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
(Registrants 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 Registrants common stock, par value $0.01 per share, were issued and outstanding as of November 13, 2013.
Hamilton Bancorp, Inc. and Subsidiaries
Form 10-Q
Part I. Financial Information
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 |
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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 | ||||||
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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 | ||||||
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Total Assets |
$ | 313,738,995 | $ | 331,962,151 | ||||
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Liabilities and Shareholders Equity | ||||||||
Liabilities |
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Noninterest-bearing deposits |
$ | 16,391,063 | $ | 11,546,214 | ||||
Interest-bearing deposits |
230,368,248 | 248,570,661 | ||||||
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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 | ||||||
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Total liabilities |
248,681,000 | 264,526,540 | ||||||
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Commitments and contingencies |
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Shareholders Equity |
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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 | |||||
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Total shareholders equity |
65,057,995 | 67,435,611 | ||||||
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Total Liabilities and Shareholders Equity |
$ | 313,738,995 | $ | 331,962,151 | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
3
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 |
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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 | ||||||||||||
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Total interest revenue |
2,608,654 | 2,718,504 | 5,283,736 | 5,605,565 | ||||||||||||
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Interest expense |
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Deposits |
485,532 | 729,924 | 1,033,490 | 1,515,864 | ||||||||||||
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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 | ||||||||||||
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Net interest income after provision for loan losses |
1,108,565 | 1,988,580 | 2,931,689 | 4,031,701 | ||||||||||||
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Noninterest revenue |
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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 | ||||||||||||
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Total noninterest revenue |
191,284 | 230,813 | 456,268 | 420,150 | ||||||||||||
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Noninterest expenses |
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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 | ||||||||||||
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Total noninterest expenses |
2,189,444 | 2,036,561 | 4,326,012 | 3,948,826 | ||||||||||||
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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 | ||||||||||
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Net (loss) income |
$ | (500,299 | ) | $ | 140,832 | $ | (482,712 | ) | $ | 364,025 | ||||||
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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
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 | ||||||
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Other comprehensive income: |
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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 | ) | ||||||||||
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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 | ||||||||||
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Other comprehensive (loss) income |
(150,084 | ) | 96,210 | (1,894,904 | ) | 248,027 | ||||||||||
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Total comprehensive (loss) income |
$ | (650,383 | ) | $ | 237,042 | $ | (2,377,616 | ) | $ | 612,052 | ||||||
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The accompanying notes are an integral part of these consolidated financial statements.
5
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 | ||||||||||||||||||
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Balance September 30, 2012 |
$ | | $ | | $ | 34,797,924 | $ | | $ | 878,881 | $ | 35,676,805 | ||||||||||||
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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 | ) | ||||||||||||||||
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Balance September 30, 2013 |
$ | 37,030 | $ | 35,554,350 | $ | 33,779,052 | $ | (2,814,280 | ) | $ | (1,498,157 | ) | $ | 65,057,995 | ||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
6
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 |
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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 | ) | |||||
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Net cash provided by operating activities |
2,111,296 | 219,181 | ||||||
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Cash flows from investing activities |
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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 | ) | ||||
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Net cash provided by investing activities |
5,197,114 | 6,960,935 | ||||||
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Cash flows from financing activities |
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Net increase (decrease) in |
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Deposits |
(13,348,564 | ) | 50,498,406 | |||||
Advances by borrowers for taxes and insurance |
(371,922 | ) | (459,236 | ) | ||||
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Net cash provided (used) by financing activities |
(13,720,486 | ) | 50,039,170 | |||||
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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 | ||||||
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Cash and cash equivalents at end of period |
$ | 27,556,668 | $ | 92,468,834 | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
7
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 |
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Net income (loss) |
$ | (482,713 | ) | $ | 364,025 | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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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 |
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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 |
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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 | |||||
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Net cash provided by operating activities |
$ | 2,111,296 | $ | 219,181 | ||||
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Noncash investing activity |
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Real estate acquired through foreclosure |
$ | 1,003,313 | $ | 427,988 | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
8
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 Banks 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 holders 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 10Q and Regulation SX 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 Companys 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 periods presentation.
Nature of Operations
The Companys 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 Companys 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
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
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 sharebasic 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
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 | ) | |||||
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|
|||||
Balance September 30, 2012 |
$ | 2,664,432 | $ | 236,166 | ||||
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|||||
Goodwill | Core deposit intangible |
|||||||
Balance March 31, 2013 |
$ | 2,664,432 | $ | 212,333 | ||||
Acquired during the period |
| | ||||||
Amortization |
| (22,000 | ) | |||||
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|
|||||
Balance September 30, 2013 |
$ | 2,664,432 | $ | 190,333 | ||||
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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 | |||
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$ | 190,333 | |||
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12
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 | ||||||||||||
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113,235,643 | 639,796 | 3,030,067 | 110,845,372 | |||||||||||||
FHLMC stock |
6,681 | 2,768 | | 9,449 | ||||||||||||
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$ | 113,242,324 | $ | 642,564 | $ | 3,030,067 | $ | 110,854,821 | |||||||||
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March 31, 2013 |
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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 | ||||||||||||
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115,571,417 | 1,081,254 | 423,488 | 116,229,183 | |||||||||||||
FHLMC stock |
6,681 | | 1,921 | 4,760 | ||||||||||||
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$ | 115,578,098 | $ | 1,081,254 | $ | 425,409 | $ | 116,233,943 | |||||||||
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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 (GSEs).
13
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 | ||||||||||||
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$ | 113,235,643 | $ | 110,845,372 | $ | 115,571,417 | $ | 116,229,183 | |||||||||
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The following table presents the Companys 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 |
| | | | | | ||||||||||||||||||
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$ | 2,762,416 | $ | 69,279,841 | $ | 267,651 | $ | 9,795,192 | $ | 3,030,067 | $ | 79,075,033 | |||||||||||||
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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 | ||||||||||||||||||
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$ | 410,210 | $ | 54,423,714 | $ | 15,199 | $ | 3,378,251 | $ | 425,409 | $ | 57,801,965 | |||||||||||||
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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
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 | ||||||
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|||||
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 | ||||||
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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 | ) | ||||
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$ | 151,593,127 | $ | 159,120,418 | |||||
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(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 Banks 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 Banks 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 customers 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
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 |
| | | | | | | | | |||||||||||||||||||||||||||
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$ | 2,071,224 | $ | 1,318,557 | $ | 771,945 | $ | 40,674 | $ | 2,658,510 | $ | 313,229 | $ | 2,345,281 | $ | 13,343,031 | $ | 140,989,118 | |||||||||||||||||||
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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 | ) | | | | | | | | ||||||||||||||||||||||||||
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$ | 3,552,364 | $ | 58,000 | $ | 1,788,032 | $ | | $ | 1,822,332 | $ | 492,240 | $ | 1,330,092 | $ | 7,200,197 | $ | 154,212,547 | |||||||||||||||||||
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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 | ) | | | | | | | | ||||||||||||||||||||||||||
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$ | 3,552,364 | $ | 1,729,975 | $ | 3,211,115 | $ | | $ | 2,071,224 | $ | 508,585 | $ | 1,562,639 | $ | 13,124,796 | $ | 148,147,034 | |||||||||||||||||||
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16
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 | | | | |||||||||||||||||||||||||||
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$ | 2,450,330 | $ | 113,389 | $ | 3,634,137 | $ | 6,197,856 | $ | 148,134,293 | $ | 154,332,149 | $ | 675,000 | $ | 4,272,262 | $ | 321,703 | |||||||||||||||||||
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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 | | | | |||||||||||||||||||||||||||
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$ | 2,684,792 | $ | 179,316 | $ | 4,137,222 | $ | 7,001,330 | $ | 154,270,500 | $ | 161,271,830 | $ | | $ | 5,131,743 | $ | 462,008 | |||||||||||||||||||
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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 | |||||||||||||||
|
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|
|
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|
|
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|
|
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|
|
|||||||||||||||
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 | |||||||||||||||
|
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17
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 Banks 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 Banks 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 managements close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Banks 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
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 Banks 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 borrowers 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
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 TDRs 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
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 Banks 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
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 Banks 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
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 Companys 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 LoansThe Bank has measured impairment generally based on the fair value of the loans 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 Banks 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
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
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
Item 2. Managements 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 Companys 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 Companys 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 Banks 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 Companys 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
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 managements 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 managements 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 Banks 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 Banks 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
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 Companys 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 Banks 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.
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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 Banks 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.
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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.
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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 | ||||||||||||||||||||
|
|
|
|
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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 | ||||||||||||||||||||||
|
|
|
|
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Total liabilities and shareholders equity |
$ | 318,743 | $ | 320,778 | ||||||||||||||||||||
|
|
|
|
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Net interest income |
$ | 2,124 | $ | 1,989 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest rate spread (3) |
2.71 | % | 2.49 | % | ||||||||||||||||||||
|
|
|
|
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Net interest-earning assets (4) |
$ | 59,940 | $ | 41,191 | ||||||||||||||||||||
|
|
|
|
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Net interest margin (5) |
2.88 | % | 2.64 | % | ||||||||||||||||||||
|
|
|
|
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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 managements 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
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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
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 Banks 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
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.
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Six Months Ended September 30, | ||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
2013 | 2012 | |||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | |||||||||||||||||||||
Balance | Interest | Cost | Balance | Interest | Cost | |||||||||||||||||||
Assets: |
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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 | % | ||||||||||||||||
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Total interest-earning assets |
301,170 | 5,284 | 3.51 | % | 299,852 | 5,606 | 3.74 | % | ||||||||||||||||
Noninterest-earning assets |
22,967 | 18,526 | ||||||||||||||||||||||
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Total assets |
$ | 324,137 | $ | 318,378 | ||||||||||||||||||||
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Liabilities and Shareholders Equity: |
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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 | % | ||||||||||||||||
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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 | ||||||||||||||||||||||
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Total liabilities |
257,545 | 282,711 | ||||||||||||||||||||||
Total shareholders equity |
66,592 | 35,667 | ||||||||||||||||||||||
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Total liabilities and shareholders equity |
$ | 324,137 | $ | 318,378 | ||||||||||||||||||||
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Net interest income |
$ | 4,251 | $ | 4,090 | ||||||||||||||||||||
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Interest rate spread (3) |
2.65 | % | 2.59 | % | ||||||||||||||||||||
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Net interest-earning assets (4) |
$ | 61,094 | $ | 36,660 | ||||||||||||||||||||
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Net interest margin (5) |
2.82 | % | 2.73 | % | ||||||||||||||||||||
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Average interest-earning assets to average interest-bearing liabilities |
125.45 | % | 113.93 | % | ||||||||||||||||||||
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(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 managements 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.
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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: |
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One-to four-family |
64 | 77 | ||||||
Commercial |
| 489 | ||||||
Construction |
| 337 | ||||||
Commercial |
708 | 873 | ||||||
Home equity |
| 5 | ||||||
Consumer |
| 7 | ||||||
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Total charge-offs |
772 | 1,788 | ||||||
Recoveries |
41 | | ||||||
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Net charge-offs |
731 | 1,788 | ||||||
Provision for loan losses |
1,319 | 58 | ||||||
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Allowance for loan losses at end of period |
$ | 2,659 | $ | 1,822 | ||||
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Allowance for loan losses to non-performing loans |
53.75 | % | 42.47 | % | ||||
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Allowance for loan losses to total loans outstanding at the end of the period |
1.72 | % | 1.13 | % | ||||
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Net charge-offs to average loans outstanding during the period (not annualized) |
0.45 | % | 1.07 | % | ||||
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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
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
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 organizations 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 Companys Annual Report on Form 10-K for the year ended March 31, 2013 filed on June 28, 2013. The Companys 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 Companys management, including the Companys principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Companys 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 Companys 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 SECs rules and forms, and (2) is accumulated and communicated to the Companys 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 Companys internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
38
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 Banks or the Companys financial condition or results of operations.
For information regarding the Companys risk factors, see Risk Factors in the Companys 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.
None.
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
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 |