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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 December 31, 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]

 

3,409,243 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding as of February 14, 2017.

 

 

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, 2016 (unaudited) and March 31, 2016

2

     
 

Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2016 and 2015 (unaudited)

3

     
 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended December 31, 2016 and 2015 (unaudited)

5

     
 

Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended December 31, 2016 and 2015 (unaudited)

6

     
 

Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2016 and 2015 (unaudited)

7 - 8

     
 

Notes to Consolidated Financial Statements (unaudited)

9 – 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

67

     

Item 3.

Defaults upon Senior Securities

67

     

Item 4.

Mine Safety Disclosures

67

     

Item 5.

Other Information

67

     

Item 6.

Exhibits

68

     
 

Signatures

68

 

 

Part I. – Financial Information

Item 1. Financial Statements

  

HAMILTON BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Financial Condition

December 31, 2016 and March 31, 2016

 

   

December 31,

   

March 31,

 
   

2016

   

2016

 
   

(Unaudited)

   

(Audited)

 

Assets

               
Assets                

Cash and due from banks

  $ 15,703,886     $ 47,101,688  

Federal funds sold

    2,611,864       20,346,848  

Cash and cash equivalents

    18,315,750       67,448,536  

Certificates of deposit held as investment

    499,303       3,968,229  

Securities available for sale, at fair value

    106,754,363       70,484,400  

Federal Home Loan Bank stock, at cost

    1,640,100       1,042,500  

Loans held for sale

    -       259,450  

Loans

    331,398,269       221,859,056  

Allowance for loan losses

    (2,063,569 )     (1,702,365 )

Net loans and leases

    329,334,700       220,156,691  

Premises and equipment, net

    4,228,766       3,555,474  

Premises and equipment held for sale

    -       405,000  

Foreclosed real estate

    460,220       443,015  

Accrued interest receivable

    1,481,388       948,166  

Bank-owned life insurance

    18,132,876       12,709,908  

Deferred income taxes

    7,408,268       2,353,141  

Income taxes refundable

    -       228,920  

Goodwill and other intangible assets

    9,393,243       7,386,111  

Other assets

    2,186,102       1,527,014  
Total Assets   $ 499,835,079     $ 392,916,555  
                 

Liabilities and Shareholders' Equity

               
Liabilities                

Noninterest-bearing deposits

  $ 22,397,875     $ 19,747,437  

Interest-bearing deposits

    385,927,067       294,246,214  

Total deposits

    408,324,942       313,993,651  

Borrowings

    26,194,142       14,805,237  

Advances by borrowers for taxes and insurance

    1,112,278       1,079,794  

Other liabilities

    3,529,827       1,493,290  

Total liabilities

    439,161,189       331,371,972  
                 

Commitments and contingencies

    -       -  
                 
Shareholders' Equity                

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

    34,136       34,136  

Additional paid in capital

    31,631,868       31,242,731  

Retained earnings

    32,707,101       32,659,455  

Unearned ESOP shares

    (2,221,800 )     (2,369,920 )

Accumulated other comprehensive loss

    (1,477,415 )     (21,819 )

Total shareholders' equity

    60,673,890       61,544,583  
Total Liabilities and Shareholders' Equity   $ 499,835,079     $ 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 Nine Months Ended December 31, 2016 and 2015

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31,

   

December 31,

 
   

2016

   

2015

   

2016

   

2015

 
                                 

Interest revenue

                               

Loans, including fees

  $ 3,878,223     $ 2,805,851     $ 11,026,020     $ 6,906,069  

U.S. treasuries, government agencies and FHLB stock

    33,022       91,940       182,130       276,415  

Municipal and corporate bonds

    107,564       31,722       226,230       94,145  

Mortgage-backed securities

    310,709       272,751       829,437       848,181  

Federal funds sold and other bank deposits

    28,065       18,005       147,504       31,650  

Total interest revenue

    4,357,583       3,220,269       12,411,321       8,156,460  
                                 

Interest expense

                               

Deposits

    673,348       458,024       1,959,630       1,241,457  

Borrowed funds

    74,336       38,191       192,977       64,487  

Total interest expense

    747,684       496,215       2,152,607       1,305,944  
                                 

Net interest income

    3,609,899       2,724,054       10,258,714       6,850,516  

Provision for loan losses

    780,000       70,000       1,040,006       190,000  

Net interest income after provision for loan losses

    2,829,899       2,654,054       9,218,708       6,660,516  
                                 

Noninterest revenue

                               

Service charges

    104,882       102,979       319,489       304,951  

Gain on sale of investment securities

    23,720       20,497       23,720       42,212  

Gain on sale of loans held for sale

    1,438       7,826       23,047       43,395  

(Loss) gain on sale of property and equipment

    (11,043 )     -       (11,043 )     407,188  

Earnings on bank-owned life insurance

    126,302       87,616       364,928       264,062  

Other

    42,784       14,675       119,937       49,194  

Total noninterest revenue

    288,083       233,593       840,078       1,111,002  
                                 

Noninterest expenses

                               

Salaries

    1,354,327       1,102,598       4,092,481       3,018,168  

Employee benefits

    359,987       293,260       1,056,741       809,583  

Occupancy

    234,310       195,155       709,081       548,817  

Advertising

    16,305       43,295       91,635       89,109  

Furniture and equipment

    93,058       85,077       290,818       237,752  

Data processing

    206,596       154,977       583,407       439,989  

Legal services

    47,831       52,100       161,278       110,091  

Other professional services

    284,979       131,353       808,309       291,260  

Merger related expenses

    -       196,645       219,417       828,225  

Branch consolidation expense

    -       -       437,424       -  

Deposit insurance premiums

    63,571       63,105       251,759       151,970  

Foreclosed real estate expense and losses (gains)

    (1,578 )     3,270       6,530       17,157  

Other operating

    457,466       459,817       1,367,726       1,114,428  

Total noninterest expenses

    3,116,852       2,780,652       10,076,606       7,656,549  
                                 

Income (loss) before income taxes

    1,130       106,995       (17,820 )     114,969  

Income tax (benefit) expense

    (58,239 )     234,176       (65,466 )     324,830  

Net income (loss)

  $ 59,369     $ (127,181 )   $ 47,646     $ (209,861 )
                                 

Net income (loss) per common share:

                               

Basic

  $ 0.02     $ (0.04 )   $ 0.01     $ (0.07 )

Diluted

  $ 0.02     $ (0.04 )   $ 0.01     $ (0.07 )

 

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

 

 

HAMILTON BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

Three and Nine Months Ended December 31, 2016 and 2015

  

   

Three Months Ended

   

Nine Months Ended

 
   

December 31,

   

December 31,

 
   

2016

   

2015

   

2016

   

2015

 
                                 

Net income (loss)

  $ 59,369     $ (127,181 )   $ 47,646     $ (209,861 )

Other comprehensive income:

                               

Unrealized loss on investment securities available for sale

    (2,467,108 )     (801,265 )     (2,380,040 )     (716,655 )

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

    (23,720 )     (20,497 )     (23,720 )     (42,212 )

Total unrealized loss on investment securities available for sale

    (2,490,828 )     (821,762 )     (2,403,760 )     (758,867 )

Income tax benefit relating to investment securities available for sale

    (982,508 )     (324,144 )     (948,164 )     (299,335 )

Other comprehensive income (loss)

    (1,508,320 )     (497,618 )     (1,455,596 )     (459,532 )
                                 

Total comprehensive loss

  $ (1,448,951 )   $ (624,799 )   $ (1,407,950 )   $ (669,393 )

 

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)

Nine Months Ended December 31, 2016 and 2015

 

                                   

Accumulated

         
           

Additional

           

Unearned

   

other

   

Total

 
   

Common

   

paid-in

   

Retained

   

ESOP

   

comprehensive

   

shareholders'

 
   

stock

   

capital

   

earnings

   

shares

   

loss

   

equity

 
                                                 

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  
                                                 

Balance March 31, 2016

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

Net income

    -       -       47,646       -       -       47,646  

Unrealized loss on available for sale securities, net of tax effect of $ (948,164)

    -       -       -       -       (1,455,596 )     (1,455,596 )

Stock based compensation - options

    -       156,907       -       -       -       156,907  

Stock based compensation - restricted stock

    -       169,279       -       -       -       169,279  

ESOP shares allocated for release

    -       62,951       -       148,120       -       211,071  
                                                 

Balance December 31, 2016

  $ 34,136     $ 31,631,868     $ 32,707,101     $ (2,221,800 )   $ (1,477,415 )   $ 60,673,890  

 

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

 

 

 

HAMILTON BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)

Nine Months Ended December 31, 2016 and 2015

 

   

Nine Months Ended

 
   

December 31,

 
   

2016

   

2015

 
                 

Cash flows from operating activities

               

Interest received

  $ 12,443,330     $ 8,379,943  

Fees and commissions received

    428,385       761,333  

Interest paid

    (3,005,077 )     (1,397,455 )

Cash paid to suppliers and employees

    (8,881,370 )     (7,160,562 )

Origination of loans held for sale

    (2,397,825 )     (4,486,900 )

Proceeds from sale of loans held for sale

    2,680,322       4,955,978  

Increase in deferred tax asset and income tax refundable

    (1,479,473 )     (204,030 )

Net cash (used) provided by operating activities

    (211,708 )     848,307  
                 

Cash flows from investing activities

               

Acquisition, net of cash acquired

    (11,006,813 )     (12,723,871 )

Proceeds from sale of securities available for sale

    4,273,234       9,985,335  

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

    24,634,898       14,067,458  

Proceeds from sale of certificates of deposit

    2,228,273       -  

Proceeds from maturing and called certificates of deposit

    1,724,000       514,510  

Redemption of Federal Home Loan Bank stock

    185,000       -  

Purchase of investment securities available for sale

    (50,585,898 )     -  

Loans made, net of principal repayments

    (1,442,039 )     (13,728,071 )

Purchase of premises and equipment

    (190,682 )     (47,219 )

Proceeds from sale of premises and equipment

    429,177       463,839  

Proceeds from sale of foreclosed real estate

    -       11,752  

Net cash used by investing activities

    (29,750,850 )     (1,456,267 )
                 

Cash flows from financing activities

               

Net increase (decrease) in

               

Deposits

    (15,202,712 )     13,308,083  

Advances by borrowers for taxes and insurance

    32,484       (95,546 )

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

    (19,170,228 )     13,212,541  
                 

Net (decrease) increase in cash and cash equivalents

    (49,132,786 )     12,604,581  
                 

Cash and cash equivalents at beginning of period

    67,448,536       16,643,888  
                 

Cash and cash equivalents at end of period

  $ 18,315,750     $ 29,248,469  
                 

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)

 

   

Nine Months Ended

 
   

December 31,

 
   

2016

   

2015

 
                 

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

               

Net income (loss)

  $ 47,646     $ (209,861 )

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

               

Amortization of premiums on securities

    600,201       311,204  

Amortization of premiums on certificates of deposit

    12,927       7,043  

Gain on sale of investment securities

    (23,720 )     (42,212 )

Loan discount accretion

    (103,330 )     25,811  

Deposit premium amortization

    (455,107 )     (52,656 )

Borrowing premium amortization

    (404,632 )     (41,955 )

Core deposit intangible asset amortization

    89,506       38,620  

Premises and equipment depreciation and amortization

    251,976       200,092  

Loss (gain) on disposal of premises and equipment

    11,043       (407,188 )

Stock based compensation

    326,186       325,902  

Provision for loan losses

    1,040,006       190,000  

ESOP shares allocated for release

    211,071       186,330  

Decrease (increase) in

               

Accrued interest receivable

    (533,222 )     (161,838 )

Loans held for sale

    259,450       425,683  

Cash surrender value of life insurance

    (364,927 )     (264,062 )

Income taxes refundable and deferred income taxes

    (1,544,939 )     120,800  

Other assets

    2,300,101       374,756  

Increase (decrease) in

               

Accrued interest payable

    7,269       3,100  

Deferred loan origination fees

    55,433       41,263  

Other liabilities

    (1,994,646 )     (222,525 )

Net cash (used) provided by operating activities

  $ (211,708 )   $ 848,307  
                 

Noncash investing activity

               

Real estate acquired through foreclosure

  $ 17,205     $ 12,560  

  

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)

December 31, 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 nine months ended December 31, 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 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.

 

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited)

 

 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.

 

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”) 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.

 

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited)

  

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.

 

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 No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This update made the following changes that may affect the Company: (1) Debt Prepayment or Debt Extinguishment Costs: Cash payments for debt prepayment or debt extinguishment costs should be classified as cash flows for financing activities. (2) Proceeds from the settlement of Bank-Owned Life Insurance Policies: Cash proceeds received from the settlement of bank-owned life insurance policies should be classified as cash flows from investing activities. The cash payments for premiums on bank-owned policies may be classified as cash flows from investing activities, operating activities, or a combination of investing and operating activities. The amendments in this Update will be effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company does not expect the guidance to have a material impact on its financial statements.

 

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.

 

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited)

 

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.

 

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.

 

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited)

 

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.

 

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

   

Fair Value

   

As recorded by

 
   

Bancorp, Inc.

   

Adjustments

   

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 )   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  
                         

Definite lived intangible assets acquired

    -       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  

 

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited)

 

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.

 

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 December 31, 2015 and nine-month periods ended December 31, 2016 and 2015 as if the Fraternity acquisition had occurred as of the beginning of the periods presented.

 

   

Three Months Ended

                 
    December 31,    

Nine Months Ended December 31,

 
   

2015

   

2016

   

2015

 
Net interest income   $ 3,978,170     $ 10,862,778     $ 10,589,458  
Other non-interest revenue     236,691       862,502       1,245,048  

Total revenue

    4,214,861       11,725,279       11,834,506  
Provision expense     70,000       1,040,006       190,000  
Other non-interest expense     3,775,757       9,420,767       11,044,009  

Income before income taxes

    369,104       1,264,507       600,497  
Income tax expense     389,641       385,181       534,920  

Net (loss) income

  $ (20,537 )   $ 879,325     $ 65,577  
                         

Basic (loss) earnings per share

  $ (0.01 )   $ 0.28     $ 0.02  

Diluted (loss) earnings per share

  $ (0.01 )   $ 0.28     $ 0.02  

  

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. For the three and nine months ending December 31, 2015, acquisition costs of $196,000 and $828,000, respectively, associated with the acquisition of Fairmount are included in non-interest expense. For the nine months ending December 31, 2016 there were no acquisition costs attributable to Fairmount because that acquisition had been completed at that time. The acquisition expenses are non-deductible and the reasoning for income tax expense being higher in those periods relative to pre-tax income.

 

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 had we 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

   

Fair Value

   

As recorded by

 
   

Fairmount Bancorp, Inc.

   

Adjustments

   

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  
                         

Definite lived intangible assets acquired

    -       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 this measurement period, we made a net adjustment of $215,000 in the purchase price allocations. These adjustments included items relating to the valuation of loans, property and equipment, payables and deferred taxes.

 

Of the total estimated purchase price, we have allocated an estimate of $9.6 million to net tangible assets acquired and we have allocated approximately $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.

 

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited)

 

Pro forma Condensed Combined Financial Information. The following schedule includes consolidated statements of operations data for the unaudited pro forma results for the nine month periods ended December 31, 2016 and 2015 as if the Fairmount acquisition had occurred as of the beginning of the periods presented.

 

   

Nine Months Ended December 31,

 
   

2016

   

2015

 

Net interest income

  $ 10,258,714     $ 8,323,913  

Other non-interest revenue

    840,079       1,214,209  
Total revenue     11,098,793       9,538,122  

Provision expense

    1,040,006       180,000  

Other non-interest expense

    10,076,607       7,662,302  
Income before income taxes     (17,820 )     1,695,820  

Income tax expense

    (65,466 )     624,593  
Net income   $ 47,646     $ 1,071,226  
                 

Basic earnings per share

  $ 0.01     $ 0.34  

Diluted earnings per share

  $ 0.01     $ 0.34  

 

The pro forma condensed financial information in the table above for the nine months ending December 31, 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 $1.1 million 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 had we 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.

 

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 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,

   

Nine Months Ended December 31,

 
   

2016

   

2015

   

2016

   

2015

 

Legal

  $ -     $ 68,528     $ 55,500     $ 433,051  

Professional services

    -       128,117       157,567       316,959  

Advertising

    -       -       -       2,779  

Data processing

    -       -       -       48,745  

Other

    -       -       6,350       26,691  

Total meger related expenses

  $ -     $ 196,645     $ 219,417     $ 828,225  

 

In addition, included in other professional service expense in the Statement of Operations for the three and nine months ended December 31, 2016 is $145,000 and $387,000 relating to non-compete agreements and $26,800 and $80,400 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 was for a six-month period that ended November 2016.

 

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited)

 

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, 2016 and 2015 are summarized below:

 

   

Three months ended December 31,

   

Nine Months Ended December 31,

 
   

2016

   

2015

   

2016

   

2015

 
                                 

Net income (loss)

  $ 59,369     $ (127,181 )   $ 47,646     $ (209,861 )

Weighted average common shares outstanding - basic

    3,176,815       3,166,470       3,176,708       3,166,230  

Weighted average common shares outstanding - diluted

    3,179,281       N/A       3,179,174       N/A  

Income (loss) per common share - basic and diluted

  $ 0.02     $ (0.04 )   $ 0.01     $ (0.07 )
                                 

Anti-dilutive shares

    85,394       43,930       85,394       43,930  

 

During the three and nine months ending December 31, 2015, none of the common stock equivalents were dilutive due to the loss reported during that period.

 

Note 5:

Investment Securities Available for Sale

 

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

 

           

Gross

   

Gross

         
   

Amortized

   

unrealized

   

unrealized

   

Fair

 

December 31, 2016

 

cost

   

gains

   

losses

   

value

 
                                 

U.S. government agencies

  $ 3,529,287     $ 442     $ 20,324     $ 3,509,405  

Municipal bonds

    17,141,022       2,503       994,563       16,148,962  

Corporate bonds

    2,000,000       -       86,472       1,913,528  

Mortgage-backed securities

    86,523,845       53,349       1,394,726       85,182,468  
    $ 109,194,154     $ 56,294     $ 2,496,085     $ 106,754,363  

 

            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 securities

    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 $4,273,234 and $4,957,280 during the three months ended December 31, 2016 and 2015, respectively, with gains of $36,131 and losses of $12,411 for the three months ended December 31, 2016 and gains of $23,197 and losses of $2,700 for the three months ended December 31, 2015.

 

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited)

 

Proceeds from sales of investment securities were $4,273,234 and $9,985,335 during the nine months ended December 31, 2016 and 2015, respectively, with gains of $36,131 and losses of $12,411 for the nine months ended December 31, 2016 and gains of $95,912 and losses of $53,700 for the nine months ended December 31, 2015.

 

As of December 31, 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 $95,489 and fair value of $95,356 as of December 31, 2016.

 

As of December 31, 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 $729,816 and $1,993,266, respectively.

 

The amortized cost and estimated fair value of debt securities by contractual maturity at December 31, 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

 
   

December 31, 2016

   

March 31, 2016

 
   

Amortized

   

Fair

   

Amortized

   

Fair

 
   

cost

   

value

   

cost

   

value

 
                                 

Maturing

                               

Within one year

  $ -     $ -     $ 731,217     $ 731,060  

Over one to five years

    4,240,900       4,236,036       3,268,217       3,287,589  

Over five to ten years

    4,178,327       4,051,550       9,830,135       9,751,610  

Over ten years

    14,251,082       13,284,308       2,751,156       2,773,941  

Mortgage-backed securities, in monthly installments

    86,523,845       85,182,469       53,939,706       53,940,200  
    $ 109,194,154     $ 106,754,363     $ 70,520,431     $ 70,48