$	2,016	$	7,046	$	264	$	13	$	412,235
HELOCs - originated	140,565		776		1,417		—		7		142,765
HELOCs - purchased	91,949		—		474		—		—		92,423
Construction and land/lots	71,401		8		156		—		—		71,565
Indirect auto finance	141,431		—		1,102		—		—		142,533
Consumer	11,025		—		70		3		4		11,102
Commercial loans:
Commercial real estate	972,258		6,971		12,720		—		—		991,949
Construction and development	219,918		3,040		255		1		—		223,214
Commercial and industrial	147,757		621		2,788		—		16		151,182
Equipment finance	184,384		—		1,043		—		—		185,427
Municipal finance	114,957		283		—		—		—		115,240
Total loans	$	2,498,541	$	13,715	$	27,071	$	268	$	40	$	2,539,635

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)



	Pass		Special Mention		Substandard		Doubtful		Loss		Total
June 30, 2019
Retail consumer loans:
One-to-four family	$	644,159	$	2,089	$	8,072	$	384	$	19	$	654,723
HELOCs - originated	137,001		766		1,434		—		9		139,210
HELOCs - purchased	116,306		—		666		—		—		116,972
Construction and land/lots	79,995		71		164		—		—		80,230
Indirect auto finance	152,393		13		1,042		—		—		153,448
Consumer	11,375		1		33		3		4		11,416
Commercial loans:
Commercial real estate	901,183		8,066		10,306		—		—		919,555
Construction and development	207,827		790		1,357		1		—		209,975
Commercial and industrial	157,325		877		600		—		—		158,802
Equipment finance	131,674		—		384		—		—		132,058
Municipal finance	111,721		295		—		—		—		112,016
Total loans	$	2,650,959	$	12,968	$	24,058	$	388	$	32	$	2,688,405

The Company's total purchased credit impaired ("PCI") loans by segment, class, and risk grade at the dates indicated follows:



	Pass		Special Mention		Substandard		Doubtful		Loss		Total
December 31, 2019
Retail consumer loans:
One-to-four family	$	3,515	$	487	$	1,018	$	—	$	—	$	5,020
HELOCs - originated	224		—		—		—		—		224
Construction and land/lots	110		—		226		—		—		336
Commercial loans:
Commercial real estate	3,231		1,860		979		—		—		6,070
Construction and development	283		—		342		—		—		625
Commercial and industrial	1,542		—		—		—		3		1,545
Total loans	$	8,905	$	2,347	$	2,565	$	—	$	3	$	13,820



	Pass		Special Mention		Substandard		Doubtful		Loss		Total
June 30, 2019
Retail consumer loans:
One-to-four family	$	4,124	$	248	$	1,496	$	—	$	—	$	5,868
HELOCs - originated	225		—		—		—		—		225
Construction and land/lots	142		—		230		—		—		372
Commercial loans:
Commercial real estate	4,503		1,903		1,300		—		—		7,706
Construction and development	453		—		488		—		—		941
Commercial and industrial	1,666		—		—		—		3		1,669
Total loans	$	11,113	$	2,151	$	3,514	$	—	$	3	$	16,781

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

The Company's total loans by segment, class, and delinquency status at the dates indicated follows:



	Past Due								Total
	30-89 Days		90 Days+		Total		Current		Loans
December 31, 2019
Retail consumer loans:
One-to-four family	$	3,575	$	1,676	$	5,251	$	412,004	$	417,255
HELOCs - originated	260		260		520		142,469		142,989
HELOCs - purchased	47		298		345		92,078		92,423
Construction and land/lots	9		260		269		71,632		71,901
Indirect auto finance	520		155		675		141,858		142,533
Consumer	14		17		31		11,071		11,102
Commercial loans:
Commercial real estate	285		1,237		1,522		996,497		998,019
Construction and development	—		148		148		223,691		223,839
Commercial and industrial	80		30		110		152,617		152,727
Equipment finance	1,620		1,043		2,663		182,764		185,427
Municipal finance	—		—		—		115,240		115,240
Total loans	$	6,410	$	5,124	$	11,534	$	2,541,921	$	2,553,455



	Past Due								Total
	30-89 Days		90 Days+		Total		Current		Loans
June 30, 2019
Retail consumer loans:
One-to-four family	$	1,615	$	1,389	$	3,004	$	657,587	$	660,591
HELOCs - originated	226		231		457		138,978		139,435
HELOCs - purchased	—		485		485		116,487		116,972
Construction and land/lots	138		6		144		80,458		80,602
Indirect auto finance	459		237		696		152,752		153,448
Consumer	6		8		14		11,402		11,416
Commercial loans:
Commercial real estate	2,279		516		2,795		924,466		927,261
Construction and development	—		1,133		1,133		209,783		210,916
Commercial and industrial	207		99		306		160,165		160,471
Equipment finance	649		384		1,033		131,025		132,058
Municipal finance	—		—		—		112,016		112,016
Total loans	$	5,579	$	4,488	$	10,067	$	2,695,119	$	2,705,186

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

The Company's recorded investment in loans, by segment and class, that are not accruing interest or are 90 days or more past due and still accruing interest at the dates indicated follows:



	December 31, 2019				June 30, 2019
	Nonaccruing		90 Days + & still accruing		Nonaccruing		90 Days + & still accruing
Retail consumer loans:
One-to-four family	$	3,534	$	—	$	3,223	$	—
HELOCs - originated	389		—		372		—
HELOCs - purchased	474		—		666		—
Construction and land/lots	43		—		6		—
Indirect auto finance	497		—		463		—
Consumer	36		—		21		—
Commercial loans:
Commercial real estate	7,690		—		3,559		—
Construction and development	256		—		1,357		—
Commercial and industrial	299		—		307		—
Equipment finance	1,043		—		384		—
Total loans	$	14,261	$	—	$	10,358	$	—

PCI loans totaling $1,214 at December 31, 2019 and $1,344 at June 30, 2019 are excluded from nonaccruing loans due to the accretion of discounts established in accordance with the acquisition method of accounting for business combinations.

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 lower interest rate, a reduction in principal, or a longer term to maturity. Additionally, all TDRs are considered impaired. The Company had no commitments to lend additional funds on these TDR loans at December 31, 2019.

The Company's loans that were performing under the payment terms of TDRs that were excluded from nonaccruing loans above at the dates indicated follows:



	December 31, 2019		June 30, 2019
Performing TDRs included in impaired loans	$	15,208	$	23,116

An analysis of the allowance for loan losses by segment for the periods shown is as follows:



	Three Months Ended December 31, 2019												Three Months Ended December 31, 2018
	PCI			Retail Consumer			Commercial			Total			PCI			Retail Consumer			Commercial			Total
Balance at beginning of period	$	194		$	5,728		$	15,392		$	21,314		$	295		$	7,252		$	13,385		$	20,932
Provision for (recovery of) loan losses	(42		)	(1,043		)	1,485			400			(96		)	(341		)	437			—
Charge-offs	—			(96		)	(599		)	(695		)	—			(177		)	(78		)	(255		)
Recoveries	—			811			201			1,012			—			502			240			742
Balance at end of period	$	152		$	5,400		$	16,479		$	22,031		$	199		$	7,236		$	13,984		$	21,419



	Six Months Ended December 31, 2019												Six Months Ended December 31, 2018
	PCI			Retail Consumer			Commercial			Total			PCI			Retail Consumer			Commercial			Total
Balance at beginning of period	$	201		$	6,419		$	14,809		$	21,429		$	483		$	7,527		$	13,050		$	21,060
Provision for (recovery of) loan losses	(49		)	(1,599		)	2,048			400			(284		)	(406		)	690			—
Charge-offs	—			(383		)	(742		)	(1,125		)	—			(592		)	(81		)	(673		)
Recoveries	—			963			364			1,327			—			707			325			1,032
Balance at end of period	$	152		$	5,400		$	16,479		$	22,031		$	199		$	7,236		$	13,984		$	21,419

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

The Company's ending balances of loans and the related allowance, by segment and class, at the dates indicated follows:



	Allowance for Loan Losses								Total Loans Receivable
	PCI		Loans individually evaluated for impairment		Loans collectively evaluated		Total		PCI		Loans individually evaluated for impairment		Loans collectively evaluated		Total
December 31, 2019
Retail consumer loans:
One-to-four family	$	18	$	66	$	1,557	$	1,641	$	5,020	$	4,036	$	408,199	$	417,255
HELOCs - originated	—		7		1,158		1,165		224		7		142,758		142,989
HELOCs - purchased	—		—		411		411		—		—		92,423		92,423
Construction and land/lots	—		—		1,142		1,142		336		309		71,256		71,901
Indirect auto finance	—		—		927		927		—		11		142,522		142,533
Consumer	—		4		128		132		—		4		11,098		11,102
Commercial loans:
Commercial real estate	113		743		8,311		9,167		6,070		7,111		984,838		998,019
Construction and development	4		5		3,443		3,452		625		322		222,892		223,839
Commercial and industrial	17		16		1,693		1,726		1,545		43		151,139		152,727
Equipment finance	—		67		1,753		1,820		—		1,013		184,414		185,427
Municipal finance	—		—		448		448		—		—		115,240		115,240
Total	$	152	$	908	$	20,971	$	22,031	$	13,820	$	12,856	$	2,526,779	$	2,553,455
June 30, 2019
Retail consumer loans:
One-to-four family	$	62	$	74	$	2,375	$	2,511	$	5,868	$	5,318	$	649,405	$	660,591
HELOCs - originated	—		7		1,060		1,067		225		7		139,203		139,435
HELOCs - purchased	—		—		518		518		—		—		116,972		116,972
Construction and land/lots	—		—		1,265		1,265		372		323		79,907		80,602
Indirect auto finance	—		—		927		927		—		—		153,448		153,448
Consumer	—		4		189		193		—		4		11,412		11,416
Commercial loans:
Commercial real estate	118		28		7,890		8,036		7,706		8,692		910,863		927,261
Construction and development	4		5		3,187		3,196		941		1,397		208,578		210,916
Commercial and industrial	17		2		1,957		1,976		1,669		2		158,800		160,471
Equipment finance	—		—		1,305		1,305		—		—		132,058		132,058
Municipal finance	—		—		435		435		—		—		112,016		112,016
Total	$	201	$	120	$	21,108	$	21,429	$	16,781	$	15,743	$	2,672,662	$	2,705,186

Loans acquired through acquisitions are initially excluded from the allowance for loan losses in accordance with the acquisition method of accounting for business combinations. The Company records these loans at fair value, which includes a credit discount, therefore, no allowance for loan losses is established for these acquired loans at acquisition. A provision for loan losses is recorded for any further deterioration in these acquired loans subsequent to the acquisition.

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

The Company's impaired loans and the related allowance, by segment and class, excluding PCI loans, at the dates indicated follows:



	Total Impaired Loans
	Unpaid Principal Balance		Recorded Investment With a Recorded Allowance		Recorded Investment With No Recorded Allowance		Total		Related Recorded Allowance
December 31, 2019
Retail consumer loans:
One-to-four family	$	15,469	$	11,533	$	1,956	$	13,489	$	442
HELOCs - originated	2,378		1,579		182		1,761		43
HELOCs - purchased	475		475		—		475		2
Construction and land/lots	1,696		814		309		1,123		26
Indirect auto finance	749		356		203		559		3
Consumer	372		20		41		61		6
Commercial loans:
Commercial real estate	8,424		6,084		1,855		7,939		754
Construction and development	1,617		643		80		723		8
Commercial and industrial	9,783		284		855		1,139		19
Equipment finance	1,467		405		638		1,043		67
Total impaired loans	$	42,430	$	22,193	$	6,119	$	28,312	$	1,370
June 30, 2019
Retail consumer loans:
One-to-four family	$	18,302	$	12,461	$	3,152	$	15,613	$	472
HELOCs - originated	2,410		564		1,219		1,783		46
HELOCs - purchased	666		—		666		666		—
Construction and land/lots	1,917		957		323		1,280		26
Indirect auto finance	601		353		137		490		2
Consumer	379		7		41		48		6
Commercial loans:
Commercial real estate	10,127		6,434		3,404		9,838		36
Construction and development	2,574		940		791		1,731		7
Commercial and industrial	10,173		354		768		1,122		6
Equipment finance	462		—		384		384		—
Total impaired loans	$	47,611	$	22,070	$	10,885	$	32,955	$	601

The table above includes $15,456 and $17,212, of impaired loans that were not individually evaluated at December 31, 2019 and June 30, 2019, respectively, because these loans did not meet the Company's threshold for individual impairment evaluation. The recorded allowance above includes $462 and $481 related to these loans that were not individually evaluated at December 31, 2019 and June 30, 2019, respectively.

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

The Company's average recorded investment in impaired loans and interest income recognized on impaired loans for the three and six months ended December 31, 2019 and 2018 follows:



	Three Months Ended
	December 31, 2019				December 31, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Retail consumer loans:
One-to-four family	$	14,276	$	192	$	17,856	$	175
HELOCs - originated	1,862		26		924		13
HELOC - purchased	476		3		186		3
Construction and land/lots	1,117		20		1,525		21
Indirect auto finance	483		6		335		2
Consumer	53		3		1,618		16
Commercial loans:
Commercial real estate	8,665		76		4,257		34
Construction and development	1,181		11		1,766		15
Commercial and industrial	742		14		196		8
Equipment finance	$	1,032	—		$	—	$	—
Total loans	$	29,887	$	351	$	28,663	$	287



	Six Months Ended
	December 31, 2019				December 31, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Retail consumer loans:
One-to-four family	$	15,085	$	378	$	18,568	$	467
HELOCs - originated	1,700		53		1,121		35
HELOCs - purchased	540		6		186		7
Construction and land/lots	1,201		44		1,559		55
Indirect auto finance	467		15		331		6
Consumer	288		6		1,212		45
Commercial loans:
Commercial real estate	8,419		144		4,506		121
Construction and development	1,527		26		1,853		31
Commercial and industrial	710		90		208		25
Equipment finance	643		3		—		—
Total loans	$	30,580	$	765	$	29,544	$	792

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

A summary of changes in the accretable yield for PCI loans for the three and six months ended December 31, 2019 and 2018 follows:



	Three Months Ended
	December 31, 2019			December 31, 2018
Accretable yield, beginning of period	$	4,916		$	5,452
Reclass from nonaccretable yield ⁽¹⁾	135			414
Other changes, net ⁽²⁾	(295		)	198
Interest income	(401		)	(832		)
Accretable yield, end of period	$	4,355		$	5,232



	Six Months Ended
	December 31, 2019			December 31, 2018
Accretable yield, beginning of period	$	5,259		$	5,734
Reclass from nonaccretable yield ⁽¹⁾	250			424
Other changes, net ⁽²⁾	(309		)	335
Interest income	(845		)	(1,261		)
Accretable yield, end of period	$	4,355		$	5,232

______________________________________


(1)	Represents changes attributable to expected loss assumptions.


(2)	Represents changes in cash flows expected to be collected due to the impact of modifications, changes in prepayment assumptions, and changes in interest rates.

For the three and six months ended December 31, 2019 and 2018, the following tables present a breakdown of the types of concessions made on TDRs by loan class:



	Three Months Ended December 31, 2019					Three Months Ended December 31, 2018
	Number of Loans	Pre Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment		Number of Loans	Pre Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment
Below market interest rate:
Retail consumer:
One-to-four family	—	$	—	$	—	1	$	85	$	85
Commercial:
Commercial real estate	1	88		88		—	—		—
Total	1	$	88	$	88	1	$	85	$	85
Extended payment terms:
Retail consumer:
One-to-four family	1	$	56	$	53	—	$	—	$	—
Commercial:
Commercial & Industrial	1	826		826		—	—		—
Total	2	$	882	$	879	—	$	—	$	—
Other TDRs:
Retail consumer:
One-to-four family	2	$	11	$	10	5	$	354	$	353
Consumer	—	—		—		1	85		85
Commercial:
Construction and development	1	182		79		—	—		—
Total	3	$	193	$	89	6	$	439	$	438
Total	6	$	1,163	$	1,056	7	$	524	$	523

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)



	Six Months Ended December 31, 2019					Six Months Ended December 31, 2018
	Number of Loans	Pre Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment		Number of Loans	Pre Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment
Below market interest rate:
Retail consumer:
One-to-four family	—	$	—	$	—	1	$	85	$	85
Commercial:
Commercial real estate	1	88		88		—	—		—
Total	1	$	88	$	88	1	$	85	$	85
Extended payment terms:
Retail consumer:
One-to-four family	2	$	70	$	67	—	$	—	$	—
Commercial:
Commercial and industrial	1	826		826		—	—		—
Total	3	$	896	$	893	—	$	—	$	—
Other TDRs:
Retail consumer:
One-to-four family	3	$	45	$	43	9	$	598	$	593
Indirect auto finance	4	68		61		1	33		30
Consumer	—	—		—		2	87		87
Commercial:
Construction and development	1	182		79		—	—		—
Total	8	$	295	$	183	12	$	718	$	710
Total	12	$	1,279	$	1,164	13	$	803	$	795

Other TDRs include TDRs that have a below market interest rate and extended payment terms. The Company does not typically forgive principal when restructuring troubled debt.

The following tables present loans that were modified as TDRs within the previous 12 months and for which there was a payment default during the three and six months ended December 31, 2019 and 2018:



	Three Months Ended December 31, 2019			Three Months Ended December 31, 2018
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
Other TDRs:
Retail consumer:
One-to-four family	—	$	—	2	$	165
Consumer	—	—		1	2
Total	—	$	—	3	$	167
Total	—	$	—	3	$	167



	Six Months Ended December 31, 2019			Six Months Ended December 31, 2018
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
Other TDRs:
Retail consumer:
One-to-four family	2	$	50	2	$	165
Consumer	—	—		1	2
Total	2	$	50	3	$	167
Total	2	$	50	3	$	167

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

In the determination of the allowance for loan losses, management considers TDRs for all loan classes, and the subsequent nonperformance in accordance with their modified terms, by measuring impairment on a loan-by-loan basis based on either the value of the loan's expected future cash flows discounted at the loan's original effective interest rate or on the collateral value, net of the estimated costs of disposal, if the loan is collateral dependent.


6.	Real Estate Owned

The activity within REO for the periods shown is as follows:



	Three Months Ended December 31,						Six Months Ended December 31,
	2019			2018			2019			2018
Balance at beginning of period	$	2,582		$	3,286		$	2,929		$	3,684
Transfers from loans	—			22			46			96
Sales, net of gain or loss	(965		)	(230		)	(1,346		)	(574		)
Writedowns	(166		)	(123		)	(178		)	(251		)
Balance at end of period	$	1,451		$	2,955		$	1,451		$	2,955

At December 31, 2019 and June 30, 2019, the Bank had $581 and $1,018 respectively, of foreclosed residential real estate property in REO. The recorded investment in consumer mortgage loans collateralized by residential real estate in the process of foreclosure totaled $147 and $243 at December 31, 2019 and June 30, 2019, respectively.


7.	Net Income per Share

The following is a reconciliation of the numerator and denominator of basic and diluted net income per share of common stock as of the dates indicated:



	Three Months Ended December 31,						Six Months Ended December 31,
	2019			2018			2019			2018
Numerator:
Net income	$	9,191		$	8,041		$	17,995		$	15,831
Allocation of earnings to participating securities	(72		)	(57		)	(140		)	(112		)
Numerator for basic EPS - Net income available to common stockholders	$	9,119		$	7,984		$	17,855		$	15,719
Effect of dilutive securities:
Dilutive effect to participating securities	8			2			5			4
Numerator for diluted EPS	$	9,127		$	7,986		$	17,860		$	15,723
Denominator:
Weighted-average common shares outstanding - basic	16,906,457			17,797,553			17,002,052			17,961,465
Effect of dilutive shares	661,223			699,781			658,635			728,119
Weighted-average common shares outstanding - diluted	17,567,680			18,497,334			17,660,687			18,689,584
Net income per share - basic	$	0.54		$	0.45		$	1.05		$	0.88
Net income per share - diluted	$	0.52		$	0.43		$	1.01		$	0.84

Potential dilutive shares are excluded from the computation of earnings per share if their effect is anti-dilutive. There were 459,400 and 470,800 stock options that were anti-dilutive for the three and six months ended December 31, 2019, respectively. There were 420,300 stock options that were anti-dilutive for the three and six months ended December 31, 2018.


8.	Equity Incentive Plan

The Company provides stock-based awards through the 2013 Omnibus Incentive Plan, which provides for awards of restricted stock, restricted stock units, stock options, stock appreciation rights and cash awards to directors, directors emeritus, officers, employees and advisory directors. The cost of equity-based awards under the 2013 Omnibus Incentive Plan generally is based on the fair value of the awards on their grant date. The maximum number of shares that may be utilized for awards under the plan is 2,962,400, including 2,116,000 for stock options and stock appreciation rights and 846,400 for awards of restricted stock and restricted stock units.

Shares of common stock issued under the 2013 Omnibus Incentive Plan may be authorized but unissued shares or, in the case of restricted stock awards, may be repurchased shares.

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

The table below presents share-based compensation expense and the estimated related tax benefit for stock options and restricted stock for the three and six months ended December 31, 2019 and 2018, respectively:



	Three Months Ended December 31,				Six Months Ended December 31,
	2019		2018		2019		2018
Share-based compensation expense	$	440	$	372	$	883	$	756
Tax benefit	$	103	$	78	$	208	$	192

The table below presents stock option activity for the six months ended December 31, 2019 and 2018:



	Options	Weighted- average exercise price		Remaining contractual life (years)	Aggregate Intrinsic Value
Options outstanding at June 30, 2018	1,718,270	$	17.29	5.9	$	18,664
Exercised	42,200	14.42		—	—
Forfeited	4,700	17.11		—	—
Options outstanding at December 31, 2018	1,671,370	$	17.37	5.4	$	14,732
Exercisable at December 31, 2018	1,185,270	$	14.51	4.2	$	13,832
Non-vested at December 31, 2018	486,100	$	24.33	8.5	$	900

Options outstanding at June 30, 2019	1,657,214	$	17.59	5.0	$	12,909
Granted	25,000	25.37		—	—
Exercised	66,900	14.40		—	—
Forfeited	800	17.35		—	—
Options outstanding at December 31, 2019	1,614,514	$	17.84	4.7	$	14,538
Exercisable at December 31, 2019	1,212,714	$	15.45	3.5	$	13,805
Non-vested at December 31, 2019	401,800	$	25.07	7.9	$	733

Assumptions used in estimating the fair value of options granted during the six months ended December 31, 2019 and 2018 are presented below:



	December 31,			December 31,
	2019			2018
Weighted-average volatility	17.84		%	—		%
Expected dividend yield	0.95		%	—		%
Risk-free interest rate	1.55		%	—		%
Expected life (years)	6.5			—
Weighted-average fair value of options granted	$	4.67		$	—

At December 31, 2019, the Company had $1,854 of unrecognized compensation expense related to 401,800 stock options originally scheduled to vest over five- and seven-year vesting periods. The weighted average period over which compensation cost related to non-vested awards expected to be recognized was 1.4 years at December 31, 2019. At December 31, 2018, the Company had $2,385 of unrecognized compensation expense related to 486,100 stock options originally scheduled to vest over five- and seven-year vesting periods. The weighted average period over which compensation cost related to non-vested awards expected to be recognized was 1.8 years at December 31, 2018.

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

The table below presents restricted stock award activity for the six months ended December 31, 2019 and 2018:



	Restricted stock awards	Weighted- average grant date fair value		Aggregate Intrinsic Value
Non-vested at June 30, 2018	133,410	$	22.85	$	3,755
Vested	2,800	16.27		—
Forfeited	2,700	16.13		—
Non-vested at December 31, 2018	127,910	$	23.14	$	3,349

Non-vested at June 30, 2019	123,800	$	24.65	$	3,322
Granted	13,000	25.37		—
Vested	400	19.02		—
Forfeited	3,200	20.62		—
Non-vested at December 31, 2019	133,200	$	24.83	$	3,574

The table above includes performance-based restrictive stock units totaling 10,375 which were granted during the year ended June 30, 2019. These stock units are scheduled to vest over 3.0 years assuming certain performance metrics are met.

At December 31, 2019, unrecognized compensation expense was $2,325 related to 133,200 shares of restricted stock originally scheduled to vest over three-, five- and seven-year vesting periods. The weighted average period over which compensation cost related to non-vested awards is expected to be recognized was 1.5 years at December 31, 2019. At December 31, 2018, unrecognized compensation expense was $2,129 related to 127,910 shares of restricted stock originally scheduled to vest over five- and seven-year vesting periods. The weighted average period over which compensation cost related to non-vested awards is expected to be recognized was 1.6 years at December 31, 2018.


9.	Commitments and Contingencies

Loan Commitments – Legally binding commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. In the normal course of business, there are various outstanding commitments to extend credit that are not reflected in the consolidated financial statements. At December 31, 2019 and June 30, 2019, respectively, loan commitments (excluding $164,770 and $181,477 of undisbursed portions of construction loans) totaled $75,665 and $93,432 of which $17,053 and $34,631 were variable rate commitments and $58,612 and $58,801 were fixed rate commitments. The fixed rate loans had interest rates ranging from 1.69% to 9.11% at December 31, 2019 and 2.69% to 8.59% at June 30, 2019, and terms ranging from three to 30 years. Pre-approved but unused lines of credit (principally second mortgage home equity loans and overdraft protection loans) totaled $383,692 and $353,663 at December 31, 2019 and June 30, 2019, respectively. These amounts represent the Company's exposure to credit risk, and in the opinion of management have no more than the normal lending risk that the Company commits to its borrowers. The Company has two types of commitments related to certain one-to-four family loans held for sale: rate lock commitments and forward loan commitments. Rate lock commitments are commitments to extend credit to a customer that has an interest rate lock and are considered derivative instruments. The rate lock commitments do not qualify for hedge accounting. In order to mitigate the risk from interest rate fluctuations, we enter into forward loan sale commitments on a “best efforts” basis, which do not meet the definition of a derivative instrument. The fair value of these commitments was not material at December 31, 2019 or June 30, 2019.

The Company grants construction and permanent loans collateralized primarily by residential and commercial real estate to customers throughout its primary market areas. In addition, the Company grants equipment financing throughout the eastern United States and municipal financing to customers throughout North and South Carolina. The Company’s loan portfolio can be affected by the general economic conditions within these market areas. Management believes that the Company has no significant concentration of credit in the loan portfolio.

Restrictions on Cash – The Bank is required by regulation to maintain a varying cash reserve balance with the FRB. The daily average calculated cash reserve required as of December 31, 2019 and June 30, 2019 was $2,348, and $2,633, respectively, which was satisfied by vault cash and balances held at the FRB.

Guarantees – Standby letters of credit obligate the Company to meet certain financial obligations of its customers, if, under the contractual terms of the agreement, the customers are unable to do so. The financial standby letters of credit issued by the Company are irrevocable and payment is only guaranteed upon the borrower's failure to perform its obligations to the beneficiary. Total commitments under standby letters of credit as of December 31, 2019 and June 30, 2019 were $7,976 and $9,460, respectively. There was no liability recorded for these letters of credit at December 31, 2019 or June 30, 2019, respectively.

Litigation – From time to time, the Company is involved in litigation matters in the ordinary course of business. These proceedings and the associated legal claims are often contested, and the outcome of individual matters is not always predictable. These claims and counter claims typically arise during the course of collection efforts on problem loans or with respect to actions to enforce liens on properties in which the Company holds a security interest. The Company is not a party to any pending legal proceedings that management believes would have a material adverse effect on the Company’s financial condition or results of operations.

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)


10.	Fair Value of Financial Instruments

The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets. The fair value of financial instruments presented in this note are based on the same methodology as presented in Note 21 of the Notes to Consolidated Financial Statements contained in the Company’s 2019 Form 10-K.

Fair Value Hierarchy

The Company groups assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:


Level 1:	Valuation is based upon quoted prices for identical instruments traded in active markets.


Level 2:	Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.


Level 3:	Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Following is a description of valuation methodologies used for assets recorded at fair value. The Company does not have any liabilities recorded at fair value.

Investment Securities Available for Sale

Securities available for sale are valued on a recurring basis at quoted market prices where available. If quoted market prices are not available, fair values are based on quoted prices of comparable securities. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange or U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities and debentures issued by government sponsored enterprises, municipal bonds, and corporate debt securities. The Company has no Level 3 securities.

Impaired Loans

The Company does not record loans at fair value on a recurring basis. From time to time, however, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. The Company reviews all impaired loans each quarter to determine if an allowance is necessary. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.

Once a loan is identified as individually impaired, the fair value is estimated using one of two methods, which include collateral value and discounted cash flows. Loans are considered collateral dependent if repayment is expected solely from the collateral. For these collateral dependent impaired loans, the Company obtains updated appraisals at least annually. These appraisals are reviewed for appropriateness and then discounted for estimated closing costs to determine if an allowance is necessary. As part of the quarterly review of impaired loans, the Company reviews these appraisals to determine if any additional discounts to the fair value are necessary. If a current appraisal is not obtained, the Company determines whether a discount is needed to the value from the original appraisal based on the decline in value of similar properties with recent appraisals. For loans that are not collateral dependent, estimated fair value is based on the present value of expected future cash flows using the interest rate implicit in the original agreement. Impaired loans where a charge-off has occurred or an allowance is established during the period being reported require classification in the fair value hierarchy. The Company records such impaired loans as a nonrecurring Level 3 in the fair value hierarchy.

Loans Held for Sale

Loans held for sale are adjusted to lower of cost or fair value. Fair value is based on commitments on hand from investors or, if commitments have not yet been obtained, what investors are currently offering for loans with similar characteristics. The Company considers all loans held for sale carried at fair value as nonrecurring Level 3.

Real Estate Owned

REO is considered held for sale and is adjusted to fair value less estimated selling costs upon transfer of the loan to foreclosed assets. Fair value is based upon independent market prices, appraised value of the collateral or management's estimation of the value of the collateral. The Company considers all REO that has been charged off or received an allowance during the period as nonrecurring Level 3.

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

Financial Assets Recorded at Fair Value on a Recurring Basis

The following table presents financial assets measured at fair value on a recurring basis at the dates indicated:



	December 31, 2019
Description	Total		Level 1		Level 2		Level 3
U.S Government Agencies	$	8,268	$	—	$	8,268	$	—
Residential MBS of U.S. Government Agencies and GSEs	54,571		—		54,571		—
Municipal Bonds	23,164		—		23,164		—
Corporate Bonds	60,019		—		60,019		—
Total	$	146,022	$	—	$	146,022	$	—



	June 30, 2019
Description	Total		Level 1		Level 2		Level 3
U.S Government Agencies	$	15,210	$	—	$	15,210	$	—
Residential MBS of U.S. Government Agencies and GSEs	75,180		—		75,180		—
Municipal Bonds	25,312		—		25,312		—
Corporate Bonds	6,084		—		6,084		—
Total	$	121,786	$	—	$	121,786	$	—

There were no transfers between levels during the six months ended December 31, 2019.

The following table presents financial assets measured at fair value on a non-recurring basis at the dates indicated:



	December 31, 2019
Description	Total		Level 1		Level 2		Level 3
Impaired loans	$	6,623	$	—	$	—	$	6,623
REO	707		—		—		707
Total	$	7,330	$	—	$	—	$	7,330



	June 30, 2019
Description	Total		Level 1		Level 2		Level 3
Impaired loans	$	9,071	$	—	$	—	$	9,071
REO	1,804		—		—		1,804
Total	$	10,875	$	—	$	—	$	10,875

Quantitative information about Level 3 fair value measurements during the period ended December 31, 2019 is shown in the table below:



	Fair Value at December 31, 2019		Valuation Techniques	Unobservable Input	Range	Weighted Average
Nonrecurring measurements:
Impaired loans, net	$	6,623	Discounted appraisals and discounted cash flows	Collateral discounts and discount spread	0% - 28% 0% - 3%	19%
REO	$	707	Discounted appraisals	Collateral discounts	8% - 25%	11%

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

The stated carrying value and estimated fair value amounts of financial instruments as of December 31, 2019 and June 30, 2019, are summarized below:



	December 31, 2019
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and interest-bearing deposits	$	88,918	$	88,918	$	88,918	$	—	$	—
Commercial paper	253,794		253,794		253,794		—		—
Certificates of deposit in other banks	47,628		47,628		—		47,628		—
Securities available for sale	146,022		146,022		—		146,022		—
Loans, net	2,532,510		2,494,000		—		—		2,494,000
Loans held for sale	118,055		119,237		—		—		119,237
FHLB stock	21,556		21,556		21,556		—		—
FRB stock	7,353		7,353		7,353		—		—
SBIC investments	7,989		7,989		—		—		7,989
Accrued interest receivable	9,714		9,714		—		987		8,727
Liabilities:
Noninterest-bearing and NOW deposits	784,748		784,748		—		784,748		—
Money market accounts	815,949		815,949		—		815,949		—
Savings accounts	167,520		167,520		—		167,520		—
Certificates of deposit	789,552		791,101		—		791,101		—
Borrowings	435,000		443,019		—		443,019		—
Accrued interest payable	1,517		1,517		—		1,517		—



	June 30, 2019
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and interest-bearing deposits	$	71,043	$	71,043	$	71,043	$	—	$	—
Commercial paper	241,446		241,446		241,446		—		—
Certificates of deposit in other banks	52,005		52,005		—		52,005		—
Securities available for sale	121,786		121,786		—		121,786		—
Loans, net	2,683,761		2,604,827		—		—		2,604,827
Loans held for sale	18,175		18,591		—		—		18,591
FHLB stock	31,969		31,969		31,969		—		—
FRB stock	7,335		7,335		7,335		—		—
SBIC investments	6,074		6,074		—		—		6,074
Accrued interest receivable	10,533		10,533		350		750		9,433
Liabilities:
Noninterest-bearing and NOW deposits	746,617		746,617		—		746,617		—
Money market accounts	691,172		691,172		—		691,172		—
Savings accounts	177,278		177,278		—		177,278		—
Certificates of deposit	712,190		712,485		—		712,485		—
Borrowings	680,000		688,418		—		688,418		—
Accrued interest payable	2,252		2,252		—		2,252		—

The Company had off-balance sheet financial commitments, which included approximately $624,127 and $628,572 of commitments to originate loans, undisbursed portions of interim construction loans, and unused lines of credit at December 31, 2019 and June 30, 2019, respectively (see Note 9). Since these commitments are based on current rates, the carrying amount approximates the fair value.

Estimated fair values were determined using the following methods and assumptions:

Cash and interest-bearing deposits – The stated amounts approximate fair values as maturities are less than 90 days.

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

Commercial paper – The stated amounts approximate fair value due to the short-term nature of these investments.

Certificates of deposit in other banks – The stated amounts approximate fair values.

Securities available for sale – Fair values are based on quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Loans held for sale – The fair value of mortgage loans held for sale is determined by outstanding commitments from investors on a "best efforts" basis or current investor yield requirements, calculated on the aggregate loan basis. The fair value of U.S. Small Business Administration ("SBA") loans held for sale is based on what investors are currently offering for loans with similar characteristics.

Loans, net – Fair values for loans are estimated by segregating the portfolio by type of loan and discounting scheduled cash flows using current market interest rates for loans with similar terms and credit quality. A prepayment assumption is used as an estimate of the portion of loans that will be repaid prior to their scheduled maturity. A liquidity premium assumption is used as an estimate for the additional return required by an investor of assets that are potentially considered illiquid.

FHLB and FRB stock – No ready market exists for these stocks and they have no quoted market value. However, redemptions of these securities have historically been at par value. Accordingly, cost is deemed to be a reasonable estimate of fair value.

SBIC investments – No ready market exists for these investments and they have no quoted market value. SBIC investments are valued at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions of identical or similar investments. Accordingly, cost is deemed to be a reasonable estimate of fair value.

Deposits – Fair values for demand deposits, money market accounts, and savings accounts are the amounts payable on demand. The fair value of certificates of deposit is estimated by discounting the contractual cash flows using current market interest rates for accounts with similar maturities.

Borrowings – The fair value of advances from the FHLB is estimated based on current rates for borrowings with similar terms.

Accrued interest receivable and payable – The stated amounts of accrued interest receivable and payable approximate the fair value.

Limitations – Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, a significant asset not considered a financial asset is premises and equipment. In addition, tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.


11.	Leases

As Lessee - Operating Leases

Company operating leases primarily include office space and bank branches. Certain leases include one or more options to renew, with renewal terms that can extend the lease term up to 15 additional years. The exercise of lease renewal options is at our sole discretion. When it is reasonably certain that we will exercise our option to renew or extend the lease term, that option is included in estimating the value of the ROU and lease liability. At December 31, 2019, we did not have any leases that had not yet commenced for which we had created a ROU asset and a lease liability. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. Most of our lease agreements include periodic rate adjustments for inflation. The depreciable life of ROU assets and leasehold improvements are limited to the shorter of the useful life or the expected lease term. Leases with an initial term of 12 months or less are not recorded on our Consolidated Balance Sheets; we recognize lease expenses for these leases over the lease term.

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

The following tables present supplemental balance sheet information related to operating leases. ROU assets are included in other assets and lease liabilities are included in other liabilities.



Supplemental Balance Sheet Information:	December 31, 2019
ROU assets	$	4,812
Lease liabilities	4,809
Weighted-average remaining lease terms	5.29
Weighted-average discount rate	3.14		%

The following schedule summarizes aggregate future minimum lease payments under these operating leases at December 31, 2019:



Fiscal year ending June 30:
Remaining 2020	$	669
2021	1,123
2022	1,026
2023	989
2022	522
Thereafter	896
Total of future minimum payments	$	5,225

The following table presents components of operating lease expense for the three and six months ended December 31, 2019:



	Three Months Ended December 31, 2019			Six Months Ended December 31, 2019
Operating lease cost (included in occupancy expense)	$	459		$	932
Sublease income (included in other, net noninterest income)	(56		)	(120		)
Total operating lease expense, net	403			812

As Lessee - Finance Lease

The Company currently leases land for one of its branch office locations under a finance lease. The ROU asset for the finance lease totaled $2,052 at December 31, 2019 and is included in other assets. The amount was previously recorded in premises and equipment, net. The corresponding lease liability totaled $1,861 at December 31, 2019 and is included in other liabilities. For the three and six months ended December 31, 2019, interest expense on the lease liability totaled $25 and $49, respectively. The finance lease has a maturity date of July 2028 and a discount rate of 5.18%. Upon adoption of ASC 842, the capital lease obligation for June 30, 2019 was also reclassified to other liabilities.

The following schedule summarizes aggregate future minimum lease payments under this finance lease obligation at December 31, 2019:



Fiscal year ending June 30:
Remaining 2020	$	67
2021	134
2022	134
2023	134
2023	145
Thereafter	1,993
Total minimum lease payments	2,607
Less: amount representing interest	(746		)
Present value of net minimum lease payments	$	1,861

Supplemental lease cash flow information for the six months ended December 31, 2019:



ROU assets - noncash additions (operating leases)	$	5,296
ROU assets - noncash addition (finance lease)	2,052
Cash paid for amounts included in the measurement of lease liabilities (operating leases)	1,091
Cash paid for amounts included in the measurement of lease liabilities (finance leases)	67

HOMETRUST BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

As Lessor - General

The Company leases equipment to commercial end users under operating and finance lease arrangements. Our equipment finance leases consist mainly of transportation, medical, and agricultural equipment. Many of our operating and finance leases offer the lessee the option to purchase the equipment at fair value or for a nominal fixed purchase option; and most of the leases that do not have a nominal purchase option include renewal provisions resulting in some leases continuing beyond initial contractual terms. Our leases do not include early termination options, and continued rent payments are due if leased equipment is not returned at the end of the lease.

As Lessor - Operating Leases

Operating lease income is recognized as a component of noninterest income on a straight-line basis over the lease term. Lease terms range from 1 to 5 years. Assets related to operating leases are included in other assets and the corresponding depreciation expense is recorded on a straight-line basis as a component of other noninterest expense. Leased assets totaled $15,507 with a residual value of $9,082 as of December 31, 2019. For the three and six months ended December 31, 2019, total equipment finance operating lease income totaled $658 and $1,226, respectively. For the three and six months ended December 31, 2019, depreciation expense totaled $459 and $808, respectively.

The following schedule summarizes aggregate future minimum operating lease payments to be received at December 31, 2019:



Fiscal year ending June 30:
Remaining 2020	$	1,709
2021	6,505
2022	4,566
2023	2,609
2022	1,661
Thereafter	87
Total of future minimum payments	$	17,137

As Lessor - Finance Leases

Finance lease income is recognized as a component of loan interest income over the lease term. The finance leases are included as a component of the equipment finance class of financing receivables under the commercial loan segment. For the three and six months ended December 31, 2019, total interest income on equipment finance leases totaled $383 and 702, respectively.

The following table presents components of finance lease net investment included within equipment finance class of financing receivables:



	December 31, 2019
Lease receivables	$	31,446

The following schedule summarizes aggregate future minimum finance lease payments to be received at December 31, 2019:



Fiscal year ending June 30:
Remaining 2020	$	3,695
2021	9,152
2022	7,762
2023	7,236
2024	4,855
Thereafter	2,197
Total minimum payments	34,897
Less: amount representing interest	(3,451		)
Total	$	31,446

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 credit risks of lending activities, including changes in the level and trend of loan delinquencies and write offs and changes in our allowance for loan losses and provision for loan 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; 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 we originate; 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 loan 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 loan 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 we may in the future acquire into our 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; and the other risks detailed from time to time in our filings with the SEC, including our 2019 Form 10-K.

Many of the forward-looking statements are based upon management's beliefs and assumptions at the time they are made. We undertake 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 "we", "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 Federal Reserve System, 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.

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. We also work with a third party to originate HELOCs which are pooled and sold. In addition, we purchase investment securities consisting primarily of securities issued by United States Government agencies and government-sponsored enterprises, as well as, corporate bonds, commercial paper and FDIC insured certificates of deposit.

We offer 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.

We are 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 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 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 loan losses which is required to establish the allowance for loan losses at a level that adequately provides for probable losses inherent in our loan portfolio. As a loan's risk rating improves, property values increase, or recoveries of amounts previously charged off are received, a recapture of previously recognized provision for loan losses may be added to net interest income.

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.

In recent years, we have expanded our geographic footprint into seven additional markets through strategic acquisitions as well as two de novo commercial loan offices and one de novo branch office. Looking forward, we believe opportunities currently exist within our market areas to grow our franchise. We anticipate organic growth as the local economies and loan demand strengthen, through our marketing efforts and as a result of the opportunities being created as a result of the consolidation of financial institutions occurring in our market areas. We may also seek to expand our 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. We will continue to be disciplined as it pertains to future expansion focusing primarily on organic growth in our current market areas.

At December 31, 2019, we 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 and the allowance for loan losses, (ii) the valuation of goodwill and other intangible assets, and (iii) the valuation of or recognition of deferred tax assets and liabilities. These policies and estimates are 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 with the 2019 Form 10-K. There have not been any material changes in the Company's critical accounting policies and estimates during the six months ended December 31, 2019 as compared to the disclosure contained in the Company's 2019 Form 10-K.

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. Refer to Note 2 of our consolidated financial statements 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 allowance for loan losses to total loans excluding acquired 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, we have 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 and Six Months Ended December 31, 2019 and 2018” 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,		June 30,		December 31,
(Dollars in thousands, except per share data)	2019		2019		2018
Total stockholders' equity	$	416,995	$	408,896	$	410,970
Less: goodwill, core deposit intangibles, net of taxes	26,959		27,562		28,284
Tangible book value ⁽¹⁾	$	390,036	$	381,334	$	382,686
Common shares outstanding	17,664,384		17,984,105		18,520,825
Tangible book value per share	$	22.08	$	21.20	$	20.66
Book value per share	$	23.61	$	22.74	$	22.19

Set forth below is a reconciliation to GAAP of tangible equity to tangible assets:



	As of
	December 31,			June 30,			December 31,
(Dollars in thousands)	2019			2019			2018
Tangible book value ⁽¹⁾	$	390,036		$	381,334		$	382,686
Total assets	3,470,232			3,476,178			3,413,099
Less: goodwill, core deposit intangibles, net of taxes	26,959			27,562			28,284
Total tangible assets⁽²⁾	$	3,443,273		$	3,448,616		$	3,384,815
Tangible equity to tangible assets	11.33		%	11.06		%	11.31		%

_________________________________________________________________


(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 allowance for loan losses to total loans and the allowance for loan losses as adjusted to exclude acquired loans:



	As of
(Dollars in thousands)	December 31,			June 30,			December 31,
	2019			2019			2018
Total gross loans receivable (GAAP)	$	2,553,455		$	2,705,186		$	2,632,730
Less: acquired loans	186,970			214,046			236,389
Adjusted gross loans (non-GAAP)	$	2,366,485		$	2,491,140		$	2,396,341

Allowance for loan losses (GAAP)	$	22,031		$	21,429		$	21,419
Less: allowance for loan losses on acquired loans	152			201			199
Adjusted allowance for loan losses (non-GAAP)	$	21,879		$	21,228		$	21,220
Adjusted allowance for loan losses / Adjusted gross loans (non-GAAP)	0.92		%	0.85		%	0.89		%

Comparison of Financial Condition at December 31, 2019 and June 30, 2019

General. Total assets and liabilities remained relatively level at $3.5 and $3.1 billion, respectively, at December 31, 2019 compared to June 30, 2019. As previously reported in the first quarter of the fiscal year, the Company marketed for sale $256.8 million in one-to-four family loans, of which $154.9 million were sold during the second quarter resulting in a $958,000 after-tax gain. The Company is selling these lower rate one-to-four family loans to decrease its loan to deposit ratio while increasing its net interest margin over time. The funds received from the one-to-four family loans sold and deposit growth of $230.5 million, or 9.9% were used to pay down $245.0 million, or 36.0% of borrowings, fund the $41.6 million, or 7.8% net increase in cash and cash equivalents, commercial paper, certificates of deposit in other banks, securities available for sale, and other investments at cost for the first six months of fiscal 2020.

As of July 1, 2019, the Company adopted the new lease accounting standard, which drove several changes on the balance sheet. Land totaling $2.1 million related to the Company's one finance lease (f/k/a capital lease) was reclassed from premises and equipment, net to other assets as a ROU asset and the corresponding liability was reclassed from a separate line on the balance sheet to other liabilities as a lease liability. The Company's operating leases led to approximately $4.8 million in ROU assets and corresponding lease liabilities, which are maintained in other assets and other liabilities, respectively.

Cash, cash equivalents, and commercial paper. Total cash and cash equivalents increased $17.9 million, or 25.2%, to $88.9 million at December 31, 2019 from $71.0 million at June 30, 2019. Commercial paper increased $12.3 million, or 5.1% to $253.8 million at December 31, 2019 from $241.4 million at June 30, 2019.

Investments. Debt securities available for sale increased $24.2 million, or 19.9%, to $146.0 million at December 31, 2019 from $121.8 million at June 30, 2019. During the six months ended December 31, 2019, $56.4 million of securities were purchased (primarily shorter term corporate bonds) partially offset by $24.9 million of securities which matured and $7.1 million of MBS principal payments which were received. The overall increase in shorter-term corporate bonds provides the Company with higher yields compared to MBS and agency securities while remaining within our investment policy. At December 31, 2019, certificates of deposit in other banks decreased $4.4 million, or 8.4% to $47.6 million compared to $52.0 million at June 30, 2019. The decrease in certificates of deposit in other banks was due to $13.0 million in maturities partially offset by $8.6 million in CD purchases. All certificates of deposit in other banks are fully insured by the FDIC. We evaluate individual investment securities quarterly for other-than-temporary declines in market value. We did not believe that there were any other-than-temporary impairments at December 31, 2019; therefore, no impairment losses were recorded during the first six months of fiscal 2020. Other investments at cost decreased $8.5 million, or 18.7% to $36.9 million at December 31, 2019 from $45.4 million at June 30, 2019. Other investments at cost included FHLB stock, FRB stock, and SBIC investments totaling $21.5 million, $7.4 million, and $8.0 million, respectively. The overall decrease was driven by a $10.4 million, or 32.6% reduction in FHLB stock as a result of $245.0 million in borrowings paid down during the first six months of fiscal 2020.

Loans held for sale. Loans held for sale increased to $118.1 million at December 31, 2019 from $18.2 million at June 30, 2019. The balance includes approximately $85.6 million of the previously discussed one-to-four family loans being marketed for sale. Excluding these one-to-four family loans, loans held for sale increased $14.3 million primarily from $17.3 million of HELOCs originated for sale.

Loans. Net loans receivable decreased $151.3 million, or 5.6%, at December 31, 2019 to $2.5 billion from June 30, 2019 due to the previously mentioned one-to-four loans moved to held for sale, which was partially offset by $114.4 million, or 8.8% annualized rate of organic loan growth.

Retail consumer and commercial 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)	2019		2019		$			%		2019		2019
Retail consumer loans:
One-to-four family	$	417,255	$	660,591	$	(243,336	)	(36.8	)%	16.3	%	24.4	%
HELOCs - originated	142,989		139,435		3,554			2.5		5.6		5.2
HELOCs - purchased	92,423		116,972		(24,549		)	(21.0	)	3.6		4.3
Construction and land/lots	71,901		80,602		(8,701		)	(10.8	)	2.8		3.0
Indirect auto finance	142,533		153,448		(10,915		)	(7.1	)	5.6		5.7
Consumer	11,102		11,416		(314		)	(2.8	)	0.4		0.4
Total retail consumer loans	878,203		1,162,464		(284,261		)	(24.5	)	34.4		43.0
Commercial loans:
Commercial real estate	998,019		927,261		70,758			7.6		39.1		34.3
Construction and development	223,839		210,916		12,923			6.1		8.8		7.8
Commercial and industrial	152,727		160,471		(7,744		)	(4.8	)	6.0		5.9
Equipment finance	185,427		132,058		53,369			40.4		7.3		4.9
Municipal leases	115,240		112,016		3,224			2.9		4.5		4.1
Total commercial loans	1,675,252		1,542,722		132,530			8.6		65.6		57.0
Total loans	$	2,553,455	$	2,705,186	$	(151,731	)	(5.6	)%	100.0	%	100.0	%

Our expansion into larger metro markets combined with improvements in the economy, employment rates, and stronger real estate prices, have led to significant increases in originations of construction and commercial loans located in our market areas. We will continue to take a disciplined approach in our construction and land development lending by concentrating our efforts on smaller one-to-four family residential loans to builders known to us and developers of commercial real estate and multifamily properties with proven success in this type of construction. At December 31, 2019, construction and land/lots totaled $71.9 million including $63.6 million of one-to-four family construction loans that will roll over to permanent loans upon completion of the construction period. Undisbursed construction and land/lots loan commitments at December 31, 2019 totaled $58.9 million. Total construction and development loans at December 31, 2019, were $223.8 million, excluding unfunded loan commitments of $105.8 million, of which $87.3 million was for non-residential commercial real estate construction, $60.0 million was for land development, $49.9 million was for speculative construction of single family properties, and $26.6 million was for multi-family construction. Undisbursed construction and development loan commitments at December 31, 2019 included $58.4 million of commercial real estate projects, multi-family residential projects of $16.4 million and $35.3 million for the speculative construction of one- to four-family residential properties.

Total equipment finance loans at December 31, 2019, were $185.4 million, an increase of $53.4 million from June 30, 2019. Our Equipment Finance line of business first began operations in May 2018 and offers companies that are purchasing equipment for their business flexible and customizable repayment terms while managing related tax and accounting issues. These products are primarily made up of commercial finance agreements and commercial loans for transportation, construction, 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 size of approximately $200,000.

Asset Quality. Our overall asset quality metrics continue to demonstrate our commitment to growing and maintaining a loan portfolio with a moderate risk profile.

Nonperforming assets increased by $2.4 million, or 18.3% to $15.7 million, or 0.45% of total assets, at December 31, 2019 from $13.3 million, or 0.38% of total assets at June 30, 2019. Nonperforming assets included $14.3 million in nonaccruing loans and $1.5 million in REO at December 31, 2019, compared to $10.4 million and $2.9 million, in nonaccruing loans and REO, respectively, at June 30, 2019. The increase in nonperforming assets was mainly driven by one large commercial real estate loan relationship that was moved to nonaccrual during the quarter. Included in nonperforming loans are $7.3 million of TDR loans of which $5.8 million were current with respect to their modified payment terms. At December 31, 2019, $7.6 million, or 53.0%, of nonaccruing loans were current on their loan payments. PCI loans aggregating $1.2 million obtained through prior acquisitions were excluded from nonaccruing loans due to the accretion of discounts established in accordance with the acquisition method of accounting for business combinations. Nonperforming loans to total loans was 0.56% at December 31, 2019 and 0.38% at June 30, 2019.

The ratio of classified assets to total assets increased to 0.90% at December 31, 2019 from 0.89% at June 30, 2019. Classified assets increased to $31.4 million at December 31, 2019 compared to $30.9 million at June 30, 2019. Delinquent loans (loans delinquent 30 days or more) increased to $11.5 million at December 31, 2019, from $10.1 million at June 30, 2019 which was driven by a $1.6 million increase in equipment finance contracts.

As of December 31, 2019, we had identified $28.3 million of impaired loans compared to $33.0 million at June 30, 2019. Our impaired loans are comprised of loans on nonaccrual status and all TDRs, whether performing or on nonaccrual status under their restructured terms. Impaired loans may be evaluated for reserve purposes using either a specific impairment analysis or on a collective basis as part of homogeneous pools. As of December 31, 2019, there were $12.9 million loans individually evaluated for impairment and $15.4 million were collectively evaluated. For more information on these impaired loans, see Note 5 of the Notes to Consolidated Financial Statements under Item 1 of this report.

Allowance for loan losses. We establish an allowance for loan losses by charging amounts to the loan loss provision at a level required to reflect estimated credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers, among other factors, historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect borrowers' ability to repay, estimated value of any underlying collateral, prevailing economic conditions and current risk factors specifically related to each loan type.

The allowance for loan losses was $22.0 million, or 0.86% of total loans, at December 31, 2019 compared to $21.4 million, or 0.79% of total loans, at June 30, 2019. The allowance for loan losses to gross loans excluding acquired loans was 0.92% at December 31, 2019, compared to 0.85% at June 30, 2019. The increase in the ratio of allowance for loan losses to gross loans was driven by approximately $154.9 million of one-to-four family loans being sold, $85.6 million one-to-four loans being transferred to loans held for sale from total loans, and a $602,000 increase in the allowance for loan losses from a $400,000 provision for loan losses and $202,000 in net loan recoveries. The increase in the allowance was mainly driven by the previously mentioned commercial real estate loan relationship that was moved to nonaccrual during the quarter which resulted in a combination of charge-offs and impairments totaling approximately $1.1 million. The allowance for our acquired loans at December 31, 2019 was $152,000 compared to $201,000 at June 30, 2019.

There was a $400,000 provision for loan losses for the six months ended December 31, 2019, compared to no provision for the corresponding period in fiscal year 2019. Net loan recoveries totaled $202,000 for the six months ended December 31, 2019, compared to $359,000 for the same period in fiscal year 2019. Net recoveries as a percentage of average loans were (0.01)% and (0.03)% for the six months ended December 31, 2019 and 2018, respectively.

The allowance as a percentage of nonaccruing loans decreased to 154.48% at December 31, 2019 from 206.90% at June 30, 2019.

We believe that the allowance for loan losses as of December 31, 2019 was adequate to absorb the known and inherent risks of loss in the loan portfolio at that date. While we believe 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 allowance for loan losses 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. The adoption of ASU 2016-03, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" will significantly change the Company's accounting for the allowance for loan losses. For more information on this ASU, See Note 2 - Recent Accounting Pronouncements of the Notes to Consolidated Financial Statements under Item 1 of this report.

Real estate owned. REO decreased $1.5 million, or 50.5% to $1.5 million at December 31, 2019 primarily due to $1.3 million in REO sales during the six months ended December 31, 2019. The total balance of REO at December 31, 2019 included $581,000 in single-family homes, $435,000 in commercial real estate,and $435,000 in unimproved land.

Deferred income taxes. Deferred income taxes decreased $4.5 million, or 16.8%, to $22.1 million at December 31, 2019 from $26.5 million at June 30, 2019. The decrease was primarily driven by the realization of net operating losses through increases in taxable income.

Goodwill. Goodwill remained unchanged at $25.6 million at both December 31, 2019 and June 30, 2019.

Other assets. Other assets increased $13.6 million, or 58.7%, to $36.8 million at December 31, 2019 from $23.2 million at June 30, 2019. The increase was driven by the previously mentioned ROU assets on our finance and operating leases and a $5.5 million increase in operating leases from our newer equipment finance line of business.

Deposits. Deposits increased $230.5 million, or 9.9% during the six months ended December 31, 2019 to $2.6 billion from $2.3 billion at June 30, 2019 primarily due to deposit growth initiatives which led to a $153.2 million increase in core deposits as well as a $77.4 million increase in certificates of deposit.

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)	2019		2019		$			%		2019		2019
Core deposits:
Noninterest-bearing accounts	$	327,320	$	294,322	$	32,998		11.2	%	12.8	%	12.6	%
NOW accounts	457,428		452,295		5,133			1.1	%	17.9	%	19.4	%
Money market accounts	815,949		691,172		124,777			18.1	%	31.9	%	29.7	%
Savings accounts	167,520		177,278		(9,758		)	(5.5	)%	6.5	%	7.6	%
Core deposits	1,768,217		1,615,067		153,150			9.5	%	69.1	%	69.4	%
Certificates of deposit	789,552		712,190		77,362			10.9	%	30.9	%	30.6	%
Total	$	2,557,769	$	2,327,257	$	230,512		9.9	%	100.0	%	100.0	%

Borrowings. Borrowings decreased to $435.0 million at December 31, 2019 from $680.0 million at June 30, 2019. A total of $60.0 million of these FHLB advances have maturities of less than 30 days and $375.0 million consist of convertible FHLB advances with maturities greater than nine years; together with a weighted average interest rate of 1.59% at December 31, 2019.

Equity. Stockholders' equity at December 31, 2019 increased $8.1 million, or 2.0% to $417.0 million from $408.9 million at June 30, 2019. The increase was due to $18.0 million in net income and $1.6 million in stock-based compensation, partially offset by 396,421 shares of common stock repurchased at an average cost of $25.78, or approximately $10.2 million in total, and $2.2 million related to cash dividends declared.

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,
	2019							2018
	Average Balance Outstanding			Interest Earned/ Paid⁽²⁾		Yield/ Rate⁽²⁾		Average Balance Outstanding			Interest Earned/ Paid⁽²⁾		Yield/ Rate⁽²⁾
	(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable⁽¹⁾	$	2,782,412		$	32,409	4.66	%	$	2,610,117		$	30,826	4.72	%
Commercial paper and deposits in other banks	346,376			1,912		2.21	%	313,158			1,965		2.51	%
Securities available for sale	165,577			1,093		2.64	%	151,788			876		2.31	%
Other interest-earning assets⁽³⁾	44,398			772		6.95	%	44,147			1,015		9.20	%
Total interest-earning assets	3,338,763			36,186		4.34	%	3,119,210			34,682		4.45	%
Other assets	269,679							250,516
Total assets	3,608,442							3,369,726
Liabilities and equity:
Interest-bearing deposits:
Interest-bearing checking accounts	455,747			375		0.33	%	465,418			302		0.26	%
Money market accounts	785,374			2,083		1.06	%	689,335			1,265		0.73	%
Savings accounts	168,022			50		0.12	%	196,434			63		0.13	%
Certificate accounts	778,664			3,813		1.96	%	564,112			1,977		1.40	%
Total interest-bearing deposits	2,187,807			6,321		1.16	%	1,915,299			3,607		0.75	%
Borrowings	605,489			2,541		1.68	%	673,783			3,692		2.19	%
Total interest-bearing liabilities	2,793,296			8,862		1.27	%	2,589,082			7,299		1.13	%
Noninterest-bearing deposits	334,732							309,012
Other liabilities	65,812							60,689
Total liabilities	3,193,840							2,958,783
Stockholders' equity	414,602							410,943
Total liabilities and stockholders' equity	$	3,608,442						$	3,369,726

Net earning assets	$	545,467						$	530,128
Average interest-earning assets to
average interest-bearing liabilities	119.53		%					120.48		%
Tax-equivalent:
Net interest income				$	27,324						$	27,383
Interest rate spread						3.07	%						3.32	%
Net interest margin⁽⁴⁾						3.27	%						3.51	%
Non-tax-equivalent:
Net interest income				$	27,034						$	27,101
Interest rate spread						3.03	%						3.28	%
Net interest margin⁽⁴⁾						3.24	%						3.48	%

(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 $290 and $282 for the three months ended December 31, 2019

and 2018, respectively, calculated based on a combined federal and state tax rate of 24%.

(3) The average other interest-earning assets consists of FRB stock, FHLB stock, and SBIC investments.

(4) Net interest income divided by average interest-earning assets.



	For the Six Months Ended December 31,
	2019							2018
(Dollars in thousands)	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⁾	$	2,766,022		$	64,960	4.70	%	$	2,584,145		$	59,837	4.63	%
Commercial paper and deposits in other banks	354,750			4,165		2.35	%	317,219			3,823		2.41	%
Securities available for sale	152,143			1,989		2.61	%	153,019			1,732		2.26	%
Other interest-earning assets⁽³⁾	45,054			1,604		7.12	%	43,302			1,853		8.56	%
Total interest-earning assets	3,317,969			72,718		4.38	%	3,097,685			67,245		4.34	%
Other assets	267,028							248,084
Total assets	$	3,584,997						$	3,345,769
Liabilities and equity:
Interest-bearing liabilities:
Interest-bearing checking accounts	448,636			694		0.31	%	462,657			571		0.25	%
Money market accounts	752,178			3,844		1.02	%	683,332			2,222		0.65	%
Savings accounts	170,207			103		0.12	%	202,362			131		0.13	%
Certificate accounts	761,810			7,533		1.98	%	547,310			3,433		1.25	%
Total interest-bearing deposits	2,132,831			12,174		1.14	%	1,895,661			6,357		0.75	%
Borrowings	644,451			5,862		1.82	%	659,821			6,950		2.11	%
Total interest-bearing liabilities	2,777,282			18,036		1.30	%	2,555,482			13,307		1.04	%
Noninterest-bearing deposits	330,418							316,397
Other liabilities	64,456							61,985
Total liabilities	3,172,156							2,933,864
Stockholders' equity	412,841							411,905
Total liabilities and stockholders' equity	$	3,584,997						$	3,345,769

Net earning assets	$	540,687						$	542,203
Average interest-earning assets to
average interest-bearing liabilities	119.47		%					121.22		%
Tax-equivalent:
Net interest income				$	54,682						$	53,938
Interest rate spread						3.08	%						3.30	%
Net interest margin⁽⁴⁾						3.30	%						3.48	%
Non-tax-equivalent:
Net interest income				$	54,108						$	53,373
Interest rate spread						3.05	%						3.26	%
Net interest margin⁽⁴⁾						3.26	%						3.45	%

(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 $574 and $565 for the six months ended December 31, 2019 and 2018, respectively, calculated based on a combined federal and state tax rate of 24%.

(3) The average other interest-earning assets consists of FRB stock, FHLB stock, and SBIC investments.

(4) Net interest income divided by average interest-earning assets.

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, 2019
	Compared to
	Three Months Ended December 31, 2018
	Increase/ (decrease) due to						Total increase/(decrease)
(Dollars in thousands)	Volume			Rate			Total increase/(decrease)
Interest-earning assets:
Loans receivable⁽¹⁾	$	2,034		$	(451	)	$	1,583
Commercial paper and deposits in other banks	209			(262		)	(53		)
Securities available for sale	79			138			217
Other interest-earning assets	6			(249		)	(243		)
Total interest-earning assets	$	2,328		$	(824	)	$	1,504
Interest-bearing liabilities:
Interest-bearing checking accounts	$	(6	)	$	79		$	73
Money market accounts	176			642			818
Savings accounts	(10		)	(3		)	(13		)
Certificate accounts	752			1,084			1,836
Borrowings	(374		)	(777		)	(1,151		)
Total interest-bearing liabilities	538			1,025			1,563
Net increase (decrease) in tax equivalent interest income	$	1,790		$	(1,849	)	$	(59	)



	Six Months Ended December 31, 2019
	Compared to
	Six Months Ended December 31, 2018
	Increase/ (decrease) due to						Total increase/(decrease)
(Dollars in thousands)	Volume			Rate			Total increase/(decrease)
Interest-earning assets:
Loans receivable⁽¹⁾	$	4,212		$	911		$	5,123
Commercial paper and deposits in other banks	451			(109		)	342
Securities available for sale	(10		)	267			257
Other interest-earning assets	75			(324		)	(249		)
Total interest-earning assets	4,728			745			5,473
Interest-bearing liabilities:
Interest-bearing checking accounts	$	(16	)	$	139		$	123
Money market accounts	224			1,398			1,622
Savings accounts	(21		)	(7		)	(28		)
Certificate accounts	1,345			2,755			4,100
Borrowings	(162		)	(926		)	(1,088		)
Total interest-bearing liabilities	1,370			3,359			4,729
Net increase (decrease) in tax equivalent interest income	$	3,358		$	(2,614	)	$	744

_____________

(1) Interest income used in the average interest earned and yield calculation includes the tax equivalent adjustment of $290 and $282 for the three months ended December 31, 2019 and 2018, 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 $574 and $565 for the six months ended December 31, 2019 and 2018, respectively, calculated based on a combined federal and state income tax rate of 24%.

Comparison of Results of Operation for the Three Months Ended December 31, 2019 and 2018

General. During the three months ended December 31, 2019, net income increased 14.3% to $9.2 million compared to $8.0 million for the three months ended December 31, 2018. The Company's diluted earnings per share increased 20.9% to $0.52 for the three months ended December 31, 2019 compared to $0.43 for the same period in fiscal 2019. Earnings for the three months ended December 31, 2019 included a $958,000 after tax gain from the sale of one-to-four family loans previously reported as held for sale to shift the Company's loan mix and lower its loan to deposit ratio.

Net Interest Income. Net interest income decreased slightly by $67,000, or 0.2% to $27.0 million for the quarter ended December 31, 2019 compared to $27.1 million for the corresponding period in fiscal 2019. The decrease in net interest income for the quarter ended December 31, 2019 was primarily due to a $1.5 million increase in interest and dividend income driven by an increase in average interest-earning assets, which was more than offset by a $1.6 million increase in interest expense.

Average interest-earning assets increased $219.6 million, or 7.0% to $3.3 billion for the quarter ended December 31, 2019 compared to $3.1 billion for the corresponding quarter in fiscal 2019. For the quarter ended December 31, 2019, the average balance of total loans receivable increased $172.3 million, or 6.6% compared to the same quarter last year primarily due to organic loan growth. The average balance of commercial paper and deposits in other banks increased $33.2 million, or 10.6% between the periods driven by increases in commercial paper investments. The average balance in securities available for sale increased $13.8 million, or 9.1%, which was primarily driven by the purchase of shorter-term corporate bonds that provide higher yields over MBS and agency securities. These increases were mainly funded by a portion of the $204.2 million, or 7.9% increase 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, 2019 decreased to 3.27% from 3.51% for the same period a year ago.

Total interest and dividend income increased $1.5 million, or 4.3% for the three months ended December 31, 2019 as compared to the same period last year, which was primarily driven by a $1.6 million, or 5.2% increase in loan interest income and a $217,000, or 24.8% increase in interest income from securities available for sale which was partially offset by a $242,000, or 23.9% decrease in other investment income. The additional loan interest income was primarily driven by an increase in the average balance of loans receivable partially offset by a decrease in loan yields. Average loan yields decreased six basis points to 4.66% for the quarter ended December 31, 2019 from 4.72% in the corresponding quarter last year. Accretable income on acquired loans stems from the discount established at the time these loan portfolios were acquired and the related impact of prepayments on purchased loans. Each quarter the Company analyzes the cash flow assumptions on the acquired loan pools and, at least semi-annually, the Company updates loss estimates, prepayment speeds and other variables when analyzing cash flows. In addition to this accretion income, which is recognized over the estimated life of the loan pools, if a loan is removed from a pool due to payoff or foreclosure, the unaccreted discount in excess of losses is recognized as an accretion gain in interest income. As a result, income from acquired loan pools can be volatile from quarter to quarter, however the incremental accretion is expected to decrease over time as the balance of the purchase discount for acquired loans decreases. For the quarters ended December 31, 2019 and 2018, average loan yields included five and 13 basis points, respectively, from the accretion of purchase discounts on acquired loans. The total purchase discount for acquired loans was $5.9 million at December 31, 2019, compared to $6.7 million at June 30, 2019, and $7.7 million at December 31, 2018.

Total interest expense increased $1.6 million, or 21.4% for the quarter ended December 31, 2019 compared to the same period last year. The increase was driven by a $2.7 million, or 75.2% increase in deposit interest expense partially offset by a $1.2 million, or 31.2% decrease in interest expense on borrowings. The additional deposit interest expense was a result of our continued focus on increasing deposits as the average balance of interest-bearing deposits increased $272.5 million, or 14.2% along with a 41 basis point increase in the average cost of interest-bearing deposits for the quarter ended December 31, 2019 compared to the same quarter last year. Average borrowings for the quarter ended December 31, 2019 decreased $68.3 million, or 10.1% along with a 51 basis point decrease in the average cost of borrowings compared to the same period last year. Borrowings were paid down utilizing proceeds from the previously mentioned one-to-four family loan sale. The decrease in the average cost of borrowings was driven by the lower federal funds rate during the current quarter compared to the prior year. The overall average cost of funds increased 14 basis points to 1.27% for the current quarter compared to 1.13% in the same quarter last year due primarily to the impact of the deposit market interest rate increases on our interest-bearing liabilities.

Provision for Loan Losses. During the three months ended December 31, 2019 there was a $400,000 provision for loan losses compared to no provision for the corresponding quarter of fiscal 2019. Net loan recoveries totaled $317,000 for the three months ended December 31, 2019 compared to $487,000 for the same period in fiscal 2019. Annualized net recoveries as a percentage of average loans was (0.05)% for the three months ended December 31, 2019, compared to (0.07)% for the same period in fiscal 2019.

See Comparison of Financial Condition - Asset Quality for additional details.

Noninterest Income. Noninterest income increased $4.0 million, or 78.4% to $9.1 million for the three months ended December 31, 2019 from $5.1 million for the same period in the previous fiscal year primarily due a $2.8 million, or 300.0% increase in the gain on sale of loans held for sale, as well as a $576,000, or 195.3% increase in loan income and fees, and a $565,000, or 75.4% increase in other noninterest income. The increase in the gain on sale of loans held for sale was a result of the previously discussed one-to-four family loans sold during the quarter which resulted in a non-recurring $1.3 million gain. In addition, $57.8 million of residential mortgage loans originated for sale were sold with gains of $1.5 million compared to $24.9 million sold and gains of $649,000 in the corresponding quarter in the prior year. During the quarter ended December 31, 2019, $16.5 million of the guaranteed portion of SBA commercial loans were sold with gains of $1.0 million compared to $4.8 million sold and gains of $295,000 in the corresponding quarter in the prior year. The $576,000, or 194.8% increase for the quarter in loan income and fees is primarily a result of our adjustable rate conversion program and prepayment fees on equipment finance loans. The $565,000, or 75.5% increase in other noninterest income primarily related to operating lease income from the new equipment finance line of business.

Noninterest Expense. Noninterest expense for the three months ended December 31, 2019 increased $2.2 million, or 10.0% to $24.0 million compared to $21.9 million for the three months ended December 31, 2018. The increase was primarily due to a $1.3 million, or 10.2% increase in salaries and employee benefits as a result of new positions and annual salary increases; an $891,000, or 36.7% increase in other expenses, mainly driven by depreciation from our equipment finance line of business and expenses related to our upcoming core system conversion; a $239,000, or 59.5% increase in marketing and advertising expense, which was used to promote deposit growth and other banking products; a $112,000, or 46.2% increase in REO-related expenses as a result of higher pre-foreclosure expenses during the quarter, and a $90,000, or 4.7% increase in computer services. Partially offsetting these increases was a decrease of $323,000, or 96.4% in deposit insurance premiums as a result of credits issued by the FDIC and a $153,000, or 29.1% decrease in core deposit intangible amortization for the three months ended December 31, 2019 compared to the same period last year.

Income Taxes. The Company's income tax expense for the three months ended December 31, 2019 increased $189,000, or 8.3% to $2.5 million from $2.3 million for the corresponding quarter in the previous year as a result of higher pretax income. The effective tax rate for the three months ended December 31, 2019 and 2018 was 21.2% and 22.1%, respectively.

Comparison of Results of Operation for the Six Months Ended December 31, 2019 and 2018

General. During the six months ended December 31, 2019, net income increased $2.2 million, or 13.7% to $18.0 million from $15.8 million for the six months ended December 31, 2018. Diluted earnings per share increased 20.2% to $1.01 for the first six months of fiscal year 2020, compared to $0.84 in the same period in fiscal 2019.

Net Interest Income. Net interest income increased $734,000, or 1.4% to $54.1 million for the six months ended December 31, 2019 compared to $53.4 million for the six months ended December 31, 2018. This increase in net interest income was driven by a $5.5 million increase in interest and dividend income primarily driven by an increase in average interest-earning assets, which was partially offset by a $4.7 million increase in interest expense.

Average interest-earning assets increased $220.3 million, or 7.1% to $3.3 billion for the six months ended December 31, 2019 compared to $3.1 billion for the corresponding period in fiscal 2019. For the six months ended December 31, 2019, the average balance of total loans receivable increased $181.9 million, or 7.0% compared to the same period last year primarily due to organic loan growth. The average balance of commercial paper and deposits in other banks increased $37.5 million, or 11.8% between the periods driven by increases in commercial paper investments. These increases were primarily funded by the $221.8 million, or 8.7% increase in average interest-bearing liabilities, as compared to the same six month period last year. Net interest margin (on a fully taxable-equivalent basis) for the six months ended December 31, 2019 decreased to 3.30% from 3.48% for the same period a year ago.

Total interest and dividend income increased $5.5 million, or 8.2% for the six months ended December 31, 2019 as compared to the same period last year, which was primarily driven by a $5.1 million, or 8.6% increase in loan interest income, a $257,000, or 14.8% increase in interest income from securities available for sale, and a $342,000, or 8.9% increase in interest income from commercial paper and interest-bearing deposits, which was partially offset by a $249,000, or 13.4% decrease in other investment income. The additional loan interest income was driven by increases in both the average balance of loans receivable and loan yields compared to the prior year. Average loan yields increased seven basis points to 4.70% for the six months ended December 31, 2019 from 4.63% in the corresponding period last year. For the six months ended December 31, 2019 and 2018, average loan yields included six and nine basis points, respectively, from the accretion of purchase discounts on acquired loans.

Total interest expense increased $4.7 million, or 35.5% for the six months ended December 31, 2019 compared to the same period last year. The increase was driven by a $5.8 million, or 91.5% increase in deposit interest expense partially offset by a $1.1 million, or 15.7% decrease in interest expense on borrowings. The additional deposit interest expense was a result of a $237.2 million, or 12.5% increase in the average balance of interest-bearing deposits along with a 47 basis point increase in the average cost of those deposits for the six months ended December 31, 2019 as compared to the same period last year. Average borrowings for the six months ended December 31, 2019 decreased $15.4 million, or 2.3% along with a 29 basis point decrease in the average cost of borrowings compared to the same period last year. The overall cost of funds increased 26 basis points to 1.30% for the six months ended December 31, 2019 compared to 1.04% in the corresponding period last year.

Provision for Loan Losses. There was a $400,000 provision for loan losses for the six months ended December 31, 2019 compared to no provision for the corresponding period in fiscal 2019. This provision for loan losses relates to the previously discussed commercial lending relationship. Net loan recoveries totaled $202,000 for the six months ended December 31, 2019, compared to $359,000 for the same period in fiscal 2019. Annualized net charge-offs as a percentage of average loans were (0.01)% for the six months ended December 31, 2019 compared to (0.03)% for the same period last fiscal year.

See "Comparison of Financial Condition - Asset Quality" for additional details.

Noninterest Income. Noninterest income increased $6.0 million, or 56.4%, to $16.7 million for the six months ended December 31, 2019 from $10.7 million for the six months ended December 31, 2018, primarily due to a $3.5 million, or 132.4% increase in the gain on sale of loans held for sale, a $1.1 million, or 181.4% increase in loan income and fees, and a $1.2 million, or 85.9% increase in other noninterest income. In addition to the previously mentioned non-recurring gain on the sale of one-to-four family loans, $103.2 million of residential mortgage loans were sold with gains of $2.8 million for the six months ended December 31, 2019, compared to $56.5 million sold and gains of $1.4 million in the corresponding period in the prior year. During the six months ended December 31, 2019, $29.2 million of SBA commercial loans were sold with recorded gains of $2.1 million compared to $17.2 million sold and gains of $1.2 million in the corresponding period in the prior year. The increase in loan income and fees is primarily a result of our adjustable rate conversion program and prepayment fees on equipment finance loans. The increase in other noninterest income primarily related to operating lease income from the equipment finance line of business.

Noninterest Expense. Noninterest expense for the six months ended December 31, 2019 increased $3.8 million, or 8.8%, to $47.6 million compared to $43.7 million for the six months ended December 31, 2018. The increase was primarily due to a $2.5 million, or 9.9% increase in salaries and employee benefits; a $1.4 million, or 27.8% increase in other expenses, mainly driven by depreciation from our equipment finance line of business; a $501,000, or 61.2% increase in marketing and advertising expense; and a $265,000, or 7.1% increase in computer services. Partially offsetting these increases was a decrease of $627,000, or 98.1% in deposit insurance premiums due to credits issued by the FDIC and a $308,000, or 28.2% decrease in core deposit intangible amortization for the six months ended December 31, 2019 compared to the same period last year.

Income Taxes. For the six months ended December 31, 2019, the Company's income tax expense increased $373,000, or 8.3% to $4.9 million from $4.5 million for the six months ended December 31, 2018 as a result of higher pretax income. The effective tax rate for the three months ended December 31, 2019 and 2018 was 21.3% and 22.1%, 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. We rely on a number of different sources in order to meet our 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, 2019, the Bank had an available borrowing capacity of $77.9 million with the FHLB of Atlanta, a $119.7 million line of credit with the FRB and a line of credit with each of three unaffiliated banks totaling $70.0 million. At December 31, 2019, we had $435.0 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, we have 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 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 December 31, 2019 brokered deposits totaled $180.7 million, or 7.1% of total deposits compared to $176.8 million, or 7.6% of total deposits at June 30, 2019.

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, we maintain 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. The Company's primary source of funds consists of the net proceeds retained from the Conversion. The Company 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, 2019, the Company (on an unconsolidated basis) had liquid assets of $5.8 million.

We use our sources of funds primarily to meet our ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments. At December 31, 2019, the total approved loan commitments and unused lines of credit outstanding amounted to $240.4 million and $383.7 million, respectively, as compared to $274.9 million and $353.7 million, respectively, as of June 30, 2019. Certificates of deposit scheduled to mature in one year or less at December 31, 2019, totaled $450.1 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.

During the first six months of fiscal 2020, cash and cash equivalents increased $17.9 million, or 25.2%, to $88.9 million as of December 31, 2019 from $71.0 million as of June 30, 2019. Cash provided by investing activities was $50.8 million while cash used in operating activities and financing activities was $7.0 million and $26.0 million, respectively. Primary sources of cash for the six months ended December 31, 2019 included a $230.5 million increase in deposits, $154.9 million in loans not initially originated for sale were sold, $24.9 million in maturing securities available for sale, $4.4 million in maturing certificates of deposit in other banks, net of purchases, $7.1 million in principal repayments from mortgage-backed securities, and $8.5 million in net redemptions of other investments. Primary uses of cash during the period included a $245.0 million decrease in borrowings, an increase in loans of $78.7 million, a net increase in commercial paper of $9.2 million, $56.4 million of purchases of debt securities available for sale, $5.6 million in purchases of operating lease equipment, $2.2 million in cash dividends, and $10.2 million in common stock repurchases. 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, we engage 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, 2019, we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows.

A summary of our off-balance sheet commitments to extend credit at December 31, 2019, is as follows (in thousands):



Undisbursed portion of construction loans	$	164,770
Commitments to make loans	75,665
Unused lines of credit	383,692
Unused letters of credit	7,976
Total loan commitments	$	632,103

Capital Resources

At December 31, 2019, stockholders' equity totaled $417.0 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, we are 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 System, 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, 2019. 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, 2019 under applicable regulatory requirements.

HomeTrust Bancshares, Inc. and the Bank's actual and required minimum capital amounts and ratios are as follows (dollars in thousands):



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

As of December 31, 2019
Common Equity Tier I Capital to Risk-Weighted Assets	$	383,861	12.09	%	$	142,923	4.50	%	$	206,444	6.50	%
Tier I Capital (to Total Adjusted Assets)	$	383,861	10.74	%	$	142,993	4.00	%	$	178,741	5.00	%
Tier I Capital (to Risk-weighted Assets)	$	383,861	12.09	%	$	190,564	6.00	%	$	254,085	8.00	%
Total Risk-based Capital (to Risk-weighted Assets)	$	406,347	12.79	%	$	254,085	8.00	%	$	317,606	10.00	%

As of June 30, 2019
Common Equity Tier I Capital to Risk-Weighted Assets	$	374,729	12.20	%	$	138,226	4.50	%	$	199,659	6.50	%
Tier I Capital (to Total Adjusted Assets)	$	374,729	10.89	%	$	137,649	4.00	%	$	172,062	5.00	%
Tier I Capital (to Risk-weighted Assets)	$	374,729	12.20	%	$	184,301	6.00	%	$	245,734	8.00	%
Total Risk-based Capital (to Risk-weighted Assets)	$	396,613	12.91	%	$	245,734	8.00	%	$	307,168	10.00	%

HomeTrust Bank:

As of December 31, 2019
Common Equity Tier I Capital to Risk-Weighted Assets	$	367,909	11.59	%	$	142,877	4.50	%	$	206,378	6.50	%
Tier I Capital (to Total Adjusted Assets)	$	367,909	10.29	%	$	142,956	4.00	%	$	178,695	5.00	%
Tier I Capital (to Risk-weighted Assets)	$	367,909	11.59	%	$	190,503	6.00	%	$	254,004	8.00	%
Total Risk-based Capital (to Risk-weighted Assets)	$	390,391	12.30	%	$	254,004	8.00	%	$	317,504	10.00	%

As of June 30, 2019
Common Equity Tier I Capital to Risk-Weighted Assets	$	355,759	11.59	%	$	138,153	4.50	%	$	199,555	6.50	%
Tier I Capital (to Total Adjusted Assets)	$	355,759	10.34	%	$	137,590	4.00	%	$	171,988	5.00	%
Tier I Capital (to Risk-weighted Assets)	$	355,759	11.59	%	$	184,204	6.00	%	$	245,606	8.00	%
Total Risk-based Capital (to Risk-weighted Assets)	$	377,639	12.30	%	$	245,606	8.00	%	$	307,007	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, 2019, the conservation buffer was 4.79% and 4.30% 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.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

There has not been any material change in the market risk disclosures contained in our 2019 Form 10-K.

Item 4. Controls and Procedures

An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Act")) as of December 31, 2019, was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and several other members of the Company's senior management. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures in effect as of December 31, 2019, were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is: (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. In addition, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the quarter ended December 31, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all errors and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls may be circumvented by the individual acts of some persons, by collusion of two or more people, or by override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The "Litigation" section of Note 9 to the Consolidated Financial Statements included in Part I, Item 1 is incorporated herein by reference.


Item 1A.	Risk Factors

There have been no material changes in the Risk Factors previously disclosed in Item 1A of the Company's 2019 Form 10-K.


Item 2.	Unregistered Sales of Equity Securities and use of Proceeds

(a) Not applicable

(b) Not applicable

(c) The following table provides information about repurchases of common stock by the Company during the quarter ended December 31, 2019:



Period	Total Number Of Shares Purchased	Average Price Paid per Share		Total Number Of Shares Purchased as Part of Publicly Announced Plans	Maximum Number of Shares that May Yet Be Purchased Under Publicly Announced Plans
October 1 - October 31, 2019	73,211	$	25.94	73,211	851,723
November 1 - November 30, 2019	52,050	26.20		52,050	799,673
December 1 - December 31, 2019	82,000	26.29		82,000	717,673
Total	207,261	$	26.15	207,261	717,673

On October 16, 2019, the Company announced that its Board of Directors had authorized the repurchase of up to 889,123 shares of the Company's common stock, representing 5% of the Company's outstanding shares at the time of the announcement. The shares may be purchased in the open market or in privately negotiated transactions, from time to time depending upon market conditions and other factors. As of December 31, 2019, 171,450 of the shares approved on October 16, 2019 had been purchased at an average price of $26.20.


Item 3.	Defaults Upon Senior Securities

Nothing to report.


Item 4.	Mine Safety Disclosures

Not applicable.


Item 5.	Other Information

Nothing to report.


Item 6.	Exhibits



Regulation S-K Exhibit Number	Document	Reference to Prior Filing or Exhibit Number Attached Hereto

3.1	Charter of HomeTrust Bancshares, Inc.	(b)
3.2	Articles Supplementary to the Charter of HomeTrust Bancshares, Inc. for HomeTrust Bancshares, Inc.'s Junior Participating Preferred Stock, Series A	(c)
3.3	Amended and Restated Bylaws of HomeTrust Bancshares, Inc.	(p)
4.1	Tax Benefits Preservation Plan, dated as of September 25, 2012, between HomeTrust Bancshares, Inc. and Registrar and Transfer Company, as Rights Agent	(c)
4.2	Amendment No. 1, dated as of August 31, 2015, to Tax Benefit Preservation Plan, dated as of September 25, 2012, between HomeTrust Bancshares, Inc. and Computershare Trust Company, N.A., as successor rights agent to Registrar and Transfer Company	(l)
4.3	Amendment No. 2, dated as of August 21, 2018, to Tax Benefits Preservation Plan, dated as ofSeptember 25, 2012, between HomeTrust Bancshares, Inc. and Computershare Trust Company,N.A., as successor rights agent to Registrar and Transfer Company	(o)
10.1	HomeTrust Bancshares, Inc. Strategic Operating Committee Incentive Plan	(v)
10.2	Amended and Restated Employment Agreement entered into between HomeTrust Bancshares, Inc. and Dana L. Stonestreet	(q)
10.3	Amended and Restated Employment Agreement entered into between HomeTrust Bancshares,Inc. and C. Hunter Westbrook	(q)
10.3A	Amendment No. 1 to Amended and Restated Employment Agreement entered into between HomeTrust Bancshares, Inc. and C. Hunter Westbrook	(s)
10.4	Amended and Restated Employment Agreement entered into between HomeTrust Bancshares,Inc. and Tony J. VunCannon	(q)
10.5	Employment Agreement between HomeTrust Bancshares, Inc. and Howard L. Sellinger	(q)
10.6	Employment Agreement between HomeTrust Bank and Sidney A. Biesecker	(b)
10.7	HomeTrust Bank Executive Supplemental Retirement Income Master Agreement ("SERP")	(b)
10.7A	SERP Joinder Agreement for F. Edward Broadwell, Jr.	(b)
10.7B	SERP Joinder Agreement for Dana L. Stonestreet	(b)
10.7C	SERP Joinder Agreement for Tony J. VunCannon	(b)
10.7D	SERP Joinder Agreement for Howard L. Sellinger	(b)
10.7E	SERP Joinder Agreement for Stan Allen	(b)
10.7F	SERP Joinder Agreement for Sidney A. Biesecker	(b)
10.7G	SERP Joinder Agreement for Peggy C. Melville	(b)
10.7H	SERP Joinder Agreement for William T. Flynt	(b)
10.7I	Amended and Restated Supplemental Income Agreement between HomeTrust Bank, as successor to Industrial Federal Savings Bank, and Sidney Biesecker	(f)
10.8	HomeTrust Bank Director Emeritus Plan ("Director Emeritus Plan")	(b)
10.8A	Director Emeritus Plan Joinder Agreement for William T. Flynt	(b)
10.8B	Director Emeritus Plan Joinder Agreement for J. Steven Goforth	(b)
10.8C	Director Emeritus Plan Joinder Agreement for Craig C. Koontz	(b)



10.8D	Director Emeritus Plan Joinder Agreement for Larry S. McDevitt	(b)
10.8E	Director Emeritus Plan Joinder Agreement for F.K. McFarland, III	(b)
10.8F	Director Emeritus Plan Joinder Agreement for Peggy C. Melville	(b)
10.8G	Director Emeritus Plan Joinder Agreement for Robert E. Shepherd, Sr.	(b)
10.9	HomeTrust Bank Defined Contribution Executive Medical Care Plan	(b)
10.10	HomeTrust Bank 2005 Deferred Compensation Plan	(b)
10.11	HomeTrust Bank Pre-2005 Deferred Compensation Plan	(b)
10.12	HomeTrust Bancshares, Inc. 2013 Omnibus Incentive Plan ("Omnibus Incentive Plan")	(g)
10.13	Form of Incentive Stock Option Award Agreement under Omnibus Incentive Plan	(h)
10.14	Form of Non-Qualified Stock Option Award Agreement under Omnibus Incentive Plan	(h)
10.15	Form of Stock Appreciation Right Award Agreement under Omnibus Incentive Plan	(h)
10.16	Form of Restricted Stock Award Agreement under Omnibus Incentive Plan	(h)
10.17	Form of Restricted Stock Unit Award Agreement under Omnibus Incentive Plan	(h)
10.18	Reserved
10.19	Reserved
10.20	Money Purchase Deferred Compensation Agreement, dated as of September 1, 1987, between HomeTrust Bank and F. Edward Broadwell, Jr.	(k)
10.21	Retirement Payment Agreement, dated as of September 1, 1987, between HomeTrust Bank and F. Edward Broadwell, Jr., as amended	(k)
10.22	Retirement Payment Agreement, dated as of September 1, 1987, between HomeTrust Bank and Larry S. McDevitt, as amended	(k)
10.23	Retirement Payment Agreement, dated as of September 1, 1987, between HomeTrust Bank and Peggy C. Melville, as amended	(k)
10.24	Retirement Payment Agreement, dated as of August 1, 1988, between HomeTrust Bank and Robert E. Shepherd, Sr., as amended	(k)
10.25	Retirement Payment Agreement, dated as of May 1, 1991, between HomeTrust Bank and William T. Flynt, as amended	(k)
10.26	Offer Letter between HomeTrust Bank and Keith J. Houghton	(m)
10.27	Change in Control Severance Agreement between HomeTrust Bancshares, Inc. and Marty Caywood	(i)
10.28	Amended and Restated Change in Control Severance Agreement between HomeTrust Bancshares, Inc. and Keith J. Houghton	(q)
10.29	Amended and Restated Change in Control Severance Agreement between HomeTrust Bancshares, Inc. and R. Parrish Little	(r)
10.30	Change in Control Severance Agreement between HomeTrust Bancshares, Inc. and Paula C. Labian	(u)
31.1	Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	31.1
31.2	Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	31.2
32	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	32.0
101	The following materials from HomeTrust Bancshares' Quarterly Report on Form 10-Q for the quarter ended December 31, 2019, formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Changes in Stockholders' Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements.	101


(a)	Reserved


(b)	Filed as an exhibit to HomeTrust Bancshares's Registration Statement on Form S-1 (File No. 333-178817) filed on December 29, 2011.


(c)	Filed as an exhibit to HomeTrust Bancshares's Current Report on Form 8-K filed on September 25, 2012 (File No. 001-35593).


(d)	Filed as an exhibit to HomeTrust Bancshares's Current Report on Form 8-K filed on November 27, 2013 (File No. 001-35593).


(e)	Filed as an exhibit to HomeTrust Bancshares's Annual Report on Form 10-K for the fiscal year ended June 30, 2012 (File No. 001-35593).


(f)	Filed as an exhibit to Amendment No. One to HomeTrust Bancshares's Registration Statement on Form S-1 (File No. 333-178817) filed on March 9, 2012.


(g)	Attached as Appendix A to HomeTrust Bancshares's definitive proxy statement filed on December 5, 2012 (File No. 001-35593).


(h)	Filed as an exhibit to HomeTrust Bancshares's Registration Statement on Form S-8 (File No. 333-186666) filed on February 13, 2013.


(i)	Filed as an exhibit to HomeTrust Bancshares's Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 (File No. 001-35593).


(j)	Filed as an exhibit to Jefferson Bancshares, Inc.'s Quarterly Report on Form 10-Q for the quarter ended December 31, 2008 (File No. 000-50347).


(k)	Filed as an exhibit to HomeTrust Bancshares's Annual Report on Form 10-K for the fiscal year ended June 30, 2014 (File No. 001-35593).


(l)	Reserved.


(m)	Filed as an exhibit to HomeTrust Bancshares's Annual Report on Form 10-K for the fiscal year ended June 30, 2015 (File No. 001-35593).


(n)	Filed as an exhibit to HomeTrust Bancshares's Current Report on Form 8-K filed on January 29, 2016 (File No. 001-35593).


(o)	Filed as an exhibit to HomeTrust Bancshares’s Current Report on Form 8-K filed on August 21, 2018 (File No. 001-35593).


(p)	Filed as an exhibit to HomeTrust Bancshares's Current Report on Form 8-K filed on May 1, 2018 (File No. 001-35593).


(q)	Filed as an exhibit to HomeTrust Bancshares’s Current Report on Form 8-K filed on September 11, 2018 (File No. 001-35593).


(r)	Filed as an exhibit to HomeTrust Bancshares's Annual Report on Form 10-K for the fiscal year ended June 30, 2018 (File No. 001-35593).


(s)	Filed as an exhibit to HomeTrust Bancshares’s Current Report on Form 8-K filed on September 25, 2018 (File No. 001-35593.


(t)	Filed as an exhibit to HomeTrust Bancshares's Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 (File No. 001-35593).


(u)	Filed as an exhibit to HomeTrust Bancshares's Quarterly Report on Form 10-Q for the quarter ended December 31, 2018 (File No. 001-35593).


(v)	Filed as an exhibit to HomeTrust Bancshares's Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 (File No. 001-35593).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	HomeTrust Bancshares, Inc.


Date: February 7, 2020	By:	/s/ Dana L. Stonestreet
		Dana L. Stonestreet
		Chairman, President and CEO
		(Duly Authorized Officer)

Date: February 7, 2020	By:	/s/ Tony J. VunCannon
		Tony J. VunCannon
		Executive Vice President, CFO, Corporate Secretary and Treasurer
		(Principal Financial and Accounting Officer)