HomeTrust Bancshares, Inc. (HTB) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion and analysis reviews our consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the Consolidated Financial Statements and notes thereto, which are included in Item 8 of this Form 10-K. You should read the information in this section in conjunction with the business and financial information regarding us as provided in this Form 10-K.

Overview

Our principal business consists of attracting deposits from the general public and investing those funds, along with borrowed funds, in commercial real estate loans, construction and development loans, commercial and industrial loans, equipment finance leases, municipal leases, loans secured by first and second mortgages on one-to-four family residences including home equity loans, construction and land/lot loans, indirect automobile loans, and other consumer loans. We also originate one-to-four family loans, SBA loans, and HELOCs to sell to third parties. In addition, we invest in debt securities issued by United States Government agencies and GSEs, corporate bonds, commercial paper and certificates of deposit in other banks 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.

53

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. Changes in levels of interest rates affect our net interest income. Because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including the 150 basis point reduction in the targeted federal funds rate during 2020, until the pandemic subsides, expect our net interest income and net interest margin to be adversely affected throughout fiscal 2021 and possibly longer.

A secondary source of income is noninterest income, which includes revenue we receive from providing products and services, including service charges and fees on deposit accounts, loan income and fees, gains on the sale of loans held for sale, and gains and losses from sales of debt securities.

An offset to net interest income is the provision for credit losses which is required to establish the ACL at a level that adequately provides for current expected credit losses inherent in our loan portfolio, off balance sheet commitments, and debt securities. Under the new CECL standard all financial assets measured at amortized cost and off balance sheet credit exposures, including loans, investment securities and unfunded commitments are evaluated for credit losses. See Note 1 "Summary of Significant Accounting Policies" in this report on Form 10-K for further discussion.

Our noninterest expenses consist primarily of salaries and employee benefits, expenses for occupancy, marketing and computer services, and FDIC deposit insurance premiums. Salaries and benefits consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement and other employee benefits. Occupancy expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of lease payments, property taxes, depreciation charges, maintenance and costs of utilities.

Our geographic footprint includes seven markets accessed through numerous strategic acquisitions as well as two de novo commercial loan offices. Looking forward, we believe opportunities currently exist within our market areas to grow our franchise. While COVID-19 has dampened our growth activities, we believe as the local and global economy returns to normalcy we remain in a position to create organic growth through marketing efforts. We may also seek to expand our franchise through the selective acquisition of individual branches, loan purchases and, to a lesser degree, whole bank transactions that meet our investment and market objectives. We will continue to be disciplined as it pertains to future expansion focusing primarily on organic growth in our current market areas.

At June 30, 2021, we had 41 locations in North Carolina (including the Asheville metropolitan area, Piedmont region, Charlotte, and Raleigh/Cary), Upstate South Carolina (Greenville), East Tennessee (including Kingsport/Johnson City/Bristol, Knoxville, and Morristown) and Southwest Virginia (including the Roanoke Valley).

Business and Operating Strategy and Goals

Our primary objective is to continue to operate and grow HomeTrust Bank as a well-capitalized, profitable, independent, community banking organization. Our mission is to create stockholder value by building relationships with our employees, customers, and communities in our primary markets in North Carolina (including the Asheville metropolitan area, Piedmont region, Charlotte, and Raleigh/Cary), Upstate South Carolina (Greenville), East Tennessee (including Kingsport/Johnson City/Bristol, Knoxville, and Morristown) and Southwest Virginia (including the Roanoke Valley) through exceptional service and helping our customers every day to be "Ready For What’s Next" in their financial lives. We will also need to continue providing our employees with the tools necessary to effectively deliver our products and services to customers in order to compete effectively with other financial institutions operating in our market areas and to fulfill our "Commitment to the Customer Experience."

Since our Conversion in 2012, we have been busy implementing new lines of business, adding new markets, improving processes, and updating our systems. We now have the lines of business and markets necessary to continue our growth. Our focus over the next few years will be on strategic initiatives to enhance profitability by reducing ongoing costs and increasing revenues in our diversified maturing lines of business. The focus on the operating environment will be designed to maximize our new systems and create efficient scalable processes. In connection with profitability improvement initiatives, we recently announced the closure of nine branches and restructuring of our balance sheet with the prepayment of our remaining long-term borrowings. In addition, beginning July 1, 2021, the Bank brought its back-office SBA loan servicing process in-house, which is expected to provide additional servicing fee and gain on sale income. In aggregate, our approach is designated to lead to increased profitability and franchise value over time.

Critical Accounting Policies

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.

54

The following represent our critical accounting policies:

Allowance for Credit Losses or ACL.  The ACL reflects our estimate of credit losses that will result from the inability of our borrowers to make required loan payments. We record loans charged off against the ACL and subsequent recoveries, if any, increase the ACL when they are recognized. We use a systematic methodology to determine our ACL for loans held for investment and certain off-balance-sheet credit exposures. The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio. We consider the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The estimate of our ACL involves a high degree of judgment; therefore, our process for determining expected credit losses may result in a range of expected credit losses. Our ACL recorded in the balance sheet reflects our best estimate within the range of expected credit losses. We recognize in net income the amount needed to adjust the ACL for management’s current estimate of expected credit losses. Our ACL is calculated using collectively evaluated and individually evaluated loans. See "Adoption of CECL Standard" in "Note 1 - Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K for further discussion of the adoption of CECL.

Goodwill and Intangibles. We review goodwill for potential impairment on an annual basis during the fourth quarter, or more often if events or circumstances indicate there may be impairment. In testing goodwill for impairment, we have the option to assess either qualitative or quantitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If we elect to perform a qualitative assessment and determine that an impairment is more likely than not, we are then required to perform a quantitative impairment test, otherwise no further analysis is required. Under the quantitative impairment test, the evaluation involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value exceeds estimated fair value an impairment charge is recognized for the difference, but limited by the amount of goodwill allocated to that reporting unit. Other identifiable intangible assets are evaluated for impairment if events or changes in circumstances indicate a possible impairment.

Non-GAAP Financial Measures

In addition to results presented in accordance with GAAP, this Form 10-K contains certain non-GAAP financial measures, which include: efficiency ratio; tangible book value per share; tangible equity to tangible assets ratio and the ratio of the allowance for credit losses to total loans excluding PPP loans and acquired loans. We believe these non-GAAP financial measures and ratios as presented are useful for both investors and management to understand the effects of certain items and provide an alternative view of our performance over time and in comparison to our competitors. These non-GAAP measures have inherent limitations, are not required to be uniformly applied and are not audited. They should not be considered in isolation or as a substitute for total stockholders' equity or operating results determined in accordance with GAAP. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies.

Set forth below is a reconciliation to GAAP of our efficiency ratio:

55

Set forth below is a reconciliation to GAAP of tangible book value and tangible book value per share:

_________________________________________________________________

(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:

_________________________________________________________________

(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.

Set forth below is a reconciliation to GAAP of the allowance for credit losses to total loans and the allowance for credit losses as adjusted to exclude PPP loans:

_________________________________________________________________

(1) PPP loans are fully guaranteed loans by the U.S. government.

56

Recent Developments: COVID-19, the CARES Act, and Our Response

The COVID-19 pandemic has caused economic and social disruption on an unprecedented scale. While some industries have been impacted more severely than others, all businesses have been impacted to some degree. This disruption resulted in business closures across the country, significant job loss, and aggressive measures by the federal government.

Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the CARES Act (Coronavirus Aid, Relief, and Economic Security Act of 2020) was signed into law on March 27, 2020 as a $2.2 trillion legislative package. The purpose of the CARES Act was to prevent a severe economic downturn through various measures, including direct financial aid to families and economic stimulus to significantly impacted industry sectors. The package also included extensive emergency funding for hospitals and healthcare providers. On December 27, 2020, the 2021 Consolidated Appropriations Act was signed into law providing an additional $900 billion in stimulus relief. Effective February 24, 2021, the Biden Administration extended the national emergency declaration for one year due to COVID-19. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as the Consolidated Appropriations Act and regulatory relief efforts have had a material impact on our operations.

In response to the COVID-19 pandemic, we offered a variety of relief options designed to support our customers and the communities we serve. As businesses reopened and the economy started to improve, we began to see our markets return to some normalcy; however, we continue to monitor the impact of the new Delta variant of COVID-19 which has prompted many public health officials and municipalities to reinstate mask mandates and reconsider lifting pandemic restrictions. While it is not possible to know the full extent of the impact as of the date of this filing, set forth (below) are potentially material items of which we are aware.

See "Note 1 - Summary of Significant Accounting Policies" in the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information.

Paycheck Protection Program Participation. The CARES Act authorized the SBA to temporarily guarantee loans under the new PPP loan program. The goal of the PPP was to avoid as many layoffs as possible, and to encourage small businesses to maintain payrolls. As a qualified SBA lender, we were automatically authorized to originate PPP loans upon commencement of the program in April 2020. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be forgiven and repaid by the SBA so long as employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses.

We participated in the SBA PPP during calendar years 2020 and 2021. During the quarter ended June 30, 2021, the program’s funds were depleted and subsequently we ended our participation. We originated a total of $112.0 million or 469 PPP loans under the program throughout the pandemic which included a total of $31.2 million in PPP loans for calendar year 2021. As of June 30, 2021, outstanding PPP loans totaled $46.7 million which included $1.1 million in net deferred fees that will be accreted into interest income over the remaining life of the loans unless the loans are forgiven, at which point these fees would be accelerated into income. We earned $1.8 million and $179,000 in fees through accretion including some accelerated accretion resulting from loan forgiveness for the years ended June 30, 2021 and 2020, respectively. We have worked with the SBA and our customers to forgive a total of $64.2 million in PPP loans during our participation in the program.

Loan Modifications. As of June 30, 2021, substantially all loans placed on full payment deferral during the pandemic had come out of deferral and borrowers are either making regular loan payments or interest-only payments until the latter part of calendar year 2021. As of June 30, 2021, we had $78.9 million in commercial loan deferrals on interest-only payments and only $107,000 in loans with full principal and interest payment deferrals compared to $551.3 million as of June 30, 2020. We continue to work with our customers to determine the best option for repayment of accrued interest on the deferred payments.

We believe the steps we have taken and continue to take are necessary to effectively manage our portfolio and assist our customers through the ongoing uncertainty surrounding the duration, impact and government response to the COVID-19 pandemic. In addition, we will continue to work with our customers to determine the best option for repayment of accrued interest on the deferred payments.

Allowance for Credit Losses. We recorded a benefit for credit losses of $7.1 million for the year ended June 30, 2021, compared to a $8.5 million provision in the year ended June 30, 2020. On July 1, 2020, we adopted the new CECL accounting standard with an allowance for credit losses which included the impact of COVID-19 based on the current expected credit losses. While leading economic indicators have improved as of June 30, 2021, we continue to maintain qualitative reserves in our allowance for credit losses which includes management's estimate of the impact for COVID-19. Under the prior incurred loss model, approximately $4.3 million of the prior year provision reflects probable credit losses related to COVID-19 based upon the conditions that existed as of June 30, 2020, including consideration for the downturn in certain leading economic indicators, such as the weaker stock market, lower manufacturing activity and retail sales, consumer confidence, and increases in unemployment with the remaining provision being driven by increased charge-offs and impairments in our commercial and equipment finance portfolios. The provision during the previous year was primarily related to the additional allowance stemming from our assessment of COVID-19 on the loan portfolio.

Branch Operations and Support Personnel. Throughout the pandemic we have provided banking services with a focus on the health and safety of our customers and employees. We continue to monitor the effects of customer behavior specific to in-person branch transactions and have experienced meaningful increases in digital banking activity and online deposit account openings. Partially in response to these changes,

57

we recently announced our plans to close nine branches in North Carolina, Tennessee, and Virginia. We continue to respond to the banking needs of our customers whether through physical branch locations and/or digital banking services.

Capital. At June 30, 2021 and 2020, our tangible equity to total tangible assets ratio was 10.59% and 10.33%, respectively, and HomeTrust Bank’s capital was well in excess of all regulatory requirements. As a result of our strong capital levels, we are well positioned to face the challenges of the COVID-19 pandemic.

Accounting and Reporting Considerations. The CARES Act provides that a financial institution may elect to suspend (1) the requirements under GAAP for certain loan modifications that would otherwise be categorized as a TDR and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes. We have elected this as a policy change.

Also in response to the COVID-19 pandemic, the Federal Reserve, the FDIC, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the CFPB, in consultation with the state financial regulators (collectively, the “agencies”) issued a joint interagency statement (issued March 22, 2020; revised statement issued April 7, 2020). Some of the provisions applicable to us include, but are not limited to:

•Loan modifications that do not meet the conditions of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. The agencies confirmed with FASB staff that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payment.

•With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed by the due date stipulated in the legal agreement. If a financial institution agrees to a payment deferral, these loans would not be considered past due during the period of the deferral.

•While short-term COVID-19 modifications are in effect, these loans generally should not be reported as nonaccrual or as classified.

See "Risk Factors" under Part I, Item 1A for additional risks related to COVID-19.

Comparison of Financial Condition at June 30, 2021 and June 30, 2020

General.  Total assets and liabilities decreased by $198.1 million and $186.4 million, down to $3.5 billion and $3.1 billion, respectively, at June 30, 2021 as compared to June 30, 2020. The cumulative decrease of $201.6 million, or 41.8% in cash and cash equivalents, commercial paper, and certificates of deposit in other banks; along with the $169.8 million, or 6.1% increase in deposits was used to pay down borrowings by $360.0 million. The $16.4 million, or 21.2% increase in loans held for sale primarily relates to additional one-to-four family and home equity loans originated for sale during the period. The $15.2 million, or 39.1% decrease in other investments, at cost was due to FHLB stock being sold back in connection with the paydown of borrowings mentioned below.

On July 1, 2020, we adopted the CECL accounting standard in accordance with ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The cumulative effect adjustment from this change in accounting policy resulted in an increase in our allowance for credit losses for loans of $14.8 million, additional deferred tax assets of $3.9 million, additional reserve for unfunded loan commitments of $2.3 million, and a reduction to retained earnings of $13.2 million. In addition, an allowance for credit losses for commercial paper was established for $250,000 with a deferred tax asset of $58,000. The adoption of this ASU did not have an effect on available-for-sale debt securities for the year ended June 30, 2021.

Cash, cash equivalents, and commercial paper.  Total cash and cash equivalents decreased $70.6 million, or 58.1%, to $51.0 million at June 30, 2021 from $121.6 million at June 30, 2020. The commercial paper balance decreased $115.4 million, or 37.8% to $189.6 million at June 30, 2021 from $305.0 million at June 30, 2020. Our investments in commercial paper have short-term maturities and limited exposure of $15.0 million per each highly-rated company.

Investments.  Debt securities available for sale increased $28.9 million, or 22.7%, to $156.5 million at June 30, 2021 compared to $127.5 million at June 30, 2020. During fiscal year 2021, $108.0 million of securities were purchased (primarily shorter term corporate bonds) partially offset by $61.5 million of securities which matured and $15.2 million of MBS principal repayments which were received. The overall higher levels of shorter-term corporate bonds provides us with higher yields compared to MBS and agency securities while remaining within our investment policy. At June 30, 2021, certificates of deposit in other banks decreased $15.6 million, or 28.0% to $40.1 million compared to $55.7 million at June 30, 2020. The decrease in certificates of deposit in other banks was due to $22.9 million in maturities partially offset by $7.3 million in purchases. All certificates of deposit in other banks are fully insured by the FDIC. On a quarterly basis, management evaluates securities for impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value. All debt securities available for sale in an unrealized loss position as of June 30, 2021 continue to perform as scheduled and management does not believe that there is a credit loss or that a provision for credit losses is necessary. Other investments at cost decreased $15.2 million, or 39.1% to $23.7 million at June 30, 2021 from $38.9 million at June 30, 2020. Other investments at cost included SBIC investments, FRB stock, and FHLB stock totaling $10.2 million, $7.3 million, and $6.2 million, respectively. The overall decrease was driven by a $17.2 million, or 73.6% reduction in FHLB stock as a result of the payoff of borrowings during fiscal year 2021.

58

Loans held for sale. Loans held for sale increased to $93.5 million at June 30, 2021 from $77.2 million at June 30, 2020. The $16.4 million, or 21.2% increase was driven by a $9.7 million increase HELOCs originated for sale, a $3.8 million increase in mortgage loans originated for sale, and a $2.9 million increase in SBA commercial loans originated for sale.

Loans.  Total loans decreased $35.9 million, or 1.3%, to $2.7 billion at June 30, 2021 driven by PPP loan forgiveness totaling $64.2 million, the continued payoff of purchased HELOCs of $32.8 million, partially offset by $31.0 million in organic loan growth (which excludes PPP loans and purchases of home equity lines of credit).

Retail consumer and commercial loans consist of the following at the dates indicated:

Asset quality. Nonperforming assets decreased by $3.5 million, or 21.3% to $12.8 million, or 0.36% of total assets, at June 30, 2021 compared to $16.3 million, or 0.44% of total assets at June 30, 2020. Nonperforming assets included $12.6 million in nonaccruing loans and $188,000 in REO at June 30, 2021, compared to $15.9 million and $337,000 in nonaccruing loans and REO, respectively, at June 30, 2020. The decrease in nonaccruing loans primarily relates to five loans totaling $3.3 million that were charged off or paid off during the fiscal year. Included in nonperforming loans at June 30, 2021 are $5.5 million of TDR loans of which $4.2 million were current at June 30, 2021, with respect to their modified payment terms. At June 30, 2021, $6.6 million, or 52.6%, of nonaccruing loans were current on their loan payments. The ratio of nonperforming loans to total loans was 0.46% at June 30, 2021 and 0.58% at June 30, 2020. Performing TDRs that were excluded from nonaccruing loans totaled $11.1 million and $13.2 million at June 30, 2021 and June 30, 2020, respectively.

The ratio of classified assets to total assets decreased to 0.76% at June 30, 2021 from 0.84% at June 30, 2020 due to the decrease in classified loans during fiscal 2021. Classified assets decreased to $26.7 million at June 30, 2021 compared to $31.1 million at June 30, 2020 primarily due to $5.7 million in payoffs, $1.6 million in charge-offs, and $950,000 in upgrades during the year ended June 30, 2021. Delinquent loans (loans delinquent 30 days or more) at June 30, 2021 were $7.1 million, or 0.3% of total loans compared to $16.1 million, or 0.6% of total loans at June 30, 2020.

Our overall asset quality metrics continue to demonstrate our commitment to growing and maintaining a loan portfolio with a moderate risk profile; however, we will remain diligent in our review of the portfolio and overall economy as we continue to maneuver through the uncertainty surrounding COVID-19. See "Recent Developments: COVID-19, the CARES Act, and Our Response" on page 57 for additional information regarding our response to COVID-19.

Allowance for credit losses. As previously mentioned, we adopted the CECL accounting standard in accordance with ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." See "Adoption of CECL Standard" in "Note 1 - Summary of Significant Accounting Policies," "Note 5 - Loans and Allowance for Credit Losses on Loans," and "Critical Accounting Policies – Allowance for Credit Losses" of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K for further discussion of the adoption of CECL.

The allowance for credit losses was $35.5 million, or 1.30% of total loans, at June 30, 2021 compared to $28.1 million, or 1.01% of total loans, at June 30, 2020, which was primarily driven by additional allowance stemming from the our adoption of the new CECL accounting standard. The allowance for credit losses to total gross loans excluding PPP loans was 1.32% at June 30, 2021, compared to 1.04% at June 30, 2020.

59

There was a net benefit for credit losses of $7.1 million for the year ended June 30, 2021, compared to an $8.5 million provision for credit losses for fiscal year 2020. The net benefit for credit losses was primarily driven by changes in the economic forecast which improved in outlook since the adoption of the standard and a decline in the balance of total loans. Net charge-offs totaled $143,000 for the year ended June 30, 2021, compared to $1.9 million for fiscal year 2020. Net charge-offs as a percentage of average loans were 0.01% and 0.07% for the years ended June 30, 2021 and 2020, respectively.

Our individually evaluated loans are comprised of loans meeting certain thresholds, on nonaccrual status, and all TDRs, whether performing or on nonaccrual status under their restructured terms. Individually evaluated loans may be evaluated for reserve purposes using either the cash flow or the collateral valuation method. As of June 30, 2021, there were $8.8 million in loans individually evaluated. For more information on these individually evaluated loans, see "Note 5 - Loans and Allowance for Credit Losses on Loans" in this Quarterly Report on Form 10-Q.

Management believes the ACL as of June 30, 2021 was adequate to absorb the estimated losses in the loan portfolio at that date. While management believes the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of the ACL is subject to review by bank regulators as part of the routine examination process, which may result in the establishment of additional reserves based upon their judgment of information available to them at the time of their examination. Lastly, a further deterioration in national and local economic conditions, as a result of the COVID-19 pandemic or other factors, could result in a material increase in the ACL and may adversely affect our financial condition and results of operations.

Real estate owned.  REO decreased $149,000, or 44.2% to $188,000 at June 30, 2021 from $337,000 at June 30, 2020.

Deferred income taxes. Deferred income taxes increased $567,000, or 3.5%, to $16.9 million at June 30, 2021 from $16.3 million at June 30, 2020. The increase was primarily driven by a $1.7 million increase in deferred tax assets related to the allowance for credit losses partially offset by a $1.0 million increase in deferred tax liabilities related to the depreciable basis in premises and equipment and other deferred tax liabilities.

Other assets. Other assets increased $8.0 million, or 16.1%, to $57.5 million at June 30, 2021 from $49.5 million at June 30, 2020. The increase was driven by a $4.3 million increase in operating leases from our equipment finance line of business, a $1.4 million increase in current taxes receivable, a $1.1 million increase in SBA servicing assets, and a $897,000 increase in ROU assets, partially offset by decreases across various other assets.

Deposits.  Total deposits increased $169.8 million, or 6.1%, to $3.0 billion at June 30, 2021 from $2.8 billion at June 30, 2020. The increase was driven by a $436.2 million, or 21.3% increase in core deposits as a result of additional funds to customers from government stimulus and our focused effort to realign the deposit mix. Partially offsetting the increase was a managed runoff of certificates of deposit and brokered deposits totaling $266.4 million, or 36.0% down to $472.8 million at June 30, 2021.

Borrowings.  Total borrowings decreased $360.0 million, or 75.8% to $115.0 million at June 30, 2021 from $475.0 million at June 30, 2020 due to the early retirement of $475.0 million in long-term FHLB borrowings partially offset by $115.0 million in additional borrowings at lower rates and 30-day maturities.

Equity.  Stockholders’ equity at June 30, 2021 decreased $11.7 million, or 2.9% to $396.5 million from $408.3 million at June 30, 2020. Changes within stockholders' equity included $15.7 million in net income and $6.7 million in stock-based compensation and stock option exercises, offset by $13.4 million related to the adoption of the new CECL accounting standard, 733,347 shares of common stock being repurchased at an average cost of $22.03, or approximately $16.2 million in total, and $5.0 million related to cash dividends declared. As of June 30, 2021, we were considered "well capitalized" in accordance with the regulatory capital guidelines and exceeded all regulatory capital requirements. Tangible book value per share decreased $0.15, or 0.7% to $22.28 as of June 30, 2021 compared to $22.43 at June 30, 2020.

60

Average Balances, Interest and Average Yields/Cost

The following table sets forth the average balance sheet, interest income and expense, and average yields and costs for the years indicated. All average balances are daily average balances. Nonaccruing loans have been included in the table as loans carrying a zero yield.

(1)    The average loans receivable, net balances include loans held for sale and nonaccruing loans.

(2)    Interest income used in the average interest/earned and yield calculation includes the tax equivalent adjustment of $1.3 million, $1.2 million, and $1.2 million for fiscal years ended June 30, 2021, 2020, and 2019, respectively, calculated based on a combined federal and state tax rate of 24% for all three years.

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

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

61

Rate/Volume Analysis

The following schedule 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.

Comparison of Results of Operations for the Years Ended June 30, 2021 and June 30, 2020

General.  Net income totaled $15.7 million, or $0.94 per diluted share for 2021, compared to $22.8 million, or $1.30 per diluted share for 2020. Earnings during 2021 were negatively impacted by $22.7 million in prepayment penalties on borrowings as well as a $1.5 million charge related to branch closure and restructuring expenses, which were partially offset by a $7.1 million benefit for credit losses compared an $8.5 million provision for credit losses in 2020.

On June 15, 2021, we announced a plan to close nine branches in North Carolina, Tennessee, and Virginia. The branch closures are part of our ongoing strategic initiatives to respond to changing customer preferences and will reduce operating expenses and provide additional company-wide efficiencies. The branch closure and restructuring expenses recognized for the year ended June 30, 2021 includes costs associated with impacted employees, impairment of an operating lease asset, the write-down of branch facilities, and other net costs. All applicable regulatory requirements have been met and the branch closures will occur on September 16, 2021.

Net Interest Income.  Net interest income for 2021 was $103.3 million, compared to $104.1 million for 2020. The $782,000, or 0.8% decrease was due to a $17.5 million decrease in interest and dividend income partially offset by a $16.7 million decrease in interest expense, both of which were driven primarily by the lower rate environment in the current year.

During 2021, average interest-earning assets increased $115.6 million, or 3.5% to $3.4 billion compared to $3.3 billion in the prior year. The average balance of total loans receivable increased by $71.1 million, or 2.6% compared to last year. The average balance of commercial paper and deposits in other banks increased $62.5 million, or 16.2% during 2021. These increases were funded by a $12.4 million, or 8.2% decrease in debt securities available for sale, a $5.6 million, or 13.3% decrease in other interest-earning assets and a $149.2 million, or 4.8% increase in average deposits (interest and noninterest-bearing) and borrowings as compared to last year. Net interest margin (on a fully taxable-equivalent basis) for 2021 decreased to 3.04% from 3.17% in prior year.

Interest Income.  Total interest and dividend income for 2021 decreased $17.5 million, or 12.9%, compared to 2020, which was driven by a $10.4 million, or 8.5% decrease in interest income from loans, a $5.1 million, or 66.6% decrease in interest income from commercial paper and deposits in other banks, a $1.7 million, or 45.1% decrease in interest income from debt securities available for sale, and a $356,000, or 13.2% decrease in interest income from other interest-earning assets. The lower interest income was driven by the decrease in market yields compared to the prior year. Average loan yields decreased 48 basis points to 4.01% for 2021 from 4.49% last year. For the years ended June 30, 2021 and 2020, average loan yields included seven and six basis points, respectively, from the accretion of purchase discounts on acquired

62

loans. Average yields on commercial paper and deposits in other banks decreased 143 basis points to 0.57% for 2021 from 2.00% in the prior year. Average yields on debt securities available for sale decreased 98 basis points to 1.47% for 2021 from 2.45% in the prior year.

Interest Expense.  Total interest expense in 2021 decreased $16.7 million, or 52.1%, compared to 2020. The decrease was driven by a $13.5 million, or 59.0% decrease in interest expense on deposits and a $3.3 million, or 35.1% decrease in interest expense on borrowings compared to last year. The $116.1 million, or 5.4% increase in average interest-bearing deposits for 2021 was more than offset by the 65 basis point decrease down to 0.41% in the corresponding cost of deposits compared to 1.06% in 2020. Average borrowings for 2021 decreased $151.6 million, or 26.7% along with a 19 basis point decrease in the average cost of borrowings compared to last year. The overall average cost of funds decreased 61 basis points to 0.57% for 2021 compared to 1.18% last year due primarily to the impact of the lower amount of borrowings and reduced market rates.

Provision for Credit Losses.  During 2021, there was a net benefit for credit losses of $7.1 million compared to a $8.5 million provision for credit losses in 2020. As discussed earlier, the current year benefit was driven by changes in the economic forecast which continue to improve since the adoption of the CECL standard. See "Comparison of Financial Condition at June 30, 2021 and 2020 - Asset Quality and Allowance for Credit Losses" for additional details.

Noninterest Income.  Noninterest income in 2021 increased $9.5 million, or 31.3% to $39.8 million from $30.3 million in 2020 primarily due to a $7.4 million, or 74.5% increase in the gain on sale of loans held for sale and a $2.8 million, or 44.0% increase in other noninterest income, partially offset by a $299,000, or 3.2% decrease in service charges and fees on deposit accounts, and a $286,000, or 11.5% decrease in loan income and fees. The increase in the gain on sale of loans held for sale was primarily driven by an increase in sales of mortgage, SBA and home equity loans. There were $406.5 million of residential mortgage loans originated for sale which were sold with gains of $10.5 million compared to $203.9 million sold with gains of $5.4 million in the prior year. Included in the prior year's gain on sale of loans was an additional $1.3 million non-recurring gain related to $154.9 million one-to-four family portfolio loans reclassed to loans held for sale that were sold during the year. During 2021, $66.1 million of the guaranteed portion of SBA commercial loans were sold with recorded gains of $6.1 million compared to $38.1 million sold with gains of $2.8 million in 2020. In addition, $110.8 million of home equity loans were sold during 2021 with gains of $724,000 compared to $71.1 million sold with gains of $415,000 in 2020. The increase in other noninterest income primarily related to a $2.2 million, or 66.9% increase in operating lease income from the equipment finance line of business and a $538,000, or 63.4% increase in the investment services line of business. The decrease in service charges and fees on deposit accounts was primarily related to lower nonsufficient fund fees as customers decreased spending during the pandemic. The decrease in loan income and fees was primarily a result of lower fees from our adjustable rate conversion program.

Noninterest Expense.  Noninterest expense for 2021 increased $34.1 million, or 35.1% to $131.2 million compared to $97.1 million in 2020. The increase was primarily due to $22.7 million in prepayment penalties on borrowings and $1.5 million in branch closure and restructuring charges previously mentioned. In addition, there was a $6.2 million, or 11.0% increase in salaries and employee benefits; a $2.9 million, or 20.8% increase in other expenses, driven by depreciation from our equipment finance line of business; a $1.5 million, or 17.8% increase in computer services; an $899,000 increase in deposit insurance premiums as a result of credits issued by the FDIC being utilized in the prior year period; and a $293,000, or 3.2% increase in net occupancy expense. Partially offsetting these increases was a $686,000, or 48.3% decrease in core deposit intangible amortization and a cumulative decrease of $399,000, or 7.8% in telephone, postage, and supplies expense, and marketing and advertising expense for the year ended June 30, 2021 compared to last year. In addition, there was a $893,000, or 60.5% decrease in REO related expenses as a result of fewer properties held, no post-foreclosure writedowns, and a gain on the sale of REO in the current period compared to a loss last year.

Income Taxes.  Income tax expense for 2021 decreased $2.6 million, or 43.2% to $3.4 million from $6.0 million in 2020 as a result of lower taxable income. The effective tax rate for 2021 and 2020 was 17.9% and 20.9%, respectively. The lower effective tax rate in the current period compared to the prior period was driven by a comparable amount of tax-exempt income in each period compared to lower pre-tax book income for 2021. For more information on income taxes and deferred taxes, see "Note 12 - Income Taxes" of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

Comparison of Results of Operation for the Years Ended June 30, 2020 and June 30, 2019

General. During 2020, net income totaled $22.8 million, or $1.30 per diluted share for the year ended June 30, 2020, compared to $27.1 million, or $1.46 per diluted share for fiscal year 2019. Earnings during the year ended June 30, 2020 were negatively impacted by a significant increase in the provision for credit losses based on our assessment of COVID-19 on various macroeconomic factors. In addition, the decrease in interest rates over the past year has negatively affected our net interest margin.

Net Interest Income. Net interest income for 2020 was $104.1 million, compared to $106.8 million for 2019. The $2.7 million, or 2.6% decrease was due to a $960,000 decrease in interest and dividend income primarily driven by a decrease in yields and a $1.8 million increase in interest expense.

During 2020, average interest-earning assets increased $174.7 million, or 5.5% to $3.3 billion compared to $3.2 billion in the prior year. For the year ended June 30, 2020, the average balance of total loans receivable increased $114.8 million, or 4.4% compared to last year primarily due to organic loan growth. The average balance of commercial paper and deposits in other banks increased $59.2 million, or 18.1% between the years driven by increases in commercial paper investments. These increases were primarily funded by the $165.5 million, or 5.7% increase in average interest-bearing liabilities and noninterest-bearing deposits, as compared to last year. Net interest margin (on a fully taxable-equivalent basis) for the year ended June 30, 2020 decreased to 3.17% from 3.43% for the year ended June 30, 2019.

63

Interest Income. Total interest and dividend income for 2020 decreased $960,000, or 0.7%, compared to 2019, which was driven by a $896,000, or 25.0% decrease in interest income on other interest-earning assets and a $579,000, or 7.0% decrease in interest income from commercial paper and interest-bearing deposits in other banks. The reduced income was a result of lower interest rates on commercial paper and other investments as well as lower interest earned on FHLB stock as borrowings were paid down during the year. The overall decreases were partially offset by a $271,000, or 0.2% increase in loan interest income and a $244,000, or 7.1% increase in interest income from debt securities available for sale. The additional loan interest income was driven by the increase in the average balance of loans receivable offset by a decrease in loan interest yield compared to the prior year. Average loan yields decreased by 18 basis points to 4.49% for the year ended June 30, 2020 from 4.67% last year. For the years ended June 30, 2020 and 2019, average loan yields included six and eight basis points, respectively, from the accretion of purchase discounts on acquired loans. 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 prior to the adoption of ASU No. 206-13, we analyzed the cash flow assumptions on loan pools purchased and, at least semi-annually, we updated loss estimates, prepayment speeds, and other variables when analyzing cash flows. In addition to this accretion income, which was recognized over the estimated life of the loans pools, if a loan was removed from a pool due to payoff or foreclosure, the unaccreted discount in excess of losses was recognized as an accretion gain in interest income. As a result, income from loan pools could be volatile from quarter to quarter as well as year over year.

Interest Expense. Total interest expense in 2020 increased $1.8 million, or 5.8%, compared to 2019. The increase was driven by a $7.1 million, or 44.9% increase in deposit interest expense partially offset by a $5.3 million, or 36.3% decrease in interest expense on borrowings. The additional deposit interest expense was a result of a $211.1 million, or 10.9% increase in the average balance of interest-bearing deposits along with a 25 basis point increase in the average cost of those deposits for the year ended June 30, 2020 as compared to last year. Average borrowings for the year ended June 30, 2020 decreased $103.8 million, or 15.4% along with a 54 basis point decrease in the average cost of borrowings compared to last year. The overall cost of funds increased two basis points to 1.18% for the year ended June 30, 2020 compared to 1.16% last year.

Provision for Credit Losses. During 2020, there was an $8.5 million provision for credit losses, compared to a $5.7 million in 2019. As discussed earlier, the current year provision was driven by COVID-19 and increased charge-offs compared to prior year's provision which primarily related to one commercial relationship.

Noninterest Income. Noninterest income in 2020 increased $7.4 million, or 32.2% to $30.3 million from $22.9 million in 2019 primarily due

to a $3.7 million, or 60.0% increase in the gain on sale of loans held for sale, a $2.7 million, or 74.7% increase in other noninterest income, and a $1.1 million, or 75.4% increase in loan income and fees. The increase in the gain on sale of loans held for sale was a result of the one-to-four family loans sold during the period which resulted in a non-recurring $1.3 million gain. In addition to this non-recurring gain, $203.9 million of residential mortgage loans were sold with gains of $5.4 million for the year ended June 30, 2020, compared to $120.6 million sold with gains of $2.8 million in the prior year. During the year ended June 30, 2020, $38.1 million of SBA commercial loans were sold with recorded gains of $2.8 million compared to $47.4 million sold and gains of $3.4 million in the prior year. In addition, $71.1 million of home equity loans were sold during the year for a gain of $415,000. The increase in other noninterest income primarily related to a $2.4 million increase in operating lease income from the equipment finance line of business. The increase in loan income and fees is primarily a result of our adjustable rate conversion program and prepayment fees on equipment finance loans.

Noninterest Expense. Noninterest expense for 2020 increased $7.0 million, or 7.8% to $97.1 million compared to $90.1 million in 2019. The

increase was primarily due to a $4.4 million, or 8.4% increase in salaries and employee benefits; a $3.0 million, or 27.4% increase in other expenses, mainly driven by depreciation from our equipment finance line of business and expenses related to our core conversion; a $489,000,

or 6.4% increase in computer services; a $235,000, or 7.7% increase in telephone, postage, and supplies; and a $162,000, or 12.3% increase in

REO-related expenses. Partially offsetting these increases was a $608,000, or 30.0% decrease in core deposit intangible amortization; a decrease of $526,000, or 36.9% in deposit insurance premiums related to credit from the FDIC; and a $226,000, or 2.4% decrease in net occupancy expenses for the year ended June 30, 2020 compared to the last year.

Income Taxes. Income tax expense for 2020 decreased $767,000, or 11.3% to $6.0 million from $6.8 million in 2019 as a result of lower taxable income. The effective tax rate for the years ended June 30, 2020 and 2019 was 20.9% and 20.0%, respectively.

Asset/Liability Management

Our Risk When Interest Rates Change.  The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market interest rates change over time. Our loans generally have longer maturities than our deposits. Accordingly, our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk. If interest rates rise, our net interest income could be reduced because interest paid on interest-bearing liabilities, including deposits and borrowings, could increase more quickly than interest received on interest-earning assets, including loans and other investments. In addition, rising interest rates may hurt our income because they may reduce the demand for loans.

How We Measure Our Risk of Interest Rate Changes.  As part of our process to manage our exposure to changes in interest rates and comply with applicable regulations, we monitor our interest rate risk. In monitoring interest rate risk we continually analyze and manage assets and liabilities based on market conditions, their payment streams and interest rates, the timing of their maturities, their sensitivity to actual or potential changes in market interest rates, and interest rate sensitivities of our non-maturity deposits with respect to interest rates

64

paid and the level of balances. The board of directors sets the asset and liability policy of HomeTrust Bank, which is implemented by management and an asset/liability committee whose members include certain members of senior management.

The purpose of this committee is to communicate, coordinate and control asset/liability management consistent with our business plan and board approved policies. The committee establishes and monitors the volume and mix of assets and funding sources taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The objectives are to manage assets and funding sources to produce results that are consistent with liquidity, capital adequacy, growth, risk, and profitability goals.

The committee generally meets on a quarterly basis to review, among other things, economic conditions and interest rate outlook, current and projected liquidity needs and capital position, anticipated changes in the volume and mix of assets and liabilities and interest rate risk exposure limits versus current projections pursuant to net present value of portfolio equity analysis and income simulations. The committee recommends strategy changes based on this review. The committee is responsible for reviewing and reporting on the effects of the policy implementations and strategies to the board of directors at least quarterly.

Among the techniques we have used at various times to manage interest rate risk are: (i) increasing our portfolio of hybrid and adjustable-rate one-to-four family residential loans and commercial loans; (ii) maintaining a strong capital position, which provides for a favorable level of interest-earning assets relative to interest-bearing liabilities; and (iii) emphasizing less interest rate sensitive and lower-costing “core deposits.” We also maintain a portfolio of short-term or adjustable-rate assets and use fixed-rate FHLB advances and brokered deposits to extend the term to repricing of our liabilities.

We consider the relatively short duration of our deposits in our overall asset/liability management process. As short-term rates increase, we have assets and liabilities that increase with the market. This is reflected in the change in our PVE when rates increase (see the table below). PVE is defined as the net present value of our existing assets and liabilities. In addition, we have historically demonstrated an ability to maintain retail deposits through various interest rate cycles. If local retail deposit rates increase dramatically, we also have access to wholesale funding through our lines of credit with the FHLB and FRB, as well as through the brokered deposit market to replace retail deposits, as needed.

Depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, the committee may in the future determine to increase our interest rate risk position somewhat in order to maintain or increase our net interest margin. In particular, during certain periods of stable or declining interest rates, we believe that the increased net interest income resulting from a mismatch in the maturity of our assets and liabilities portfolios may provide high enough returns to justify increased exposure to sudden and unexpected increases in interest rates. As a result of this philosophy, our results of operations and the economic value of our equity will remain vulnerable to increases in interest rates and to declines due to differences between long- and short-term interest rates.

The committee regularly reviews interest rate risk by forecasting the impact of alternative interest rate environments on net interest income and our PVE. The committee also evaluates these impacts against the potential changes in net interest income and market value of our portfolio equity that are monitored by the board of directors of HomeTrust Bank generally on a quarterly basis.

Our asset/liability management strategy sets limits on the change in PVE given certain changes in interest rates. The table presented here, as of June 30, 2021, 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 0.00% to 0.25% 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 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, 2021, our loans with interest rate floors totaled approximately $543.5 million or 19.9% of our total loan portfolio and had a weighted average floor rate of 3.9%, $353.5 million of these loans were at their floor rate, of which $323.6 million, or 91.5%, had yields that would begin floating again once prime rates increase at least 200 basis points.

65

In evaluating our exposure to interest rate movements, certain shortcomings inherent in the method of analysis presented in the foregoing table must be considered. For example, although certain assets and liabilities may have similar maturities or repricing periods, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in interest rates. Additionally, certain assets, such as adjustable rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a significant change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed above. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. We consider all of these factors in monitoring our exposure to interest rate risk.

The board of directors and management of HomeTrust Bank believe that certain factors afford HomeTrust Bank the ability to operate successfully despite its exposure to interest rate risk. HomeTrust Bank may manage its interest rate risk by originating and retaining adjustable rate loans in its portfolio, by borrowing from the FHLB to match the duration of our funding to the duration of originated fixed rate one-to-four family and commercial loans held in portfolio and by selling on an ongoing basis certain currently originated longer term fixed rate one-to-four family real estate loans.

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 June 30, 2021, HomeTrust Bank had an additional borrowing capacity of $289.4 million with the FHLB of Atlanta, a $92.9 million line of credit with the FRB, and three lines of credit with three unaffiliated banks totaling $100.0 million. Additionally, we classify our securities portfolio as available for sale, providing an additional source of liquidity. Management believes that our security portfolio is of high quality and the securities would therefore be marketable. In addition, we have historically sold fixed-rate mortgage loans in the secondary market to reduce interest rate risk and to create still another source of liquidity. From time to time we also utilize brokered time deposits to supplement our other sources of funds. Brokered time deposits are obtained by utilizing an outside broker that is paid a fee. This funding requires advance notification to structure the type of deposit desired by us. Brokered deposits can vary in term from one month to several years and have the benefit of being a source of longer-term funding. We also utilize brokered deposits to help manage interest rate risk by extending the term to repricing of our liabilities, enhance our liquidity and fund asset growth. Brokered deposits are typically from outside our primary market areas, and our brokered deposit levels may vary from time to time depending on competitive interest rate conditions and other factors. At June 30, 2021, brokered deposits totaled $4.3 million or 0.2% of total deposits.

Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments, such as overnight deposits and federal funds. On a longer term basis, we maintain a strategy of investing in various lending products and debt securities, including mortgage-backed securities. On a stand-alone level we are a separate legal entity from HomeTrust Bank and must provide for our own liquidity and pay our own operating expenses. Our primary source of funds consists of dividends or capital distributions from HomeTrust Bank, although there are regulatory restrictions on the ability of HomeTrust Bank to pay dividends. At June 30, 2021, we (on an unconsolidated basis) had liquid assets of $9.6 million.

At the Bank level, we use our sources of funds primarily to meet our ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments. At June 30, 2021, the total approved loan commitments and unused lines of credit outstanding amounted to $401.1 million and $530.5 million, respectively, as compared to $199.4 million and $398.8 million, respectively, as of June 30, 2020. Certificates of deposit scheduled to mature in one year or less at June 30, 2021, totaled $392.9 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 fiscal 2021, cash and cash equivalents decreased $70.6 million, or 58.1%, from $121.6 million as of June 30, 2020 to $51.0 million as of June 30, 2021. Cash used in financing activities of $229.7 million was partially offset by cash provided by investing activities of $156.3 million and operating activities of $2.8 million. Primary uses of cash during the year included the prepayment (or early retirement) of $475.0 million in borrowings, $108.0 million in purchases of debt securities available for sale, $22.7 million in prepayment penalties on borrowings, $16.2 million in common stock repurchases, $16.1 million in purchases of premises and equipment, $9.2 million in purchases of operating lease equipment, and $5.0 million in cash dividends. Primary sources of cash for the year ended June 30, 2021 included a $169.8 million increase in deposits, $116.2 million net decrease in commercial paper, $64.2 million decrease in loans, $61.5 million in maturing debt securities available for sale, $15.6 million in maturities of certificates of deposit in other banks, net of purchases, $15.2 million in principal repayments from MBSs, and $15.2 million in net redemptions of other investments. All sources and uses of cash reflect our cash management strategy to increase our higher yielding investments and loans by increasing lower costing borrowings and reducing our holdings of lower yielding investments.

During fiscal 2020, cash and cash equivalents increased $50.6, or 71.2%, from $71.0 million as of June 30, 2019 to $121.6 million as of June 30, 2020. Cash provided by financing activities of $217.6 million was partially offset by cash used in investing activities of $124.9 million and operating activities of $42.1 million. Primary sources of cash for the year ended June 30, 2020 included a $450.3 million increase in deposits, $154.9 million in loans not initially originated for sale were sold, $57.9 million in maturing debt securities available for sale, $14.5 million in principal repayments from MBSs, and $6.4 million in net redemptions of other investments. Primary uses of cash during the year

66

included a $205.0 million decrease in borrowings, an increase in loans of $205.7 million, a net increase in commercial paper of $57.5 million, $77.2 million in purchases of debt securities available for sale, $3.7 million in purchases of certificates of deposit in other banks, net of maturities, $14.0 million in purchases of operating lease equipment, $4.6 million in cash dividends, and $24.5 million in common stock repurchases.

Contractual Obligations

The following table presents our significant contractual obligations at June 30, 2021:

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 year ended June 30, 2021, we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows.

A summary of our off-balance sheet commitments to extend credit at June 30, 2021, is as follows:

Capital Resources

At June 30, 2021, stockholders' equity totaled $396.5 million. Management monitors our capital levels to provide for current and future business opportunities and to ensure HomeTrust Bank meets regulatory guidelines for “well-capitalized” institutions.

We are 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 BHCA 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 the same manner as those applicable to bank holding companies.

Both the Bank and us as a company are required to maintain specified levels of regulatory capital under federal banking regulations. The capital adequacy requirements are quantitative measures established by regulation that require us and the Bank to maintain minimum amounts and ratios of capital. Our company and the Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by bank regulators that, if undertaken, could have a direct material effect on our financial statements. At June 30, 2021, our company and the Bank both exceeded all regulatory capital requirements.

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, 2021, 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 10.74%, 10.74%, 11.43%, and 9.81%, respectively. As of June 30, 2020, Common Equity Tier 1, Tier 1 Risk-Based, Total Risk-Based, and Tier 1 Leverage capital ratios were 10.91%, 10.91%, 11.77%, and 9.94%, respectively.

As of June 30, 2021, 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 11.26%, 11.26%, 11.96%, and 10.29%, respectively. As of June 30, 2020, Common Equity Tier 1, Tier 1 Risk-Based, Total Risk-Based, and Tier 1 Leverage capital ratios were 11.26%, 11.26%, 12.12%, and 10.26%, respectively.

67

See Item 1, “Business-How We are Regulated,” and Note 18 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K for additional details on our capital requirements.

Impact of Inflation

The Consolidated Financial Statements and related financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles generally require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.

Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. The primary impact of inflation is reflected in the increased cost of our operations. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. In a period of rapidly rising interest rates, the liquidity and maturity structures of our assets and liabilities are critical to the maintenance of acceptable performance levels.

The principal effect of inflation on earnings, as distinct from levels of interest rates, is in the area of noninterest expense. Expense items such as employee compensation, employee benefits, and occupancy and equipment costs may be subject to increases as a result of inflation. An additional effect of inflation is the possible increase in dollar value of the collateral securing loans that we have made. Our management is unable to determine the extent, if any, to which properties securing loans have appreciated in dollar value due to inflation.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 1 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.