Form 10-Q
Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2013

OR

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

Commission File No. 001-35693

 

 

Hamilton Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   46-0543309

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

501 Fairmount Avenue, Suite 200,

Towson, Maryland

  21286
(Address of Principal Executive Offices)   Zip Code

(410) 823-4510

(Registrant’s telephone number)

N/A

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

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.

YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES  x    NO  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES  ¨    NO  x

3,703,000 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding as of November 13, 2013.

 

 

 


Table of Contents

Hamilton Bancorp, Inc. and Subsidiaries

Form 10-Q

Index

 

          Page  
   Part I. Financial Information   
Item 1.    Financial Statements   
   Consolidated Statements of Financial Condition as of September 30, 2013 (unaudited) and March 31, 2013      1   
   Consolidated Statements of Operations for the Three and Six Months Ended September 30, 2013 and 2012 (unaudited)      2   
   Consolidated Statements of Comprehensive Income for the Three and Six Months Ended September 30, 2013 and 2012 (unaudited)      3   
   Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended September 30, 2013 and 2012 (unaudited)      6   
   Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2013 and 2012 (unaudited)      7 – 8   
   Notes to Consolidated Financial Statements (unaudited)      9 – 25   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      26 – 38   
Item 3.    Quantitative and Qualitative Disclosures about Market Risk      38   
Item 4.    Controls and Procedures      38   
   Part II. Other Information   
Item 1.    Legal Proceedings      39   
Item 1A.    Risk Factors      39   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      39   
Item 3.    Defaults upon Senior Securities      39   
Item 4.    Mine Safety Disclosures      39   
Item 5.    Other Information      39   
Item 6.    Exhibits      39   
   Signatures      40   


Table of Contents

Part I. – Financial Information

Item 1. Financial Statements

HAMILTON BANCORP, INC AND SUBSIDIARY

Consolidated Statements of Financial Condition

September 30, 2013 and March 31, 2013

 

     September 30,     March 31,  
     2013     2013  
     (Unaudited)     (Audited)  
Assets   

Assets

    

Cash and due from banks

   $ 6,736,254      $ 3,468,481   

Federal funds sold and Federal Home Loan Bank deposit

     6,998,749        9,590,434   

Interest-bearing deposits in other banks

     13,821,665        20,909,829   
  

 

 

   

 

 

 

Cash and cash equivalents

     27,556,668        33,968,744   

Investment securities available for sale

     110,854,821        116,233,943   

Federal Home Loan Bank stock, at cost

     405,100        400,600   

Loans held for sale

     —          196,743   

Loans, less allowance for loan losses of $2,658,510 and $2,071,224

     151,593,127        159,120,418   

Premises and equipment

     2,320,779        2,460,832   

Foreclosed real estate

     1,758,972        755,659   

Accrued interest receivable

     836,440        861,412   

Bank-owned life insurance

     11,816,607        11,622,667   

Deferred income taxes

     2,003,365        854,922   

Income taxes refundable

     367,438        1,222,027   

Goodwill and other intangible assets

     2,854,765        2,876,765   

Other assets

     1,370,913        1,387,419   
  

 

 

   

 

 

 

Total Assets

   $ 313,738,995      $ 331,962,151   
  

 

 

   

 

 

 
Liabilities and Shareholders’ Equity   

Liabilities

    

Noninterest-bearing deposits

   $ 16,391,063      $ 11,546,214   

Interest-bearing deposits

     230,368,248        248,570,661   
  

 

 

   

 

 

 

Total deposits

     246,759,311        260,116,875   

Advances by borrowers for taxes and insurance

     397,078        769,000   

Other liabilities

     1,524,611        3,640,665   
  

 

 

   

 

 

 

Total liabilities

     248,681,000        264,526,540   
  

 

 

   

 

 

 

Commitments and contingencies

     —          —     

Shareholders’ Equity

    

Common stock, $.01 par value, 100,000,000 shares authorized. Issued: 3,703,000 shares at September 30, and March 31, 2013

     37,030        37,030   

Additional paid in capital

     35,554,350        35,554,350   

Retained earnings

     33,779,052        34,261,764   

Unearned ESOP shares

     (2,814,280     (2,814,280

Accumulated other comprehensive income

     (1,498,157     396,747   
  

 

 

   

 

 

 

Total shareholders’ equity

     65,057,995        67,435,611   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 313,738,995      $ 331,962,151   
  

 

 

   

 

 

 

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

 

3


Table of Contents

HAMILTON BANCORP, INC AND SUBSIDIARY

Consolidated Statements of Operations (Unaudited)

Three and Six Months Ended September 30, 2013 and 2012

 

     Three Months Ended      Six Months Ended  
     September 30,      September 30,  
     2013     2012      2013     2012  

Interest revenue

         

Loans, including fees

   $ 2,089,194      $ 2,254,598       $ 4,239,422      $ 4,616,052   

U.S. government agency securities

     116,671        64,751         235,553        141,066   

Mortgage-backed securities

     394,356        380,244         788,693        814,144   

Federal funds sold and other bank deposits

     8,433        18,911         20,068        34,303   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest revenue

     2,608,654        2,718,504         5,283,736        5,605,565   
  

 

 

   

 

 

    

 

 

   

 

 

 

Interest expense

         

Deposits

     485,532        729,924         1,033,490        1,515,864   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

     2,123,122        1,988,580         4,250,246        4,089,701   

Provision for loan losses

     1,014,557        —           1,318,557        58,000   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     1,108,565        1,988,580         2,931,689        4,031,701   
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest revenue

         

Service charges

     76,559        54,631         144,341        111,447   

Gain on sale of investment securities

     —          —           95,516        51,212   

Gain on sale of loans held for sale

     16,470        6,342         19,982        12,810   

Earnings on bank-owned life insurance

     96,994        74,600         193,940        148,190   

Other

     1,261        95,240         2,489        96,491   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest revenue

     191,284        230,813         456,268        420,150   
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest expenses

         

Salaries

     808,198        829,175         1,626,024        1,523,154   

Employee benefits

     315,923        267,735         609,355        539,805   

Occupancy

     266,136        221,097         485,519        432,921   

Advertising

     44,654        77,174         118,555        180,315   

Furniture and equipment

     70,743        76,078         155,356        151,703   

Data processing

     133,733        148,413         285,635        283,889   

Professional services

     194,735        70,941         410,364        126,894   

Deposit insurance premiums

     64,396        67,736         124,386        144,947   

Foreclosed real estate expense and losses

     23,140        40,841         40,595        73,299   

Other operating

     267,786        237,371         470,223        491,899   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest expenses

     2,189,444        2,036,561         4,326,012        3,948,826   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     (889,595     182,832         (938,055     503,025   

Income tax (benefit) expense

     (389,296     42,000         (455,343     139,000   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net (loss) income

   $ (500,299   $ 140,832       $ (482,712   $ 364,025   
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic earnings (loss) per common share

   $ (0.15     N/A       $ (0.14     N/A   

Diluted earnings (loss) per common share

   $ (0.15     N/A       $ (0.14     N/A   

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

 

4


Table of Contents

HAMILTON BANCORP, INC AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (Unaudited)

Three and Six Months Ended September 30, 2013 and 2012

 

     Three Months Ended      Six Months Ended  
     September 30,      September 30,  
     2013     2012      2013     2012  

Net (loss) income

   $ (500,299   $ 140,832       $ (482,712   $ 364,025   
  

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income:

         

Unrealized (loss) gain on investment securities available for sale

     (235,663     158,882         (2,947,831     460,803   

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

     —          —           (95,516     (51,212
  

 

 

   

 

 

    

 

 

   

 

 

 

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

     (235,663     158,882         (3,043,347     409,591   

Income tax (benefit) expense relating to investment securities available for sale

     (85,579     62,672         (1,148,443     161,564   
  

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive (loss) income

     (150,084     96,210         (1,894,904     248,027   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total comprehensive (loss) income

   $ (650,383   $ 237,042       $ (2,377,616   $ 612,052   
  

 

 

   

 

 

    

 

 

   

 

 

 

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

 

5


Table of Contents

HAMILTON BANCORP, INC AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

Six Months Ended September 30, 2013 and 2012

 

                               Accumulated        
            Additional            Unearned     other     Total  
     Common      paid-in      Retained     ESOP     comprehensive     shareholders’  
     stock      capital      earnings     shares     income     equity  

Balance March 31, 2012

   $       $       $ 34,433,899      $      $ 630,854      $ 35,064,753   

Net income

     —           —           364,025        —          —          364,025   

Unrealized gain on available for sale securities, net of tax effect of $161,564

     —           —           —          —          248,027        248,027   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2012

   $ —         $ —         $ 34,797,924      $ —        $ 878,881      $ 35,676,805   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance March 31, 2013

   $ 37,030       $ 35,554,350       $ 34,261,764      $ (2,814,280   $ 396,747      $ 67,435,611   

Net loss

     —           —           (482,712     —          —          (482,712

Unrealized loss on available for sale securities, net of tax effect of $(1,148,443)

     —           —           —          —          (1,894,904     (1,894,904
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2013

   $ 37,030       $ 35,554,350       $ 33,779,052      $ (2,814,280   $ (1,498,157   $ 65,057,995   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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

 

6


Table of Contents

HAMILTON BANCORP, INC AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)

Six Months Ended September 30, 2013 and 2012

 

     Six Months Ended  
     September 30,  
     2013     2012  

Cash flows from operating activities

    

Interest received

   $ 5,665,370      $ 6,280,552   

Fees and commissions received

     146,829        207,938   

Interest paid

     (1,043,364     (1,550,371

Cash paid to suppliers and employees

     (4,184,197     (3,945,247

Origination of loans held for sale

     (1,400,000     (1,782,000

Proceeds from sale of loans held for sale

     1,616,725        1,794,810   

Income taxes received (paid)

     1,309,933        (786,501
  

 

 

   

 

 

 

Net cash provided by operating activities

     2,111,296        219,181   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Proceeds from maturities of certificates of deposit

     —          248,000   

Proceeds from sale of securities available for sale

     3,608,148        4,129,198   

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

     13,165,583        32,246,029   

Purchase of investment securities available for sale

     (16,746,315     (39,381,716

Purchase of Federal Home Loan Bank stock

     (4,500     21,100   

Loans made, net of principal repayments

     5,205,097        9,889,888   

Purchase of premises and equipment

     (30,899     (191,564
  

 

 

   

 

 

 

Net cash provided by investing activities

     5,197,114        6,960,935   
  

 

 

   

 

 

 

Cash flows from financing activities

    

Net increase (decrease) in

    

Deposits

     (13,348,564     50,498,406   

Advances by borrowers for taxes and insurance

     (371,922     (459,236
  

 

 

   

 

 

 

Net cash provided (used) by financing activities

     (13,720,486     50,039,170   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (6,412,076     57,219,286   

Cash and cash equivalents at beginning of period

     33,968,744        35,249,548   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 27,556,668      $ 92,468,834   
  

 

 

   

 

 

 

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

 

7


Table of Contents

HAMILTON BANCORP, INC AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)

(Continued)

 

     Six Months Ended  
     September 30,  
     2013     2012  

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

    

Net income (loss)

   $ (482,713   $ 364,025   

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

    

Amortization of premiums on securities

     356,338        605,582   

Gain on sale of investment securities

     (95,516     (51,212

Loan premium amortization

     11,500        11,500   

Deposit premium amortization

     (9,000     (30,000

Core deposit intangible asset amortization

     22,000        27,500   

Premises and equipment depreciation and amortization

     170,952        174,872   

Provision for loan losses

     1,318,557        58,000   

Decrease (increase) in

    

Accrued interest receivable

     24,972        50,426   

Loans held for sale

     196,743        —     

Cash surrender value of life insurance

     (193,940     (148,190

Income taxes refundable

     854,589        —     

Other assets

     16,507        (360,538

Increase (decrease) in

    

Accrued interest payable

     (874     (4,507

Income taxes payable

     —          (647,500

Deferred loan origination fees

     (11,176     7,479   

Other liabilities

     (67,643     161,744   
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 2,111,296      $ 219,181   
  

 

 

   

 

 

 

Noncash investing activity

    

Real estate acquired through foreclosure

   $ 1,003,313      $ 427,988   
  

 

 

   

 

 

 

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

 

8


Table of Contents

HAMILTON BANCORP, INC AND SUBSIDIARY

Form 10-Q

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2013

Note 1: Nature of Operations and Summary of Significant Accounting Policies

Basis of Presentation

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, in accordance with a Plan of Conversion adopted by its Board of Directors and approved by its members, the Bank converted from a mutual savings bank to a stock savings bank and became the wholly owned subsidiary of the Company. The conversion was accomplished through the sale and issuance of 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. In connection with the conversion, the Bank’s Board of Directors adopted an employee stock ownership plan (the “ESOP”) which subscribed for 8.0% of shares sold in the offering, or 296,240 shares. Accordingly, the reported results for the six months ended September 30, 2013 relate to the consolidated holding company and the results for the six months ended September 30, 2012 relate solely to the operations of the Bank.

In accordance with Office of the Comptroller of the Currency (the “OCC”) regulations, upon the completion of the conversion, the Bank restricted retained earnings by establishing a liquidation account. The liquidation account will be maintained for the benefit of eligible account holders who continue to maintain their accounts at the Bank after conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank, and only in such event, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

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, 2013 from audited financial statements. Operating results for the six months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2014, 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, 2013. Certain amounts from prior period financial statements have been reclassified to conform to the current period’s presentation.

Nature of Operations

The Company’s assets consist of its investment in the Bank and its liquid investments. The Company is primarily engaged in the business of directing, planning, and coordinating the business activities of the Bank. The Company’s most significant asset is its investment in the Bank. The Bank offers a full range of banking services to individuals and businesses through its main office and four 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 are real estate mortgages and commercial business loans.

 

9


Table of Contents

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

The Bank closed its Belmar branch on August 2, 2013. Customer accounts at the Belmar branch were transferred to the Baltimore City branch on Harford Road. There has been no significant runoff of Belmar branch accounts since the branch closing.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the 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.

Subsequent Events

Management has evaluated events and transactions subsequent to September 30, 2013 through November 8, 2013, the date these financial statements were issued. No significant subsequent events were identified that would affect the presentation of the financial statements.

Note 2: New Accounting Pronouncements

Recent Accounting Pronouncements

ASU 2011-11, Balance Sheet (Topic 210)—Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 amends Topic 210, “Balance Sheet,” to require an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement. ASU 2011-11 is effective for annual and interim periods beginning on April 1, 2013, and is not expected to have a significant impact on our financial statements.

ASU 2012-02, Intangibles – Goodwill and Other (Topic 350) – Testing Indefinite-Lived Intangible Assets for Impairment. ASU 2012-02 gives entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events or circumstances, an entity determines it is more likely than not that an indefinite-lived intangible asset is impaired, then the entity must perform the quantitative impairment test. If, under the quantitative impairment test, the carrying amount of the intangible asset exceeds its fair value, an entity should recognize an impairment loss in the amount of that excess. Permitting an entity to assess qualitative factors when testing indefinite-lived intangible assets for impairment results in guidance that is similar to the goodwill impairment testing guidance in ASU 2011-08. ASU 2012-02 became effective on January 1, 2013, and did not have a significant impact on our financial statements.

ASU 2012-06, Business Combinations (Topic 805) – Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution (a consensus of the FASB Emerging Issues Task Force). ASU 2012-06 clarifies the applicable guidance for subsequently measuring an indemnification asset recognized as a result of a government-assisted acquisition of a financial institution. Under ASU 2012-06, when a reporting entity recognizes an indemnification asset as a result of a government-assisted acquisition of a financial institution and, subsequently, a change in the cash flows expected to be collected on the indemnification asset occurs (as a result of a change in cash flows expected to be collected on the assets subject to indemnification), the

 

10


Table of Contents

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement (that is, the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets). ASU 2012-06 became effective on April 1, 2013, and did not have a significant impact on our financial statements.

ASU 2013-02, Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 amends recent guidance related to the reporting of comprehensive income to enhance the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 became effective on April 1, 2013, and did not have a significant impact on our financial statements.

Note 3: Earnings per Share

When presented, basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. 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. Because the mutual to stock conversion was not completed until October 10, 2012, per share earnings data is not meaningful for prior comparative periods and therefore is not presented.

Both the basic and diluted earnings per share for the three and six months ended September 30, 2013 are summarized below:

 

     Three Months ended
September 30, 2013
    Six Months ended
September 30, 2013
 

Net loss

   $ (500,299   $ (482,712

Average common shares outstanding

     3,421,572        3,421,572   

Loss per common share—basic and diluted

   $ (0.15   $ (0.14

Note 4: Goodwill and Other Intangible Assets

On December 4, 2009, the Bank acquired a branch office in Pasadena, Maryland from K Bank. The Bank paid premiums of $653,000 and $92,000 for the certificates of deposit and loans that were acquired, respectively. The premiums are being amortized over four years, which is the estimated lives of the certificates and loans. The Bank also purchased $757,432 of premises and equipment, which includes the building, land, and equipment. In addition, the Bank recorded goodwill totaling $2,664,432 and identifiable intangibles (core deposit intangible) totaling $434,000, which is being amortized over 10 years. The goodwill is deductible for tax purposes. We evaluate goodwill and other intangible assets for impairment on an annual basis.

 

11


Table of Contents

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

The activity in goodwill and acquired intangible assets related to the branch purchase is as follows:

 

     Goodwill      Core deposit
intangible
 

Balance March 31, 2012

   $ 2,664,432       $ 263,666   

Acquired during the period

     —           —     

Amortization

     —           (27,500
  

 

 

    

 

 

 

Balance September 30, 2012

   $ 2,664,432       $ 236,166   
  

 

 

    

 

 

 
     Goodwill      Core deposit
intangible
 

Balance March 31, 2013

   $ 2,664,432       $ 212,333   

Acquired during the period

     —           —     

Amortization

     —           (22,000
  

 

 

    

 

 

 

Balance September 30, 2013

   $ 2,664,432       $ 190,333   
  

 

 

    

 

 

 

At September 30, 2013, future estimated annual amortization associated with the core deposit intangible is as follows:

 

Year ending September 30,

   Amount  

2014

     36,500   

2015

     30,000   

2016

     28,167   

2017

     28,000   

2018

     28,000   

2019

     28,000   

2020

     11,666   
  

 

 

 
   $ 190,333   
  

 

 

 

 

12


Table of Contents

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

Note 5: Investment Securities Available for Sale

The amortized cost and fair value of securities at September 30, 2013 and March 31, 2013, are summarized as follows:

 

            Gross      Gross         
     Amortized      unrealized      unrealized      Fair  

September 30, 2013

   cost      gains      losses      value  

U.S. government agency

   $ 25,055,869       $ 36,762       $ 1,317,608       $ 23,775,023   

Mortgage-backed

     88,179,774         603,034         1,712,459         87,070,349   
  

 

 

    

 

 

    

 

 

    

 

 

 
     113,235,643         639,796         3,030,067         110,845,372   

FHLMC stock

     6,681         2,768         —           9,449   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 113,242,324       $ 642,564       $ 3,030,067       $ 110,854,821   
  

 

 

    

 

 

    

 

 

    

 

 

 

March 31, 2013

           

U.S. government agency

   $ 27,075,038       $ 66,149       $ 111,939       $ 27,029,248   

Mortgage-backed

     88,496,379         1,015,105         311,549         89,199,935   
  

 

 

    

 

 

    

 

 

    

 

 

 
     115,571,417         1,081,254         423,488         116,229,183   

FHLMC stock

     6,681         —           1,921         4,760   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 115,578,098       $ 1,081,254       $ 425,409       $ 116,233,943   
  

 

 

    

 

 

    

 

 

    

 

 

 

Proceeds from sales of investment securities were $3,608,148 and $4,129,198 during the six months ended September 30, 2013 and 2012, respectively, with gains of $95,516 and no losses for the six months ended September 30, 2013 and gains of $51,212 and no losses for the six months ended September 30, 2012.

As of September 30, 2013, the Company had pledged one security to the Federal Reserve Bank with a book value of $2,000,000 and a fair value of $1,790,864.

As of September 30, 2013 and March 31, 2013, all mortgage-backed securities are backed by U.S. Government- Sponsored Enterprises (GSE’s).

 

13


Table of Contents

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, 2013 and March 31, 2013 follow. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.

 

     Available for Sale  
     September 30, 2013      March 31, 2013  
     Amortized      Fair      Amortized      Fair  
     cost      value      cost      value  

Maturing

           

Within one year

   $ 499,983       $ 505,183       $ 1,505,451       $ 1,520,815   

Over one to five years

     5,557,678         5,583,949         6,575,873         6,620,671   

Over five to ten years

     12,000,000         11,188,521         11,999,256         11,938,889   

Over ten years

     6,998,208         6,497,370         6,994,458         6,948,873   

Mortgage-backed, in monthly installments

     88,179,774         87,070,349         88,496,379         89,199,935   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 113,235,643       $ 110,845,372       $ 115,571,417       $ 116,229,183   
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 2013 and March 31, 2013.

 

     Less than 12 months      12 months or longer      Total  
     Unrealized      Fair      Unrealized      Fair      Unrealized      Fair  

September 30, 2013

   losses      value      losses      value      losses      value  

U.S. government agency obligations

   $ 1,317,608       $ 21,680,601       $ —         $ —         $ 1,317,608       $ 21,680,601   

Mortgage-backed

     1,444,808         47,599,240         267,651         9,795,192         1,712,459         57,394,432   

FHLMC stock

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,762,416       $ 69,279,841       $ 267,651       $ 9,795,192       $ 3,030,067       $ 79,075,033   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

March 31, 2013

                 

U.S. government agency obligations

   $ 111,939       $ 18,881,775       $ —         $ —         $ 111,939       $ 18,881,775   

Mortgage-backed

     298,271         35,541,939         13,278         3,373,491         311,549         38,915,430   

FHLMC stock

     —           —           1,921         4,760         1,921         4,760   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 410,210       $ 54,423,714       $ 15,199       $ 3,378,251       $ 425,409       $ 57,801,965   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The gross unrealized losses on debt securities are not considered by management to be other-than-temporary impairments. Management has the intent and ability to hold these securities until recovery of their value. In most cases, temporary impairment is caused by market interest rate fluctuations.

 

14


Table of Contents

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

Note 6: Loans Receivable and Allowance for Loan Losses

Loans receivable consist of the following at September 30, 2013 and March 31, 2013:

 

     September 30,     March 31,  
     2013     2013  

Real estate loans

    

One-to four-family

    

Residential

   $ 59,926,687      $ 63,912,507   

Investor (1)

     14,825,920        15,825,857   

Commercial

     39,480,354        36,238,661   

Construction

     4,573,277        3,508,125   
  

 

 

   

 

 

 
     118,806,238        119,485,150   

Commercial

     21,839,145        26,936,644   

Home equity loans

     12,511,663        13,727,266   

Consumer

     1,175,103        1,122,770   
  

 

 

   

 

 

 

Total Loans

     154,332,149        161,271,830   

Premium on loans purchased

     3,834        15,334   

Net deferred loan origination fees and costs

     (84,346     (95,522

Allowance for loan losses

     (2,658,510     (2,071,224
  

 

 

   

 

 

 
   $ 151,593,127      $ 159,120,418   
  

 

 

   

 

 

 

 

(1) “Investor” loans are residential mortgage loans secured by non-owner occupied one- to four-family properties

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 mortgage 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 90% of the appraised value of a property 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.

 

15


Table of Contents

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

The following tables present for the six months ended September 30, 2013 and 2012 and for the year ended March 31, 2013, the balance of the allowance for loan losses by portfolio segment, disaggregated by impairment methodology, which is further segregated by amounts evaluated for impairment collectively and individually. 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.

 

                                  Allowance     Loan Balance  
                                  Individually     Collectively     Individually     Collectively  
                                  evaluated     evaluated     evaluated     evaluated  
Six months ended:   Allowance     Provision for     Charge           Allowance     for     for     for     for  

September 30, 2013

  3/31/2013     loan losses     offs     Recoveries     9/30/2013     impairment     impairment     impairment     impairment  

Real estate loans

                 

One-to four-family

  $ 372,390      $ 172,776      $ 64,206      $ 24,280      $ 505,240      $ 63,642      $ 441,598      $ 1,923,343      $ 72,829,264   

Commercial

    613,047        43,004        —          —          656,051        —          656,051        4,768,676        34,711,678   

Construction

    417,311        (84,222     —          —          333,089        249,587        83,502        2,541,587        2,031,690   

Commercial

    635,840        1,188,174        707,739        15,925        1,132,200        —          1,132,200        4,052,401        17,786,744   

Home equity loans

    31,484        (2,649     —          —          28,835        —          28,835        57,024        12,454,639   

Consumer

    1,152        1,474        —          469        3,095        —          3,095        —          1,175,103   

Unallocated

    —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 2,071,224      $ 1,318,557      $ 771,945      $ 40,674      $ 2,658,510      $ 313,229      $ 2,345,281      $ 13,343,031      $ 140,989,118   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                                  Allowance     Loan Balance  
                                  Individually     Collectively     Individually     Collectively  
                                  evaluated     evaluated     evaluated     evaluated  
Six months ended:   Allowance     Provision for     Charge           Allowance     for     for     for     for  

September 30, 2012

  3/31/2012     loan losses     offs     Recoveries     9/30/2012     impairment     impairment     impairment     impairment  

Real estate loans

                 

One-to four-family

  $ 342,905      $ 32,576      $ 76,546      $ —        $ 298,935      $ 78,627      $ 220,308      $ 1,314,702      $ 86,245,874   

Commercial

    879,698        105,745        488,772        —          496,671        —          496,671        1,641,343        26,515,012   

Construction

    1,047,658        (296,969     337,076        —          413,613        413,613        —          3,439,427        —     

Commercial

    1,231,723        216,835        873,423        —          575,135        —          575,135        780,204        24,923,431   

Home equity loans

    41,829        1,325        5,330        —          37,824        —          37,824        24,521        15,399,723   

Consumer

    270        6,769        6,885        —          154        —          154        —          1,128,507   

Unallocated

    8,281        (8,281     —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 3,552,364      $ 58,000      $ 1,788,032      $ —        $ 1,822,332      $ 492,240      $ 1,330,092      $ 7,200,197      $ 154,212,547   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                                  Allowance     Loan Balance  
                                  Individually     Collectively     Individually     Collectively  
                                  evaluated     evaluated     evaluated     evaluated  
Year ended   Allowance     Provision for     Charge           Allowance     for     for     for     for  

March 31, 2013

  3/31/2012     loan losses     offs     Recoveries     3/31/2013     impairment     impairment     impairment     impairment  

Real estate loans

                 

One-to four-family

  $ 342,905      $ 284,263      $ 254,778      $ —        $ 372,390      $ 66,504      $ 305,886      $ 1,795,014      $ 77,943,350   

Commercial

    879,698        434,621        701,272        —          613,047        —          613,047        4,806,293        31,432,368   

Construction

    1,047,658        (293,270     337,077        —          417,311        417,311        —          3,508,125        —     

Commercial

    1,231,723        1,308,430        1,904,313        —          635,840        24,770        611,070        2,993,490        23,943,154   

Home equity loans

    41,829        (5,015     5,330        —          31,484        —          31,484        21,874        13,705,392   

Consumer

    270        9,227        8,345        —          1,152        —          1,152        —          1,122,770   

Unallocated

    8,281        (8,281     —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 3,552,364      $ 1,729,975      $ 3,211,115      $ —        $ 2,071,224      $ 508,585      $ 1,562,639      $ 13,124,796      $ 148,147,034   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

16


Table of Contents

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

Past due loans, segregated by age and class of loans, as of September 30, 2013 and March 31, 2013, were as follows. There were no loans ninety days or more past due and accruing interest at March 31, 2013.

 

                Loans                       Accruing           Nonaccrual  
    Loans     Loans     90 or more                       loans 90 or           interest  
    30-59 days     60-89 days     days     Total past     Current           more days     Nonaccrual     not  

September 30, 2013

  past due     past due     past due     due loans     loans     Totals loans     past due     loans     accrued  

Real estate loans

                 

One-to four-family

  $ 507,124      $ 95,269      $ 538,483      $ 1,140,876      $ 73,611,731      $ 74,752,607      $ —        $ 538,483      $ 54,089   

Commercial

    303,400        —          1,385,566        1,688,966        37,791,388        39,480,354        —          1,385,566        216,007   

Construction

    —          —          —          —          4,573,277        4,573,277        —          —          —     

Commercial

    1,581,386        —          1,673,197        3,254,583        18,584,562        21,839,145        675,000        2,311,322        49,202   

Home equity loans

    58,064        18,120        36,891        113,075        12,398,588        12,511,663        —          36,891        2,405   

Consumer

    356        —          —          356        1,174,747        1,175,103        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 2,450,330      $ 113,389      $ 3,634,137      $ 6,197,856      $ 148,134,293      $ 154,332,149      $ 675,000      $ 4,272,262      $ 321,703   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                Loans                       Accruing           Nonaccrual  
    Loans     Loans     90 or more                       loans 90 or           interest  
    30-59 days     60-89 days     days     Total past     Current           more days     Nonaccrual     not  

March 31, 2013

  past due     past due     past due     due loans     loans     Totals loans     past due     loans     accrued  

Real estate loans

                 

One-to four-family

  $ 756,123      $ 179,316      $ 1,371,429      $ 2,306,868      $ 77,431,496      $ 79,738,364      $ —        $ 1,377,827      $ 159,594   

Commercial

    —          —          1,406,421        1,406,421        34,832,240        36,238,661        —          1,406,421        167,519   

Construction

    —          —          1,003,314        1,003,314        2,504,811        3,508,125        —          1,003,314        111,950   

Commercial

    1,865,563        —          319,167        2,184,730        24,751,914        26,936,644        —          1,307,290        21,643   

Home equity loans

    63,106        —          36,891        99,997        13,627,269        13,727,266        —          36,891        1,302   

Consumer

    —          —          —          —          1,122,770        1,122,770        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 2,684,792      $ 179,316      $ 4,137,222      $ 7,001,330      $ 154,270,500      $ 161,271,830      $ —        $ 5,131,743      $ 462,008   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Impaired Loans as of and for the six months ended September 30, 2013 and the year ended March 31, 2013 were as follows:

 

     Unpaid      Recorded      Recorded                              
     contractual      investment      investment      Total             Average         
     principal      with no      with      recorded      Related      recorded      Interest  

September 30, 2013

   balance      allowance      allowance      investment      allowance      investment      recognized  

Real estate loans

                    

One-to four-family

   $ 2,147,771       $ 1,225,522       $ 892,035       $ 2,117,557       $ 63,642       $ 2,173,788       $ 41,198   

Commercial

     5,481,779         4,768,676         —           4,768,676         —           4,782,550         150,934   

Construction

     2,541,587         —           2,541,587         2,541,587         249,587         2,541,587         87,283   

Commercial

     5,358,709         4,052,401         —           4,052,401         —           4,706,664         122,156   

Home equity loans

     57,649         57,024         —           57,024         —           57,824         306   

Consumer

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 15,587,495       $ 10,103,623       $ 3,433,622       $ 13,537,245       $ 313,229       $ 14,262,413       $ 401,877   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Unpaid      Recorded      Recorded                              
     contractual      investment      investment      Total             Average         
     principal      with no      with      recorded      Related      recorded      Interest  

March 31, 2013

   balance      allowance      allowance      investment      allowance      investment      recognized  

Real estate loans

                    

One-to four-family

   $ 2,766,726       $ 1,373,947       $ 900,717       $ 2,274,664       $ 66,504       $ 2,476,899       $ 78,717   

Commercial

     5,498,540         4,806,293         —           4,806,293         —           5,045,501         237,838   

Construction

     3,853,728         1,003,314         2,504,811         3,508,125         417,311         3,462,305         168,173   

Commercial

     3,586,694         2,783,250         210,240         2,993,490         24,770         3,231,026         124,040   

Home equity loans

     22,554         21,874         —           21,874         —           24,166         425   

Consumer

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 15,728,242       $ 9,988,678       $ 3,615,768       $ 13,604,446       $ 508,585       $ 14,239,897       $ 609,193   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

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:

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.

Foreclosed real estate will be treated as a classifiable asset. Generally, foreclosed real estate will be classified as substandard, except if the property is subject to an agreement of sale or if the asset is generating sufficient income. An appraisal may be performed on the asset to estimate its value. When the property is transferred to foreclosed real estate, a sufficient amount will be charged off against the allowance for loan losses in order to account for the property at its fair value.

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.

 

18


Table of Contents

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

The following tables present the September 30, 2013 and March 31, 2013, balances of classified loans based on the risk grade. Classified loans include Special Mention, Substandard, and Doubtful loans.

 

     Special                       

September 30, 2013

   mention      Substandard      Doubtful      Total  

Real estate loans

           

One-to four-family

   $ 1,927,032       $ 627,533       $ —         $ 2,554,565   

Commercial

     —           4,768,676         —           4,768,676   

Construction

     —           2,541,587         —           2,541,587   

Commercial

     7,294,802         4,052,401         —           11,347,203   

Home equity loans

     38,252         36,891         —           75,143   

Consumer

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 9,260,086       $ 12,027,088       $ —         $ 21,287,174   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Special                       

March 31, 2013

   mention      Substandard      Doubtful      Total  

Real estate loans

           

One-to four-family

   $ 1,767,930       $ 1,371,429       $ —         $ 3,139,359   

Commercial

     —           4,806,293         —           4,806,293   

Construction

     —           3,508,125         —           3,508,125   

Commercial

     1,220,111         2,993,490         —           4,213,601   

Home equity loans

     51,659         36,891         —           88,550   

Consumer

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,039,700       $ 12,716,228       $ —         $ 15,755,928   
  

 

 

    

 

 

    

 

 

    

 

 

 

Classified 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, 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. TDRs are also classified as nonperforming if they are on nonaccrual or become greater than 30 days past due.

 

19


Table of Contents

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

A summary of TDRs at September 30, 2013 and March 31, 2013 follows:

 

     Number of                       

September 30, 2013

   contracts      Performing      Nonperforming      Total  

Real estate loans

           

One-to four-family

     5       $ 1,362,250       $ 134,198       $ 1,496,448   

Commercial

     —           —           —           —     

Construction

     —           —           —           —     

Commercial

     3         —           1,016,142         1,016,142   

Home equity loans

     1         20,132         —           20,132   

Consumer

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     9       $ 1,382,382       $ 1,150,340       $ 2,532,722   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Number of                       

March 31, 2013

   contracts      Performing      Nonperforming      Total  

Real estate loans

           

One-to four-family

     4       $ 1,436,343       $ 6,630       $ 1,442,973   

Commercial

     —           —           —           —     

Construction

     —           —           —           —     

Commercial

     3         —           1,177,788         1,177,788   

Home equity loans

     1         21,874         —           21,874   

Consumer

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     8       $ 1,458,217       $ 1,184,418       $ 2,642,635   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the number of contracts and the dollar amount of TDR’s that were added during the six month period ended September 30, 2013. The amount shown reflects the outstanding loan balance at the time of the modification.

 

     Number of      Outstanding recorded  

Six months ended September 30, 2013

   contracts      investment  

Real estate loans

     

One-to four-family

     1       $ 72,104   

Commercial

     —           —     

Construction

     —           —     

Commercial

     —           —     

Home equity loans

     —           —     

Consumer

     —           —     
  

 

 

    

 

 

 
     1       $ 72,104   
  

 

 

    

 

 

 

 

20


Table of Contents

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

The following table represents loans that were modified as TDRs within the previous 12 months and have subsequently defaulted in the six months ended September 30, 2013 and 2012. Payment default under a TDR is defined as any TDR that is 90 days or more past due since the loan was modified.

 

     Six months ended September 30,  
     2013      2012  
     Number of      Recorded      Number of      Recorded  

TDR Loan Type

   Contracts      Investment      Contracts      Investment  

Commercial

     1       $ 216,667         0       $ —     

The recorded investment of the commercial TDR loan as of September 30, 2013 reflects a partial charge-off of $47,060 during the quarter ended March 31, 2013 and a subsequent payment of $102,500 from the auction of repossessed equipment. There is additional collateral that the bank has yet to collect upon. Management does not expect to incur any additional losses on this particular loan.

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. Management is not aware of any accounting loss to be incurred by funding these loan commitments.

The Bank had the following outstanding commitments and unused lines of credit as of September 30, 2013 and March 31, 2013:

 

     September 30,      March 31,  
     2013      2013  

Unused commercial lines of credit

   $ 7,027,829       $ 8,161,901   

Unused home equity lines of credit

     17,328,701         17,346,101   

Mortgage loan commitments

     —           837,000   

Home equity loan commitments

     49,000         132,500   

Construction loan commitments

     65,037         240,875   

Commercial loan commitments

     2,037,500         7,710,000   

 

21


Table of Contents

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

Note 7: Regulatory Capital Ratios

The Office of the Comptroller of the Currency has adopted risk-based capital standards for banking organizations. These standards require ratios of capital to assets for minimum capital adequacy and to be classified as well capitalized under prompt corrective action provisions. The capital ratios and minimum capital requirements of the Bank at September 30, 2013 and March 31, 2013 were as follows:

 

           Minimum     To be well  
     Actual     capital requirement     capitalized (1)  
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (dollars in thousands)  

September 30, 2013

               

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

   $ 46,546         27.34   $ 13,618         8.00   $ 17,022         10.00

Tier 1 capital (to risk-weighted assets)

     44,412         26.09     6,809         4.00     10,213         6.00

Tier 1 capital (to adjusted total assets)

     44,412         14.69     12,095         4.00     15,119         5.00

March 31, 2013

               

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

   $ 46,956         26.70   $ 14,068         8.00   $ 17,586         10.00

Tier 1 capital (to risk-weighted assets)

     44,885         25.52     7,034         4.00     10,551         6.00

Tier 1 capital (to adjusted total assets)

     44,885         14.13     12,707         4.00     15,884         5.00

 

(1) – Under prompt corrective action provisions

Tier 1 capital consists of total shareholders’ equity less goodwill and intangible assets. 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.

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.

In its regulatory report filed as of September 30, 2013, 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. Management has no plans that should change the classification of the capital adequacy.

Note 8: 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

 

22


Table of Contents

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

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.

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 September 30, 2013 and March 31, 2013, the Bank has categorized its investment securities available for sale as follows:

 

     Level 1      Level 2      Level 3         
     inputs      inputs      inputs      Total  

September 30, 2013

           

U.S. government agency

   $ —         $ 23,775,023       $ —         $ 23,775,023   

Mortgage-backed

     —           87,070,349         —           87,070,349   

FHLMC stock

     9,449         —           —           9,449   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available for sale

   $ 9,449       $ 110,845,372       $ —         $ 110,854,821   
  

 

 

    

 

 

    

 

 

    

 

 

 

March 31, 2013

           

U.S. government agency

   $ —         $ 27,029,248       $ —         $ 27,029,248   

Mortgage-backed

     —           89,199,935         —           89,199,935   

FHLMC stock

     4,760         —           —           4,760   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available for sale

   $ 4,760       $ 116,229,183       $ —         $ 116,233,943   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30, 2013 and March 31, 2013, the fair values consist of loan balances of $13,537,245 and $13,604,446 that have been written down by $313,229 and $508,585, respectively, as a result of specific loan loss allowances.

Foreclosed real estate – The Bank’s foreclosed real estate is measured at fair value less estimated cost to sell. As of September 30, 2013 and March 31, 2013, the fair value of foreclosed real estate was estimated to be $1,758,972 and $755,659, 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.

 

23


Table of Contents

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

     Level 1      Level 2      Level 3         
     inputs      inputs      inputs      Total  

September 30, 2013

           

Impaired loans

   $ —         $ —         $ 13,224,016       $ 13,224,016   

Foreclosed real estate

     —           —           1,758,972         1,758,972   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans and foreclosed real estate

   $ —         $ —         $ 14,982,988       $ 14,982,988   
  

 

 

    

 

 

    

 

 

    

 

 

 

March 31, 2013

           

Impaired loans

   $ —         $ —         $ 13,095,861       $ 13,095,861   

Foreclosed real estate

     —           —           755,659         755,659   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans and foreclosed real estate

   $ —         $ —         $ 13,851,520       $ 13,851,520   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table reconciles the beginning and ending balance of foreclosed real estate, which is measured on a nonrecurring basis using significant unobservable, level 3, inputs:

 

Balance, March 31, 2013

   $ 755,659   

Transfer to foreclosed real estate

     1,003,313   

Proceeds from sale of foreclosed real estate

     —     

Loss on sale of foreclosed real estate

     —     
  

 

 

 

Balance, September 30, 2013

   $ 1,758,972   
  

 

 

 

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.

 

     September 30, 2013      March 31, 2013  
     Carrying      Fair      Carrying      Fair  
     amount      value      amount      value  

Financial assets

           

Level 1 inputs

           

Cash and cash equivalents

   $ 27,556,668       $ 27,556,668       $ 33,968,744       $ 33,968,744   

Level 2 inputs

           

Loans held for sale

     —           —           196,743         203,416   

Federal Home Loan Bank stock

     405,100         405,100         400,600         400,600   

Bank-owned life insurance

     11,816,607         11,816,607         11,622,667         11,622,667   

Level 3 inputs

           

Loans receivable, net

     151,593,127         153,903,639         159,120,418         162,443,898   

Financial liabilities

           

Level 1 inputs

           

Advance payments by borrowers for taxes and insurance

     397,078         397,078         769,000         769,000   

Level 3 inputs

           

Deposits

     246,759,311         246,214,291         260,116,875         261,490,896   

 

24


Table of Contents

HAMILTON BANCORP, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

The fair values of cash and cash equivalents, certificates of deposit in other banks, and advance payment by borrowers for taxes and insurance are estimated to equal the carrying amount. These are Level 1 inputs.

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. These are Level 2 inputs.

The fair value of fixed-rate loans is estimated to be the present value of scheduled payments discounted using interest rates currently in effect. The fair value of variable-rate loans, including loans with a demand feature, is estimated to equal the carrying amount. The valuation of loans is adjusted for estimated loan losses.

The fair value of interest-bearing checking, savings, and money market deposit accounts is equal to the carrying amount. 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 outstanding loan commitments and unused lines of credit are considered to be the same as the contractual amounts, and are not included in the table above. These commitments generate fees that approximate those currently charged to originate similar commitments.

 

25


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

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 item 1A of Hamilton Bancorp, Inc.’s Annual Report on Form 10-K filed June 28, 2013 with the Securities and Exchange Commission under the section 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 $35,640,000. The Company’s business is the ownership of the outstanding capital stock of the Bank. The Company does not own or lease any property but instead uses the premises, equipment and other property of the Bank.

Founded in 1915, the Bank is a community-oriented financial institution, dedicated to serving the financial service needs of customers and businesses within its geographic area, which consists of Baltimore City, Baltimore County, and Anne Arundel County in Maryland. 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 four full-service branch offices located in Baltimore City, Cockeysville, Towson and Pasadena, Maryland. The Bank is subject to extensive regulation, examination and supervision by the Office of the Comptroller of the Currency, its primary federal regulator, and the Federal Deposit Insurance Corporation, its deposit insurer. The Company is subject to regulation and supervision by the Board of Governors of the Federal Reserve System.

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.

Critical Accounting Policies

We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. The following represent our critical accounting policies:

 

26


Table of Contents

Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default, the amount and timing of future cash flows on impacted loans, value of collateral, and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance monthly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions, and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, periodically reviews our allowance for loan losses and may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.

Fair Value of Investments. Securities are characterized as available for sale or held to maturity based on management’s ability and intent regarding such investment at acquisition. On an ongoing basis, management must estimate the fair value of its investment securities based on information and assumptions it deems reliable and reasonable, which may be quoted market prices or if quoted market prices are not available, fair values extrapolated from the quoted prices of similar instruments. Based on this information, an assessment must be made as to whether any decline in the fair value of an investment security should be considered as an other-than-temporary impairment and recorded in noninterest revenue as a loss on investments. The determination of such impairment is subject to a variety of factors, including management’s judgment and experience.

Goodwill Impairment. Goodwill represents the excess purchase price paid for our Pasadena branch 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 Bank is considered the Reporting Unit for purposes of impairment testing. Impairment testing requires that the fair value of the Bank be compared to the carrying amount of the Bank’s net assets, including goodwill. If the fair value of the Bank exceeds the book value, no write-down of recorded goodwill is required. If the fair value of the Bank 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. We estimate the fair value of the Bank utilizing three valuation methods including the Comparable Transactions Approach, the Public Market Peers Approach, and the Discounted Cash Flow Approach.

Based on our impairment testing during February 2013, there was no evidence of impairment of the Bank’s goodwill or intangible assets.

Comparison of Financial Condition at September 30, 2013 and March 31, 2013

Assets. Total assets decreased $18.2 million, or 5.5%, to $313.7 million at September 30, 2013 from $332.0 million at March 31, 2013. The decrease was primarily the result of a $6.4 million decrease in cash and cash equivalents, a $5.4 million decrease in total securities, and a $7.7 million decrease in loans receivable and loans held for sale, partially offset by a $1.0 million increase in foreclosed real estate and a $1.1 million increase in deferred income taxes due to the recent increase in interest rates and their impact on unrealized gains and losses within the investment portfolio. The increase in foreclosed real estate is due to one non-accrual participation loan that was foreclosed upon by the lead bank.

Cash and Cash Equivalents. Cash and cash equivalents decreased by $6.4 million, or 18.9%, to $27.6 million at September 30, 2013 from $34.0 million at March 31, 2013. The decrease in cash and cash equivalents funded a $13.4 million decrease in overall deposit balances and a $2.0 million payment for an unsettled security, partially offset by a $5.4 million decrease in investment securities and an overall decrease in net loans receivable of $7.5 million that included a $1.0 million loan transfer to foreclosed real estate.

 

27


Table of Contents

Securities. Total securities decreased $5.4 million, or 4.6%, to $110.9 million at September 30, 2013, as U.S. government agency securities decreased $3.3 million and mortgage-backed securities decreased $2.1 million. The decrease in securities was partly due to the sale of two mortgage-backed securities with proceeds of $3.6 million and $96,000 in gains with no losses on the sales. The remaining decrease is primarily attributable to $13.2 million in principal repayments and a $3.0 million decrease in the fair value of securities resulting from the recent increase in interest rates. The decreases were partially offset by the purchase of $16.7 million in mortgage-backed securities and collateralized mortgage obligations during the six months ended September 30, 2013.

Loans. Net loans, including loans held for sale, decreased by $7.7 million, or 4.8%, to $151.6 million at September 30, 2013 from $159.3 million at March 31, 2013, after an increase in net loans of $2.1 million in the first quarter of the fiscal year. The largest decline in loans over the most recent six months occurred in residential one- to four-family loans with a decrease of $5.2 million as such loans were either paid down, repaid or refinanced and newly originated residential mortgages were sold in the secondary market at a premium. Home equity loans and lines of credit also decreased $1.2 million, or 8.9%, to $12.5 million at September 30, 2013. Commercial loans, consisting of construction, commercial business and commercial real estate loans, decreased slightly by $791,000, or 1.2%, to $65.9 million at September 30, 2013. Commercial business loans decreased $5.1 million, or 18.9%, due to several large commercial business loans paying off in the current quarter. The decrease in commercial business loans was partially offset by increases of $3.2 million and $1.1 million in commercial real estate and construction loans, respectively. The increase in commercial real estate and construction loans reflects the settlement of several large loans during the three months ended June 30, 2013 and the Company’s continued focus on originating these types of loans.

Foreclosed Real Estate. Foreclosed real estate increased $1.0 million to $1.8 million at September 30, 2013 from $756,000 at March 31, 2013. One non-accrual participation loan that pertained to the development and construction of real estate property was transferred to foreclosed real estate this quarter upon foreclosure by the lead bank. The property is currently being listed for sale by the lead bank.

Deposits. Total deposits decreased $13.4 million, or 5.1%, to $246.8 million at September 30, 2013 from $260.1 million at March 31, 2013. The decrease is attributable to our on-going efforts to reduce the Bank’s reliance on certificates of deposit as a funding source. We continued to allow higher costing certificates of deposit to runoff at maturity during the first six months of fiscal 2014, as we focused on increasing the level of core deposits. During the six month period ended September 30, 2013, certificates of deposit decreased $19.6 million, or 10.0%, to $176.4 million, while money market accounts increased $760,000 or 2.7%, to $29.0 million, NOW accounts increased $710,000 or 8.0%, to $9.6 million, and non-interest bearing deposits increased $4.8 million, or 42.0%, to $16.4 million. Statement savings accounts decreased $70,000 to $15.4 million at September 30, 2013.

Borrowings. We had no borrowings outstanding at September 30, 2013 or March 31, 2013.

Equity. Total equity decreased $2.4 million, or 3.5%, to $65.0 million at September 30, 2013 from $67.4 million at March 31, 2013. The decrease was due to a net loss of $500,000 and a $1.9 million decrease in accumulated other comprehensive income resulting from decreased market value within the investment portfolio due to higher market interest rates.

Comparison of Asset Quality at September 30, 2013 and March 31, 2013

Our non-performing assets increased $819,000 to $6.7 million at September 30, 2013 from $5.9 million at March 31, 2013. Total nonperforming assets were 2.1% of total assets at the end of the current quarter, compared to 1.8% at March 31, 2013. Our nonperforming loans decreased $184,000 from $5.1 million at March 31, 2013, to $4.9 million at September 30, 2013. The decrease in nonperforming loans includes one non-accrual participation loan for $1.0 million that was transferred to foreclosed real estate, $731,000 in net charge offs, $704,000 that were paid off and $193,000 in principal repayments, partly offset by the addition of $1.8 million in non-accrual loans and one loan for $675,000 that is accruing and paying under the same terms as contractually agreed, but is 90 days past its contractual maturity date and is therefore reported as nonperforming. Total nonperforming loans also include two commercial business loans totaling $1.3 million, one of which is a troubled debt restructure, that are paying as agreed but have been placed on non-accrual by management until the borrower can show improved cash flow.

 

28


Table of Contents

The provision for loan losses totaled $1.0 million for the quarter ended September 30, 2013 compared to no provision for the same quarter in fiscal 2013. The provision for loan losses totaled $1.3 million for the six months ended September 30, 2013 compared to $58,000 for the same period in fiscal 2013. The increased provision in the second quarter of fiscal 2014 was related to net charge offs totaling $586,000, largely related to three different commercial business borrowers, as well as an increase of $429,000 resulting from a reduction in the historical loss period we use in calculating average loan loss percentages for various classes of loans. These average loss percentages are applied to the various classes of loans as one factor in the determination of our allowance for loan losses. This reduction in the historical loss period increased the average loss percentages for certain classes of loans, while reducing others, with the effect of increasing the overall required allowance for loan losses balance calculated in accordance with ASC 450.

The allowance for loan losses at September 30, 2013 totaled $2.7 million, or 1.72% of total loans, compared to $2.1 million at March 31, 2013, or 1.28% of total loans. The $587,000 increase in the allowance for loan losses was primarily the result of the $1.3 million provision for loan losses, partially offset by the $731,000 in net charge-off of loans for the six months ending September 30, 2013.

Comparison of Results of Operations for the Three Months Ended September 30, 2013 and 2012 (unaudited)

General. A net loss of $500,000 was reported for the three months ended September 30, 2013, compared to net income of $141,000 for the three months ended September 30, 2012. The decrease resulted primarily from a $1.0 million increase in the provision for loan losses and a $153,000 increase in noninterest expenses, partially offset by a $135,000 increase in net interest income and a $431,000 decrease in income tax expense.

Net Interest Income. Net interest income increased $135,000, or 6.8%, to $2.1 million for the three months ended September 30, 2013 compared to $2.0 million for the three months ended September 30, 2012. The increase in net interest income primarily resulted from a decrease of $244,000 in interest expense, partially offset by a decrease of $110,000 in interest and dividend revenue. During fiscal 2014, the average cost of deposits (the Bank’s only interest-bearing liabilities), in particular certificates of deposit, declined faster than the average yield earned on our interest-earning assets and had a positive impact on net interest income. As a result, our interest rate spread for the three months ended September 30, 2013 increased 22 basis points to 2.71%, compared to 2.49% for the three month period ended September 30, 2012.

Interest and Dividend Revenue. Interest and dividend revenue decreased $110,000 to $2.6 million for the three months ended September 30, 2013 from $2.7 million for the three months ended September 30, 2012. The decrease resulted primarily from a $165,000 decrease in interest revenue on loans and a $10,000 decrease in interest revenue on federal funds sold and other bank deposits, partially offset by an increase of $66,000 in interest revenue on U.S. government agency and mortgage-backed securities.

Interest on loans decreased $165,000, or 7.3%, to $2.1 million for the three months ended September 30, 2013, compared to $2.3 million for the three months ended September 30, 2012. The decrease in interest revenue on loans was primarily due to a $4.3 million decrease in the net average balance of loans from $162.5 million for the three months ended September 30, 2012 to $158.2 million for the three months ended September 30, 2013 due to the payoff of several larger commercial loans bearing higher rates of interest in the current quarter. This resulted in a 27 basis point decrease in the average yield on loans from 5.55% for the three months ended September 30, 2012 to 5.28% for the three months ended September 30, 2013. The decrease in average yields on loans is also a reflection of the decrease in market interest rates for loan products.

Interest and dividend revenue on total securities increased $66,000 to $511,000 for the three months ended September 30, 2013 from $445,000 for the three months ended September 30, 2012. The increase resulted from a $52,000 increase in interest revenue on U.S. government agency securities and a $14,000 increase in interest revenue on mortgage-backed securities. The increase in interest revenue on U.S. government agency securities was primarily due to a $13.5 million increase in the average balance of U.S. government agency securities to $25.0 million, partially offset by a 38 basis point decrease in the average yield to 1.87% for the period ended September 30, 2013 compared to the same period last year. The increase in interest revenue from mortgage-backed securities was primarily due to a $5.1 million increase in the average balance on mortgage-backed securities to $89.0 million.

 

29


Table of Contents

Interest revenue associated with federal funds sold and other bank deposits decreased $10,000, or 55.4%, to $8,000 for the three months ended September 30, 2013 from $19,000 for the three months ended September 30, 2012. The decrease is primarily attributable to the average balance of federal funds sold and other bank deposits decreasing $20.8 million compared to the same period last year as a result of funds received in the prior year associated with the stock offering that was completed in October 2012.

Interest Expense. Interest expense, consisting entirely of the cost of interest-bearing deposits, decreased $244,000, or 33.5%, to $486,000 for the three months ended September 30, 2013 from $730,000 for the three months ended September 30, 2012. The decrease in the cost of interest-bearing deposits was due to a decrease of 30 basis points in the average rate paid on interest-bearing deposits to 0.82% for the three months ended September 30, 2013 from 1.12% for the three months ended September 30, 2012. The decrease in interest expense was also due to a $25.3 million, or 9.7%, decrease in the average balance of interest-bearing deposits from $260.7 million for the three months ended September 30, 2012 to $235.4 million for the three months ended September 30, 2013. The decline in the average balance of interest-bearing deposits was primarily due to our strategy to allow higher costing certificates of deposit to runoff at maturity and gradually replace them with lower-cost core deposits. The balance of certificates of deposit decreased $31.0 million to $176.4 million at September 30, 2013 from $207.4 million at September 30, 2012.

Average Balances, Interest and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest revenue and dividends 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 revenue or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using monthly balances. Amortization of net deferred loan fees are included in interest revenue on loans and are insignificant. No tax-equivalent adjustments were made.

 

30


Table of Contents
     Three Months Ended September 30,  
     (dollars in thousands)  
     2013     2012  
     Average            Yield/     Average            Yield/  
     Balance     Interest      Cost     Balance     Interest      Cost  

Assets:

              

Cash and cash equivalents

   $ 23,062      $ 8         0.14   $ 43,871      $ 19         0.17

Investment securities (2)

     25,078        117         1.87     11,548        65         2.25

Mortgage-backed securities

     89,065        395         1.77     84,007        380         1.81

Loans receivable, net (1)

     158,156        2,089         5.28     162,482        2,255         5.55
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     295,361        2,609         3.53     301,908        2,719         3.60

Noninterest-earning assets

     23,382             18,870        
  

 

 

        

 

 

      

Total assets

   $ 318,743           $ 320,778        
  

 

 

        

 

 

      

Liabilities and Shareholders’ Equity:

              

Certificates of deposit

   $ 180,557      $ 472         1.05   $ 210,979      $ 706         1.34

Money Market

     29,226        9         0.12     27,880        16         0.23

Statement savings

     15,393        2         0.05     15,208        7         0.18

NOW accounts

     10,245        2         0.08     6,650        1         0.06
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     235,421        485         0.82     260,717        730         1.12

Noninterest-bearing deposits

     15,715             22,445        

Other noninterest-bearing liabilities

     1,928             1,828        
  

 

 

        

 

 

      

Total liabilities

     253,064             284,990        

Total shareholders’ equity

     65,679             35,788        
  

 

 

        

 

 

      

Total liabilities and shareholders’ equity

   $ 318,743           $ 320,778        
  

 

 

        

 

 

      

Net interest income

     $ 2,124           $ 1,989      
    

 

 

        

 

 

    

Net interest rate spread (3)

          2.71          2.49
       

 

 

        

 

 

 

Net interest-earning assets (4)

   $ 59,940           $ 41,191        
  

 

 

        

 

 

      

Net interest margin (5)

          2.88          2.64
       

 

 

        

 

 

 

Average interest-earning assets to average interest-bearing liabilities

     125.46          115.80     
  

 

 

        

 

 

      

 

(1) Loans on non-accrual status are included in average loans carrying a zero yield.
(2) Includes U.S agency securities, and to a much lesser extent, FHLMC debt securities and Federal Home Loan Bank equity securities.
(3) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(4) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(5) 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. We recorded a $1.0 million provision for loan losses for the three months ended September 30, 2013 compared to no provision for loan losses for the three months ended September 30, 2012. The increased provision in the second quarter of 2013 was related to net charge offs totaling $586,000, largely related to three different commercial business borrowers, as well as an increase of $429,000 resulting from a reduction in the historical loss period we use in calculating average loan loss percentages for various classes of loans. These average loss percentages are applied to the various classes of loans as one factor in the

 

31


Table of Contents

determination of our allowance for loan losses. This reduction in the historical loss period increased the average loss percentages for certain classes of loans, while reducing others, with the effect of increasing the overall required allowance for loan losses balance calculated in accordance with ASC 450.

The allowance for loan losses was $2.7 million, or 53.8% of non-performing loans at September 30, 2013 compared to $1.8 million, or 41.9% of non-performing loans at September 30, 2012. During the three months ended September 30, 2013, loan charge offs totaled $603,000 with recoveries of $17,000, compared to $285,000 in charge offs and no recoveries during the three months ended September 30, 2012. During fiscal year 2014 we will continue our emphasis in growing commercial real estate and commercial business loans, which are generally considered to bear higher risk than one-to four-family mortgage loans and could contribute to higher provisions going forward.

Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the periods indicated.

 

     Three Months Ended  
     September 30,  
     2013     2012  
     (dollars in thousands)  

Allowance for loan losses at beginning of period

   $ 2,230      $ 2,107   

Charge-offs:

    

Real estate loans:

    

One-to four-family

     35        —     

Commercial

     —          —     

Construction

     —          —     

Commercial

     568        280   

Home equity

     —          5   

Consumer

     —          —     
  

 

 

   

Total charge-offs

     603        285   

Recoveries

     17        —     
  

 

 

   

 

 

 

Net charge-offs

     586        285   

Provision for loan losses

     1,015        —     
  

 

 

   

 

 

 

Allowance for loan losses at end of period

   $ 2,659      $ 1,822   
  

 

 

   

 

 

 

Allowance for loan losses to non-performing loans

     53.75     42.47
  

 

 

   

 

 

 

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

     1.72     1.13
  

 

 

   

 

 

 

Net charge-offs to average loans outstanding during the period (not annualized)

     0.36     0.17
  

 

 

   

 

 

 

Noninterest Revenue. Noninterest revenue decreased $40,000 to $191,000 for the three months ended September 30, 2013, compared to $231,000 for the three months ended September 30, 2012. The decrease was primarily attributable to a decrease of $94,000 in other noninterest revenue relating to the sale of SBA loans in the prior year quarter, offset by a $22,000 increase in service charges, a $22,000 increase in earnings on bank-owned life insurance (‘BOLI’), and a $10,000 increase in gains on sale of loans held for sale. The increase in BOLI income compared to the prior year is due to a $3.0 million purchase of BOLI in December 2012.

Noninterest Expense. Noninterest expense increased $153,000, or 7.5%, to $2.2 million for the three months ended September 30, 2013 from $2.0 million for the three months ended September 30, 2012. The largest components of this increase consisted of a $27,000 increase in salaries and benefits, a $45,000 increase in building occupancy and a $124,000 increase in professional services. These increases were partially offset by a $33,000 decrease in advertising, an $18,000

 

32


Table of Contents

decrease in foreclosed real estate expense and a $15,000 decrease in data processing. The increase in salaries and benefits is primarily related to the expense associated with the new ESOP plan put in place in October 2012 as well as new hires and normal increases in salaries, partially offset by no bonus accrual in the current year. Also contributing to higher noninterest expense were the costs incurred for professional services relating to being a stock institution and the workout of problem loans, along with increased occupancy expense associated with current branch locations, including costs associated with closing our Belmar branch location. The cost savings from closing this branch have not been realized to date. Advertising expense decreased as a result of the rebranding effort that was undertaken last year.

Income tax Expense. We recorded a $389,000 income tax benefit for the three months ended September 30, 2013 after a net loss before income taxes of $890,000, compared to $42,000 of income tax expense for the three months ended September 30, 2012. The effective income tax rate was a negative 43.8% for the three months ended September 30, 2013 and 23.0% for the three months ended September 30, 2012. The reason the effective tax rate in the second quarter of fiscal 2014 period was negative is a result of the net loss before income taxes, as well as tax-exempt revenue totaling $124,000.

Comparison of Results of Operations for the Six Months Ended September 30, 2013 and 2012 (unaudited)

General. A net loss of $483,000 was reported for the six months ended September 30, 2013, compared to net income of $364,000 for the same six months ended September 30, 2012. The decrease resulted primarily from a $1.3 million increase in the provision for loan losses and a $377,000 increase in noninterest expenses, partially offset by a $161,000 increase in net interest income and a $594,000 decrease in income tax expense.

Net Interest Income. Net interest income increased $161,000, or 3.9%, to $4.3 million for the six months ended September 30, 2013 compared to $4.1 million for the six months ended September 30, 2012. The increase in net interest income primarily resulted from a decrease of $482,000 in interest expense, partially offset by a decrease of $322,000 in interest and dividend revenue. During fiscal 2014, the average cost of deposits (the Bank’s only interest-bearing liabilities), in particular certificates of deposit, declined slightly faster than the average yield earned on our interest-earning assets and had a positive impact on net interest income. In addition, average interest-earning assets increased slightly by $1.3 million to $301.2 million for the six months ended September 30, 2013 compared to the prior year period, along with a shift in interest-earning assets to higher yielding assets. As a result, our interest rate spread for the six months ended September 30, 2013 increased 6 basis points to 2.65% compared to 2.59% for the six month period ended September 30, 2012.

Interest and Dividend Revenue. Interest and dividend revenue decreased $322,000 to $5.3 million for the six months ended September 30, 2013 from $5.6 million for the six months ended September 30, 2012. The decrease resulted primarily from a $377,000 decrease in interest revenue on loans and a $14,000 decrease in interest revenue on federal funds sold and other bank deposits, partially offset by an increase of $69,000 in interest revenue on U.S. government agency and mortgage-backed securities.

Interest revenue on loans decreased $377,000, or 8.2%, to $4.2 million for the six months ended September 30, 2013, compared to $4.6 million for the six months ended September 30, 2012. The decrease in interest revenue on loans was primarily due to a $6.3 million decrease in the net average balance of loans from $165.2 million for the six months ended September 30, 2012 to $158.9 million for the six months ended September 30, 2013 due to the payoff of several larger commercial loans bearing higher rates of interest in the current quarter of 2013. This resulted in a 26 basis point decrease in the average yield on loans from 5.59% for the six months ended September 30, 2012 to 5.33% for the six months ended September 30, 2013. The decrease in average yields is also a reflection of the decrease in market interest rates for loan products.

Interest and dividend revenue on total securities increased $69,000 to $1.0 million for the six months ended September 30, 2013 from $955,000 for the six months ended September 30, 2012. The increase resulted from a $94,000 increase in interest revenue on U.S. government agency securities, offset by a $25,000 decrease in interest on mortgage-backed securities. The increase in interest on U.S. government agency securities was primarily due to an $11.3 million increase in the average balance of U.S. government agency securities to $26.0 million, offset by a 9 basis point decrease

 

33


Table of Contents

in the average yield to 1.81% for the period ended September 30, 2013 compared to the same period last year. The decrease in interest revenue from mortgage-backed securities was primarily due to a 28 basis point decrease in the average yield on mortgage-backed securities to 1.74% compared to 2.02% for the same period last year, partially offset by a $9.9 million increase in the average balance of mortgage-backed securities to $90.5 million at September 30, 2013.

Interest revenue associated with federal funds sold and other bank deposits decreased $14,000, or 41.5%, to $20,000 for the six months ended September 30, 2013 from $34,000 for the six months ended September 30, 2012. The decrease is primarily attributable to the average balance of federal funds sold and other bank deposits decreasing $13.6 million compared to the same period last year as a result of funds received in the prior year associated with the stock offering that was completed in October 2012.

Interest Expense. Interest expense, consisting entirely of the cost of interest-bearing deposits, decreased $482,000, or 31.8%, to $1.0 million for the six months ended September 30, 2013 from $1.5 million for the six months ended September 30, 2012. The decrease in the cost of interest-bearing deposits was due to a decrease of 29 basis points in the average rate paid on interest-bearing deposits to 0.86% for the six months ended September 30, 2013 from 1.15% for the six months ended September 30, 2012. The decrease in interest expense was also due to a $23.1 million, or 8.8%, decrease in the average balance of interest-bearing deposits from $263.2 million for the six months ended September 30, 2012 to $240.1 million for the six months ended September 30, 2013. The decline in the average balance of interest-bearing deposits was primarily due to our strategy to allow higher costing certificates of deposit to runoff at maturity and gradually replace them with lower-cost core deposits. The balance of certificates of deposit decreased $31.0 million to $176.4 million at September 30, 2013 from $207.4 million at September 30, 2012.

Average Balances, Interest and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest revenue and dividends 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 revenue or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using monthly balances. Amortization of net deferred loan fees are included in interest revenue on loans and are insignificant. No tax-equivalent adjustments were made. Nonaccruing loans have been included in the table as loans carrying a zero yield.

 

34


Table of Contents
     Six Months Ended September 30,  
     (dollars in thousands)  
     2013     2012  
     Average            Yield/     Average            Yield/  
     Balance     Interest      Cost     Balance     Interest      Cost  

Assets:

              

Interest-bearing deposits

   $ 25,647      $ 20         0.16   $ 39,222      $ 34         0.17

Investment securities (2)

     26,080        236         1.81     14,821        141         1.90

Mortgage-backed securities

     90,515        789         1.74     80,571        814         2.02

Loans receivable, net (1)

     158,928        4,239         5.33     165,238        4,617         5.59
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     301,170        5,284         3.51     299,852        5,606         3.74

Noninterest-earning assets

     22,967             18,526        
  

 

 

        

 

 

      

Total assets

   $ 324,137           $ 318,378        
  

 

 

        

 

 

      

Liabilities and Shareholders’ Equity:

              

Certificates of deposit

   $ 185,986      $ 1,009         1.09   $ 213,766      $ 1,455         1.36

Money market

     28,815        17         0.12     27,153        44         0.32

Statement savings

     15,301        4         0.05     15,206        15         0.20

NOW accounts

     9,974        3         0.06     7,067        2         0.06
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     240,076        1,033         0.86     263,192        1,516         1.15

Noninterest-bearing deposits

     14,946             17,196        

Other noninterest-bearing liabilities

     2,523             2,323        
  

 

 

        

 

 

      

Total liabilities

     257,545             282,711        

Total shareholders’ equity

     66,592             35,667        
  

 

 

        

 

 

      

Total liabilities and shareholders’ equity

   $ 324,137           $ 318,378        
  

 

 

        

 

 

      

Net interest income

     $ 4,251           $ 4,090      
    

 

 

        

 

 

    

Interest rate spread (3)

          2.65          2.59
       

 

 

        

 

 

 

Net interest-earning assets (4)

   $ 61,094           $ 36,660        
  

 

 

        

 

 

      

Net interest margin (5)

          2.82          2.73
       

 

 

        

 

 

 

Average interest-earning assets to average interest-bearing liabilities

     125.45          113.93     
  

 

 

        

 

 

      

 

(1) Loans on non-accrual status are included in average loans carrying a zero yield.
(2) Includes U.S agency securities, and to a much lesser extent, FHLMC debt securities and Federal Home Loan Bank equity securities.
(3) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(4) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(5) 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. We recorded a $1.3 million provision for loan losses for the six months ended September 30, 2013 compared to a $58,000 provision for loan losses for the six months ended September 30, 2012. The increased provision in the current year was related to net charge offs totaling $731,000, largely related to three different commercial business borrowers, as well as an increase of $429,000 recorded in the current quarter of fiscal 2014 resulting from a reduction in the historical loss period we use in calculating average loan loss percentages for various classes of loans. These average loss percentages are applied to the various classes of loans as one factor in the determination of our allowance for loan losses. This reduction in the historical loss period increased the average loss percentages for certain classes of loans, while reducing others, with the effect of increasing the overall required allowance for loan losses balance calculated in accordance with ASC 450.

 

35


Table of Contents

The allowance for loan losses was $2.7 million, or 53.8% of non-performing loans at September 30, 2013 compared to $1.8 million, or 41.9% of non-performing loans at September 30, 2012. During the six months ended September 30, 2013, loan charge offs totaled $772,000 with recoveries of $41,000, compared to $1.8 million in charge offs and no recoveries during the six months ended September 30, 2012. During fiscal year 2014 we will continue our emphasis in growing commercial real estate and commercial business loans, which are generally considered to bear higher risk than one-to four-family mortgage loans and could contribute to higher provisions going forward.

Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the periods indicated.

 

     Six Months Ended  
     September 30,  
     2013     2012  
     (dollars in thousands)  

Allowance for loan losses at beginning of period Charge-offs:

   $ 2,071      $ 3,552   

Real estate loans:

    

One-to four-family

     64        77   

Commercial

     —          489   

Construction

     —          337   

Commercial

     708        873   

Home equity

     —          5   

Consumer

     —          7   
  

 

 

   

 

 

 

Total charge-offs

     772        1,788   

Recoveries

     41        —     
  

 

 

   

 

 

 

Net charge-offs

     731        1,788   

Provision for loan losses

     1,319        58   
  

 

 

   

 

 

 

Allowance for loan losses at end of period

   $ 2,659      $ 1,822   
  

 

 

   

 

 

 

Allowance for loan losses to non-performing loans

     53.75     42.47
  

 

 

   

 

 

 

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

     1.72     1.13
  

 

 

   

 

 

 

Net charge-offs to average loans outstanding during the period (not annualized)

     0.45     1.07
  

 

 

   

 

 

 

Noninterest Revenue. Noninterest revenue increased $36,000 to $456,000 for the six months ended September 30, 2013, compared to $420,000 for the six months ended September 30, 2012. The increase was primarily attributable to a $33,000 increase in service charges, a $46,000 increase in earnings on bank-owned life insurance (‘BOLI’), and a $44,000 increase in gain on sale of investment securities, offset by a $94,000 decrease in other noninterest revenue relating to the sale of SBA loans in the prior year period. The increase in BOLI income compared to the prior year is due to a $3.0 million purchase of BOLI in December 2012.

Noninterest expense. Noninterest expense increased $377,000, or 9.6%, to $4.3 million for the six months ended September 30, 2013 from $3.9 million for the six months ended September 30, 2012. The largest components of this increase consisted of a $172,000 increase in salaries and benefits, a $53,000 increase in building occupancy and a $283,000 increase in professional services. These increases were partially offset by a $62,000 decrease in advertising, a $33,000 decrease in foreclosed real estate expense and a $21,000 decrease in federal deposit insurance premiums. The

 

36


Table of Contents

increase in salaries and benefits is primarily related to the expense associated with the new ESOP plan put in place in October 2012 as well as new hires and normal increases in salaries, offset by no bonus accrual in the current year. Also contributing to higher noninterest expense were the costs incurred for professional services relating to being a stock institution and the workout of problem loans, along with increased occupancy expense associated with current branch locations, including costs associated with closing our Belmar branch location. The cost savings from closing this branch have not been realized to date. Advertising expense decreased as a result of the rebranding effort that was undertaken last year and federal deposit insurance premiums decreased as deposit balances decreased over the past six months.

Income Tax Expense. We recorded a $455,000 income tax benefit for the six months ended September 30, 2013 after a net loss before income taxes of $938,000, compared to $139,000 of income tax expense for the six months ended September 30, 2012. The effective income tax rate was a negative 48.5% for the six months ended September 30, 2013 and 27.6% for the six months ended September 30, 2012. The reason the effective tax rate for the fiscal year 2014 is negative is a result of the net loss before income taxes, as well as tax-exempt revenue totaling $249,000.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds available to meet short-term liquidity needs consist of deposit inflows, loan repayments, and maturities and sales of investment securities. 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 do not have long-term debt or other financial obligations that would create long-term liquidity concerns.

Our most liquid assets are cash and cash equivalents and interest-bearing deposits. The level of these assets depends on our operating, financing, lending, and investing activities during any given period. At September 30, 2013, cash and cash equivalents totaled $27.6 million and securities classified as available-for-sale amounted to $110.9 million. Our liquidity has increased as a result of the $35.6 million received in net proceeds from the mutual-to-stock conversion completed on October 10, 2012. In addition, at September 30, 2013, the Bank had the ability to borrow a total of approximately $62.7 million or 20% of total assets from the Federal Home Loan Bank of Atlanta. The Bank also has two lines of credit totaling $6.0 million with one large financial institution. At September 30, 2013, we had no Federal Home Loan Bank advances outstanding or borrowings on the lines of credit.

Certificates of deposit due within one year of September 30, 2013 totaled $93.6 million, or 53.0% 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. 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 September 30, 2014. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

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 September 30, 2013, we had $26.5 million in commitments to extend credit outstanding.

We are subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At September 30, 2013, the Bank exceeded all of its regulatory capital requirements and was considered “well capitalized” under regulatory guidelines.

 

37


Table of Contents

In July 2013, the Federal Deposit Insurance Corporation and the other federal bank regulatory agencies issued a final rule that will revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital unless a one-time opt-out is exercised. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule becomes effective for the Company and the Bank on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.

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, 2013 filed on June 28, 2013. The Company’s market risk has not changed materially from that disclosed in the annual report.

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of the period covered by this report. Based upon such evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) 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.

During the period covered by this report, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

38


Table of Contents

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 28, 2013. As of September 30, 2013, 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 September 30, 2013 (unaudited) and March 31, 2013; (ii) the Consolidated Statements of Operations for the three and six months ended September 30, 2013 and 2012 (unaudited); (iii) the Consolidated Statements of Comprehensive Income for the three and six months ended September 30, 2013 and 2012 (unaudited); (iv) the Consolidated Statements of Equity for the six months ended September 30, 2013 and 2012 (unaudited); (v) the Consolidated Statement of Cash Flows for the six months ended September 30, 2013 and 2012 (unaudited); and (vi) Notes to Consolidated Financial Statements (unaudited).

 

* This information is furnished and not filed for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

39


Table of Contents

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: November 13, 2013       /s/ Robert A. DeAlmeida
      Robert A. DeAlmeida
      President and Chief Executive Officer
Date: November 13, 2013       /s/ John P. Marzullo
      John P. Marzullo
      Senior Vice President, Chief Financial Officer and Treasurer