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EX-32 - EXHIBIT 32 - Hamilton Bancorp, Inc.ex32.htm
EX-31.2 - EXHIBIT 31.2 - Hamilton Bancorp, Inc.ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Hamilton Bancorp, Inc.ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X]

Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended December 31, 2015

 

OR

 

[   ]

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from _______________ to _______________

 

Commission File No. 001-35693

 

Hamilton Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

Maryland

 

46-0543309

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

     

501 Fairmount Avenue, Suite 200, Towson, Maryland 

 

21286

(Address of Principal Executive Offices)

 

Zip Code

 

(410) 823-4510

(Registrant’s telephone number)

 

N/A

(Former name or former address, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.

YES [  X  ]     NO [    ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES [ X ]     NO [   ]

 

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

 

Large accelerated filer [   ]

 

Accelerated filer [   ]

Non-accelerated filer [   ]

 

Smaller reporting company [ X ]

(Do not check if smaller reporting company)

   

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES [   ]     NO [X]

 

3,417,615 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding as of February 16, 2016.

 

 
 

 

 

Hamilton Bancorp, Inc. and Subsidiaries 

Form 10-Q 

 

Index 

 

       

Page

Part I. Financial Information

         

Item 1.

 

Financial Statements

   
         
   

Consolidated Statements of Financial Condition as of December 31, 2015 (unaudited) and March 31, 2015

 

1

         
   

Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2015 and 2014 (unaudited)

 

2

         
   

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended December 31, 2015 and 2014 (unaudited)

 

3

         
   

Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended December 31, 2015 and 2014 (unaudited)

 

4

         
   

Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2015 and 2014 (unaudited)

 

5 - 6

         
   

Notes to Consolidated Financial Statements (unaudited)

 

7 – 32

         

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

33 – 53

         

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

53

         

Item 4.

 

Controls and Procedures

 

54

         

Part II. Other Information

         

Item 1.

 

Legal Proceedings

 

55

         

Item 1A.

 

Risk Factors

 

55

         

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

55

         

Item 3.

 

Defaults upon Senior Securities

 

55

         

Item 4.

 

Mine Safety Disclosures

 

55

         

Item 5.

 

Other Information

 

55

         

Item 6.

 

Exhibits

 

55

         
   

Signatures

 

56

 

 
 

 

 

Part I. – Financial Information

Item 1. Financial Statements

  

HAMILTON BANCORP, INC AND SUBSIDIARY

Consolidated Statements of Financial Condition

December 31, 2015 and March 31, 2015

 

   

December 31,

   

March 31,

 
   

2015

   

2015

 
   

(Unaudited)

   

(Audited)

 

Assets

 

Assets

               

Cash and due from banks

  $ 5,538,454     $ 3,294,273  

Federal funds sold and Federal Home Loan Bank deposit

    7,272,405       6,226,976  

Interest-bearing deposits in other banks

    16,437,610       7,122,639  

Cash and cash equivalents

    29,248,469       16,643,888  

Certificates of deposit held as investment

    3,974,044       -  

Investment securities available for sale, at fair value

    77,616,277       92,939,751  

Federal Home Loan Bank stock, at cost

    1,038,700       522,700  

Loans held for sale

    155,456       581,139  

Loans, less allowance for loan losses of $2,015,723 and $1,690,236

    226,313,352       158,594,958  

Premises and equipment, net

    4,071,415       1,972,348  

Foreclosed real estate

    443,015       455,575  

Accrued interest receivable

    997,778       835,940  

Bank-owned life insurance

    12,624,031       12,359,969  

Goodwill

    6,478,860       2,664,432  

Core deposit intangible

    642,254       138,333  

Deferred income taxes

    2,931,398       1,961,850  

Income taxes refundable

    228,920       -  

Other assets

    1,492,799       1,368,886  

Total Assets

  $ 368,256,768     $ 291,039,769  
                 

Liabilities and Shareholders' Equity

 

Liabilities

               

Noninterest-bearing deposits

  $ 22,332,169     $ 16,652,771  

Interest-bearing deposits

    266,709,116       205,666,121  

Total deposits

    289,041,285       222,318,892  

Borrowings

    16,847,192       6,000,000  

Advances by borrowers for taxes and insurance

    523,482       619,028  

Other liabilities

    1,202,258       1,302,141  

Total liabilities

    307,614,217       230,240,061  
                 

Commitments and Contingencies

    -       -  
                 

Shareholders' Equity

               

Common stock, $.01 par value, 100,000,000 shares authorized. Issued: 3,418,113 shares at December 31, 2015 and 3,417,713 shares at March 31, 2015

    34,181       34,177  

Additional paid in capital

    31,196,927       30,832,815  

Retained earnings

    32,542,210       32,752,071  

Unearned ESOP shares

    (2,369,920 )     (2,518,040 )

Accumulated other comprehensive income

    (760,847 )     (301,315 )

Total shareholders' equity

    60,642,551       60,799,708  

Total Liabilities and Shareholders' Equity

  $ 368,256,768     $ 291,039,769  

 

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

 

 
1

 

  

HAMILTON BANCORP, INC AND SUBSIDIARY

Consolidated Statements of Operations (Unaudited)

Three and Nine Months Ended December 31, 2015 and 2014

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31,

   

December 31,

 
   

2015

   

2014

   

2015

   

2014

 
                                 

Interest and dividend revenue

                               

Loans, including fees

  $ 2,805,851     $ 1,827,384     $ 6,906,069     $ 5,412,607  

U.S. treasuries, government agencies and FHLB stock

    91,940       104,905       276,415       327,264  

Municipal and corporate bonds

    31,722       36,346       94,145       105,183  

Mortgage-backed securities

    272,751       358,987       848,181       1,137,231  

Federal funds sold and other bank deposits

    18,005       5,376       31,650       21,749  

Total interest and dividend revenue

    3,220,269       2,332,998       8,156,460       7,004,034  
                                 

Interest expense

                               

Deposits

    458,024       414,117       1,241,457       1,273,106  

Borrowed funds

    38,191       410       64,487       410  

Total interest expense

    496,215       414,527       1,305,944       1,273,516  
                                 

Net interest income

    2,724,054       1,918,471       6,850,516       5,730,518  

Provision for loan losses

    70,000       (125,000 )     190,000       345,000  

Net interest income after provision for loan losses

    2,654,054       2,043,471       6,660,516       5,385,518  
                                 

Noninterest revenue

                               

Service charges

    102,979       105,954       304,951       311,515  

Gain on sale of investment securities

    20,497       42,471       42,212       230,645  

Gain on sale of loans held for sale

    7,826       2,979       43,395       27,716  

Gain on sale of property and equipment

    -       -       407,188       (1,832 )

Earnings on bank-owned life insurance

    87,616       89,929       264,062       271,315  

Other fees and commissions

    14,675       8,095       49,194       31,528  

Total noninterest revenue

    233,593       249,428       1,111,002       870,887  
                                 

Noninterest expenses

                               

Salaries

    1,102,598       988,583       3,018,168       2,944,357  

Employee benefits

    293,260       254,539       809,583       884,237  

Occupancy

    195,155       170,401       548,817       537,526  

Advertising

    43,295       37,758       89,109       102,050  

Furniture and equipment

    85,077       77,286       237,752       233,381  

Data processing

    154,977       137,435       439,989       413,354  

Legal services

    52,100       44,012       110,091       153,551  

Other professional services

    131,353       100,452       291,260       254,560  

Merger related expenses

    196,645       -       828,225       -  

Deposit insurance premiums

    63,105       57,506       151,970       175,600  

Foreclosed real estate expense and losses (gains)

    3,270       -       17,157       (4,964 )

Other operating

    459,817       326,462       1,114,428       967,921  

Total noninterest expenses

    2,780,652       2,194,434       7,656,549       6,661,573  
                                 

Income (loss) before income taxes

    106,995       98,465       114,969       (405,168 )

Income tax expense (benefit)

    234,176       20,622       324,830       (231,967 )

Net income (loss)

  $ (127,181 )   $ 77,843     $ (209,861 )   $ (173,201 )
                                 

Earnings (loss) per common share - basic

  $ (0.04 )   $ 0.02     $ (0.07 )   $ (0.05 )

Earnings (loss) per common share - diluted

  $ (0.04 )   $ 0.02     $ (0.07 )   $ (0.05 )

 

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

 

 
2

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (Unaudited)

Three and Nine months Ended December 31, 2015 and 2014

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31,

   

December 31,

 
   

2015

   

2014

   

2015

   

2014

 
                                 

Net income (loss)

  $ (127,181 )   $ 77,843     $ (209,861 )   $ (173,201 )

Other comprehensive income:

                               

Unrealized gain (loss) on investment securities available for sale

    (801,265 )     1,643,661       (716,655 )     1,589,832  

Reclassification adjustment for realized (gain) loss on investment securities available for sale included in net income

    (20,497 )     (42,471 )     (42,212 )     (230,645 )

Total unrealized gain (loss) on investment securities available for sale

    (821,762 )     1,601,190       (758,867 )     1,359,187  

Income tax expense (benefit) relating to investment securities available for sale

    (324,144 )     631,589       (299,335 )     536,132  

Other comprehensive income (loss)

    (497,618 )     969,601       (459,532 )     823,055  
                                 

Total comprehensive income (loss)

  $ (624,799 )   $ 1,047,444     $ (669,393 )   $ 649,854  

 

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

 

 
3

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

Nine Months Ended December 31, 2015 and 2014

 

                                   

Accumulated

         
           

Additional

           

Unearned

   

other

   

Total

 
   

Common

   

paid-in

   

Retained

   

ESOP

   

comprehensive

   

shareholders'

 
   

stock

   

capital

   

earnings

   

shares

   

income

   

equity

 
                                                 

Balance March 31, 2014

  $ 35,951     $ 32,910,362     $ 33,066,380     $ (2,666,160 )   $ (1,576,265 )   $ 61,770,268  

Net loss

    -       -       (173,201 )     -       -       (173,201 )

Unrealized loss on available for sale securities, net of tax effect of $536,132

    -       -       -       -       823,055       823,055  

Repurchase of common stock

    (1,798 )     (2,500,392 )     -       -       -       (2,502,190 )

Stock based compensation - options

    -       156,907       -       -       -       156,907  

Restricted stock - compensation and activity

    (22 )     154,797       -       -       -       154,775  

ESOP shares allocated for release

    -       26,907       -       148,120       -       175,027  
                                                 

Balance December 31, 2014

  $ 34,131     $ 30,748,581     $ 32,893,179     $ (2,518,040 )   $ (753,210 )   $ 60,404,641  
                                                 

Balance March 31, 2015

  $ 34,177     $ 30,832,815     $ 32,752,071     $ (2,518,040 )   $ (301,315 )   $ 60,799,708  

Net loss

    -       -       (209,861 )     -       -       (209,861 )

Unrealized loss on available for sale securities, net of tax effect of $ (299,335)

    -       -       -       -       (459,532 )     (459,532 )

Stock based compensation - options

    -       156,907       -       -       -       156,907  

Restricted stock - compensation and activity

    4       168,995       -       -       -       168,999  

ESOP shares allocated for release

    -       38,210       -       148,120       -       186,330  
                                                 

Balance December 31, 2015

  $ 34,181     $ 31,196,927     $ 32,542,210     $ (2,369,920 )   $ (760,847 )   $ 60,642,551  

 

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

 

 
4

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)

Nine Months Ended December 31, 2015 and 2014

 

   

Nine Months Ended

 
   

December 31,

 
   

2015

   

2014

 
                 

Cash flows from operating activities

               

Interest received

  $ 8,379,943     $ 7,363,035  

Fees and commissions received

    761,333       338,265  

Interest paid

    (1,397,455 )     (1,273,465 )

Cash paid to suppliers and employees

    (7,160,562 )     (6,105,927 )

Origination of loans held for sale

    (4,486,900 )     (2,070,500 )

Proceeds from sale of loans held for sale

    4,955,978       1,843,150  

Income taxes (paid) refund received

    (204,030 )     565,595  

Net cash provided by operating activities

    848,307       660,153  
                 

Cash flows from investing activities

               

Acqusition, net of cash acquired

    (12,723,871 )     -  

Proceeds from sale of securities available for sale

    9,985,335       9,805,005  

Proceeds from maturing and called securities available for sale, including principal pay downs

    14,067,458       19,212,112  

Proceeds from maturing and called certificates of deposit

    514,510       -  

Purchase of investment securities available for sale

    -       (23,242,712 )

Purchase of Federal Home Loan Bank stock

    -       (130,500 )

Loans made, net of principal repayments

    (13,728,071 )     (14,117,276 )

Purchase of premises and equipment

    (47,219 )     (101,021 )

Proceeds from sale of foreclosed real estate

    11,752       -  

Proceeds from sale of premises and equipment

    463,839       -  

Net cash used by investing activities

    (1,456,267 )     (8,574,392 )
                 

Cash flows from financing activities

               
Net increase (decrease) in                

Deposits

    13,308,083       (14,979,209 )

Advances by borrowers for taxes and insurance

    (95,546 )     (403,674 )

Proceeds from borrowings

    2,000,000       3,000,000  

Payments of borrowings

    (2,000,000 )     -  

Issuance of restricted stock

    4       -  

Repurchase of common stock

    -       (2,502,190 )

Net cash provided (used) by financing activities

    13,212,541       (14,885,073 )
                 

Net increase (decrease) in cash and cash equivalents

    12,604,581       (22,799,312 )
                 

Cash and cash equivalents at beginning of period

    16,643,888       33,073,310  
                 

Cash and cash equivalents at end of period

  $ 29,248,469     $ 10,273,998  
                 

Supplemental Disclosures of Cash Flow Information:

               

Total cash consideration paid for Fairmount Merger

  $ 14,192,370     $ -  

Less cash acquired

    1,468,499       -  

Acquisition, net of cash acquired

  $ 12,723,871     $ -  

 

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

 

 
5

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)

(Continued)

 

   

Nine Months Ended

 
   

December 31,

 
   

2015

   

2014

 
                 

Reconciliation of net income to net cash provided (used) by operating activities

               

Net loss

  $ (209,861 )   $ (173,201 )

Adjustments to reconcile net income to net cash provided (used) by operating activities

               

Amortization of premiums on certificates of deposit

    7,043       -  

Amortization of premiums on securities

    311,204       342,791  

Gain on sale of investment securities

    (42,212 )     (230,645 )

Amortization of premiums on loans

    25,811       -  

Amortization of premium on deposits

    (52,656 )     -  

Amortization of premium on borrowings

    (41,955 )     -  

Core deposit intangible asset amortization

    38,620       25,750  

Premises and equipment depreciation and amortization

    200,092       191,489  

Gain on sale of property and equipment

    (407,188 )     1,832  

Stock based compensation

    325,902       311,682  

Provision for loan losses

    190,000       345,000  

ESOP shares allocated for release

    186,330       175,027  

Decrease (increase) in

               

Accrued interest receivable

    (161,838 )     23,742  

Loans held for sale

    425,683       (255,066 )

Cash surrender value of life insurance

    (264,062 )     (271,315 )

Income taxes refundable and deferred income taxes

    120,800       333,628  

Other assets

    374,756       215,287  

Increase (decrease) in

               

Accrued interest payable

    3,100       52  

Deferred loan origination fees

    41,263       (10,479 )

Other liabilities

    (222,525 )     (365,421 )

Net cash provided by operating activities

  $ 848,307     $ 660,153  
                 

Noncash investing activity

               

Real estate acquired through foreclosure

  $ -     $ 12,560  

 

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

 

 
6

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Form 10-Q

 

Notes to Consolidated Financial Statements (Unaudited)

December 31, 2015

 

Note 1:     Nature of Operations and Summary of Significant Accounting Policies

 

Hamilton Bancorp, Inc. (the “Company”) was incorporated on September 7, 2012 to serve as the stock holding company for Hamilton Bank (the “Bank”), a federally chartered savings bank. On October 10, 2012, in accordance with a Plan of Conversion adopted by its Board of Directors and approved by its members, the Bank converted from a mutual savings bank to a stock savings bank and became the wholly owned subsidiary of the Company. In connection with the conversion, the Company sold 3,703,000 shares of common stock at a price of $10.00 per share, through which the Company received proceeds of approximately $35,580,000, net of offering expenses of approximately $1,450,000. In addition, the Bank’s Board of Directors adopted an employee stock ownership plan (the “ESOP”) which subscribed for 8.0% of shares sold in the offering, or 296,240 common shares. The purchase of shares by the ESOP was funded by a loan from the Company.

 

In accordance with Office of the Comptroller of the Currency (the “OCC”) regulations, upon the completion of the conversion, the Bank restricted retained earnings by establishing a liquidation account. The liquidation account will be maintained for the benefit of eligible account holders who continue to maintain their accounts at the Bank after conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank, and only in such event, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

 

On September 11, 2015, the Bank acquired all the common stock of Fairmount Bancorp, Inc. (“Fairmount”) in an all cash transaction for $14.2 million.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and with instructions for Form 10–Q and Regulation S–X as promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the preceding unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. We derived the balances as of March 31, 2015 from audited financial statements. Operating results for the nine months ended December 31, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2016, or any other period. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2015. Certain amounts from prior period financial statements have been reclassified to conform to the current period’s presentation.

 

Summary of Significant Accounting Policies

 

The accounting and reporting policies of Hamilton Bancorp, Inc. and Subsidiary (“Hamilton”) conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and to general practices in the banking industry. The more significant policies follow:

 

Principles of Consolidation. The accompanying consolidated financial statements include the accounts of the parent company and its wholly owned subsidiary, Hamilton Bank. All significant intercompany balances and transactions have been eliminated in consolidation.

 

 
7

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited)

 

Nature of Operations. Hamilton Bancorp is a holding company that operates a community bank with five branches in the Baltimore-metropolitan area. Its primary deposit products are certificates of deposit and demand, savings, NOW, and money market accounts. Its primary lending products consist of real estate mortgages, along with commercial and consumer loans. Hamilton Bancorp’s primary source of revenue is derived from loans to customers, who are predominately small and middle-market businesses and middle-income individuals.

 

Use of Estimates. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, deferred income tax valuation allowances, the fair value of investment securities and other temporary impairment of investment securities.

 

Accounting for Certain Loans or Debt Securities Acquired in a Transfer. The loans acquired from the Company’s acquisition of Fairmount on September 11, 2015 (see Note 3 “Acquisition of Fairmount Bancorp, Inc.”) were recorded at fair value at the acquisition date and no separate valuation allowance was established.  The initial fair values were determined by management, with the assistance of an independent valuation specialist, based on estimated expected cash flows discounted at appropriate rates.  The discount rates were based on market rates for new originations of comparable loans and did not include a separate factor for loan losses as that was included in the estimated cash flows. 

 

Accounting Standards Codification (“ASC”) Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, applies to loans acquired in a transfer with evidence of deterioration of credit quality for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable.  If both conditions exist, the Company determines whether to account for each loan individually or whether such loans will be assembled into pools based on common risk characteristics such as credit score, loan type, and origination date.  

 

The Company considered expected prepayments and estimated the total expected cash flows, which included undiscounted expected principal and interest.  The excess of that amount over the fair value of the loan is referred to as accretable yield.  Accretable yield is recognized as interest income on a constant yield basis over the expected life of the loan.  The excess of the contractual cash flows over expected cash flows is referred to as nonaccretable difference and is not accreted into income.  Over the life of the loan, the Company continues to estimate expected cash flows.  Subsequent decreases in expected cash flows are recognized as impairments in the current period through the allowance for loan losses.  Subsequent increases in cash flows to be collected are first used to reverse any existing valuation allowance and any remaining increase are recognized prospectively through an adjustment of the loan’s yield over its remaining life.  

 

ASC Topic 310-20, Nonrefundable Fees and Other Costs, was applied to loans not considered to have deteriorated credit quality at acquisition.  Under ASC Topic 310-20, the difference between the loan’s principal balance at the time of purchase and the fair value is recognized as an adjustment of yield over the life of the loan. 

 

Allowance for Loan Losses. The allowance for loan losses represents an amount which, in management’s judgment, will be adequate to absorb probable future losses on existing loans. The allowance for loan losses is established, as loan losses are estimated to have occurred, through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Recoveries on previously charged-off loans are credited to the allowance for loan losses.

 

The allowance for loan losses is increased by provisions charged to income and reduced by charge-offs, net of recoveries. Management’s periodic evaluation of the adequacy of the allowance is based on the Bank’s past loan loss experience, known and inherent risks in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and current economic conditions.

 

Management considers a number of factors in estimating the required level of the allowance. These factors include: historical loss experience in the loan portfolios; the levels and trends in past-due and nonaccrual loans; the status of nonaccrual loans and other loans identified as having the potential for further deterioration; credit risk and industry concentrations; trends in loan volume; the effects of any changes in lending policies and procedures or underwriting standards; and a continuing evaluation of the economic environment. Management modified the analysis in fiscal 2015 by weighting our net charge-off history to specifically reflect recent changes in the loan portfolio, the commercial lending staff, and our internal credit administration procedures.

 

 
8

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited)

 

Accumulated Other Comprehensive Income. The Bank records unrealized gains and losses on available for sale securities in accumulated other comprehensive income, net of taxes. Unrealized gains and losses on available for sale securities are reclassified into earnings as the gains or losses are realized upon sale of the securities. The credit component of unrealized losses on available for sale securities that are determined to be other-than-temporarily impaired are reclassified into earnings at the time the determination is made.

 

Stock Based Compensation. Compensation cost is recognized for stock options and restricted stock awards issued to employees and directors, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

 

Pending Merger. On October 12, 2015, Hamilton Bancorp, Inc. (“Hamilton Bancorp”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among Hamilton Bancorp, Hamilton Acquisition Corp. II (a wholly owned subsidiary of Hamilton Bancorp) and Fraternity Community Bancorp, Inc. (“Fraternity Community Bancorp”), pursuant to which, among other things, Fraternity Community Bancorp will merge with and into Hamilton Bancorp, with Hamilton Bancorp as the surviving entity, and immediately thereafter, Fraternity Federal Savings & Loan Association will be merged with and into Hamilton Bank with Hamilton Bank as the surviving bank (collectively, the “Merger”).

 

Under the terms of the Merger Agreement, stockholders of Fraternity Community Bancorp will receive a cash payment equal to nineteen dollars and twenty-five cents ($19.25) for each share of Fraternity Community Bancorp common stock, or an aggregate of approximately $26.5 million.

 

The transaction has been approved by the Board of Directors of each company and is expected to close in the quarter ending June 30, 2016. Completion of the Merger is subject to customary closing conditions, including the receipt of required regulatory approvals and the approval of Fraternity Community Bancorp’s shareholders.

 

 

Note 2:     New Accounting Pronouncements

 

Recent Accounting Pronouncements

 

ASU No. 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force). The guidance clarifies when an “in substance repossession or foreclosure” occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, such that all or a portion of the loan should be derecognized and the real estate property recognized. ASU 2014-04 states that a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendments of ASU 2014-04 also require interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. ASU 2014-04 became effective for interim and annual periods beginning after December 15, 2014, and did not have a significant impact on our financial statements.

 

 
9

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited)

 

ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 is effective on January 1, 2017 and is not expected to have a significant impact on our financial statements.

 

ASU 2014-11, “Transfers and Servicing (Topic 860).” ASU 2014-11 requires that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. In addition, ASU 2014-11 requires separate accounting for repurchase financings, which entails the transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty. ASU 2014-11 requires entities to disclose certain information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements. In addition, ASU 2014-11 requires disclosures related to collateral, remaining contractual term and of the potential risks associated with repurchase agreements, securities lending transactions and repurchase-to-maturity transactions. ASU 2014-11 became effective on April 1, 2015 and did not have a significant impact on our financial statements.

 

ASU No. 2014-12, CompensationStock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force). The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. Guidance in Topic 718 as it relates to awards with performance conditions that affect vesting should be applied to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. As indicated in the definition of vest, the stated vesting period (which includes the period in which the performance target could be achieved) may differ from the requisite service period. The amendments of ASU 2014-12 became effective on December 15, 2015 and did not have a significant impact on our financial statements.

 

ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. ASU 2016-01 will be effective for us on January 1, 2018 and is not expected to have a significant impact on our financial statements.

 

 
10

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited)

 

Note 3:          Acquisition of Fairmount Bancorp, Inc.

 

On September 11, 2015, Hamilton Bancorp acquired Fairmount Bancorp, Inc. (“Fairmount”), the parent company of Fairmount Bank. Under the terms of the Merger Agreement, shareholders of Fairmount received a cash payment equal to thirty dollars ($30.00) for each share of Fairmount common stock. The total merger consideration was $14.2 million.

 

In connection with the acquisition, Fairmount Bank was merged with and into Hamilton Bank, with Hamilton bank as the surviving bank. The results of the Fairmount acquisition are included with Hamilton’s results as of and from September 11, 2015.

 

As required by the acquisition method of accounting, we have adjusted the acquired assets and liabilities of Fairmount to their estimated fair value on the date of acquisition and added them to those of Hamilton Bancorp. Based on management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, which we have based on level 3 valuation estimates and assumptions that are subject to change, we have allocated the preliminary purchase price for Fairmount as follows:

 

   

As recorded by

   

 

   

As recorded by

 
   

Fairmount Bancorp, Inc.

   

Fair Value Adjustments

   

Hamilton Bancorp, Inc.

 

Identifiable assets:

                       

Cash and cash equivalents

  $ 1,468,499     $ -     $ 1,468,499  

Certificates of deposit

    4,467,825       27,772       4,495,597  

Investment securities available for sale

    9,757,177       -       9,757,177  

Loans

    55,454,414       (1,207,017 )     54,247,397  

Allowance For Loan Loss

    (591,070 )     591,070       -  

Premises and equipment

    2,975,587       (666,997 )     2,308,590  

Core Deposit Intangible

    22,802       (22,802 )     -  

Deferred income taxes

    423,258       596,675       1,019,933  

Other assets

    1,014,673       -       1,014,673  

Total identifiable assets

  $ 74,993,165     $ (681,299 )   $ 74,311,866  
                         

Identifiable liabilities:

                       

Non-interest bearing deposits

    909,669       -       909,669  

Interest bearing deposits

    52,123,868       433,429       52,557,297  

Borrowings

    10,500,000       389,147       10,889,147  

Other liabilities

    120,351       -       120,351  

Total identifiable liabilities

  $ 63,653,888     $ 822,576     $ 64,476,464  
                         

Net tangible assets acquired

    11,339,276       (1,503,875 )     9,835,401  
                         

Definite lived intangible assets acquired

    -       542,540       542,540  

Goodwill

    -       3,814,428       3,814,428  

Net intangible assets acquired

    -       4,356,968       4,356,968  
                         

Total cash consideration

  $ 11,339,276     $ 2,853,093     $ 14,192,369  

 

Prior to the end of the measurement period, if information becomes available which indicates the purchase price allocations require adjustments, we will include such adjustments in the purchase price allocation retrospectively.

 

 
11

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited)

 

Of the total estimated purchase price, we have allocated an estimate of $9.8 million to net tangible assets acquired and we have allocated $543,000 to the core deposit intangible which is a definite lived intangible asset. We have allocated the remaining purchase price to goodwill, which is deductible for income tax purposes. We will amortize the core deposit intangible on a straight-line basis over its estimated useful life of 8 years. We will evaluate goodwill annually for impairment.

 

Pro Forma Condensed Combined Financial Information. The following schedule includes consolidated statements of operations data for the unaudited pro forma results for the periods ended December 31, 2015 and 2014 as if the Fairmount Bancorp acquisition had occurred as of the beginning of the periods presented.

  

   

Nine Months Ended December 31,

 
   

2015

   

2014

 

Net interest income

  $ 8,323,913     $ 8,160,799  

Other non-interest revenue

    1,214,209       1,041,938  
Total revenue     9,538,122       9,202,737  

Provision expense

    190,000       345,000  

Other non-interest expense

    7,858,947       8,106,822  
Income before income taxes     1,489,175       750,915  

Income tax expense

    743,672       99,729  
Net income   $ 745,504     $ 651,186  
                 

Basic earnings per share

  $ 0.24     $ 0.20  

Diluted earnings per share

  $ 0.24     $ 0.20  

 

We have not included any provision for loan losses during the period for loans acquired from Fairmount Bancorp. In accordance with accounting for business combinations, we included the credit losses evident in the loans in the determination of the fair value of loans at the date of acquisition and eliminated the allowance for loan losses maintained by Fairmount Bancorp at acquisition date. Also excluded are an estimated $1.3 million in merger related expenses associated with completing the actual acquisition. This expense includes expenses incurred by both the buyer and the seller.

 

We have presented the pro forma financial information for illustrative purposes only and it is not necessarily indicative of the financial results of the combined companies if we had actually completed the acquisition at the beginning of the periods presented, nor does it indicate future results for any other interim or full year period. Pro forma basic and diluted earnings per common share were calculated using Hamilton Bancorp’s actual weighted average shares outstanding for the periods presented, assuming the acquisition occurred at the beginning of the periods presented.

 

In connection with the acquisition of Fairmount and the pending acquisition of Fraternity, the Company incurred merger related costs. These expenses were primarily related to legal, other professional services and system conversions. The following table details the expenses included in the consolidated statements of operations for the periods shown.

 

   

Three months ended December 31, 2015

   

Nine months ended December 31, 2015

 
   

Fairmount

   

Fraternity

   

Total

   

Fairmount

   

Fraternity

   

Total

 

Legal

  $ 3,713     $ 64,815     $ 68,528     $ 247,794     $ 185,257     $ 433,051  

Professional services

    3,117       125,000       128,117       176,786       140,173       316,959  

Data processing

    -       -       -       48,745       -       48,745  

Advertising

    -       -       -       2,779       -       2,779  

Other

    -       -       -       26,547       144       26,691  

Total meger related expenses

  $ 6,830     $ 189,815     $ 196,645     $ 502,651     $ 325,574     $ 828,225  

 

 

Note 4:          Earnings per Share

 

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Weighted average shares exclude unallocated ESOP shares. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

 

Both the basic and diluted earnings per share for the three and nine months ended December 31, 2015 and 2014 are summarized below:

 

   

Three Months ended

   

Three Months ended

   

Nine months ended

   

Nine months ended

 
   

December 31, 2015

   

December 31, 2014

   

December 31, 2015

   

December 31, 2014

 
                                 

Net income (loss)

  $ (127,181 )   $ 77,843     $ (209,861 )   $ (173,201 )

Average common shares outstanding - basic

    3,166,470       3,146,640       3,166,230       3,185,558  

Average common shares outstanding - diluted

 

N/A

   

N/A

   

N/A

   

N/A

 

Income (loss) per common share - basic and diluted

  $ (0.04 )   $ 0.02     $ (0.07 )   $ (0.05 )
                                 
Anti-dilutive shares     42,667       N/A       42,667       N/A  

 

During the three and nine months ending December 31, 2014, none of the common stock equivalents had vested.

 

 
12

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited)

 

Note 5:     Investment Securities Available for Sale

 

The amortized cost and fair value of securities at December 31, 2015 and March 31, 2015, are summarized as follows:

 

           

Gross

   

Gross

         
   

Amortized

   

unrealized

   

unrealized

   

Fair

 

December 31, 2015

 

cost

   

gains

   

losses

   

value

 
                                 

U.S. government agencies

  $ 15,010,819     $ 3,881     $ 255,234     $ 14,759,466  

Municipal bonds

    2,706,994       92,656       3,000       2,796,650  

Corporate bonds

    2,000,000       -       136,968       1,863,032  

Mortgage-backed

    59,154,920       99,346       1,057,137       58,197,129  
    $ 78,872,733     $ 195,883     $ 1,452,339     $ 77,616,277  

 

 

   

Amortized

   

unrealized

   

unrealized

   

Fair

 

March 31, 2015

 

cost

   

gains

   

losses

   

value

 
                                 

U.S. government agencies

  $ 17,509,211     $ 3,363     $ 200,627     $ 17,311,947  

Municipal bonds

    2,149,114       168,016       -       2,317,130  

Corporate bonds

    2,000,000       -       46,736       1,953,264  

Mortgage-backed

    71,779,015       387,015       808,620       71,357,410  
    $ 93,437,340     $ 558,394     $ 1,055,983     $ 92,939,751  

 

 

Proceeds from sales of investment securities were $4,957,280 and $4,486,919 during the three months ended December 31, 2015 and 2014, respectively, with gains of $23,197 and losses of $2,700 for the three months ended December 31, 2015 and gains of $53,047 and losses of $10,576 for the three months ended December 31, 2014.

 

Proceeds from sales of investment securities were $9,985,335 and $9,805,005 during the nine months ended December 31, 2015 and 2014, respectively, with gains of $95,912 and losses of $53,700 for the nine months ended December 31, 2015 and gains of $241,221 and losses of $10,576 for the nine months ended December 31, 2014.

 

As of December 31, 2015 and March 31, 2015, all mortgage-backed securities are backed by U.S. Government- Sponsored Enterprises.

 

As of December 31, 2015 and March 31, 2015, the Company had one pledged security to the Federal Reserve Bank with a book value of $2,000,000 for both periods and a fair value of $1,949,882, and $1,970,080, respectively.

 

The amortized cost and estimated fair value of debt securities by contractual maturity at December 31, 2015 and March 31, 2015 follow. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.

 

 
13

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited)

  

   

Available for Sale

 
   

December 31, 2015

   

March 31, 2015

 
   

Amortized

   

Fair

   

Amortized

   

Fair

 
   

cost

   

value

   

cost

   

value

 
                                 

Maturing

                               

Within one year

  $ 732,054     $ 731,559     $ 509,211     $ 512,574  

Over one to five years

    3,012,739       2,987,055       -       -  

Over five to ten years

    14,577,740       14,221,319       19,000,000       18,752,637  

Over ten years

    1,395,280       1,479,215       2,149,114       2,317,130  

Mortgage-backed, in monthly installments

    59,154,920       58,197,129       71,779,015       71,357,410  
    $ 78,872,733     $ 77,616,277     $ 93,437,340     $ 92,939,751  

 

 

The following table presents the Company's investments' gross unrealized losses and the corresponding fair values by investment category and length of time that the securities have been in a continuous unrealized loss position at December 31, 2015 and March 31, 2015.

 

   

Less than 12 months

   

12 months or longer

   

Total

 
   

Gross

           

Gross

           

Gross

         
   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

 

December 31, 2015

 

losses

   

value

   

losses

   

value

   

losses

   

value

 
                                                 

U.S. government agencies

  $ 68,806     $ 7,451,910     $ 186,428     $ 6,813,572     $ 255,234     $ 14,265,482  

Municipal bonds

    3,000       868,633       -       -       3,000       868,633  

Corporate bonds

    -       -       136,968       1,863,032       136,968       1,863,032  

Mortgage-backed securities

    277,984       18,877,162       779,153       25,557,549       1,057,137       44,434,711  
    $ 349,790     $ 27,197,705     $ 1,102,549     $ 34,234,153     $ 1,452,339     $ 61,431,858  
                                                 

March 31, 2015

                                               
                                                 

U.S. government agencies

  $ 11,208     $ 3,988,792     $ 189,419     $ 12,810,581     $ 200,627     $ 16,799,373  

Municipal bonds

    -       -       -       -       -       -  

Corporate bonds

    46,736       1,953,264       -       -       46,736       1,953,264  

Mortgage-backed securities

    187,176       9,687,070       621,444       33,241,821       808,620       42,928,891  
    $ 245,120     $ 15,629,126     $ 810,863     $ 46,052,402     $ 1,055,983     $ 61,681,528  

 

 

The gross unrealized losses on debt securities are not considered by management to be other-than-temporary impairments. Management has the intent and ability to hold these securities until recovery of their value. In most cases, temporary impairment is caused by market interest rate fluctuations.

 

 
14

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited)

 

Note 6:      Loans Receivable and Allowance for Loan Losses

 

Loans receivable, excluding loans held for sale, consist of the following at December 31, 2015 and March 31, 2015:

 

   

December 31, 2015

   

March 31, 2015

 
   

Legacy (1)

   

Acquired

   

Total Loans

   

% of Total

   

Legacy (1)

   

% of Total

 

Real estate loans:

                                               

One-to four-family:

                                               

Residential

  $ 46,675,990     $ 22,988,263     $ 69,664,253       30 %   $ 49,864,923       31 %

Residential construction

    5,196,931       1,616,661       6,813,592       3 %     3,955,702       2 %

Investor (2)

    12,508,464       17,092,234       29,600,698       13 %     12,971,519       8 %

Commercial

    76,460,241       2,925,586       79,385,827       35 %     59,273,398       37 %

Commercial construction

    1,886,203       1,850,747       3,736,950       2 %     2,405,849       1 %

Total real estate loans

    142,727,829       46,473,491       189,201,320       83 %     128,471,391       79 %

Commercial business

    18,574,241       2,683,947       21,258,188       9 %     18,489,603       12 %

Home equity loans

    12,062,929       2,212,783       14,275,712       6 %     12,261,292       8 %

Consumer

    3,367,363       1,200,805       4,568,168       2 %     1,166,155       1 %

Total Loans

    176,732,362       52,571,026       229,303,388