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

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02/09/2018 | 10:15pm CEST
Forward-Looking Statements
Certain matters in this Form 10-Q constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements relate to our financial condition, results of operations, plans,
objectives, future performance or business. Forward-looking statements are not
statements of historical fact, are based on certain assumptions and are
generally identified by use of the words "believes," "expects," "anticipates,"
"estimates," "forecasts," "intends," "plans," "targets," "potentially,"
"probably," "projects," "outlook" or similar expressions or future or
conditional verbs such as "may," "will," "should," "would," and "could."
Forward-looking statements include statements with respect to our beliefs,
plans, objectives, goals, expectations, assumptions, and statements about future
economic performance and projections of financial items. These forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors that could cause actual results to differ materially from the results
anticipated or implied by our forward-looking statements, including, but not
limited to: the credit risks of lending activities, including changes in the
level and trend of loan delinquencies and write offs and changes in our
allowance for loan losses and provision for loan losses that may be impacted by
deterioration in the housing and commercial real estate markets; changes in
general economic conditions, either nationally or in our market areas; changes
in the levels of general interest rates, and the relative differences between
short and long term interest rates, deposit interest rates, our net interest
margin and funding sources; fluctuations in the demand for loans, the number of
unsold homes, land and other properties and fluctuations in real estate values
in our market areas; decreases in the secondary market for the sale of loans
that we originate; results of examinations of us by the Board of Governors of
the Federal Reserve System ("Federal Reserve"), the North Carolina Office of the
Commissioner of Banks ("NCCOB"), or other regulatory authorities, including the
possibility that any such regulatory authority may, among other things, require
us to increase our allowance for loan losses, write-down assets, change our
regulatory capital position or affect our ability to borrow funds or maintain or
increase deposits, which could adversely affect our liquidity and earnings;
legislative or regulatory changes that adversely affect our business including
the effect of Dodd-Frank Wall Street Reform and Consumer Protection Act (the
"Dodd-Frank Act"), changes in laws or regulations, changes in regulatory
policies and principles or the application or interpretation of laws and
regulations by regulatory agencies and tax authorities, including changes in
deferred tax asset and liability activity, or the interpretation of regulatory
capital or other rules, including as a result of Basel III; our ability to
attract and retain deposits; management's assumptions in determining the
adequacy of the allowance for loan losses; our ability to control operating
costs and expenses, especially costs associated with our operation as a public
company; the use of estimates in determining fair value of certain assets, which
estimates may prove to be incorrect and result in significant declines in
valuation; difficulties in reducing risks associated with the loans on our
balance sheet; staffing fluctuations in response to product demand or the
implementation of corporate strategies that affect our workforce and potential
associated charges; computer systems on which we depend could fail or experience
a security breach; our ability to retain key members of our senior management
team; costs and effects of litigation, including settlements and judgments; our
ability to successfully integrate any assets, liabilities, customers, systems,
and management personnel we may in the future acquire into our operations and
our ability to realize related revenue synergies and cost savings within
expected time frames and any goodwill charges related thereto; increased
competitive pressures among financial services companies; changes in consumer
spending, borrowing and savings habits; the availability of resources to address
changes in laws, rules, or regulations or to respond to regulatory actions;
adverse changes in the securities markets; inability of key third-party
providers to perform their obligations to us; statements with respect to our
intentions regarding disclosure and other changes resulting from the Jumpstart
Our Business Startups Act of 2012 ("JOBS Act"); changes in accounting
principles, policies or guidelines and practices, as may be adopted by the
financial institution regulatory agencies, the Public Company Accounting
Oversight Board or the Financial Accounting Standards Board; and other economic,
competitive, governmental, regulatory, and technological factors affecting our
operations, pricing, products and services; and the other risks detailed from
time to time in our filings with the Securities and Exchange Commission ("SEC"),
including our 2017 Form 10-K.
Any of the forward-looking statements are based upon management's beliefs and
assumptions at the time they are made.  We undertake no obligation to publicly
update or revise any forward-looking statements included in this report or to
update the reasons why actual results could differ from those contained in such
statements, whether as a result of new information, future events or
otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking statements discussed in this report might not occur and you
should not put undue reliance on any forward-looking statements.
As used throughout this report, the terms "we", "our", "us", "HomeTrust
Bancshares" or the "Company" refer to HomeTrust Bancshares, Inc. and its
consolidated subsidiaries, including HomeTrust Bank (the "Bank") unless the
context indicates otherwise.
Overview
HomeTrust Bancshares, Inc., a Maryland corporation, was formed for the purpose
of becoming the holding company for HomeTrust Bank in connection with HomeTrust
Bank's conversion from mutual to stock form, which was completed on July 10,
2012 (the "Conversion"). As a bank holding company and financial holding
company, HomeTrust Bancshares, Inc. is regulated by the Federal Reserve. As a
North Carolina state-chartered bank, and member of the Federal Reserve System,
the Bank's primary regulators are the NCCOB and the Federal Reserve. The Bank's
deposits are federally insured up to applicable limits by the Federal Deposit
Insurance Corporation ("FDIC"). The Bank is a member of the Federal Home Loan
Bank of Atlanta ("FHLB" or "FHLB of Atlanta"), which is one of the 12 regional
banks in the Federal Home Loan Bank System ("FHLB System"). Our headquarters is
located in Asheville, North Carolina.
Our principal business consists of attracting deposits from the general public
and investing those funds, along with borrowed funds, in loans secured by first
and second mortgages on one-to-four family residences, including home equity
loans and construction and land/lot loans, commercial real estate loans,
construction and development loans, commercial and industrial loans, indirect
automobile loans, and municipal leases. Municipal leases are secured primarily
by a ground lease for a firehouse or an equipment lease for fire trucks and
firefighting equipment to fire departments located throughout North and South
Carolina. We also purchase investment securities consisting primarily of
securities issued

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by United States Government agencies and government-sponsored enterprises, as
well as, commercial paper and certificates of deposit insured by the FDIC.
We offer a variety of deposit accounts for individuals, businesses, and
nonprofit organizations. Deposits and borrowings are our primary source of funds
for our lending and investing activities.
We are significantly affected by prevailing economic conditions, as well as,
government policies and regulations concerning, among other things, monetary and
fiscal affairs, housing and financial institutions. Deposit flows are influenced
by a number of factors, including interest rates paid on competing time
deposits, other investments, account maturities, and the overall level of
personal income and savings. Lending activities are influenced by the demand for
funds, the number and quality of lenders, and regional economic cycles.
Our primary source of pre-tax income is net interest income. Net interest income
is the difference between interest income, which is the income that we earn on
our loans and investments, and interest expense, which is the interest that we
pay on our deposits and borrowings. Changes in levels of interest rates affect
our net interest income. A secondary source of income is noninterest income,
which includes revenue we receive from providing products and services,
including service charges on deposit accounts, loan income and fees, SBA lending
fees, and gains and losses from sales of securities.
An offset to net interest income is the provision for loan losses which is
required to establish the allowance for loan losses at a level that adequately
provides for probable losses inherent in our loan portfolio. As a loan's risk
rating improves, property values increase, or recoveries of amounts previously
charged off are received, a recapture of previously recognized provision for
loan losses may be added to net interest income.
Our noninterest expenses consist primarily of salaries and employee benefits,
expenses for occupancy, marketing and computer services, and FDIC deposit
insurance premiums. Salaries and benefits consist primarily of the salaries and
wages paid to our employees, payroll taxes, expenses for retirement and other
employee benefits. Occupancy expenses, which are the fixed and variable costs of
buildings and equipment, consist primarily of lease payments, property taxes,
depreciation charges, maintenance and costs of utilities.
In recent years, we have expanded our geographic footprint into seven additional
markets through strategic acquisitions as well as three de novo commercial loan
offices. Looking forward, we believe opportunities currently exist within our
market areas to grow our franchise. We anticipate organic growth as the local
economy and loan demand strengthens, through our marketing efforts and as a
result of the opportunities being created as a result of the consolidation of
financial institutions occurring in our market areas. We may also seek to expand
our franchise through the selective acquisition of individual branches, loan
purchases and, to a lesser degree, whole bank transactions that meet our
investment and market objectives. We will continue to be disciplined as it
pertains to future expansion focusing primarily on organic growth in our current
market areas.
On January 1, 2017, the Company completed its acquisition of TriSummit pursuant
to an Agreement and Plan of Merger, dated as of September 20, 2016, under which
TriSummit merged with and into HomeTrust with HomeTrust as the surviving
corporation in the Merger. Immediately following the Merger, TriSummit's wholly
owned subsidiary bank, TriSummit Bank, merged with and into the Bank. See Note 3
of the Notes to Consolidated Financial Statements under Item 1 of this report
for more details on the Merger.
On August 1, 2017, the Company opened a commercial loan production office in
Greensboro, North Carolina.
At December 31, 2017, we had 43 locations in North Carolina (including the
Asheville metropolitan area, Greensboro/"Piedmont" region, Charlotte, and
Raleigh), Upstate South Carolina (Greenville), East Tennessee (including
Kingsport/Johnson City/Bristol, Knoxville, and Morristown) and Southwest
Virginia (including the Roanoke Valley).
Critical Accounting Policies and Estimates
Certain of our accounting policies are important to the portrayal of our
financial condition, since they require management to make difficult, complex or
subjective judgments, some of which may relate to matters that are inherently
uncertain. Estimates associated with these policies are susceptible to material
changes as a result of changes in facts and circumstances. Facts and
circumstances which could affect these judgments include, but are not limited
to, changes in interest rates, changes in the performance of the economy, and
changes in the financial condition of borrowers. These policies relate to (i)
the determination of the provision and the allowance for loan losses, (ii)
business combinations and acquired loans, (iii) the valuation of REO, (iv) the
valuation of goodwill and other intangible assets, and (v) the valuation of or
recognition of deferred tax assets and liabilities. These policies and estimates
are described in further detail in Part II, Item 7 Management's Discussion and
Analysis of Financial Condition and Results of Operations and Note 1, Summary of
Significant Accounting Policies with the 2017 Form 10-K. There have not been any
material changes in the Company's critical accounting policies and estimates
during the six months ended December 31, 2017 as compared to the disclosure
contained in the Company's 2017 Form 10-K, with the exception of the revaluation
of net deferred tax assets related to the Tax Act. For more information on the
revaluation, see Note 7 of the Notes to Consolidated Financial Statements under
Item 1 of this report.
On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains
provisions that, among other things, reduce certain reporting requirements for
qualifying public companies. As an "emerging growth company" we may delay
adoption of new or revised accounting pronouncements applicable to public
companies until such pronouncements are made applicable to private companies. We
intend to take advantage of the benefits of this extended transition period,
although we have not done so to date. Accordingly, our financial statements may
not be comparable to companies that comply with such new or revised accounting
standards or disclosures.
Reclassifications and corrections. To maintain consistency and comparability,
certain amounts from prior periods have been reclassified to conform to current
period presentation with no effect on net income or shareholders' equity as
previously reported.

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Recent Accounting Pronouncements. Refer to Note 2 of our consolidated financial
statements for a description of recent accounting pronouncements including the
respective dates of adoption and effects on results of operations and financial
condition.
Non-GAAP Financial Measures

In addition to results presented in accordance with GAAP, this report contains
certain non-GAAP financial measures, which include: tangible book value per
share; tangible equity to tangible assets ratio; net interest income and net
interest margin as adjusted to exclude additional FHLB borrowings and proceeds
from such borrowings; net income, earnings per share ("EPS"), return on assets
("ROA"), and return on equity ("ROE") excluding merger-related expenses, certain
state tax expense, adjustments for the change in federal tax law, and gain from
the sale of premises and equipment; and the ratio of the allowance for loan
losses to total loans excluding acquired loans. Management elected to utilize
short-term FHLB borrowings beginning in November 2014 as part of a leverage
strategy to increase net interest income. The Company believes that showing the
effects of these borrowings on net interest income and net interest margin is
useful to both management and investors as these measures are commonly used to
measure financial institution's performance and against peers.

Management has presented the non-GAAP financial measures in this discussion and
analysis excluding merger-related expenses, certain state tax expense,
adjustments for the change in federal tax law, and gain from the sale of
premises because it believes excluding these items is more indicative of and
provides useful and comparative information to assess trends in our core
operations while facilitating comparison of the quality and composition of the
Company's earnings over time and in comparison to its competitors. However,
these non-GAAP financial measures are supplemental, are not audited and are not
a substitute for operating results or any analysis determined in accordance with
GAAP. Where applicable, we have also presented comparable earnings information
using GAAP financial measures. Because not all companies use the same
calculations, our presentation may not be comparable to other similarly titled
measures as calculated by other companies. See "Comparison of Results of
Operations for the Three and Six Months Ended December 31, 2017 and 2016" for
more detailed information about our financial performance.
Set forth below is a reconciliation to GAAP of tangible book value and tangible
book value per share:
                                                                         As of
                                                    December 31,        June 30,        December 31,
(Dollars in thousands, except per share data)           2017              2017              2016
Total stockholders' equity                        $      395,361$    397,647$      367,776
Less: goodwill, core deposit intangibles, net
of taxes                                                  30,083           30,157             16,795
Tangible book value (1)                           $      365,278$    367,490$      350,981
Common shares outstanding                             18,967,175       18,967,875         18,000,750
Tangible book value per share                     $        19.26$      19.37$        19.50
Book value per share                              $        20.84$      20.96$        20.43

_________________________________________________________________

(1) Tangible book value is equal to total stockholders' equity less goodwill and

core deposit intangibles, net of related deferred tax liabilities.




Set forth below is a reconciliation to GAAP of tangible equity to tangible
assets:
                                                                       As of
                                                   December 31,      June 30,       December 31,
(Dollars in thousands)                                 2017            2017             2016
Tangible book value(1)                            $    365,278$   367,490$    350,981
Total assets                                         3,250,588       3,206,533        2,774,240
Less: goodwill, core deposit intangibles, net
of taxes                                                30,083          30,157           16,795
Total tangible assets(2)                          $  3,220,505$ 3,176,376$  2,757,445
Tangible equity to tangible assets                       11.34 %         

11.57 % 12.73 %

_________________________________________________________________

(1) Tangible equity (or tangible book value) is equal to total stockholders'

equity less goodwill and core deposit intangibles, net of related deferred

tax liabilities.

(2) Total tangible assets is equal to total assets less goodwill and core deposit

    intangibles, net of related deferred tax liabilities.





                                       36

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Set forth below is a reconciliation to GAAP of net interest income and net
interest margin as adjusted to exclude additional FHLB borrowings and proceeds
from such borrowings:
                                                              Three Months Ended December 31,
                                                  2017                                              2016
                             Average Balance     Interest                      Average Balance     Interest
(Dollars in thousands)         Outstanding     Earned / Paid    Yield/ Rate      Outstanding     Earned / Paid    Yield/ Rate
Interest-earning assets (1)  $   2,974,198$    29,226         3.93  %     $   2,521,311$    22,636         3.59  %
Less: Interest-earning
assets funded by additional
FHLB borrowings (2)                255,000           1,056         1.66  %           340,000             908         1.07  %
Interest-earning assets -
adjusted                     $   2,719,198$    28,170         4.14  % 

$ 2,181,311$ 21,728 3.98 %

Interest-bearing liabilities $ 2,469,855$ 3,618 0.58 %

    $   2,088,325$     1,648         0.31  %
Additional FHLB borrowings         255,000             782         1.23  %           340,000             378         0.44  %
Interest-bearing liabilities
- adjusted                   $   2,214,855$     2,836         0.51  %  

$ 1,748,325$ 1,270 0.29 %


Tax equivalent net interest
income and net interest
margin                                         $    25,608         3.44  %                       $    20,988         3.33  %
Tax equivalent net interest
income and net interest
margin - adjusted                                   25,334         3.73  %                            20,458         3.75  %
Difference                                     $       274        (0.29 )%                       $       530        (0.42 )%


                                                               Six Months Ended December 31,
                                                  2017                                              2016
                             Average Balance     Interest                      Average Balance     Interest
(Dollars in thousands)         Outstanding     Earned / Paid    Yield/ Rate      Outstanding     Earned / Paid    Yield/ Rate
Interest-earning assets (1)  $   2,946,607$    57,508         3.90  %     $   2,524,362$    46,017         3.65  %
Less: Interest-earning
assets funded by additional
FHLB borrowings (2)                250,000           2,024         1.62  %           367,500           1,907         1.04  %
Interest-earning assets -
adjusted                     $   2,696,607$    55,484         4.12  %  

$ 2,156,862$ 44,110 4.20 %

Interest-bearing liabilities $ 2,444,457$ 6,933 0.56 %

    $   2,093,127$     3,302         0.31  %
Less: Additional FHLB
borrowings                         250,000           1,505         1.20  %           367,500             788         0.43  %
Interest-bearing liabilities
- adjusted                   $   2,194,457$     5,428         0.49  %  

$ 1,725,627$ 2,514 0.29 %


Tax equivalent net interest
income and net interest
margin                                         $    50,575         3.43  %                       $    42,715         3.38  %
Tax equivalent net interest
income and net interest
margin - adjusted                                   50,056         3.71  %                            41,596         3.86  %
Difference                                     $       519        (0.28 )%                       $     1,119        (0.48 )%


_________________________________________________________________________________

(1) Interest income used in the average interest/earned and yield calculation

includes the tax equivalent adjustment of $378 and $573 for the three months

ended December 31, 2017 and 2016, respectively, calculated based on a

combined federal and state tax rate of 30% and 37%, respectively. Interest

income used in the average interest/earned and yield calculation includes the

tax equivalent adjustment of $764 and $1,163 for the six months ended

December 31, 2017 and 2016, respectively, calculated based on a combined

federal and state tax rate of 30% and 37%, respectively.

(2) Proceeds from the additional borrowings were invested in various

    interest-earning assets including: deposits with the FRB, FHLB stock,
    certificates of deposit in other banks, and commercial paper.



                                       37

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Set forth below is a reconciliation to GAAP net income (loss), EPS, ROA, and ROE as adjusted to exclude merger-related expenses, certain state tax expense, adjustments for the change in federal tax law, and gain from the sale of premises and equipment:

                                                 Three Months Ended                Six months ended
(Dollars in thousands, except per share             December 31,                     December 31,
data)
                                                2017            2016             2017            2016
Merger-related expenses                    $         -      $        27     $         -      $       334
State tax expense adjustment (1)                     -                -             133              490
Change in federal tax law adjustment (2)        17,693                -          17,693                -
Gain from sale of premises and equipment             -                -            (164 )           (385 )
Total adjustments                               17,693               27          17,662              439
Tax effect (3)                                       -              (10 )            49               49
Total adjustments, net of tax                   17,693               17          17,711              488

Net income (loss) (GAAP)                       (10,666 )          2,983          (5,099 )          6,807

Net income (non-GAAP)                      $     7,027$     3,000$    12,612$     7,295

Per Share Data
Average shares outstanding - basic          17,975,883       16,900,387      17,971,439       16,893,775
Average shares outstanding - diluted        17,975,883       17,444,144      17,971,439       17,391,404
Average shares outstanding - diluted
(adjusted) (4)                              18,689,894       17,444,144      18,655,048       17,391,404

Basic EPS
EPS (GAAP)                                 $     (0.59 )$      0.17$     (0.28 )$      0.39
Non-GAAP adjustment                               0.98             0.01            0.98             0.04
EPS (non-GAAP)                             $      0.39$      0.18$      0.70$      0.43

Diluted EPS
EPS (GAAP)                                 $     (0.59 )$      0.17$     (0.28 )$      0.39
Non-GAAP adjustment                               0.97                -            0.96             0.04
EPS (non-GAAP)                             $      0.38$      0.17$      0.68$      0.43

Average Balances
Average assets                             $ 3,249,632$ 2,765,047$ 3,223,758$ 2,764,985
Average equity                                 405,993          365,740         403,708          364,018

ROA
ROA (GAAP)                                       (1.31 )%          0.43 %         (0.32 )%          0.49 %
Non-GAAP adjustment                               2.17  %             - %          1.10  %          0.04 %
ROA (non-GAAP)                                    0.86  %          0.43 %          0.78  %          0.53 %

ROE
ROE (GAAP)                                      (10.51 )%          3.26 %         (2.53 )%          3.74 %
Non-GAAP adjustment                              17.43  %          0.02 %          8.78  %          0.27 %
ROE (non-GAAP)                                    6.92  %          3.28 %          6.25  %          4.01 %

________________________________________________________________________

(1) State tax adjustment is a result of a decrease in value of our deferred tax

assets stemming from recent decreases in North Carolina's corporate tax rate.

(2) Revaluation of net deferred tax assets due to the Tax Cuts and Jobs Act.

(3) Tax amounts have been adjusted for certain nondeductible merger-related

expenses.

(4) Average shares outstanding - diluted were adjusted for the three and six

months ended December 31, 2017 to include potentially dilutive shares not

    considered due to the corresponding net losses under GAAP.




                                       38

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Set forth below is a reconciliation to GAAP of the allowance for loan losses to
total loans and the allowance for loan losses as adjusted to exclude acquired
loans:
                                                                      As of
(Dollars in thousands)                            December 31,      June 30,       December 31,
                                                      2017            2017             2016
Total gross loans receivable (GAAP)              $  2,419,256$ 2,352,415$  1,955,629
Less: acquired loans                                  311,508         374,538          169,234
Adjusted gross loans (non-GAAP)                  $  2,107,748     $ 

1,977,877 $ 1,786,395


Allowance for loan losses (GAAP)                 $     21,090$    21,151$     20,986
Less: allowance for loan losses on acquired
loans                                                     566             727              336
Adjusted allowance for loan losses (non-GAAP)    $     20,524$    20,424$     20,650
Adjusted allowance for loan losses / Adjusted
gross loans (non-GAAP)                                   0.97 %          1.03 %           1.16 %



Comparison of Financial Condition at December 31, 2017 and June 30, 2017
General.  Total assets increased $44.0 million, or 1.4% to $3.3 billion at
December 31, 2017 from $3.2 billion at June 30, 2017. Total liabilities
increased $46.3 million, or 1.6% to $2.9 billion at December 31, 2017 from $2.8
billion at June 30, 2017. Deposit growth of $59.8 million, or 2.9% and the
cumulative decrease of $63.9 million, or 19.3% in certificates of deposit in
other banks and securities available for sale during the first six months of
fiscal 2018 were used to partially fund the $66.5 million, or 2.8% increase in
total loans, the $49.9 million, or 33.3% increase in commercial paper, and
reduce borrowings by $11.5 million, or 1.7%. We continue to utilize our
leveraging strategy, where designated short-term FHLB borrowings are invested in
various short-term liquid assets to generate additional net interest income, as
well as the required purchase of additional FHLB stock which generates increased
dividend income.
Cash, cash equivalents, and commercial paper.  Total cash and cash equivalents
increased $11.7 million, or 13.4%, to $98.7 million at December 31, 2017 from
$87.0 million at June 30, 2017 mainly due to additional funds held at the
Federal Reserve Bank. In conjunction with our leveraging strategy, we purchase
commercial paper to take advantage of higher returns with relatively low risk
while remaining highly liquid. The commercial paper balance increased $49.9
million, or 33.3% to $199.7 million at December 31, 2017 from $149.9 million at
June 30, 2017.
Investments.  Securities available for sale decreased $32.0 million, or 16.0%,
to $167.7 million at December 31, 2017 from $199.7 million at June 30,
2017. During the six months ended December 31, 2017, $19.7 million of securities
matured and $10.9 million of principal payments were received. At December 31,
2017, certificates of deposit in other banks decreased $32.0 million, or 24.1%
to $100.3 million compared to $132.3 million at June 30, 2017. The decrease in
certificates of deposit in other banks was due to $44.5 million in maturities
partially offset by $12.6 million in purchases. All certificates of deposit in
other banks are fully insured by the FDIC. We evaluate individual investment
securities quarterly for other-than-temporary declines in market value. We did
not believe that there were any other-than-temporary impairments at December 31,
2017; therefore, no impairment losses were recorded during the first six months
of fiscal 2018. Other investments at cost at December 31, 2017 included FRB and
FHLB stock totaling $7.3 million and $31.6 million, respectively. In total,
other investments decreased $478,000, or 1.2% from June 30, 2017 as a result of
required redemptions of FHLB stock due to reductions in our FHLB borrowings.
Loans held for sale. Loans held for sale increased $1.5 million, or 26.1% at
December 31, 2017 to $7.1 million from $5.6 million at June 30, 2017. The
increase was driven by volume increases as a result of expanding our mortgage
operations into our newer market areas and adding additional seasoned loan
officers.
Loans.  Net loans receivable increased $66.6 million, or 2.9%, at December 31,
2017 to $2.4 billion from June 30, 2017 primarily due to $66.8 million of
organic loan growth.
For the six-month period ended December 31, 2017, retail loan portfolio
originations increased $16.2 million, or 11.0% to $163.7 million from $147.5
million, compared to the same period in the previous year. For the six-month
period ended December 31, 2017, commercial loan portfolio originations increased
$68.2 million, or 30.2% to $294.0 million, from $225.8 million, compared to the
same period in the previous year. For the quarter ended December 31, 2017,
organic net loan growth, which excludes loans acquired through acquisitions and
purchases of HELOCs, was $66.8 million or 6.1% annualized.

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Retail consumer and commercial loans consist of the following at the dates
indicated:
                                           As of                                             Percent of total
                                December 31,       June 30,             Change           December 31,    June 30,
(Dollars in thousands)              2017             2017            $           %           2017          2017
Retail consumer loans:
One-to-four family            $      686,229$   684,089$  2,140       0.3  %         28.4 %       29.1 %
HELOCs - originated                  150,084         157,068       (6,984 )    (4.4 )           6.2          6.7
HELOCs - purchased                   162,181         162,407         (226 )    (0.1 )           6.7          6.9
Construction and land/lots            60,805          50,136       10,669      21.3             2.5          2.1
Indirect auto finance                150,042         140,879        9,163       6.5             6.2          6.0
Consumer                               9,699           7,900        1,799      22.8             0.4          0.3

Total retail consumer loans 1,219,040 1,202,479 16,561

     1.4            50.4         51.1
Commercial loans:
Commercial real estate               786,381         730,408       55,973       7.7            32.5         31.0

Construction and development 185,921 197,966 (12,045 )

   (6.1 )           7.7          8.4
Commercial and industrial            127,709         120,387        7,322       6.1             5.3          5.1
Municipal leases                     100,205         101,175         (970 )    (1.0 )           4.1          4.3
Total commercial loans             1,200,216       1,149,936       50,280       4.4            49.6         48.9
Total loans                   $    2,419,256$ 2,352,415$ 66,841       2.8  %        100.0 %      100.0 %


Recently, our expansion into larger metro markets as well as in-market
acquisitions combined with improvements in the economy, employment rates,
stronger real estate prices, and a general lack of new housing inventory in
certain markets have led to us significantly increasing originations of
construction loans for properties located in our market areas. We have hired
experienced commercial real estate relationship managers, credit officers, and
developed a construction risk management group to better manage construction
risk, as part of our efforts to grow the construction portfolio. We will
continue to take a disciplined approach in our construction and land development
lending by concentrating our efforts on smaller one-to-four residential loans to
builders known to us and developers of commercial real estate and multifamily
properties with proven success in this type of construction. At December 31,
2017, construction and land/lots totaled $60.8 million including $46.4 million
of one-to-four family construction loans that will roll over to permanent loans
upon completion of the construction period, excluding unfunded loan commitments
of $59.3 million. Total construction and development loans at December 31, 2017,
were $185.9 million, excluding unfunded loan commitments of $123.3 million, of
which $69.5 million was for non-residential commercial real estate construction,
$65.0 million was for land development, $39.6 million was for speculative
construction of single family properties, and $11.8 million was for multi-family
construction. Undisbursed construction and development loan commitments at
December 31, 2017 included $80.9 million of commercial real estate projects,
multi-family residential projects of $8.7 million and $33.7 million for the
speculative construction of one- to four-family residential properties.
Asset Quality. Our overall asset quality metrics continue to demonstrate our
commitment to growing and maintaining a loan portfolio with a moderate risk
profile. Nonperforming assets decreased $800,000 to $19.2 million, or 0.59% of
total assets, at December 31, 2017 from $20.0 million at June 30, 2017.
Nonperforming assets included $14.4 million in nonaccruing loans and $4.8
million in REO at December 31, 2017, compared to $13.7 million and $6.3 million,
in nonaccruing loans and REO respectively, at June 30, 2017. Included in
nonperforming loans are $4.8 million of loans restructured from their original
terms of which $2.1 million were current with respect to their modified payment
terms. The increase in nonaccruing loans was primarily due to one construction
and development relationship totaling $771,000, partially offset by loans
returning to performing status as payment history and the borrower's financial
status improved. At December 31, 2017, $4.6 million, or 32.1%, of nonaccruing
loans were current on their loan payments. Purchased credit impaired loans
aggregating $4.6 million were excluded from nonaccruing loans due to the
accretion of discounts established in accordance with the acquisition method of
accounting for business combinations. Nonperforming loans to total loans was
0.59% at December 31, 2017 compared to 0.58% at June 30, 2017.
The ratio of classified assets to total assets decreased to 1.39% at
December 31, 2017 from 1.57% at June 30, 2017. Classified assets decreased 10.8%
to $44.8 million at December 31, 2017 compared to $50.2 million at June 30, 2017
primarily due to payoffs of two commercial real estate loans totaling $1.6
million and the decrease in REO of $1.5 million. Delinquent loans (loans
delinquent 30 days or more) increased to $17.3 million at December 31, 2017,
from $15.2 million at June 30, 2017 primarily due to one construction and
development loan relationship in the 90+ day category and one-to-four family
loans in the 30-60 day category.
As of December 31, 2017, we had identified $40.8 million of impaired loans
compared to $43.0 million at June 30, 2017. Our impaired loans are comprised of
loans on non-accrual status and all TDRs, whether performing or on non-accrual
status under their restructured terms. Impaired loans may be evaluated for
reserve purposes using either a specific impairment analysis or on a collective
basis as part of homogeneous pools. As of December 31, 2017, there were $19.8
million loans individually evaluated for impairment and $21.0 million were
collectively evaluated. For more information on these impaired loans, see Note 5
of the Notes to Consolidated Financial Statements under Item 1 of this report.
Allowance for loan losses.  We establish an allowance for loan losses by
charging amounts to the loan loss provision at a level required to reflect
estimated credit losses in the loan portfolio. In evaluating the level of the
allowance for loan losses, management considers, among other factors, historical
loss experience, the types of loans and the amount of loans in the loan
portfolio, adverse situations that may affect borrowers' ability

                                       40

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to repay, estimated value of any underlying collateral, prevailing economic
conditions and current risk factors specifically related to each loan type.
The allowance for loan losses was $21.1 million, or 0.87% of total loans, at
December 31, 2017 compared to $21.2 million, or 0.90% of total loans, at
June 30, 2017. The allowance for loan losses to gross loans excluding acquired
loans was 0.97% at December 31, 2017, compared to 1.03% at June 30, 2017. Loans
acquired from acquisitions are recorded at fair value, which includes a credit
discount, therefore, no allowance for loan losses is established for these
acquired loans unless the credit quality deteriorates further subsequent to the
acquisition. The allowance for our acquired loans at December 31, 2017 was
$566,000 compared to $727,000 at June 30, 2017.
There was no provision for loan loss during the three and six months ended
December 31, 2017 and December 31, 2016 as the allowance for loan losses
required by our loan growth was offset by continued improvements in our asset
quality. Net loan charge offs totaled $907,000 for the three months ended
December 31, 2017 compared to net recoveries of $35,000 for the same period
during the prior fiscal year. Net charge offs totaled $61,000 for the six months
ended December 31, 2017 compared to $306,000 for the same period during the
prior fiscal year. Net charge offs as a percentage of average loans increased to
0.15% for the three months ended December 31, 2017 from net recoveries of
(0.01)% for the same period last fiscal year. Net charge offs as a percentage of
average loans decreased to 0.01% compared to 0.03% for the same period last
fiscal year.
The allowance as a percentage of nonaccruing loans decreased to 146.79% at
December 31, 2017 from 154.77% at June 30, 2017.
We believe that the allowance for loan losses as of December 31, 2017 was
adequate to absorb the known and inherent risks of loss in the loan portfolio at
that date. While we believe the estimates and assumptions used in our
determination of the adequacy of the allowance are reasonable, there can be no
assurance that such estimates and assumptions will not be proven incorrect in
the future, or that the actual amount of future provisions will not exceed the
amount of past provisions or that any increased provisions that may be required
will not adversely impact our financial condition and results of operations. In
addition, the determination of the amount of the allowance for loan losses is
subject to review by bank regulators as part of the routine examination process,
which may result in the establishment of additional reserves based upon their
judgment of information available to them at the time of their examination.
Real estate owned. REO decreased $1.5 million, to $4.8 million at December 31,
2017 primarily due to $2.2 million in REO sales during the period, partially
offset by $591,000 in properties transferred to REO and a gain on sale of REO of
$393,000 during the period. The total balance of REO at December 31, 2017
included $1.9 million in land, construction and development projects (both
residential and commercial), $1.8 million in commercial real estate, and $1.1
million in single-family homes.
Deferred income taxes. Deferred income taxes decreased $20.9 million, or 36.4%,
to $36.5 million at December 31, 2017 from $57.4 million at June 30, 2017. The
decrease was primarily driven by the previously mentioned revaluation as a
result of the Tax Act, the realization of net operating losses through increases
in taxable income, and to a lesser extent, the revaluation of deferred tax
assets relating to a change in North Carolina's corporate tax rate, as discussed
below.
Goodwill. Goodwill remained at $25.6 million at December 31, 2017 and June 30,
2017.
Deposits.  Deposits increased $59.8 million, or 2.9%, to $2.1 billion at
December 31, 2017 as compared to $2.0 billion at June 30, 2017. The increase was
primarily due to an increase of $79.8 million in our core deposits (which
excludes certificates of deposit) as a result of recent deposit gathering
initiatives, which were partially offset by a $20.1 million managed run off in
our higher costing certificates of deposit and brokered deposits by competing
less aggressively for time deposits.
The following table sets forth our deposits by type of deposit account as of the
dates indicated:
                                      As of                                               Percent of total
                           December 31,       June 30,              Change           December 31,     June 30,
(Dollars in thousands)         2017             2017            $           %            2017           2017
Core deposits:
   Noninterest-bearing
accounts                 $      313,493$   310,172       3,321         1.1  %         14.9 %        15.1 %
   NOW accounts                 489,668         469,377      20,291         4.3  %         23.2 %        22.9 %
   Money market accounts        638,259         569,607      68,652        12.1  %         30.3 %        27.8 %
   Savings accounts             224,732         237,149     (12,417 )      (5.2 )%         10.7 %        11.6 %
Core deposits                 1,666,152       1,586,305      79,847         5.0  %         79.0 %        77.4 %
Certificates of deposit         442,056         462,146     (20,090 )      (4.3 )%         21.0 %        22.6 %
Total                    $    2,108,208$ 2,048,451      59,757         2.9  %        100.0 %       100.0 %


Borrowings.  Borrowings decreased to $685.0 million at December 31, 2017 from
$696.5 million at June 30, 2017. A total of $585.0 million of these FHLB
advances have maturities of less than 90 days with a weighted average interest
rate of 1.34% at December 31, 2017.

                                       41

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Equity.  Stockholders' equity at December 31, 2017 decreased to $395.4 million
from $397.6 million at June 30, 2017. The decrease was primarily driven by $5.1
million in net losses due to the deferred tax revaluation, and a $601,000
decrease in other comprehensive income, partially offset by $2.0 million
representing stock-based compensation, and $680,000 in a cumulative adjustment
for the adoption of Accounting Standard Update 2016-09, "Improvements to
Employee Share-Based Payment Accounting."

                                       42

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Average Balances, Interest and Average Yields/Cost
The following table sets forth for the periods indicated, information regarding
average balances of assets and liabilities as well as the total dollar amounts
of interest income from average interest-earning assets and interest expense on
average interest-bearing liabilities, resultant yields, interest rate spread,
net interest margin (otherwise known as net yield on interest-earning assets),
and the ratio of average interest-earning assets to average interest-bearing
liabilities. All average balances are daily average balances. Nonaccruing loans
have been included in the table as loans carrying a zero yield.
                                                For the Three Months Ended December 31,
                                            2017                                      2016
                              Average       Interest                    Average       Interest
                              Balance        Earned/      Yield/        Balance        Earned/      Yield/
                            Outstanding      Paid(2)      Rate(2)     Outstanding      Paid(2)      Rate(2)
                                                        (Dollars in thousands)

Assets:

Interest-earning assets:
Loans receivable(1)        $ 2,406,014$  26,518        4.41 %   $ 1,910,134$  20,444        4.28 %
Deposits in other
financial institutions         151,197           517        1.37 %       178,119           478        1.07 %
Investment securities          175,039           903        2.06 %       188,023           862        1.83 %
Other interest-earning
assets(3)                      241,948         1,288        2.13 %       245,035           852        1.39 %
Total interest-earning
assets                       2,974,198        29,226        3.93 %     2,521,311        22,636        3.59 %
Other assets                   275,434                                   243,736
Total assets                 3,249,632                                 2,765,047
Liabilities and equity:
Interest-bearing deposits:
Interest-bearing checking
accounts                       471,474           236        0.20 %       405,340           172        0.17 %
Money market accounts          644,928           585        0.36 %       518,095           351        0.27 %
Savings accounts               227,933            76        0.13 %       210,223            70        0.13 %
Certificate accounts           448,507           644        0.57 %       408,314           448        0.44 %
Total interest-bearing
deposits                     1,792,842         1,541        0.33 %     1,541,972         1,041        0.28 %
Borrowings                     677,013         2,077        1.22 %       546,353           607        0.44 %
 Total interest-bearing
liabilities                  2,469,855         3,618        0.58 %     2,088,325         1,648        0.31 %
Noninterest-bearing
deposits                       307,934                                   250,914
Other liabilities               65,850                                    60,068
Total liabilities            2,843,639                                 2,399,307
Stockholders' equity           405,993                                   365,740
Total liabilities and
stockholders' equity       $ 3,249,632$ 2,765,047

Net earning assets         $   504,343$   432,986
Average interest-earning
assets to
average interest-bearing
liabilities                     120.42 %                                  120.73 %
Tax-equivalent:
Net interest income                        $  25,608$  20,988
Interest rate spread                                        3.35 %                                    3.28 %
Net interest margin(4)                                      3.44 %                                    3.33 %
Non-tax-equivalent:
Net interest income                        $  25,230$  20,415
Interest rate spread                                        3.30 %                                    3.18 %
Net interest margin(4)                                      3.39 %                                    3.24 %


(1) The average loans receivable, net balances include loans held for sale and
nonaccruing loans.
(2) Interest income used in the average interest/earned and yield calculation
includes the tax equivalent adjustment of $378,000 and $573,000 for the three
months ended December 31, 2017 and 2016, respectively, calculated based on a
combined federal and state tax rate of 30% and 37%, respectively.
(3) The average other interest-earning assets consists of FRB stock, FHLB stock,
and commercial paper. See Comparison of Results of Operation for the Three
Months Ended December 31, 2017 for discussion of our leveraging strategy.
(4) Net interest income divided by average interest-earning assets.

                                       43

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                                                 For the Six Months Ended December 31,
                                            2017                                      2016
                              Average       Interest                    Average       Interest
                              Balance        Earned/      Yield/        Balance        Earned/      Yield/
                            Outstanding      Paid(2)      Rate(2)     Outstanding      Paid(2)      Rate(2)
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable(1)        $ 2,383,768$  52,154        4.38 %   $ 1,879,110$  41,515        4.42 %
Deposits in other
financial institutions         155,175         1,053        1.36 %       184,918           974        1.05 %
Investment securities          182,479         1,875        2.06 %       192,456         1,742        1.81 %
Other interest-earning
assets(3)                      225,185         2,426        2.15 %       267,878         1,786        1.33 %
Total interest-earning
assets                       2,946,607        57,508        3.90 %     2,524,362        46,017        3.65 %
Other assets                   277,151                                   240,623
Total assets               $ 3,223,758$ 2,764,985
Liabilities and equity:
Interest-bearing
liabilities:
Interest-bearing checking
accounts                       467,201           452        0.19 %       404,581           345        0.17 %

Money market accounts 625,095 1,062 0.34 % 518,672

           698        0.27 %
Savings accounts               230,436           153        0.13 %       210,201           140        0.13 %
Certificate accounts           449,173         1,220        0.54 %       419,552           957        0.46 %
Total interest-bearing
deposits                     1,771,905         2,887        0.33 %     1,553,006         2,140        0.27 %
Borrowings                     672,552         4,046        1.20 %       540,121         1,162        0.43 %
Total interest-bearing
liabilities                  2,444,457         6,933        0.56 %     2,093,127         3,302        0.31 %
Noninterest-bearing
deposits                       309,265                                   246,212
Other liabilities               66,328                                    61,628
Total liabilities            2,820,050                                 2,400,967
Stockholders' equity           403,708                                   364,018
Total liabilities and
stockholders' equity       $ 3,223,758$ 2,764,985

Net earning assets         $   502,150$   431,235
Average interest-earning
assets to
average interest-bearing
liabilities                     120.54 %                                  120.60 %
Tax-equivalent:
Net interest income                        $  50,575$  42,715
Interest rate spread                                        3.34 %                                    3.34 %
Net interest margin(4)                                      3.43 %                                    3.38 %
Non-tax-equivalent:
Net interest income                        $  49,811$  41,552
Interest rate spread                                        3.29 %                                    3.24 %
Net interest margin(4)                                      3.38 %                                    3.29 %


__________________
(1) The average loans receivable, net balances include loans held for sale and
nonaccruing loans.
(2) Interest income used in the average interest/earned and yield calculation
includes the tax equivalent adjustment of $764,000 and $1,163,000 for the six
months ended December 31, 2017 and 2016, respectively, calculated based on a
combined federal and state tax rate of 30% and 37%, respectively.
(3) The average other interest-earning assets consists of FRB stock, FHLB stock,
and commercial paper. See Comparison of Results of Operation for the Six Months
Ended December 31, 2017 for discussion of our leveraging strategy.
(4) Net interest income divided by average interest-earning assets.

                                       44

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Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and that due to the changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
                                                             Three Months Ended December 31, 2017
                                                                          Compared to
                                                             Three Months Ended December 31, 2016
                                                             Increase/
                                                             (decrease)
                                                               due to                           Total
(Dollars in thousands)                               Volume              Rate            increase/(decrease)

Interest-earning assets:

 Loans receivable(1)                             $      5,306$        768       $               6,074
Deposits in other financial institutions                  (72 )              111                          39
 Investment securities                                    (60 )              101                          41
 Other interest-earning assets                            (11 )              447                         436
  Total interest-earning assets                  $      5,163$      1,427       $               6,590

Interest-bearing liabilities:

 Interest-bearing checking accounts              $         29       $         35       $                  64
 Money market accounts                                     85                149                         234
 Savings accounts                                           6                  -                           6
 Certificate accounts                                      44                152                         196
 Borrowings                                               145              1,325                       1,470
  Total interest-bearing liabilities                      309              1,661                       1,970
Net increase (decrease) in tax equivalent
interest income                                  $      4,854$       (234 )     $               4,620


                                                             Six Months Ended December 31, 2017
                                                                         Compared to
                                                             Six Months Ended December 31, 2016
                                                             Increase/
                                                            (decrease)
                                                              due to                          Total
(Dollars in thousands)                               Volume              Rate          increase/(decrease)
Interest-earning assets:
 Loans receivable(1)                             $     11,151$       (512 )   $              10,639
Deposits in other financial institutions                 (156 )              235                        79
 Investment securities                                    (90 )              223                       133
 Other interest-earning assets                           (285 )              925                       640
  Total interest-earning assets                        10,620                871                    11,491

Interest-bearing liabilities:

 Interest-bearing checking accounts              $         54       $         53     $                 107
 Money market accounts                                    143                221                       364
 Savings accounts                                          13                  -                        13
 Certificate accounts                                      68                195                       263
 Borrowings                                               285              2,599                     2,884
  Total interest-bearing liabilities                      563              3,068                     3,631
Net increase (decrease) in tax equivalent
interest income                                  $     10,057$     (2,197 )   $               7,860


_____________
(1) Interest income used in the average interest/earned and yield calculation
includes the tax equivalent adjustment of $378,000 and $573,000 for the three
months ended December 31, 2017 and 2016, respectively, calculated based on a
combined federal and state tax rate of 30% and 37%. Interest income used in the
average interest/earned and yield calculation includes the tax equivalent
adjustment of $764,000 and $1,163,000 for the six months ended December 31, 2017
and 2016, respectively, calculated based on a combined federal and state tax
rate of 30% and 37%.

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Comparison of Results of Operation for the Three Months Ended December 31, 2017
and 2016
General.  During the three months ended December 31, 2017, we had a net loss of
$10.7 million, driven by an estimated $17.7 million deferred tax revaluation
resulting from enactment of the Tax Cuts and Jobs Act (the "Tax Act"), compared
to net income of $3.0 million for the three months ended December 31, 2016. The
Company's diluted loss per share was $0.59 for the three months ended
December 31, 2017 compared to earning per share of $0.17 for the same period in
fiscal 2017. The Tax Act, among other things, reduced the federal corporate tax
rate to 21% effective January 1, 2018 requiring the Company to revalue net
deferred tax assets. The resulting estimated $17.7 million deferred tax
revaluation was reflected as an increase to the Company's income tax expense.
Net income and diluted earnings per share before the change in the federal tax
rate and prior year merger-related expenses for the quarter ended December 31,
2017 was $7.0 million and $0.38, compared to $3.0 million and $0.17,
respectively.
Net Interest Income. Net interest income increased $4.8 million, or 23.6% to
$25.2 million for the quarter ended December 31, 2017 compared to $20.4 million
for the corresponding period in 2016. The increase in net interest income for
the quarter ended December 31, 2017 was driven by a $6.8 million, or 30.8%
increase in interest and dividend income due primarily to an increase in average
interest-earning assets.
Average interest-earning assets increased $452.9 million, or 18.0% to $3.0
billion for the quarter ended December 31, 2017 compared to $2.5 billion for the
corresponding quarter in fiscal 2017. The average balance of loans receivable
for the quarter ended December 31, 2017 increased $495.9 million, or 26.0% due
to the TriSummit acquisition and organic net loan growth, which was mainly
funded by the cumulative decrease of $43.0 million, or 7.0% in average
interest-earning deposits with banks, securities available for sale, and other
interest-earning assets, an increase in average deposits of $307.9 million, or
17.2%, and an increase in average FHLB borrowings of $130.7 million, or 23.9% as
compared to the same quarter last year. Net interest margin (on a fully
taxable-equivalent basis) for the three months ended December 31, 2017 increased
to 3.44% from 3.33% for the same period a year ago. During the three months
ended December 31, 2017 our leveraging strategy produced an additional $1.1
million in interest and dividend income at an average yield of 1.66%, while the
average cost of the borrowings was 1.23%, resulting in approximately $274,000 in
net interest income. During the same quarter in the prior fiscal year, our
leveraging strategy produced an additional $908,000 in interest and dividend
income at an average yield of 1.07%, while the average cost of the borrowings
was 0.44%, resulting in approximately $530,000 in net interest income. Excluding
the effects of the leveraging strategy, the tax equivalent net interest margin
would be 3.73% and 3.75% for the quarters ended December 31, 2017 and 2016,
respectively.
Total interest and dividend income increased $6.8 million, or 30.8% for the
three months ended December 31, 2017 as compared to the same period last year,
which was primarily driven by a $6.3 million, or 31.6% increase in loan interest
income, a $364,000, or 38.8% increase in interest income on certificates of
deposit and other interest-bearing deposits, and a $110,000, or 28.1% increase
in other investment interest income. The additional loan interest income was
primarily due to the increase in the average balance of loans receivable as well
as an increase in the average loan yields due to increases in the federal funds
rate over the past 12 months. Average loan yields increased 13 basis points to
4.41% for the quarter ended December 31, 2017 from 4.28% in the corresponding
quarter from last year. In addition, there was a $146,000, or 18.9% increase in
the accretion of purchase discounts on acquired loans to $920,000 for the
quarter ended December 31, 2017 from $774,000 for the same quarter in fiscal
2017 as a result of prepayments. Accretable income on acquired loans stems from
the discount established at the time these loan portfolios were acquired and the
related impact of prepayments on purchased loans. Each quarter, the Company
analyzes the cash flow assumptions on the PCI loan pools and, at least
semi-annually, the Company updates loss estimates, prepayment speeds and other
variables when analyzing cash flows. In addition to this accretion income, which
is recognized over the estimated life of the loan pools, if a loan is removed
from a pool due to payoff or foreclosure, the unaccreted discount in excess of
losses is recognized as an accretion gain in interest income. As a result,
income from loan pools can be volatile from quarter to quarter. For the quarters
ended December 31, 2017 and 2016, the average loan yields included 15 and 16
basis points, respectively, from the accretion of purchase discounts on acquired
loans.
Total interest expense increased $2.0 million, or 119.5% for the quarter ended
December 31, 2017 compared to the same period last year. This increase was
primarily related to the TriSummit acquisition and recent deposit gathering
initiatives contributing to a $250.9 million, or 16.3% increase in the average
balance of interest-bearing deposits. In addition, average borrowings,
consisting primarily of short-term FHLB advances, increased by $130.7 million to
$677.0 million due to funding for loan growth along with a 78 basis point
increase in the average cost of such borrowings during the quarter as compared
to the same quarter last year. The overall average cost of funds increased 27
basis points to 0.58% for the current quarter as compared to the same quarter
last year due primarily to the impact of the recent increases in the federal
funds rate on our borrowings.
Provision for Loan Losses. During the three months ended December 31, 2017 and
2016, there was no provision for loan losses as improved credit quality measures
have been sufficient to cover reserves needed for loan growth and changes in the
mix of loans. Net loan charge-offs totaled $907,000 for the three months ended
December 31, 2017 compared to net recoveries of $35,000 for the same period last
year. Net charge-offs as a percentage of average loans increased to 0.15% for
the three months ended December 31, 2017 from net recoveries of (0.01%) for the
same period last fiscal year.
See Comparison of Financial Condition - Asset Quality for additional details.
Noninterest Income.  Noninterest income increased $846,000, or 21.5%, to $4.8
million for the three months ended December 31, 2017 from $3.9 million in the
comparative quarter of 2016. The leading factors of the increase included a
$299,000, or 15.9% increase in service charges on deposit accounts as a result
of the increase in deposit accounts as well as a $424,000, or 45.3% increase in
loan income from the gain on sale of mortgage loans and various commercial
loan-related fees driven by the new SBA loan line of business.
Noninterest Expense.  Noninterest expense for the quarter ended December 31,
2017 increased $695,000, or 3.4%, to $21.2 million compared to $20.5 million for
the quarter ended December 31, 2016. The TriSummit acquisition led to additional
noninterest expenses as shown in the cumulative increase of $973,000, or 17.4%
in net occupancy expense; telephone, postage,and supplies; core deposit
intangible amortization; and

                                       46

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other expenses. Deposit insurance premiums increased $216,000, or 106.4% as the
net asset base has increased. These increases in noninterest expense were
partially offset by the absence of $27,000 in merger-related expenses, a
$140,000, or 30.5% decrease in marketing and advertising expense, and a
$408,000, or 56.9% decrease in real estate owned ("REO") related expenses for
the quarter ended December 31, 2017 compared to the same period last year. For
the three months ended December 31, 2017, there was a $235,000 decrease on
writedowns and losses from REO sales compared to the corresponding quarter last
year; and a $173,000 decrease in REO expenses as a result of fewer REO
properties held.
Income Taxes.  The Company had income tax expense of $19.5 million for the three
months ended December 31, 2017, an increase of $18.6 million compared to
$893,000 for the three months ended December 31, 2016 as a result of the Tax
Act. As previously mentioned, the reduction in the corporate tax rate required
the Company to revalue net deferred tax assets, resulting in a $17.7 million
adjustment through income tax expense. In addition, our June 30 fiscal year end
required the use of a blended rate as prescribed by the Internal Revenue Code.
The blended federal rate of 27.5% was effective retroactively to July 1, 2017
and will be used for the entire fiscal year ended June 30, 2018. As a result of
this blended rate, income tax expense for the quarter ended December 31, 2017
includes approximately $418,000 in tax benefit from adjusting the federal income
tax rate to 27.5% from 34% for the first quarter of the fiscal year. Excluding
the effect of the revaluation of net deferred tax assets, the additional income
tax expense was due to higher taxable income. For more information on the Tax
Act's impact on the Company's income tax expense, see Note 7 of the Notes to
Consolidated Financial Statements under Item 1 of this report.
Comparison of Results of Operation for the Six Months Ended December 31, 2017
and 2016
General.  During the six months ended December 31, 2017, we had a net loss of
$5.1 million compared to net income of $6.8 million for the six months ended
December 31, 2016 as a result of the previously mentioned deferred tax
revaluation. Diluted loss per share was $0.28 for the first six months of fiscal
year 2018, compared to $0.39 per share in the same period in fiscal 2017. Net
income and diluted earnings per share before the change in the federal tax rate,
prior year merger-related expenses, certain state income tax expenses, and gains
from the sale of premises and equipment for the six months ended December 31,
2017 was $12.6 million and $0.68, compared to $7.3 million and $0.43,
respectively.
Net Interest Income. Net interest income increased $8.3 million, or 19.9% to
$49.8 million for the six months ended December 31, 2017 compared to $41.6
million for the six months ended December 31, 2016. This increase in net
interest income was driven by an $11.9 million, or 26.5% increase in interest
and dividend income partially offset by a $3.6 million, or 110.0% increase in
interest expense.
Average interest-earning assets increased $422.2 million, or 16.7% to $2.9
billion for the six months ended December 31, 2017 compared to $2.5 billion in
the same period in fiscal 2017. The $504.7 million, or 26.9% increase in average
balance of loans receivable for the six months ended December 31, 2017 was due
to the TriSummit acquisition and increased organic loan growth, which was mainly
funded by the cumulative decrease of $82.4 million, or 12.8% in average
interest-earning deposits with banks, securities available for sale, and other
interest-earning assets, an increase in average deposits of $282.0 million, or
15.7% and an increase in average FHLB borrowings of $132.4 million, or 24.5%.
Net interest margin (on a fully taxable-equivalent basis) for the six months
ended December 31, 2017 increased five basis points to 3.43% from 3.38% for the
period last year. For the six months ended December 31, 2017, our leveraging
strategy produced an additional $2.0 million in interest and dividend income at
an average yield of 1.62%, while the average cost of the borrowings was 1.20%,
resulting in approximately $519,000 in net interest income. Our leveraging
strategy produced an additional $1.9 million in interest and dividend income at
an average yield of 1.04% during the corresponding period in fiscal 2017, while
the average cost of the borrowings was 0.43%, resulting in approximately $1.1
million in net interest income. Excluding the effects of the leveraging
strategy, the tax equivalent net interest margin would be 3.71% and 3.86% for
the six months ended December 31, 2017 and 2016, respectively.
Total interest income increased $11.9 million, or 26.5% for the six months ended
December 31, 2017 as compared to the same period last year. The increase was
primarily driven by an $11.0 million, or 27.4% increase in loan interest income,
a $490,000, or 24.7% increase in certificates of deposit and other
interest-bearing deposits, and a $229,000, or 29.4% increase in other investment
income. The additional loan interest income was primarily due to the increase in
the average balance of loans receivable, which was partially offset by a
$908,000 decrease in the accretion of purchase discounts on acquired loans to
$1.7 million for the six months ended December 31, 2017 from $2.6 million for
the same period in fiscal 2017, as a result of full repayments of several loans
with large discounts in the previous year. Overall, average loan yields
decreased four basis points to 4.38% for the six months ended December 31, 2017
from 4.42% in the fiscal 2017 period. Excluding the effects of the accretion on
purchase discounts on acquired loans, loan yields increased nine basis points to
4.23% for the six months ended December 31, 2017 compared to 4.14% in the same
period last year.
Total interest expense increased $3.6 million, or 110.0% for the six months
ended December 31, 2017 compared to the same period last year. This increase was
primarily related to the increase in average borrowings and the corresponding 77
basis point increase in the average cost of those borrowings, resulting in
additional interest expense of $2.9 million for the six months ended December
31, 2017 as compared to the same period in the prior year. The overall increase
in average interest-bearing deposits and the seven basis point increase in cost
of funds resulted in an additional $747,000 in interest expense for the six
months ended December 31, 2017 compared to the corresponding period last year.
Provision for Loan Losses.  There was no provision for loan losses during the
six months ended December 31, 2017 or 2016. Net charge-offs for the six months
ended December 31, 2017 and 2016 were $61,000 and $306,000, respectively. Net
charge-offs as a percentage of average loans was 0.01% for the six months ended
December 31, 2017 compared to 0.03% for the same period last fiscal year.
See Comparison of Financial Condition - Asset Quality for additional details.
Noninterest Income.  Noninterest income increased $1.2 million, or 14.4%, to
$9.4 million for the six months ended December 31, 2017 from $8.2 million for
the six months ended December 31, 2016. The increase was primarily the result of
a $424,000, or 11.2% increase in service charges on deposit accounts; a
$549,000, or 28.7% increase in loan income from the gain on sale of mortgage
loans and various commercial

                                       47

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loan-related fees; and $414,000, or 40.6% increase in other income. Partially
offsetting these increases was a $221,000, or 57.4% decrease in gains from the
sale of fixed assets for the six months ended December 31, 2017 compared to the
same period last year.
Noninterest Expense.  Noninterest expense for the six months ended December 31,
2017 increased $2.6 million, or 6.7%, to $42.3 million compared to $39.6 million
for the six months ended December 31, 2016. Salaries and employee benefits
increased $1.8 million, or 8.0% primarily as a result of the TriSummit
acquisition. The TriSummit acquisition was the leading factor in the $1.5
million, or 13.0% cumulative increase in net occupancy expense; telephone,
postage, and supplies; core deposit intangible amortization; and other expenses.
Partially offsetting these increases was the absence of $334,000 in
merger-related expenses, and a $587,000, or 59.2% decrease in REO-related
expenses for the six months ended December 31, 2017 compared to the same period
last year, which was driven by a $42,000 gain on the sale of REO compared to a
$469,000 loss on the sale of REO in the corresponding period in the prior year.
Income Taxes.  For the six months ended December 31, 2017, the Company's income
tax expense was $22.0 million compared to $3.3 million for the six months ended
December 31, 2016. The increase was a result of the deferred tax revaluation and
to a lesser extent, higher taxable income. In addition, the Company had a
$133,000 and a $490,000 charge during the six months ended December 31, 2017 and
2016, respectively, related to the decrease in value of our deferred tax assets
based on decreases in North Carolina's corporate tax rate.
Liquidity
Management maintains a liquidity position that it believes will adequately
provide funding for loan demand and deposit run-off that may occur in the normal
course of business. We rely on a number of different sources in order to meet
our potential liquidity demands. The primary sources are increases in deposit
accounts and cash flows from loan payments and the securities portfolio.
In addition to these primary sources of funds, management has several secondary
sources available to meet potential funding requirements. As of December 31,
2017, the Bank had an available borrowing capacity of $56.3 million with the
FHLB of Atlanta, a $115.4 million line of credit with the FRB and three lines of
credit with three unaffiliated banks totaling $60.0 million. At December 31,
2017, we had $685.0 million in FHLB advances outstanding and nothing outstanding
under our other lines of credit. Additionally, the Company classifies its
securities portfolio as available for sale, providing an additional source of
liquidity. Management believes that our security portfolio is of high quality
and the securities would therefore be marketable. In addition, we have
historically sold longer term fixed-rate mortgage loans in the secondary market
to reduce interest rate risk and to create still another source of liquidity.
From time to time we also utilize brokered time deposits to supplement our other
sources of funds. Brokered time deposits are obtained by utilizing an outside
broker that is paid a fee. This funding requires advance notification to
structure the type of deposit desired by us. Brokered deposits can vary in term
from one month to several years and have the benefit of being a source of
longer-term funding. We also utilize brokered deposits to help manage interest
rate risk by extending the term to repricing of our liabilities, enhance our
liquidity and fund asset growth. Brokered deposits are typically from outside
our primary market areas, and our brokered deposit levels may vary from time to
time depending on competitive interest rate conditions and other factors. At
December 31, 2017 brokered deposits totaled $11.8 million, or 0.6% of total
deposits.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments,
such as overnight deposits and federal funds. On a longer term basis, we
maintain a strategy of investing in various lending products and investment
securities, including mortgage-backed securities and commercial paper. HomeTrust
Bancshares on a stand-alone level is a separate legal entity from the Bank and
must provide for its own liquidity and pay its own operating expenses. The
Company's primary source of funds consists of the net proceeds retained from the
Conversion. The Company also has the ability to receive dividends or capital
distributions from the Bank, although there are regulatory restrictions on the
ability of the Bank to pay dividends. At December 31, 2017, the Company (on an
unconsolidated basis) had liquid assets of $20.1 million.
We use our sources of funds primarily to meet our ongoing commitments, pay
maturing deposits and fund withdrawals, and to fund loan commitments. At
December 31, 2017, the total approved loan commitments and unused lines of
credit outstanding amounted to $178.0 million and $447.8 million, respectively,
as compared to $202.1 million and $414.4 million, respectively, as of June 30,
2017. Certificates of deposit scheduled to mature in one year or less at
December 31, 2017, totaled $302.2 million. It is management's policy to manage
deposit rates that are competitive with other local financial institutions.
Based on this management strategy, we believe that a majority of maturing
deposits will remain with us.
During the first six months of fiscal 2018, cash and cash equivalents increased
$11.7 million, or 13.4%, from $87.0 million as of June 30, 2017 to $98.7 million
as of December 31, 2017. Cash provided by operating and financing activities was
$13.0 million and $48.3 million, respectively; while cash used in investing
activities was $49.6 million. Primary sources of cash for the six months ended
December 31, 2017 included $19.7 million in proceeds from the maturity of
securities available for sale, $31.9 million in maturing certificates of deposit
in other banks, net of purchases, $10.9 million in principal repayments from
mortgage-backed securities, and a $59.8 million increase in deposits. Primary
uses of cash during the period included a net increase in commercial paper of
$48.4 million, an increase in loans of $65.8 million, and a $11.5 million
decrease in borrowings. All sources and uses of cash reflect our cash management
strategy to increase our number of higher yielding investments and loans by
increasing lower costing borrowings and reducing our holdings in lower yielding
investments.
Off-Balance Sheet Activities
In the normal course of operations, we engage in a variety of financial
transactions that are not recorded in our financial statements. These
transactions involve varying degrees of off-balance sheet credit, interest rate
and liquidity risks. These transactions are used primarily to manage customers'
requests for funding and take the form of loan commitments and lines of
credit. For the six months ended December 31, 2017, we engaged in no off-balance
sheet transactions likely to have a material effect on our financial condition,
results of operations or cash flows.

                                       48

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A summary of our off-balance sheet commitments to extend credit at December 31,
2017, is as follows (in thousands):
Undisbursed portion of construction loans $ 123,262
Commitments to make loans                    54,720
Unused lines of credit                      447,787
Unused letters of credit                      9,927
Total loan commitments                    $ 635,696


Capital Resources
At December 31, 2017, stockholder's equity totaled $395.4 million. HomeTrust
Bancshares, Inc. is a bank holding company and a financial holding company
subject to regulation by the Federal Reserve. As a bank holding company, we are
subject to capital adequacy requirements of the Federal Reserve under the Bank
Holding Company Act of 1956, as amended and the regulations of the Federal
Reserve. Our subsidiary, the Bank, an FDIC-insured, North Carolina
state-chartered bank and a member of the Federal Reserve System, is supervised
and regulated by the Federal Reserve and the NCCOB and is subject to minimum
capital requirements applicable to state member banks established by the Federal
Reserve that are calculated in a manner similar to those applicable to bank
holding companies.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
At December 31, 2017, HomeTrust Bancshares, Inc. and the Bank each exceeded all
regulatory capital requirements as of that date. Consistent with our goals to
operate a sound and profitable organization, our policy is for the Bank to
maintain a "well-capitalized" status under the regulatory capital categories of
the Federal Reserve. The Bank was categorized as "well-capitalized" at
December 31, 2017 under applicable regulatory requirements.

                                       49

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

Regulatory Requirements

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

As of December 31, 2017Common Equity Tier I Capital to
Risk-Weighted Assets             $ 354,765      13.02 %   $     122,649           4.50 %   $  177,160       6.50 %
Tier I Capital (to Total
Adjusted Assets)                 $ 354,765      11.06 %   $     128,323           4.00 %   $  160,404       5.00 %
Tier I Capital (to Risk-weighted
Assets)                          $ 354,765      13.02 %   $     163,533           6.00 %   $  218,043       8.00 %
Total Risk-based Capital (to
Risk-weighted Assets)            $ 376,310      13.81 %   $     218,043           8.00 %   $  272,554      10.00 %

As of June 30, 2017
Common Equity Tier I Capital to
Risk-Weighted Assets             $ 342,664      13.07 %   $     118,024           4.50 %   $  170,478       6.50 %
Tier I Capital (to Total
Adjusted Assets)                 $ 342,664      11.13 %   $     123,149           4.00 %   $  153,936       5.00 %
Tier I Capital (to Risk-weighted
Assets)                          $ 342,664      13.07 %   $     157,365           6.00 %   $  209,820       8.00 %
Total Risk-based Capital (to
Risk-weighted Assets)            $ 364,269      13.89 %   $     209,820           8.00 %   $  262,275      10.00 %

HomeTrust Bank:

As of December 31, 2017Common Equity Tier I Capital to
Risk-Weighted Assets             $ 318,394      11.73 %   $     122,157           4.50 %   $  176,449       6.50 %
Tier I Capital (to Total
Adjusted Assets)                 $ 318,394       9.95 %   $     128,038           4.00 %   $  160,047       5.00 %
Tier I Capital (to Risk-weighted
Assets)                          $ 318,394      11.73 %   $     162,876           6.00 %   $  217,168       8.00 %
Total Risk-based Capital (to
Risk-weighted Assets)            $ 339,816      12.52 %   $     217,168           8.00 %   $  271,461      10.00 %

As of June 30, 2017
Common Equity Tier I Capital to
Risk-Weighted Assets             $ 305,216      11.68 %   $     117,560           4.50 %   $  169,809       6.50 %
Tier I Capital (to Total
Adjusted Assets)                 $ 305,216       9.97 %   $     122,453           4.00 %   $  153,066       5.00 %
Tier I Capital (to Risk-weighted
Assets)                          $ 305,216      11.68 %   $     156,747           6.00 %   $  208,996       8.00 %
Total Risk-based Capital (to
Risk-weighted Assets)            $ 326,635      12.50 %   $     208,996           8.00 %   $  261,245      10.00 %


In addition to the minimum common equity Tier 1 ("CET1"), Tier 1 and total
risk-based capital ratios, HomeTrust Bancshares, Inc. and the Bank now have to
maintain a capital conservation buffer consisting of additional CET1 capital
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. This new capital conservation buffer requirement has phased in starting
in January 2016 at 0.625% of risk-weighted assets and will increase each year
until fully implemented to an amount equal to 2.5% of risk-weighted assets in
January 2019. At December 31, 2017, the Bank's CET1 capital exceeded the
required capital conservation buffer of 1.25%.
Impact of Inflation
The effects of price changes and inflation can vary substantially for most
financial institutions. While management believes that inflation affects the
growth of total assets, it believes that it is difficult to assess the overall
impact. Management believes this to be the case due to the fact that generally
neither the timing nor the magnitude of the inflationary changes in the consumer
price index ("CPI") coincides with changes in interest rates. The price of one
or more of the components of the CPI may fluctuate considerably and thereby
influence the overall CPI without having a corresponding effect on interest
rates or upon the cost of those goods and services normally purchased by the
Company. In years of high inflation and high interest rates, intermediate and
long-term interest rates tend to increase, thereby adversely impacting the
market values of investment securities, mortgage loans and other long-term fixed
rate loans. In addition, higher short-term interest rates caused by inflation
tend to increase the cost of funds. In other years, the opposite may occur.

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