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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

[X]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended March 31, 2018

 

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 Number: 1-35693

 

HAMILTON BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

MARYLAND

(State or other jurisdiction of incorporation or organization)

46-0543309

(I.R.S. Employer Identification No.)

   

501 Fairmount Avenue, Suite 200, Towson, Maryland

(Address of principal executive offices)

21286

(Zip Code)

 

(410) 823-4510

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

                      Title of each class                   

Common Stock, par value $0.01 per share

Name of each exchange on which registered

Nasdaq Capital Market

     

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [    ] No [ X ]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [    ] No [ X ]

 

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 filing 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 (§ 232.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]

 

 

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

 

Large accelerated filer [   ]

Accelerated filer [   ]

Non-accelerated filer [   ] 

(Do not check if a smaller reporting company)

Smaller reporting company [ X ]

Emerging growth company [   ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [   ]     

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes [    ] No [ X ]

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of September 30, 2017 was $47,974,641

 

The number of shares outstanding of the registrant’s common stock as of June 29, 2018 was 3,407,613.

 

DOCUMENTS INCORPORATED BY REFERENCE:

Proxy Statement for the Registrant’s Annual Meeting of Stockholders (Part III)

 

 

 

 

INDEX

 

 

Part I

 

 

 

Page

 

 

 

Item 1.

Business

1

Item 1A.

Risk Factors

22

Item 1B.

Unresolved Staff Comments

29

Item 2.

Properties

29

Item 3.

Legal Proceedings

30

Item 4.

Mine Safety Disclosures

30

 

 

 

 

Part II

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

30

Item 6.

Selected Financial Data

32

Item 7.

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

34

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

64

Item 8.

Financial Statements and Supplementary Data

64

Item 9.

Changes In and Disagreements With Accountants on Accounting And financial Disclosure

64

Item 9A.

Controls and Procedures

64

Item 9B.

Other Information

65

 

 

 

 

Part III

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

65

Item 11.

Executive Compensation

66

Item 12.

Security Ownership of Certain Beneficial Owners and Management And Related Stockholder Matters

66

Item 13.

Certain Relationships and Related Transactions, and Director Independence

67

Item 14.

Principal Accounting Fees and Services

67

 

 

 

 

Part IV

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

67

Item 16.

Form 10-K Summary

68

 

 

 

SIGNATURES

69

 

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This page intentionally left blank.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This report contains certain “forward-looking statements” within the meaning of the federal securities laws. These statements are not historical facts; rather, they are statements based on Hamilton Bancorp, Inc.’s current expectations regarding its business strategies, intended results and future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions.

 

Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the credit quality and composition of the loan and investment portfolios, valuation of assets acquired, deposit flows, competition, demand for loan products and for financial services in Hamilton Bancorp, Inc.’s market area, changes in real estate market values in Hamilton Bancorp, Inc.’s market area, changes in relevant accounting principles and guidelines and the inability of third party service providers to perform as required. For further discussion of factors that may affect the results, see “Item 1A. Risk Factors” in this Annual Report on Form 10-K (“Annual Report”). These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Except as required by law, we disclaim any intention or obligation to update or revise any forward-looking statements after the date of this Annual Report, whether as a result of new information, future events or otherwise.

 

In this Annual Report, the terms “we,” “our,” and “us” refer to Hamilton Bancorp, Inc. and Hamilton Bank, unless the context indicates another meaning. In addition, we sometimes refer to Hamilton Bancorp, Inc. as “Hamilton Bancorp,” and to Hamilton Bank as the “Bank.”

 

PART I

 

Item 1.     BUSINESS

 

General

 

Hamilton Bancorp, Inc. (the “Company”) is a Maryland chartered corporation incorporated on June 7, 2012 to serve as the stock holding company for Hamilton Bank (the “Bank”), a state chartered commercial bank. On October 10, 2012, in accordance with a Plan of Conversion adopted by its Board of Directors and approved by its members, the Bank converted from a mutual savings bank to a stock savings bank and became the wholly owned subsidiary of the Company. In connection with the conversion, the Company sold 3,703,000 shares of common stock at a price of $10.00 per share, through which the Company received net proceeds of approximately $35,580,000. On December 21, 2017, the Bank converted its charter from a federal savings bank to a Maryland state-chartered commercial bank and now operates under the laws of the State of Maryland. In conjunction with the Bank’s charter conversion, Hamilton Bancorp converted from a savings and loan holding company to a bank holding company. Hamilton Bancorp’s principal business activity is the ownership of the Bank’s capital stock and the management of the offering proceeds it retained in connection with the Bank’s conversion. Hamilton Bancorp does not own or lease any property but instead uses the premises, equipment and other property of the Bank with the payment of appropriate rental fees, as required by applicable law and regulations, under the terms of an expense allocation agreement. In the future, Hamilton Bancorp may acquire or organize other operating subsidiaries.

 

Founded in 1915 and celebrating over 100 years of service, the Bank is a community-oriented financial institution, dedicated to serving the financial needs of consumers and businesses within its market area. Our lending market area is considered greater Maryland, southern Pennsylvania, Washington D.C., and northern Virginia. We offer a variety of deposit and loan products in our market area. Our real estate loans consist primarily of one-to- four family mortgage loans (including owner-occupied and non-owner-occupied investor loans), as well as commercial real estate loans, and home equity loans and lines of credit. We also offer commercial term, leases and line of credit loans along with consumer loans consisting primarily of automobile loans, recreational vehicles and loans secured by deposits. We currently operate out of our corporate headquarters in Towson, Maryland and our seven full-service branch offices located in Baltimore City, Cockeysville, Towson, Rosedale, Ellicott City and Pasadena, Maryland. Our market area for deposits is primarily the local counties surrounding our offices. Our primary source of income is loans to small and middle-market businesses and middle-income individuals.

 

 

We also invest in securities, which consist primarily of U.S. government agency, municipal and corporate bond obligations, mortgage-backed securities and collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises, and to a much lesser extent, equity securities of government-sponsored enterprises.

 

We offer a variety of deposit accounts, including certificate of deposit accounts, money market accounts, savings accounts, checking accounts and individual retirement accounts. Over the past three years we have borrowed funds from the Federal Home Loan Bank (FHLB) to meet growing loan demand and to facilitate several purchases of loan pools since March 2017. We have also acquired FHLB advances through our acquisitions of Fraternity Community Bancorp, Inc. and Fairmount Bancorp, Inc. completed in May 2016 and September 2015, respectively. We are committed to offering alternative banking delivery systems, including ATMs, online and mobile banking and remote deposit capture.

 

Recent Acquisitions

 

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 & Loan, with and into the Company pursuant to the Agreement and Plan of Merger dated 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 & Loan was merged with and into the Bank, with the Bank 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 $15.4 million. Immediately following the merger of Fairmount, Fairmount Bank was merged with and into the Bank, with the Bank the surviving entity.

 

As a result of the acquisitions, we have added three branches to our branch structure in the Baltimore area. (See Note 3 – “Acquisition of the consolidated financial statements for additional discussion concerning the more recent acquisition of Fraternity).

 

Available Information

 

The Bank’s website address is www.hamilton-bank.com. Available through the Investor Relations area of our website are annual reports on Form 10-K, quarterly reports on Form 10-Q, news releases on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. In general, we intend that these reports be available as soon as practicable after they are filed with or furnished to the Securities and Exchange Commission (“SEC”). Information on the Bank’s website should not be considered a part of this Annual Report.

 

 

Market Area

 

We conduct our operations from our seven full-service banking offices in Maryland. Our primary deposit market includes the areas surrounding our banking offices in Cockeysville, Pasadena, Towson, Rosedale, Ellicott City and two locations in Baltimore City. In July 2017, we re-located our Ellicott City branch in Howard County a short distance away from the former location so as to still serve our existing customer base and surrounding area. The landlord, whom the property was leased from, is converting the former branch property into other commercial space. In March 2018 we also re-located our Pigtown branch, located in Baltimore City, just a few doors down from our former branch. The new branch locations are both smaller in size, offering cost savings, and allowed us to redesign our branches so the needs of our customers can be better served. In the new locations we did away with the conventional teller line and created a more open space with the use of a cash recycler. Our employees can now interact and provide greater assistance to our customers in a friendlier and inviting environment.

 

The Bank considers greater Maryland, southern Pennsylvania, Washington D.C., and northern Virginia its primary lending area for its various consumer, commercial and mortgage lending services. It is the policy of the Bank to focus on lending to customers within its primary lending area, and/or to collateralize secured loans with real property located within the primary lending area. However, we occasionally purchase or make loans secured by collateral located outside of our primary lending market, especially to borrowers with whom we have an existing relationship or who have a significant presence within our primary market. Our primary lending market contains a diverse cross section of employment sectors, with a mix of services, manufacturing, wholesale/retail trade, federal and local government, health care facilities and finance related employment. The city of Baltimore is now considered a major center for both the financial and health service industries.

 

Our branch network includes Baltimore City and the Maryland counties of Anne Arundel, Howard, and Baltimore. Maryland continues to rank first in the nation with respect to median household income, as reflected in 2016, with median household income of nearly $79,000 compared to a national average of $58,000. Both Howard and Anne Arundel county rank amongst the top counties in the state with respect to household income and report lower unemployment. Baltimore City, Baltimore County, Howard, and Anne Arundel County reported preliminary unemployment rates of 6.1%, 4.3%, 3.1% and 3.6%, respectively, for December 2017, compared to the statewide and national unemployment rates of 4.3% and 3.9%, respectively.

 

Competition

 

We face significant competition within our market both in making loans and attracting deposits. Our market area has a high concentration of financial institutions including large money center and regional banks, community banks and credit unions. Some of our competitors offer products and services that we currently do not offer, such as trust services and private banking. Our competition for loans and deposits comes principally from commercial banks, savings institutions, internet banks, mortgage banking firms, consumer finance companies, credit unions, and non-bank lenders. We face additional competition for deposits from short-term money market funds, brokerage firms, mutual funds and insurance companies. Our primary focus is to build and develop profitable customer relationships across all lines of business while maintaining our position as a community bank.

 

As of June 30, 2017 (the latest date for which information is available), our market share was 0.38% of total deposits in Baltimore City, making us the 12th largest out of 27 financial institutions in Baltimore City. In addition, as of June 30, 2017, our deposit market share was 1.25%, 0.41% and 0.65% of total deposits in Baltimore County, Anne Arundel, and Howard County, respectively, making us the 12th largest out of 32 financial institutions in Baltimore County, the 20th largest out of 28 financial institutions in Anne Arundel County and 16th largest out of 20 financial institutions in Howard County.

 

Lending Activities 

 

General. Historically, our principal lending activity has been the origination of mortgage loans collateralized by one-to-four family residential real estate located within our primary market area. In recent years we have reduced our emphasis on the origination of one-to-four family mortgage lending to become less reliant on the origination of such loans for growth and to emphasize the origination of commercial business and commercial real estate lending. This will allow the Bank to develop a more diversified loan portfolio, generate loan growth from different resources, and provide our customers with more products and services that fit their needs. In connection with this strategy, we have hired several commercial real estate and commercial business loan officers over the past couple of years with strong experience in these lending areas. In addition, back office commercial loan personnel have also been hired to assist with the processing, underwriting, and monitoring of our commercial loan portfolio. Our commercial loan underwriting analysis is maintained in-house and allows us to be more efficient in originating loans and enhancing the customer experience. We sold a majority of our newly originated one-to-four family mortgage loans with terms over 10 years into the secondary market. However, towards the end of fiscal 2017 and throughout fiscal 2018, we did retain in our portfolio the fixed-rate residential mortgages we originated due to the amount of run-off we were experiencing within the portfolio. In addition to commercial business loans and leases, commercial real estate loans and residential mortgage loans, we also offer home equity loans and lines of credit, residential and commercial construction loans, and, to a much lesser extent, other consumer loans.

 

 

Our portfolio of one-to four-family residential loans have increased in amount during fiscal 2018 and 2017 due to the purchase of several pools of loans in fiscal 2018 and our acquisition of Fraternity in fiscal 2017. The percentage of one-to four-family loans to total loans, however, has declined from 44% at March 31, 2017 to 40% at March 31, 2018.    

 

Loan Portfolio Composition. Set forth below is selected information concerning the composition of our loan portfolio in dollar amounts and in percentages as of the dates indicated. Amounts shown do not include loans held for sale equal to $-0-, $-0-, $259,000, $581,000 and $-0- at March 31, 2018, 2017, 2016, 2015 and 2014, respectively.

 

   

At March 31,

 
   

2018

   

2017

   

2016

 
   

Amount

   

Percent

   

Amount

   

Percent

   

Amount

   

Percent

 
   

(Dollars in thousands)

 

Real estate loans:

                                               

Residential mortgage loans:

                                               

One- to four-family residential

  $ 163,448       42.0

%

  $ 157,446       46.4

%

  $ 69,300       31.1

%

One- to four-family investor

    26,736       6.9       25,522       7.5       27,860       12.5  

Commercial construction

    7,116       1.8       3,190       0.9       8,527       3.8  

Commercial

    112,166       28.8       107,564       31.7       78,115       35.1  

Total real estate loans

    309,466       79.5       293,722       86.6       183,802       82.5  

Commercial business loans

    40,144       10.3       21,537       6.4       20,395       9.2  

Consumer:

                                               

Home equity loans and lines of credit

    19,996       5.1       20,544       6.1       14,391       6.4  

Other consumer

    19,615       5.0       3,197       0.9       4,179       1.9  

Total consumer loans

    39,611       10.2       23,741       7.0       18,570       8.3  

Total loans receivable

    389,221       100.0

%

    339,000       100.0

%

    222,767       100.0

%

                                                 

Premium (discount) on loans acquired

    1,412               76               (769 )        

Net deferred loan origination fees and costs

    (212 )             (143 )             (139 )        

Allowance for loan losses

    (2,822 )             (2,195 )             (1,702 )        

Total loans receivable, net

  $ 387,599             $ 336,738             $ 220,157          

 

 

   

At March 31,

 
   

2015

   

2014

 
   

Amount

   

Percent

   

Amount

   

Percent

 
   

(Dollars in thousands)

 

Real estate loans:

                               

Residential mortgage loans:

                               

One- to four-family residential

  $ 49,865       31.1

%

  $ 57,674       39.8

%

One- to four-family investor

    12,971       8.1       14,000       9.7  

Commercial construction

    6,362       4.0       3,268       2.3  

Commercial

    59,273       36.9       41,406       28.6  

Total real estate loans

    128,471       80.1       116,348       80.4  

Commercial business loans

    18,490       11.5       15,657       10.8  

Consumer:

                               

Home equity loans and lines of credit

    12,261       7.6       11,660       8.0  

Other consumer

    1,166       0.8       1,154       0.8  

Total consumer loans

    13,427       8.4       12,814       8.8  

Total loans receivable

    160,388       100.0

%

    144,819       100.0

%

                                 

Premium (discount) on loans acquired

    -               -          

Net deferred loan origination fees and costs

    (103 )             (119 )        

Allowance for loan losses

    (1,690 )             (1,786 )        

Total loans receivable, net

  $ 158,595             $ 142,914          

 

Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at March 31, 2018. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.

 

     

One- to Four-Family

Residential Real Estate

   

One- to Four-Family

Investor Real Estate

   

Commercial Construction

Real Estate

   

Commercial Real Estate

 
     

Amount

   

Weighted Average

Rate

   

Amount

   

Weighted Average

Rate

   

Amount

   

Weighted Average

Rate

   

Amount

   

Weighted Average

Rate

 
     

(Dollars in thousands)

 

Due During the Years Ending March 31,

                                                                 

2019

    $ 5,740       4.43

%

  $ 2,935       7.38

%

  $ 2,441       5.10

%

  $ 12,696       3.95

%

2020

      541       4.84       1,142       6.26       401       6.00       8,357       4.14  

2021

      1,195       4.52       692       6.76       -       -       2,636       4.66  
2022 to 2023       1,965       3.35       4,424       5.78       -       -       19,746       4.74  
2024 to 2028       6,164       3.83       8,874       5.69       3,829       5.11       56,238       4.30  
2029 to 2033       13,826       3.62       2,260       5.29       139       6.62       6,034       4.52  

2034 and beyond

      134,017       4.14       6,409       5.79       306       5.25       6,459       5.31  
                                                                   

Total

    $ 163,448       4.09

%

  $ 26,736       5.93

%

  $ 7,116       5.19

%

  $ 112,166       4.40

%

 

 

     

Commercial Business

   

Home Equity Loans

and Lines of Credit

   

Other Consumer

   

Total

 
     

Amount

   

Weighted Average

Rate

   

Amount

   

Weighted Average

Rate

   

Amount

   

Weighted Average

Rate

   

Amount

   

Weighted Average

Rate

 

 

   

(Dollars in thousands)

 
Due During the Years Ending March 31,        

2019

    $ 9,569       4.96

%

  $ 110       7.26

%

  $ 1,151       2.78

%

  $ 34,642       4.65

%

2020

      2,065       4.05       152       4.70       212       4.96       12,870       4.42  

2021

      3,964       5.15       192       6.02       365       4.85       9,044       5.05  
2022 to 2023       15,510       4.65       428       5.65       249       5.06       42,322       4.76  
2024 to 2028       7,355       4.65       2,928       4.70       3,531       5.52       88,919       4.53  
2029 to 2033       374       4.50       4,467       4.75       11,715       4.60       38,815       4.30  

2034 and beyond

      1,307       4.62       11,719       4.68       2,392       4.21       162,609       4.30  
                                                                   

Total

    $ 40,144       4.74

%

  $ 19,996       4.75

%

  $ 19,615       4.63

%

  $ 389,221       4.46

%

 

Fixed and Adjustable-Rate Loan Schedule. The following table sets forth at March 31, 2018, the dollar amount of all fixed-rate and adjustable-rate loans due after March 31, 2019.

 

   

Due after March 31, 2019

 
   

Fixed

   

Adjustable

   

Total

 
   

(In thousands)

 

Real estate loans:

                       

One- to four-family residential

  $ 132,291     $ 25,417     $ 157,708  

One- to four-family investor

    19,827       3,974       23,801  

Commercial construction

    2,297       2,378       4,675  

Commercial

    87,740       11,730       99,470  

Commercial business loans

    26,762       3,813       30,575  

Consumer loans:

                       

Home equity loans and lines of credit

    4,171       15,715       19,886  

Other consumer

    18,464       -       18,464  

Total loans

  $ 291,552     $ 63,027     $ 354,579  

 

Residential Mortgage Loans. Hamilton Bank originates mortgage loans secured by owner occupied one-to-four family residential properties. To a lesser extent, we have also acquired, participated and made loans to investors for the purchase of one-to-four family residential properties that are not owner-occupied. As of March 31, 2018, we had a total of $190.2 million of residential mortgage loans secured by one-to-four family properties, of which $163.4 million, or 85.9%, were secured by properties serving as the primary residence of the owner. The remaining $26.7 million, or 14.1%, of such loans were secured by non-owner-occupied residential properties. The majority of our residential mortgage loans are secured by properties within our primary lending area of greater Maryland, southern Pennsylvania, Washington D.C., and northern Virginia, however, during fiscal 2018 we did purchase several residential mortgage loan pools totaling $19.3 million in areas outside of our market.

 

 

Historically, the terms of our one-to-four family mortgage loans retained in our portfolio ranged from 10 to 30 years. In order to lower our interest rate risk in a rising rate environment though, we have been selling to the secondary market the majority of our one-to-four family fixed rate loans that have been originated with terms exceeding 10 years. However, towards the end of fiscal 2017 and throughout fiscal 2018, we did portfolio the fixed-rate residential mortgages we originated due to the amount of run-off we were experiencing within the portfolio. In fiscal 2019, we plan to sell these loans into the secondary market. During fiscal 2017 and 2016, we sold $2.2 million, or 23.5%, and $4.4 million, or 68.0%, of one-to-four family mortgage loans that we originated with terms exceeding 10 years, respectively. Our residential mortgage portfolio is almost entirely comprised of fixed-rate loans, with 83.9% of residential mortgage loans due after March 31, 2019 having fixed rates at March 31, 2018. During the year ended March 31, 2018, we originated $1.5 million in residential mortgage loans with adjustable-rates.

 

We generally do not make new one-to-four family mortgage loans on owner-occupied properties with loan-to-value ratios exceeding 95% at the time the loan is originated, and all loans with loan-to-value ratios in excess of 80% require private mortgage insurance. Loan to value ratios on refinances may not exceed 80%, and loan-to-value ratios for non-owner-occupied properties may not exceed 85%. In addition, borrower debt may generally not exceed 43% of the borrower’s monthly cash flow. With respect to borrower debt on loans secured by non-owner-occupied properties, we look to the investor’s aggregate debt and cash flows from all investment properties the investor operates. We require all properties securing residential mortgage loans to be appraised by a board-approved independent appraiser.

 

Loans secured by non-owner-occupied properties typically have five to ten year terms and amortize over a 25 to 30 year period. Because of the increased risk associated with non-owner-occupied properties, interest rates on such loans are higher than owner-occupied properties; averaging 5.9% during the year ended March 31, 2018. We have generally only originated loans secured by non-owner-occupied properties to investors that reside in our market area.

 

In an effort to provide financing for first-time home buyers, we offer 30-year fixed-rate one-to-four family mortgage loans with loan-to-value ratios up to 95%, which cannot be readily sold to the secondary market and are held in portfolio.

 

We also make “jumbo loans” (loans above $424,100, the current maximum conforming loan amount as established by the Federal Housing Finance Agency) that we may sell into the secondary market or retain in the Bank’s portfolio depending upon the residential mortgage run-off at the time. Jumbo loans that we originate and sell, typically have 30-year terms and maximum loan-to-value ratios of 80%. At March 31, 2018, our largest outstanding portfolio jumbo residential mortgage loan was for $2.3 million at origination, with a current book balance of $1.9 million. This loan is performing in accordance with its original terms.

 

From 2009 through part of fiscal 2017, applications for loans that we intended to sell were processed through Mortgage Department Services, LLC (“MDS”), a company in which we had a minority interest.  In fiscal 2017 we brought this process in-house using various software programs. Each application and loan is reviewed to ensure that the loan meets the standards for sale to the secondary market and the Bank’s portfolio (See “—Loan Originations, Participations, Purchases and Sales”). When we sell loans in the secondary market, we typically sell the loans at a premium and record the income immediately as a gain on sale of loans. All such loans are sold with servicing released and in most cases, with recourse that we provide to the purchaser in the case of (i) delinquency within the first 90 days of sale or (ii) breaches of customary representations and warranties to the buyers.

 

All residential mortgage loans that we originate include “due-on-sale” clauses, which give us the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not repaid. All borrowers are required to obtain title insurance for the benefit of Hamilton Bank. We also require homeowner’s insurance and fire and casualty insurance and, where circumstances warrant, flood insurance.

 

Commercial Real Estate Loans. We originate commercial real estate loans within our primary lending area, with an emphasis on the Greater Baltimore region, that are secured by properties used for business purposes such as small office buildings or retail facilities. We have increased our origination of commercial real estate loans over the last several years. At March 31, 2018, commercial real estate loans amounted to 28.8% of total loans or $112.2 million, including $11.8 million acquired in the Fraternity acquisition, compared to approximately $41.4 million, or 28.6% of total loans, at March 31, 2014.

 

 

Our commercial real estate loans are underwritten based on our loan underwriting polices. Our policies provide that such loans may be made in amounts of up to 85% of the appraised value of the property, provided that the property is more than 50% owner-occupied or 75% of the appraised value of the property if it is not owner-occupied. Our commercial real estate loans typically have terms of 5 to 10 years and amortize for a period of up to 25 years. In the past year we have originated an increased amount of commercial real estate loans with terms of 7 to 10 years based upon the strength of the property cash flow and loan to value ratio. Interest rates may be fixed or adjustable. If adjustable, then they are generally based on the Prime rate of interest, LIBOR, or U.S. Treasuries Constant Maturity.

 

The regulatory loan-to-one borrower limit is 15% of a bank’s unimpaired capital plus unimpaired surplus, or approximately $6.3 million at March 31, 2018. We have adopted an internal limit equal to 75% of the Bank’s loan-to-one borrower limit. The internal limit at March 31, 2018 is $4.7 million. We generally target commercial real estate loans with balances of $250,000 to $4.0 million. At March 31, 2018, our commercial real estate loans had an average balance of $807,000. At that same date, our largest commercial real estate relationship consisted of one loan totaling $4.7 million. This loan is secured by a shopping center, and was performing in accordance with their original terms at March 31, 2018.

 

Commercial real estate lending involves additional risks compared to one-to-four family residential lending because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, and/or the collateral value of the commercial real estate securing the loan. Repayment of such loans may be subject, to a greater extent than residential loans, to adverse conditions in the real estate market or the economy. Also, commercial real estate loans typically involve larger loan balances in relation to single borrowers or groups of related borrowers. Commercial real estate loans generally have a higher rate of interest and shorter term than residential mortgage loans because of increased risks associated with this type of lending. We seek to minimize these risks through our underwriting standards. We have experienced a decrease over the past several years in the number of delinquencies and non-performing loans in our commercial real estate loan portfolio. See “Risk Factors—Our increase in commercial real estate loans has increased our credit risk.”

 

Commercial Business Loans. We originate commercial business loans and lines of credit secured by non-real estate business assets. These loans are generally originated to small and middle market businesses in our primary market area, although in fiscal 2018 we purchased a $15.5 million pool of commercial equipment lease loans that are considered out of our market area. Our commercial business loans are generally used for working capital purposes or for acquiring equipment, inventory or furniture, and are primarily secured by business assets other than real estate, such as business equipment, inventory and accounts receivable. We have increased our origination of commercial business loans over the last few years and intend to continue to grow this portfolio at a moderate pace. At March 31, 2018, commercial business loans and lines of credit outstanding totaled $40.1 million, including the $15.5 million pool of commercial equipment lease loans. This loan segment amounted to 10.3% of total loans, compared to approximately $15.7 million, or 10.8% of total loans, at March 31, 2014. At March 31, 2018, we also had $9.2 million of available and unfunded commercial business lines of credit.

 

Our commercial business loans have terms up to five years at both fixed and adjustable rates of interest, although, adjustable rates of interest are preferred and obtained when possible. Our commercial business loans are underwritten based on our commercial business loan underwriting policies. We typically avoid making commercial business loans to purchase highly specialized, custom made equipment which may be difficult to dispose of in the event of default. When making commercial business loans, we consider the financial statements, lending history and debt service capabilities of the borrower (generally requiring a minimum debt service coverage ratio of 1.20:1.00), the projected cash flows of the business, and the value of the collateral, if any. The majority all commercial business loans are guaranteed by the principals of the borrower.

 

 

Hamilton Bank is also qualified to make Small Business Administration (“SBA”) loans. The SBA program is an economic development program which finances the expansion of small businesses. Under the SBA program, we originate and fund loans under the SBA 7(a) Loan Program which qualify for guarantees up to 85% for loans less than or equal to $150,000 and 75% for loans greater than $150,000. We also originate loans under the SBA’s CDC/504 Loan Program in which we generally provide 50% of the financing, taking a first lien on the real property as collateral. We do not treat the SBA guarantee as a substitute for a borrower meeting our credit standards, and, except for minimum capital levels or maximum loan terms, the borrower must meet our other credit standards as applicable to loans outside the SBA process. During fiscal 2018 and fiscal 2017, we did not originate any loans under the SBA 7(a) Loan Program.

 

We focus on the origination of commercial business loans in amounts between $250,000 and $4.0 million. At March 31, 2018, our commercial business loans had an average outstanding balance of $180,000. At that same date, our largest commercial business loan was a commercial line of credit with a commitment balance of $5.0 million, of which $2.5 million has been advanced. The loan is secured by the business assets of the company and is performing in accordance with its original terms at March 31, 2018.

 

Commercial business loans generally have a greater credit risk than one-to-four family residential mortgage loans and real estate backed commercial loans. Unlike residential and commercial mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. We seek to minimize these risks through our underwriting standards. See “Risk Factors - Our entry into commercial real estate and commercial business lending may result in higher losses on our loans.”

 

Home Equity Loans and Lines of Credit. We offer home equity loans and lines of credit that are secured by the borrower’s primary or secondary residence. At March 31, 2018, we had $20.0 million, or 5.1% of our total loan portfolio in home equity loans and lines of credit. At that date we also had $22.6 million of undisbursed funds related to home equity lines of credit.

 

Home equity loans and lines of credit are generally underwritten using the same criteria that we use to underwrite one-to-four family residential mortgage loans. Home equity loans and lines of credit may be underwritten with a loan-to-value ratio of up to 80% when combined with the principal balance of the existing first mortgage loan. Our home equity loans are primarily originated with fixed rates of interest with terms of up to 20 years. Our home equity lines of credit are originated with adjustable-rates based on the prime rate of interest plus or minus an applicable margin and require interest paid monthly. Home equity loans and lines of credit are available in amounts of between $10,000 and $1.0 million.

 

Home equity loans and lines of credit secured by second mortgages have greater risk than one-to-four family residential mortgage loans secured by first mortgages. We face the risk that the collateral will be insufficient to compensate us for loan losses and costs of foreclosure. When customers default on their loans, we attempt to foreclose on the property and resell the property as soon as possible to minimize foreclosure and carrying costs. However, the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and we may be unsuccessful in recovering the remaining balance from those customers. Particularly with respect to our home equity loans and lines of credit, decreases in real estate values could adversely affect the value of property securing the loan.

 

Construction Loans. We originate construction loans for both commercial and residential real estate. Construction loans we originate generally provide for the payment of interest only during the construction phase. At the end of the construction phase, the loan converts to a permanent mortgage loan at the same or a different rate of interest. The construction period on the residential homes is typically nine to twelve months, at which time Hamilton Bank is repaid through permanent financing by a third party with servicing released or the loan is converted under the loan documents to a permanent loan and is retained in the Bank’s portfolio.

 

 

Before making a commitment to fund a construction loan, Hamilton Bank requires detailed cost estimates to complete the project and an appraisal of the property by an independent licensed appraiser. Hamilton Bank also reviews and inspects each property before disbursement of funds during the term of the construction loan. Loan proceeds are disbursed after inspection based on the percentage of completion method. Construction loans for one-to-four family residential real estate may be underwritten with a loan-to-value ratio of up to 80% or 95% with private mortgage insurance. Commercial construction loans generally may not exceed a loan-to-value ratio of 75% to 80%.

 

Construction lending generally involves a greater degree of risk than other one-to-four family mortgage lending. The repayment of the construction loan is, to a great degree, dependent upon the successful and timely completion of construction. Various potential factors including construction delays or the financial viability of the builder may further impair the borrower’s ability to repay the loan.

 

At March 31, 2018, total construction loans represented $12.6 million, or 3.2%, of Hamilton Bank’s total loans, of which $5.5 million consisted of residential construction loans and $7.1 million were commercial construction. At March 31, 2018, the commitment to fund or advance funds on total construction loans equaled $13.2 million. At March 31, 2018, our largest construction loan was a commercial construction loan with a contractual principal and recorded investment balance of $1.5 million. This loan is under the SBA CDC/504 loan program and we are waiting to be taken out by the SBA. The loan is secured by the commercial property being constructed and is performing in accordance with its original terms at March 31, 2018.

 

Other Consumer Loans. We make loans secured by deposit accounts up to 90% of the amount of the depositor’s deposit account balance. On a more limited basis, we also originate automobile loans to our customers, along with boats, motorcycles, and recreational vehicles. During fiscal 2018 we purchased two loan pools consisting of recreational vehicles from the same seller that totaled $19.8 million. These loans are located outside of what is considered our lending area. Other consumer loans at March 31, 2018 totaled $19.6 million, or 5.0% of our total loan portfolio.

 

Loan Originations, Participations, Purchases and Sales. Most of our loan originations are generated by our loan personnel operating at our corporate headquarters and banking office locations. All loans we originate are underwritten pursuant to our policies and procedures. While we originate fixed-rate and adjustable-rate loans, our ability to generate each type of loan depends upon relative borrower demand and the pricing levels as set in the local marketplace by competing banks, thrifts, credit unions, and mortgage banking companies. Our volume of real estate loan originations is influenced significantly by market interest rates. As a result, the volume of our real estate loan originations can vary from period to period.

 

Consistent with our interest rate risk strategy, in the low interest rate environment that has existed in recent years, we have sold on a servicing-released basis the majority of our one-to-four family residential mortgage loans with maturities over 10 years that we have originated. All loan applications originated from 2009 through the first part of 2017, that we had the intention of selling, were processed through a third party. That third party has since dissolved and we started directly underwriting and selling loans in the secondary market ourselves in 2017. Through the Fraternity acquisition, we obtained the necessary software and personnel to be able to process loans we intend to sell in-house. We receive a premium for each loan that is delivered or sold to the secondary market. When a loan is sold, it is sold with servicing released and in most cases, with recourse that we provide to the purchaser in the event of (i) delinquency within the first 90 days of sale or (ii) breaches of customary representations and warranties to the buyers. As a result of the acquisitions, the amount of normal attrition and prepayments associated with the one-to-four family residential mortgage portfolio increased during fiscal 2018. Consequently, we began to portfolio our residential mortgage loan originations versus selling them in the secondary market during fiscal 2018 so as to maintain our loan diversification. We are however, once again looking to start selling residential mortgage loans in the secondary market

 

 

From time to time, we have purchased loan participations in commercial loans in which we are not the lead lender that are secured by real estate or other assets within the state of Maryland. With regard to all loan participations, we follow our customary loan underwriting and approval policies, and although we may be only approving and servicing a portion of the loan, we underwrite the loan request as if we had originated the loan to ensure cash flow and collateral are sufficient. At March 31, 2018, our loan participations totaled $18.7 million, or 4.8% of our total loan portfolio, the majority of which were in our primary market area. Of the $18.7 million in participations, only $32,000 are on nonaccrual at March 31, 2018 compared to $126,000 at March 31, 2017. We do not specifically look to loan participations as a means to increase loan volume; however, we do look at opportunities for participations, if presented, on a case by case basis.

 

In addition to loan participations, we may look to purchase pools or portfolios of loans from time-to-time to enhance growth and earnings potential. As with participations, we follow our customary loan underwriting standards when reviewing a particular pool of loans to determine if the purchase meets the Bank’s established credit guidelines. Based upon the number of loans within a particular pool, we may not be able to review the loan pool on a loan-by-loan basis, but will review the loan data requested on the entire pool, such as delinquency, credit scores, and appraised values and examine an adequate sample of the individual loans that make up the loan pool. During fiscal 2018 we purchased several pools of loans both within and outside of our market area. The loan pools totaled $54.6 million and consisted of $15.5 million in commercial lease loans, $19.8 million in recreational vehicles, and $19.3 million in one-to four-family residential mortgage loans. The loan purchases were funded through the use of cash and approximately $27.0 million in new FHLB borrowings. At the end of fiscal 2017 we also purchased $23.4 million of one-to-four family jumbo residential mortgage loans in two separate pools. These purchases were funded with approximately $12.5 million in cash and $11.5 million in borrowings from the FHLB. We entered into a cash flow hedge with respect to these borrowings to lock in a long-term cost of funds and minimize some of the interest rate risk associated with purchasing longer-term assets.

 

In May 2016, in connection with the acquisition of Fraternity Federal Savings and Loan, we acquired approximately $108.7 million in outstanding loans. As of March 31, 2018, the outstanding balance of those acquired from Fraternity totaled $79.4 million, or 20.4% of gross loans, of which $70,000 are on non-accrual. The remaining loans are performing as agreed under their current terms at March 31, 2018. In September 2015, prior to Fraternity, we acquired Fairmount Bank and approximately $53.6 million in outstanding loans, of which $32.1 million remain outstanding at March 31, 2018. The outstanding Fairmount loans make-up 8.2% of gross loans at March 31, 2018.

 

As noted earlier, we may sell residential mortgage loans into the secondary market at a premium. We also have the ability to sell certain pools of loans to increase liquidity, improve current earnings, divest of a concentration of loans, or manage problem credits. When selling a pool of loans, we analyze whether the sale makes sense from a profit standpoint and then look for several bids from various parties so as to maximize the price with respect to the sale. In fiscal 2017 we sold two pools of loans with a combined book value of $4.5 million. Both pools consisted primarily of one-to-four family non-owner occupied residential mortgage (“residential investor”) loans acquired in the Fairmount Bank acquisition. The financial performance of the residential investor loans sold was deteriorating and the underlying collateral did not provide sufficient support. Selling the pool of loans made the most sense with respect to managing these problem credits and reducing any additional losses going forward.    

 

 

The following table shows our loan origination, repayment and sale activities for the fiscal years indicated.

 

   

Year Ended March 31,

 
   

2018

   

2017

 
   

(In thousands)

 
                 

Total loans at beginning of year

  $ 339,000     $ 222,767  

Loans originated:

               

Real estate loans:

               

Residential mortgage loans:

               

One- to four-family residential

    16,788       21,837  

One- to four-family investor

    -       -  

Commercial construction

    5,654       4,759  

Commercial

    16,218       25,397  

Total real estate loans

    38,660       51,993  
                 

Commercial business loans

    8,125       10,117  

Consumer:

               

Home equity loans and lines of credit

    6,452       5,920  

Other consumer

    226       112  

Total consumer loans

    6,678       6,032  
                 

Total loans originated

    53,463       68,142  
                 

Fraternity Bank loans acquired

    -       108,804  

Residential loan pool purchases

    19,251       23,422  

SBA commercial loans purchased

    3,254          

Commercial lease loan pool purchased

    15,473       -  

Recreational vehicle loan pools purchased

    19,961       -  
                 

Deduct:

               

Principal repayments

    51,919       62,724  

Loans sold in the secondary market

    -       6,640  

Transferred to foreclosed real estate

    24       127  

Unused lines of credit

    9,238       14,644  
                 

Net loan activity

    50,221       116,233  
                 

Total loans at end of year

  $ 389,221     $ 339,000  

 

Loan Approval Procedures and Authority. Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures developed by management and approved by our board of directors. The loan approval process is intended to assess the borrower’s ability to repay the loan and the value of the collateral that will secure the loan. To assess the borrower’s ability to repay, our policies provide for the review of the borrower’s employment and credit history and information on the historical and projected income and expenses of the borrower. We will also evaluate a guarantor when a guarantee is provided as part of the loan.

 

Hamilton Bank’s policies and loan approval limits are established by our board of directors. Designated Bank officers and loan committee are assigned levels of loan authority. Having loan authority gives the individuals or committee the ability to authorize the extension of credit. Every extension of credit requires two signatures, one of which must have sufficient authority given the risk rating and aggregate exposure. The second approver cannot be an individual assigned less loan authority than the sponsor of the loan. Loan authority is recommended by the Chief Credit Officer and approved by the Loan Committee. All loan authorities are reviewed and confirmed annually by the Loan Committee. The Chief Credit Officer, and or the President may recommend interim changes to establish loan limits or assign loan authority for new officers. These interim changes shall be presented to the Loan Committee for approval at its next regularly scheduled meeting. The Chief Credit Officer and/or the President also have the authority to reduce or remove loan authority. Such changes in lending authority are to be reported to Loan Committee after the fact.

 

 

Securities Activities

 

General. Our investment policy is developed by management and approved by the board of directors. The objectives of the policy are to: (i) ensure adequate liquidity for loan demand and deposit fluctuations, and to allow us to alter our liquidity position to meet both day-to-day and long-term changes in assets and liabilities; (ii) manage interest rate risk in accordance with our interest rate risk policy; (iii) provide collateral for pledging requirements; (iv) maximize return on our investments; and (v) maintain a balance of high quality diversified investments to minimize risk.

 

Our Investment Committee, consisting of our President and Chief Executive Officer, our Chief Financial Officer, and Controller is responsible for implementing our investment policy, including approval of investment strategies and monitoring investment performance. The President and Chief Financial Officer are authorized to execute purchases or sales of securities. The board of directors regularly reviews our investment strategies and the market value of our investment portfolio.

 

We account for investment and mortgage-backed securities in accordance with Accounting Standards Codification (ASC) Topic 320, “Investments – Debt and Equity Securities.” ASC 320 requires that investments be categorized as held-to maturity, trading, or available for sale. Our securities are generally categorized as available-for-sale based on our need to meet daily liquidity needs and to take advantage of profits that may occur from time to time. At March 31, 2018, all of our securities were classified as available for sale.

 

Federally chartered savings institutions have authority to invest in various types of assets, including government-sponsored enterprise obligations, securities of various federal agencies, residential mortgage-backed securities, certain certificates of deposit of insured financial institutions, overnight and short-term loans to other banks, corporate debt instruments, debt instruments of municipalities and Fannie Mae and Freddie Mac equity securities. At March 31, 2018, our investment portfolio consisted almost entirely of securities and mortgage-backed securities issued by U.S. Government agencies, municipalities or U.S. Government-sponsored enterprises. At that same date we also held $2.0 million of corporate bonds, which equaled approximately 2.6% of our total investment securities based upon the fair value of such securities. The principal and interest on our mortgage-backed securities are guaranteed by the issuing entity.

 

At March 31, 2018, we owned just over $3.1 million in Federal Home Loan Bank of Atlanta stock. As a member of Federal Home Loan Bank of Atlanta, we are required to purchase stock in the Federal Home Loan Bank of Atlanta. At March 31, 2018, we had no investments in a single company or entity (other than an agency of the U.S. Government, a municipality or a U.S. Government-sponsored enterprise) that had an aggregate book value in excess of 10% of our equity.

 

In fiscal 2017, our investment balances increased through the acquisition of Fraternity and the build-up of excess cash. During fiscal 2018, however, our investment balances have decreased due to either calls or maturing bonds, normal principal pay downs on our mortgage backed securities, or the sale of certain securities. The proceeds from these reductions in securities have been used to fund loan activity and loan purchases, and to a lesser extent reinvested in investment securities.

 

 

Amortized Cost and Estimated Fair Value of Securities. The following table sets forth certain information regarding the amortized cost and estimated fair values of our securities as of the dates indicated.

 

   

At March 31,

 
   

2018

   

2017

   

2016

 
   

Amortized

Cost

   

Fair Value

   

Amortized

Cost

   

Fair Value

   

Amortized

Cost

   

Fair Value

 
   

(In thousands)

 

Mortgage-backed securities:

                                               

Fannie Mae

  $ 28,107     $ 27,066     $ 35,034     $ 34,473     $ 27,774     $ 27,712  

Ginnie Mae

    8,418       8,245       10,003       9,924       5,988       6,006  

Freddie Mac

    21,776       20,952       30,593       30,132       20,178       20,222  

Other

    2,778       2,762       6,365       6,304       -       -  

Total mortgage-backed securities

    61,079       59,025       81,995       80,833       53,940       53,940  

U.S. Government agencies

    2,753       2,719       3,525       3,512       10,519       10,533  

Municipal bonds

    12,435       11,706       17,096       16,168       4,061       4,112  

Corporate bonds

    2,000       1,954       2,000       1,916       2,000       1,899  
                                                 

Total

  $ 78,267     $ 75,404     $ 104,616     $ 102,429     $ 70,520     $ 70,484  

 

Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at March 31, 2018 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur.

 

   

At March 31, 2018

 
   

One Year or Less

   

More Than One Year Through Five Years

   

More Than Five Years Through Ten Years

   

More Than Ten Years

   

Total Securities

 
   

Amortized Cost

   

Weighted Average Yield

   

Amortized Cost

   

Weighted Average Yield

   

Amortized Cost

   

Weighted Average Yield

   

Amortized Cost

   

Weighted Average Yield

   

Amortized Cost

   

Estimated Fair Value

   

Weighted Average Yield

 
   

(Dollars in thousands)

 

Mortgage-backed securities:

                                                                                       

Fannie Mae

  $ 1,354       3.80 %   $ 2,570       3.15 %   $ 2,918       1.80 %   $ 21,265       2.58 %   $ 28,107     $ 27,066       2.61 %

Ginnie Mae

    -       -       13       1.77       26       4.19       8,379       2.76       8,418       8,245       2.76  

Freddie Mac

    -       -       828       1.99       4,277       2.20       16,671       2.58       21,776       20,952       2.48  

Other

    -       -       236       3.99       -       -       2,542       4.77       2,778       2,762       4.70  

Total mortgage-backed securities

    1,354       3.80 %     3,647       2.94 %     7,221       2.05 %     48,857       2.72 %     61,079       59,025       2.68 %

U.S. Government agencies

    2,009       1.74       744       2.14       -       -       -       -       2,753       2,719       1.85  

Municipal bonds

    -       -       488       3.54       1,579       3.33       10,368       3.45       12,435       11,706       3.44  

Corporate bonds

    -       -       -       -       2,000       3.36       -       -       2,000       1,954       3.36  
                                                                                         

Total

  $ 3,363       2.57 %   $ 4,879       2.88 %   $ 10,800       2.48 %   $ 59,225       2.85 %   $ 78,267     $ 75,404       2.79 %

 

 

Sources of Funds

 

General. Deposits, scheduled amortization and prepayments of loan principal, maturities and calls of securities and funds provided by operations are our primary sources of funds for use in lending, investing and for other general purposes. In addition, we may also borrow from the Federal Home Loan Bank of Atlanta (FHLB), as we did in fiscal 2018, to fund our loan growth both organically and through loan purchases. In fiscal 2016 and 2017 we acquired $10.5 million and $15.0 million of FHLB advances in the acquisitions of Fairmount and Fraternity of which $7.5 million and $5.0 million has matured or rolled over, respectively. As of March 31, 2018, there were $60.6 million in advances outstanding from the FHLB.

 

Deposits. We offer deposit products having a range of interest rates and terms. We currently offer statement savings accounts, interest and noninterest-bearing demand accounts, health savings accounts (HSA), money market accounts and certificates of deposit. We also offer the Certificate of Deposit Account Registry Service (CDARS) program to our customers. Our strategic plan includes a greater emphasis on developing commercial business activities, centered around both deposit and lending customer relationships.

 

Deposit flows are significantly influenced by general and local economic conditions, changes in prevailing interest rates, internal pricing decisions and competition. Our deposits are primarily obtained from areas surrounding our branch offices. In order to attract and retain deposits we rely on paying competitive interest rates and providing quality service.

 

Based on experience, we believe that our deposits are relatively stable. However, the ability to attract and maintain deposits and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions. At March 31, 2018, $247.0 million, or 61.0% of our total deposit accounts were certificates of deposit, of which $125.1 million had maturities of one year or less.

 

The following tables set forth the distribution of our average deposit accounts, by account type, for the years indicated. Our focus has been on growing our lower costing core deposits (considered all deposits other certificates of deposit) and relying less on originating certificates of deposit.

 

 

   

For the Years Ended March 31,

 
   

2018

   

2017

   

2016

 
   

Average Balance

   

Percent

   

Weighted Average

Rate

   

Average Balance

   

Percent

   

Weighted Average

Rate

   

Average Balance

   

Percent

   

Weighted Average

Rate

 
   

(Dollars in thousands)

 

Deposit type:

                                                                       

Certificates of deposit

  $ 242,949       60.3

%

    1.01

%

  $ 259,721       63.8

%

    0.89

%

  $ 172,064       64.9

%

    0.96

%

Money market

    60,589       15.1       0.53       61,568       15.1       0.37       35,124       13.3       0.17  

Statement savings

    43,408       10.8       0.12       43,527       10.7       0.15       25,843       9.8       0.10  

Noninterest bearing demand

    29,306       7.3       -       24,078       5.9       -       19,282       7.3       -  

NOW accounts

    26,094       6.5       0.03       18,333       4.5       0.03       12,447       4.7       0.03  
                                                                         

Total deposits

  $ 402,346       100.0

%

    0.70

%

  $ 407,227       100.0

%

    0.64

%

  $ 264,760       100.0

%

    0.66

%

 

 

The following table sets forth certificates of deposit classified by interest rate as of the dates indicated.

 

     

At March 31,

 
     

2018

   

2017

   

2016

 
     

(In thousands)

 

Interest Rate:

                         

Less than 2.00%

    $ 231,253     $ 241,121     $ 181,572  
2.00% to 2.99%       15,736       6,512       13,459  
3.00% to 3.99%       -       -       -  
4.00% to 4.99%       -       -       -  

5.00% and above

      -       -       -  
                           

Total

    $ 246,989     $ 247,633     $ 195,031  

 

Maturities of Certificates of Deposit Accounts. The following table sets forth the amount and maturities of certificates of deposit accounts at the dates indicated.

 

     

At March 31, 2018

 
     

Period to Maturity

 
     

Less Than

or Equal to

One Year

   

More Than

One to Two

Years

   

More Than

Two to

Three Years

   

More Than

Three Years

   

Total

   

Percent of

Total

 
     

(Dollars in thousands)

 

Interest Rate Range:

                                                 

Less than 2.00%

    $ 123,043     $ 59,427     $ 24,327     $ 24,456     $ 231,253       93.6

%

2.00% to 2.99%       2,032       4,803       2,133       6,768       15,736       6.4  
3.00% to 3.99%       -       -       -       -       -       -  
4.00% to 4.99%       -       -       -       -       -       -  
5.00% to 5.99%       -       -       -       -       -       -  

Total

    $ 125,075     $ 64,230     $ 26,460     $ 31,224     $ 246,989       100.0

%

 

As of March 31, 2018, the aggregate amount of outstanding certificates of deposit at Hamilton Bank in amounts greater than or equal to $100,000 was approximately $113.5 million. The following table presents the maturity of these certificates of deposit at such date.

 

Period to Maturity

 

At March 31, 2018

 
   

(In thousands)

 
         

Three months or less

  $ 14,020  

Over three through six months

    13,472  

Over six months through one year

    27,261  

Over one year to three years

    41,612  

Over three years

    17,108  
         

Total

  $ 113,473  

 

 

Borrowed Funds. As a member of the FHLB, Hamilton Bank is eligible to obtain advances upon the security of the Federal Home Loan Bank common stock owned and certain loan products, provided certain standards related to credit-worthiness have been met. Federal Home Loan Bank advances are available pursuant to several credit programs, each of which has its own interest rate and range of maturities. At March 31, 2018, based on available collateral, we had the ability to borrow approximately $68.3 million from the Federal Home Loan Bank of Atlanta. Beginning in the second half of fiscal 2015, we began to increase our borrowings from the FHLB as a means to fund our loan growth both organically and through loan purchases. Additionally, in fiscal 2016 and 2017 we acquired $10.5 million and $15.0 million of FHLB advances in the acquisitions of Fairmount and Fraternity of which $7.5 million and $5.0 million has matured or rolled over, respectively. As of March 31, 2018, there were $60.6 million in advances outstanding from the FHLB as presented in the table below.

 

   

March 31, 2018

 

March 31, 2017

 
   

Amount

   

Rate

 

Maturity Date

 

Amount

   

Rate

 

Maturity Date

 

FHLB advance

  5,550,000     1.84%  

6/11/2018

  5,550,000     0.94%  

6/9/2017

 

FHLB advance

  6,000,000     1.90%  

6/29/2018

  6,000,000     0.93%  

6/29/2017

 

FHLB advance

  1,000,000

*

  2.60%  

7/2/2018

  1,000,000

*

  4.24%  

7/31/2017

 

FHLB advance

  1,000,000

*

  3.05%  

7/3/2018

  5,000,000

**

  4.28%  

7/31/2017

 

FHLB advance

  5,000,000

**

  3.94%  

7/23/2018

  1,000,000

*

  4.01%  

8/21/2017

 

FHLB advance

  1,000,000     1.74%  

7/31/2018

  1,000,000

*

  0.91%  

8/31/2017

 

FHLB advance

  1,000,000     1.40%  

8/21/2018

  1,500,000

*

  3.23%  

11/24/2017

 

FHLB advance

  4,000,000     1.94%  

8/27/2018

  1,500,000

*

  3.40%  

11/27/2017

 

FHLB advance

  3,000,000     1.41%  

8/27/2018

  1,000,000

*

  2.60%  

7/2/2018

 

FHLB advance

  5,000,000

**

  3.38%  

9/19/2018

  1,000,000

*

  3.05%  

7/3/2018

 

FHLB advance

  1,000,000

*

  2.60%  

10/2/2018

  5,000,000

**

  3.94%  

7/23/2018

 

FHLB advance

  1,000,000     1.95%  

12/31/2018

  5,000,000

**

  3.38%  

9/19/2018

 

FHLB advance

  3,000,000     1.38%  

7/31/2019

  1,000,000

*

  2.60%  

10/2/2018

 

FHLB advance

  3,000,000     1.96%  

8/26/2019

  -            

FHLB advance

  3,000,000     1.59%  

8/26/2019

  -            

FHLB advance

  3,000,000     1.42%  

8/26/2019

  -            

FHLB advance

  1,500,000     1.95%  

11/25/2019

  -            

FHLB advance

  1,500,000     1.78%  

11/27/2019

  -            

FHLB advance

  3,000,000     2.31%  

2/3/2020

  -            

FHLB advance

  1,000,000     2.15%  

11/30/2020

  -            

FHLB advance

  2,000,000     2.28%  

12/28/2020

  -            

FHLB advance

  2,000,000     2.49%  

2/1/2021

  -            

FHLB advance

  3,000,000     1.48%  

8/25/2021

  -            
    60,550,000             35,550,000            

Premium on FHLB advances assumed

  122,140             547,650            

Total FHLB advances

  $60,672,140             $36,097,650            

 

* Advances assumed in the Fairmount Bancorp acquisition

** Advances assumed in the Fraternity Community Bancorp acquisition

 

 

Hamilton Bank may also borrow up to $5.0 million from a correspondent bank under a secured federal funds line of credit, and $1.0 million under an unsecured line of credit. We would be required to pledge investment securities to draw upon the secured line of credit. During fiscal 2018, there was nothing drawn upon under either line of credit.

 

Employees

 

As of March 31, 2018, we had 72 full-time equivalent employees. Our employees are not represented by any collective bargaining group. Management believes that we have a good working relationship with our employees.

 

Subsidiary Activities

 

Hamilton Bancorp has one direct subsidiary, Hamilton Bank. At March 31, 2018, Hamilton Bank has five wholly owned subsidiaries including 3110 FC, LLC, a Maryland limited liability company that was formed to hold other real estate owned acquired through foreclosure or deed-in-lieu of foreclosure. On May 13, 2016, in connection with the acquisition of Fraternity Community Bancorp, the Bank acquired four additional subsidiaries: 4819 Palmer Avenue LLC, a limited liability company organized under the laws of the State of Maryland ("4819 Palmer"); 764 Washington Boulevard LLC, a limited liability company organized under the laws of the State of Maryland ("764 WB LLC"); 764 Washington Boulevard II LLC, a limited liability company organized under the laws of the State of Maryland ("764 WB LLC II"); and Fraternity Insurance Agency, Inc., an inactive corporation organized under the laws of the State of Maryland. 4819 Palmer, 764 WB LLC and 764 WB LLC II were each formed by Fraternity Federal Savings & Loan Association to hold other real estate owned.

 

 

REGULATION AND SUPERVISION

 

General

 

In December 2017, the Bank converted its charter from a federal savings bank to a Maryland chartered commercial bank. As a Maryland-chartered commercial bank, Hamilton Bank is subject to the regulation, supervision, and control of the Maryland Office of the Commissioner of Financial Regulation (“MOCFR”). Hamilton Bank is subject to regulation, supervision and control of the FDIC, an agency of the federal government. The federal and state system of regulation and supervision establishes a comprehensive framework of activities in which Hamilton Bank may engage and is intended primarily for the protection of depositors and the FDIC’s Deposit Insurance Fund, and not for the protection of stockholders. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to matters such as their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. Hamilton Bank is also regulated to a lesser extent by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), which governs the reserves to be maintained against deposits and other matters. Hamilton Bank must comply with the consumer protection regulations issued by the Consumer Financial Protections Bureau. Hamilton Bank also is a member of and owns stock in the Federal Home Loan Bank of Atlanta, which is one of the twelve regional banks in the Federal Home Loan Bank System. The MOCFR and the FDIC examine Hamilton Bank and prepare reports for the consideration of its board of directors on any operating deficiencies. Hamilton Bank’s relationship with its depositors and borrowers is also regulated by federal and state law, especially in matters concerning the ownership of deposit accounts, the form and content of Hamilton Bank’s loan documents and certain consumer protection matters.

 

As a bank holding company, Hamilton Bancorp is subject to examination and supervision by, and is required to file certain reports with, the Federal Reserve Board. Hamilton Bancorp is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

 

Set forth below are certain material regulatory requirements that are applicable to Hamilton Bank and Hamilton Bancorp. This description of statutes and regulations is not intended to be a complete description of such statutes and regulations and their effects on Hamilton Bank and Hamilton Bancorp. Any change in these laws or regulations, whether by Congress or the applicable regulatory agencies, could have a material adverse impact on Hamilton Bancorp, Hamilton Bank and their operations.

 

Banking Regulation

 

General. The Bank is a Maryland commercial bank and its deposit accounts are insured by the Deposit Insurance Fund of the FDIC. The Bank is subject to supervision, examination and regulation by the MOCFR and the FDIC. 

 

The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”) as an independent bureau of the Federal Reserve System. The CFPB assumed responsibility for implementing federal consumer financial protection and fair lending laws and regulations, a function formerly handled by federal bank regulatory agencies. However, institutions of less than $10 billion, such as the Bank, continue to be examined for compliance with consumer protection or fair lending laws and regulations by, and be subject to enforcement authority of their primary federal regulators.

 

Capital Requirements. Under the FDIC’s regulations, federally insured state-chartered banks that are not members of the Federal Reserve System (“state non-member banks”), such as Hamilton Bank, are required to comply with minimum leverage capital requirements. Federal regulations require federally insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8%, and a Tier 1 capital to total assets leverage ratio of 4%. In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in. It is currently at 1.875%, and will be fully phased in at 2.5% on January 1, 2019.

 

 

In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. In assessing an institution’s capital adequacy, the FDIC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions if it deems necessary.

 

Legislation enacted in May 2018 requires the federal banking agencies, including the FDIC, to establish for banks with assets of less than $10 billion of assets a “community bank leverage ratio” of 8 to 10%. Banks with capital meeting the specified requirement will be considered to meet the applicable regulatory capital requirements including the risk-based requirements. The establishment of the community bank leverage ratio is subject to notice and comment rulemaking by the federal regulators.

 

Prompt Corrective Regulatory Action. Federal law establishes a system of prompt corrective action to resolve the problems of undercapitalized institutions. The FDIC has adopted regulations to implement the prompt corrective action legislation. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.

 

“Undercapitalized” banks must adhere to growth, capital distribution (including dividend) and other limitations and are required to submit a capital restoration plan. A bank’s compliance with such a plan must be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional measures, including, but not limited to, a required sale of sufficient voting stock to become adequately capitalized, a requirement to reduce total assets, cessation of taking deposits from correspondent banks, the dismissal of directors or officers and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.

 

At March 31, 2018, Hamilton Bank’s capital exceeded all applicable regulatory requirements.

 

Loans to One Borrower. Under Maryland law, the maximum amount that the Bank is generally permitted to lend to any one borrower and his or her related interests may generally not exceed 10% of the Bank’s unimpaired capital and surplus, which is defined to include the Bank’s capital, surplus, retained earnings and 50% of its reserve for possible loan losses. By interpretive ruling of the Maryland Commissioner, Maryland banks have the option of lending up to the amount that would be permissible for a national bank, which is generally 15% of unimpaired capital and surplus (defined to include a bank’s total capital for regulatory capital purposes plus any loan loss allowances not included in regulatory capital). Under this formula, the Bank would have been permitted to lend up to $6.3 million to any one borrower at March 31, 2018. As of March 31, 2018, Hamilton Bank was in compliance with the loans to one borrower limitations.

 

Branching. Maryland law provides that, with the approval of the Commissioner, Maryland banks may establish branches within Maryland and may establish branches in other states by any means permitted by the laws of such state or by federal law. Federal law permits well capitalized and well managed bank holding companies to acquire banks in any state, subject to Federal Reserve Board approval, certain concentration limits and other specified conditions. Interstate mergers of banks are also authorized, subject to regulatory approval and other specified conditions. In addition, banks are permitted to establish de novo branches on an interstate basis to the extent that branching is authorized by the law of the host state for the banks chartered by that state.

 

 

Insurance of Deposit Accounts. The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. The deposit insurance per account owner is currently $250,000.

 

The FDIC charges insured depository institutions premiums to maintain the Deposit Insurance Fund. Assessments for most institutions are based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of failure within three years. The assessment range (inclusive of possible adjustments) for most banks and savings associations is 1.5 basis points to 30 basis points of total assets less tangible equity.

 

In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in by 2019. For the third calendar quarter of fiscal 2018, the annualized FICO assessment will be equal to 0.32 of a basis point of total assets less tangible capital.

 

Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.

 

Dividends. Maryland banks may only pay cash dividends from undivided profits or, with the prior approval of the Commissioner, their surplus in excess of 100% of required capital stock. Federal law provides that an insured depository institution may not make any dividend, including paying a dividend, if after paying such dividend, the institution would fail to satisfy any applicable regulatory capital requirement. In addition, Hamilton Bank’s ability to pay dividends is limited if Hamilton Bank does not have the capital conservation buffer required by the new capital rules, which may limit the ability of Hamilton Bancorp to pay dividends to its stockholders. See — “Capital Requirements”.

 

Transactions with Related Parties. A state nonmember bank, such as the Bank, is limited in the amount of “covered transactions” with any affiliate, including Hamilton Bancorp. Covered transactions must be on terms substantially the same, or at least as favorable, to the Bank as those provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar types of transactions. Certain covered transactions, such as loans to affiliates, must meet specified collateral requirements.

 

Loans to directors, executive officers and principal stockholders of a state nonmember bank must be made on substantially the same terms as those prevailing for comparable transactions with persons who are not executive officers, directors, principal stockholders or employees of the bank. Loans to any executive officer, director and principal stockholder are subject to additional restriction, including certain board of director’s approval requirements and specified limits.

 

Enforcement. The Commissioner has extensive enforcement authority over Maryland banks. This includes the ability to issue cease and desist orders and civil money penalties and to remove directors or officers. The Commissioner may also take possession of a Maryland bank whose capital is impaired and seek to have a receiver appointed by a court.

 

The FDIC has primary federal enforcement responsibility over state banks under its jurisdiction, including the authority to bring enforcement action against all “institution-related parties,” including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an institution. Formal enforcement action may range from the issuance of capital directive or a cease and desist order for the removal of officers and/or directors, receivership, conservatorship or termination of deposit insurance. Civil money penalties cover a wide range of violations and actions, and range up to $25,000 per day or even up to $1 million per day (in the most egregious cases). Criminal penalties for most financial institution crimes include fines of up to $1 million and imprisonment for up to 30 years.

 

 

Community Reinvestment Act. Under the Community Reinvestment Act (“CRA”), a bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate-income neighborhoods. The CRA requires the FDIC to provide a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. Since converting our charter, the FDIC has not conducted a CRA examination. Our latest CRA examination, dated April 2015, was performed by the Office of the Comptroller of the Currency (“OCC”) and was rated “Satisfactory.”

 

Federal Home Loan Bank System. Hamilton Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the Federal Home Loan Bank of Atlanta, Hamilton Bank is required to acquire and hold shares of capital stock in the Federal Home Loan Bank. As of March 31, 2018, Hamilton Bank was in compliance with this requirement.

 

Other Regulations

 

Interest and other charges collected or contracted for by Hamilton Bank are subject to state usury laws and federal laws concerning interest rates. Hamilton Bank’s operations are also subject to federal laws applicable to credit transactions. In addition, the Consumer Financial Protection Bureau issues regulations and standards under federal consumer protection laws that affect consumer businesses. These include regulations setting “ability to repay” and “qualified mortgage” standards for residential mortgage loans and mortgage loan servicing and originator compensation standards. Hamilton Bank is evaluating recent regulations and proposals, and devotes significant compliance, legal and operational resources to compliance with consumer protection regulations and standards.

 

Holding Company Regulation

 

General. As a bank holding company, Hamilton Bancorp is subject to comprehensive regulation, examination and supervision by the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended (the “BHCA”), and the regulations of the Federal Reserve Board. The Federal Reserve Board also has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders, and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices.

 

Permissible Activities. A bank holding company is limited in its activities to banking, managing or controlling banks, or providing services for its subsidiaries. Other permitted non-bank activities have been identified as closely related to banking. Bank holding companies that are “well capitalized” and “well managed” and whose financial institution subsidiaries have satisfactory Community Reinvestment Act records can elect to become “financial holding companies,” which are permitted to engage in a broader range of financial activities than are permitted to bank holding companies. Hamilton Bancorp has not opted to become a financial holding company.

 

The Federal Reserve Board has the power to order a holding company or its subsidiaries to terminate any activity, or to terminate its ownership or control of any subsidiary, when it has reasonable cause to believe that the continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of that holding company.

 

Capital. Bank holding companies are generally required to maintain on a consolidated basis, specified minimum ratios of capital to total assets and capital to risk-weighted assets. However, these requirements generally apply to bank holding companies with consolidated assets of $1 billion or more, and do not apply to Hamilton Bancorp. Recent legislation has increased to $3 billion of assets the threshold for the applicability of consolidated holding company capital requirements, subject the promulgation of regulations by the Federal Reserve board.   

 

Source of Strength. The Dodd-Frank Act extended the “source of strength” doctrine to bank holding companies. The Federal Reserve Board has issued regulations requiring that all bank holding companies serve as a source of managerial and financial strength to their subsidiary bank by providing capital, liquidity and other support in times of financial stress.

 

 

Dividends. The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate or earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The policy statement also states that a bank holding company should inform the Federal Reserve Board supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred stock if the bank holding company is experiencing financial weaknesses or if the repurchase or redemption would result in a net reduction, as of the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies may affect the ability of Hamilton Bancorp to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.

 

Acquisition. Under the Federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a company), or group acting in concert, seeks to acquire direct or indirect “control” of a bank holding company. Under certain circumstances, a change of control may occur, and prior notice is required, upon the acquisition of 10% or more of the company’s outstanding voting stock, unless the Federal Reserve Board has found that the acquisition will not result in control of the company. A change in control definitively occurs upon the acquisition of 25% or more of the company’s outstanding voting stock. Under the Change in Bank Control Act, the Federal Reserve Board generally has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition.

 

Federal Securities Laws

 

Hamilton Bancorp’s common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Hamilton Bancorp is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

 

 

 

ITEM 1A.

RISK FACTORS

 

Our commercial real estate loans increase our credit risk.

 

Beginning in 2009, we changed our business strategy with respect to organic growth to become less reliant upon one-to-four family lending and emphasize commercial lending; in particularly commercial real estate lending. To support this strategy, we hired additional commercial lenders, as well as enhanced our back-office monitoring and loan administration with additional personnel. We have also participated in commercial real estate loans originated by other institutions in the past. At March 31, 2018, commercial real estate loans totaled $112.2 million, or 28.8% of total loans. This increase includes a combined $16.0 million of commercial real estate loans acquired in our acquisition of Fairmount Bancorp, Inc. in September 2015 and Fraternity Community Bancorp, Inc. in May 2016.

 

Commercial real estate loans generally have more risk than the one-to-four family residential real estate loans that we originate. Because the repayment of commercial real estate loans depends on the successful management and operation of the borrower’s properties or businesses, repayment of such loans can be affected by adverse conditions in the local real estate market or economy. Commercial real estate loans may also involve relatively large loan balances to individual borrowers or groups of related borrowers. In addition, a downturn in the real estate market or the local economy could adversely affect the value of properties securing the loan or the revenues from the borrower’s business, thereby increasing the risk of nonperforming loans.

 

Given our increase in commercial real estate lending, and that a significant portion of our portfolio in commercial real estate loans is not seasoned, we have a limited loss history with which to measure the level of risk in our commercial real estate loan portfolio. Delinquencies and loan losses related to our commercial real estate loans could increase more than we have provided for in our allowance for loan losses as we continue to emphasize this type of lending activity.

 

 

A portion of our one-to-four family residential mortgage loans is comprised of non-owner occupied (investor) properties, which increases the credit risk on this portion of our loan portfolio.

 

A portion of our loan portfolio is comprised of loans secured by non-owner occupied one-to-four family properties, which we refer to as “investor loans”. At March 31, 2018, $26.7 million of our one-to-four family residential mortgage loans in our portfolio, or 6.9% of total loans, were comprised of investor loans. We acquired approximately $9.2 million of investor loans in connection with our acquisition of Fraternity Community Bancorp, Inc. in May 2016 and another $17.1 million with respect to our acquisition of Fairmount Bancorp, Inc. in September 2015. There is a greater credit risk inherent in non-owner-occupied properties, than in owner-occupied since the repayment of these loans may depend, in part, on the successful management of the property and/or the borrower’s ability to lease the unit or units of the property. A downturn in the real estate market or the local economy could adversely affect the value of properties securing these loans or the revenues derived from these properties, which could affect the borrower’s ability to repay the loan.

 

In addition, we have limited experience with the performance of the investor loans acquired in connection with the acquisition of Fraternity Community Bancorp, Inc. and Fairmount Bancorp, Inc. See — “We have relatively limited experience with the performance of loans acquired in our recent acquisitions of Fraternity Community Bancorp, Inc. and Fairmount Bancorp, Inc. Certain of our estimates related to accounting for acquired loans may differ from actual results" below regarding risks associated with our recent acquisition of these and other loans.

 

We have relatively limited experience with the performance of loans acquired in our acquisitions of Fraternity Community Bancorp, Inc. and Fairmount Bancorp, Inc., and our purchase of several pools of loans acquired in March 2017 and throughout fiscal 2018. Certain of our estimates related to accounting for acquired loans may differ from actual results.

 

We acquired Fraternity Community Bancorp, Inc. in May 2016, and Fairmount Bancorp, Inc. in September 2015. In addition, in March 2017 we purchased $23.4 million of one-to-four family jumbo residential mortgage loans in two separate pools. In fiscal 2018 we continued to purchase various pools of loans, including $15.5 million in commercial lease loans, $19.9 million in recreational vehicles (“RVs”), and $19.2 million in residential mortgage loans. It is difficult to assess the future performance of loans recently added to our portfolio as part of these acquisitions and/or purchases because our relatively limited experience with such loans does not provide us with a significant history from which to judge future collectability.

 

These loans may experience higher delinquency or charge-off levels than our historical loan portfolio experience, which could adversely affect our future performance.

 

If the estimates we have made regarding the performance of loans we have acquired or purchased are inadequate, the fair value estimates may exceed the actual collectability of the balances, and this may result in the related loans being considered by us as impaired, which would result in a reduction in interest income. The tangible book value we measure is based in part on these estimates, and if fair value estimates differ from actual collectability, then subsequent earnings may also differ from original estimates. Measures of tangible book value and earnings impact of business combinations are frequently used in evaluating the merits and value of business combinations. Numerous assumptions and estimates are integral to purchased loan accounting, and actual results could be different from prior estimates.

 

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.

 

We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover probable incurred losses in our loan portfolio, resulting in additions to our allowance for loan losses. Additions to the allowance for loan losses are established through the provision for losses on loans which is charged against income.

 

 

The unseasoned nature of a significant portion of our commercial real estate loans and commercial business loans, along with various purchases of loan pools, increases the risk that our allowance may be insufficient to absorb losses without significant additional provisions.

 

In addition, if the loans we have acquired in our recent acquisitions of Fraternity Community Bancorp, Inc. and Fairmount Bancorp, Inc. do not perform as we have estimated, our allowance for loan losses may not be adequate. See — “We have relatively limited experience with the performance of loans acquired in our recent acquisitions of Fraternity Community Bancorp, Inc. and Fairmount Bancorp, Inc., and our purchase of several pools of loans acquired in March 2017 and throughout fiscal 2018. Certain of our estimates related to accounting for acquired loans may differ from actual results," above.

 

Significant increases to our allowance materially decrease our net income. In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities might have a material adverse effect on our financial condition and results of operations.

 

The Financial Accounting Standards Board has adopted a new accounting standard that will become effective for us on April 1, 2020. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses. This will change the current method of providing allowances for loan losses that are probable, which would likely require us to increase our allowance for loan losses, and to greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for loan losses.

 

We have a significant number of loans secured by real estate, and a downturn in the local real estate market could negatively impact our profitability.

 

At March 31, 2018, approximately $309.5 million, or 79.5%, of our total loan portfolio was secured by residential or commercial real estate, almost all of which is located in our primary lending market. Future declines in the real estate values in lending markets could significantly impair the value of the particular collateral securing our loans and our ability to sell the collateral upon foreclosure for an amount necessary to satisfy the borrower’s obligations to us. This could require increasing our allowance for loan losses to address the decrease in the value of the real estate securing our loans, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

 

Our recent acquisitions of Fairmount Bancorp, Inc. and Fraternity Community Bancorp, Inc. involve integrations and other risks.

 

Acquisitions involve a number of risks and challenges including: our ability to integrate the branches and operations we acquire, and the associated internal controls and regulatory functions, into our current operations; our ability to limit the outflow of deposits held by our new customers in the acquired branches and to successfully retain and manage the loans we acquire; our ability to attract new deposits and to generate new interest-earning assets in geographic areas we have not previously served. Additionally, no assurance can be given that the operation of acquired branches would not adversely affect our existing profitability; that we would be able to achieve results in the future similar to those achieved by our existing banking business; that we would be able to compete effectively in the market areas served by acquired branches; or that we would be able to manage any growth resulting from the transaction effectively. We face the additional risk that the anticipated benefits of the acquisition may not be realized fully or at all, or within the time period expected.

 

 

Historically low interest rates and/or changes in interest rates may adversely affect our net interest income and profitability.

 

While it has was the policy of the Federal Reserve Board to maintain interest rates at historically low levels over the past several years through its targeted federal funds rate and the purchase of mortgage-backed securities, the Federal Reserve Board raised the federal funds rate beginning in December 2015. As a general matter, our net interest income was adversely impacted by the low rate environment that existed over the past several years, however, at this point it is uncertain what impact the recent rate increases might have on our net interest income (the difference between interest income we earn on our assets and the interest expense we pay on our liabilities). It is also uncertain when the Federal Reserve Board might raise or lower the federal funds rate in the future. If interest rates continue to rise, it may negatively impact the housing markets and the U.S. economic recovery. If rates remain relatively low it could create deflationary pressures, which while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

 

Our profitability depends substantially on our net interest income, which is the difference between the interest income earned on our interest-earning assets and the interest expense paid on our interest-bearing liabilities. Increases in interest rates may decrease loan demand (which would also decrease our ability to generate noninterest income through the sale of loans into the secondary market and related fees for continuing to service those sold loans, particularly SBA loans sold) and make it more difficult for borrowers to repay adjustable-rate loans. In addition, as market interest rates rise, we will have competitive pressures to increase the rates we pay on deposits. Because interest rates we pay on our deposits could be expected to increase more quickly than the increase in the yields we earn on our interest-earning assets, our net interest income would be adversely affected.

 

We also are subject to reinvestment risk associated with changes in interest rates. Changes in interest rates may affect the average life of loans and mortgage-related securities. Decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the interest rates on existing loans and securities.

 

Interest rate shifts may reduce net interest income and otherwise negatively impact our financial condition and results of operations.

 

The majority of our banking assets are monetary in nature and subject to risk from changes in interest rates. Like most community banks, our earnings and cash flows depend to a great extent upon the level of our net interest income, or the difference between the interest income we earn on loans, investments and other interest-earning assets, and the interest we pay on interest-bearing liabilities, such as deposits and borrowings. Changes in interest rates can increase or decrease our net interest income, because different types of assets and liabilities may react differently, and at different times, to market interest rate changes.

 

When interest-bearing liabilities mature or reprice more quickly, or to a greater degree than interest-earning assets in a period, an increase in interest rates could reduce net interest income. Similarly, when interest-earning assets mature or reprice more quickly, or to a greater degree than interest-bearing liabilities, falling interest rates could reduce net interest income. An increase in interest rates may, among other things, reduce the demand for loans and our ability to originate loans and decrease loan repayment rates. Conversely, a decrease in the general level of interest rates may affect us through, among other things, increased prepayments on our loan portfolio and increased competition for deposits. Accordingly, changes in the level of market interest rates affect our net yield on interest-earning assets, loan origination volume and our overall results. Although our asset-liability management strategy is designed to control and mitigate exposure to the risks related to changes in market interest rates, those rates are affected by many factors outside of our control, including governmental monetary policies, inflation, deflation, recession, changes in unemployment, the money supply, international disorder and instability in domestic and foreign financial markets.

 

 

Rising interest rates could make it more difficult for us to obtain funding at attractive rates of interest to fund our interest earning assets.

 

Rising rates of interest may force us to pay higher rates of interest on deposits and/or seek other funding sources that may require us to pay higher rates of interest. At March 31, 2018, 87.0% of our funding came from deposits, of which 38.9% were “core” deposits. If interest rates continue to rise, we will need to offer higher rates of interest on our interest-bearing deposits. We have recently experienced a significant increase in competition for deposits in our market. In addition, we may experience a decrease in the amount of deposits we are able to attract, as our customers seek higher rate of return through other investments. Replacing funds due to the loss of deposits may require that we pay higher rates of interest. An increase in the rates we pay for funding will have a negative impact on our profitability.

 

We could potentially recognize goodwill impairment charges.

 

As of March 31, 2018, we had $8.6 million of goodwill related to acquisitions.  Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.  Impairment testing requires that the fair value of the Company be compared to the carrying amount of the Company’s net assets, including goodwill.  If the fair value of the Company is less than book value, an expense may be required to write-down the related goodwill to the proper carrying value.  We test for impairment of goodwill during December of each year.  There could be a requirement to evaluate the recoverability of goodwill prior to or after the normal annual assessment if there is a disruption in our business, unexpected significant declines in our operating results, or sustained market capitalization declines. These types of events and the resulting analysis could result in goodwill impairment charges in the future, which would adversely affect the results of operations. As a result of impairment testing performed during December 2017 and a subsequent analysis resulting from the significant decline in operating income during the fourth quarter of fiscal 2018 due to the recording of a valuation allowance on the Company’s deferred tax assets, it was determined that the fair value of our only reporting unit exceeded the carrying value of its assets and liabilities. Therefore, goodwill was not considered impaired at March 31, 2018. 

 

Strong competition within our market areas may limit our growth and profitability.

 

Competition in the banking and financial services industry within our market area is intense. In our market area we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors have substantially greater resources and lending limits than we have and offer certain services that we do not or cannot provide. Our profitability depends upon our continued ability to successfully compete in our market area. The greater resources and broader range of deposit and loan products offered by our competition may limit our ability to increase our interest-earning assets and profitability. We expect competition to remain intense in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to entry, allowed banks to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Competition for deposits and the origination of loans could limit our ability to successfully implement our business plan, and could adversely affect our results of operations in the future.

 

Competition in the banking and financial services industry is coming not only from local markets but from technology oriented financial services (“FinTech”) companies, which are subject to limited regulation. They offer user friendly front-end, quick turnaround times for loans and other benefits. While Hamilton is evaluating FinTech companies with the possibility of developing relationships for efficiency in processing and/or as a source of loans and other business, we cannot limit the possibility that our customers or future prospects will work directly with a FinTech company instead. This could impact our growth and profitability going forward.

 

We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations.

 

We are subject to extensive regulation, supervision and examination by the Federal Reserve Board and the Federal Deposit Insurance Corporation, our primary federal regulators. Such regulation and supervision governs the activities in which an institution and its holding company may engage, and are intended primarily for the protection of the insurance fund and the depositors and borrowers of Hamilton Bank rather than for holders of our common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations.

 

 

Income from secondary mortgage market operations is volatile, and we may incur losses or charges with respect to our secondary mortgage market operations which would negatively affect our earnings.

 

We may sell in the secondary market a portion of residential mortgage loans that we originate with terms over 10 years on a servicing released basis, earning noninterest income in the form of gains on sale. When interest rates rise, the demand for mortgage loans tends to fall and may reduce the number of loans available for sale. In addition to interest rate levels, weak or deteriorating economic conditions also tend to reduce loan demand. We do sell loans in the secondary market with recourse based upon delinquency or breach of customary representations and warranties we provide to the buyers. If we breach those representations and warranties, the buyers can require us to repurchase the loans and we may incur a loss on the repurchase.

 

Our recent investments in municipal debt securities expose us to additional credit risks.

 

The composition and allocation of our investment portfolio has historically emphasized U.S. agency mortgage-backed securities and U.S. agency debentures. While such assets still make up the great majority of our investment portfolio at March 31, 2018, we have recently increased the amount of bank-qualified municipal obligations in our portfolio. Unlike U.S. agency securities, the municipal debt securities acquired are backed only by the credit of their issuers and not guaranteed by the federal government. These investments expose us to a greater degree of credit risk than U.S. agency securities. Any decline in the credit quality of these securities exposes us to the risk that the market value of the securities could decrease which may require us to write down their value on our books and could lead to a possible default in payment.

 

Legislative and regulatory initiatives may affect our business activities and increase operating costs.

 

The potential exists for additional federal or state laws and regulations regarding lending, funding practices, capital, and liquidity standards. Bank regulatory agencies are expected to be more active in responding to concerns and trends identified in examinations, including the expected issuance of many formal enforcement orders. In addition, new laws, regulations, and other regulatory changes may also increase our compliance costs and affect our business and operations. Moreover, the FDIC sets the cost of our FDIC insurance premiums, which can affect our profitability.

 

The Dodd-Frank Act made extensive changes in the regulation of insured depository institutions. The Dodd-Frank Act, among other things, impacted assessments for deposit insurance, capital requirements, risk retention on the origination of certain securitized loans and debit card interchange fees. It also introduced a number of reforms related to mortgage originations. There is a significant possibility that the Dodd-Frank Act will, at a minimum, result in continued increases in regulatory burden, compliance costs and interest expense.

 

New laws, regulations, and other regulatory changes, along with negative developments in the financial industry and the domestic and international credit markets, may significantly affect the markets in which we do business, the markets for and value of our loans and investments, and our ongoing operations, costs and profitability. For more information, see “Regulation and Supervision” in Item 1 of this Annual Report.

 

We may incur fines, penalties and other negative consequences from regulatory violations, possibly even inadvertent or unintentional violations.

 

We maintain systems and procedures designed to ensure that we comply with applicable laws and regulations. However, some legal and regulatory frameworks provide for the imposition of fines or penalties for noncompliance even though the noncompliance was inadvertent or unintentional and even though there was in place at the time systems and procedures designed to ensure compliance. There may be negative consequences resulting from a finding of noncompliance, including restrictions on certain activities. Such a finding may also damage our reputation as described above and could restrict the ability of institutional investment managers to invest in our securities.

 

 

Systems failures, interruptions or breaches of security could have an adverse effect on our financial condition and results of operations.

 

We are subject to certain operational risks, including, but not limited to, data processing system failures and errors, inadequate or failed internal processes, customer or employee fraud and catastrophic failures resulting from terrorist acts or natural disasters. We depend upon data processing, software, communication, and information exchange on a variety of computing platforms and networks and over the Internet, and we rely on the services of a variety of vendors to meet our data processing and communication needs. Despite instituted safeguards, we cannot be certain that all of our systems are entirely free from vulnerability to attack or other technological difficulties or failures. Information security risks have increased significantly due to the use of online, telephone and mobile banking channels by clients and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties. Our technologies, systems, networks and our clients’ devices have been subject to, and are likely to continue to be the target of, cyber-attacks, computer viruses, malicious code, phishing attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our clients’ confidential, proprietary and other information, the theft of client assets through fraudulent transactions or disruption of our or our clients’ or other third parties’ business operations. If information security is breached or other technology difficulties or failures occur, information may be lost or misappropriated, services and operations may be interrupted and we could be exposed to claims from customers. While we maintain a system of internal controls and procedures, any of these results could have a material adverse effect on our business, financial condition, results of operations or liquidity.

 

Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities.

 

We are subject to various privacy, information security and data protection laws, including requirements concerning security breach notification, and we could be negatively impacted by these laws. For example, our business is subject to the Gramm-Leach-Bliley Act which, among other things: (i) imposes certain limitations on our ability to share nonpublic personal information about our customers with nonaffiliated third parties; (ii) requires that we provide certain disclosures to customers about our information collection, sharing and security practices and afford customers the right to “opt out” of any information sharing by us with nonaffiliated third parties (with certain exceptions) and (iii) requires we develop, implement and maintain a written comprehensive information security program containing safeguards appropriate based on our size and complexity, the nature and scope of our activities, and the sensitivity of customer information we process, as well as plans for responding to data security breaches. Various state and federal banking regulators and states have also enacted data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach. Moreover, legislators and regulators in the United States are increasingly adopting or revising privacy, information security and data protection laws that potentially could have a significant impact on our current and planned privacy, data protection and information security-related practices, our collection, use, sharing, retention and safeguarding of consumer or employee information, and some of our current or planned business activities. This could also increase our costs of compliance and business operations and could reduce income from certain business initiatives. This includes increased privacy-related enforcement activity at the federal level, by the Federal Trade Commission, as well as at the state level, such as with regard to mobile applications.

 

Compliance with current or future privacy, data protection and information security laws (including those regarding security breach notification) affecting customer or employee data to which we are subject could result in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could have a material adverse effect on our business, financial conditions or results of operations. Our failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory or governmental investigations or actions, litigation, fines, sanctions and damage to our reputation, which could have a material adverse effect on our business, financial condition or results of operations.

 

We rely on other companies to provide key components of our business infrastructure.

 

Third-party vendors provide key components of our business infrastructure such as internet connections, network access and core application processing. While we have selected these third-party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our customers or otherwise conduct our business efficiently and effectively. Replacing these third-party vendors could also entail significant delay and expense.

 

 

If our risk management framework does not effectively identify or mitigate our risks, we could suffer losses.

 

Our risk management framework seeks to mitigate risk and appropriately balance risk and return. We have established processes and procedures intended to identify, measure, monitor and report the types of risk to which we are subject, including credit risk, operations risk, compliance risk, reputation risk, strategic risk, market risk, liquidity risk, and information technology risk. We seek to monitor and control our risk exposure through a framework of policies, procedures and reporting requirements. Management of our risks in some cases depends upon the use of analytical and/or forecasting models. If the models used to mitigate these risks are inadequate, we may incur losses. In addition, there may be risks that exist, or that develop in the future, that we have not appropriately anticipated, identified or mitigated. If our risk management framework does not effectively identify or mitigate our risks, we could suffer unexpected losses and could be materially adversely affected.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.

PROPERTIES

 

We conduct our business through our executive and administrative office located in Towson, Maryland, which also serves as a full-service banking office, and six other full-service branch offices located in Baltimore City and the Maryland counties of Baltimore, Howard and Anne Arundel. The aggregate net book value of our premises, including leasehold improvements, was $3.4 million at March 31, 2018. Our facilities are adequate and suitable for our operations as conducted by us. The following table sets forth certain information with respect to our offices, including lease expiration dates for leased properties.

 

Location

 

Leased or

Owned

 

Year Opened/ Acquired

 

Lease Expiration

Date

 
               

Executive and Administrative Office:

             
               

501 Fairmount Ave. Suite 200

Towson, Maryland 21286

 

Leased

 

2011

 

November 30, 2021

 
               

Branches:

             
               

5600 Harford Road

Baltimore, Maryland 21214

 

Owned

 

1937

 

 
               

8108 Jumpers Hole Road

Pasadena, Maryland 21122

 

Owned

 

2009

 

 
               

8216 Philadelphia Road

Rosedale, Maryland 21237

 

Owned

 

2015

 

 
               

788 Washington Boulevard

Baltimore City, Maryland 21230 (2)

 

Leased

 

2018

 

August 31, 2022

 
               

9050 National Pike

Ellicott City, Maryland 21042 (3)

 

Leased

 

2017

 

August 31, 2023

 
               

10283 York Road

Cockeysville, Maryland 21030 (1)

 

Leased

 

2016

 

Jan. 31, 2020

 

______________________

(1)

Property was acquired in the Fraternity Community Bancorp acquisition on May 13, 2016.

(2)

This branch was opened in March 2018. The former branch located at 764 Washington Boulevard in Baltimore City, located on the same block as the new location, was acquired in the Fraternity acquisition and operated as Fraternity’s administrative offices, as well as a full-service branch. We sold the former property in December 2017.

(3)

This branch was opened in July 2017 and is less than a mile from the former branch that was also leased. The former branch location at 8460 Baltimore National Pike in Ellicott City, Maryland was closed. The lessor decided to reconstruct this property for an alternative use and we were required to relocate.

 

 

ITEM 3.

LEGAL PROCEEDINGS

 

Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market and Dividend Information.

 

The Company’s common stock is listed on the NASDAQ Capital Market (“NASDAQ”) under the trading symbol “HBK.” The Company completed its initial public offering on October 10, 2012, and its stock commenced trading on the same day.

 

The following table sets forth the high and low sales prices of the Company’s common stock as reported by NASDAQ for the periods indicated. The Company has not paid any dividends to its stockholders to date. See “Dividends” below.

 

   

Price Range Per Share

 

Fiscal 2018:

 

High

   

Low

 
                 

Fourth Quarter

  $ 15.87     $ 14.25  

Third Quarter

    15.40       14.25  

Second Quarter

    15.05       14.05  

First Quarter

    15.25       14.45  

 

   

Price Range Per Share

 

Fiscal 2017:

 

High

   

Low

 
                 

Fourth Quarter

  $ 14.55     $ 14.28  

Third Quarter

    14.50       13.50  

Second Quarter

    14.19       13.33  

First Quarter

    14.25       13.30  

 

Holders.

 

As of June 29, 2018, there were approximately 134 holders of record of the Company’s common stock.

 

 

Dividends.

 

The Company has not paid any dividends to its shareholders to date. The payment of dividends in the future will depend upon a number of factors, including capital requirements, the Company’s financial condition and results of operations, tax considerations, statutory and regulatory limitations and general economic conditions. In addition, the Company’s ability to pay dividends is dependent on dividends received from Hamilton Bank. For more information regarding restrictions on the payment of cash dividends by the Company and by Hamilton Bank, see “Business—Regulation and Supervision—Holding Company Regulation—Dividends”, “Business— Regulation and Supervision—Federal Savings Institution Regulation—Dividend Limitations” and Note 15 to the Consolidated Financial Statements included in this Annual Report. No assurances can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in the future.

 

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities.

 

None.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers. 

 

There were no shares repurchased by the Company during fiscal 2018.

 

 

ITEM 6.

SELECTED FINANCIAL DATA

 

The following tables set forth selected historical financial and other data of Hamilton Bancorp, Inc. for the periods and at the dates indicated. The following is only a summary and you should read it in conjunction with the consolidated financial statements of Hamilton Bancorp, Inc. and notes beginning on page F-1 of this Annual Report. The information at March 31, 2018 and 2017 and for the years then ended is derived in part from the audited consolidated financial statements that appear in this Annual Report. The information at March 31, 2016, 2015 and 2014 and for the years then ended is derived in part from audited financial statements that do not appear in this Annual Report.

 

   

At March 31,

 
   

2018

   

2017

   

2016

   

2015

   

2014

 
   

(In thousands)

 

Selected Financial Condition Data:

                                       
                                         

Total assets

  $ 525,533     $ 514,530     $ 392,917     $ 291,040     $ 302,769  

Cash and cash equivalents

    23,368       29,354       67,449       16,644       33,073  

Investment securities (1)

    16,379       21,597       16,544       21,582       26,778  

Mortgage-backed securities

    59,025       80,832       53,940       71,357       76,776  

Loans, net (2)

    387,599       336,738       220,416       159,176       142,914  

Federal Home Loan Bank of Atlanta stock at cost

    3,122       2,020       1,043       523       266  

Bank-owned life insurance

    17,456       18,253       12,710       12,360       12,002  

Deposits

    405,143       412,856       313,994       222,319       238,820  

Borrowings

    60,672       36,125       14,805       6,000       -  

Total equity

    54,076       59,791       61,545       60,800       61,770  

__________________________________________

(1)

Includes U.S. agency securities, municipal and corporate bonds.

(2)

Includes loans held for sale of $-0-, $-0-, $259,000, $581,000 and $-0- at March 31, 2018, 2017, 2016, 2015 and 2014, respectively.

 

   

For the Years Ended March 31,

 
   

2018

   

2017

   

2016

   

2015

   

2014

 
   

(In thousands, except per share data)

 

Selected Operating Data:

                                       
                                         

Interest revenue

  $ 18,080     $ 16,762     $ 11,318     $ 9,383     $ 10,236  

Interest expense

    3,587       2,871       1,843       1,662       1,916  

Net interest income

    14,493       13,891       9,475       7,721       8,320  

Provision for loan losses

    1,575       3,395       440       170       1,874  

Net interest income after provision for loan losses

    12,918       10,496       9,035       7,551       6,446  

Noninterest revenue

    1,996       1,054       1,554       1,108       1,056  

Noninterest expense

    12,911       13,237       10,260       9,310       9,689  

Income (loss) before income taxes (benefit)

    2,003       (1,687 )     329