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Table Of Contents

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 September 30, 2016

 

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]

 

3,413,646 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding as of November 14, 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 September 30, 2016 (unaudited) and March 31, 2016

 

1

         
   

Consolidated Statements of Operations for the Three and Six Months Ended September 30, 2016 and 2015 (unaudited)

 

2

         
   

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended September 30, 2016 and 2015 (unaudited)

 

3

         
   

Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended September 30, 2016 and 2015 (unaudited)

 

4

         
   

Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2016 and 2015 (unaudited)

 

5 - 6

         
   

Notes to Consolidated Financial Statements (unaudited)

 

7 – 40

         

Item 2.

 

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

 

41-65

         

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

66

         

Item 4.

 

Controls and Procedures

 

66

         

Part II. Other Information

         

Item 1.

 

Legal Proceedings

 

67

         

Item 1A.

 

Risk Factors

 

67

         

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

68

         

Item 3.

 

Defaults upon Senior Securities

 

68

         

Item 4.

 

Mine Safety Disclosures

 

68

         

Item 5.

 

Other Information

 

68

         

Item 6.

 

Exhibits

 

68

         
   

Signatures

 

69

 

 

Part I. – Financial Information

Item 1. Financial Statements

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Consolidated Statements of Financial Condition

September 30, 2016 and March 31, 2016

 

   

September 30,

   

March 31,

 
   

2016

   

2016

 
   

(Unaudited)

   

(Audited)

 

Assets

               

Assets

               

Cash and due from banks

  $ 36,303,965     $ 47,101,688  

Federal funds sold

    9,440,899       20,346,848  

Cash and cash equivalents

    45,744,864       67,448,536  

Certificates of deposit held as investment

    3,471,821       3,968,229  

Securities available for sale, at fair value

    95,740,770       70,484,400  

Federal Home Loan Bank stock, at cost

    1,640,100       1,042,500  

Loans held for sale

    1,446,000       259,450  

Loans

    328,734,982       221,859,056  

Allowance for loan losses

    (1,942,368 )     (1,702,365 )

Net loans and leases

    326,792,614       220,156,691  

Premises and equipment, net

    4,217,803       3,555,474  

Premises and equipment held for sale

    405,000       405,000  

Foreclosed real estate

    460,220       443,015  

Accrued interest receivable

    1,306,616       948,166  

Bank-owned life insurance

    18,006,574       12,709,908  

Deferred income taxes

    6,359,372       2,353,141  

Income taxes refundable

    234,413       228,920  

Goodwill and other intangible assets

    9,424,759       7,386,111  

Other assets

    1,928,880       1,527,014  

Total Assets

  $ 517,179,806     $ 392,916,555  
                 

Liabilities and Shareholders' Equity

               

Liabilities

               

Noninterest-bearing deposits

  $ 22,529,558     $ 19,747,437  

Interest-bearing deposits

    399,777,044       294,246,214  

Total deposits

    422,306,602       313,993,651  

Borrowings

    26,340,635       14,805,237  

Advances by borrowers for taxes and insurance

    1,335,132       1,079,794  

Other liabilities

    5,394,396       1,493,290  

Total liabilities

    455,376,765       331,371,972  
                 

Commitments and contingencies

    -       -  
                 

Shareholders' Equity

               

Common stock, $.01 par value, 100,000,000 shares authorized. Issued: 3,413,646 shares at September 30, 2016 and March 31, 2016

    34,136       34,136  

Additional paid in capital

    31,460,188       31,242,731  

Retained earnings

    32,647,732       32,659,455  

Unearned ESOP shares

    (2,369,920 )     (2,369,920 )

Accumulated other comprehensive income (loss)

    30,905       (21,819 )

Total shareholders' equity

    61,803,041       61,544,583  

Total Liabilities and Shareholders' Equity

  $ 517,179,806     $ 392,916,555  

 

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

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Consolidated Statements of Operations (Unaudited)

Three and Six Months Ended September 30, 2016 and 2015

 

   

Three Months Ended

   

Six Months Ended

 
   

September 30,

   

September 30,

 
   

2016

   

2015

   

2016

   

2015

 
                                 

Interest revenue

                               

Loans, including fees

  $ 3,831,123     $ 2,159,611     $ 7,147,796     $ 4,100,218  

U.S. treasuries, government agencies and FHLB stock

    62,534       87,767       149,108       184,475  

Municipal and corporate bonds

    69,640       27,617       118,667       62,423  

Mortgage-backed securities

    287,231       277,835       518,728       575,430  

Federal funds sold and other bank deposits

    52,734       8,382       119,438       13,645  

Total interest revenue

    4,303,262       2,561,212       8,053,737       4,936,191  
                                 

Interest expense

                               

Deposits

    674,470       410,990       1,286,282       783,433  

Borrowed funds

    76,569       21,342       118,641       26,295  

Total interest expense

    751,039       432,332       1,404,923       809,728  
                                 

Net interest income

    3,552,223       2,128,880       6,648,814       4,126,463  

Provision for loan losses

    50,006       120,000       260,006       120,000  

Net interest income after provision for loan losses

    3,502,217       2,008,880       6,388,808       4,006,463  
                                 

Noninterest revenue

                               

Service charges

    119,487       98,142       214,608       193,220  

Gain on sale of investment securities

    -       21,715       -       21,715  

Gain on sale of loans held for sale

    10,437       18,571       21,609       35,569  

Gain on sale of property and equipment

    -       -       -       407,188  

Earnings on bank-owned life insurance

    126,100       88,704       238,626       176,446  

Other

    26,474       20,274       77,153       43,271  

Total noninterest revenue

    282,498       247,406       551,996       877,409  
                                 

Noninterest expenses

                               

Salaries

    1,355,548       977,330       2,738,154       1,915,570  

Employee benefits

    347,420       254,140       696,754       516,323  

Occupancy

    258,871       179,036       474,771       353,662  

Advertising

    43,979       18,451       75,330       45,814  

Furniture and equipment

    99,437       74,234       197,760       152,675  

Data processing

    191,088       143,023       376,811       285,011  

Legal services

    63,185       35,812       113,448       57,991  

Other professional services

    342,400       67,986       545,514       159,907  

Merger related expenses

    9,081       400,795       197,233       631,580  

Branch consolidation expense

    -       -       437,424       -  

Deposit insurance premiums

    110,989       39,002       188,188       88,865  

Foreclosed real estate expense and losses (gains)

    -       13,079       8,108       13,887  

Other operating

    428,658       350,033       910,260       654,611  

Total noninterest expenses

    3,250,656       2,552,921       6,959,755       4,875,896  
                                 

Income (loss) before income taxes

    534,059       (296,635 )     (18,951 )     7,976  

Income tax expense (benefit)

    210,573       (95,633 )     (7,228 )     90,654  

Net income (loss)

  $ 323,486     $ (201,002 )   $ (11,723 )   $ (82,678 )
                                 

Net income (loss) per common share:

                               

Basic

  $ 0.10     $ (0.06 )   $ 0.00     $ (0.03 )

Diluted

  $ 0.10     $ (0.06 )   $ 0.00     $ (0.03 )

 

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

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (Unaudited)

Three and Six Months Ended September 30, 2016 and 2015

 

 

   

Three Months Ended

   

Six Months Ended

 
   

September 30,

   

September 30,

 
   

2016

   

2015

   

2016

   

2015

 
                                 

Net income (loss)

  $ 323,486     $ (201,085 )   $ (11,723 )   $ (82,760 )

Other comprehensive income (loss):

                               

Unrealized gain (loss) on investment securities available for sale

    (483,055 )     1,285,089       87,068       84,610  

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

    -       (21,715 )     -       (21,715 )

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

    (483,055 )     1,263,374       87,068       62,895  

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

    (190,542 )     498,338       34,344       24,809  

Other comprehensive income (loss)

    (292,513 )     765,036       52,724       38,086  
                                 

Total comprehensive income (loss)

  $ 30,973     $ 563,951     $ 41,001     $ (44,674 )

 

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

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

Six Months Ended September 30, 2016 and 2015

 

                                   

Accumulated

         
           

Additional

           

Unearned

   

other

   

Total

 
   

Common

   

paid-in

   

Retained

   

ESOP

   

comprehensive

   

shareholders'

 
   

stock

   

capital

   

earnings

   

shares

   

income (loss)

   

equity

 
                                                 

Balance March 31, 2015

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

Net loss

    -       -       (82,760 )     -       -       (82,760 )

Unrealized gain on available for sale securities, net of tax effect of $24,809

    -       -       -       -       38,086       38,086  

Stock based compensation - options

    -       104,605       -       -       -       104,605  

Restricted stock - compensation and activity

    4       112,569       -       -       -       112,573  
                                                 

Balance September 30, 2015

  $ 34,181     $ 31,049,989     $ 32,669,311     $ (2,518,040 )   $ (263,229 )   $ 60,972,212  
                                                 
                                                 

Balance March 31, 2016

  $ 34,136     $ 31,242,731     $ 32,659,455     $ (2,369,920 )   $ (21,819 )   $ 61,544,583  

Net loss

    -       -       (11,723 )     -       -       (11,723 )

Unrealized gain on available for sale securities, net of tax effect of $34,344

    -       -       -       -       52,724       52,724  

Stock based compensation - options

    -       104,605       -       -       -       104,605  

Stock based compensation - restricted stock

    -       112,852       -       -       -       112,852  
                                                 

Balance September 30, 2016

  $ 34,136     $ 31,460,188     $ 32,647,732     $ (2,369,920 )   $ 30,905     $ 61,803,041  

 

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

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)

Six Months Ended September 30, 2016 and 2015

 

   

Six Months Ended

 
   

September 30,

 
   

2016

   

2015

 
                 

Cash flows from operating activities

               

Interest received

  $ 8,036,376     $ 5,024,636  

Fees and commissions received

    291,762       643,679  

Interest paid

    (1,950,269 )     (806,704 )

Cash paid to suppliers and employees

    (4,086,091 )     (3,761,913 )

Origination of loans held for sale

    (1,719,700 )     (3,543,900 )

Proceeds from sale of loans held for sale

    554,759       4,160,608  

Income taxes paid

    (1,705,736 )     (228,919 )

Net cash (used) provided by operating activities

    (578,899 )     1,487,487  
                 

Cash flows from investing activities

               

Acquisition, net of cash acquired

    (11,006,813 )     (12,723,871 )

Proceeds from sale of securities available for sale

    -       5,028,054  

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

    19,526,230       10,156,217  

Proceeds from sale maturing and called certificates of deposit

    985,000       250,000  

Purchase of Federal Home Loan Bank stock

    185,000       -  

Purchase of investment securities available for sale

    (27,442,181 )     -  

Loans made, net of principal repayments

    1,817,831       (10,921,223 )

Purchase of premises and equipment

    (99,085 )     (26,227 )

Proceeds from sale of premises and equipment

    35,000       463,839  

Proceeds from sale of foreclosed real estate

    -       11,752  

Net cash used by investing activities

    (15,999,018 )     (7,761,459 )
                 

Cash flows from financing activities

               

Net increase (decrease) in

               

Deposits

    (1,381,093 )     7,601,767  

Advances by borrowers for taxes and insurance

    255,338       (39,717 )

Proceeds from borrowings

    -       2,000,000  

Payments of borrowings

    (4,000,000 )     (2,000,000 )

Issuance of restricted stock

    -       4  

Net cash (used) provided by financing activities

    (5,125,755 )     7,562,054  
                 

Net (decrease) increase in cash and cash equivalents

    (21,703,672 )     1,288,082  
                 

Cash and cash equivalents at beginning of period

    67,448,536       16,643,888  
                 

Cash and cash equivalents at end of period

    45,744,864     $ 17,931,970  
                 

Supplemental Disclosures of Cash Flow Information:

               

Total cash consideration paid for Fraternity acquisition

  $ 25,704,871     $ -  

Total cash consideration paid for Fairmount acquisition

    -       14,192,370  

Less cash acquired

    14,698,058       1,468,499  

Acquisition, net of cash acquired

  $ 11,006,813     $ 12,723,871  

 

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

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)

(Continued)

 

 

   

Six Months Ended

 
   

September 30,

 
   

2016

   

2015

 
                 

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

               

Net loss

  $ (11,723 )   $ (82,760 )

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

               

Amortization of premiums on securities

    317,361       215,456  

Amortization of premiums on certificates of deposit

    9,408       1,227  

Gain on sale of investment securities

    -       (21,715 )

Loan discount accretion

    (28,951 )     17,020  

Deposit premium amortization

    (295,066 )     -  

Borrowing premium amortization

    (258,139 )     -  

Core deposit intangible asset amortization

    57,990       14,500  

Premises and equipment depreciation and amortization

    171,562       121,825  

Gain on disposal of premises and equipment

    -       (407,188 )

Stock based compensation

    217,456       217,177  

Provision for loan losses

    260,006       120,000  

Decrease (increase) in

               

Accrued interest receivable

    (358,450 )     (175,284 )

Loans held for sale

    (1,186,550 )     581,139  

Cash surrender value of life insurance

    (238,625 )     (176,446 )

Income taxes refundable and deferred income taxes

    (1,712,964 )     (138,265 )

Other assets

    2,557,323       497,064  

Increase (decrease) in

               

Accrued interest payable

    7,859       3,024  

Deferred loan origination fees

    43,271       30,108  

Other liabilities

    (130,667 )     670,605  

Net cash (used) provided by operating activities

  $ (578,899 )   $ 1,487,487  

 

 

 

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

 

  

HAMILTON BANCORP, INC AND SUBSIDIARY

Form 10-Q

 

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2016

 

Note 1:

Nature of Operations and Summary of Significant Accounting Policies

 

Nature of Operations

 

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, 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. The Bank’s employee stock ownership plan (the “ESOP”) purchased 8.0% of the 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. The Company’s common stock began trading on the NASDAQ Capital Market under the trading symbol “HBK” on October 12, 2012.

 

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 May 13, 2016, the Company completed its acquisition of Fraternity Community Bancorp, Inc. (“Fraternity”) through the merger of Fraternity, the parent company of Fraternity Federal Savings and Loan, with and into the Company pursuant to the Agreement and Plan of Merger dated as of October 12, 2015, by and between the Company and Fraternity. As a result of the merger, each shareholder of Fraternity received a cash payment equal to nineteen dollars and twenty-five cents ($19.25) for each share of Fraternity common stock, or an aggregate of approximately $25.7 million. Immediately following the merger of Fraternity into the Company, Fraternity Federal Savings and Loan was merged with and into the Bank, with the Bank as the surviving entity.

 

On September 11, 2015, the Company completed its acquisition of Fairmount Bancorp, Inc. (“Fairmount”) through the merger of Fairmount, the parent company of Fairmount Bank, with and into the Company pursuant to the Agreement and Plan of Merger dated as of April 15, 2015, by and between the Company and Fairmount. As a result of the merger, each shareholder of Fairmount received a cash payment equal to thirty dollars ($30.00) for each share of Fairmount common stock, or an aggregate of approximately $14.2 million. Immediately following the merger of Fairmount into the Company, Fairmount Bank was merged with and into the Bank, with the Bank as the surviving entity.

 

Hamilton Bancorp is a holding company that operates a community bank with seven 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 business and middle-income individuals.

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited) 

 

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, 2016 from audited financial statements. Operating results for the three and six months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2017, 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, 2016. 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 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.

 

Use of Estimates. The preparation of financial statements in conformity with 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.

 

Loans Receivable. The Bank makes mortgage, commercial, and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans throughout the Baltimore metropolitan area. The ability of the Bank’s debtors to repay their loans is dependent upon the real estate and general economic conditions in this area.

 

Loans are reported at their outstanding unpaid principal balance adjusted for the allowance for loan loss, premiums on loans acquired, and/or any deferred fees or costs on originated loans. Interest revenue is accrued on the unpaid principal balance. Loan origination fees and the direct costs of underwriting and closing loans are recognized over the life of the related loan as an adjustment to yield using a method that approximates the interest method. Any differences that arise from prepayment will result in a recalculation of the effective yield.

 

Loans are generally placed on nonaccrual status when they are 90 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual status at an earlier date if the collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual status are reversed against interest revenue. The interest on nonaccrual loans is accounted for on the cash basis method, until the loans qualify for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and, in management’s judgment, future payments are reasonably assured.

 

Loans are considered impaired when, based on current information, management considers it unlikely that collection of principal and interest payments will be made according to contractual terms. If collection of principal is evaluated as doubtful, all payments are applied to principal. Impaired loans are measured: (i) at the present value of expected cash flows discounted at the loan’s effective interest rate; (ii) at the observable market price; or (iii) at the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, impairment is recognized through an allocation of the allowance for loan losses and corresponding provision for loan losses. Generally, identified impairments are charged-off against the allowance for loan losses.

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited) 

 

Troubled debt restructurings are loans for which Hamilton, for legal or economic reasons related to a debtor’s financial difficulties, has granted a concession to the debtor that it otherwise would not have considered. Concessions that result in the categorization of a loan as a troubled debt restructuring include:

 

 

Reduction of the stated interest rate;

 

 

Extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk;

 

 

Reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement; or

 

 

Reduction of accrued interest

 

 

Accounting for Certain Loans or Debt Securities Acquired in a Transfer. The loans acquired from the Company’s acquisition of Fraternity on May 13, 2016 (see Note 3 “Acquisitions - Fraternity Community Bancorp, Inc. and 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. The look back period for historical losses consists of reviewing both a 36 and 48 month look back period for net charge-offs. Both of these periods are used individually to develop a range in which the allowance for loan losses should be within.

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited) 

 

 

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 during the quarter ended September 30, 2016 by keeping our net charge-off history as a percentage of loans, as it pertains to each loan segment, constant across all risk ratings and altering our qualitative factors either up or down based upon the respective risk rating for each loan segment. The change in methodology did not have a material impact on the amount of the allowance for loan and lease losses at September 30, 2016 as compared to the prior methodology.

 

 

Accumulated Other Comprehensive Income (Loss). 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.

 

 

Note 2:

New Accounting Pronouncements

 

Recent Accounting Pronouncements

 

ASU 2016-13, Financial Instruments – Credit Losses. The ASU sets forth a “current expected credit loss” (CECL) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently assessing the impact of the adoption of this ASU on its consolidated financial statements.

 

ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718). This ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements.  Some of the key provisions of this new ASU include: (1) companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”).  Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools will be eliminated.  The guidance also eliminates the requirement that excess tax benefits be realized before companies can recognize them.  In addition, the guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity; (2) increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation.  The new guidance will also require an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement of cash flows (current guidance did not specify how these cash flows should be classified); and (3) permit companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards.  Forfeitures can be estimated, as required today, or recognized when they occur.  ASU No. 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016.  Early adoption is permitted, but all of the guidance must be adopted in the same period.  The Company is currently evaluating the provisions of ASU No. 2016-09 to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements.

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited) 

 

ASU 2016-02, Leases (Topic 842). This ASU guidance requires lessees to recognize lease assets and lease liabilities related to certain operating leases on the balance sheet by lessees and disclose key information about leasing arrangements. This guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.

 

ASU No. 2016-01, Financial Instruments – Recognition and Measurement of Financial Assets and Liabilities. This ASU requires equity investments to be measured at fair value with changes in fair value recognized in net income, excluding equity investments that are consolidated or accounted for under the equity method of accounting. The amendment allows equity investments without readily determinable fair values to be measured at cost minus impairment, with a qualitative assessment required to identify impairment. The amendment also requires public companies to use exit prices to measure the fair value of financial instruments purposes; requiring 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 statement; it eliminates the disclosure requirements related to measurement assumptions for the fair value of instruments measured at amortized cost. In addition, for liabilities measured at fair value under the fair value option, to present in other comprehensive income changes in fair value due to changes in instrument specific credit risk. ASU No. 2016-01 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting the new guidance on its consolidated financial statements.

 

ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period

Adjustments. This update eliminates the requirement to retrospectively adjust the provisional amounts recognized at the acquisition date with a corresponding adjustment to goodwill. These adjustments are required when new information is obtained about facts and circumstances that existed as of the acquisition date that if known, would have affected the measurement of the amounts initially recognized or would have resulted in the recognition of additional assets or liabilities. The update also requires the nature of and reason for the business combination, to be disclosed in the consolidated financial statements. ASU 2015-16 became effective for fiscal years beginning after December 15, 2015, and was not material to the consolidated financial statements. All measurement period adjustments related to the acquisition of Fairmount and Fraternity were recorded in the period in which the adjustments were determined.

 

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.

 

Note 3:          Acquisitions

 

Fraternity Community Bancorp, Inc.

 

On May 13, 2016, Hamilton Bancorp acquired Fraternity Community Bancorp, Inc. (“Fraternity”), the parent company of Fraternity Federal Savings and Loan. Under the terms of the Merger Agreement, shareholders of Fraternity received a cash payment equal to nineteen dollars and twenty-five cents ($19.25) for each share of Fraternity common stock. The total merger consideration was $25.7 million.

 

In connection with the acquisition, Fraternity Federal Savings and Loan was merged with and into Hamilton Bank, with Hamilton Bank as the surviving bank. The results of the Fraternity acquisition are included with Hamilton’s results as of and from May 13, 2016.

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited) 

 

As required by the acquisition method of accounting, we have adjusted the acquired assets and liabilities of Fraternity 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 Fraternity as follows:

 

   

As recorded by

Fraternity Community

Bancorp, Inc.

   

Fair Value

Adjustments

     

As recorded by

Hamilton Bancorp, Inc.

 

Identifiable assets:

                         

Cash and cash equivalents

  $ 15,196,058     $ -       $ 15,196,058  

Investment securities available for sale

    17,570,712       -         17,570,712  

FHLB Bank Stock

    782,600       -         782,600  

Loans

    108,872,041       (126,757 )

A

    108,745,284  

Allowance For Loan Loss

    (1,550,000 )     1,550,000  

A

    -  

Premises and equipment

    691,095       78,711  

B

    769,806  

Bank-Owned Life Insurance

    5,058,041       -         5,058,041  

Deferred income taxes

    2,743,481       (410,377 )

C

    2,333,104  

Other assets

    2,877,665       -         2,877,665  

Total identifiable assets

  $ 152,241,693     $ 1,091,577       $ 153,333,270  
                           

Identifiable liabilities:

                         

Non-interest bearing deposits

    1,242,187       -         1,242,187  

Interest bearing deposits

    107,648,792       1,098,131  

D

    108,746,923  

Borrowings

    15,000,000       793,537  

E

    15,793,537  

Other liabilities

    4,023,914       -         4,023,914  

Total identifiable liabilities

  $ 127,914,893     $ 1,891,668       $ 129,806,561  
                           

Net tangible assets acquired

    24,326,800       (800,091 )       23,526,709  
                           

Core deposit intangible

    -       242,020         242,020  

Goodwill

    -       1,936,142         1,936,142  

Net intangible assets acquired

    -       2,178,162         2,178,162  
                           

Total cash consideration

  $ 24,326,800     $ 1,378,071       $ 25,704,871  

 

 

Explanation of fair value adjustments:

 

A - Adjustment reflects the fair value adjustments based on Hamilton Bancorp’s evaluation of the acquired loan portfolio and excludes the allowance for losses recorded by Fraternity Community Bancorp, Inc.

B - Adjustment reflects the fair value adjustments based on Hamilton Bancorp’s evaluation of the acquired premises and equipment.

C - Adjustment to record deferred tax asset related to fair value adjustments at 39.45% income tax rate.

D - Adjustment arises since the rates on interest-bearing deposits are higher than rates available on similar deposits as of the acquisition date.

E - Adjustment reflects the fair value of Fraternity’s borrowings acquired on acquisition date.

 

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. During the quarter ended September 30, 2016, Hamilton made two such adjustments. The first was a $1.3 million adjustment to deferred income tax after determination of the estimated net operating loss to be reported by Fraternity for the short period ended May 13, 2016 (the acquisition date). The second adjustment was to other liabilities for $246,000 relating primarily to an accrual of Fraternity’s supplemental ESOP that was not previously recorded at the acquisition date.

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited) 

 

Of the total estimated purchase price, we have allocated $23.5 million to net tangible assets acquired and we have allocated $242,020 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 eight 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 three months ended September 30, 2015 and six-month periods ended September 30, 2016 and 2015 as if the Fraternity acquisition had occurred as of the beginning of the periods presented.

 

 

      Three Months Ended September 30,     

Six Months Ended September 30,

 
   

2015

   

2016

   

2015

 

Net interest income

  $ 7,367,097     $ 7,504,048     $ 6,655,739  

Other non-interest revenue

    1,581,874       532,116       1,008,357  

Total revenue

    8,948,971       8,036,164       7,664,096  

Provision expense

    120,000       210,000       120,000  

Other non-interest expense

    8,299,440       7,077,072       7,043,695  

Income before income taxes

    529,531       749,092       500,401  

Income tax expense

    318,164       255,772       160,837  

Net income

  $ 211,367     $ 493,320     $ 339,564  
                         

Basic earning per share

  $ 0.07     $ 0.16     $ 0.11  

Diluted earnings per share

  $ 0.07     $ 0.16     $ 0.11  

 

We have not included any provision for loan losses during the period for loans acquired from Fraternity. 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 Fraternity at acquisition date. Also excluded are an estimated $3.0 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.

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited) 

 

The following table outlines the contractually required payments receivable, cash flows we expect to receive, non-accretable credit adjustments and the accretable yield for all Fraternity loans as of the acquisition date.

 

   

Contractually

                                 
   

Required

   

Non-Accretable

   

Cash Flows

           

Carrying Value

 
   

Payments

   

Credit

   

Expected To Be

   

Accretable FMV

   

of Loans

 
   

Receivable

   

Adjustments

   

Collected

   

Adjustments

   

Receivable

 
                                         

Performing loans acquired

  $ 107,474,993     $ -     $ 107,474,993     $ 242,773     $ 107,717,766  
                                         

Impaired loans acquired

    1,397,048       (314,484 )     1,082,564       (55,046 )     1,027,518  
                                         

Total

  $ 108,872,041     $ (314,484 )   $ 108,557,557     $ 187,727     $ 108,745,284  

 

At our acquisition of Fraternity, we recorded all loans acquired at the estimated fair value on the purchase date with no carryover of the related allowance for loan losses. On the acquisition date, we segregated the loan portfolio into two loan pools, performing and nonperforming loans, to be retained in our portfolio.

 

We had an independent third party determine the fair value of cash flows on $107,474,993 of performing loans. The valuation took into consideration the loans' underlying characteristics, including account types, remaining terms, annual interest rates, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan to value ratios, loss exposures, and remaining balances. These performing loans were segregated into pools based on loan and payment type and in some cases, risk grade. The effect of this fair valuation process was a net accretable premium adjustment of $242,773 at acquisition.

 

We also individually evaluated 23 impaired loans totaling $1,397,048 to determine the fair value as of the May 13, 2016 measurement date. In determining the fair value for each individually evaluated impaired loan, we considered a number of factors including the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral and net present value of cash flows we expect to receive, among others.

 

We established a credit risk related non-accretable difference of $314,484 relating to these acquired, credit impaired loans, reflected in the recorded net fair value. We further estimated the timing and amount of expected cash flows in excess of the estimated fair value and established an accretable discount adjustment of $55,046 at acquisition relating to these impaired loans.

 

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.

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited) 

 

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

Fairmount Bancorp, Inc.

   

Fair Value

Adjustments

     

As recorded by

Hamilton Bancorp, Inc.

 

Identifiable assets:

                         

Cash and cash equivalents

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

Certificates of deposit

    4,467,825       27,772  

A

    4,495,597  

Investment securities available for sale

    9,729,405       -         9,729,405  

Loans

    55,454,414       (1,876,502 )

B

    53,577,912  

Allowance For Loan Loss

    (591,070 )     591,070  

B

    -  

Premises and equipment

    2,975,587       (726,997 )

C

    2,248,590  

Core Deposit Intangible

    22,802       (22,802 )

D

    -  

Deferred income taxes

    965,256       596,675  

E

    1,561,931  

Other assets

    1,031,755       -         1,031,755  

Total identifiable assets

  $ 75,524,473     $ (1,410,784 )     $ 74,113,689  
                           

Identifiable liabilities:

                         

Non-interest bearing deposits

    909,669       -         909,669  

Interest bearing deposits

    52,123,868       433,429  

F

    52,557,297  

Borrowings

    10,500,000       389,147  

G

    10,889,147  

Other liabilities

    120,351       -         120,351  

Total identifiable liabilities

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

Net tangible assets acquired

    11,870,585       (2,233,360 )       9,637,225  
                           

Core deposit intangible

    -       542,540         542,540  

Goodwill

    -       4,012,605         4,012,605  

Net intangible assets acquired

    -       4,555,145         4,555,145  
                           

Total cash consideration

  $ 11,870,585     $ 2,321,785       $ 14,192,370  

 

Explanation of fair value adjustments:

 

A - Adjustment reflects marking the certificates of deposit portfolio to fair value as of the acquisition date.

B - Adjustment reflects the fair value adjustments based on Hamilton Bancorp’s evaluation of the acquired loan portfolio and excludes the allowance for losses recorded by Fairmount Bancorp, Inc.

C - Adjustment reflects the fair value adjustments based on Hamilton Bancorp’s evaluation of the acquired premises and equipment.

D - Adjustment reflects the elimination of core deposit intangible recorded by Fairmount Bancorp, Inc. from an acquisition prior.

E - Adjustment to record deferred tax asset related to fair value adjustments at 39.45% income tax rate.

F - Adjustment arises since the rates on interest-bearing deposits are higher than rates available on similar deposits as of the acquisition date.

G - Adjustment reflects the fair value of Fraternity’s borrowings acquired on acquisition date.

 

Prior to the end of the September 11, 2016 measurement period, if information became available which indicated the purchase price allocations require adjustments, we included such adjustments in the purchase price allocation retrospectively. During the quarter ended September 30, 2016, Hamilton made one such adjustment to deferred tax for $11,700 in relation to the final determination of the net operating loss incurred by Fairmount for the short period ended September 11, 2015 (the acquisition date).

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited) 

 

Of the total estimated purchase price, we have allocated $9.6 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 eight 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 three-month period ended September 30, 2016 and six-month periods ended September 30, 2016 and 2015 as if the Fairmount acquisition had occurred as of the beginning of the periods presented.

 

 

   

Three Months

                 
      Ended September    

Six Months Ended September 30,

 
   

2015

   

2016

   

2015

 

Net interest income

  $ 2,797,750     $ 6,648,815     $ 5,599,859  

Other non-interest revenue

    287,084       551,996       980,616  

Total revenue

    3,084,834       7,200,811       6,580,475  

Provision expense

    110,000       260,000       110,000  

Other non-interest expense

    2,250,134       6,959,755       5,078,295  

Income before income taxes

    724,700       (18,944 )     1,392,180  

Income tax expense

    187,187       (7,228 )     509,496  

Net income

  $ 537,513     $ (11,716 )   $ 882,684  
                         

Basic earnings per share

  $ 0.17     $ (0.00 )   $ 0.28  

Diluted earnings per share

  $ 0.17     $ (0.00 )   $ 0.28  

 

The pro forma condensed financial information in the table above for the six months ending September 30, 2016, includes the revenue and expenses associated with the acquisition of Fraternity Community Bancorp, Inc. on May 13, 2016 through the end of the period, including $674,000 in acquisition related and branch consolidation expenses.

 

We have not included any provision for loan losses during the period for loans acquired from Fairmount. 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 at acquisition date. Also excluded are an estimated $3.1 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.

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited) 

 

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

 

 

   

Three months ended September 30,

   

Six months ended September 30,

 
   

2016

   

2015

   

2016

   

2015

 

Legal

  $ 9,081     $ 229,035     $ 55,500     $ 364,523  

Professional services

    -       101,169       135,383       188,842  

Advertising

    -       -       -       2,779  

Date processing

    -       48,745       -       48,745  

Other

    -       21,846       6,350       26,691  

Total meger related expenses

  $ 9,081     $ 400,795     $ 197,233     $ 631,580  

 

In addition, included in other professional service expense in the Statement of Operations for the three and six months ended September 30, 2016 is $145,000 and $242,000 relating to non-compete agreements and $40,200 and $53,600 in consulting expense that has been paid to former executives in the acquisitions, respectively. The non-compete agreements are for a term of one and two years for various former executives, while the consulting contract is for a six-month period ending November 2016.

 

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 six months ended September 30, 2016 and 2015 are summarized below:

 

   

Three months ended September 30,

   

Six months ended September 30,

 
   

2016

   

2015

   

2016

   

2015

 
                                 

Net income (loss)

  $ 323,486     $ (201,085 )   $ (11,723 )   $ (82,760 )

Average common shares outstanding - basic

    3,176,654       3,166,309       3,176,654       3,166,110  

Average common shares outstanding - diluted

    3,176,654       3,166,780       3,176,654       3,166,581  

Income (loss) per common share - basic and diluted

  $ 0.10     $ (0.06 )   $ (0.00 )   $ (0.03 )

 

During the three months and six months ending September 30, 2015 and 2016, none of the common stock equivalents were dilutive due to either a net loss reported during that period or the market price of the stock at that respective date was below the exercise price for any dilutive options to be executed.

 

Note 5:

Investment Securities Available for Sale

 

The amortized cost and fair value of securities at September 30, 2016 and March 31, 2016, are summarized as follows:

 

           

Gross

   

Gross

         
   

Amortized

   

unrealized

   

unrealized

   

Fair

 

September 30, 2016

 

cost

   

gains

   

losses

   

value

 
                                 

U.S. government agencies

  $ 4,010,149     $ 24,245     $ 430     $ 4,033,964  

Municipal bonds

    12,771,487       100,477       119,335       12,752,629  

Corporate bonds

    2,000,000       -       89,766       1,910,234  

Mortgage-backed

    76,908,097       365,475       229,629       77,043,943  
    $ 95,689,733     $ 490,197     $ 439,160     $ 95,740,770  

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited)  

 

           

Gross

   

Gross

         
   

Amortized

   

unrealized

   

unrealized

   

Fair

 

March 31, 2016

 

cost

   

gains

   

losses

   

value

 
                                 

U.S. government agencies

  $ 10,519,126     $ 20,622     $ 6,752     $ 10,532,996  

Municipal bonds

    4,061,599       51,105       140       4,112,564  

Corporate bonds

    2,000,000       -       101,360       1,898,640  

Mortgage-backed

    53,939,706       300,731       300,237       53,940,200  
    $ 70,520,431     $ 372,458     $ 408,489     $ 70,484,400  

 

Proceeds from sales of investment securities were $5,028,054 during the three and six months ended September 30, 2015, with gains of $72,715 and losses of $51,000. There were no sales of investment securities during the three and six months ended September 30, 2016.

 

 

At September 30, 2016 and March 31, 2016, all mortgage-backed securities are backed by U.S. Government-Sponsored Enterprises (GSE’s), except one private label mortgage-backed security that was acquired in the Fraternity acquisition in May 2016 with a book value of $100,416 and fair value of $100,234 as of September 30, 2016.

 

At September 30, 2016 and March 31, 2016, the Company had one pledged security to the Federal Reserve Bank with a book value of $744,186 and $2,000,000 and a fair value of $743,756 and $1,993,266, respectively.

 

The amortized cost and estimated fair value of debt securities by contractual maturity at September 30, 2016 and March 31, 2016 follow. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.

 

   

Available for Sale

 
   

September 30, 2016

   

March 31, 2016

 
   

Amortized

   

Fair

   

Amortized

   

Fair

 
   

cost

   

value

   

cost

   

value

 
                                 

Maturing

                               

Within one year

  $ 250,516     $ 250,779     $ 731,217     $ 731,060  

Over one to five years

    3,452,131       3,489,621       3,268,217       3,287,589  

Over five to ten years

    4,181,277       4,108,929       9,830,135       9,751,610  

Over ten years

    10,897,712       10,847,498       2,751,156       2,773,941  

Mortgage-backed, in monthly installments

    76,908,097       77,043,943       53,939,706       53,940,200