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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X]

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

 

 

For the quarterly period ended June 30, 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 No. 001-35693

 

Hamilton Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

Maryland

 

46-0543309

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

     

501 Fairmount Avenue, Suite 200, Towson, Maryland 

 

21286

(Address of Principal Executive Offices)

 

Zip Code

 

(410) 823-4510

(Registrant’s telephone number)

 

N/A

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. YES [ X ]     NO [   ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [ X ]     NO [   ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one)

 

Large accelerated filer [   ]

 

Accelerated filer [   ]

Non-accelerated filer [   ]

 

Smaller reporting company [ X ]

(Do not check if smaller reporting company)

   

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 in Rule 12b-2 of the Exchange Act).

YES [   ]     NO [X]

 

The Registrant’s common stock, par value $0.01 per share, consisted of 3,416,414 shares issued and outstanding as of August 13, 2018.

 

 

 

 

Hamilton Bancorp, Inc. and Subsidiary

Form 10-Q

 

Index 

 

     

Page

Part I. Financial Information

       

Item 1.

 

Financial Statements

 
       
   

Consolidated Statements of Financial Condition as of June 30, 2018 (unaudited) and March 31, 2018

1

       
   

Consolidated Statements of Operations for the Three Months Ended June 30, 2018 and 2017 (unaudited)

2

       
   

Consolidated Statements of Comprehensive Income for the Three Months Ended June 30, 2018 and 2017 (unaudited)

3

       
   

Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended June 30, 2018 and 2017 (unaudited)

4

       
   

Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2018 and 2017 (unaudited)

5 - 6

       
   

Notes to Consolidated Financial Statements (unaudited)

7 – 42

       

Item 2.

 

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

43 – 61

       

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

6`

       

Item 4.

 

Controls and Procedures

6`

       

Part II. Other Information

       

Item 1.

 

Legal Proceedings

62

       

Item 1A.

 

Risk Factors

62

       

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

62

       

Item 3.

 

Defaults upon Senior Securities

62

       

Item 4.

 

Mine Safety Disclosures

62

       

Item 5.

 

Other Information

62

       

Item 6.

 

Exhibits

62

       
   

Signatures

63

 

 

 

Part I.Financial Information

Item 1. Financial Statements

 

 

HAMILTON BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Financial Condition

June 30, 2018 and March 31, 2018

 

   

June 30,

   

March 31,

 
   

2018

   

2018

 
   

(Unaudited)

   

(Audited)

 

Assets

 

Assets

               

Cash and due from banks

  $ 28,820,533     $ 15,488,396  

Federal funds sold

    7,238,852       7,880,019  

Cash and cash equivalents

    36,059,385       23,368,415  

Certificates of deposit held as investment

    499,167       499,189  

Securities available for sale, at fair value

    72,638,697       75,404,136  

Federal Home Loan Bank stock, at cost

    2,994,900       3,122,400  

Loans

    381,044,039       390,420,885  

Allowance for loan losses

    (2,836,987 )     (2,821,903 )

Net loans and leases

    378,207,052       387,598,982  

Premises and equipment, net

    3,928,511       3,945,825  

Foreclosed real estate

    457,778       457,778  

Accrued interest receivable

    1,470,881       1,468,382  

Bank-owned life insurance

    17,569,375       17,455,850  

Income taxes refundable

    40,000       40,000  

Goodwill and other intangible assets

    9,145,248       9,176,764  

Other assets

    2,264,055       2,995,741  

Total Assets

  $ 525,275,049     $ 525,533,462  
                 

Liabilities and Shareholders' Equity

 

Liabilities

               

Noninterest-bearing deposits

  $ 27,485,033     $ 29,557,943  

Interest-bearing deposits

    376,989,028       375,585,032  

Total deposits

    404,474,061       405,142,975  

Borrowings

    59,599,093       60,672,140  

Advances by borrowers for taxes and insurance

    2,707,378       1,962,665  

Other liabilities

    3,575,171       3,679,550  

Total liabilities

    470,355,703       471,457,330  
                 

Commitments and contingencies

    -       -  
                 

Shareholders' Equity

               

Common stock, $.01 par value, 100,000,000 shares authorized. Issued and outstanding: 3,416,414 shares at June 30, 2018 and 3,407,613 shares at March 31, 2018

    34,164       34,076  

Additional paid in capital

    32,239,049       32,113,534  

Retained earnings

    26,799,923       25,920,490  

Unearned ESOP shares

    (2,073,680 )     (2,073,680 )

Accumulated other comprehensive loss

    (2,080,110 )     (1,918,288 )

Total shareholders' equity

    54,919,346       54,076,132  

Total Liabilities and Shareholders' Equity

  $ 525,275,049     $ 525,533,462  

 

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

 

 

 

HAMILTON BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Operations (Unaudited)

Three Months Ended June 30, 2018 and 2017

 

   

Three Months Ended

 
   

June 30,

 
   

2018

   

2017

 

Interest revenue

               

Loans, including fees

  $ 4,407,943     $ 3,848,013  

U.S. treasuries, government agencies and FHLB stock

    53,689       32,684  

Municipal and corporate bonds

    94,411       113,969  

Mortgage-backed securities

    275,008       338,906  

Federal funds sold and other bank deposits

    110,719       54,408  

Total interest revenue

    4,941,770       4,387,980  
                 

Interest expense

               

Deposits

    875,064       660,458  

Borrowed funds

    258,588       134,270  

Total interest expense

    1,133,652       794,728  
                 

Net interest income

    3,808,118       3,593,252  

Provision for loan losses

    60,000       160,000  

Net interest income after provision for loan losses

    3,748,118       3,433,252  
                 

Noninterest revenue

               

Service charges

    120,584       119,199  

Gain on sale of loans held for sale

    9,542       -  

Earnings on bank-owned life insurance

    113,525       122,576  

Other

    47,123       24,717  

Total noninterest revenue

    290,774       266,492  
                 

Noninterest expenses

               

Salaries

    1,467,581       1,459,998  

Employee benefits

    411,842       393,174  

Occupancy

    271,828       260,838  

Advertising

    17,024       27,028  

Furniture and equipment

    90,299       83,984  

Data processing

    192,654       164,850  

Legal services

    56,338       101,890  

Other professional services

    98,316       180,302  

Deposit insurance premiums

    101,109       57,128  

Foreclosed real estate expense and losses

    -       1,186  

Other operating

    452,468       422,647  

Total noninterest expense

    3,159,459       3,153,025  
                 

Income before income taxes

    879,433       546,719  

Income tax expense

    -       154,342  

Net Income

  $ 879,433     $ 392,377  
                 

Net income per common share:

               

Basic

  $ 0.27     $ 0.12  

Diluted

  $ 0.27     $ 0.12  

 

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

 

 

 

HAMILTON BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (Unaudited)

Three Months Ended June 30, 2018 and 2017

 

   

Three Months Ended

 
   

June 30,

 
   

2018

   

2017

 
                 

Net income

  $ 879,433     $ 392,377  

Other comprehensive (loss) income:

               

Unrealized (loss) gain on investment securities available for sale

    (259,861 )     549,343  

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

    -       -  

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

    (259,861 )     549,343  

Unrealized gain (loss) on derivative transactions

    98,039       (209,948 )

Income tax expense relating to investment securities available for sale and derivative transactions

    -       133,874  

Other comprehensive (loss) income

    (161,822 )     205,521  
                 

Total comprehensive income

  $ 717,611     $ 597,898  

 

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

 

 

 

HAMILTON BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

Three Months Ended June 30, 2018 and 2017

 

                                   

Accumulated

         
           

Additional

           

Unearned

   

other

   

Total

 
   

Common

   

paid-in

   

Retained

   

ESOP

   

comprehensive

   

shareholders'

 
   

stock

   

capital

   

earnings

   

shares

   

loss

   

equity

 
                                                 

Balances at April 1, 2017

  $ 34,111     $ 31,656,235     $ 31,730,673     $ (2,221,800 )   $ (1,407,989 )   $ 59,791,230  

Net income

    -       -       392,377       -       -       392,377  

Unrealized gain on available for sale securities, net of tax effect of $ 216,688

    -       -       -       -       332,655       332,655  

Unrealized loss on derivative transactions securities, net of tax effect of $(82,814)

    -       -       -       -       (43,500 )     (43,500 )

Stock based compensation - options

    -       57,392       -       -       -       57,392  

Stock based compensation - restricted stock

    -       57,819       -       -       -       57,819  
                                                 

Balances at June 30, 2017

  $ 34,111     $ 31,771,446     $ 32,123,050     $ (2,221,800 )   $ (1,118,834 )   $ 60,587,973  
                                                 
                                                 

Balances at April 1, 2018

  $ 34,076     $ 32,113,534     $ 25,920,490     $ (2,073,680 )   $ (1,918,288 )   $ 54,076,132  

Net income

    -       -       879,433       -       -       879,433  

Unrealized loss on available for sale securities, net of tax effect of $ -0-

    -       -       -       -       (259,861 )     (259,861 )

Unrealized gain on derivative transactions, net of tax effect of $ -0-

    -       -       -       -       98,039       98,039  

Stock based compensation - options

    -       61,514       -       -       -       61,514  

Restricted stock - compensation and activity

    88       64,001       -       -       -       64,089  
                                                 

Balances at June 30, 2018

  $ 34,164     $ 32,239,049     $ 26,799,923     $ (2,073,680 )   $ (2,080,110 )   $ 54,919,346  

 

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

 

 

 

HAMILTON BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)

Three Months Ended June 30, 2018 and 2017

 

   

Three Months Ended

 
   

June 30,

 
   

2018

   

2017

 
                 

Cash flows from operating activities

               

Interest received

  $ 5,014,653     $ 4,515,279  

Fees and commissions received

    167,707       143,916  

Interest paid

    (1,286,649 )     (1,066,546 )

Cash paid to suppliers and employees

    (2,291,909 )     (2,393,508 )

Origination of loans held for sale

    (453,100 )     -  

Proceeds from sale of loans held for sale

    462,642       -  

Net cash provided by operating activities

    1,613,344       1,199,141  
                 

Cash flows from investing activities

               

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

    4,332,019       4,126,059  

Purchase of investment securities available for sale

    (1,985,000 )     -  

Redemption of Federal Home Loan Bank stock

    127,500       -  

Loans made, net of principal repayments

    9,415,130       (14,747,850 )

Purchase of premises and equipment

    (67,026 )     (121,649 )

Net cash provided (used) by investing activities

    11,822,623       (10,743,440 )
                 

Cash flows from financing activities

               

Net increase (decrease) in

               

Deposits

    (587,837 )     (428,522 )

Advances by borrowers for taxes and insurance

    744,713       974,614  

Proceeds from borrowings

    -       11,550,000  

Payments of borrowings

    (1,000,000 )     (11,553,111 )

Interest rate swap on FHLB borrowings

    98,039       (126,314 )

Issuance of restricted stock

    88       -  

Net cash (used) provided by financing activities

    (744,997 )     416,667  
                 

Net increase (decrease) in cash and cash equivalents

    12,690,970       (9,127,632 )
                 

Cash and cash equivalents at beginning of period

    23,368,415       29,353,921  
                 

Cash and cash equivalents at end of period

  $ 36,059,385     $ 20,226,289  

 

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

 

 

HAMILTON BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)

(Continued)

 

   

Three Months Ended

 
   

June 30,

 
   

2018

   

2017

 
                 

Reconciliation of net income to net cash provided by operating activities

               

Net income

  $ 879,433     $ 392,377  

Adjustments to reconcile net income to net cash provided by operating activities

               

Amortization of premiums on certificates of deposit

    22       23  

Amortization of premiums on securities

    158,560       238,628  

Write-down of foreclosed real estate

    -       1,186  

Loan discount accretion

    (75,104 )     (450 )

Deposit premium amortization

    (81,077 )     (125,009 )

Borrowing premium amortization

    (73,047 )     (146,560 )

Core deposit intangible asset amortization

    31,516       31,516  

Premises and equipment depreciation and amortization

    84,340       79,517  

Stock based compensation

    125,515       115,212  

Provision for loan losses

    60,000       160,000  

Decrease (increase) in

               

Accrued interest receivable

    (2,499 )     (108,369 )

Cash surrender value of life insurance

    (113,525 )     (122,576 )

Income taxes refundable and deferred income taxes

    -       154,342  

Other assets

    731,685       229,464  

Increase (decrease) in

               

Accrued interest payable

    1,127       (249 )

Deferred loan origination fees

    (8,096 )     (2,533 )

Other liabilities

    (105,506 )     302,622  

Net cash provided by operating activities

  $ 1,613,344     $ 1,199,141  
                 

Noncash investing activity

               

Real estate acquired through foreclosure

  $ -     $ 17,305  

 

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

 

 

HAMILTON BANCORP, INC AND SUBSIDIARY

Form 10-Q

 

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2018

 

 

Note 1:

Nature of Operations and Summary of Significant Accounting Policies

 

Nature of Operations

 

Hamilton Bancorp, Inc. (the “Company”) was incorporated on June 7, 2012 to serve as the stock holding company for Hamilton Bank (the “Bank”), a federally chartered savings bank. On October 10, 2012, the Bank converted from a mutual savings bank to a stock savings bank and became the wholly owned subsidiary of the Company. In connection with the conversion, the Company sold 3,703,000 shares of common stock at a price of $10.00 per share, through which the Company received proceeds of approximately $35,580,000, net of offering expenses of approximately $1,450,000. The Bank’s employee stock ownership plan (the “ESOP”) purchased 8.0% of the shares sold in the offering, or 296,240 common shares. The purchase of shares by the ESOP was funded by a loan from the Company. The company’s common stock began trading on the NASDAQ Capital Market under the trading symbol “HBK” on October 12, 2012.

 

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. The charter conversion is part of the Bank’s strategic plan which will allow it to continue to focus on growth opportunities in commercial, consumer and mortgage lending as well as small business and retail banking. The Maryland Office of the Commissioner of Financial Regulation will serve as the Bank's primary regulator with federal oversight provided by the Federal Deposit Insurance Corporation.  Hamilton Bancorp will continue to be regulated by the Federal Reserve Board.

 

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

 

On September 11, 2015, the Company completed its acquisition of Fairmount Bancorp, Inc. (“Fairmount Bancorp”) through the merger of Fairmount Bancorp, 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 Bancorp. As a result of the merger, each shareholder of Fairmount Bancorp received a cash payment equal to thirty dollars ($30.00) for each share of Fairmount Bancorp common stock, or an aggregate of approximately $15.4 million. Immediately following the merger of Fairmount Bancorp into the Company, Fairmount Bank was merged with and into the Bank, with the Bank as the surviving entity.

 

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

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and with instructions for Form 10–Q and Regulation S–X as promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the preceding unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. We derived the balances as of March 31, 2018 from audited financial statements. Operating results for the three months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2019, or any other period. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2018.

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

Summary of Significant Accounting Policies

 

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

 

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

 

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

 

Investment Securities. Management determines the appropriate classification of investment securities at the time of purchase. Securities that may be sold before maturity are classified as available for sale and carried at fair value. Investment securities that management has the intent and ability to hold to maturity are classified as held to maturity and carried at amortized cost. All investment securities held by Hamilton at June 30, 2018 and March 31, 2018 were classified as available for sale.

 

Investment securities designated as available for sale are stated at estimated fair value based on quoted market prices. They represent those securities which management may sell as part of its asset/liability strategy or that may be sold in response to changing interest rates or liquidity needs. Changes in unrealized gains and losses, net of related deferred taxes, for available-for-sale securities are recorded in other comprehensive income. Realized gains (losses) on available-for-sale securities are included in noninterest revenue and, when applicable, are reported as a reclassification adjustment in other comprehensive income. Realized gains and losses on the sale of available-for-sale securities are recorded on the trade date and are determined by the specific identification method. The amortization of premiums and the accretion of discounts are recognized in interest revenue using methods approximating the interest method over the term of the security.

 

In estimating other-than-temporary impairment losses, management considers the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

 

Loans Held For Sale. Mortgage loans originated and intended for sale are carried at the lower of aggregate cost or estimated fair value. Fair value is determined based on outstanding investor commitments, or in the absence of such commitments, based on current investor yield requirements. Gains and losses on loan sales are determined by the specific-identification method.

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

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

 

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

 

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

 

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

 

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

 

 

Reduction of the stated interest rate;

 

 

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

 

 

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

 

 

Reduction of accrued interest.

 

 

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

 

The allowance for loan losses is increased by provisions charged to income and reduced by charge-offs, net of recoveries. Management’s periodic evaluation of the adequacy of the allowance is based on the Bank’s past loan loss experience, known and inherent risks in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and current economic conditions. The look back period for historical losses consists of reviewing both a 36 and 48 month look back period for net charge-offs. Both of these periods are used individually to develop a range in which the allowance for loan losses should be within.

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

Management considers a number of factors in estimating the required level of the allowance. These factors include: historical loss experience in the loan portfolios; the levels and trends in past-due and nonaccrual loans; the status of nonaccrual loans and other loans identified as having the potential for further deterioration; credit risk and industry concentrations; trends in loan volume; the effects of any changes in lending policies and procedures or underwriting standards; and a continuing evaluation of the economic environment. As part of the estimation process, management keeps the net charge-off history as a percentage of loans, as it pertains to each loan segment, constant across all risk ratings and alters the qualitative factors either up or down based upon the respective risk rating for each loan segment.

 

Foreclosed Real Estate. Real estate acquired through foreclosure or other means is recorded at the lower of its carrying value or the fair value of the related real estate collateral less estimated selling costs. Losses in estimated fair value incurred at the time of acquisition of the property are charged to the allowance for loan losses. Subsequent reductions in the estimated fair value of the property are included in noninterest expense. Costs to maintain foreclosed real estate are expensed as incurred.

 

Goodwill and Other Intangible Assets. Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Intangible assets, consisting of core deposit intangibles, represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset may be sold or exchanged on its own or in combination with a related contract, asset, or liability. Core deposit intangibles are amortized on an accelerated basis over an eight-year period. Goodwill is not amortized but is evaluated on an annual basis to determine impairment, if any. Any impairment of goodwill would be recognized against income in the period of impairment.

 

Derivative Financial Instruments and Hedging Activities. Derivatives are initially recognized at fair value on the date the derivative contract is entered into and subsequently re-measured at their fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. The Company documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions.

 

For derivatives qualifying as cash flow hedges, the Company also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The effective portion of changes in fair value of derivatives that are designated and qualify as cash flow hedges is recognized in the consolidated statement of comprehensive income (loss). The gain or loss relating to the ineffective portion is recognized immediately in the consolidated statement of operations as a gain or loss. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognized when the forecast transaction is ultimately recognized in the consolidated statement of operations. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the consolidated statement of operations as a gain or loss to income.

 

For derivative instruments designated as fair-value hedges, the change in fair value of the derivative is recognized in the consolidated statement of operations under the same heading as the change in fair value of the hedged item for the portion attributable to the hedged risk. For accounting purposes, if the derivative is highly effective, the change in fair values relating to the asset or liability and the hedged item will offset one another and result in no impact to overall income.

 

Gains (losses) on derivatives representing either hedge components excluded from the assessment of effectiveness or hedge ineffectiveness are recognized in earnings.

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

Revenue from Contracts with Customers. We record revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, we must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) we satisfy a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods. Our primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. We have evaluated the nature of our contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Operation was not necessary. Contracts with customers are generally fully satisfied in regard to performance obligations as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

 

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

 

Income Taxes. The Bank recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets and liabilities are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that all or some portion of the deferred tax assets will not be realized.

 

Earnings Per Common Share. Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Weighted average shares exclude unallocated ESOP shares. Diluted earnings per share includes additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares relate to outstanding stock options, restricted stock, and warrants and are determined using the treasury stock method.

 

 

 

Note 2:

New Accounting Pronouncements

 

Recent Accounting Pronouncements

 

ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities. This ASU’s objectives are to: (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities; and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. The ASU is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The Company does not expect the adoption of ASU 2017-12 to have a material impact on the Company’s consolidated financial statements.

 

ASU No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company will evaluate the guidance in this update but does not expect it to have a significant impact on the Company’s consolidated financial statements.

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. This update removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. As a result, under the ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.

 

ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This guidance clarifies the definition of a business and assists entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under this guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset (or group of similar assets), the assets acquired would not represent a business. In addition, in order to be considered a business, an acquisition would have to include at a minimum an input and a substantive process that together significantly contribute to the ability to create an output. The amended guidance also narrows the definition of outputs by more closely aligning it with how outputs are described in FASB guidance for revenue recognition. This guidance was effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company adopted this guidance effective April 1, 2018 and it did not have a material impact on our consolidated financial statements.

 

ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This update addresses diversity on how certain cash receipts and payments are reflected in the statement of cash flows. The update made the following changes that may affect the Company: (1) Debt Prepayment or Debt Extinguishment Costs: Cash payments for debt prepayment or debt extinguishment costs should be classified as cash flows for financing activities. (2) Proceeds from the settlement of Bank-Owned Life Insurance Policies: Cash proceeds received from the settlement of bank-owned life insurance policies should be classified as cash flows from investing activities. The cash payments for premiums on bank-owned policies may be classified as cash flows from investing activities, operating activities, or a combination of investing and operating activities. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and is required to be applied retrospectively to all periods presented. The company adopted this guidance April 1, 2018, which did not result in a change in the classification in the statement of cash flows and did not have a material impact on our consolidated financial statements.

 

ASU 2016-13, Financial Instruments – Credit Losses. The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the guidance in this update replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate credit losses. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The guidance in this update for public business entities is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Hamilton Bancorp is in the process of implementing a committee and has begun to gather loan information and consider acceptable methodologies to comply with this ASU. The implementation team will meet periodically to discuss the latest developments and updates via webcasts, publications, and conferences. We are currently evaluating and in the process of selecting a third-party vendor solution to assist us in the application of ASU 2016-13. Hamilton Bancorp’s evaluation indicates that the provisions of ASU No. 2016-13 are expected to impact its consolidated financial statements, in particular the level of the reserve for loan losses. We are, however, continuing to evaluate the extent of the potential impact.

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

ASU 2016-02, Leases (Topic 842). From the lessee’s perspective, the new ASU standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for lessees. The guidance also eliminates the current real estate-specific provision and changes the guidance on sale-leaseback transactions, initial direct costs and lease executory costs. With respect to lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. All entities will classify leases to determine how to recognize lease-related revenue and expense. In applying this guidance entities will also need to determine whether an arrangement contains a lease or service agreement. Disclosures are required by lessees and lessors to meet the objective of enabling users of financials statements to assess the amount, timing, and uncertainty of cash flows arising from leases. For public entities, this guidance is effective for the first interim or annual period beginning after December 15, 2018. Early adoption is permitted. Entities are required to use a modified retrospective transition method for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements.

 

In July 2018, as a follow-up to ASU 2016-02 (Topic 842), the Board issued ASU No. 2018-10 – Codification Improvements to Topic 842, Leases to clarify the codification associated with ASU 2016-02 or to correct unintended application of guidance. The amendments in this Update are of a similar nature to the items typically addressed in the Codification improvements project and affect narrow aspects of the guidance issued in the amendments in Update 2016-02. The Update addresses sixteen separate issues under the guidance that provide a clearer understanding as to intent and application of the guidance. The Company is assessing the guidance under ASU 2016-02 and 2018-10 to determine its impact on the Company’s consolidated financial statements.

 

ASU No. 2018-11, Leases (Topic 842) – Targeted Improvements. The purpose of this ASU is to update ASU 2016-02 to address stakeholders concerns regarding comparative reporting and separating components of a lease contract for lessors. For comparative reporting, entities are required under ASU 2016-02 to use a modified retrospective transition method. Due to issues in implementing, the Board decided to provide another transition method that allows companies to initially apply the new leases standard at the adoption date versus retrospectively and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The amendments in this update also provides lessors a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component, similar to the expedient provided by lessees. However, the lessor practical expedient is limited to circumstances in which the nonlease component or components otherwise would be accounted for under the new revenue guidance and both (1) the timing and pattern of transfer are the same for the nonlease component(s) and associated lease component and (2) the lease component, if accounted for separately, would be classified as an operating lease. The Company is assessing this guidance in conjunction with ASU 2016-02 to determine its impact on the Company’s consolidated financial statements.

 

ASU No. 2016-01, Financial Instruments – Recognition and Measurement of Financial Assets and Liabilities. This ASU requires equity investments to be measured at fair value with changes in fair value recognized in net income, excluding equity investments that are consolidated or accounted for under the equity method of accounting. The amendment allows equity investments without readily determinable fair values to be measured at cost minus impairment, with a qualitative assessment required to identify impairment. The amendment also requires public companies to use exit prices to measure the fair value of financial instruments purposes; requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statement; it eliminates the disclosure requirements related to measurement assumptions for the fair value of instruments measured at amortized cost. In addition, for liabilities measured at fair value under the fair value option, to present in other comprehensive income changes in fair value due to changes in instrument specific credit risk. The Company’s management engaged a third-party expert in the field of valuation and reporting to assist management and ensure adequate documentation of financial controls and analysis performed in its review of “exit pricing” of the fair values of loans, deposits, and other financial instruments. This ASU is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We adopted this ASU effective April 1, 2018. With the adoption of this ASU, equity securities can no longer be classified as available for sale, and as such marketable equity securities are disclosed as a separate line item on the Consolidated Statement of Financial Condition with changes in the fair value of equity securities reflected in net income. At June 30, 2018 the Company did not have any equity securities. During the first quarter of fiscal 2019, we began using an exit price notion when measuring the fair value of our loan portfolio, excluding loans held for sale, for disclosure purposes. The adoption of this ASU did not have a significant impact on our consolidated financial statements.

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

 

The guidance in this ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. This ASU does not apply to revenue associated with financial instruments including loans and securities that are accounted for under U.S. GAAP. Consequently, adoption of the ASU did not have a significant impact on the Company’s consolidated financial statements and related disclosures since the primary source of revenue for the Company is derived from interest and dividends earned on loans, investment securities and other financial instruments that are outside the scope of the ASU. The Company has assessed its revenue streams and reviewed its contracts with customers that are affected by the new guidance. This includes fees on deposits, gains and losses on the sale of foreclosed real estate, credit and debit card interchange fees, merchant card services, and administrative services for customer deposit account such as ATM and wire transfer transactions. The Company’s revenue recognition pattern for revenue streams within the scope of the ASU has not changed significantly from current practice and is immaterial to our financial statements. This guidance was effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted this guidance effective April 1, 2018 and it did not have a material impact on our consolidated financial statements.

 

 

Note 3:

Earnings per Share

 

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

 

Both the basic and diluted earnings per share for the three months ended June 30, 2018 and 2017 are summarized below:

 

   

Three Months Ended

   

Three Months Ended

 
   

June 30, 2018

   

June 30, 2017

 
                 

Net income

  $ 879,433     $ 392,377  

Weighted average common shares outstanding - basic

    3,209,046       3,188,895  

Weighted average common shares outstanding - diluted

    3,230,287       3,198,999  

Income per common share - basic and diluted

  $ 0.27     $ 0.12  
                 

Anti-dilutive shares

    159,019       121,686  

 

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

 

Note 4:

Investment Securities Available for Sale

 

The amortized cost and fair value of securities at June 30, 2018 and March 31, 2018, are summarized as follows:

 

           

Gross

   

Gross

         
   

Amortized

   

unrealized

   

unrealized

   

Fair

 

June 30, 2018

 

cost

   

gains

   

losses

   

value

 
                                 

U.S. government agencies

  $ 2,750,087     $ -     $ 34,435     $ 2,715,652  

Municipal bonds

    12,405,766       -       772,923       11,632,843  

Corporate bonds

    2,000,000       -       16,750       1,983,250  

Mortgage-backed securities

    58,605,648       4,212       2,302,908       56,306,952  
    $ 75,761,501     $ 4,212     $ 3,127,016     $ 72,638,697  

 

 

           

Gross

   

Gross

         
   

Amortized

   

unrealized

   

unrealized

   

Fair

 

March 31, 2018

 

cost

   

gains

   

losses

   

value

 
                                 

U.S. government agencies

  $ 2,753,346     $ -     $ 34,697     $ 2,718,649  

Municipal bonds

    12,435,068       -       729,077       11,705,991  

Corporate bonds

    2,000,000       -       45,924       1,954,076  

Mortgage-backed securities

    61,078,665       12,993       2,066,238       59,025,420  
    $ 78,267,079     $ 12,993     $ 2,875,936     $ 75,404,136  

 

There were no sales of investment securities during the three months ended June 30, 2018 or 2017.

 

As of June 30, 2018 and March 31, 2018, all mortgage-backed securities are backed by U.S. Government-Sponsored Enterprises (GSE’s), except one private label mortgage-backed security that was acquired in the Fraternity acquisition in May 2016 with a book value of $53,850 and fair value of $54,709 as of June 30, 2018.

 

As of June 30, 2018 and March 31, 2018, the Company had one security pledged to the Federal Reserve Bank with a book value of $744,186 at both dates and a fair value of $719,728 and $723,023, respectively.

 

The amortized cost and estimated fair value of debt securities by contractual maturity at June 30, 2018 and March 31, 2018 follow. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.

 

   

Available for Sale

 
   

June 30, 2018

   

March 31, 2018

 
   

Amortized

   

Fair

   

Amortized

   

Fair

 
   

cost

   

value

   

cost

   

value

 
                                 

Maturing

                               

Within one year

  $ 2,005,901     $ 1,995,924     $ 2,009,160     $ 1,995,625  

Over one to five years

    1,230,371       1,190,018       1,231,928       1,196,368  

Over five to ten years

    3,576,063       3,524,030       3,578,827       3,500,641  

Over ten years

    10,343,518       9,621,773       10,368,499       9,686,082  

Mortgage-backed securities, in monthly installments

    58,605,648       56,306,952       61,078,665       59,025,420  
    $ 75,761,501     $ 72,638,697     $ 78,267,079     $ 75,404,136  

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

The following table presents the Company's investments' gross unrealized losses and the corresponding fair values by investment category and length of time that the securities have been in a continuous unrealized loss position at June 30, 2018 and March 31, 2018.

 

   

Less than 12 months

   

12 months or longer

   

Total

 
   

Gross unrealized

   

Fair

   

Gross unrealized

   

Fair

   

Gross unrealized

   

Fair

 

June 30, 2018

 

losses

   

value

   

losses

   

value

   

losses

   

value

 
                                                 

U.S. government agencies

  $ 24,458     $ 719,728     $ 9,977     $ 1,995,924     $ 34,435     $ 2,715,652  

Municipal bonds

    -       -       772,923       11,632,843       772,923       11,632,843  

Corporate bonds

    -       -       16,750       1,983,250       16,750       1,983,250  

Mortgage-backed securities

    494,184       18,259,112       1,808,724       37,779,118       2,302,908       56,038,230  
    $ 518,642     $ 18,978,840     $ 2,608,374     $ 53,391,135     $ 3,127,016     $ 72,369,975  

 

   

Less than 12 months

   

12 months or longer

   

Total

 
   

Gross unrealized

   

Fair

   

Gross unrealized

   

Fair

   

Gross unrealized

   

Fair

 

March 31, 2018

 

losses

   

value

   

losses

   

value

   

losses

   

value

 
                                                 

U.S. government agencies

  $ 21,163     $ 723,023     $ 13,534     $ 1,995,625     $ 34,697     $ 2,718,648  

Municipal bonds

    -       -       729,077       11,705,991       729,077       11,705,991  

Corporate bonds

    -       -       45,924       1,954,076       45,924       1,954,076  

Mortgage-backed securities

    383,987       15,880,948       1,682,251       40,684,836       2,066,238       56,565,784  
    $ 405,150     $ 16,603,971     $ 2,470,786     $ 56,340,528     $ 2,875,936     $ 72,944,499  

 

 

The unrealized losses that exist are a result of market changes in interest rates since the original purchase. Management systematically evaluates investment securities for other-than-temporary declines in fair value on an annual basis from the date of purchase if the respective security is in a loss position. This analysis requires management to consider various factors, which include (1) duration and magnitude of the decline in value, (2) the financial condition of the issuer or issuers and (3) structure of the security.

 

An impairment loss is recognized in earnings if any of the following are true: (1) the Company intends to sell the debt security; (2) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) the Company does not expect to recover the entire amortized cost basis of the security. In situations where the Company intends to sell or when it is more likely than not that the Company will be required to sell the security, the entire impairment loss must be recognized in earnings. In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in shareholders’ equity as a component of other comprehensive income, net of deferred tax.

 

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

 

Note 5:

Loans Receivable and Allowance for Loan Losses

 

Loans receivable, excluding loans held for sale, consist of the following at June 30, 2018 and March 31, 2018:

 

   

June 30, 2018

   

March 31, 2018

 
   

Legacy (1)

   

Acquired

   

Total Loans

   

% of Total

   

Legacy (1)

   

Acquired

   

Total Loans

   

% of Total

 

Real estate loans:

                                                               

One-to four-family:

                                                               

Residential (2)

  $ 84,252,950     $ 70,509,208     $ 154,762,158       41 %   $ 85,248,184     $ 72,749,066     $ 157,997,250       41 %

Residential construction

    5,636,504       -       5,636,504       1 %     5,450,827       -       5,450,827       1 %

Investor (3)

    8,822,670       17,210,983       26,033,653       7 %     9,275,031       17,460,809       26,735,840       7 %

Commercial

    102,659,016       10,486,192       113,145,208       30 %     100,403,769       11,762,485       112,166,254       29 %

Commercial construction

    2,550,462       854,370       3,404,832       1 %     5,763,784       1,352,019       7,115,803       2 %

Total real estate loans

    203,921,602       99,060,753       302,982,355       80 %     206,141,595       103,324,379       309,465,974       80 %

Commercial business (4)

    37,061,370       1,905,770       38,967,140       10 %     38,302,739       1,841,226       40,143,965       10 %

Home equity loans

    13,735,464       5,475,308       19,210,772       5 %     13,956,327       6,039,462       19,995,789       5 %

Consumer (5)

    17,861,626       739,300       18,600,926       5 %     18,849,448       766,063       19,615,511       5 %

Total Loans

    272,580,062       107,181,131       379,761,193       100 %     277,250,109       111,971,130       389,221,239       100 %

Net deferred loan origination fees and costs

    (204,650 )     -       (204,650 )             (212,746 )     -       (212,746 )        

Loan premium (discount)

    1,844,408       (356,912 )     1,487,496               1,922,428       (510,036 )     1,412,392          
    $ 274,219,820     $ 106,824,219     $ 381,044,039             $ 278,959,791     $ 111,461,094     $ 390,420,885          
                                                                 

(1)

As a result of the acquisition of Fraternity Community Bancorp, Inc., the parent company of Fraternity Federal Savings and Loan, in May 2016 and Fairmount Bancorp, Inc., the parent company of Fairmount Bank, in September 2015, we have segmented the portfolio into two components, loans originated by Hamilton Bank "Legacy" and loans acquired from Fraternity Community Bancorp, Inc. and Fairmount Bancorp, Inc. "Acquired".

(2)

"Legacy" one-to four-family residential real estate loans at March 31, 2018 includes $19.2 million of various loan pools purchased in the second half of fiscal 2018.

(3)

"Investor" loans are residential mortgage loans secured by non-owner occupied one-to four-family properties.

(4)

"Legacy" commercial business loans at March 31, 2018 includes a $15.5 million pool of commercial lease loans purchased in June 2017 and $3.2 million in guaranteed SBA loans purchased in second half of fiscal 2018.

(5)

"Legacy" consumer loans at March 31, 2018 includes $19.9 million of purchased loan pools consisting of recreational vehicles that were purchased in August and December 2017.

 

Residential lending is generally considered to involve less risk than other forms of lending, although payment experience on these loans is dependent on economic and market conditions in the Bank's lending area. Construction loan repayments are generally dependent on the related properties or the financial condition of its borrower or guarantor. Accordingly, repayment of such loans can be more susceptible to adverse conditions in the real estate market and the regional economy.

 

A substantial portion of the Bank's loan portfolio is real estate loans secured by residential and commercial real estate properties located in the Baltimore metropolitan area. Loans are extended only after evaluation of a customer's creditworthiness and other relevant factors on a case-by-case basis. The Bank generally does not lend more than 75% - 95% of the appraised value of a property, depending on the type of loan, and requires private mortgage insurance on residential mortgages with loan-to-value ratios in excess of 80%. In addition, the Bank generally obtains personal guarantees of repayment from borrowers and/or others for construction loans and disburses the proceeds of those and similar loans only as work progresses on the related projects.

 

Commercial business loans are made to provide funds for equipment and general corporate needs.  Repayment of a loan primarily uses the funds obtained from the operation of the borrower’s business.  Commercial loans also include lines of credit that are utilized to finance a borrower’s short-term credit needs and/or to finance a percentage of eligible receivables and inventory. The Company’s loan portfolio also includes equipment leases, which consists of leases for essential commercial equipment used by small to medium sized businesses.

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

The home equity loans consist of both conforming loans and revolving lines of credit to consumers which are secured by residential real estate. These loans are typically secured with second mortgages on the homes. Consumer loans include share loans, installment loans and, to a lesser extent, personal lines of credit.  Share loans represent loans that are collateralized by a certificate of deposit or other deposit product. Installment loans are used by customers to purchase primarily automobiles, but may be used to also purchase boats and recreational vehicles.

 

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended June 30, 2018 and 2017. The allowance for loan losses allocated to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments.

 

   

June 30, 2018

 

Three Months Ended June 30, 2018

 

Residential Real

Estate

   

Investor Real Estate

   

Commercial Real

Estate

   

Commercial

Construction

   

Commercial

Business

   

Home Equity

   

Consumer

   

Total

 

Allowance for credit losses:

                                                               

Beginning balance

  $ 608,723     $ 51,690     $ 1,253,383     $ 33,430     $ 673,982     $ 69,459     $ 131,236     $ 2,821,903  

Charge-offs

    (8,047 )     (5,580 )     (31,320 )     -       -       -       (2,465 )     (47,412 )

Recoveries

    767       65       -       -       -       -       1,664       2,496  

Provision for credit losses

    (232 )     17,331       133,823       (18,637 )     (64,610 )     (1,192 )     (6,483 )     60,000  

Ending balance

  $ 601,211     $ 63,506     $ 1,355,886     $ 14,793     $ 609,372     $ 68,267     $ 123,952     $ 2,836,987  
                                                                 

Allowance allocated to:

                                                               

Legacy Loans:

                                                               

Individually evaluated for impairment

  $ 261,902     $ -     $ -     $ -     $ -     $ -     $ -     $ 261,902  

Collectively evaluated for impairment

    339,309       63,506       1,355,886       14,793       609,372       68,267       123,952       2,575,085  
                                                                 

Acquired Loans:

                                                               

Individually evaluated for impairment

  $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  

Collectively evaluated for impairment

    -       -       -       -       -       -       -       -  

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

   

June 30, 2017

 

Three Months Ended June 30, 2017

 

Residential Real

Estate

   

Investor Real Estate

   

Commercial Real Estate

   

Commercial

Construction

   

Commercial

Business

   

Home Equity

   

Consumer

   

Total

 

Allowance for credit losses:

                                                               

Beginning balance

  $ 553,539     $ 35,275     $ 1,375,894     $ 9,031     $ 149,461     $ 70,071     $ 1,544     $ 2,194,815  

Charge-offs

    -       (4,078 )     -       -       -       -       -       (4,078 )

Recoveries

    -       5,307       -       -       175       -       1,309       6,791  

Provision for credit losses

    (8,982 )     27,967       (63,736 )     17,956       193,458       (5,410 )     (1,253 )     160,000  

Ending balance

  $ 544,557     $ 64,471     $ 1,312,158     $ 26,987     $ 343,094     $ 64,661     $ 1,600     $ 2,357,528  
                                                                 

Allowance allocated to:

                                                               

Legacy Loans:

                                                               

Individually evaluated for impairment

  $ 278,573     $ -     $ -     $ -     $ -     $ -     $ -     $ 278,573  

Collectively evaluated for impairment

    265,984       64,471       1,312,158       26,987       343,094       64,661       1,600       2,078,955  
                                                                 

Acquired Loans:

                                                               

Individually evaluated for impairment

  $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  

Collectively evaluated for impairment

    -       -       -       -       -       -       -       -  

 

 

Our recorded investment in loans at June 30, 2018 and 2017 related to each balance in the allowance for probable loan losses by portfolio segment and disaggregated on the basis of our impairment methodology was as follows:

 

   

June 30, 2018

 
   

Residential Real

Estate

   

Investor Real Estate

   

Commercial Real

Estate

   

Commercial

Construction

   

Commercial

Business

   

Home Equity

   

Consumer

   

Total

 

Loans:

                                                               

Legacy Loans:

                                                               

Individually evaluated for impairment

  $ 1,784,758     $ 58,599     $ 7,505,365     $ -     $ 858,762     $ 7,408     $ 19,853     $ 10,234,745  

Collectively evaluated for impairment

    88,104,696       8,764,071       95,153,651       2,550,462       36,202,608       13,728,056       17,841,773       262,345,317  

Ending balance

  $ 89,889,454     $ 8,822,670     $ 102,659,016     $ 2,550,462     $ 37,061,370     $ 13,735,464     $ 17,861,626     $ 272,580,062  
                                                                 

Acquired Loans:

                                                               

Individually evaluated for impairment

  $ 892,087     $ 433,174     $ 197,259     $ -     $ -     $ -     $ 58,706     $ 1,581,226  

Collectively evaluated for impairment

    69,617,121       16,777,808       10,288,933       854,370       1,905,770       5,475,308       680,595       105,599,905  

Ending balance

  $ 70,509,208     $ 17,210,982     $ 10,486,192     $ 854,370     $ 1,905,770     $ 5,475,308     $ 739,301     $ 107,181,131  

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

   

June 30, 2017

 
   

Residential

Real

Estate

   

Investor Real

Estate

   

Commercial Real

Estate

   

Commercial

Construction

   

Commercial

Business

   

Home Equity

   

Consumer

   

Total

 

Loans:

                                                               

Legacy Loans:

                                                               

Individually evaluated for impairment

  $ 1,762,599     $ 7,772     $ 1,546,811     $ -     $ 723,753     $ 10,980     $ -     $ 4,051,915  

Collectively evaluated for impairment

    73,656,157       7,803,689       91,081,612       2,326,457       34,615,330       14,105,667       2,135,569       225,724,481  

Ending balance

  $ 75,418,756     $ 7,811,461     $ 92,628,423     $ 2,326,457     $ 35,339,083     $ 14,116,647     $ 2,135,569     $ 229,776,396  
                                                                 

Acquired Loans:

                                                               

Individually evaluated for impairment

  $ 1,177,729     $ 183,728     $ 203,215     $ -     $ -     $ -     $ 68,772     $ 1,633,444  

Collectively evaluated for impairment

    79,118,824       18,249,669       14,196,187       1,191,507       2,037,264       6,668,685       859,928       122,322,064  

Ending balance

  $ 80,296,553     $ 18,433,397     $ 14,399,402     $ 1,191,507     $ 2,037,264     $ 6,668,685     $ 928,700     $ 123,955,508  

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

Past due loans, segregated by age and class of loans, as of June 30, 2018 and March 31, 2018, were as follows:

 

   

June 30, 2018

   

March 31, 2018

 
   

Legacy

   

Acquired

   

Total

   

Legacy

   

Acquired

   

Total

 

Current

  $ 263,581,744     $ 105,746,394     $ 369,328,138     $ 270,807,643     $ 109,972,473     $ 380,780,116  

Accruing past due loans:

                                               

30-59 days past due:

                                               

Real estate loans:

                                               

Residential

    74,733       82,995       157,728       63,618       689,364       752,982  

Investor

    -       -       -       -       -       -  

Commercial

    -       -       -       -       -       -  

Commercial construction

    -       -       -       -       -       -  

Commercial business

    14,573       -       14,573       135,502       -       135,502  

Home equity loans

    -       -       -       -       -       -  

Consumer

    28,161       28,005       56,166       148,876       -       148,876  

Total 30-59 days past due

    117,467       111,000       228,467       347,996       689,364       1,037,360  
                                                 

60-89 days past due:

                                               

Real estate loans:

                                               

Residential

    26,172       -       26,172       70,291       -       70,291  

Investor

    -       -       -       -       -       -  

Commercial

    -       -       -       -       -       -  

Commercial construction

    -       -       -       -       -       -  

Commercial business

    -       -       -       134,524       -       134,524  

Home equity loans

    -       -       -       -       -       -  

Consumer

    -       -       -       28,300       -       28,300  

Total 60-89 days past due

    26,172       -       26,172       233,115       -       233,115  
                                                 

90 or more days past due:

                                               

Real estate loans:

                                               

Residential

    -       -       -       -       -       -  

Investor

    515,243       517,040       1,032,283       734,818       471,423       1,206,241  

Commercial

    -       197,259       197,259       -       -       -  

Commercial construction

    -       -       -       -       -       -  

Commercial business

    -       -       -       -       -       -  

Home equity loans

    -       -       -       -       -       -  

Consumer

    -       -       -       -       -       -  

Total 90 or more days past due

    515,243       714,299       1,229,542       734,818       471,423       1,206,241  

Total accruing past due loans

    658,882       825,299       1,484,181       1,315,929       1,160,787       2,476,716  
                                                 

Non-accruing loans:

                                               

Real estate loans:

                                               

Residential

    515,611       315,038       830,649       526,584       338,060       864,644  

Investor

    58,599       294,400       352,999       60,949       300,872       361,821  

Commercial

    7,505,364       -       7,505,364       4,356,264       198,938       4,555,202  

Commercial construction

    -       -       -       -       -       -  

Commercial business

    240,009       -       240,009       165,285       -       165,285  

Home equity loans

    -       -       -       12,605       -       12,605  

Consumer

    19,853       -       19,853       4,850       -       4,850  

Non-accruing loans:

    8,339,436       609,438       8,948,874       5,126,537       837,870       5,964,407  

Total Loans

  $ 272,580,062     $ 107,181,131     $ 379,761,193     $ 277,250,109     $ 111,971,130     $ 389,221,239  
                                                 
                                                 

Nonaccrual interest not accrued:

                                               

Real estate loans:

                                               

Residential

  $ 2,248     $ 4,308     $ 6,556     $ 8,250     $ 53,120     $ 61,370  

Investor

    969       4,138       5,107       8,513       15,604       24,117  

Commercial

    184,891       -       184,891       294,619       -       294,619  

Commercial construction

    -       -       -       -       -       -  

Commercial business

    7,462       -       7,462       12,891       -       12,891  

Home equity loans

    -       -       -       436       -       436  

Consumer

    446       -       446       385       -       385  

Total nonaccrual interest not accrued

  $ 196,016     $ 8,446     $ 204,462     $ 325,094     $ 68,724     $ 393,818  

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

Impaired Loans as of and for the three months ended June 30, 2018 and 2017, and the year ended March 31, 2018, was as follows:

 

   

Impaired Loans at June 30, 2018

   

Three Months Ended June 30, 2018

 
   

Unpaid

                                 
   

Contractual

                   

Average

   

Interest

 
   

Principal

   

Recorded

   

Related

   

Recorded

   

Income

 

 

 

Balance

   

Investment

   

Allowance

   

Investment

   

Recognized

 
Legacy:                              

With no related allowance recorded:

                                       

Real estate loans:

                                       

Residential

  $ 630,805     $ 484,375     $ -     $ 490,726     $ 10,492  

Investor

    124,696       58,599       -       59,355       1,312  

Commercial

    9,565,282       7,505,365       -       5,957,014       53,278  

Commercial construction

    -       -       -                  

Commercial business

    1,619,151       858,762       -       827,871       8,863  

Home equity loans

    34,472       7,408       -       17,016       953  

Consumer

    22,382       19,853       -       19,577       -  

With an allowance recorded:

                                       

Real estate loans:

                                       

Residential

    1,327,589       1,300,383       261,902       1,312,130       13,834  

Investor

    -       -       -       -       -  

Commercial

    -       -       -       -       -  

Commercial construction

    -       -       -       -       -  

Commercial business

    -       -       -       -       -  

Home equity loans

    -       -       -       -       -  

Consumer

    -       -       -       -       -  

Total legacy impaired

    13,324,377       10,234,745       261,902       8,683,689       88,732  
                                         

Acquired (1):

                                       

With no related allowance recorded:

                                       

Real estate loans:

                                       

Residential

    1,052,825       892,087       -       936,819       10,156  

Investor

    755,381       433,174       -       437,401       9,184  

Commercial

    247,259       197,259       -       198,098       1,863  

Commercial construction

    -       -       -       -       -  

Commercial business

    -       -       -       -       -  

Home equity loans

    39,418       -       -       -       419  

Consumer

    93,577       58,706       -       59,571       2,418  

With an allowance recorded:

                                       

Real estate loans:

                                       

Residential

    -       -       -       -       -  

Investor

    -       -       -       -       -  

Commercial

    -       -       -       -       -  

Commercial construction

    -       -       -       -       -  

Commercial business

    -       -       -       -       -  

Home equity loans

    -       -       -       -       -  

Consumer

    -       -       -       -       -  

Total acquired impaired

    2,188,460       1,581,226       -       1,631,889       24,040  

Total impaired

  $ 15,512,837     $ 11,815,971     $ 261,902     $ 10,315,578     $ 112,772  

 

(1)

Generally accepted accounting principles require that we record acquired loans at fair value at acquisition, which includes a discount for loans with credit impairment. These purchased credit impaired loans are not performing according to their contractual terms and meet the definition of an impaired loan. Although we do not accrue interest income at the contractual rate on these loans, we do recognize an accretable yield as interest income to the extent such yield is supported by cash flow analysis of the underlying loans. 

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

   

Impaired Loans at June 30, 2017

   

Three Months Ended June 30, 2017

 
   

Unpaid

                                 
   

Contractual

                   

Average

   

Interest

 
   

Principal

   

Recorded

   

Related

   

Recorded

   

Income

 

 

 

Balance

   

Investment

   

Allowance

   

Investment

   

Recognized

 
Legacy:                              

With no related allowance recorded:

                                       

Real estate loans:

                                       

Residential

  $ 581,380     $ 449,473     $ -     $ 453,305     $ 288  

Investor

    50,947       7,772       -       7,847       -  

Commercial

    3,433,621       1,546,811       -       1,546,812       -  

Commercial construction

    -       -       -       -       -  

Commercial business

    1,138,939       723,753       -       740,966       25,151  

Home equity loans

    36,734       10,980       -       11,510       93  

Consumer

    -       -       -       -       -  

With an allowance recorded:

                                       

Real estate loans:

                                       

Residential

    1,340,394       1,313,126       278,573       1,317,495       12,802  

Investor

    -       -       -       -       -  

Commercial

    -       -       -       -       -  

Commercial construction

    -       -       -       -       -  

Commercial business

    -       -       -       -       -  

Home equity loans

    -       -       -       -       -  

Consumer

    -       -       -       -       -  

Total legacy impaired

    6,582,015       4,051,915       278,573       4,077,935       38,334  
                                         

Acquired (1):

                                       

With no related allowance recorded:

                                       

Real estate loans:

                                       

Residential

    1,370,261       1,177,729       -       1,184,445       11,221  

Investor

    333,362       183,728       -       168,815       3,102  

Commercial

    253,215       203,215       -       203,870       1,912  

Commercial construction

    -       -       -       -       -  

Commercial business

    -       -       -       -       -  

Home equity loans

    44,852       -       -       -       288  

Consumer

    107,670       68,772       -       70,988       1,927  

With an allowance recorded:

                                       

Real estate loans:

                                       

Residential

    -       -       -       -       -  

Investor

    -       -       -       -       -  

Commercial

    -       -       -       -       -  

Commercial construction

    -       -       -       -       -  

Commercial business

    -       -       -       -       -  

Home equity loans

    -       -       -       -       -  

Consumer

    -       -       -       -       -  

Total acquired impaired

    2,109,360       1,633,444       -       1,628,118       18,450  

Total impaired

  $ 8,691,375     $ 5,685,359     $ 278,573     $ 5,706,053     $ 56,784  

 

(1)

Generally accepted accounting principles require that we record acquired loans at fair value at acquisition, which includes a discount for loans with credit impairment. These purchased credit impaired loans are not performing according to their contractual terms and meet the definition of an impaired loan. Although we do not accrue interest income at the contractual rate on these loans, we do recognize an accretable yield as interest income to the extent such yield is supported by cash flow analysis of the underlying loans. 

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

   

Impaired Loans at March 31, 2018

   

For the Year Ended March 31, 2018

 
   

Unpaid

                                 
   

Contractual

                   

Average

   

Interest

 
   

Principal

   

Recorded

   

Related

   

Recorded

   

Income

 

 

 

Balance

   

Investment

   

Allowance

   

Investment

   

Recognized

 
Legacy:                              

With no related allowance recorded:

                                       

Real estate loans:

                                       

Residential

  $ 665,051     $ 517,600     $ -     $ 548,636     $ 9,257  

Investor

    126,389       60,949       -       118,175       3,772  

Commercial

    6,487,088       4,356,264       -       4,634,504       1,077  

Commercial construction

    -       -       -       -       -  

Commercial business

    1,562,756       795,410       -       1,082,773       103,474  

Home equity loans

    47,650       20,595       -       22,604       392  

Consumer

    48,115       34,266       -       38,514       1,576  

With an allowance recorded:

                                       

Real estate loans:

                                       

Residential

    1,336,078       1,309,440       266,256       1,328,919       51,928  

Investor

    -       -       -       -          

Commercial

    -       -       -       -       -  

Commercial construction

    -       -       -       -       -  

Commercial business

    -       -       -       -       -  

Home equity loans

    -       -       -       -       -  

Consumer

    -       -       -       -       -  

Total legacy impaired

    10,273,127       7,094,524       266,256       7,774,125       171,476  
                                         

Acquired (1):

                                       

With no related allowance recorded:

                                       

Real estate loans:

                                       

Residential

    1,082,484       922,252       -       945,602       26,437  

Investor

    682,045       444,254       -       659,246       37,368  

Commercial

    248,938       198,938       -       201,519       7,336  

Commercial construction

    -       -       -       -       -  

Commercial business

    -       -       -       -       -  

Home equity loans

    40,473       -       -       -       1,329  

Consumer

    95,986       60,371       -       64,013       6,062  

With an allowance recorded:

                                       

Real estate loans:

                                       

Residential

    -       -       -       -       -  

Investor

    -       -       -       -       -  

Commercial

    -       -       -       -       -  

Commercial construction

    -       -       -       -       -  

Commercial business

    -       -       -       -       -  

Home equity loans

    -       -       -       -       -  

Consumer

    -       -       -       -       -  

Total acquired impaired

    2,149,926       1,625,815       -       1,870,380       78,532  

Total impaired

  $ 12,423,053     $ 8,720,339     $ 266,256     $ 9,644,505     $ 250,008  

 

(1)

Generally accepted accounting principles require that we record acquired loans at fair value at acquisition, which includes a discount for loans with credit impairment. These purchased credit impaired loans are not performing according to their contractual terms and meet the definition of an impaired loan. Although we do not accrue interest income at the contractual rate on these loans, we do recognize an accretable yield as interest income to the extent such yield is supported by cash flow analysis of the underlying loans. 

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

The following table documents changes in the carrying amount of acquired impaired loans (Purchased Credit Impaired or “PCI”) for the three months ended June 30, 2018 and 2017, along with the outstanding balance at the end of the period:

 

   

June 30, 2018

   

June 30, 2017

 
                 

Recorded investment at beginning of period

  $ 1,021,424     $ 1,341,935  

Accretion

    1,526       (360 )

Reductions for payments

    (21,493 )     (46,664 )

Recorded investment at end of period

  $ 1,001,457     $ 1,294,911  

Oustanding principal balance at end of period

  $ 1,247,145     $ 1,630,658  

 

 

A summary of changes in the accretable yield for PCI loans for the three months ended June 30, 2018 and 2017 is as follows:

 

   

June 30, 2018

   

June 30, 2017

 
                 

Accretable yield, beginning of period

  $ 31,895     $ 59,639  

Accretion

    (1,526 )     360  

Reclassification from nonaccretable difference

    -       -  

Accretable yield, end of period

  $ 30,369     $ 59,999  

 

Impaired loans also include certain loans that have been modified in troubled debt restructurings (TDRs) where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Bank's loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Generally, nonaccrual loans that are modified and considered TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower's sustained repayment performance for a reasonable period, generally six months.

 

A summary of TDRs at June 30, 2018 and March 31, 2018 follows:

 

   

Number of

                         

June 30, 2018

 

contracts

   

Performing

   

Nonperforming

   

Total

 

Real estate loans:

                               

Residential

    16     $ 1,242,975     $ 306,235     $ 1,549,210  

Investor

    -       -       -       -  

Commercial

    2       -       1,195,421       1,195,421  

Commercial construction

    -       -       -       -  

Commercial business

    1       604,181       -       604,181  

Home equity loans

    -       -       -       -  

Consumer

    -       -       -       -  
      19     $ 1,847,156     $ 1,501,656     $ 3,348,812  

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

   

Number of

                         

March 31, 2018

 

contracts

   

Performing

   

Nonperforming

   

Total

 

Real estate loans:

                               

Residential

    15     $ 1,230,166     $ 312,964     $ 1,543,130  

Investor

    -       -       -       -  

Commercial

    2       -       1,195,421       1,195,421  

Commercial construction

    -       -       -       -  

Commercial business

    1       605,488       -       605,488  

Home equity loans

    -       -       -       -  

Consumer

    -       -       -       -  
      18     $ 1,835,654     $ 1,508,385     $ 3,344,039  

 

The following table presents the number of contracts and the dollar amount of TDRs that were added during the three-month period ended June 30, 2018 and 2017. The amount shown reflects the outstanding loan balance at the time of the modification. There are no commitments to extend credit under existing TDRs as of June 30, 2018.

 

 

   

Loans Modified as a TDR for the Three Months Ended

 
   

June 30, 2018

   

June 30, 2017

 

Troubled Debt Restructurings

 

Number of

contracts

   

Outstanding recorded

investment

   

Number of

contracts

   

Outstanding recorded

investment

 
                                 

Real estate loans:

                               

Residential

    1     $ 20,866       1     $ 1,931  

 

There were no TDRs that defaulted in the three months ended June 30, 2018 and 2017. Payment default under a TDR is defined as any TDR that is 90 days or more past due following the time that the loan was modified or the inability of the TDR to make the required payment subsequent to the modification.      

 

In calculating the allowance for loan losses, individual TDRs are evaluated for impairment. TDRs are evaluated for impairment based upon either the present value of cash flows or, if collateral dependent, the lower of cost or fair value of the underlying collateral. If it is determined that the cash flows or underlying collateral is less than the carrying amount of the loan, the difference in value will be charged-off through earnings, unless the TDR is performing, in which case a specific reserve may be set-up for that TDR.

 

 

Credit quality indicators

 

As part of the ongoing monitoring of the credit quality of the Bank's loan portfolio, management tracks certain credit quality indicators including trends related to the risk grade of loans, the level of classified loans, net charge offs, nonperforming loans, and the general economic conditions in the Bank's market.

 

The Bank utilizes a risk grading matrix to assign a risk grade to each of its loans. A description of the general characteristics of loans characterized as watch list or classified is as follows:

 

Pass

A pass loan is considered of sufficient quality to preclude a special mention or an adverse rating. Pass assets generally are well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral.

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

Special Mention

 

A special mention loan has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Bank's credit position at some future date. Special mention loans are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification.

 

Loans that would primarily fall into this notational category could have been previously classified adversely, but the deficiencies have since been corrected. Management should closely monitor recent payment history of the loan and value of the collateral.

 

Borrowers may exhibit poor liquidity and leverage positions resulting from generally negative cash flow or negative trends in earnings. Access to alternative financing may be limited to finance companies for business borrowers and may be unavailable for commercial real estate borrowers.

 

Substandard

 

A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness, or weaknesses, that jeopardize the collection or liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. This will be the measurement for determining if a loan is impaired.

 

Borrowers may exhibit recent or unexpected unprofitable operations, an inadequate debt service coverage ratio, or marginal liquidity and capitalization. These loans require more intense supervision by Bank management.

 

Doubtful

 

A doubtful loan has all the weaknesses inherent as a substandard loan with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. A loan classified as doubtful exhibits loss potential. However, there is still sufficient reason to permit the loan to remain on the books. A doubtful classification could reflect the deterioration of the primary source of repayment and serious doubt exists as to the quality of the secondary source of repayment.

 

Doubtful classifications should be used only when a distinct and known possibility of loss exists. When identified, adequate loss should be recorded for the specific assets. The entire asset should not be classified as doubtful if a partial recovery is expected, such as liquidation of the collateral or the probability of a private mortgage insurance payment is likely.

 

Loss

 

Loans classified as loss are considered uncollectable and of such little value that their continuance as loans is unjustified. A loss classification does not mean a loan has absolutely no value; partial recoveries may be received in the future. When loans or portions of a loan are considered a loss, it will be the policy of the Bank to write-off the amount designated as a loss. Recoveries will be treated as additions to the allowance for loan losses.

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

The following tables present the June 30, 2018 and March 31, 2018, balances of classified loans based on the risk grade. Classified loans include Special Mention, Substandard, Doubtful, and Loss loans. The Bank had no loans classified as Doubtful or Loss as of June 30, 2018 or March 31, 2018.

 

   

June 30, 2018

   

March 31, 2018

 
   

LEGACY

   

ACQUIRED

   

TOTAL

   

LEGACY

   

ACQUIRED

   

TOTAL

 

Risk Rating:

                                               

Rating - Pass:

                                               

Real estate loans:

                                               

Residential

  $ 87,092,026     $ 68,580,711     $ 155,672,737     $ 87,863,805     $ 70,901,293     $ 158,765,098  

Investor

    8,764,071       16,487,657       25,251,728       9,214,082       16,719,346       25,933,428  

Commercial

    95,153,651       10,288,933       105,442,584       92,955,370       11,563,547       104,518,917  

Commercial construction

    2,550,462       854,370       3,404,832       5,763,784       1,352,019       7,115,803  

Commercial Business

    36,806,789       1,905,770       38,712,559       37,978,293       1,841,226       39,819,519  

Home Equity

    13,728,056       5,367,653       19,095,709       13,935,732       5,928,787       19,864,519  

Consumer

    17,841,773       707,772       18,549,545       18,733,489       733,669       19,467,158  

Total Pass

    261,936,828       104,192,866       366,129,694       266,444,555       109,039,887       375,484,442  
                                                 

Rating - Special Mention:

                                               

Real estate loans:

                                               

Residential

    2,370,659       1,036,410       3,407,069       2,365,652       925,521       3,291,173  

Investor

    -       291,458       291,458       -       297,209       297,209  

Commercial

    -       -       -       3,092,135       -       3,092,135  

Commercial construction

    -       -       -       -       -       -  

Commercial Business

    -       -       -       134,524       -       134,524  

Home Equity

    -       107,655       107,655       -       110,675       110,675  

Consumer

    -       -       -       96,474       -       96,474  

Total Special Mention

    2,370,659       1,435,523       3,806,182       5,688,785       1,333,405       7,022,190  
                                                 

Rating - Substandard:

                                               

Real estate loans:

                                               

Residential

    426,769       892,087       1,318,856       469,554       922,252       1,391,806  

Investor

    58,599       431,868       490,467       60,949       444,254       505,203  

Commercial

    7,505,365       197,259       7,702,624       4,356,264       198,938       4,555,202  

Commercial construction

    -       -       -       -       -       -  

Commercial Business

    254,581       -       254,581       189,922       -       189,922  

Home Equity

    7,408       -       7,408       20,595       -       20,595  

Consumer

    19,853       31,528       51,381       19,485       32,394       51,879  

Total - Substandard

    8,272,575       1,552,742       9,825,317       5,116,769       1,597,838       6,714,607  
                                                 

Rating - Doubtful

    -       -       -       -       -       -  

Rating - Loss

    -       -       -       -       -       -  

TOTAL LOANS

  $ 272,580,062     $ 107,181,131     $ 379,761,193     $ 277,250,109     $ 111,971,130     $ 389,221,239  

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

In the normal course of business, the Bank has various outstanding commitments and contingent liabilities that are not reflected in the accompanying financial statements. Loan commitments and lines of credit are agreements to lend to a customer as long as there is no violation of any condition to the contract. Mortgage loan commitments generally have fixed interest rates, fixed expiration dates, and may require payment of a fee. Other loan commitments generally have fixed interest rates. Lines of credit generally have variable interest rates. Such lines do not represent future cash requirements because it is unlikely that all customers will draw upon their lines in full at any time.

 

The Bank’s maximum exposure to credit loss in the event of nonperformance by the customer is the contractual amount of the credit commitment. Loan commitments, lines of credit, and letters of credit are made on the same terms, including collateral, as outstanding loans. The Bank has established an off-balance sheet reserve for potential losses associated with any outstanding commitment or unused line of credit. The off-balance sheet reserve is a percentage of the outstanding commitment or unused line of credit that is based upon a discounted charge-off history associated with each respective loan segment. The reserve at June 30, 2018 and March 31, 2018 totaled $52,000 and $50,000, respectively. At June 30, 2018, management is not aware of any accounting loss to be incurred by funding these loan commitments at this time.

 

The Bank had the following outstanding commitments and unused lines of credit as of June 30, 2018 and March 31, 2018:

 

Outstanding Commitment and

 

June 30,

   

March 31,

 

Used Lines of Credit

 

2018

   

2018

 
                 

Unused commercial lines of credit

  $ 11,325,807     $ 9,187,810  

Unused home equity lines of credit

    24,296,445       22,560,376  

Unused consumer lines of credit

    185,417       29,331  

Residential construction loan commitments

    5,600,272       4,234,076  

Commercial construction loan commitments

    8,147,129       8,968,416  

Home equity loan commitments

    696,000       389,600  

Commercial loan commitments

    4,490,151       5,125,000  

Standby letter of credit

    415,607       250,224  

 

 

 

Note 6:     Goodwill and Other Intangible Asset

 

The Company’s intangible assets (goodwill and core deposit intangible) at June 30, 2018 consists of assets recorded in December 2009 associated with the acquisition of a branch office in Pasadena, Maryland and the acquisition of Fairmount and Fraternity in September 2015 and May 2016, respectively. Only the goodwill related to the branch office acquisition in the amount of $2.7 million is deductible for tax purposes. We conducted our annual impairment test of goodwill as of December 31, 2017. In addition, due to the significant increase in tax expense resulting from the recording of a valuation allowance on our net deferred tax assets in the fourth quarter of fiscal 2018, we concluded that a triggering event had occurred. Therefore, we performed an additional goodwill impairment analysis during the quarter ending March 31, 2018. Based upon the impairment tests performed as of December 31, 2017 and March 31, 2018, the fair values exceeded the carrying values of our only reporting unit. As a result, no impairment to goodwill was recorded for the period ended March 31, 2018. The core deposit intangible assets are being amortized straight-line over a life of eight years.

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

The following table presents the changes in the net book value of intangible assets for the three months ended June 30, 2018 and 2017:

 

           

Core deposit

 
   

Goodwill

   

intangible

 
                 

Balance April 1, 2017

  $ 8,563,530     $ 739,298  

Amortization

    -       (31,516 )

Balance June 30, 2017

    8,563,530       707,782  

 

           

Core deposit

 
   

Goodwill

   

intangible

 

Balance April 1, 2018

  $ 8,563,530     $ 613,234  

Amortization

    -       (31,516 )

Balance June 30, 2018

  $ 8,563,530     $ 581,718  

 

      At June 30, 2018, future expected annual amortization associated with the core deposit intangible is as follows:

 

Year ending March 31,

 

Amount

 
         

2019

    94,554  

2020

    123,737  

2021

    98,070  

2022

    98,070  

2023

    98,070  

2024

    64,174  

2025

    5,043  
    $ 581,718  

 

 

 

Note 7:     Derivative – Interest Rate Swap Agreement

 

The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. The Company posted $754,000 and $751,000 under collateral arrangements as of June 30, 2018 and March 31, 2018, respectively, to satisfy collateral requirements associated with the risk exposure associated with all interest rate swap agreements.

 

Interest Rate SWAPS Designated as Cash Flow Hedges

 

During fiscal 2017, the Company entered into several interest rate swaps that were designated as cash flow hedges. The interest rate swaps have notional amounts totaling $11.6 million as of June 30, 2018 and were designated as cash flow hedges of certain Federal Home Loan Bank advances. The purpose of the cash flow hedges is to match-fund longer-term assets with longer-term borrowings to reduce potential interest rate risk and cost by swapping a variable rate borrowing for a fixed rate borrowing. The aggregate fair value of the swaps is recorded in other assets (liabilities) with changes in fair value associated with the effective portion recorded in other comprehensive income (loss) and the ineffective portion recorded in other non-interest income (expense). The cash flow hedges were determined to be ineffective beginning with the quarter ended September 30, 2017. As such, a total of $381 of ineffectiveness has been reported in net income for the three-month period ended June 30, 2018.

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

Summary information about the interest rate swaps designated as cash flow hedges is as follows:

 

 

   

Notional

 

Effective

     

Pay Fixed

   

Receive

Interest Rate Swap

 

Amount

 

Start Date

 

Maturity Date

 

Rate

   

Floating Rate

FHLB Advance Swap 1

  $ 1,850,000  

March 9, 2017

 

March 9, 2022

    2.24 %  

3-Month LIBOR

FHLB Advance Swap 2

    1,850,000  

March 9, 2017

 

March 9, 2024

    2.41 %  

3-Month LIBOR

FHLB Advance Swap 3

    1,850,000  

March 9, 2017

 

March 9, 2027

    2.57 %  

3-Month LIBOR

FHLB Advance Swap 4

    2,000,000  

March 29, 2017

 

March 29, 2022

    2.08 %  

3-Month LIBOR

FHLB Advance Swap 5

    2,000,000  

March 29, 2017

 

March 29, 2024

    2.24 %  

3-Month LIBOR

FHLB Advance Swap 6

    2,000,000  

March 29, 2017

 

March 29, 2027

    2.40 %  

3-Month LIBOR

Total Notional Amount   $ 11,550,000                    

 

 

Interest expense recorded on the swap transactions totaled $2,738 for the three months ended June 30, 2018 and is reported as a component of interest expense on FHLB Advances.

 

The following table reflects cash flow hedges included in the Consolidated Statements of Financial Condition as of June 30, 2018 and March 31, 2018:

 

   

6/30/2018

   

3/31/2018

 
   

Notional

           

Notional

         
   

Amount

   

Fair Value

   

Amount

   

Fair Value

 

Included in assets:

                               

Interest rate swaps related to FHLB Advances

  $ 11,550,000     $ 315,884     $ 11,550,000     $ 217,464  

 

The following tables present the net gain (loss) recorded in accumulated other comprehensive income (loss) and the Consolidated Statements of Operations relating to the cash flow derivative instruments for the three-month periods ended June 30, 2018 and 2017:

 

   

Three Month and Period Ended June 30, 2018

 
   

Amount of Gain

   

Amount of Gain

   

Amount of Gain

 
   

(Loss) Recognized

   

(Loss) Reclassified

   

(Loss) Recognized in

 
   

in OCI

   

from OCI to

   

Other Noninterest Income

 
   

(Effective Portion)

   

Interest Income

   

(Ineffective Portion)

 
                         

Interest Rate Contracts

  $ 98,039     $ -     $ (381 )

 

 

   

Three Month and Period Ended June 30, 2017

 
   

Amount of Gain

   

Amount of Gain

   

Amount of Gain

 
   

(Loss) Recognized

   

(Loss) Reclassified

   

(Loss) Recognized in

 
   

in OCI

   

from OCI to

   

Other Noninterest Income

 
   

(Effective Portion)

   

Interest Income

   

(Ineffective Portion)

 
                         

Interest Rate Contracts

  $ (126,314 )   $ -     $ -  

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

 Interest Rate SWAPS Designated as Fair Value Hedges

 

The derivative position relates to a transaction in which the Bank entered into an interest rate swap with another financial institution using a fixed rate commercial real estate loan as an offset. The Bank agrees to pay the other financial institution a fixed interest rate on a notional amount based upon the commercial real estate loan and in return receive a variable interest rate on the same notional amount. This transaction allows the Bank to effectively convert a fixed rate loan to a variable rate. Because the terms of the swap with the other financial institution and the commercial real estate loan offset each other, with the only difference being credit risk associated with the loan, changes in the fair value of the underlying derivative contract and the commercial real estate loan are not materially different and do not significantly impact the Bank’s results of operations.

 

During the second quarter of fiscal 2016, the Company entered into the interest rate swap agreement with a $3.3 million notional amount to convert a fixed rate commercial real estate loan at 3.99% into a variable rate for a term of approximately 10 years. The notional amount of the interest rate swap and the offsetting commercial real estate loan were $3.1 million at June 30, 2018. The derivative is designated as a fair value hedge.

 

Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. The Bank’s exposure is limited to the replacement value of the contract rather than the notional amount, principal, or contract amount. There are provisions in the agreement with the counterparty that allow for certain unsecured credit exposure up to an agreed threshold. Exposures in excess of the agreed threshold are collateralized. In addition, the Bank minimizes credit risk through credit approvals, limits, and monitoring procedures.

 

The fair value hedge is summarized below:

 

   

June 30, 2018

   

March 31, 2018

 
   

Notional Amount

   

Principal Amount

   

Fair Value

   

Notional Amount

   

Principal Amount

   

Fair Value

 

Included in Loans and Leases:

                                               

Commercial real estate loan

  $ -     $ 3,070,825     $ 2,973,514     $ -     $ 3,091,892     $ 3,022,744  
                                                 

Included in Other Assets:

                                               

Interest Rate Swap

  $ 3,070,825     $ -     $ 97,311     $ 3,091,892       -     $ 69,148  

 

 

No gain or loss was recognized in earnings with respect to the interest rate swap for the three months ended June 30, 2018 and 2017 due to the fact the gain or increase in the fair value of the commercial real estate loan was offset by the loss or decrease in the fair value of the interest rate swap.

 

 

 

Note 8:     Deposits

 

The following table details the composition of deposits and the related percentage mix of total deposits, respectively:

 

   

June 30, 2018

   

March 31, 2018

 
   

Amount

   

% of Total

   

Amount

   

% of Total

 

Savings

  $ 40,965,710       10.1 %   $ 42,499,381       10.6 %

Noninterest-bearing checking

    27,485,033       6.8 %     29,557,943       7.3 %

Interest-bearing checking

    29,482,021       7.3 %     27,219,286       6.7 %

Money market accounts

    66,235,735       16.4 %     58,466,228       14.4 %

Time deposits

    239,974,615       59.4 %     246,988,613       61.0 %
    $ 404,143,114       100.0 %   $ 404,731,451       100.0 %

Premium on deposits asssumed

    330,947               411,524          

Total deposits

  $ 404,474,061             $ 405,142,975          

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

 

Note 9:     Lines of Credit and Federal Home Loan Bank Advances

 

The Bank may 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 federal funds line of credit. The Bank would be required to pledge investment securities to draw upon the secured line of credit. There were no borrowings under these lines of credit at June 30, 2018 and March 31, 2018.

 

Borrowings consist of advances from the Federal Home Loan Bank (FHLB). The Bank may borrow up to 25 percent of its assets under a line of credit agreement with the FHLB. Advances under the line of credit are secured by certain loans owned by the Bank. As of June 30, 2018 and March 31, 2018, the Bank had $72.0 million and $68.3 million, respectively, of available credit from the FHLB. Advances are limited by the balance of loans available for pledge. The amount of loans that were deemed eligible to pledge as collateral totaled $116.7 million at June 30, 2018 and $122.6 million at March 31, 2018. As a condition of obtaining the line of credit from the FHLB, the FHLB also requires the Bank purchase shares of capital stock in the FHLB. Information relating to borrowings at June 30, 2018 and March 31, 2018 is presented below.

 

   

June 30, 2018

   

March 31, 2018

 
   

Amount

   

Rate

   

Maturity Date

   

Amount

   

Rate

   

Maturity Date

 

FHLB advance (1)

  $ 5,550,000       2.08 %  

9/10/2018

    $ 5,550,000       1.84 %  

6/11/2018

 

FHLB advance (2)

    6,000,000       2.07 %  

10/1/2018

      6,000,000       1.90 %  

6/29/2018

 

FHLB advance

    1,000,000       2.60 %  

7/2/2018

      1,000,000       2.60 %  

7/2/2018

 

FHLB advance

    1,000,000       3.05 %  

7/3/2018

      1,000,000       3.05 %  

7/3/2018

 

FHLB advance

    5,000,000       3.94 %  

7/23/2018

      5,000,000       3.94 %  

7/23/2018

 

FHLB advance

    1,000,000       1.74 %  

7/31/2018

      1,000,000       1.74 %  

7/31/2018

 

FHLB advance

    1,000,000       1.40 %  

8/21/2018

      1,000,000       1.40 %  

8/21/2018

 

FHLB advance

    4,000,000       1.94 %  

8/27/2018

      4,000,000       1.94 %  

8/27/2018

 

FHLB advance

    3,000,000       1.41 %  

8/27/2018

      3,000,000       1.41 %  

8/27/2018

 

FHLB advance

    5,000,000       3.38 %  

9/19/2018

      5,000,000       3.38 %  

9/19/2018

 

FHLB advance

    -       -     -       1,000,000       2.60 %  

10/2/2018

 

FHLB advance

    1,000,000       1.95 %  

12/31/2018

      1,000,000       1.95 %  

12/31/2018

 

FHLB advance

    3,000,000       1.38 %  

7/31/2019

      3,000,000       1.38 %  

7/31/2019

 

FHLB advance

    3,000,000       1.96 %  

8/26/2019

      3,000,000       1.96 %  

8/26/2019

 

FHLB advance

    3,000,000       1.59 %  

8/26/2019

      3,000,000       1.59 %  

8/26/2019

 

FHLB advance

    3,000,000       1.42 %  

8/26/2019

      3,000,000       1.42 %  

8/26/2019

 

FHLB advance

    1,500,000       1.95 %  

11/25/2019

      1,500,000       1.95 %  

11/25/2019

 

FHLB advance

    1,500,000       1.78 %  

11/27/2019

      1,500,000       1.78 %  

11/27/2019

 

FHLB advance

    3,000,000       2.31 %  

2/3/2020

      3,000,000       2.31 %  

2/3/2020

 

FHLB advance

    1,000,000       2.15 %  

11/30/2020

      1,000,000       2.15 %  

11/30/2020

 

FHLB advance

    2,000,000       2.28 %  

12/28/2020

      2,000,000       2.28 %  

12/28/2020

 

FHLB advance

    2,000,000       2.49 %  

2/1/2021

      2,000,000       2.49 %  

2/1/2021

 

FHLB advance

    3,000,000       1.48 %  

8/25/2021

      3,000,000       1.48 %  

8/25/2021

 
      59,550,000                       60,550,000                

Premium on FHLB advances assumed

    49,093                       122,140                

Total borrowings

  $ 59,599,093                     $ 60,672,140                

 

(1) -

 

FHLB Advance is tied to three derivative cash flow hedges in increments of $1.85 million each. The three individual cash flow hedges are for a term of five, seven and ten years, respectively and are tied to the 3-month LIBOR rate. In order for the cash flow hedges to remain effective, the corresponding FHLB Advance will have to be renewed every three months until the respective cash flow hedge matures.

(2) -

 

FHLB Advance is tied to three derivative cash flow hedges in increments of $2.0 million each. The three individual cash flow hedges are for a term of five, seven and ten years, respectively and are tied to the 3-month LIBOR rate. In order for the cash flow hedges to remain effective, the corresponding FHLB Advance will have to be renewed every three months until the respective cash flow hedge matures.

 

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

 

Note 10:     Regulatory Capital Ratios

 

Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.

 

The Basel III Capital Rules became effective for Hamilton Bank on January 1, 2015 (subject to a phase-in period for certain provisions). Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of Common Equity Tier 1 capital, Tier 1 capital and Total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined).

 

In connection with the adoption of the Basel III Capital Rules, we elected to opt-out of the requirement to include accumulated other comprehensive income in Common Equity Tier 1. Common Equity Tier 1 for Hamilton Bank is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities and subject to transition provisions.

 

Under the revised prompt corrective action requirements, as of January 1, 2015, insured depository institutions are required to meet the following in order to qualify as “well capitalized:” (1) a common equity Tier 1 risk-based capital ratio of 6.5%; (2) a Tier 1 risk-based capital ratio of 8%; (3) a total risk-based capital ratio of 10% and (4) a Tier 1 leverage ratio of 5%. As of June 30, 2018, the Bank met all capital adequacy requirements under the Basel III Capital Rules to be considered “well capitalized” under prompt corrective action rules.

 

The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and is being phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019). The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to Hamilton Bank.

 

The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

 

As a result of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”), banking regulatory agencies must adopt a revised definition of “well capitalized” for financial institutions and holding companies with assets of less than $10 billion and that are not determined to be ineligible by their primary federal regulator due to their risk profile (a “qualifying community bank”). The new definition will expand the ways that a qualifying community bank may meet its capital requirements and be deemed “well qualified.” The new rule will establish a “community bank leverage ratio” equal to the tangible equity capital divided by the average total consolidated assets. A qualifying community bank that exceeds a to-be-determined threshold for this new leverage ratio, which regulators must set at between 8% and 10%, will be considered to be well capitalized and to have met generally applicable leverage capital requirements, generally applicable risk-based capital requirements, and any other capital or leverage requirements to which such financial institution or holding company is subject.

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

In addition, as a result of the Act, the Federal Reserve Board is required to amend its small bank holding company and savings and loan holding company policy statement to provide that holding companies with consolidated assets of less than $3 billion that are (i) not engaged in significant nonbanking activities, (ii) do not conduct significant off-balance sheet activities, and (iii) do not have a material amount of SEC-registered debt or equity securities, other than trust preferred securities, that contribute to an organization’s complexity, will no longer be subject to regulatory capital requirements, effective no later than November 2018.

 

The following table presents actual and required capital ratios as of June 30, 2018 and March 31, 2018 for Hamilton Bank and the Company under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of January 1, 2015 based on the phase-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules are fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.

 

   

Actual

   

Minimum Capital

Required - Basel III

Phase-In Schedule

   

Minimum Capital

Required - Basel III

Fully Phased-In

   

To be well

capitalized (1)

 
   

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

 
   

(dollars in thousands)

 

June 30, 2018

                                                               
                                                                 

Common equity tier 1 capital (to risk-weighted assets)

                                                               

Hamilton Bank

  $ 40,150       11.04 %   $ 23,193       6.375 %   $ 25,466       7.00 %   $ 23,647       6.50 %

Hamilton Bancorp

    48,320       13.24 %     23,582       6.375 %     25,894       7.00 %     24,044       6.50 %

Total risk-based capital (to risk-weighted assets)

                                                               

Hamilton Bank

    43,038       11.83 %     35,926       9.875 %     38,200       10.50 %     36,380       10.00 %

Hamilton Bancorp

    51,208       14.03 %     36,529       9.875 %     38,841       10.50 %     36,992       10.00 %

Tier 1 capital (to risk-weighted assets)

                                                               

Hamilton Bank

    40,150       11.04 %     28,650       7.875 %     30,923       8.50 %     29,104       8.00 %

Hamilton Bancorp

    48,320       13.24 %     29,131       7.875 %     31,443       8.50 %     29,593       8.00 %

Tier 1 capital (to adjusted total assets)

                                                               

Hamilton Bank

    40,150       7.82 %     20,528       4.000 %     20,528       4.00 %     25,660       5.00 %

Hamilton Bancorp

    48,320       9.34 %     20,674       4.000 %     20,674       4.00 %     25,843       5.00 %
                                                                 

March 31, 2018

                                                               
                                                                 

Common equity tier 1 capital (to risk-weighted assets)

                                                               

Hamilton Bank

  $ 39,126       10.61 %   $ 23,498       6.375 %   $ 25,802       7.00 %   $ 23,959       6.50 %

Hamilton Bancorp

    47,308       12.79 %     23,582       6.375 %     25,894       7.00 %     24,044       6.50 %

Total risk-based capital (to risk-weighted assets)

                                                               

Hamilton Bank

    41,998       11.39 %     36,399       9.875 %     38,703       10.50 %     36,860       10.00 %

Hamilton Bancorp

    50,180       13.57 %     36,529       9.875 %     38,841       10.50 %     36,992       10.00 %

Tier 1 capital (to risk-weighted assets)

                                                               

Hamilton Bank

    39,126       10.61 %     29,027       7.875 %     31,331       8.50 %     29,488       8.00 %

Hamilton Bancorp

    47,308       12.79 %     29,131       7.875 %     31,443       8.50 %     29,593       8.00 %

Tier 1 capital (to adjusted total assets)

                                                               

Hamilton Bank

    39,126       7.64 %     20,497       4.000 %     20,497       4.00 %     25,621       5.00 %

Hamilton Bancorp

    47,308       9.15 %     20,674       4.000 %     20,674       4.00 %     25,843       5.00 %

 

(1) - Under prompt corrective action

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

Tier 1 capital consists of total shareholders’ equity less goodwill, intangible assets, and deferred tax net operating loss carryforwards. Total capital includes a limited amount of the allowance for loan losses and a portion of any unrealized gain on equity securities. In calculating risk-weighted assets, specified risk percentages are applied to each category of asset and off-balance-sheet items.

 

In its regulatory report filed as of June 30, 2018, the Bank exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory guidelines. Management is not aware of any events that would have caused this classification to change. Failure to meet the capital requirements could affect, among other things, the Bank's ability to accept brokered deposits and may significantly affect the operations of the Bank. Management has no plans that should change the classification of the capital adequacy.

 

 

 

Note 11:     Stock Based Compensation

 

In November 2013, the Company’s shareholders approved a new Equity Incentive Plan (the “2013 Equity Incentive Plan’’). The 2013 Equity Incentive Plan allows for up to 148,120 shares to be issued to employees, executive officers or Directors in the form of restricted stock, and up to 370,300 shares to be issued to employees, executive officers or Directors in the form of stock options. At June 30, 2018, there were 92,701 restricted stock awards issued and outstanding and 268,204 stock option awards granted under the 2013 Equity Incentive Plan.

 

Stock Options:

 

Under the above plan, the exercise price for stock options is the market price at date of grant. The maximum option term is ten years and the options granted shall vest in five equal annual installments of 20% with the first installment becoming exercisable on the first anniversary of the date of grant and succeeding installments on each anniversary thereafter. The Company plans to issue new shares to satisfy share option exercises. The total cost that has been incurred for the stock option plan was $61,514 and $57,392 for the three months ended June 30, 2018 and 2017, respectively.

 

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical data. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury rate equal to the expected term of the option in effect at the time of the grant.

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

The fair value of options granted to date was determined using the following weighted-average assumptions as of grant date.

 

Grant Date

 

Number of

Options Granted

   

Risk Free

Interest Rate

   

Expected Term

(in years)

   

Expected Stock

Price Volatility

   

Dividend

Yield

   

Fair Value of

Options Granted

 
                                                 

February 3, 2014

    225,150       2.07 %     7.0       27.30 %     0.00 %   $ 4.65  

November 1, 2016

    19,000       1.61 %     7.0       27.17 %     0.00 %   $ 4.35  

February 3, 2017

    3,700       2.27 %     7.0       27.26 %     0.00 %   $ 5.18  

April 1, 2018

    20,354       2.67 %     7.0       19.61 %     0.00 %   $ 4.05  

 

The following tables summarize the Company’s stock option activity and related information for the periods ended:

 

June 30, 2018:

 

Shares

   

Weighted

Average

Exercise Price

   

Weighted Average

Remaining

Contractual Term

(in years)

Outstanding at April 1, 2018

    242,350     $ 13.84       6.1  

Granted

    20,354       14.25       9.8  

Exercised

    -       -       -  

Forfeited, exchanged or expired

    -       -       -  

Outstanding at June 30, 2018

    262,704     $ 13.87       6.1  
                         

Vested at June 30, 2018

    180,260     $ 13.85       5.7  

 

March 31, 2018:

 

Shares

   

Weighted

Average

Exercise Price

   

Weighted Average

Remaining

Contractual Term

(in years)

Outstanding at April 1, 2017

    242,350     $ 13.84       7.1  

Granted

    -       -       -  

Exercised

    -       -       -  

Forfeited, exchanged or expired

    -       -       -  

Outstanding at March 31, 2018

    242,350     $ 13.84       6.1  
                         

Vested at March 31, 2018

    180,260     $ 13.84       5.8  

 

As of June 30, 2018, there was $269,191 of total unrecognized compensation cost related to nonvested stock options granted under the Plan. The cost is expected to be recognized over a weighted-average period of 2.2 years. The intrinsic value of a stock option is the amount that the market value of the underlying stock exceeds the exercise price of the option. Based upon a fair market value of $15.70 at June 30, 2018, the options outstanding had an intrinsic value of $450,003.

 

Restricted Stock:

 

The specific terms of each restricted stock award are determined by the Compensation Committee at the date of the grant. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at the grant date. Restricted stock awards granted shall vest in five equal annual installments of 20% with the first installment becoming vested on the first anniversary of the date of grant and succeeding installments on each anniversary thereafter.

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

The following table presents a summary of the activity in the Company’s restricted stock for the periods ended:

 

           

Weighted-Average

 

June 30, 2018:

 

Shares

   

Fair Value

 

Nonvested shares at April 1, 2018

    19,440     $ 13.74  

Granted

    8,801       14.25  

Vested

    -       -  

Forfeited

    -       -  

Nonvested shares at June 30, 2018

    28,241     $ 13.90  
                 

Fair Value of shares vested at June 30, 2018

  $ 1,012,022          

 

 

           

Weighted-Average

 

March 31, 2018:

 

Shares

   

Fair Value

 

Nonvested shares at April 1, 2017

    36,220     $ 13.76  

Granted

    -       -  

Vested

    (16,780 )     13.78  

Forfeited

    -       -  

Nonvested shares at March 31, 2018

    19,440     $ 13.74  
                 

Fair Value of shares vested at March 31, 2018

  $ 918,555          

 

The Company recorded restricted stock awards expense of $64,089 and $57,819 during the three months ended June 30, 2018 and 2017, respectively. As of June 30, 2018, there was $286,770 of total unrecognized compensation cost related to nonvested shares granted under the 2013 stock incentive plan. The cost is expected to be recognized over a weighted-average period of 2.1 years.

 

 

 

Note 12:     Fair Value Measurements

 

Generally accepted accounting principles define fair value, establish a framework for measuring fair value, and establish a hierarchy for determining fair value measurement. The hierarchy includes three levels and is based upon the valuation techniques used to measure assets and liabilities. The three levels are as follows:

 

Level 1: Valuation is based on quoted prices (unadjusted) for identical assets or liabilities in active markets;

 

Level 2: Valuation is determined from quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market; and

 

Level 3: Valuation is derived from model-based techniques in which at least one significant input is unobservable and based on the Company’s own estimates about the assumptions that market participants would use to value the asset or liability.

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

The following is a description of the valuation methods used for instruments measured at fair value as well as the general classification of such instruments pursuant to the applicable valuation method.

  

Fair value measurements on a recurring basis

 

Securities available for sale – If quoted prices are available in an active market for identical assets, securities are classified within Level 1 of the hierarchy. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. As of June 30, 2018 and March 31, 2018, the Bank has categorized its investment securities available for sale as follows:

 

   

Level 1

   

Level 2

   

Level 3

         

June 30, 2018

 

inputs

   

inputs

   

inputs

   

Total

 
                                 

U.S. government agencies

  $ -     $ 2,715,652     $ -     $ 2,715,652  

Municipal bonds

    -       11,632,843       -       11,632,843  

Corporate bonds

            -       1,983,250       1,983,250  

Mortgage-backed securities

    -       56,306,952       -       56,306,952  

Total investment securities available for sale

  $ -     $ 70,655,447     $ 1,983,250     $ 72,638,697  

 

   

Level 1

   

Level 2

   

Level 3

         

March 31, 2018

 

inputs

   

inputs

   

inputs

   

Total

 
                                 

U.S. government agencies

  $ -     $ 2,718,649     $ -     $ 2,718,649  

Municipal bonds

    -       11,705,991       -       11,705,991  

Corporate bonds

            -       1,954,076       1,954,076  

Mortgage-backed securities

    -       59,025,404       16       59,025,420  

Total investment securities available for sale

  $ -     $ 73,450,044     $ 1,954,092     $ 75,404,136  

 

 

 

Derivative – Interest rate swap agreements – The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). The quantitative models that are used utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. As of June 30, 2018, and March 31, 2018, the bank has categorized its interest rate swaps and related loan as follows:

 

   

Level 1

   

Level 2

   

Level 3

         

June 30, 2018

 

inputs

   

inputs

   

inputs

   

Total

 
                                 

Loans - Commercial real estate loan

  $ -     $ 2,973,514     $ -     $ 2,973,514  

Derivative - Interest rate swap designated as fair value hedge

    -       97,311       -       97,311  

Derivatives - Interest rate swaps designated as cash flow hedge

    -       315,884       -       315,884  

 

 

   

Level 1

   

Level 2

   

Level 3

         

March 31, 2018

 

inputs

   

inputs

   

inputs

   

Total

 
                                 

Loans - Commercial real estate loan

  $ -     $ 3,022,744     $ -     $ 3,022,744  

Derivative - Interest rate swap designated as fair value hedge

    -       69,148       -       69,148  

Derivatives - Interest rate swaps designated as cash flow hedge

    -       217,464       -       217,464  

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

The following table presents the valuation and unobservable inputs for Level 3 assets measured at fair value on a recurring basis at June 30, 2018:

 

         

Valuation

 

Unobservable

 

Range of

 

Description

 

Fair Value

 

Methodology

 

Inputs

 

Inputs

 
                         

Investment securities

  $ 1,983,250  

3rd party valuation

 

Discount to reflect current market conditions

   0.00% - 10.00%  

 

 

The following table presents a reconciliation of the investments which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods presented:

 

   

Three Months

   

Fiscal Year

 
   

Ended

   

Ended

 
   

June 30, 2018

   

March 31, 2018

 

Balance, beginning of year

  $ 1,954,092     $ 1,930,786  
                 

Transfers in:

               

Corporate bonds

    -       1,954,076  

Mortgage-backed securities

    -       16  

Municipal bonds

    -       -  
                 

Transfers out:

               

Corporate bonds

    -       -  

Mortgage-backed securities

    16       2,473  

Municipal bonds

    -       1,928,313  
                 

Change in valuation

    29,174       -  
                 

Balance, end of year

  $ 1,983,250     $ 1,954,092  

 

 

Fair value measurements on a nonrecurring basis

 

Impaired Loans - The Bank has measured impairment generally based on the fair value of the loan's collateral. Fair value is generally determined based upon independent appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values. As of June 30, 2018 and March 31, 2018, the fair values consist of loan balances of $11,815,971 and $8,720,339 that have been written down by $261,902 and $266,256, respectively, as a result of specific loan loss allowances.

 

Foreclosed real estate – The Bank's foreclosed real estate is measured at the lower of carrying value or fair value less estimated cost to sell. At June 30, 2018 and March 31, 2018, the fair value of foreclosed real estate was estimated to be $457,778 respectively. Fair value was determined based on offers and/or appraisals. Cost to sell the assets was based on standard market factors. The Company has categorized its foreclosed assets as Level 3.

 

 

   

Level 1

   

Level 2

   

Level 3

         
   

inputs

   

inputs

   

inputs

   

Total

 

June 30, 2018

                               
                                 

Impaired loans

  $ -     $ -     $ 11,554,069     $ 11,554,069  

Foreclosed real estate

    -       -       457,778       457,778  

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

   

Level 1

   

Level 2

   

Level 3

         
   

inputs

   

inputs

   

inputs

   

Total

 

March 31, 2018

                               
                                 

Impaired loans

  $ -     $ -     $ 8,454,083     $ 8,454,083  

Foreclosed real estate

    -       -       457,778       457,778  

 

 

 

The following table presents the valuation and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis at June 30, 2018:

 

         

Valuation

 

Unobservable

 

Range of

 

Description

 

Fair Value

 

Methodology

 

Inputs

 

Inputs

 
                         

Impaired loans, net of allowance

  $ 11,554,069  

Appraised value

 

Discount to reflect current market conditions

   0.00% - 25.00%  
                         
         

Discounted cash flows

 

Discount rates

   2.63% - 7.25%  
                         

Foreclosed real estate

  $ 457,778  

Appraised value

 

Discount to reflect current market conditions

   0.00%  - 25.00%  

 

 

The following table summarizes changes in foreclosed real estate for the periods shown, which is measured on a nonrecurring basis using significant unobservable, level 3, inputs.

 

   

Three Months

   

Fiscal Year

 
   

Ended

   

Ended

 
   

June 30, 2018

   

March 31, 2018

 

Balance at beginning of period

  $ 457,778     $ 503,094  

Transfer to foreclosed real estate

    -       23,834  

Write-down of foreclosed real estate

    -       (31,955 )

Proceeds from sale of foreclosed real estate

    -       (35,896 )

Loss on sale of foreclosed real estate

    -       (1,299 )

Balance at end of period

  $ 457,778     $ 457,778  

 

The remaining financial assets and liabilities are not reported on the balance sheets at fair value on a recurring basis. The calculation of estimated fair values is based on market conditions at a specific point in time and may not reflect current or future fair values.

 

 

HAMILTON BANCORP INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

   

June 30, 2018

   

March 31, 2018

 
   

Carrying

   

Fair

   

Carrying

   

Fair

 
   

amount

   

value

   

amount

   

value

 

Financial assets

                               

Level 1 inputs

                               

Cash and cash equivalents

  $ 36,059,385     $ 36,059,385     $ 23,368,415     $ 23,368,415  
                                 

Level 2 inputs

                               

Federal Home Loan Bank stock

    2,994,900       2,994,900       3,122,400       3,122,400  

Bank-owned life insurance

    17,569,375       17,569,375       17,455,850       17,455,850  
                                 

Level 3 inputs

                               

Certificates of deposit held as investment

    499,167       484,380       499,189       492,751  

Loans receivable, net of unearned income

    377,973,214       367,539,525       387,328,993       385,818,260  
                                 

Financial liabilities

                               

Level 2 inputs

                               

Deposits

    404,474,061       404,848,830       405,142,975       405,026,957  

Advance payments by borrowers for taxes and insurance

    2,707,378       2,707,378       1,962,665       1,962,665  

Borrowings

    59,599,093       58,581,779       60,672,140       60,494,922  

 

The fair values of cash and cash equivalents and advances by borrowers for taxes and insurance are estimated to equal the carrying amount.

 

The fair values of Federal Home Loan Bank stock and bank-owned life insurance are estimated to equal carrying amounts, which are based on repurchase prices of the FHLB stock and the insurance company.

 

Beginning in the first quarter 2018, the fair value of loans are determined using an exit price methodology as prescribed by ASU 2016-01, which became effective for the Company during in the first quarter ended June 30, 2018. The exit price estimation of fair value is based on the present value of the expected cash flows. The projected cash flows are based on the contractual terms of the loans, adjusted for prepayments and use of a discount rate based on the relative risk of the cash flows, taking into account the loan type, maturity of the loan, liquidity risk, servicing costs, and a required return on debt and capital (Level 3). In addition, an incremental liquidity discount is applied to certain loans, using historical sales of loans during periods of similar economic conditions as a benchmark. In comparison, loan fair values as of March 31, 2018 were estimated based on an entrance price methodology.  As a result, the fair value adjustments as of June 30, 2018 and March 31, 2018 are not comparable.

 

The fair value of certificates of deposit held as investments is estimated based on interest rates currently offered for certificates of deposit with similar remaining maturities.

 

The fair value of interest-bearing checking, savings, and money market deposit accounts is equal to the carrying amount due to these products having no stated maturity. The fair value of fixed-maturity time deposits is estimated based on interest rates currently offered for deposits of similar remaining maturities.

 

The fair value of borrowings is estimated based on interest rates currently offered for borrowings of similar remaining maturities.

 

The fair value of outstanding loan commitments and unused lines of credit are considered to be the same as the contractual amount, and are not included in the table above. These commitments generate fees that approximate those currently charged to originate similar commitments.

 

 

 

 

ITEM 2.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

Statements included in this management's discussion and analysis include non-GAAP financial measures and should be read along with the accompanying tables which provide a reconciliation of non-GAAP financial measures to GAAP financial measures. The Company's management uses these non-GAAP financial measures, including tangible common equity, in its analysis of the Company's performance. The tangible common equity non-GAAP reconciliation, which includes tangible book value per share, is presented within the “Summary of Recent Performance and Other Activities” section below.

 

Management believes that non-GAAP financial measures provide additional useful information that allows readers to evaluate the ongoing performance of the Company without regard to transactional activities. Non-GAAP financial measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider the Company's performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the Company's results or financial condition as reported under GAAP. 

 

Safe Harbor Statement for Forward-Looking Statements

 

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

 

Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could cause or contribute to the Company’s actual results, performance, and achievements being materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these differences include, without limitation, general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government, legislative and regulatory changes, the quality and composition of the loan and investment securities portfolio, loan demand, deposit flows, competition, and changes in accounting principles and guidelines. Additional factors that may affect our results are discussed in Part II, Item 1A of this form 10-Q and Item 1A of Hamilton Bancorp, Inc.’s Annual Report on Form 10-K filed June 29, 2018 with the Securities and Exchange Commission under the sections titled “Risk Factors”. 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 applicable law or regulation, the Company assumes no obligation and disclaims any obligation to update any forward-looking statements.

 

General

 

Hamilton Bancorp, Inc. (the “Company”) is a Maryland corporation incorporated on June 7, 2012 by Hamilton Bank (the “Bank”) to be its holding company following the Bank’s conversion from the mutual to the stock form of organization (the “Conversion”). The Conversion was completed on October 10, 2012. On that same date, the Company completed its public stock offering and issued 3,703,000 shares of its common stock for aggregate proceeds of $37,030,000, and net proceeds of $35,580,000. The Company’s business is the ownership of the outstanding capital stock of the Bank. 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. The charter conversion is part of the bank’s strategic plan which will allow it to continue to focus on growth opportunities in commercial, consumer and mortgage lending as well as small business and retail banking. The Maryland Office of the Commissioner of Financial Regulation will serve as the Bank's primary regulator with federal oversight provided by the Federal Deposit Insurance Corporation.  Hamilton Bancorp will continue to be regulated by the Federal Reserve Board.

 

 

Founded in 1915 and celebrating over 100 years of service, the Bank is a community-oriented financial institution, dedicated to serving the financial service needs of consumers and businesses within its market area, which is considered greater Maryland, southern Pennsylvania, Washington D.C., and northern Virginia. We offer a variety of deposit products and provide loans secured by real estate located in our market area. Our real estate loans consist primarily of one-to four-family mortgage loans, as well as commercial real estate loans, and home equity loans and lines of credit. We also offer commercial term and line of credit loans and, to a limited extent, consumer loans. 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. The Company does not own or lease any property but instead uses the premises, equipment and other property of the Bank.

 

On May 13, 2016, the Company acquired Fraternity Community Bancorp, Inc. (“Fraternity”), the parent company of Fraternity Federal Savings and Loan in an all cash transaction for $25.7 million. In addition, the Company acquired Fairmount Bancorp, Inc. (“Fairmount”), the parent company of Fairmount Bank on September 11, 2015 in an all cash transaction for $14.2 million. Both acquisitions combined added three branches to our branch structure in the Baltimore area.

 

The Company and the Bank maintain an Internet website at http://www.hamilton-bank.com. Information on our website should not be considered a part of this Quarterly Report on Form 10-Q.

 

Summary of Recent Performance and Other Activities

 

The Company and its wholly owned subsidiary, Hamilton Bank, continued to show improvement in overall earnings, as well as revenue and loan growth during the three months ended June 30, 2018 compared to the same period a year ago. Net income improved from $392,000 to $879,000 for the comparable periods, an increase of $487,000 or 124.2%, while interest revenue grew from $4.4 million to $4.9 million, an increase of $554,000. These increases are reflective of the overall growth of the loan portfolio over the past year due to organic and purchased loans and the Company’s focus on managing operating expenses. Interest revenue was partially offset by a $339,000 increase in interest expense over this same period due to the rise in interest rates.

 

Non-interest revenue increased $24,000, or 9.1%, to $291,000 for the three months ended June 30, 2018 compared to $266,000 for the three months ended June 30, 2017. On a comparative basis, there were increases relating to gain on sale of loans and other noninterest revenue, partially offset by a reduction in earnings on bank-owned life insurance (BOLI). In the prior year period, the Company made a conscious decision to hold in portfolio the majority of our residential loan originations versus selling them in the secondary market to partially offset the increased run-off associated with this loan type. Beginning in fiscal 2019, however, we again started to sell qualified residential loan originations into the secondary market as a means to generate noninterest revenue and diversify our income stream.

 

Non-interest expense for the quarter ended June 30, 2018 was relatively unchanged at $3.2 million from the quarter ended June 30, 2017. We have been able to manage a growing loan portfolio from an operational cost basis and continue to increase our interest revenue as noted earlier. This is reflected in the improvement of the Company’s efficiency ratio which has improved from 81.7% for the three months ended June 30, 2017 to 77.1% for the three months ended June 30, 2018. We have experienced significant decline in both legal and other professional services expense quarter-over-quarter related to costs incurred in the prior year, including costs associated with our charter conversion and payments under non-compete agreements that were a part of the Fraternity Community Bancorp, Inc. acquisition in May 2016. Offsetting these declines were increases in data processing expense and Federal Deposit Insurance Corporation (FDIC) insurance premiums. Management remains committed to managing our operational expenses and achieving higher efficiencies.

 

For the three months ended June 30, 2018, the Company did not report any income tax expense due to the release of a portion of the valuation allowance on our net deferred tax assets established in the prior fiscal year. Management concluded, based upon analysis and substantive evidence, that it is more likely than not that the Company will be unable to generate sufficient taxable income in the foreseeable future to fully utilize the net deferred tax assets. If, in the future, the Company generates taxable income on a sustained basis sufficient to support the deferred tax assets, the need for a deferred tax valuation allowance could change, resulting in the reversal of all or a portion of the deferred tax asset valuation at that time. The establishment of a valuation allowance on our deferred tax assets for financial reporting purposes does not affect how the net operating loss carryforwards may be utilized on our subsequent income tax returns. Income tax expense for the periods reported is based upon year-to-date results and is not reflective of annual earnings.

 

 

The following highlights contain additional financial data and events that have occurred during the three months ended June 30, 2018:

 

 

Net income increased $487,000 to $879,000, or $0.27 per common share, for the three months ending June 30, 2018, compared to net income of $392,000, or $0.12 per common share. This represents an increase of 125.0% in earnings per share quarter-over-quarter.

 

 

Net interest income increased to $3.8 million, up $215,000, or 6.0%, from $3.6 million for the quarter ended June 30, 2017. This improvement was driven by a $554,000, or 12.6%, increase in interest revenue, partially offset by a $339,000 increase in interest expense.

 

 

Net interest margin remained relatively unchanged, increasing 2 basis points to 3.10% for the three months ended June 30, 2018 from 3.08% for the same period a year ago.

 

 

Efficiency ratio improved by roughly 5.6% decreasing from 81.7% for the three months ended June 30, 2017 to 77.1% for the three months ended June 30, 2018. The improvement in the efficiency ratio was driven by the increase in revenue as noninterest expenses remained relatively flat quarter-over-quarter at $3.2 million.

 

 

Total assets remained relatively unchanged, declining from $525.5 million at March 31, 2018 to $525.3 million at June 30, 2018, a decrease of $259,000.

 

 

Gross loans decreased $9.5 million, or 2.4%, from $389.2 million to $379.8 million. The decrease is due to principal paydowns and pay-offs within the loan portfolio, including one commercial relationship that totaled $6.3 million in pay-offs. 

 

 

Cash and cash equivalents increased $12.7 million, or 54.3%, to $36.1 million at June 30, 2018, compared to $23.4 million at March 31, 2018. The increase is related to the decline in the loan portfolio and a $2.8 million decline in the investment portfolio related to normal principal paydowns on mortgage-backed securities.

 

 

Lower costing core deposits (including all deposits except certificates of deposit) increased by $6.5 million during the quarter ended June 30, 2018, while higher costing time deposits declined by $7.0 million. Core deposits at June 30, 2018 made up 40.6% of total deposits compared to 38.9% and 40.0% at March 31, 2018 and June 30, 2017, respectively.

 

 

Annualized net charge-offs to average loans improved to 0.05% compared to 0.26% at March 31, 2018, while the allowance for loan losses as a percentage of gross loans increased slightly from 0.73% to 0.75%.

 

 

The provision for loan losses was $60,000 for the quarter ended June 30, 2018, including $45,000 in net charge-offs compared to a provision for loan losses of $160,000 and $3,000 in net recoveries for the same period a year ago. The larger provision in the prior year was related to growth in the loan portfolio during that quarter.

 

 

Nonperforming loans to gross loans increased to 2.68% at June 30, 2018 from 1.84%. The increase is related to one commercial real estate relationship with a book value of $3.1 million that was placed on non-accrual during the current quarter. The borrower continues to make payments in accordance with the loan terms; however, their financial cash flow does not support the debt payment and as such, we have placed the loan on non-accrual. All payments received will be applied to principal accordingly.

 

 

 

At June 30, 2018 the Company had a book value of $16.08 per common share and a tangible book value of $13.40 per common share compared to $15.87 and $13.18, respectively, at March 31, 2018. Book value and tangible book value increased as a result of the net income reported for the quarter. Tangible book value, a non-GAAP measure, was determined as follows:

 

   

June 30,

   

March 31,

 
   

2018

   

2018

 

Tangible book value per common share:

               

Total shareholders' equity

  $ 54,919,346     $ 54,076,132  

Less: Goodwill and other intangible assets

    (9,145,248 )     (9,176,764 )

Tangible common equity (Non-GAAP)

  $ 45,774,098     $ 44,899,368  
                 

Outstanding common shares

    3,416,414       3,407,613  
                 

Book value per common share (GAAP)

  $ 16.08     $ 15.87  
                 

Tangible book value per common share (Non-GAAP)

  $ 13.40     $ 13.18  

 

 

The Company maintained strong liquidity and at June 30, 2018 the Bank was deemed “well capitalized” under federal regulations.

 

Strategic Plan

 

We have based our 2019-2021 strategic plan on the objective of improving shareholder value and growth through creating sustainable and profitable growth given the current and expected economic and competitive environment in the financial services industry. Our short-term goals include continuing the growth of operating revenue, changing the mix of our deposits base to be more concentrated in lower costing core deposits, collecting payments on non-accrual and past due loans, enhancing and improving credit quality, expanding fee income, maintaining a branch network that is economical and efficient, and using technology to improve efficiencies and enhance the customer experience.

 

We identified several strategic priorities in our three-year Strategic Plan. Those priorities included focusing on the following core areas:

 

 

Efficient Operating Revenue Growth – Generating sustainable, profitable operating revenue through smart growth of earning assets that are funded by low-cost core deposits and growth of noninterest income. In addition, we will focus on efficient utilization of the Bank’s assets and other resources. This strategic priority includes prudent loan growth, sales strategies to attract and grow small business deposit and other fee income services, strategic marketing campaigns, studying and benchmarking efficiency and productivity, and focusing on ways to utilize technology to drive earnings.

 

 

Low-Cost Funding Strategies – Focusing on utilizing and growing low-cost core deposits as the primary funding source for loans. Given the current environment for higher-returns on investments, the retention of deposit customers along with targeted sales strategies will be important to growing deposits. Comprehensive marketing plans for increasing brand awareness in our market and promotion of products and services will be required, along with a seamless, fully integrated delivery experience for our customers that leverages technology and optimizes efficiencies. These strategies will apply to not just consumers, but to all commercial and small business customers.

 

 

Capital to Support Growth – Increasing the capital and value of the holding company’s stock through sustainable, consistent earnings, prudent capital management and enhancement of overall “franchise value”. We will continually evaluate the Bank’s capital needs and, if additional capital is needed, evaluate the most suitable type of capital, whether it be subordinated-debt or common or preferred stock.

 

Although the current economic climate continues to present significant challenges for the financial industry, management feels that based on our strategic initiatives we have positioned the Company to capitalize on the opportunities that may become available in the current economy, as well as a healthier economy going forward.     

 

 

Critical Accounting Policies

 

The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with generally accepted accounting principles used in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

 

For a discussion of significant accounting policies, see Note 1—Nature of Operations and Summary of Significant Accounting Policies in the Notes to our Consolidated Financial Statements. The following are the accounting policies that we believe require the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available:

 

Allowance for Loan Losses. The allowance for loan losses is the estimated amount considered necessary to cover inherent credit losses in the loan portfolio at the balance sheet date. The allowance is established through the provision for losses on loans which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of our most critical accounting policies.

 

Management, at a minimum, performs a quarterly evaluation of the allowance for loan losses. Consideration is given to historical losses in conjunction with a variety of other factors including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change.

 

The analysis has two components, specific and general allocations. Specific allocations can be made for estimated losses related to loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. If the fair value of the loan is less than the loan’s carrying value, a charge is recorded for the difference. The general allocation is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general reserve.

 

We cannot predict with certainty the amount of loan charge-offs that we will incur. Our regulatory agencies, as an integral part of their examination processes, periodically review our allowance for credit losses. Such agencies may require that we recognize additions to the allowance for credit losses based on their judgments about information available to them at the time of their examination. To the extent that actual outcomes differ from management’s estimates, additional provisions to the allowance for credit losses may be required that would adversely impact earnings in future periods.

 

 

Securities Valuation and Impairment. We classify our investments in debt and equity securities as either held to maturity or available for sale. Securities classified as held to maturity are recorded at cost or amortized cost. Available-for-sale securities are carried at fair value. We obtain our fair values from a third-party service. This service’s fair value calculations are based on quoted market prices when such prices are available. If quoted market prices are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the quoted prices of similar instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes. Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting our financial position, results of operations and cash flows.

 

 

If the estimated value of investments is less than the cost or amortized cost, we evaluate whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred and we determine that the impairment is other-than-temporary, we record the impairment of the investment in the period in which the event or change occurred. We also consider how long a security has been in a loss position in determining if it is other than temporarily impaired. Management also assesses the nature of the unrealized losses taking into consideration factors such as changes in risk-free interest rates, general credit spread widening, market supply and demand, creditworthiness of the issuer, and quality of the underlying collateral. At June 30, 2018, all of our securities were either issued by U.S. government agencies, U.S. government-sponsored enterprises, municipalities, or corporations.     

 

Goodwill Impairment. Goodwill represents the excess purchase price paid over the fair value of the net assets acquired. 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. The Company is considered the Reporting Unit for purposes of impairment testing. 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 exceeds the book value, no write-down of recorded goodwill is required. 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 February of each year based upon December financial information and current projections. We estimate the fair value of the Company utilizing four valuation methods including the Comparable Transactions Approach, the Control Premium Approach, the Public Market Peers Approach, and the Discounted Cash Flow Approach.

 

Based on our impairment testing as of February 2018, there was no evidence of impairment of the Company’s goodwill or intangible assets.

 

Business Combinations. Business combinations are accounted for using the acquisition method of accounting. Under the acquisition method of accounting, acquired assets and assumed liabilities are included with the acquirer's accounts as of the date of acquisition at estimated fair value, with any excess of purchase price over the fair value of the net assets acquired (including identifiable core deposit intangibles) capitalized as goodwill. In the event that the fair value of the net assets acquired exceeds the purchase price, an acquisition gain is recorded for the difference in the consolidated statements of operations for the period in which the acquisition occurred. The core deposit intangible asset is recognized as an asset apart from goodwill when it arises from contractual or other legal rights or if it is capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged. In addition, acquisition-related costs and restructuring costs are recognized as period expenses as incurred.

 

Income Taxes. We account for income taxes under the asset/liability method. We recognize deferred tax assets for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carry-forwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize the effect on deferred tax assets and liabilities of a change in tax rates in income in the period indicated by the enactment date. We establish a valuation allowance for deferred tax assets when, in the judgment of management, it is more likely than not that such deferred tax assets will not become realizable. The judgment about the level of future taxable income is dependent to a great extent on matters that may, at least in part, be beyond our control.

 

Analysis of Financial Condition at June 30, 2018 and March 31, 2018

 

Assets. Total assets remained relatively unchanged over the quarter ended June 30, 2018, decreasing $258,000 to $525.3 million at June 30, 2018 from $525.5 million at March 31, 2018. The decrease is primarily attributable to a $9.5 million reduction in gross loans and a $2.8 million decrease in the investment portfolio, partially offset by a $12.7 million increase in cash and cash equivalents.

 

Cash and Cash Equivalents. Cash and cash equivalents at June 30, 2018 totaled $36.1 million compared to $23.4 million at March 31, 2018, an increase of 54.3% or $12.7 million. The growth is a result of proceeds received from the $9.5 million in principal paydowns and/or pay-offs within the loan portfolio and a declining investment portfolio from normal principal payments associated with the mortgage-backed security portfolio. Excluding funds needed for liquidity and operational needs, management intends to utilize any excess cash for future loan growth and possible repayment of maturing advances.

 

 

Investment Securities. Our investment portfolio consists primarily of investment grade securities including U.S. government agency and government-sponsored entity (“GSEs”) securities, securities issued by states, counties and municipalities, corporate bonds, and mortgage-backed securities. At June 30, 2018, all securities are classified as available for sale. While we usually intend to hold investment securities until maturity, this classification provides us the opportunity to divest of securities that may no longer meet our liquidity objectives. During the three months ended June 30, 2018, we did not sell any securities.

 

Investment securities decreased $2.8 million, or 3.7%, to $72.6 million at June 30, 2018, from $75.4 million at March 31, 2018. The decrease is attributable to $4.1 million in cash flows resulting from normal principal payments associated with our collateralized mortgage obligation and mortgage-backed security portfolios, partially offset by the purchase of one security during the quarter with a book value of $2.0 million. The fair value of the investment portfolio declined $260,000 from an unrealized net loss position of $2.9 million at March 31, 2018 to an unrealized net loss position of $3.1 million at June 30, 2018. The decrease in fair value of the investment portfolio is a result of the increase in interest rates over the past three months.

 

We have evaluated securities with unrealized losses for an extended period of time and determined that these losses are temporary because, at this point in time, we have the ability to hold them until maturity. Currently, we have no intent to sell these securities; however, if market conditions or funding needs change, we may sell securities if needed. As the maturity date moves closer and/or interest rates decline, we expect that any unrealized losses for individual securities in the portfolio will decline or dissipate. In addition, we perform an annual impairment analysis with respect to securities issued by states, counties, municipalities, and corporations that are in a loss position for an extended period of time, typically twelve months. As a result, we have not identified any portion of the unrecorded loss as being attributed to credit deterioration in the issuer of the security.

 

Loans. Excluding loan premiums and loan origination fees and costs, gross loans receivable decreased by $9.5 million, or 2.4%, to $379.8 million at June 30, 2018 from $389.2 million at March 31, 2018. The decrease is primarily attributable to normal principal pay-downs and pay-offs within the loan portfolio, including $6.3 million in pay-offs associated with one commercial relationship. Included in gross loans at June 30, 2018 are acquired loans with a book balance of $106.8 million associated with the prior acquisitions of Fraternity and Fairmount institutions (these loans are reflected in the “acquired” loan column of the table below). At June 30, 2018, gross loans receivable represented 72.3% of total assets compared to 68.6% of total assets a year ago. The following table details the composition of loans and the related percentage mix and growth of total loans:

 

   

June 30, 2018

   

March 31, 2018

   

Year-To-Date Growth

 
                           

Percent

                           

Percent

           

Growth

 
   

Legacy

   

Acquired

   

Total

   

of Total

   

Legacy

   

Acquired

   

Total

   

of Total

   

Amount

   

Percent

 

Real estate loans:

                                                                               

One-to four-family:

                                                                               

Residential

  $ 84,252,950     $ 70,509,208     $ 154,762,158       40.8 %   $ 85,248,184     $ 72,749,066     $ 157,997,250       40.6 %   $ (3,235,092 )     -2.0 %

Residential construction

    5,636,504       -       5,636,504       1.5 %     5,450,827       -       5,450,827       1.4 %     185,677       3.4 %

Investor

    8,822,670       17,210,983       26,033,653       6.9 %     9,275,031       17,460,809       26,735,840       6.9 %     (702,187 )     -2.6 %

Commercial

    102,659,016       10,486,192       113,145,208       29.8 %     100,403,769       11,762,485       112,166,254       28.8 %     978,954       0.9 %

Commercial construction

    2,550,462       854,370       3,404,832       0.9 %     5,763,784       1,352,019       7,115,803       1.8 %     (3,710,971 )     -52.2 %

Total real estate loans

    203,921,602       99,060,753       302,982,355       79.8 %     206,141,595       103,324,379       309,465,974       79.5 %     (6,483,619 )     -2.1 %

Commercial business

    37,061,370       1,905,770       38,967,140       10.4 %     38,302,739       1,841,226       40,143,965       10.3 %     (1,176,825 )     -2.9 %

Home equity loans

    13,735,464       5,475,308       19,210,772       5.1 %     13,956,327       6,039,462       19,995,789       5.1 %     (785,017 )     -3.9 %

Consumer

    17,861,626       739,300       18,600,926       4.9 %     18,849,448       766,063       19,615,511       5.0 %     (1,014,585 )     -5.2 %

Gross loans

  $ 272,580,062     $ 107,181,131     $ 379,761,193       100.0 %   $ 277,250,109     $ 111,971,130     $ 389,221,239       100.0 %   $ (9,460,046 )     -2.4 %

 

 

The Company’s largest category of loans continues to be residential one-to four-family loans as a result of the loans acquired in the Fraternity and Fairmount acquisitions. This loan portfolio comprises 40.8% of the entire loan portfolio at June 30, 2018, a decrease of $3.2 million from March 31, 2018. During the last half of fiscal 2017 and into fiscal 2018 we retained in portfolio many of the traditional residential mortgage loans we originated, versus selling them in the secondary market, due to the increase in normal attrition within this loan segment resulting from our acquisitions. Prior to that time, we generally sold these loans in the secondary market at a premium to assist with managing interest rate risk and to enhance non-interest revenue. At the beginning of this year, we began to once again sell most newly originated residential loans that qualify into the secondary market versus putting them in portfolio for those same reasons. Because of this, we expect the one-to four-family residential loan portfolio to decline as we focus more on the growth within the commercial portfolio to replace the residential run-off and assist with managing interest rate risk.

 

As a means to supplement our residential loan portfolio, the Company began to promote its one-to-four family residential construction lending program several years ago. During the first quarter of fiscal 2019, the Bank originated commitments of $2.2 million in residential construction loans. At June 30, 2018 we had $8.8 million in residential construction commitments, of which $5.6 million in funds have been advanced; compared to $8.7 million in residential construction commitments at March 31, 2018 of which $5.4 million in funds had been advanced. The construction period on residential homes is typically nine to twelve months, at which time the Bank is often repaid through permanent financing by a third party.

 

Real estate investor loans represent funds advanced to borrowers for the purchase or refinance of non-owner occupied one-to-four family properties. These loans made up $26.0 million, or 6.9%, of gross loans at June 30, 2018, including a remaining balance of $17.2 million that were acquired from Fraternity and Fairmount. This type of lending typically involves more risk than originating owner-occupied one-to-four family residential mortgages. The Bank typically refrains from originating this type of loan organically.

 

The Bank continues to focus on growth through origination and/or purchase of both commercial real estate and commercial business loans as these loans offer higher rates of return and shorter maturity periods than typical retail lending. Over the three months ended June 30, 2018, we saw strong organic growth within our commercial real estate loan portfolio. We organically originated $3.7 million in commercial real estate loans and transferred or reclassed nearly $2.0 million more from commercial construction loans over this period. This resulted in an overall increase, after normal principal payments, of nearly $1.0 million within this loan segment. Commercial business loans declined from $40.1 million to $39.0 million, a decrease of 2.9% or $1.2 million. Commercial business loans, although relatively stable, can fluctuate based upon demands or pay-downs on respective lines of credit. Overall commercial loans, including commercial construction loans, have declined since March 31, 2018 due to $6.3 million in pay-offs associated with one commercial relationship that had several commercial loans with the Bank.

 

 

Bank-Owned Life Insurance. We invest in bank-owned life insurance (“BOLI”) to provide us with a funding source for our benefit plan obligations. BOLI also provides us noninterest income that is tax-exempt. At June 30, 2018, our investment in BOLI increased by $114,000 from $17.5 million at March 31, 2018 to $17.6 million. The increase is attributable to the increase in cash surrender value of the underlying insurance policies. Federal regulations generally limit our investment in BOLI to 25% of our Tier 1 capital plus our allowance for loan losses. Our amount of BOLI at June 30, 2018 exceeded these limits because of the BOLI we acquired in the Fraternity acquisition in May 2016 and the increase in cash surrender value of these policies over the years. Due to the amount of BOLI currently held, the Company has no plans to purchase additional BOLI at this time.

 

Deposits. Total deposits (excluding premiums on acquired deposits) decreased $588,000 to $404.1 million at June 30, 2018 from $404.7 million at March 31, 2018. The Company continues to focus on generating lower cost, core deposits (which includes all deposits other than certificates of deposit) and maintaining maturing certificates of deposit to support continued loan growth. Overall core deposits have increased $6.5 million, or 4.1%, to $164.2 million at June 30, 2018 compared to $157.7 million at March 31, 2018. Core deposits accounted for 40.6% of total deposits at June 30, 2018, compared to 39.0% at March 31, 2018.

 

The following table details the composition of deposits and the related percentage mix and growth of total deposits.

 

   

June 30, 2018

   

March 31, 2018

   

Year-To-Date Growth

 
           

Percent

           

Percent

           

Growth

 
   

Total

   

of Total

   

Total

   

of Total

   

Amount

   

Percent

 

Savings

  $ 40,965,710       10.1 %   $ 42,499,381       10.6 %   $ (1,533,671 )     -3.6 %

Noninterest-bearing checking

    27,485,033       6.8 %     29,557,943       7.3 %     (2,072,910 )     -7.0 %

Interest-bearing checking

    29,482,021       7.3 %     27,219,286       6.7 %     2,262,735       8.3 %

Money market accounts

    66,235,735       16.4 %     58,466,228       14.4 %     7,769,507       13.3 %

Time deposits

    239,974,615       59.4 %     246,988,613       61.0 %     (7,013,998 )     -2.8 %
    $ 404,143,114       100.0 %   $ 404,731,451       100.0 %   $ (588,337 )     -0.1 %

Premium on deposits asssumed

    330,947               411,524               (80,577 )        

Total deposits

  $ 404,474,061             $ 405,142,975             $ (668,914 )        

 

Our strategy with respect to deposits has been to maintain our current certificate of deposit base as needed to support loan demand by pricing more competitively in the marketplace or through short-term certificate of deposit promotions, as we focus on growing our core deposits at a faster pace to reduce our overall cost of funds. During the first quarter of fiscal 2019, however, we have not been as aggressive in maintaining our certificates of deposits based upon funding and liquidity needs. There may be instances though when funding demands are more immediate. To meet these demands, the Company entered into a contract and began utilizing a certificate of deposit subscription service in the third quarter of fiscal 2018. The cost of these deposits is more expensive than traditional certificates of deposit because of the ability to provide the funding needed in a timely manner; but can be less costly than borrowing from the Federal Home Loan Bank or other sources. During the quarter ended June 30, 2018 we did not need to utilize this service to originate deposits to support any additional funding requirements.

 

Borrowings. Borrowings consist of both short and long-term advances from the Federal Home Loan Bank (FHLB). At June 30, 2018, outstanding advances from the FHLB decreased $1.1 million to $59.6 million compared to $60.7 million at March 31, 2018. Included in the FHLB advances is $10.0 million in FHLB advances assumed in the Fraternity acquisition, all of which mature in the second quarter of fiscal 2019. The advances assumed from Fraternity were originally longer-term borrowings and carried higher rates of interest varying from 3.4% to 4.3%. As a result of the higher stated rates, the Company recorded a discount of $794,000 when accounting for the borrowings at fair value upon acquisition. At June 30, 2018, the remaining discount is $49,000. The accretion of this discount will offset the higher stated rate of these borrowings.

 

 

At June 30, 2018, $22.0 million of the total advances are considered short-term and mature in less than one year, while the remaining $37.6 million in advances are considered long-term and mature in more than one year (See Note 7 of the Notes to Consolidated Financial Statements). Included in long-term advances is $11.6 million in advances that mature on a quarterly basis; however, they are associated with several cash flow hedge transactions and will be continuously renewed over the expected life of the hedged transactions. The hedge transactions currently have an average life of 6.1 years. Excluding the advances associated with the hedge transactions, the longest outstanding borrowing is for $3.0 million and matures in August 2021.

 

The FHLB borrowings provide an alternative means to support the cash outflow needed to fund new loan originations in coordination with deposit growth. FHLB borrowings can provide a less expensive means to support cash outflow when compared to selling higher yielding investment securities. These obligations are secured by our residential and home equity loan portfolios. At June 30, 2018, we had the ability to borrow approximately $72.0 million in additional funds from the FHLB, subject to our pledging sufficient assets. These obligations will be repaid as our cash position strengthens.

 

Equity. Total equity increased $843,000, or 1.6%, to $54.9 million at June 30, 2018 from $54.1 million at March 31, 2018. The change in equity is primarily attributable to net income of $879,000 reported for the first quarter of fiscal 2019, along with a $126,000 increase in additional paid in capital resulting from the expense derived from equity awards granted in prior periods. The increase was partially offset by a $162,000 decline in accumulated other comprehensive loss associated with the decrease in the fair value of the investment portfolio. The fair value of the investment portfolio decreased over the first quarter as a result of the increase in interest rates that occurred over that same period. The Company’s book value per common share was $16.08 at June 30, 2018 compared to $15.87 at March 31, 2018. At June 30, 2018, the Bank remains “well capitalized” as defined under federal regulations.

 

 

Analysis of Asset Quality at June 30, 2018, March 31, 2018, and June 30, 2017

 

The Bank’s asset quality remains a primary focus of management and the Board of Directors. Nonperforming assets at June 30, 2018, were $10.6 million, an increase of $3.0 million from March 31, 2018 and a $7.6 million decrease from June 30, 2017. Nonperforming assets to total assets increased from 1.45% at March 31, 2018 to 2.03% at June 30, 2018. Nonperforming assets for the respective periods were as follows:

 

   

At

   

At

   

At

 
   

June 30, 2018

   

March 31, 2018

   

June 30, 2017

 
   

(dollars in thousands)

 
                         

Nonaccruing loans

  $ 8,949     $ 5,964     $ 2,222  

Accruing loans delinquent more than 90 days

    1,230       1,206       331  

Foreclosed real estate

    458       458       520  

Total nonperforming assets

  $ 10,637     $ 7,628     $ 3,073  
                         

Asset Quality Ratios:

                       

Nonperforming loans to gross loans

    2.68 %     1.84 %     0.72 %

Nonperforming assets to total assets

    2.03 %     1.45 %     0.60 %

Net charge-offs (annualized) to average loans

    0.05 %     0.26 %     0.00 %

 

Included in nonperforming loans are accruing loans delinquent more than 90 days. These loans represent loans that are on accrual status and making payments, however, such loans are 90 days past their contractual maturity date, and therefore reported as nonperforming. At June 30, 2018 and March 31, 2018, these loan balances were elevated as they related to several borrowing relationships that are comprised of many smaller investor (residential non-owner occupied) loans that matured at the same time. The Bank’s credit department is diligently working to obtain the necessary financial information from these borrowers so that these loans can either be renewed or extended accordingly.

 

 

Nonaccrual loans increased to $8.9 million at June 30, 2018 compared to $6.0 million at March 31, 2018 and $2.2 million a year ago. The $3.0 million increase from March 2018 to June 2018 is primarily attributable to one commercial real estate relationship with a book value of $3.1 million that was placed on nonaccrual towards the end of the first quarter. The borrower continues to make timely payments under the original terms of the loan and has never been delinquent; however, review of their financial information indicates they do not have sufficient cash flow to service the debt. Because of the inability to show sufficient cash flow, we placed the loan on nonaccrual. Any payments received going forward will be applied entirely to principal until such time that sufficient cash flow can be substantiated. To date there is no impairment associated with this relationship based upon the most recently obtained appraised value.

 

As of June 30, 2018, there are two other commercial real estate relationships on nonaccrual with book values of $3.3 million and $1.2 million. Both relationships have been reviewed for impairment and recorded at their fair value based upon recent appraisals, one of which has incurred several write-downs through charge-offs over the past two years. Management continues to actively explore options and work with the borrowers to obtain the best outcome for the Bank, which may or may not result in new or additional write-downs. In July 2018, the larger of the two relationships, with a book value of $3.3 million, was resolved and paid-off with no loss to the Bank. Proceeds from the pay-off included payment of principal, past due interest and all legal and other expenses incurred.

 

There were $243,000 in non-performing commercial business loans at June 30, 2018 compared to $165,000 at March 31, 2018. The recorded book balance of $243,000 in loans is comprised of four commercial lease loans to separate borrowers with a contractual balance of $621,000 and charge-offs totaling $379,000. The purpose of the loans was to provide funding to purchase medical equipment related to cosmetic surgery. Based upon the inability to generate sufficient revenue, the borrowers stopped making payments on the leases or asked for the equipment to be repossessed. All four loans are fully guaranteed by the respective borrowers.

 

The remaining balance of nonaccrual loans at June 30, 2018 consisted of $801,000 in one-to four-family residential mortgage loans, including two loans with a book balance of $283,000 that were acquired loans, and $383,000 in residential investor loans. The majority of the residential investor loans were acquired in the Fairmount Bancorp, Inc. acquisition.

 

Delinquencies 30-89 days past due decreased $662,000 to $608,000 at June 30, 2018 from $1.3 million at March 31, 2018. This decrease is attributable to a decline in delinquencies associated with one-to four-family residential mortgage loans and commercial business loans over this period. One-to four-family residential loan delinquencies decreased $285,000 from $823,000 at March 31, 2018 to $538,000 at June 30, 2018, while commercial business loans decreased $256,000 to $14,000 at June 30, 2018. The Bank is monitoring the delinquent loans closely and working with the borrowers to develop a payment plan to make the loans current again. If the borrowers are unable to bring these loans current or re-pay or re-finance the respective loans, there could be future charge-offs associated with these loans based upon collateral values.

 

Foreclosed real estate at June 30, 2018 remained unchanged at $458,000 compared to March 31, 2018 and consisted of five properties. One of the five properties consist of semi-developed land with a fair value of $411,000. The property is listed for sale and is participated with another financial institution, with Hamilton being the lead lender. The remaining four properties totaling $47,000 are comprised of one-to-four family residential mortgage loans, all of which are participations that Hamilton owns less than 15% of and is not the lead lender.

 

The Bank recorded a $60,000 provision for loan loss during the first quarter of fiscal 2019 compared to a $160,000 provision for loan loss for the same period a year ago. The provision for loan loss for the recent quarter was primarily a result of $45,000 in net charge-offs compared to prior year provisions which were primarily a result of growth within the loan portfolio. The allowance for loan losses at June 30, 2018 totaled $2.8 million, or 0.75% of gross loans, compared to the same $2.8 million, or 0.73% of gross loans, at March 31, 2018. The immaterial change in percentage was due to the decrease in overall loan balances. This overall percentage remains relatively low compared to peers as a result of our acquired loan portfolios. Loans acquired in an acquisition are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan and lease losses. We continue to monitor and manage the acquired loan portfolio to determine if additional provisions are necessary in relation to the estimated fair value placed on those loans at acquisition date as determined by management.

 

 

The activity in the allowance for loan losses for the three-month period ended June 30, 2018 includes $47,000 in charge-offs, offset by $2,000 in recoveries and a $60,000 provision for loan losses. We currently review the adequacy of the allowance for loan losses on a quarterly basis and are proactively managing problem assets. Based upon our analysis, we believe this allowance appropriately reflects the inherent risk of loss in our loan portfolio at June 30, 2018. We estimate the allowance for loan losses within a range based upon our charge-off history and certain environmental factors.

 

Results of Operations for the Three Months Ended June 30, 2018 and 2017 (unaudited)

 

General. Net income for the quarter ended June 30, 2018 was $879,000, or $0.27 per common share, compared to net income of $392,000, or $0.12 per common share for the quarter ended June 30, 2017, a quarter-over-quarter increase of $487,000. The increase in net income was driven by an increase in net interest income associated with growth in loans over the past year, lower loan loss provisions, and no tax expense due to the establishment of a full valuation allowance on our net deferred tax assets at the end of fiscal 2018.

 

Net Interest Income. Net interest income increased $215,000, or 6.0%, to $3.8 million for the three-months ended June 30, 2018 compared to $3.6 million for the three-months ended June 30, 2017. The increase in net interest income was due to a $554,000 increase in interest revenue, partially offset by a $339,000 increase in interest expense. The increase in interest revenue was due to an increase in the average balance of interest-earning assets, particularly higher yielding loans, as well as an increase in the average yield on interest-earning assets. The average balance in interest-earning assets increased $24.4 million, or 5.2%, for the quarter ended June 30, 2018 compared to the same period in fiscal 2018, while the average yield increased 26 basis points to 4.02% from 3.76%. The average balances increased quarter-over-quarter due to organic loan growth and the purchase of several pools of loans over the past twelve months.

 

The increase in interest expense for the quarter ended June 30, 2018 compared to the same quarter last year was the result of a 28 basis points increase in the average cost of interest-bearing liabilities. The average cost of interest-bearing liabilities increased from 0.76% for the three months ended June 30, 2017 to 1.04% for the three months ended June 30, 2018. In addition, the average balance of interest-bearing liabilities also increased $19.6 million from $417.5 million to $437.2 million. The increase resulted from the growth in average borrowings, partially offset by a decrease in average interest-bearing deposits. The net interest margin increased 2 basis point from 3.08% for the three months ended June 30, 2017 to 3.10% for the three months ended June 30, 2018.

 

Interest Revenue. Interest revenue increased $554,000, or 12.6% to $4.9 million during the three-months ended June 30, 2018 compared to $4.4 million for the three-months ended June 30, 2017. The increase resulted from increases in interest and fees on loans and revenue earned on federal funds sold and other bank deposits, partially offset by a decrease in interest revenue earned on investment securities.

 

Interest and fees on loans increased $560,000, or 14.6%, to $4.4 million for the three months ended June 30, 2018, compared to $3.8 million for the three months ended June 30, 2017. The increase in interest and fees on loans is due to a $43.2 million increase in the average balance of net loans from $336.5 million to $379.7 million quarter-over-quarter. The increase in average loans is attributable to organic growth generated by our commercial lending area and strategic loan purchases over the past year. In addition, the average yield earned on loans increased 7 basis points from 4.57% for the quarter ended June 30, 2017 to 4.64% for the quarter ended June 30, 2018. The increase in yield is a result of interest revenue recognized during the quarter relating to early pay-offs on both acquired and purchased commercial loans.   

 

 

Interest revenue on investment securities decreased $63,000 to $423,000 for the three months ended June 30, 2018 from $486,000 for the three months ended June 30, 2017. The decrease is related to the average balance of investment securities decreasing $22.1 million, or 22.0%, to $78.2 million for the three months ended June 30, 2018 from $100.3 million for the same period last year, while the average yield increased 22 basis points to 2.16% from 1.94%. The largest decrease in investment securities was in mortgage-backed securities, which decreased $17.7 million to $58.1 million for the three months ended June 30, 2018 from $75.9 million for the same period last year. The average balance of investment securities also decreased quarter-over-quarter by $4.4 million. The decrease in average investments is attributable to both normal principal paydowns related to mortgage-backed securities, along with $11.6 million in securities that were sold during the past twelve months. One investment security, with a book value of $2.0 million, was purchased during the first quarter of fiscal 2019.

 

Interest Expense. Interest expense increased $339,000, or 42.6%, to $1.1 million for the three months ended June 30, 2018 compared to $795,000 for the same period in fiscal 2018, due to the increase in the average cost of both interest-bearing deposits and borrowings. The average cost of deposits increased 24 basis points from 0.69% for the three months ended June 30, 2017 to 0.93% for the three months ended June 30, 2018. The increase in average cost was partially offset by a decrease in the average balance of interest-bearing deposits. The average balance of interest-bearing deposits decreased $4.0 million, or 1.0%, to $377.5 million for the three months ended June 30, 2018 from $381.5 million for the three months ended June 30, 2017. Due to the increase in costs, the interest expense associated with interest-bearing deposits increased $214,000, or 32.4%, period-over-period.

 

For the three-month period ended June 30, 2018, average interest-bearing deposit balances increased or remained relatively unchanged for all types of deposits when compared to the same period a year ago and increased $7.5 million compared to the quarter ended March 31, 2018. We remain focused on changing the mix of our deposit portfolio by maintaining our maturing certificates of deposits and growing lower cost core deposits, including savings, interest-bearing checking and money market accounts. The average balance of core interest-bearing deposits decreased $2.0 million, or 1.5%, to $134.0 million for the three-month period ended June 30, 2018 compared to $136.0 million for the three months ended June 30, 2017; however, the average core deposits have increased $9.8 million compared to the previous quarter ended March 31, 2018. The average balance of time deposits also decreased $2.0 million, or less than 1.0%, to $243.4 million for the quarter ended June 30, 2018 compared to $245.4 for the quarter ended June 30, 2017. The decrease in time deposits is related to the competitive interest rate market as rates continue to increase.

 

Noninterest-bearing deposits allow us to fund growth in interest-earning assets at minimal cost. Average noninterest-bearing deposits decreased $729,000, or 2.5%, to $28.2 million for the three months ended June 30, 2018, compared to $29.0 million for the three months ended June 30, 2017. Our cash management personnel and commercial loan officers remain focused in working with commercial clients to move their core deposit relationships to Hamilton Bank and provide lower cost of funds.

 

For the three-month period ended June 30, 2018, average interest-bearing borrowings were $59.7 million compared to an average balance of $36.1 million for the same period a year ago. The increase in borrowings is associated with funds needed to purchase several loan portfolios over the past year and a declining deposit base. The borrowings primarily consisted of advances from the Federal Home Loan Bank. At June 30, 2018, the Bank had $59.6 million in outstanding advances from the FHLB, including $12.0 million in borrowings assumed through the Fraternity and Fairmount acquisitions. The borrowings carried an average rate of 1.74% for the three months ended June 30, 2018; a 25 basis point increase from 1.49% for the same period a year ago. Borrowing from the FHLB in today’s low interest rate environment can be a more cost-effective means to obtain funds if deposits are not growing compared to selling investment securities that are earning a higher yield.

 

 

Average Balances, Interest and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest revenue from average interest-earning assets, the dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing interest revenue or interest expense by the average balances of assets or liabilities, respectively, for the periods presented and have been annualized. Average balances have been calculated using average daily balances. No tax-equivalent adjustments were made. Nonaccrual loans have been included in the table as loans carrying a zero yield.

 

   

Three Months Ended June 30,

 
   

(dollars in thousands)

 
   

2018

   

2017

 
   

Average

           

Yield/

   

Average

           

Yield/

 
   

Balance

   

Interest

   

Cost

   

Balance

   

Interest

   

Cost

 

Interest-earning assets:

                                               

Interest bearing deposits with banks

  $ 33,858     $ 111       1.31 %   $ 30,520     $ 54       0.71 %

Investment securities (1)

    20,108       148       2.94 %     24,520       147       2.40 %

Mortgage-backed securities

    58,127       275       1.89 %     75,822       339       1.79 %

Loans receivable, net (2)

    379,677       4,408       4.64 %     336,472       3,848       4.57 %

Total interest-earning assets

    491,770       4,942       4.02 %     467,334       4,388       3.76 %

Noninterest-earning assets

    34,525                       43,584                  

Total assets

  $ 526,295                     $ 510,918                  
                                                 

Interest-bearing liabilities:

                                               

Certificates of deposit

  $ 243,443     $ 760       1.25 %   $ 245,436     $ 556       0.91 %

Money market

    61,218       99       0.65 %     64,822       89       0.55 %

Checking accounts

    30,788       3       0.04 %     26,635       2       0.03 %

Statement savings

    42,050       13       0.12 %     44,578       14       0.13 %

Total interest-bearing deposits

    377,499       875       0.93 %     381,471       661       0.69 %

Borrowings (3)

    59,658       259       1.74 %     36,073       134       1.49 %

Total interest-bearing liabilities

    437,157       1,134       1.04 %     417,544       795       0.76 %
                                                 

Noninterest-bearing liabilities and equity:

                                               

Noninterest-bearing deposits

    28,223                       28,952                  

Other noninterest-bearing liabilities

    6,129                       7,274                  

Total liabilities

    471,509                       453,770                  

Total shareholders’ equity

    54,786                       57,148                  

Total liabilities and shareholders’ equity

  $ 526,295                     $ 510,918                  
                                                 

Net interest income

          $ 3,808                     $ 3,593          

Net interest rate spread (4)

                    2.98 %                     3.00 %

Net interest-earning assets (5)

  $ 54,613                     $ 49,790                  

Net interest margin (6)

                    3.10 %                     3.08 %

Average interest-earning assets to average interest-bearing liabilities

    112.49 %                     111.92 %                
   

(1) Includes U.S agency and treasury securities, municipal and corporate bonds and to a much lesser extent, Federal Home Loan Bank equity securities.

(2) Loans on non-accrual status are included in average loans carrying a zero yield.

(3) See Note 7 of the Notes to Consolidated Financial Statements regarding cash flow hedges of FHLB advances

(4) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing libilities.

(5) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

(6) Net interest margin represents net interest income divided by average total interest-earning assets.

 

 

Provision for Loan Losses. We establish provisions for loan losses that are charged to operations in order to maintain the allowance for loan losses at a level believed, to the best of management’s knowledge, to cover all known and inherent losses in the portfolio both probable and reasonable to estimate at each reporting date. There was $60,000 charged to the provision for loan losses for the three-months ended June 30, 2018 compared to a provision for loan loss of $160,000 for the three-months ended June 30, 2017. In the current quarter, the $60,000 provision for loan loss recorded is primarily attributable to net charge-offs experienced during the quarter, while the provision for the prior year quarter was related to growth within the loan portfolio, as reflected in the table below.

 

The allowance for loan losses was $2.8 million, or 27.9% of non-performing loans at June 30, 2018 compared to $2.4 million, or 92.4% of non-performing loans at June 30, 2017. The decrease in the percentage is a result of a $7.6 million increase in non-performing loans over this same period. The increase in non-performing loans is primarily due to two commercial real estate relationships each with book values of $3.3 million and $3.1 million, respectively. The first commercial relationship was placed on nonaccrual in the second quarter of fiscal 2018, while the second relationship was placed on nonaccrual during the current quarter ended June 30, 2018. Both relationships have been evaluated for impairment at June 30, 2018 with no charge-offs necessary based upon recent appraised values. In July 2018, the larger of the two relationships, with a book value of $3.3 million, was resolved and paid-off with no loss to the Bank. Proceeds from the pay-off included payment of principal, past due interest and all legal and other expenses incurred. If these two commercial relationships were excluded, based upon no impairment at June 30, 2018, the allowance for loan losses as a percentage of non-performing loans at June 30, 2018 would be 74.4%.

 

During the three-months ended June 30, 2018, loan charge-offs totaled $47,000 with recoveries of $2,000, compared to $4,000 in charge offs and $7,000 in recoveries during the three-months ended June 30, 2017. During fiscal year 2019, we expect that we will continue our emphasis in growing commercial real estate and commercial business loans, which have higher interest rates than one-to four-family mortgage loans but are generally considered to bear higher risk than one-to four-family mortgage loans and could contribute to higher loan loss provisions going forward.

 

Summary of Allowance for Loan Losses Activity. The following table sets forth an analysis of the allowance for loan losses for the periods indicated.

 

   

Three Months Ended

 
   

June 30,

 
   

2018

   

2017

 
   

(dollars in thousands)

 
                 

Allowance for loan losses at beginning of period

  $ 2,822     $ 2,195  

Charge-offs:

               

Real estate loans:

               

Residential

    8       -  

Investor

    6       4  

Commercial

    31       -  

Commercial construction

    -       -  

Commercial business

    -       -  

Home equity

    -       -  

Consumer

    2       -  

Total charge-offs

    47       4  

Recoveries

    2       7  

Net charge-offs

    45       (3 )

Provision for loan losses

    60       160  

Allowance for loan losses at end of period

  $ 2,837     $ 2,358  
                 

Allowance for loan losses to non-performing loans

    27.87 %     92.36 %

Allowance for loan losses to total loans outstanding at the end of the period

    0.75 %     0.67 %

Net charge-offs to average loans outstanding during the period (annualized)

    0.05 %     0.00 %

 

 

Noninterest Revenue. Noninterest revenue increased $24,000, or 9.1%, to $291,000 for the three months ended June 30, 2018, compared to $266,000 for the three-months ended June 30, 2017. The following table outlines the changes in noninterest revenue for the three-month periods.

 

   

Three months ended

                 
   

June 30,

                 
   

2018

   

2017

   

$ Change

   

% Change

 

Service charges

  $ 120,584     $ 119,199     $ 1,385       1.2  

Gain on sale of loans held for sale

    9,542       -       9,542       N/A  

Earnings on bank-owned life insurance

    113,525       122,576       (9,051 )     (7.4 )

Other fees and commissions

    47,123       24,717       22,406       90.7  
                                 

Total noninterest revenue

  $ 290,774     $ 266,492     $ 24,282       9.1  

 

 

Service charges associated with retail and commercial deposit products increased slightly during the three-months ending June 30, 2018 compared to the same period a year ago. Management remains focused on growing core deposits, particularly checking accounts, which typically generate more service fee income. The average balance relating to overall checking accounts for the three months ended June 30, 2018 was $59.0 million compared to an average balance of $56.6 million at June 30, 2017, an increase of 6.2%, or $3.4 million. We continue to review and evaluate our fee structure to be more aligned with our market. Customers, however, have become more cost conscious of fees and better manage their deposit relationship with the Bank.     

 

During the three months ended June 30, 2018, the Company was able to enhance noninterest revenue by $10,000 relating to gains on loans sold to the secondary market. In the last quarter of fiscal 2017 and into fiscal 2018, the Company purposely held in portfolio the majority of our residential loan originations to partially offset the increased run-off associated with this loan segment. Beginning in fiscal 2019, however, we again started to sell qualified residential loan originations into the secondary market as a means to generate noninterest revenue and diversify our income stream.

 

 

In addition to these gains, the Company also experienced a $22,000 increase in other noninterest revenue that includes the collection of certain loan fees, merchant card services and other miscellaneous items. Loan fees and merchant card services increased quarter-over-quarter by $5,000 and $2,000, respectively. Meanwhile, earnings on BOLI declined $9 thousand due to a reduction in the cash surrender value of the Company’s outstanding BOLI related to the pay-out of death benefits in the fourth quarter of fiscal 2018.

 

 

Noninterest Expense. Noninterest expense remained relatively unchanged at $3.2 million for the three-months ended June 30, 2018 compared to the same period a year ago. The following table outlines the changes within noninterest expense for those periods.

 

   

Three months ended

                 
   

June 30,

                 
   

2018

   

2017

   

$ Change

   

% Change

 

Salaries and benefits

  $ 1,879,423     $ 1,853,172     $ 26,251       1.4  

Occupancy

    271,828       260,838       10,990       4.2  

Advertising

    17,024       27,028       (10,004 )     (37.0 )

Furniture and equipment

    90,299       83,984       6,315       7.5  

Data processing

    192,654       164,850       27,804       16.9  

Legal services

    56,338       101,890       (45,552 )     (44.7 )

Other professional services

    98,316       180,302       (81,986 )     (45.5 )

Deposit insurance premiums

    101,109       57,128       43,981       77.0  

Foreclosed real estate expense and losses

    -       1,186       (1,186 )     100.0  

Other operating

    452,468       422,647       29,821       7.1  
                                 

Total noninterest expense

  $ 3,159,459     $ 3,153,025     $ 6,434       0.2  

 

 

Overall our operating expenses have remained relatively unchanged, despite decreased operating expenses in certain areas related to prior year expenses that were incurred, offset by increases in others due to operating as a larger financial institution. We have been able to manage a growing loan portfolio from an operational cost basis and continue to increase our interest revenue. This is reflected in the improvement of the Company’s efficiency ratio which has improved from 81.7% for the three months ended June 30, 2017 to 77.1% for the three months ended June 30, 2018. Management remains committed to reducing operational expenses and achieving higher efficiencies.

 

Salaries and benefit expense remains our highest operational cost and increased by only $26,000, or 1.4%, quarter-over-quarter. This modest increase is due to annual evaluations and respective salary increases, along with employee benefit expenses that have increased slightly because of higher costs associated with our 401K plan expense and employee stock ownership plan (ESOP). The 401K plan expense has increased due to more participants, while the increase in the ESOP is related to the rise in the Company’s average stock price quarter-over-quarter. Also included in salaries and benefits for the three months ending June 30, 2018 and 2017, is $91,000 and $80,000 in expense, respectively, relating to equity awards granted to officers under the Company’s Equity Incentive Plan. The equity awards provide for management to have a vested interest in the performance of the company and share in the benefit of an increase in shareholder value. Similarly, other operating expenses for the same periods include $35,000 in each of the comparable periods associated with equity awards granted to Directors.

 

The Company realized an increase of $11,000 in occupancy expense that is related to increased repair costs to our facilities, in particular an emergency water main break during the most recent quarter at one of our branch locations. Data processing costs also increased $28,000 for the comparable quarters associated with annual cost increases, along with the introduction of new technology that has made banking easier for our customers, including products such as mobile banking. FDIC insurance premiums have increased $44,000 to $101,000 for the three months ending June 30, 2018 compared to $57,000 for the three months ending June 30, 2017. This increase is attributable to both the increase in the size of the Bank over the comparable periods, as well as the increase in the FDIC insurance premium rates over this same timeframe.

 

Offsetting the increases in noninterest expenses has been a $46,000 reduction in legal expenses and an $82,000 reduction in other professional services. Legal expense has declined because of higher costs incurred in the prior year associated with our charter conversion and consultation with counsel to advise on agreements associated with loan purchases and branch matters concerning re-location. Other professional services also declined because of costs incurred in the prior year associated with payments under non-compete agreements that were a part of the Fraternity Community Bancorp, Inc. acquisition in May 2016. The terms and the payments under the non-compete agreements were fully satisfied in April 2018.

 

 

Income Tax Expense. For the three months ending June 30, 2018, the Company did not report any income tax expense on pre-tax income of $879,000 compared to tax expense of $154,000 for the three months ended June 30, 2017 after pre-tax income of $547,000. There was no tax expense during the current quarter due to the release of a portion of the valuation allowance on our net deferred tax assets established in the prior fiscal year. In accordance with Accounting Standards Codification (ASC) 740, Accounting for Income Taxes, at June 30, 2018, the Company has assessed whether the deferred tax assets are more likely than not to be realized based on an evaluative process that considers all available positive and negative evidence. As part of this evaluative process, management considered the following sources of taxable income: 1.) taxable income in prior carryback years; 2.) the future reversals of taxable temporary differences; 3.) tax planning strategies; and 4.) future taxable income exclusive of reversing temporary differences and carryforwards. In making a conclusion, management evaluated all the available positive and negative evidence impacting these sources of taxable income. The first three options are more quantifiable and verifiable; however, management has concluded they are not viable sources of taxable income.  As such, the positive evidence that has been most heavily relied upon, but the most subjective, is future taxable income exclusive of reversing temporary differences and carryforwards. Based upon the Company being in a three-year cumulative loss position, which creates negative evidence, and because this evidence is considered significant, management has concluded that there is more negative evidence than positive evidence and therefore, it is more likely than not that the Company will be unable to generate sufficient taxable income in the foreseeable future to fully utilize the net deferred tax assets.

 

 

If, in the future, the Company generates taxable income on a sustained basis sufficient to support the deferred tax assets, the need for a deferred tax valuation allowance could change, resulting in the reversal of all or a portion of the deferred tax asset valuation at that time. The establishment of a valuation allowance on our deferred tax assets for financial reporting purposes does not affect how the net operating loss carryforwards may be utilized on our subsequent income tax returns. The valuation allowance on the Company’s net deferred tax assets decreased $220,000 to $5.6 million at June 30, 2018, from $5.8 million at March 31, 2018 due to book income of $879,000 and adjustments for permanent and temporary book-tax differences. Income tax expense for the periods reported is based upon year-to-date results and is not reflective of annual earnings.

 

 

Liquidity and Capital Resources

 

Liquidity describes our ability to meet current and future financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of investment securities and funds provided by our operations. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, and competition. We regularly adjust our investments in liquid assets available to meet short-term liquidity needs based upon our assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and securities, and (iv) the objectives of our asset/liability management policy.

 

We also have the ability to borrow from the FHLB to meet our funding and liquidity needs. At June 30, 2018, we had $59.6 million in borrowings from the FHLB, of which $12.0 million were assumed through acquisitions, and the capacity to borrow approximately $72.0 million more, subject to our pledging sufficient assets.

 

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.

 

We normally carry balances with correspondent banks that exceed the federally insured limit. We currently conduct a quarterly review of each correspondent bank’s financial information, including the banks’ capital ratios, balance sheet, income statement, allowance for loans losses, and other performance ratios, to determine if the bank is financially stable.

 

Our most liquid assets are cash and cash equivalents and interest-earning deposits. The level of these assets depends on our operating, financing, lending, and investing activities during any given period. At June 30, 2018, cash and cash equivalents totaled $36.1 million and securities classified as available-for-sale amounted to $72.6 million.

 

Total deposits decreased $669,000 over the three months ended June 30, 2018, while total deposits decreased $554,000 over the same period a year ago. Deposit flows are affected by the level of interest rates, the interest rates and products offered by competitors and other factors. In the first quarter of fiscal 2018, we continued our focus in growing our lower costing core deposits (considered to be all deposits other than certificates of deposit) and retaining maturing certificates of deposits through various promotions to assist in funding organic loan growth. Certificates of deposit allow us to lock in those funds for an extended period of time based upon current interest rates. At June 30, 2018, certificates of deposit scheduled to mature within one year totaled $126.3 million, or 52.6% of certificates of deposit. We believe the large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for longer periods due to the current low interest rate environment and local competitive pressures. Whether we retain these deposits will be determined in part by the interest rates we are willing to pay on such deposits. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on certificates of deposit due on or before June 30, 2019.

 

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, unused lines of credit and letters of credit. At June 30, 2018, we had $55.2 million in commitments to extend credit outstanding.

 

 

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.

 

At June 30, 2018, we exceeded all of the applicable regulatory capital requirements for the Bank (See capital tables in Note 10 of the Notes to Consolidated Financial Statements). Our regulatory risk weighted capital ratios increased during the first quarter of fiscal 2019 as a result of an increase in our capital levels due to the net income recorded for the quarter.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

For a discussion of our market risk, please refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2018 filed on June 29, 2018. The Company’s market risk has not changed materially from that disclosed in the annual report.

 

Item 4.

Controls and Procedures

 

As of the end of the period covered by this report, management of the Company carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures as that term is defined in Rule 13a-15(e). Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

 

It should be noted that the design of the Company’s disclosure controls and procedures is based in part upon certain reasonable assumptions about the likelihood of future events, and there can be no reasonable assurance that any design of disclosure controls and procedures will succeed in achieving its stated goals under all potential future conditions, regardless of how remote, but the Company’s principal executive and financial officers have concluded that the Company’s disclosure controls and procedures are, in fact, effective at a reasonable assurance level.

 

During the period covered by this report, there have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Securities and Exchange Commission Rule 13a-15 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

Part II – Other Information

 

Item 1.

Legal Proceedings

 

 

The Bank and Company are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Bank’s or the Company’s financial condition or results of operations.

 

Item 1A.

Risk Factors

 

For information regarding the Company’s risk factors, see “Risk Factors” in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on June 29, 2018. As of June 30, 2018, the risk factors of the Company have not changed materially from those disclosed in the annual report.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.

Defaults Upon Senior Securities

 

None.

 

Item 4.

Mine Safety Disclosures

 

None.

 

Item 5.

Other Information

 

None.

 

Item 6.

Exhibits

 

 31.1  

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

32

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

 

 101

 

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Financial Condition as of June 30, 2018 (unaudited) and March 31, 2018; (ii) the Consolidated Statements of Operations for the three months ended June 30, 2018 and 2017 (unaudited); (iii) the Consolidated Statements of Comprehensive Income for the three months ended June 30, 2018 and 2017 (unaudited); (iv) the Consolidated Statements of Equity for the three months ended June 30, 2018 and 2017 (unaudited); (v) the Consolidated Statement of Cash Flows for the three months ended June 30, 2018 and 2017 (unaudited); and (vi) Notes to Consolidated Financial Statements (unaudited).

 _______________________

* This information is furnished and not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934 unless specifically incorporated therein.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

   

HAMILTON BANCORP, INC.

     
     

Date:  August 13, 2018

 

/s/ Robert A. DeAlmeida

 
   

Robert A. DeAlmeida

   

President and Chief Executive Officer

     
     

Date:  August 13, 2018

 

/s/ John P. Marzullo

 
   

John P. Marzullo

   

Senior Vice President, Chief Financial Officer and Treasurer

 

63