Note 3 - Acquisition of Fairmount Bancorp, Inc.

12 Months Ended

Mar. 31, 2016

Notes to Financial Statements

Business Combination Disclosure [Text Block]

Note 3

:          Acquisition of Fairmount Bancorp, Inc.

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

The total merger consideration was $14.2 million.

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

As required by the acquisition method of accounting, we have adjusted the acquired assets and liabilities of Fairmount to their estimated fair value on the date of acquisition and added them to those of Hamilton Bancorp. Based on management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, which we have based on level 2 and 3 valuation estimates and assumptions that are subject to change, we have allocated the preliminary purchase price for Fairmount as follows:

	As recorded by			Fair Value			As recorded by
	Fairmount Bancorp, Inc.			Adjustments			Hamilton Bancorp, Inc.
Identifiable assets:
Cash and cash equivalents	$	1,468,499		$	-		$	1,468,499
Certificates of deposit		4,467,825			27,772			4,495,597
Investment securities available for sale		9,729,405			-			9,729,405
Loans		55,454,414			(1,425,279	)		54,029,135
Allowance For Loan Loss		(591,070	)		591,070			-
Premises and equipment		2,975,587			(726,997	)		2,248,590
Core Deposit Intangible		22,802			(22,802	)		-
Deferred income taxes		423,258			596,675			1,019,933
Other assets		1,031,755			-			1,031,755
Total identifiable assets	$	74,982,475		$	(959,561	)	$	74,022,914
Identifiable liabilities:
Non-interest bearing deposits		909,669			-			909,669
Interest bearing deposits		52,123,868			433,429			52,557,297
Borrowings		10,500,000			389,147			10,889,147
Other liabilities		120,351			-			120,351
Total identifiable liabilities	$	63,653,888		$	822,576		$	64,476,464
Net tangible assets acquired		11,328,587			(1,782,137	)		9,546,450
Definite lived intangible assets acquired		-			542,540			542,540
Goodwill		-			4,103,379			4,103,379
Net intangible assets acquired		-			4,645,919			4,645,919
Total cash consideration	$	11,328,587		$	2,863,782		$	14,192,369

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

Of the total estimated purchase price, we have allocated an estimate of $9.5 million to net tangible assets acquired and we have allocated $543,000 to the core deposit intangible which is a definite lived intangible asset. We have allocated the remaining purchase price to goodwill, which is deductible for income tax purposes. We will amortize the core deposit intangible on a straight-line basis over its estimated useful life of 8 years. We will evaluate goodwill annually for impairment.

Pro Forma Condensed Combined Financial Information.

The following schedule includes consolidated statements of operations data for the unaudited pro forma results for the periods ended March 31, 2016 and 2015 as if the Fairmount Bancorp acquisition had occurred as of the beginning of the periods presented.

	Twelve Months Ended March 31,
	2016		2015
Net interest income	$	10,948,521	$	10,974,860
Other non-interest revenue		1,657,715		1,274,053
Total revenue		12,606,236		12,248,913
Provision expense		440,000		170,000
Other non-interest expense		10,462,955		11,225,039
Income before income taxes		1,703,281		853,874
Income tax expense		840,532		119,657
Net income	$	862,750	$	734,217
Basic earnings per share	$	0.27	$	0.23
Diluted earnings per share	$	0.27	$	0.23

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

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

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

	Year ended March 31, 2016
	Fairmount		Fraternity		Total
Legal	$	255,311	$	247,015	$	502,326
Professional services		176,786		140,173		316,959
Data processing		48,745		-		48,745
Advertising		2,779		2,106		4,885
Other		26,547		144		26,691
Total meger related expenses	$	510,168	$	389,438	$	899,606

Acquired loans

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

	Contractually
	Required		Non-Accretable			Cash Flows					Carrying Value
	Payments		Credit			Expected To Be		Accretable FMV			of Loans
	Receivable		Adjustments			Collected		Adjustments			Receivable
Performing loans acquired	$	53,979,491	$	-		$	53,979,491	$	(931,299	)	$	53,048,192
Impaired loans acquired		1,578,117		(538,032	)		1,040,085		(59,142	)		980,943
Total	$	55,557,608	$	(538,032	)	$	55,019,576	$	(990,441	)	$	54,029,135

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

We had an independent third party determine the fair value of cash flows on $53,979,491 of performing loans. The valuation took into consideration the loans' underlying characteristics, including account types, remaining terms, annual interest rates, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan to value ratios, loss exposures, and remaining balances. These performing loans were segregated into pools based on loan and payment type and in some cases, risk grade. The effect of this fair valuation process was a net accretable discount adjustment of $931,299 at acquisition.

We also individually evaluated 22 impaired loans totaling $1,578,117 to determine the fair value as of the September 11, 2015 measurement date. In determining the fair value for each individually evaluated impaired loan, we considered a number of factors including the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral and net present value of cash flows we expect to receive, among others.

We established a credit risk related non-accretable difference of $538,032 relating to these acquired, credit impaired loans, reflected in the recorded net fair value. We further estimated the timing and amount of expected cash flows in excess of the estimated fair value and established an accretable discount adjustment of $59,142 at acquisition relating to these impaired loans.