10-Q 1 hbk20180930_10q.htm FORM 10-Q hbk20180930_10q.htm
 

 

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 September 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 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 [ X ]

Smaller reporting company [ X ]

   

Emerging growth company [    ]

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined 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 November 14, 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 September 30, 2018 (unaudited) and March 31, 2018

1

     
 

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

2

     
 

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

3

     
 

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

4

     
 

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

5 - 6

     
 

Notes to Consolidated Financial Statements (unaudited)

7 – 41

     

Item 2.

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

42 – 66

     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

66

     

Item 4.

Controls and Procedures

66

     

Part II. Other Information

     

Item 1.

Legal Proceedings

67

     

Item 1A.

Risk Factors

67

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

68

     

Item 3.

Defaults upon Senior Securities

68

     

Item 4.

Mine Safety Disclosures

68

     

Item 5.

Other Information

68

     

Item 6.

Exhibits

69

     
 

Signatures

70

 

 

 

Part I.Financial Information

Item 1. Financial Statements

 

HAMILTON BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Financial Condition

September 30, 2018 and March 31, 2018

 

   

September 30,

   

March 31,

 
   

2018

   

2018

 
   

(Unaudited)

   

(Audited)

 
Assets  

Assets

               

Cash and due from banks

  $ 14,536,572     $ 15,488,396  

Federal funds sold

    7,489,263       7,880,019  

Cash and cash equivalents

    22,025,835       23,368,415  

Certificates of deposit held as investment

    499,144       499,189  

Securities available for sale, at fair value

    68,862,989       75,404,136  

Federal Home Loan Bank stock, at cost

    2,782,400       3,122,400  

Loans

    375,939,704       390,420,885  

Allowance for loan losses

    (3,030,929 )     (2,821,903 )

Net loans and leases

    372,908,775       387,598,982  

Premises and equipment, net

    3,842,489       3,945,825  

Foreclosed real estate

    587,978       457,778  

Accrued interest receivable

    1,506,290       1,468,382  

Bank-owned life insurance

    17,684,501       17,455,850  

Income taxes refundable

    40,000       40,000  

Goodwill and other intangible assets

    9,113,731       9,176,764  

Other assets

    2,333,117       2,995,741  

Total Assets

  $ 502,187,249     $ 525,533,462  
                 
Liabilities and Shareholders' Equity  

Liabilities

               

Noninterest-bearing deposits

  $ 28,816,887     $ 29,557,943  

Interest-bearing deposits

    359,653,728       375,585,032  

Total deposits

    388,470,615       405,142,975  

Borrowings

    53,551,896       60,672,140  

Advances by borrowers for taxes and insurance

    1,216,584       1,962,665  

Other liabilities

    3,488,645       3,679,550  

Total liabilities

    446,727,740       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 September 30, 2018 and 3,407,613 shares at March 31, 2018

    34,164       34,076  

Additional paid in capital

    32,364,652       32,113,534  

Retained earnings

    27,464,461       25,920,490  

Unearned ESOP shares

    (2,073,680 )     (2,073,680 )

Accumulated other comprehensive loss

    (2,330,088 )     (1,918,288 )

Total shareholders' equity

    55,459,509       54,076,132  

Total Liabilities and Shareholders' Equity

  $ 502,187,249     $ 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 and Six Months Ended September 30, 2018 and 2017

 

   

Three Months Ended

   

Six Months Ended

 
   

September 30,

   

September 30,

 
   

2018

   

2017

   

2018

   

2017

 

Interest revenue

                               

Loans, including fees

  $ 4,403,945     $ 3,938,627     $ 8,811,889     $ 7,786,639  

U.S. treasuries, government agencies and FHLB stock

    63,214       46,513       116,903       79,198  

Municipal and corporate bonds

    94,654       112,571       189,065       226,540  

Mortgage-backed securities

    265,395       314,572       540,403       653,478  

Federal funds sold and other bank deposits

    113,532       26,738       224,251       81,146  

Total interest revenue

    4,940,740       4,439,021       9,882,511       8,827,001  
                                 

Interest expense

                               

Deposits

    920,018       669,605       1,795,082       1,330,063  

Borrowed funds

    272,439       158,634       531,028       292,904  

Total interest expense

    1,192,457       828,239       2,326,110       1,622,967  
                                 

Net interest income

    3,748,283       3,610,782       7,556,401       7,204,034  

Provision for loan losses

    242,496       120,000       302,496       280,000  

Net interest income after provision for loan losses

    3,505,787       3,490,782       7,253,905       6,924,034  
                                 

Noninterest revenue

                               

Service charges

    120,966       118,851       241,549       238,050  

Gain on sale of investment securities

    -       10,381       -       10,381  

Gain on sale of loans held for sale

    16,331       -       25,873       -  

Earnings on bank-owned life insurance

    115,126       123,818       228,651       246,393  

Other

    43,793       41,394       90,917       66,112  

Total noninterest revenue

    296,216       294,444       586,990       560,936  
                                 

Noninterest expenses

                               

Salaries

    1,527,455       1,510,515       2,995,036       2,970,512  

Employee benefits

    334,301       348,313       746,144       741,487  

Occupancy

    243,186       239,415       515,014       500,253  

Advertising

    14,958       14,170       31,982       41,198  

Furniture and equipment

    78,972       85,754       169,271       169,738  

Data processing

    208,888       181,506       401,541       346,356  

Legal services

    67,623       119,104       123,962       220,994  

Other professional services

    103,219       212,519       201,535       392,820  

Deposit insurance premiums

    112,821       73,762       213,930       130,890  

Foreclosed real estate expense and losses

    9,302       113       9,302       1,299  

Other operating

    436,740       431,717       889,207       854,366  

Total noninterest expense

    3,137,465       3,216,888       6,296,924       6,369,913  
                                 

Income before income taxes

    664,538       568,338       1,543,971       1,115,057  

Income tax expense

    -       157,585       -       311,927  

Net Income

  $ 664,538     $ 410,753     $ 1,543,971     $ 803,130  
                                 

Net income per common share:

                               

Basic

  $ 0.21     $ 0.13     $ 0.48     $ 0.25  

Diluted

  $ 0.21     $ 0.13     $ 0.48     $ 0.25  

 

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

 

 

 

HAMILTON BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (Unaudited)

Three and Six Months Ended September 30, 2018 and 2017

 

   

Three Months Ended

   

Six Months Ended

 
   

September 30,

   

September 30,

 
   

2018

   

2017

   

2018

   

2017

 
                                 

Net income

  $ 664,538     $ 410,753     $ 1,543,971     $ 803,130  

Other comprehensive (loss) income:

                               

Unrealized (loss) gain on investment securities available for sale

    (345,784 )     87,905       (605,645 )     637,248  

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

    -       (10,381 )     -       (10,381 )

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

    (345,784 )     77,524       (605,645 )     626,867  

Unrealized gain (loss) on derivative transactions

    95,806       26,710       193,845       (183,238 )

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

    -       41,114       -       174,990  

Other comprehensive (loss) income

    (249,978 )     63,120       (411,800 )     268,639  

Total comprehensive income

  $ 414,560     $ 473,873     $ 1,132,171     $ 1,071,769  

 

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

 

 

 

HAMILTON BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

Six Months Ended September 30, 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

    -       -       803,130       -       -       803,130  

Unrealized gain on available for sale securities, net of tax effect of $ 247,268

    -       -       -       -       379,600       379,600  

Unrealized loss on derivative transactions securities, net of tax effect of $(72,278)

    -       -       -       -       (27,326 )     (27,326 )

Stock based compensation - options

    -       114,784       -       -       -       114,784  

Restricted stock - compensation and activity

    -       115,638       -       -       -       115,638  

Balances at September 30, 2017

  $ 34,111     $ 31,886,657     $ 32,533,803     $ (2,221,800 )   $ (1,055,715 )   $ 61,177,056  
                                                 
                                                 

Balances at April 1, 2018

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

Net income

    -       -       1,543,971       -       -       1,543,971  

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

    -       -       -       -       (605,645 )     (605,645 )

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

    -       -       -       -       193,845       193,845  

Stock based compensation - options

    -       123,028       -       -       -       123,028  

Restricted stock - compensation and activity

    88       128,090       -       -       -       128,178  

Balances at September 30, 2018

  $ 34,164     $ 32,364,652     $ 27,464,461     $ (2,073,680 )   $ (2,330,088 )   $ 55,459,509  

 

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

 

 

 

HAMILTON BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)

Six Months Ended September 30, 2018 and 2017

 

   

Six Months Ended

 
   

September 30,

 
   

2018

   

2017

 
                 

Cash flows from operating activities

               

Interest received

  $ 10,055,633     $ 9,265,972  

Fees and commissions received

    332,677       305,462  

Interest paid

    (2,590,648 )     (2,011,560 )

Cash paid to suppliers and employees

    (5,354,929 )     (5,193,587 )

Origination of loans held for sale

    (1,280,300 )     -  

Proceeds from sale of loans held for sale

    1,306,173       -  

Net cash provided by operating activities

    2,468,606       2,366,287  
                 

Cash flows from investing activities

               

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

    7,618,325       8,524,350  

Proceeds from sale of investment securities available for sale

    -       4,243,760  

Purchase of investment securities available for sale

    (1,985,000 )     (1,208,480 )

Purchase (redemption) of Federal Home Loan Bank stock

    340,000       (701,200 )

Loans made, net of principal repayments

    14,328,852       (29,464,001 )

Purchase of premises and equipment

    (63,665 )     (349,306 )

Proceeds from sale of foreclosed real estate

    19,641       35,896  

Net cash provided (used) by investing activities

    20,258,153       (18,918,981 )
                 

Cash flows from financing activities

               

Net increase (decrease) in

               

Deposits

    (16,517,191 )     (18,468,720 )

Advances by borrowers for taxes and insurance

    (746,081 )     (573,435 )

Proceeds from borrowings

    24,000,000       25,000,000  

Payments of borrowings

    (31,000,000 )     (8,004,682 )

Interest rate swap on FHLB borrowings

    193,845       (99,604 )

Issuance of restricted stock

    88       -  

Net cash (used) provided by financing activities

    (24,069,339 )     (2,146,441 )
                 

Net increase (decrease) in cash and cash equivalents

    (1,342,580 )     (18,699,135 )
                 

Cash and cash equivalents at beginning of period

    23,368,415       29,353,921  
                 

Cash and cash equivalents at end of period

  $ 22,025,835     $ 10,654,786  

 

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

 

 

HAMILTON BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)

(Continued)

 

   

Six Months Ended

 
   

September 30,

 
   

2018

   

2017

 
                 

Reconciliation of net income to net cash provided by operating activities

               

Net income

  $ 1,543,971     $ 803,130  

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

               

Amortization of premiums on certificates of deposit

    45       45  

Amortization of premiums on securities

    302,178       466,542  

Gain on sale of investment securities

    -       (10,380 )

Loss on sale of foreclosed real estate

    211       1,299  

Gain on loans held for sale

    (25,873 )     -  

Loan discount accretion

    (72,593 )     121,389  

Deposit premium amortization

    (155,168 )     (231,196 )

Borrowing premium amortization

    (120,244 )     (262,799 )

Core deposit intangible asset amortization

    63,032       63,032  

Premises and equipment depreciation and amortization

    167,001       158,784  

Stock based compensation

    251,118       230,422  

Provision for loan losses

    302,496       280,000  

Decrease (increase) in

               

Accrued interest receivable

    (37,908 )     (173,469 )

Loans held for sale

    25,873       -  

Cash surrender value of life insurance

    (228,651 )     (246,393 )

Income taxes refundable and deferred income taxes

    -       311,926  

Other assets

    662,624       224,291  

Increase (decrease) in

               

Accrued interest payable

    10,874       105,402  

Deferred loan origination fees

    (18,600 )     24,464  

Other liabilities

    (201,780 )     499,798  

Net cash provided by operating activities

  $ 2,468,606     $ 2,366,287  
                 

Noncash investing activity

               

Real estate acquired through foreclosure

  $ 130,200     $ 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)

September 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 October 23, 2018, the Company and Orrstown Financial Services, Inc. (“Orrstown”), the parent company of Orrstown Bank located in Shippensburg, Pennsylvania, signed a definitive agreement and plan of merger under which the Company will merge with and into Orrstown, with Orrstown as the surviving company. Immediately, thereafter, Hamilton Bank will merge with and into Orrstown Bank, with Orrstown Bank as the surviving institution. At the effective time of the merger, each share of Hamilton Bancorp’s common stock will be converted into the right to receive (1) $4.10 in cash, subject to adjustment as set forth in the Merger Agreement and (2) 0.54 shares of common stock of Orrstown. The Merger Agreement provides each party with specified termination rights. If the Merger is not consummated under specified circumstances, Hamilton Bancorp has agreed to pay Orrstown a termination fee of $2.2 million. The transaction is expected to close in the second quarter of calendar 2019.

 

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, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

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, checking, 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 and six months ended September 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.

 

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 September 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.

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

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.

 

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.

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

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 a 48 month look back period for net charge-offs. Prior to September 30, 2018, we reviewed both a 36 and 48 month look back period individually for net charge-offs to develop a range in which the allowance for loan losses should be within. The range has grown smaller over the past year to a point where the difference in the two calculations of the allowance for loan loss is deemed immaterial. As a result, and for efficiency purposes, we began to only utilize a historical charge-off period of 48 months in determining the necessary allowance for loan losses. We believe, although similar in amount, that a 48-month period is more representative of our charge-off history. This period may change in the future depending on the performance of the loan portfolio. In addition, we also adjusted the environmental factors of the legacy and acquired loan portfolios so that they are not the same for each loan portfolio going forward. The environmental factors for each acquired loan portfolio and the legacy loan portfolio will be evaluated on their own merits so as to stand on their own characteristics. These changes at September 30, 2018 resulted in additional provisions of $294,000 and were primarily related to the acquired loan portfolios and the adjustment of their environmental factors.

 

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.

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

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.

 

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.

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

 

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.

 

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.

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

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. The Company is currently evaluating this guidance to determine the impact adoption will have on its consolidated financial statements. 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. Due to the pending merger with Orrstown, we will not be entering into a contract with an outside vendor as originally planned to assist with implementing CECL due to the timing of required adoption and the pending merger. If the merger agreement is terminated for any reason, the Company will engage an outside vendor at that time to assist with the implementation of this pronouncement utilizing information we have continued to gather.  

 

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.

  

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

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 September 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.

 

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.

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

 

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 and six months ended September 30, 2018 and 2017 are summarized below:

 

   

Three Months Ended

   

Three Months Ended

   

Six Months Ended

   

Six Months Ended

 
   

September 30, 2018

   

September 30, 2017

   

September 30, 2018

   

September 30, 2017

 
                                 

Net income

  $ 664,538     $ 410,753     $ 1,543,971     $ 803,130  

Weighted average common shares outstanding - basic

    3,209,046       3,188,895       3,209,046       3,188,895  

Weighted average common shares outstanding - diluted

    3,214,841       3,196,516       3,214,841       3,196,516  

Income per common share - basic and diluted

  $ 0.21     $ 0.13     $ 0.48     $ 0.25  
                                 

Anti-dilutive shares

    174,465       124,169       174,465       124,169  

 

 

 

Note 4:

Investment Securities Available for Sale

 

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

 

           

Gross

   

Gross

         
   

Amortized

   

unrealized

   

unrealized

   

Fair

 

September 30, 2018

 

cost

   

gains

   

losses

   

value

 
                                 

U.S. government agencies

  $ 2,746,829     $ -     $ 35,162     $ 2,711,667  

Municipal bonds

    12,376,464       -       884,033       11,492,431  

Corporate bonds

    2,000,000       -       50,868       1,949,132  

Mortgage-backed securities

    55,208,284       3,390       2,501,915       52,709,759  
    $ 72,331,577     $ 3,390     $ 3,471,978     $ 68,862,989  

 

           

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 and six months ended September 30, 2018. Proceeds from the sale of investment securities were $4,243,760 during the three and six months ended September 30, 2017, with gains of $23,352 and losses of $12,971.

 

As of September 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 $38,258 and fair value of $38,858 as of September 30, 2018.

 

As of September 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 $713,599 and $723,023, respectively.

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

The amortized cost and estimated fair value of debt securities by contractual maturity at September 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

 
   

September 30, 2018

   

March 31, 2018

 
   

Amortized

   

Fair

   

Amortized

   

Fair

 
   

cost

   

value

   

cost

   

value

 
                                 

Maturing

                               

Within one year

  $ 2,002,643     $ 1,998,068     $ 2,009,160     $ 1,995,625  

Over one to five years

    1,228,815       1,180,880       1,231,928       1,196,368  

Over five to ten years

    3,573,299       3,476,232       3,578,827       3,500,641  

Over ten years

    10,318,536       9,498,050       10,368,499       9,686,082  

Mortgage-backed securities, in monthly installments

    55,208,284       52,709,759       61,078,665       59,025,420  
    $ 72,331,577     $ 68,862,989     $ 78,267,079     $ 75,404,136  

 

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 September 30, 2018 and March 31, 2018.

 

   

Less than 12 months

   

12 months or longer

   

Total

 
   

Gross unrealized

   

Fair

   

Gross unrealized

   

Fair

   

Gross unrealized

   

Fair

 

September 30, 2018

 

losses

   

value

   

losses

   

value

   

losses

   

value

 
                                                 

U.S. government agencies

  $ -     $ -     $ 35,162     $ 2,711,667     $ 35,162     $ 2,711,667  

Municipal bonds

    -       -       884,033       11,492,431       884,033       11,492,431  

Corporate bonds

    -       -       50,868       1,949,132       50,868       1,949,132  

Mortgage-backed securities

    185,975       6,707,755       2,315,940       45,756,778       2,501,915       52,464,533  
    $ 185,975     $ 6,707,755     $ 3,286,003     $ 61,910,008     $ 3,471,978     $ 68,617,763  

 

 

   

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 September 30, 2018 and March 31, 2018:

 

   

September 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)

  $ 83,090,271     $ 68,932,853     $ 152,023,124       40 %   $ 85,248,184     $ 72,749,066     $ 157,997,250       41 %

Residential construction

    3,639,139       -       3,639,139       1 %     5,450,827       -       5,450,827       1 %

Investor (3)

    7,880,161       17,002,668       24,882,829       7 %     9,275,031       17,460,809       26,735,840       7 %

Commercial

    105,679,013       10,017,465       115,696,478       31 %     100,403,769       11,762,485       112,166,254       29 %

Commercial construction

    2,529,160       928,008       3,457,168       1 %     5,763,784       1,352,019       7,115,803       2 %

Total real estate loans

    202,817,744       96,880,994       299,698,738       80 %     206,141,595       103,324,379       309,465,974       80 %

Commercial business (4)

    36,134,376       1,755,200       37,889,576       10 %     38,302,739       1,841,226       40,143,965       10 %

Home equity loans

    14,183,532       5,184,176       19,367,708       5 %     13,956,327       6,039,462       19,995,789       5 %

Consumer (5)

    16,973,316       719,527       17,692,843       5 %     18,849,448       766,063       19,615,511       5 %

Total Loans

    270,108,968       104,539,897       374,648,865       100 %     277,250,109       111,971,130       389,221,239       100 %

Net deferred loan origination fees and costs

    (194,146 )     -       (194,146 )             (212,746 )     -       (212,746 )        

Loan premium (discount)

    1,773,078       (288,093 )     1,484,985               1,922,428       (510,036 )     1,412,392          
    $ 271,687,900     $ 104,251,804     $ 375,939,704             $ 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.

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

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.

 

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 and six-month periods ended September 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.

 

Three Months Ended September 30, 2018

 

Residential Real Estate

 

Investor

Real Estate

 

Commercial Real Estate

 

Commercial Construction

 

Commercial Business

 

Home

Equity

 

Consumer

 

Unallocated

 

Total

 

Allowance for credit losses:

                                                       

Beginning balance

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

Charge-offs

    (5,722 )   (2,531 )   -     -     (75,000 )   -     -     -     (83,253 )

Recoveries

    1,475     -     31,320     -     -     -     1,904     -     34,699  

Provision for credit losses

    68,712     253,596     (74,765 )   (2,403 )   (1,761 )   4,564     (27,180 )   21,733     242,496  

Ending balance

  $ 665,676   $ 314,571   $ 1,312,441   $ 12,390   $ 532,611   $ 72,831   $ 98,676   $ 21,733   $ 3,030,929  

 

 

Six Months Ended September 30, 2018

 

Residential

Real Estate

 

Investor

Real Estate

 

Commercial Real Estate

   

Commercial Construction

 

Commercial Business

 

Home

Equity

 

Consumer

 

Unallocated

 

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

    (13,769 )   (8,111 )   (31,320 )     -     (75,000 )   -     (2,465 )   -     (130,665 )

Recoveries

    2,242     64     31,320       -     -     -     3,569     -     37,195  

Provision for credit losses

    68,480     270,928     59,058       (21,040 )   (66,371 )   3,372     (33,664 )   21,733     302,496  

Ending balance

  $ 665,676   $ 314,571   $ 1,312,441     $ 12,390   $ 532,611   $ 72,831   $ 98,676   $ 21,733   $ 3,030,929  
                                                           

Allowance allocated to:

                                                         

Legacy Loans:

                                                         

Individually evaluated for impairment

  $ 257,866   $ 1,857   $ -     $ -   $ -   $ -   $ -   $ -   $ 259,723  

Collectively evaluated for impairment

    260,437     50,278     1,272,762       11,381     528,363     57,845     98,491     21,733     2,301,290  
                                                           

Acquired Loans:

                                                         

Individually evaluated for impairment

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

Collectively evaluated for impairment

    147,373     262,436     39,679       1,009     4,248     14,986     185     -     469,916  

                                                                                                                                                                                                                               

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

Three Months Ended September 30, 2017

 

Residential

Real Estate

 

Investor

Real Estate

 

Commercial Real Estate

 

Commercial Construction

 

Commercial Business

 

Home

Equity

 

Consumer

 

Unallocated

 

Total

 

Allowance for credit losses:

                                                       

Beginning balance

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

Charge-offs

    (8,907 )   (11,044 )   -     -     -     -     (486 )   -     (20,437 )

Recoveries

    -     12,822     -     -     206     -     872     -     13,900  

Provision for credit losses

    (7,362 )   (13,994 )   48,275     (14,913 )   (16,170 )   (2,091 )   126,255     -     120,000  

Ending balance

  $ 528,288   $ 52,255   $ 1,360,433   $ 12,074   $ 327,130   $ 62,570   $ 128,241   $ -   $ 2,470,991  

 

 

Six Months Ended September 30, 2017

 

Residential

Real Estate

 

Investor

Real Estate

 

Commercial

Real Estate

 

Commercial Construction

 

Commercial Business

 

Home

Equity

 

Consumer

 

Unallocated

 

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

    (8,907 )   (15,122 )   -     -     -     -     (486 )   -     (24,515 )

Recoveries

    -     18,129     -     -     381     -     2,181     -     20,691  

Provision for credit losses

    (16,344 )   13,973     (15,461 )   3,043     177,288     (7,501 )   125,002     -     280,000  

Ending balance

  $ 528,288   $ 52,255   $ 1,360,433   $ 12,074   $ 327,130   $ 62,570   $ 128,241   $ -   $ 2,470,991  
                                                         

Allowance allocated to:

                                                       

Legacy Loans:

                                                       

Individually evaluated for impairment

  $ 270,329   $ -   $ -   $ -   $ -   $ -   $ -   $ -   $ 270,329  

Collectively evaluated for impairment

    257,959     52,255     1,360,433     12,074     327,130     62,570     128,241     -     2,200,662  
                                                         

Acquired Loans:

                                                       

Individually evaluated for impairment

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

Collectively evaluated for impairment

    -     -     -     -     -     -     -     -     -  

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

Our recorded investment in loans at September 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:

 

September 30, 2018

 

Residential Real Estate

   

Investor

Real Estate

   

Commercial Real Estate

   

Commercial Construction

   

Commercial Business

   

Home

Equity

   

Consumer

   

Total

 

Legacy Loans:

                                                               

Individually evaluated for impairment

  $ 1,710,906     $ 59,426     $ 4,251,209     $ -     $ 769,307     $ 7,254     $ 7,208     $ 6,805,310  

Collectively evaluated for impairment

    85,018,504       7,820,735       101,427,804       2,529,160       35,365,069       14,176,278       16,966,108       263,303,658  

Ending balance

  $ 86,729,410     $ 7,880,161     $ 105,679,013     $ 2,529,160     $ 36,134,376     $ 14,183,532     $ 16,973,316     $ 270,108,968  
                                                                 

Acquired Loans:

                                                               

Individually evaluated for impairment

  $ 1,002,307     $ 499,838     $ 196,697     $ -     $ -     $ -     $ 57,772     $ 1,756,614  

Collectively evaluated for impairment

    67,930,546       16,502,829       9,820,768       928,008       1,755,200       5,184,176       661,756       102,783,283  

Ending balance

  $ 68,932,853     $ 17,002,667     $ 10,017,465     $ 928,008     $ 1,755,200     $ 5,184,176     $ 719,528     $ 104,539,897