HomeTrust Bancshares, Inc. filed 10-K

HomeTrust Bancshares, Inc. filed 10-K with SEC. Read ‘s full filing at 000153826319000038.

(1)The weighted average rate of municipal loans is adjusted for a 24% combined federal and state tax rate since the interest income from these leases is tax exempt.

The weighted average rate of municipal loans is adjusted for a 24% combined federal and state tax rate since the interest income from these leases is tax exempt.

Loan relationships in excess of $7.5 million in total credit exposure must be approved by our Senior Loan Committee, which is comprised of the Chief Credit Officer, the Commercial Banking Group Executive, and/or the Chief Operating Officer. Any loan submitted for Senior Loan Committee approval must have the prior approval of the Relationship Manager, the Market President and their assigned Senior Credit Officer. Loans in excess of $15.0 million in total credit exposure must be approved by the Executive Loan Committee comprised of the Chief Executive Officer, Chief Operating Officer, Commercial Banking Group Executive, Chief Credit Officer and another Senior Credit Officer not involved with the credit. A quorum consists of at least three members, one of whom must be either the Chief Credit Officer or the Senior Credit Officer. A 70% vote is required for approval. Total credit exposure in a single loan or group of loans to related borrowers exceeding 60% of the Bank’s legal lending limit must be approved by the Bank’s board of directors.

At June 30, 2019, the maximum amount under federal regulation that we could lend to any one borrower and the borrower’s related entities was approximately $56.6 million. Our five largest lending relationships are with commercial borrowers and totaled $108.1 million in the aggregate, or 4.0% of our $2.7 billion loan portfolio at June 30, 2019. As of June 30, 2019, all loans to these borrowers were performing in accordance with their original repayment terms.

One-to-Four Family Real Estate Lending. We originate loans secured by first mortgages on one-to-four family residences typically for the purchase or refinance of owner-occupied primary or secondary residences located primarily in our market areas. We generally originate one-to-four family residential mortgage loans through referrals from real estate agents, builders, and from existing customers. Walk-in customers are also important sources of loan originations. At June 30, 2019, $660.6 million, or 24.4%, of our loan portfolio consisted of loans secured by one-to-four family residences. Subsequent to June 30, 2019, the Company decided to sell between $200.0 million and $300.0 million of our one-to-four family loans to a third party. Once specifically identified, these loans will be moved from total loans to loans held for sale at the lower of cost or market. The transaction is anticipated to close during the second quarter of fiscal 2020 at a gain. See Note 24 “Subsequent Events” in the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information.

We originate both fixed-rate loans and adjustable-rate loans. We generally originate mortgage loans in amounts up to 80% of the lesser of the appraised value or purchase price of a mortgaged property, but will also permit loan-to-value ratios of up to 95%. For loans exceeding an 80% loan-to-value ratio we generally require the borrower to obtain private mortgage insurance covering us for any loss on the amount of the loan in excess of 80% in the event of foreclosure.

Home Equity Lines of Credit.  Our originated home equity lines of credit (“HELOCs”) consist primarily of adjustable-rate lines of credit. At June 30, 2019, HELOCs-originated totaled $131.1 million or 4.8% of our loan portfolio of which $67.4 million was secured by a first lien on owner-occupied residential property. The lines of credit may be originated in amounts, together with the amount of the existing first mortgage, typically up to 85% of the value of the property securing the loan (less any prior mortgage loans) with an adjustable-rate of interest based on The Wall Street Journal prime rate plus a margin. Currently, our home equity line of credit floor interest rate is dependent on the overall loan to value, and has a cap of 16% above the floor rate over the life of the loan. Originated HELOCs generally have up to a ten-year draw period and amounts may be reborrowed after payment at any time during the draw period. Once the draw period has lapsed, the payment is amortized over a 15-year period based on the loan balance at that time. At June 30, 2019, unfunded commitments on these lines of credit totaled $201.4 million.

In December 2014, the Company began purchasing HELOCs originated by other financial institutions. At June 30, 2019, HELOCs-purchased totaled $117.0 million, or 4.3% of our loan portfolio. Unfunded commitments on these lines of credit were $31.6 million at June 30, 2019. The credit risk characteristics are different for these loans since they were not originated by the Company and the collateral is located outside the Company’s market area, primarily in several western states. All of these loans were originated in 2012 or later, had an average FICO score of 740, and loan to values of less than 90% at origination. Loan charge-offs in this portfolio since December 2014 totaled $48,000. The Company will continue to monitor the performance of these loans and adjust the allowance for loan losses as necessary.

At June 30, 2019, our construction and land/lot loan portfolio was $80.6 million compared to $65.6 million at June 30, 2018. At June 30, 2019, unfunded loan commitments totaled $65.4 million, compared to $58.9 million at June 30, 2018. Construction-to-permanent loans are made for the construction of a one-to-four family property which is intended to be occupied by the borrower as either a primary or secondary residence. Construction-to-permanent loans are originated to the homeowner rather than the homebuilder and are structured to be converted to a first lien fixed- or adjustable-rate permanent loan at the completion of the construction phase. We do not originate construction phase only or junior lien construction-to-permanent loans. The permanent loan is generally underwritten to the same standards as our one-to-four family residential loans and may be held by us for portfolio investment or sold in the secondary market. At June 30, 2019, our construction-to-permanent loans totaled $70.3 million and the average loan size was $226,650. During the construction phase, which typically lasts for six to 12 months, we make periodic inspections of the construction site and loan proceeds are disbursed directly to the contractors or borrowers as construction progresses. Typically, disbursements are made in monthly draws during the construction period. Loan proceeds are disbursed based on a percentage of completion. Construction-to-permanent loans require payment of interest only during the construction phase. Prior to making a commitment to fund a construction loan, we require an appraisal of the property by an independent appraiser. Construction loans may be originated up to 95% of the cost or of the appraised value upon completion, whichever is less; however, we generally do not originate construction loans which exceed the lower of 80% loan to cost or appraised value without securing adequate private mortgage insurance or other form of credit enhancement such as the Federal Housing Administration or other governmental guarantee. We also require general liability, builder’s risk hazard insurance, title insurance, and flood insurance (as applicable, for properties located or to be built in a designated flood hazard area) on all construction loans. At June 30, 2019, the largest construction to permanent loan had an outstanding balance of $2.6 million and was performing according to the original repayment terms.

Indirect Auto Finance. As of June 30, 2019, our indirect auto finance installment contracts totaled $153.4 million, or 5.7% of our total loan portfolio. Going forward, the Company expects to maintain the size of this portfolio at approximately the same current percentage of the total loan portfolio. As an indirect lender, we market to automobile dealerships, both manufacturer franchised dealerships and independent dealerships, who utilize our origination platform to provide automotive financing through installment contracts on new and used vehicles. As of June 30, 2019, we worked with 69 auto dealerships located in western North Carolina and upstate South Carolina. Working with strong dealerships within our market area provides us with the opportunity to actively deepen customer relationships through cross-selling opportunities, as 83.0% of our indirect auto finance loans are originated to noncustomers.

Our indirect auto portfolio at June 30, 2019, consisted of 9,872 installment loan contracts with a weighted-average contract rate of 5.12%, an average FICO credit score of 732, and an average loan to value ratio of 106.4% based on wholesale dealer invoice on new cars and the NADA Official Used Car Guide for used cars. Approximately 85% were originated through manufacturer franchised dealerships and approximately 15% were originated through independent dealerships; 40% were contracts on new vehicles and 60% were contracts on used vehicles. The loan term is averaging 66 months which is comparable to national auto industry data.

Consumer Lending.  Our consumer loans consist of loans secured by deposits accounts or personal property such as automobiles, boats, and motorcycles, as well as unsecured consumer debt. At June 30, 2019, our consumer loans totaled $19.8 million, or 0.7% of our loan portfolio. We originate our consumer loans primarily in our market areas.

Commercial Real Estate Lending.  We originate commercial real estate loans, including loans secured by office buildings, retail/wholesale facilities, hotels, industrial facilities, medical and professional buildings, churches, and multifamily residential properties located primarily in our market areas. As of June 30, 2019, $927.3 million or 34.3% of our total loan portfolio was secured by commercial real estate property, including multifamily loans totaling $105.6 million, or 3.91% of our total loan portfolio. Of the remaining amount, $259.6 million was identified as owner occupied commercial real estate, and $562.1 million was secured by income producing, or non-owner-occupied commercial real estate. Commercial real estate loans generally are priced at a higher rate of interest than one-to-four family residential loans. Typically, these loans have higher loan balances, are more difficult to evaluate and monitor, and involve a greater degree of risk than one-to-four family residential loans. Often payments on loans secured by commercial or multi-family properties are dependent on the successful operation and management of the property; therefore, repayment of these loans may be affected by adverse conditions in the real estate market or the economy. We generally require and obtain loan guarantees from financially capable parties based upon the review of personal financial statements. If the borrower is a corporation, we generally require and obtain personal guarantees from the corporate principals based upon a review of their personal financial statements and individual credit reports.

The average outstanding loan size in our commercial real estate portfolio was $726,000 as of June 30, 2019. The Bank’s commercial focus is on developing and fostering strong banking relationships with small to mid-size clients within our market area. At June 30, 2019, the largest commercial real estate loan in our portfolio was to a local borrower in Asheville, NC for $12.6 million, secured by a hotel. Our largest multi-family loan as of June 30, 2019 was a 76.74% interest in a 91 unit apartment property in Charlotte, NC with an outstanding balance of $9.7 million. Both of these loans were performing according to their original repayment terms as of June 30, 2019.

We offer both fixed- and adjustable-rate commercial real estate loans. Our commercial real estate mortgage loans generally include a balloon maturity of five years or less. Amortization terms are generally limited to 20 years. Adjustable rate based loans typically include a floor and ceiling interest rate and are indexed to The Wall Street Journal prime rate, or the one-month London Interbank Offered Rate (“LIBOR”), plus or minus an interest rate margin and rates generally adjust daily. The maximum loan to value ratio for commercial real estate loans is generally up to 80% on purchases and refinances. We require appraisals of all non-owner occupied commercial real estate securing loans in excess of $250,000, and all owner-occupied commercial real estate securing loans in excess of $500,000, performed by independent appraisers. For loans less than these amounts, we may use the tax assessed value, broker price opinions, and/or a property inspection in lieu of an appraisal.

Our expansion into larger metro markets combined with the hiring of experienced commercial real estate relationship managers, credit officers, and the development of a construction risk management group to better manage construction risk, has led to a significant increase in and conscience effort to grow the construction and development portfolio. At June 30, 2019, our construction and development loans totaled $210.9 million, or 7.8% of our total loan portfolio. At June 30, 2019, $69.1 million or 32.8% of our construction and development loans required interest-only payments. A minimal amount of these construction loans provide for interest payments to be paid out of an interest reserve, which is established in connection with the origination of the loan pursuant to which we will fund the borrower’s monthly interest payments and add the payments to the outstanding principal balance of the loan. Unfunded commitments at June 30, 2019 totaled $123.1 million compared to $151.6 million at June 30, 2018. Land acquisition and development loans are included in the construction and development loan portfolio, and represent loans made to developers for the purpose of acquiring raw land and/or for the subsequent development and sale of residential lots. Such loans typically finance land purchase and infrastructure development of properties (i.e. roads, utilities, etc.) with the aim of making improved lots ready for subsequent sale to consumers or builders for ultimate construction of residential units. The primary source of repayment is generally the cash flow from developer sale of lots or improved parcels of land, secondary sources and personal guarantees, which may provide an additional measure of security for such loans.

Part of our land acquisition and development portfolio consists of speculative construction loans for homes. These homes typically have an average price ranging from $200,000 to $500,000. Speculative construction loans are made to home builders and are termed ‘speculative’ because the home builder does not have, at the time of loan origination, a signed contract with a home buyer who has a commitment for permanent financing with either us or another lender for the finished home. The home buyer may be identified either during or after the construction period, with the risk that the builder will have to fund the debt service on the speculative construction loan and finance real estate taxes and other carrying costs of the completed home for a significant period of time after the completion of construction, until a home buyer is identified. Loans to finance the construction of speculative single-family homes and subdivisions are generally offered to experienced builders with proven track records of performance, are qualified using the same standards as other commercial loan credits and require cash reserves to carry projects through construction completions and sale of the project. These loans require payment of interest-only during the construction phase. At June 30, 2019, loans for the speculative construction of single family properties totaled $46.0 million compared to $48.7 million at June 30, 2018. At June 30, 2019, we had four borrowers each with an aggregate outstanding loan balance over $1.0 million which comprise 10.6% of the total balance for the speculative construction of single family properties and secured by properties located in our market areas. At June 30, 2019, no speculative construction loans were classified as nonaccruing. Unfunded commitments were $31.4 million at June 30, 2019 and $30.1 million at June 30, 2018.

Commercial construction and construction to permanent loans are offered on an adjustable interest rate or fixed interest rate basis. Adjustable interest rate loans typically include a floor and ceiling interest rate and are indexed to The Wall Street Journal prime rate, plus or minus an interest rate margin. The initial construction period is generally limited to 12 to 24 months from the date of origination, and amortization terms are generally limited to 20 years; however, amortization terms of up to 25 years may be available for certain property types based on elevated underwriting and qualification criteria. Construction to permanent loans generally include a balloon maturity of five years or less; however, balloon maturities of greater than five years are allowed on a limited basis depending on factors such as property type, amortization term, lease terms, pricing, or the availability of credit enhancements. Construction loan proceeds are disbursed commensurate with the percentage of completion of work in place, as documented by periodic internal or third-party inspections. The maximum loan-to-value limit applicable to these loans is generally 80% of the appraised post-construction value. Disbursement of funds is at our sole discretion and is based on the progress of construction. At June 30, 2019 we had $97.3 million of non-residential construction loans included in our commercial construction and development loan portfolio.

Commercial and industrial loans typically have shorter maturity terms and higher interest rates than real estate loans, but generally involve more credit risk because of the type and nature of the collateral. We are focusing our efforts on small- to medium-sized, privately-held companies with local or regional businesses that operate in our market areas. At June 30, 2019, commercial and industrial loans totaled $160.5 million, which represented 5.9% of our total loan portfolio. Our commercial and industrial lending policy includes credit file documentation and analysis of the borrower’s background, capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well as an evaluation of other conditions affecting the borrower. Analysis of the borrower’s past, present and future cash flows is also an important aspect of our credit analysis. We generally obtain personal guarantees on our commercial business loans.

During fiscal 2018, we began commercial business loan originations made under the U.S. Small Business Administration (“SBA”) 7(a) and United States Department of Agriculture Business & Industry (‘USDA B&I’) programs to small businesses located throughout the Southeast. We originate these loans and utilize a third party service provider that assists with processing and closing services based on the Bank’s underwriting and credit approval criteria. Loans made by the Bank under the SBA 7(a) and USDA B&I programs generally are made to small businesses to provide working capital needs, to refinance existing debt or to provide funding for the purchase of businesses, real estate, machinery, and equipment. These loans generally are secured by a combination of assets that may include receivables, inventory, furniture, fixtures, equipment, business real property, commercial real estate and sometimes additional collateral such as an assignment of life insurance and a lien on personal real estate owned by the guarantor(s). The terms of these loans vary by use of funds. The loans are primarily underwritten on the basis of the borrower’s ability to service the loan from qualifying business income. Under the SBA 7(a) and USDA B&I loan program the loans carry a government guaranty up to 90% of the loan in some cases. Typical maturities for this type of loan vary up to twenty-five years and can be thirty years in some circumstances. SBA 7(a) and USDA B&I loans will normally be adjustable rate loans based upon the Wall Street Journal prime lending rate. Under the loan programs, we will typically sell in the secondary market the guaranteed portion of these loans to generate noninterest income and retain the related unguaranteed portion of these loans; loan servicing is handled by a third party loan sub-service provider for a fee paid for by the purchaser of the guaranteed loan portion. We generally offer SBA 7(a) loans up to $5.0 million and USDA B&I loans up to $10.0 million. During the year ended June 30, 2019, we originated $61.7 million and sold participating interests of $48.1 million in SBA 7(a) and USDA B&I loans.

Equipment Finance. Our Equipment Finance line of business first began operations in May 2018 and offers companies that are purchasing equipment for their business various products to help manage tax and accounting issues, while offering flexible and customizable repayment terms. These products are primarily made up of commercial finance agreements and commercial loans for transportation equipment, construction equipment, and manufacturing. 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. At June 30, 2019, equipment finance loans totaled $132.1 million, which represented 4.9% of our total loan portfolio.

At June 30, 2019, municipal leases totaled $112.0 million, which represented 4.1% of our total loan portfolio. At that date, $38.5 million, or 34.4% of our municipal leases were secured by fire trucks, $30.5 million, or 27.3%, were secured by fire stations, $39.4 million or 35.1%, were secured by both, with the remaining $3.6 million or 3.2% secured by miscellaneous firefighting equipment. At June 30, 2019, the average outstanding municipal lease size was $371,000.

Nonperforming Assets.  Nonperforming assets were $13.3 million, or 0.38% of total assets at June 30, 2019, compared to $14.6 million, or 0.44%, at June 30, 2018.

Once a nonaccruing troubled debt restructuring has performed according to its modified terms for six months and the collection of principal and interest under the revised terms is deemed probable, the troubled debt restructuring is removed from nonaccrual status. At June 30, 2019, $4.5 million of troubled debt restructurings were classified as nonaccrual, including $1.2 million of construction and development loans. As of June 30, 2019, $23.1 million, or 82.8% of the restructured loans have a current payment status as compared to $21.2 million, or 81.3% at June 30, 2018. Performing troubled debt restructurings increased $1.9 million, or 8.8%, from June 30, 2018 to June 30, 2019. The table below sets forth the amounts and categories of nonperforming assets.

In fiscal 2019, we liquidated $1.6 million in REO based on contractual loan values at the time of foreclosure, realizing $1.0 million in net proceeds, or 64.2%, of the foreclosed contractual loan balances. As of June 30, 2019, the book value of our REO, expressed as a percentage of the related contractual loan balances at the time the properties were transferred to REO was 37.8%.

At June 30, 2019, our allowance for loan losses was $21.4 million, or 0.79%, of our total loan portfolio, and 206.9% of total nonaccruing loans. Excluding loans acquired, which have been recorded at fair value with an appropriate credit discount, the allowance for loan losses was 0.85% of total loans at June 30, 2019. Management’s estimation of an appropriate allowance for loan losses is inherently subjective as it requires estimates and assumptions that are susceptible to significant revisions as more information becomes available or as future events change. The level of allowance is based on estimates and the ultimate losses may vary from these estimates. Large groups of smaller balance homogeneous loans, such as residential real estate, small commercial real estate, home equity and consumer loans, are evaluated in the aggregate using historical loss factors adjusted for current economic conditions. Assessing the allowance for loan losses is inherently subjective as it requires making material estimates, including the amount and timing of future cash flows expected to be received. In the opinion of management, the allowance, when taken as a whole, reflects estimated loan losses in our loan portfolio.

(1) Excluding loans acquired, which have been recorded at fair value with an appropriate credit discount, the allowance for loan losses was 0.85%, 0.91%, 1.03%, 1.32%, and 1.58% of total loans at June 30, 2019, 2018, 2017, 2016, and 2015, respectively.

Excluding loans acquired, which have been recorded at fair value with an appropriate credit discount, the allowance for loan losses was 0.85%, 0.91%, 1.03%, 1.32%, and 1.58% of total loans at June 30, 2019, 2018, 2017, 2016, and 2015, respectively.

The following table sets forth the composition of our securities portfolio and other investments at the dates indicated. All securities at the dates indicated have been classified as available for sale. At June 30, 2019, our securities portfolio did not contain securities of any issuer with an aggregate book value in excess of 10% of our equity capital, excluding those issued by the United States government or its agencies or United States government sponsored entities.

General.  Our sources of funds are primarily deposits, borrowings, payments of principal and interest on loans, and funds provided from operations. Deposits increased $131.0 million, or 6.0%, to $2.3 billion at June 30, 2019 as compared to $2.2 billion at June 30, 2018.

Deposits.  We offer a variety of deposit accounts with a wide range of interest rates and terms to both consumers and businesses. Our deposits consist of savings, money market and demand accounts, and certificates of deposit (“CDs”). We solicit deposits primarily in our market areas. At June 30, 2019, 2018 and 2017, we had $176.8 million, $108.9 million, and $16.8 million in brokered deposits, respectively. As of June 30, 2019, core deposits, which we define as our non-certificate or non-time deposit accounts, represented approximately 69.4% of total deposits.

Approximately 30.6% of our total deposits are comprised of CDs. Our liquidity could be reduced if a significant amount of CDs, maturing within a short period of time, were not renewed. Historically, a significant portion of our CDs remain with us after they mature and we believe that this will continue. However, the need to retain these time deposits could result in an increase in our cost of funds.

The Bank is subject to a statutory lending limit on aggregate loans to one person or a group of persons combined because of certain relationships and common interests. That limit is generally equal to 15% of unimpaired capital and surplus, which was $56.6 million as of June 30, 2019. The limit is increased to 25% for loans fully secured by readily marketable collateral. The Bank has no lending relationships in excess of its lending limit.

Pursuant to the Dodd-Frank Act, federal banking and securities regulators issued final rules to implement Section 619 of the Dodd-Frank Act (the ‘Volcker Rule’). These rules became effective April 15, 2014, but the Federal Reserve extended the conformance period for certain features to July 21, 2017. Generally, subject to a transition period and certain exceptions, the Volcker Rule restricts insured depository institutions and their affiliates from engaging in short-term proprietary trading of certain securities, investing in funds not registered with the SEC with collateral not entirely comprised of loans, and from engaging in hedging activities that do not hedge a specific identified risk. Banks with total consolidated assets of $10 billion or less and total consolidated trading assets and liabilities equal to 5% or less of total consolidated assets are not subject to the Volcker Rule.

Federal law generally prohibits loans by HomeTrust Bancshares to its executive officers and directors, but there is a specific exception for loans made by HomeTrust Bank to its executive officers and directors in compliance with federal banking laws. However, HomeTrust Bank’s authority to extend credit to its executive officers, directors and 10% shareholders (‘insiders’), as well as entities those insiders control, is limited. The individual and aggregate amounts of loans that HomeTrust Bank may make to insiders are based, in part, on HomeTrust Bank’s capital level and require that certain board approval procedures be followed. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. Loans to executive officers are subject to additional limitations based on the type of loan involved.

Under the capital regulations, the minimum required capital ratios for the Company and the Bank are (i) a CETI capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6.0%; (iii) a total capital ratio of 8.0%; and (iv) a leverage ratio (the ratio of Tier 1 capital to average total consolidated assets) of 4.0% for all financial institutions. CET1 generally consists of common stock and retained earnings. Tier 1 capital generally consists of CET1 and noncumulative perpetual preferred stock. Tier 2 capital generally consists of other preferred stock and subordinated debt meeting certain conditions plus an amount of the allowance for loan and lease losses up to 1.25% of assets. Total capital is the sum of Tier 1 and Tier 2 capital. The CET1 capital ratio, the Tier 1 capital ratio and the total capital ratio are sometimes referred to as the risk-based capital ratios and are determined based on risk-weightings of assets and certain off-balance sheet items that range from 0% to 1,250%.

As noted above, in addition to the risk-based capital ratios, the Bank must maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the minimum levels for such ratios 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. The capital conservation buffer requirement began to be phased in starting in January 2016 at an amount more than 0.625% of risk-weighted assets and increased each year until fully implemented to an amount more than 2.5% of risk-weighted assets on January 1, 2019. To meet the minimum capital ratios and the capital conservation buffer requirements, the capital ratios applicable to the Company and the Bank are (i) a CETI capital ratio greater than 7.0%; (ii) a Tier 1 capital ratio greater than 8.5%; (iii) a total capital ratio greater than 10.5%; and (iv) a Tier 1 leverage ratio greater than 4.0%. As of June 30, 2019, the conservation buffer for HomeTrust Bank was 4.3%.

To be consider ‘well capitalized,’ a depository institution must have a Tier 1 capital ratio of at least 8%, a total capital ratio of at least 10%, a CET1 capital ratio of at least 6.5% and a leverage ratio of at least 5% and not be subject to an individualized order, directive or agreement under which its primary federal banking regulator requires it to maintain a specific capital level. Institutions that are not well capitalized are subject to certain restrictions on brokered deposits and interest rates on deposits. Under certain circumstances, regulators are required to take certain actions against banks that fail to meet the minimum required capital ratios. Any such institution must submit a capital restoration plan and, until such plan is approved may not increase its assets, acquire another depository institution, establish a branch or engage in any new activities, or make capital distributions. As of June 30, 2019, HomeTrust Bank met the requirements to be ‘well capitalized’ and met the fully phased-in capital conservation buffer requirement. For additional information regarding the Bank’s required and actual capital levels at June 30, 2019, see Note 19 of the Notes to Consolidated Financial Statements included in Item 8 in this report.

•Total commercial real estate loans (as defined in the guidance) represent 300% or more of the bank’s total regulatory capital and the outstanding balance of the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months.

Total commercial real estate loans (as defined in the guidance) represent 300% or more of the bank’s total regulatory capital and the outstanding balance of the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months.

The guidance provides that the strength of an institution’s lending and risk management practices with respect to such concentrations will be taken into account in supervisory guidance on evaluation of capital adequacy. As of June 30, 2019, HomeTrust Bank’s aggregate recorded loan balances for construction, land development and land loans were 58.7% of regulatory capital. In addition, at June 30, 2019, HomeTrust Bank’s commercial real estate loans, as defined by the guidance, were 252.6% of regulatory capital.

Limitations on Dividends.  NCCOB and Federal Reserve regulations impose various restrictions on the ability of the Bank to pay dividends. The Bank generally may pay dividends during any calendar year in an amount up to 100% of net income for the year-to-date plus retained net income for the two preceding years, without the approval of the Federal Reserve. If the Bank proposes to pay a dividend that will exceed this limitation, it must obtain the Federal Reserve’s prior approval. The Federal Reserve may object to a proposed dividend based on safety and soundness concerns. No insured depository institution may pay a dividend if, after paying the dividend, the institution would be undercapitalized. In addition, as noted above, if the Bank does not have the required capital conservation buffer, its ability to pay dividends to HomeTrust Bancshares, Inc. will be limited.

Permissible Activities.  The business activities of HomeTrust Bancshares, Inc. are generally limited to those activities permissible for bank holding companies under Section 4(c)(8) of the BHCA, those permitted for a financial holding company under Section 4(f) of the BHCA, and certain additional activities authorized by regulation. The BHCA generally prohibits a financial holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company. A bank holding company must obtain Federal Reserve approval before acquiring directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares).

Stock Repurchases. A bank holding company, except for certain ‘well-capitalized’ and highly rated bank holding companies, is required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding twelve months, is equal to 10% or more of its consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order or any condition imposed by, or written agreement with, the Federal Reserve.

On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the ‘Tax Act’). The Tax Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Tax Act reduced the corporate federal income tax rate from a maximum of 35% to a flat 21%. The corporate federal income tax rate reduction was effective January 1, 2018. Since the Company has a fiscal year end of June 30th, the reduced federal corporate income tax rate for fiscal year 2018 was the result of the application of a blended federal statutory tax rate of 27.5%, which was based on the applicable tax rates before and after the Tax Act and corresponding number of days in the fiscal year before and after enactment, and then became a flat 21% corporate income tax rate for fiscal 2019 and thereafter. The Tax Act also required a revaluation the Company’s deferred tax assets and liabilities to account for the future impact of lower corporate income tax rates and other provisions of the legislation. As a result of the Company’s revaluation in fiscal 2018, the net deferred tax asset (‘DTA’) was reduced through an increase to the provision for income tax. The revaluation of our DTA balance resulted in a one-time increase for the fiscal year ended June 30, 2018 to federal income tax of $17.6 million. See Note 13 “Income Taxes” in the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information.

Minimum Tax. Prior to the enactment of the Tax Act, the Internal Revenue Code (“IRC”) imposed an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, called alternative minimum taxable income. The alternative minimum tax was payable to the extent such alternative minimum taxable income was in excess of the regular tax. Net operating losses could offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax could be used as credits against regular tax liabilities in future years. Upon enactment of the Tax Act, the alternative minimum tax was repealed.

Net Operating Loss Carryovers.  A financial institution may carryback net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. This provision applies to losses incurred in taxable years beginning after August 6, 1997. In 2009, IRC 172 (b) (1) was amended to allow businesses to carry back losses incurred in 2008 and 2009 for up to five years to offset 50% of the available income from the fifth year and 100% of the available income for the other four years. At June 30, 2019, we had $24.2 million of net operating loss carryforwards for federal income tax purposes.

Corporate Dividends-Received Deduction.  HomeTrust Bancshares, Inc. files a consolidated return with the Bank. As a result, any dividends HomeTrust Bancshares, Inc. receives from the Bank will not be included as income to HomeTrust Bancshares, Inc. The corporate dividends-received deduction is 100%, or 80% in the case of dividends received from corporations with which a corporate recipient does not file a consolidated tax return, depending on the level of stock ownership of the payer of the dividend.

North Carolina.  On July 24, 2013, The Tax Simplification and Reduction Act of 2013 was signed into law. With this act, corporate income tax rates in North Carolina were reduced as net General Fund tax collection revenues goals were met. For tax years beginning on or after January 1, 2017, 2016, and 2015 the tax rate was 3%, 4%, and 5%, respectively. In June 2017, the state announced an additional reduction in the tax rate to 2.5% beginning on January 1, 2019. This rate reduction is not contingent on any revenue goals. The decrease in the North Carolina corporate tax rate will continue to decrease the deferred tax assets currently recorded on our balance sheet with a corresponding increase to our income tax provision, as temporary tax differences are reversed at lower state tax rates.

If a corporation in North Carolina does business in North Carolina and in one or more other states, North Carolina taxes a fraction of the corporation’s income based on the amount of sales, payroll, and property it maintains within North Carolina. North Carolina franchise tax is levied on business corporations at the rate of $1.50 per $1,000 of the largest of the following three alternate bases: (i) the amount of the corporation’s capital stock, surplus, and undivided profits apportionable to the state; (ii) 55% of the appraised value of the corporation’s property in the state subject to local taxation; or (iii) the book value of the corporation’s real and tangible personal property in the state less any outstanding debt that was created to acquire or improve real property in the state.

South Carolina. The state of South Carolina requires banks to file a bank tax return. As a multi-state bank, we pay taxes on the portion of revenue generated within the state. In 2019 and 2018 the tax rate was 5.0%.

Tennessee. The state of Tennessee requires banks to file a franchise and excise tax form for financial institutions. The franchise tax is based on the portion of revenue generated in the state, the net worth of the Bank, and the applicable franchise tax, which was $0.25 per $100 in 2019 and 2018. The excise tax is based on the taxable income (as defined by the state), the portion of revenue generated in the state, and the applicable excise tax, which was 6.5% in 2019 and 2018.

At June 30, 2019, the most significant portion of our loans located outside of our primary market areas was HELOCs-purchased totaling $117.0 million, or 4.3% of our loan portfolio, secured by one-to-four family properties located primarily in several western states. As a result, our financial condition and results of operations will be subject to general economic conditions and the real estate conditions prevailing in the markets in which the underlying properties securing these loans are located, as well as the conditions in our primary market areas. If economic conditions or if the real estate market declines in the areas in which these properties are located, we may suffer decreased net income or losses associated with higher default rates and decreased collateral values on our existing portfolio. Further, because of their geographical diversity, these loans can be more difficult to oversee than loans in our market areas in the event of delinquency.

At June 30, 2019, $660.6 million, or 24.4% of our total loan portfolio, was secured by first liens on one-to-four family residential loans. In addition, at June 30, 2019, our home equity lines of credit totaled $248.1 million or 9.2% of our total loan portfolio, including $67.4 million secured by a first lien on the residential property. These types of loans are generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. A decline in residential real estate values resulting from a downturn in the housing market may reduce the value of the real estate collateral securing these types of loans and increase our risk of loss if borrowers default on their loans. Recessionary conditions or declines in the volume of real estate sales and/or the sales prices coupled with elevated unemployment rates may result in higher than expected loan delinquencies or problem assets, and a decline in demand for our products and services. These potential negative events may cause us to incur losses, adversely affect our capital and liquidity, and damage our financial condition and business operations. Further, the Tax Act enacted in December 2017 could negatively impact our customers because it lowers the existing caps on mortgage interest deductions and limits the state and local tax deductions. These changes could make it more difficult for borrowers to make their loan payments, and could also negatively impact the housing market, which could adversely affect our business and loan growth.

At June 30, 2019, $85.3 million, or 12.9%, of our one-to-four family loans and 3.2% of our total loan portfolio, consisted of loans secured by non-owner-occupied residential properties. Loans secured by non-owner-occupied properties generally expose a lender to greater risk of non-payment and loss than loans secured by owner-occupied properties because repayment of such loans depends primarily on the tenant’s continuing ability to pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream. In addition, the physical condition of non-owner-occupied properties is often below that of owner-occupied properties due to lax property maintenance standards, which has a negative impact on the value of the collateral properties. Furthermore, some of our non-owner-occupied residential loan borrowers have more than one loan outstanding with HomeTrust Bank which may expose us to a greater risk of loss compared to an adverse development with respect to an owner-occupied residential mortgage loan.

At June 30, 2019, construction and land/lot loans in our retail consumer loan portfolio was $80.6 million, or 3.0%, of our total loan portfolio, and consists primarily of construction to permanent loans to homeowners building a residence or developing lots in residential subdivisions intending to construct a residence within one year. Construction and development loans in our commercial loan portfolio at June 30, 2019, totaled $210.9 million, or 7.8%, of our total loan portfolio, and consists of loans to contractors and builders primarily to finance the construction of single and multi-family homes, subdivisions, as well as commercial properties. We originate these loans whether or not the collateral property underlying the loan is under contract for sale.

While commercial real estate lending may potentially be more profitable than single-family residential lending, it is generally more sensitive to regional and local economic conditions, making loss levels more difficult to predict. Collateral evaluation and financial statement analysis in these types of loans require a more detailed analysis at the time of loan underwriting and on an ongoing basis. At June 30, 2019, commercial real estate loans were $927.3 million, or 34.3% of our total loan portfolio, including multifamily loans totaling $105.6 million or 3.9% of our total loan portfolio. These loans typically involve higher principal amounts than other types of loans and some of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one-to-four family residential mortgage loan. Repayment of these loans is dependent upon income being generated from the property securing the loan in amounts sufficient to cover operating expenses and debt service, which may be adversely affected by changes in the economy or local market conditions. Commercial real estate loans also expose a lender to greater credit risk than loans secured by one-to-four family residential real estate because the collateral securing these loans typically cannot be sold as easily as residential real estate. In addition, many of our commercial real estate loans are not fully amortizing and contain large balloon payments upon maturity. Such balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or non-payment. At June 30, 2019, commercial real estate loans that were nonperforming totaled $3.6 million, or 34.4% of our total nonperforming loans.

The FDIC, the Federal Reserve Board and the Office of the Comptroller of the Currency have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under this guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if, among other factors (i) total reported loans for construction, land development, and other land represent 100% or more of total capital, or (ii) total reported loans secured by multifamily and non-farm/non-residential properties, loans for construction, land development and other land, and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital. Based on the criteria, the Bank has a concentration in commercial real estate lending as total loans for multifamily, non-farm/non-residential, construction, land development and other land represented 252.6% of total risk-based capital at June 30, 2019. The particular focus of the guidance is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be at greater risk to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. While we believe we have implemented policies and procedures with respect to our loan portfolio consistent with this guidance, bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may result in additional costs to us.

At June 30, 2019, $153.4 million, or 5.7%, of our total loan portfolio consisted of indirect auto finance loans originated by us. Indirect auto finance loans are inherently risky as they are secured by assets that depreciate rapidly. In some cases, repossessed collateral for a defaulted automobile loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency may not warrant further substantial collection efforts against the borrower. Automobile loan collections depend on the borrower’s continuing financial stability, and therefore, are more likely to be adversely affected by job loss, divorce, illness, or personal bankruptcy. In addition, our ability to originate loans is reliant on our relationships with automotive dealers. In particular, our automotive finance operations depend in large part upon our ability to establish and maintain relationships with reputable automotive dealers that direct customers to our offices or originate loans at the point-of-sale. Although we have relationships with certain automotive dealers, none of our relationships are exclusive and any may be terminated at any time. If our existing dealer base experiences decreased sales we may experience decreased loan volume in the future, which may have an adverse effect on our business, results of operations, and financial condition.

At June 30, 2019, municipal leases were $112.0 million, or 4.1%, of our total loan portfolio. We offer ground and equipment lease financing to fire departments located throughout North Carolina and, to a lesser extent, South Carolina. Repayment of our municipal leases is often dependent on the tax revenues collected by the county/municipality on behalf of the fire department. Although a municipal lease does not constitute a general obligation of the county/municipality for which the county/municipality’s taxing power is pledged, a municipal lease is ordinarily backed by the county/municipality’s covenant to budget for, appropriate and pay the tax revenues to the fire department. However, certain municipal leases contain “non-appropriation” clauses which provide that the municipality has no obligation to make lease or installment purchase payments in future years unless money is appropriated for that purpose on a yearly basis. In the case of a “non-appropriation” lease, our ability to recover under the lease in the event of non-appropriation or default will be limited solely to the repossession of the leased property, without recourse to the general credit of the lessee, and disposition or releasing of the property might prove difficult. At June 30, 2019, $11.8 million of our municipal leases contained a non-appropriation clause.

Our earnings and cash flows are largely dependent upon our net interest income. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve. In an attempt to help the overall economy, the Federal Reserve has kept interest rates low through its targeted Fed Funds rate. The Federal Reserve has steadily increased the targeted federal funds rate over the last three fiscal years to a range of 2.25% to 2.50% at June 30, 2019. Subsequent to our year end the targeted federal funds rate range was lowered to 2.00% to 2.25% and the Fed Funds Futures suggests additional decreases, subject to economic conditions.

In addition, a substantial amount of our loans have adjustable interest rates. As a result, these loans may experience a higher rate of default in a rising interest rate environment. Further, a significant portion of our adjustable rate loans have interest rate floors below which the loan’s contractual interest rate may not adjust. As of June 30, 2019, our loans with interest rate floors totaled approximately $651.2 million or 24.1% of our total loan portfolio and had a weighted average floor rate of 4.04%. At that date, $74.7 million of these loans were at their floor rate, of which $56.2 million, or 75.2%, had yields that would begin floating again once prime rates increase at least 200 basis points. The inability of our loans to adjust downward can contribute to increased income in periods of declining interest rates, although this result is subject to the risks that borrowers may refinance these loans during periods of declining interest rates. Also, when loans are at their floors, there is a further risk that our interest income may not increase as rapidly as our cost of funds during periods of increasing interest rates which could have a material adverse effect on our results of operations.

HomeTrust Bank utilizes the national brokered deposit market for a portion of our funding needs. At June 30, 2019, brokered deposits totaled $176.9 million or 7.60% of total deposits, with remaining maturities of one month to three years. Under FDIC regulations, in the event we are deemed to be less than well-capitalized, we would be subject to restrictions on our use of brokered deposits and the interest rate we can offer on our deposits. If this happens, our use of brokered deposits and the rates we would be allowed to pay on deposits may significantly limit our ability to use deposits as a funding source. If we are unable to participate in this market for any reason in the future, our ability to replace these deposits at maturity could be adversely impacted.

As of June 30, 2019, we had approximately $24.2 million of federal net operating losses (‘NOLs’). The majority of these NOLs will expire for federal tax purposes from 2024 through 2036. Our ability to use our NOLs and other pre-ownership change losses (collectively, ‘Pre-Change Losses’) to offset future taxable income will be limited if we experience an ‘ownership change’ as defined in Section 382 of the Internal Revenue Code of 1986, as amended from time to time (the ‘Code’). In general, an ownership change occurs if, among other things, the shareholders (or specified groups of shareholders) who own or have owned, directly or indirectly, 5% or more of a corporation’s common stock or are otherwise treated as 5% shareholders under Section 382 and U.S. Treasury regulations promulgated thereunder increase their aggregate percentage ownership of that corporation’s stock by more than 50 percentage points over the lowest percentage of the stock owned by these shareholders over a rolling three-year period. If we experience an ownership change our Pre-Change Losses will be subject to an annual limitation on their use, which is generally equal to the fair market value of our outstanding stock immediately before the ownership change multiplied by the long-term tax-exempt rate, which was 2.19% for ownership changes occurring in June 2019. Depending on the size of the annual limitation (which is in part a function of our market capitalization at the time of the ownership change) and the remaining carryforward period for our Pre-Change Losses (U.S. federal net operating losses generally may be carried forward for a period of 20 years), we could realize a permanent loss of some or all of our Pre-Change Losses, which could have a material adverse effect on our results of operations and financial condition.

In September 2012, we adopted a shareholder rights plan (the ‘Rights Plan’), which provides an economic disincentive for any person or group to become an owner, for relevant tax purposes, of 4.99% or more of our stock. While adoption of the Rights Plan should reduce the likelihood that future transactions in our stock will result in an ownership change under Section 382, there can be no assurance that the Rights Plan will be effective to deter a shareholder from increasing its ownership interests beyond the limits set by the Rights Plan or that an ownership change will not occur in the future.

On December 6, 2018, the Company announced that its Board of Directors had authorized the repurchase of up to 931,601 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 June 30, 2019, 706,630 of the shares approved on December 6, 2018 had been purchased at an average price of $25.69.

(2)For the years ended June 30, 2019 and 2018 the weighted average rate for municipal leases is adjusted for a 24%, and 30%, respectively, combined federal and state tax rate since the interest from these leases is tax exempt. All other years were at 37%.

For the years ended June 30, 2019 and 2018 the weighted average rate for municipal leases is adjusted for a 24%, and 30%, respectively, combined federal and state tax rate since the interest from these leases is tax exempt. All other years were at 37%.

(5)Nonperforming assets include nonaccruing loans including certain restructured loans and real estate owned. At June 30, 2019, there were $4.5 million of restructured loans included in nonaccruing loans and $4.1 million, or 39.6%, of nonaccruing loans were current on their loan payments.

Nonperforming assets include nonaccruing loans including certain restructured loans and real estate owned. At June 30, 2019, there were $4.5 million of restructured loans included in nonaccruing loans and $4.1 million, or 39.6%, of nonaccruing loans were current on their loan payments.

Maintaining and improving asset quality. The Company believes that strong asset quality is a key to long-term financial success. The percentage of nonperforming loans to total loans was 0.38% and 0.43% for June 30, 2019 and 2018, respectively. The Company’s percentage of nonperforming assets to total assets at June 30, 2019 was 0.38% compared to 0.44% at June 30, 2018. The Company has actively managed the delinquent loans and nonperforming assets by aggressively pursuing the collection of consumer debts and marketing saleable properties upon foreclosure or repossession, work-outs of classified assets and loan charge-offs. In the past several years, the Company has applied more conservative and stringent underwriting practices to new loans, including, among other things, an increased emphasis on a borrower’s ongoing ability to repay a loan by requiring lower debt to income ratios, higher credit scores and lower loan to value ratios than our previous lending policies had required. Although the Company intends to grow the commercial loan portfolio by expanding commercial real estate and commercial and industrial lending, the Company intends to manage credit exposures through the use of experienced bankers in this area, internal concentration limits, and a conservative approach to lending.

Emphasizing lower cost core deposits to manage the funding costs of our loan growth.  We offer personal checking, savings and money-market accounts, which generally are lower-cost sources of funds than certificates of deposit and are less sensitive to withdrawal when interest rates fluctuate. To build our core deposit base, over the past several years, we have sought to reduce our dependence on traditional higher cost deposits in favor of stable lower cost demand deposits. We have utilized additional product offerings, technology and a focus on customer service in working toward this goal. In addition, we intend to increase demand deposits by growing business banking relationships through expanded product lines tailored to our target business customers’ needs. We continue to implement strategies that include enhancing our online and mobile banking platform, including improvements to online account opening and sales promotions on money market and checking accounts to encourage the growth of lower cost deposits. As a result, deposits have increased 6.0% during fiscal 2019 and core deposits (which we define as our non-certificate or non-time deposit accounts) represent 69.0% of total deposits. In addition, our improvement and additional products has led to a 9.5% increase in the number of “sweet spot” relationships (which we define as households with checking, savings, and credit accounts).

General.  Total assets increased $172.0 million, or 5.2% to $3.5 billion at June 30, 2019 from $3.3 billion at June 30, 2018. Total liabilities increased $172.4 million, or 6.0% to $3.1 billion at June 30, 2019 from $2.9 billion at June 30, 2018. Deposit growth of $131.0 million, or 6.0%; a $45.0 million, or 7.1% increase in borrowings; and the cumulative decrease of $48.1 million, or 21.7% in certificates of deposit in other banks and securities available for sale during the year ended June 30, 2019 were used to partially fund the $179.3 million, or 7.1% increase in total loans receivable, net of deferred loan fees, the $12.4 million, or 5.4% increase in commercial paper, the $12.3 million, or 209.5% increase in loans held for sale, and the $3.4 million, or 8.2% increase in other investments, net during the fiscal year 2019.

Cash, cash equivalents, and commercial paper.  Total cash and cash equivalents increased $297,000, or 0.4%, to $71.0 million at June 30, 2019 from $70.7 million at June 30, 2018. The commercial paper balance increased $12.4 million, or 5.4% to $241.4 million at June 30, 2019 from $229.1 million at June 30, 2019.

Investments.  Securities available for sale decreased $33.2 million, to $121.8 million at June 30, 2019 compared to $155.0 million at June 30, 2018. At June 30, 2019, certificates of deposit in other banks decreased $14.9 million, or 22.3% to $52.0 million at June 30, 2019 compared to $66.9 million at June 30, 2018. All of the certificates of deposit in other banks are fully insured by the FDIC. The Company has reduced its liquidity position in order to fund recent loan growth. We evaluate individual investment securities quarterly for other-than-temporary declines in market value. We do not believe that there are any other-than-temporary impairments at June 30, 2019; therefore, no impairment losses have been recorded for fiscal 2019. Other investments at cost include FHLB stock, FRB stock, and SBIC investments. FHLB stock increased $2.1 million, to $32.0 million over the last fiscal year as a result of required purchases due to increased FHLB borrowings. As a member of the Federal Reserve System, the Bank is required to own FRB stock, which totaled $7.3 million as of June 30, 2019 and 2018. In addition, SBIC equity investments increased $1.3 million to $6.1 million at June 30, 2019.

Loans.  Net loans receivable increased $179.0 million, or 7.1%, to $2.7 billion at June 30, 2019 compared to $2.5 billion at June 30, 2018, driven by $228.6 million in net organic loan growth.

Asset Quality. Nonperforming assets decreased 9.0% to $13.3 million, or 0.38% of total assets, at June 30, 2019, compared to $14.6 million, or 0.44% of total assets, at June 30, 2018. Nonperforming assets included $10.4 million in nonaccruing loans and $2.9 million in REO at June 30, 2019, compared to $10.9 million and $3.7 million, in nonaccruing loans and REO, respectively, at June 30, 2018. Included in nonperforming loans are $4.5 million of loans restructured from their original terms of which $1.8 million were current with respect to their modified payment terms. The decrease in nonaccruing loans was primarily due to continued improvements in credit quality throughout the loan portfolio and loans returning to performing status as payment history and the borrower’s financial status improved. At June 30, 2019, $4.1 million, or 39.6%, of nonaccruing loans were current on their required loan payments. Purchased impaired loans acquired from prior acquisitions aggregating to $1.3 million are 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 decreased to 0.38% at June 30, 2019 from 0.43% at June 30, 2018.

The ratio of classified assets to total assets decreased to 0.89% at June 30, 2019 from 1.0% at June 30, 2018. Classified assets decreased 6.5% to $30.9 million at June 30, 2019 compared to $33.1 million at June 30, 2018. Delinquent loans (loans delinquent 30 days or more) at June 30, 2019 were $10.1 million, or 0.4% of total loans compared to $9.8 million, or 0.4% of total loans at June 30, 2018.

Our allowance for loan losses at June 30, 2019 was $21.4 million, or 0.79% of total loans, compared to $21.1 million, or 0.83% of total loans at June 30, 2018. The allowance for loan losses was 0.85% of gross loans at June 30, 2019, excluding acquired loans from the allowance for loan losses in accordance with the acquisition method of accounting for business combinations, as compared to 0.91% at June 30, 2018. The Company recorded these loans at fair value, which includes a credit discount, therefore, no allowance for loan losses is established for these loans at the time of acquisition. Any subsequent deterioration in credit quality will result in a provision for loan losses. The allowance for our acquired loans at June 30, 2019 was $201,000 compared to $483,000 at June 30, 2018. There was a $5.7 million provision for loan losses for the year ended June 30, 2019 compared to no provision for the year ended June 30, 2018, which was primarily related to a $6.0 million commercial lending relationship, which was fully charged off in the third and fourth quarters this fiscal year, as a result of the Company becoming aware at the end of March 2019, that a commercial borrower operating as a heavy equipment contractor with $6.0 million of outstanding borrowings from the Bank had unexpectedly ceased operations. Based on further investigation and certain actions taken by the principal of the borrower, the Company believed that the Bank’s collateral, consisting primarily of accounts receivable, had substantially deteriorated. As a result of this investigation and further subsequent developments, the Company determined a full charge-off of this relationship was appropriate. The Company is continuing to take action to enforce its rights against the borrower, guarantors and its collateral, including to preserve and recover the borrower’s assets, where appropriate. As a result of this charged off lending relationship, net loan charge-offs increased to $5.3 million for the year ended June 30, 2019 from $91,000 for fiscal 2018. Net charge-offs as a percentage of average loans increased to 0.20% for the year ended June 30, 2019 from 0% for last fiscal year. The allowance as a percentage of nonaccruing loans increased to 206.9% at June 30, 2019, compared to 192.96% a year earlier. While the previously mentioned significant provision for loan losses negatively affected our earnings, we believe our overall asset quality metrics continue to demonstrate our commitment to growing and maintaining a loan portfolio with a moderate risk profile.

Deferred income taxes. Deferred income taxes decreased $6.0 million, or 18.6%, to $26.5 million at June 30, 2019 from $32.6 million at June 30, 2018. The decrease was primarily driven by the realization of net operating losses through increases in taxable income.

Deposits.  Total deposits increased $131.0 million, or 6.0%, to $2.3 billion at June 30, 2019 from $2.2 billion at June 30, 2018. The increase was primarily due to $196.0 million increase in our certificates of deposit, $67.9 million of which related to additional brokered deposits. At June 30, 2019 and 2019, we had $176.8 million and $108.9 million in brokered deposits, respectively.

Borrowings.  Borrowings, comprised of FHLB advances, increased to $680.0 million at June 30, 2019 from $635.0 million at June 30, 2018. At June 30, 2019 there were $380.0 million in FHLB advances with maturities less than 90 days and $300.0 million in convertible FHLB advances with maturities greater than one year; together with a weighted average interest rate of 2.10%.

Equity.  Stockholders’ equity at June 30, 2019 decreased to $408.9 million from $409.2 million at June 30, 2018. Changes within stockholders’ equity included $27.1 million in net income, $3.0 million in stock-based compensation, and a $2.3 million increase in other comprehensive income representing a reduction in unrealized losses on investment securities, net of tax, to an unrealized gain of $733,000, partially offset by 1,149,785 shares of common stock repurchased at an average price per share of $26.65, or approximately $30.6 million in total, and $3.2 million related to cash dividends. Tangible book value per share increased $1.24, or 6.2% to $21.20 as of June 30, 2019 compared to $19.96 at June 30, 2018.

(2)Interest income used in the average interest/earned and yield calculation includes the tax equivalent adjustment of $1.2 million, $1.6 million, and $2.4 million for fiscal years ended June 30, 2019, 2018, and 2017, respectively, calculated based on a combined federal and state tax rate of 24%, 30%, and 37%, respectively.

Interest income used in the average interest/earned and yield calculation includes the tax equivalent adjustment of $1.2 million, $1.6 million, and $2.4 million for fiscal years ended June 30, 2019, 2018, and 2017, respectively, calculated based on a combined federal and state tax rate of 24%, 30%, and 37%, respectively.

Net Interest Income.  Net interest income for 2019 was $106.9 million, a $5.5 million, or 5.5% increase from $101.3 million in 2018. The increase in net interest income for the year ended June 30, 2019 reflects a $19.9 million increase in interest and dividend income due primarily to an increase in average interest-earning assets, partially offset by a $14.3 million increase in interest expense.

During 2019, average interest-earning assets increased $173.6 million, or 5.8% to $3.1 billion compared to $3.0 billion for 2018. The $213.2 million, or 8.8% increase in average balance of total loans receivable for the year ended June 30, 2019 was primarily due to organic loan growth. The average balance of other interest-earning assets increased $35.2 million, or 14.2% between the periods primarily due to increases in commercial paper investments and other investments at cost. These increases were mainly funded by the cumulative decrease of $74.7 million, or 24.2% in average interest-earning deposits in other banks and securities available for sale, and an increase in average interest-bearing liabilities of $152.1 million, or 6.2%. Net interest margin (on a fully taxable-equivalent basis) for the year ended June 30, 2019 decreased three basis points to 3.43% from 3.46% for last year.

Interest Expense.  Total interest expense was $30.4 million in 2019, a $14.3 million, or 89.0% increase from $16.1 million in 2018. The increase was primarily related to the the 44 basis point increase in the average cost of deposits and to a lesser extent the $138.1 million, or 7.7% increase in average interest-bearing deposits, resulting in additional deposit interest expense of $9.0 million for the year ended June 30, 2019 as compared to the year ended June 30, 2018. In addition, there was an increase of 77 basis points in the average cost of borrowings and a $13.9 million, or 2.1% increase in average borrowings, resulting in additional interest expense of $5.3 million for the year ended June 30, 2019 as compared to the year ended June 30, 2018. The overall cost of funds increased 51 basis points to 1.16% for the year ended June 30, 2019 compared to 0.65% last year.

Noninterest Income.  Noninterest income was $22.9 million for 2019 compared to $19.0 million for 2018. The $3.9 million, or 20.7% increase was primarily due to a $1.9 million, or 45.4% increase in gain on sale of loans primarily due to originations and sales of SBA commercial loans; a $1.1 million, or 45.3% increase in other noninterest income primarily related to operating lease income; an $809,000, or 9.2% increase in service charges on deposit accounts as a result of an increase in deposit accounts and related fees; and a $246,000, or 20.9% increase in loan income and fees. There was also no gain from the sale of premises and equipment for the year ended June 30, 2019 as compared to $164,000 last year.

Noninterest Expense.  Noninterest expense was $90.1 million in 2019, a $4.8 million, or 5.6% increase from $85.3 million in 2018. The increase was primarily due to a $4.1 million, or 8.6% increase in salaries and employee benefits; a $1.2 million, or 19.0% increase in computer services; a $375,000, or 25.4% increase in marketing and advertising; and a $121,000, or 10.2% increase in REO-related expenses. The $4.1 million increase in salaries and benefits was primarily related to additional personnel in our new SBA and equipment finance lines of business. Partially offsetting these increases was a $616,000, or 23.3% decrease in core deposit intangible amortization; a $235,000, or 2.4% decrease in net occupancy expense; and a $193,000, or 11.9% decrease in deposit insurance premiums as a result of lower nonaccrual loans during the year ended June 30, 2019 compared to last year.

Income Taxes.  The provision for income taxes was $6.8 million for fiscal 2019 as compared to $26.7 million in 2018. The Company’s corporate federal income tax rate for the years ended June 30, 2019 and 2018 was 21% and 27.5%, respectively. In the quarter ended December 31, 2017, following a revaluation of net deferred tax assets due to the Tax Act, the Company wrote down deferred tax assets of $17.9 million, which were reflected as an adjustment through income tax expense. For more information on income taxes and deferred taxes, see Note 13 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

General.  During 2018, we had net income of $8.2 million, a $3.6 million or 30.5% decrease compared to net income of $11.8 million earned in 2017. The Company’s diluted earnings per share was $0.44 for the year ended June 30, 2018 compared to $0.65 for the year ended June 30, 2017. Earnings for the year ended June 30, 2018 included a $17.9 million write-down of deferred tax assets following a deferred tax revaluation resulting from enactment of the Tax Act with no comparable charge in fiscal year 2017, which was partially offset by the absence of merger-related expenses, which totaled $7.8 million in fiscal year 2017.

Net Interest Income.  Net interest income for 2018 was $101.3 million, a $10.1 million, or 11.1% increase from $91.2 million in 2017. The increase in net interest income for the year ended June 30, 2018 reflects a $18.0 million increase in interest and dividend income due primarily to an increase in average interest-earning assets, partially offset by a $7.8 million increase in interest expense.

During 2018, average interest-earning assets increased $292.3 million, or 10.9% to $3.0 billion compared to $2.7 billion for 2017. The $338.5 million, or 16.3% increase in average balance of total loans receivable for the year ended June 30, 2018 was due to a full year’s impact of the TriSummit acquisition and increased organic loan growth. This increase was mainly funded by the cumulative decrease of $46.2 million, or 7.6% in all other average interest-earning assets, an increase in average interest-bearing deposits of $152.2 million, or 9.2%, and an $80.4 million, or 13.9% increase in average borrowings, consisting entirely of FHLB advances. Net interest margin (on a fully taxable-equivalent basis) for the year ended June 30, 2018 decreased three basis points to 3.46% from 3.49% for last year primarily as a result of increased cost of funds.

offset by a $315,000, or 7.9% decrease in interest income from securities available for sale. The additional loan interest income was primarily due to the increase in the average balance of loans receivable, which was partially offset by a $3.0 million decrease in the accretion of purchase discounts on acquired loans to $3.2 million for the year ended June 30, 2018 from $6.1 million for fiscal year 2017, resulting from the full repayments of several loans with large discounts in the previous year. This decrease caused average loan yields to decrease three basis points to 4.41% for the year ended June 30, 2018 from 4.44% in fiscal 2017. The accretion on purchase discounts 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 loan pools purchased 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 loans 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 loan pools can be volatile from quarter to quarter as well as year over year. Excluding the effects of the accretion on purchase discounts on acquired loans, loan yields increased 13 basis points to 4.28% for the year ended June 30, 2018 compared to 4.15% in fiscal 2017.

Interest Expense.  Total interest expense was $16.1 million in 2018, a $7.8 million, or 94.9% increase from $8.2 million in 2017. The increase was primarily related to the increase in average interest-bearing deposits and borrowings coupled with the increased cost of nine and 78 basis points for the years ended June 30, 2018 and 2017, respectively. The overall cost of funds increased 28 basis points to 0.65% for the year ended June 30, 2018 compared to 0.37% in the last fiscal year primarily due to the impact of the recent increases in the target federal funds rate on the cost of our borrowings.

Noninterest Income.  Noninterest income was $19.0 million for 2018 compared to $16.1 million for 2017. The $2.9 million, or 17.8% increase was primarily due to a $1.1 million, or 14.2% increase in service charges on deposit accounts as a result of the increase in deposit accounts and related fees; a $1.8 million, or 49.6% increase in loan income from the gain on sale of loans and various commercial loan-related fees driven by the commencing of originations and sales of the guaranteed portion of U.S Small Business Administration (‘SBA’) commercial loans; and an $179,000, or 7.9% increase in other noninterest income. Partially offsetting these increases was a $221,000, or 57.4% decrease in gains from the sale of premises and equipment for the year ended June 30, 2018 compared to last fiscal year.

Noninterest Expense.  Noninterest expense was $85.3 million in 2018, a $4.9 million, or 5.5% decrease from $90.3 million in 2017. The decrease was primarily driven by the absence of the previously mentioned $7.8 million of merger-related expenses; a $192,000, or 11.5% decrease in marketing and advertising; a $210,000, or 3.2% decrease in computer services; and a $222,000, or 15.7% decrease in real estate owned (“REO”) related expenses primarily as a result of fewer REO properties held. Partially offsetting these decreases were the additional expenses related to the TriSummit acquisition, a new commercial loan production office in Greensboro, NC, new SBA and equipment finance lines of business, and the opening of a de novo branch in Cary, NC as shown in the cumulative increase of $3.4 million, or 5.0% in salaries and employee benefits; net occupancy expense; telephone, postage, and supplies; and other expenses for the year ended June 30, 2018 compared to last year. Deposit insurance premiums increased $241,000, or 17.5% as the net asset base has increased.

Income Taxes.  The provision for income taxes was $26.7 million for fiscal 2018 as compared to $5.2 million in 2017. The increase was mainly driven by the Tax Act’s reduction in the federal corporate tax rate, which required the Company to revalue net deferred tax assets and establish the tax valuation allowance on a portion of our alternative minimum tax (“AMT”) credits in accordance with Internal Revenue Service guidelines, resulting in a $17.9 million adjustment through income tax expense; and to a lesser extent higher pre-tax income. In addition, for the year ended June 30, 2018, the Company had a benefit of $142,000 as compared to a charge of $490,000 for the year ended June 30, 2017 related to the revaluation of various state deferred tax assets. In addition, our June 30 fiscal year end required the use of a blended federal income tax rate as prescribed by the Internal Revenue Code. The blended federal income tax rate of 27.5% was retroactively effective July 1, 2017 and was used for the entire fiscal year ended June 30, 2018.

Our asset/liability management strategy sets limits on the change in PVE given certain changes in interest rates. The table presented here, as of June 30, 2019, is forward-looking information about our sensitivity to changes in interest rates. The table incorporates data from an independent service, as it relates to maturity repricing and repayment/withdrawal of interest-earning assets and interest-bearing liabilities. Interest rate risk is measured by changes in PVE for instantaneous parallel shifts in the yield curve up and down 400 basis points. Given the current targeted federal funds rate is 2.00% to 2.25% making an immediate change of -200, -300 and -400 basis points improbable, a PVE calculation for a decrease of greater than 100 basis points has not been prepared. An increase in rates would slightly increase our PVE because the repricing of nonmaturing deposits tend to lag behind the increase in market rates. This positive impact is partially offset by the negative effect from our loans with interest rate floors which will not adjust until such time as a  loan’s current interest rate adjusts to an increase in market rates which exceeds the interest rate floor. Conversely, in a falling interest rate environment these interest rate floors will assist in maintaining our net interest income. As of June 30, 2019, our loans with interest rate floors totaled approximately $651.2 million or 24.1% of our total loan portfolio and had a weighted average floor rate of 4.04%, $74.7 million of these loans were at their floor rate, of which $56.2 million, or 75.2%, had yields that would begin floating again once prime rates increase at least 200 basis points.

In addition to these primary sources of funds, management has several secondary sources available to meet potential funding requirements. As of June 30, 2019, HomeTrust Bank had an additional borrowing capacity of $89.5 million with the FHLB of Atlanta, a $130.0 million line of credit with the FRB, and three lines of credit with three unaffiliated banks totaling $70.0 million. At June 30, 2019, we had $680.0 million in FHLB advances outstanding. 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 fixed-rate mortgage loans in the secondary market to reduce interest rate risk and to create still another source of liquidity. From time to time we also utilize brokered time deposits to supplement our other sources of funds. Brokered time deposits are obtained by utilizing an outside broker that is paid a fee. This funding requires advance notification to structure the type of deposit desired by us. Brokered deposits can vary in term from one month to several years and have the benefit of being a source of longer-term funding. We also utilize brokered deposits to help manage interest rate risk by extending the term to repricing of our liabilities, enhance our liquidity and fund asset growth. Brokered deposits are typically from outside our primary market areas, and our brokered deposit levels may vary from time to time depending on competitive interest rate conditions and other factors. At June 30, 2019, brokered deposits totaled $176.8 million or 7.6% of total deposits.

During fiscal 2019, cash and cash equivalents increased $297,000, or 0.4%, from $70.7 million as of June 30, 2018 to $71.0 million as of June 30, 2019. Cash provided by operating activities of $7.7 million and financing activities of $143.1 million was partially offset by cash used in investing activities of $150.5 million. Primary sources of cash for the year ended June 30, 2019 included proceeds from maturities of investment securities of $38.4 million, maturities of certificates of deposit in other banks, net of purchases, of $14.9 million, principal repayments of mortgage-backed securities of $31.6 million, a $45.0 million increase in borrowings, and a $131.0 million increase in net deposits. Primary uses of cash during the period included an increase in portfolio loans of $173.8 million, a $34.7 million increase in the purchase of investment securities, a $16.6 million increase in operating lease equipment and other assets, $30.6 million in common stock repurchases, the purchase of commercial paper, net of maturities, of $5.8 million, $3.2 million in cash dividends paid on common stock, and a $2.1 million increase in fixed asset purchases. All sources and uses of cash reflect our cash management strategy to increase our amount of higher yielding investments and loans, reducing our holdings in lower yielding investments and increasing our lower costing deposits.

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. As of June 30, 2019, the Bank was considered “well capitalized” in accordance with its regulatory capital guidelines and exceeded all regulatory capital requirements with Common Equity Tier 1, Tier 1 Risk-Based, Total Risk-Based, and Tier 1 Leverage capital ratios of 11.59%, 11.59%, 12.30%, and 10.34%, respectively. As of June 30, 2018, Common Equity Tier 1, Tier 1 Risk-Based, Total Risk-Based, and Tier 1 Leverage capital ratios were 11.70%, 11.70%, 12.45%, and 10.33%, respectively.

As of June 30, 2019, HomeTrust Bancshares, Inc. exceeded all regulatory capital requirements with Common Equity Tier 1, Tier 1 Risk-Based, Total Risk-Based, and Tier 1 Leverage capital ratios of 12.20%, 12.20%, 12.91%, and 10.89%, respectively. As of June 30, 2018, Common Equity Tier 1, Tier 1 Risk-Based, Total Risk-Based, and Tier 1 Leverage capital ratios were 12.97%, 12.97%, 13.72%, and 11.45%, respectively.

Under the 401(k), the Company matches employee contributions at 50% of employee deferrals up to 6% of each employee’s compensation. The Company may also make discretionary profit sharing contributions for the benefit of all eligible participants as long as total contributions do not exceed applicable limitations. Employees become fully vested in the Company’s contributions after six years of service.

Pursuant to the Merger Agreement, each share of the common stock of TriSummit and each share of Series A Preferred Stock of TriSummit issued and outstanding immediately prior to the Merger (on an as converted basis to a share of TriSummit common stock) was converted into the right to receive $4.40 in cash and .2099 shares of HomeTrust common stock, with cash paid in lieu of fractional share interests. At the Merger date, 50% of outstanding options granted by TriSummit were canceled. The remaining options were assumed by HomeTrust and converted into options to purchase 86,185 shares of HomeTrust Common Stock. In addition, TriSummit’s $7,222 Series B, Series C and Series D TARP preferred stock (all held by private shareholders) was redeemed in connection with the closing of the merger.

The enactment of the Tax Act and subsequent Internal Revenue Service guidelines reduced the statutory federal corporate income tax rate to 21% effective January 1, 2018, requiring the Company to revalue its DTA. The resulting $17.6 million in adjustments were reflected as an increase to the Company’s income tax expense with an additional $325,000 in income tax expense during the fiscal year ended June 30, 2018 to establish a tax valuation allowance on our alternative minimum tax (“AMT”) credits. In addition, our June 30, 2018 fiscal year end required the use of a blended federal income tax rate as prescribed by the Internal Revenue Code. The blended federal income tax rate of 27.5% was retroactively effective July 1, 2017 and was used for the entire fiscal year ended June 30, 2018.

The HomeTrust Bank KSOP Plan (“KSOP”) is comprised of two components, the 401(k) Plan and the ESOP. The KSOP benefits employees with at least 1000 hours of service during a 12-month period and who have attained age 21. Under the 401(k), the Company matches employee contributions at 50% of employee deferrals up to 6% of each employee’s compensation. The Company may also make discretionary profit sharing contributions for the benefit of all eligible participants as long as total contributions do not exceed applicable limitations. Employees become fully vested in the Company’s contributions after six years of service. Under the ESOP, the amount of the Bank’s annual contribution is discretionary, however it must be sufficient to pay the annual loan payment to the Company.

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 June 30, 2019 and June 30, 2018, respectively, loan commitments (excluding $181,477 and $209,726 of undisbursed portions of construction loans) totaled $93,432 and $49,949 of which $34,631 and $19,812 were variable rate commitments and $58,801 and $30,137 were fixed rate commitments. The fixed rate loans had interest rates ranging from 2.69% to 8.59% at June 30, 2019 and 2.10% to 6.15% at June 30, 2018, 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 $353,663 and $491,649 at June 30, 2019 and 2018, 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 loans held for sale: rate lock commitments and forward loan sale 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 June 30, 2019 or June 30, 2018.

In addition to the minimum common equity Tier 1 (“CET1”), Tier 1 and total risk-based capital ratios, HomeTrust Bancshares, Inc. and the Bank have to maintain a capital conservation buffer consisting of additional CET1 capital or more than 2.50% 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. As of June 30, 2019, the conservation buffer was 4.90%% and 4.30%% for HomeTrust Bancshares, Inc. and the Bank, respectively.

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