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

 

 

Nature of Operations

 

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

 

On December 21, 2017, the Bank converted its charter from a federal savings bank to a Maryland state-chartered commercial bank and now operates under the laws of the State of Maryland and applicable Federal law. In conjunction with the Bank’s charter conversion, Hamilton Bancorp converted from a savings and loan holding company to a bank holding company. The charter conversion was part of the Bank’s strategic plan to allow it to continue to focus on growth opportunities in commercial, consumer and mortgage lending as well as small business and retail banking. The Maryland Office of the Commissioner of Financial Regulation serves as the Bank's primary regulator with federal oversight provided by the Federal Deposit Insurance Corporation.  Hamilton Bancorp will continue to be regulated by the Federal Reserve Board.

 

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

 

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

 

On September 11, 2015, the Company completed its acquisition of Fairmount Bancorp, Inc. (“Fairmount Bancorp”) through the merger of Fairmount Bancorp, the parent company of Fairmount Bank, with and into the Company pursuant to the Agreement and Plan of Merger dated as of April 15, 2015, by and between the Company and Fairmount Bancorp. As a result of the merger, each shareholder of Fairmount Bancorp received a cash payment equal to thirty dollars ( $30.00 ) for each share of Fairmount Bancorp common stock, or an aggregate of approximately $15.4 million. Immediately following the merger of Fairmount Bancorp into the Company, Fairmount Bank was merged with and into the Bank, with the Bank as the surviving entity.

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

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

 

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

 

Summary of Significant Accounting Policies

 

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

 

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

 

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

 

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

 

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

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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Reduction of the stated interest rate;

 

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

 

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

 

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Reduction of accrued interest.

 

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

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

The allowance for loan losses is increased by provisions charged to income and reduced by charge-offs, net of recoveries. Management’s periodic evaluation of the adequacy of the allowance is based on the Bank’s past loan loss experience, known and inherent risks in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and current economic conditions. The look back period for historical losses consists of reviewing a 48 month look back period for net charge-offs. Prior to September 30, 2018, we reviewed both a 36 and 48 month look back period individually for net charge-offs to develop a range in which the allowance for loan losses should be within. The range has grown smaller over the past year to a point where the difference in the two calculations of the allowance for loan loss is deemed immaterial. As a result, and for efficiency purposes, we began to only utilize a historical charge-off period of 48 months in determining the necessary allowance for loan losses. We believe, although similar in amount, that a 48 -month period is more representative of our charge-off history. This period may change in the future depending on the performance of the loan portfolio. In addition, we also adjusted the environmental factors of the legacy and acquired loan portfolios so that they are not the same for each loan portfolio going forward. The environmental factors for each acquired loan portfolio and the legacy loan portfolio will be evaluated on their own merits so as to stand on their own characteristics. These changes at September 30, 2018 resulted in additional provisions of $294,000 and were primarily related to the acquired loan portfolios and the adjustment of their environmental factors.

 

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

 

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

 

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

 

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

 

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

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

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

 

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

 

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

 

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

 

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

 

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

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Note 2:          New Accounting Pronouncements

 

Recent Accounting Pronouncements

 

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

 

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

 

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

 

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

 

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

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

ASU 2016 - 13, Financial Instruments – Credit Losses. The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the guidance in this update replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate credit losses. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The guidance in this update for public business entities is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact adoption will have on its consolidated financial statements. Hamilton Bancorp is in the process of implementing a committee and has begun to gather loan information and consider acceptable methodologies to comply with this ASU. The implementation team will meet periodically to discuss the latest developments and updates via webcasts, publications, and conferences. Due to the pending merger with Orrstown, we will not be entering into a contract with an outside vendor as originally planned to assist with implementing CECL due to the timing of required adoption and the pending merger. If the merger agreement is terminated for any reason, the Company will engage an outside vendor at that time to assist with the implementation of this pronouncement utilizing information we have continued to gather.

 

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

 

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

 

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

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

ASU No. 2016 - 01, Financial Instruments – Recognition and Measurement of Financial Assets and Liabilities . This ASU requires equity investments to be measured at fair value with changes in fair value recognized in net income, excluding equity investments that are consolidated or accounted for under the equity method of accounting. The amendment allows equity investments without readily determinable fair values to be measured at cost minus impairment, with a qualitative assessment required to identify impairment. The amendment also requires public companies to use exit prices to measure the fair value of financial instruments purposes; requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statement; it eliminates the disclosure requirements related to measurement assumptions for the fair value of instruments measured at amortized cost. In addition, for liabilities measured at fair value under the fair value option, to present in other comprehensive income changes in fair value due to changes in instrument specific credit risk. The Company’s management engaged a third -party expert in the field of valuation and reporting to assist management and ensure adequate documentation of financial controls and analysis performed in its review of “exit pricing” of the fair values of loans, deposits, and other financial instruments. This ASU is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We adopted this ASU effective April 1, 2018. With the adoption of this ASU, equity securities can no longer be classified as available for sale, and as such marketable equity securities are disclosed as a separate line item on the Consolidated Statement of Financial Condition with changes in the fair value of equity securities reflected in net income. At December 31, 2018 the Company did not have any equity securities. During the first quarter of fiscal 2019, we began using an exit price notion when measuring the fair value of our loan portfolio, excluding loans held for sale, for disclosure purposes. The adoption of this ASU did not have a significant impact on our consolidated financial statements.

 

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

 

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

 

Note 3 :          Earnings per Share

 

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

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

Both the basic and diluted earnings per share for the three and nine months ended December 31, 2018 and 2017 are summarized below:

 

		Three Months Ended				Three Months Ended				Nine Months Ended				Nine Months Ended
		December 31, 2018				December 31, 2017				December 31, 2018				December 31, 2017
Net income		$	(124,683	)		$	(1,927,190	)		$	1,419,288			$	(1,124,060	)
Weighted average common shares outstanding - basic			3,209,207				3,189,056				3,209,100				3,188,949
Weighted average common shares outstanding - diluted			3,209,207				3,189,056				3,209,895				3,188,949
Income per common share - basic and diluted		$	(0.04	)		$	(0.60	)		$	0.44			$	(0.35	)
Anti-dilutive shares			184,060				118,525				183,265				118,525

 

 

Note 4:          Investment Securities Available for Sale

 

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

 

						Gross				Gross
		Amortized				unrealized				unrealized				Fair
December 31, 2018		cost				gains				losses				value
U.S. government agencies		$	744,186			$	-			$	16,850			$	727,336
Municipal bonds			12,347,163				-				705,934				11,641,229
Corporate bonds			2,000,000				-				99,496				1,900,504
Mortgage-backed securities			52,844,355				11,438				1,547,007				51,308,786
		$	67,935,704			$	11,438			$	2,369,287			$	65,577,855

 

						Gross				Gross
		Amortized				unrealized				unrealized				Fair
March 31, 2018		cost				gains				losses				value
U.S. government agencies		$	2,753,346			$	-			$	34,697			$	2,718,649
Municipal bonds			12,435,068				-				729,077				11,705,991
Corporate bonds			2,000,000				-				45,924				1,954,076
Mortgage-backed securities			61,078,665				12,993				2,066,238				59,025,420
		$	78,267,079			$	12,993			$	2,875,936			$	75,404,136

 

There were no sales of investment securities during the three and nine months ended December 31, 2018. Proceeds from the sale of investment securities were $7,364,939 and $11,608,699 during the three and nine months ended December 31, 2017, with gains of $33,747 and $57,099 and losses of $46,483 and $59,455, respectively.

 

As of December 31, 2018, and March 31, 2018, all mortgage-backed securities are backed by U.S. Government-Sponsored Enterprises (GSE’s), except one private label mortgage-backed security that was acquired in the Fraternity acquisition in May 2016 with a book value of $37,687 and fair value of $38,032 as of December 31, 2018.

 

As of December 31, 2018, and March 31, 2018, the Company had one security pledged to the Federal Reserve Bank with a book value of $744,186 at both dates and a fair value of $727,336 and $723,023, respectively.

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

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

 

		Available for Sale
		December 31, 2018								March 31, 2018
		Amortized				Fair				Amortized				Fair
		cost				value				cost				value
Maturing
Within one year		$	-			$	-			$	2,009,160			$	1,995,625
Over one to five years			1,227,258				1,197,309				1,231,928				1,196,368
Over five to ten years			4,665,976				4,447,904				3,578,827				3,500,641
Over ten years			9,198,115				8,623,856				10,368,499				9,686,082
Mortgage-backed securities, in monthly installments			52,844,355				51,308,786				61,078,665				59,025,420
		$	67,935,704			$	65,577,855			$	78,267,079			$	75,404,136

 

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

 

		Less than 12 months								12 months or longer								Total
		Gross unrealized				Fair				Gross unrealized				Fair				Gross unrealized				Fair
December 31, 2018		losses				value				losses				value				losses				value
U.S. government agencies		$	-			$	-			$	16,850			$	727,336			$	16,850			$	727,336
Municipal bonds			-				-				705,934				11,641,229				705,934				11,641,229
Corporate bonds			-				-				99,496				1,900,504				99,496				1,900,504
Mortgage-backed securities			56,462				1,801,231				1,490,545				46,787,724				1,547,007				48,588,955
		$	56,462			$	1,801,231			$	2,312,825			$	61,056,793			$	2,369,287			$	62,858,024

 

 

		Less than 12 months								12 months or longer								Total
		Gross unrealized				Fair				Gross unrealized				Fair				Gross unrealized				Fair
March 31, 2018		losses				value				losses				value				losses				value
U.S. government agencies		$	21,163			$	723,023			$	13,534			$	1,995,625			$	34,697			$	2,718,648
Municipal bonds			-				-				729,077				11,705,991				729,077				11,705,991
Corporate bonds			-				-				45,924				1,954,076				45,924				1,954,076
Mortgage-backed securities			383,987				15,880,948				1,682,251				40,684,836				2,066,238				56,565,784
		$	405,150			$	16,603,971			$	2,470,786			$	56,340,528			$	2,875,936			$	72,944,499

 

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

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

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

 

Note 5:            Loans Receivable and Allowance for Loan Losses

 

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

 

		December 31, 2018																March 31, 2018
		Legacy (1)				Acquired				Total Loans				% of Total				Legacy (1)				Acquired				Total Loans				% of Total
Real estate loans:
One-to four-family:
Residential (2)		$	83,117,881			$	66,255,260				149,373,141				40	%		$	85,248,184			$	72,749,066			$	157,997,250				41	%
Residential construction			3,430,203				-				3,430,203				1	%			5,450,827				-				5,450,827				1	%
Investor (3)			7,337,281				16,407,266				23,744,547				6	%			9,275,031				17,460,809				26,735,840				7	%
Commercial			105,755,786				9,289,784				115,045,570				31	%			100,403,769				11,762,485				112,166,254				29	%
Commercial construction			1,543,313				1,059,217				2,602,530				1	%			5,763,784				1,352,019				7,115,803				2	%
Total real estate loans			201,184,464				93,011,527				294,195,991				80	%			206,141,595				103,324,379				309,465,974				80	%
Commercial business (4)			35,276,493				1,706,509				36,983,002				10	%			38,302,739				1,841,226				40,143,965				10	%
Home equity loans			15,077,068				4,941,051				20,018,119				5	%			13,956,327				6,039,462				19,995,789				5	%
Consumer (5)			16,329,237				699,371				17,028,608				5	%			18,849,448				766,063				19,615,511				5	%
Total Loans			267,867,262				100,358,458				368,225,720				100	%			277,250,109				111,971,130				389,221,239				100	%
Net deferred loan origination fees and costs			(178,056	)			-				(178,056	)							(212,746	)			-				(212,746	)
Loan premium (discount)			1,708,908				(299,956	)			1,408,952								1,922,428				(510,036	)			1,412,392
		$	269,398,114			$	100,058,502			$	369,456,616							$	278,959,791			$	111,461,094			$	390,420,885

 

---

( 1 )	As a result of the acquisition of Fraternity Community Bancorp, Inc., the parent company of Fraternity Federal Savings and Loan, in May 2016 and Fairmount Bancorp, Inc., the parent company of Fairmount Bank, in September 2015, we have segmented the portfolio into two components, loans originated by Hamilton Bank "Legacy" and loans acquired from Fraternity Community Bancorp, Inc. and Fairmount Bancorp, Inc. "Acquired".
( 2 )	"Legacy" one -to four -family residential real estate loans at March 31, 2018 includes $19.2 million of various loan pools purchased in the second half of fiscal 2018.
( 3 )	"Investor" loans are residential mortgage loans secured by non-owner occupied one -to four -family properties.
( 4 )	"Legacy" commercial business loans at March 31, 2018 includes a $15.5 million pool of commercial lease loans purchased in June 2017 and $3.2 million in guaranteed SBA loans purchased in second half of fiscal 2018.
( 5 )	"Legacy" consumer loans at March 31, 2018 includes $19.9 million of purchased loan pools consisting of recreational vehicles that were purchased in August and December 2017.

 

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

 

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

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

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

 

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

 

The following table details activity in the allowance for loan losses by portfolio segment for the three and nine -month periods ended December 31, 2018 and 2017. The allowance for loan losses allocated to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments.

 

Three Months Ended December 31, 2018		Residential Real Estate				Investor Real Estate				Commercial Real Estate				Commercial Construction				Commercial Business				Home Equity				Consumer				Unallocated				Total
Allowance for credit losses:
Beginning balance		$	665,676			$	314,571			$	1,312,441			$	12,390			$	532,611			$	72,831			$	98,676			$	21,733			$	3,030,929
Charge-offs			-				(32,909	)			-				-				(133,729	)			-				-				-				(166,638	)
Recoveries			41,059				33,609				-				-				10,880				-				1,267				-				86,815
Provision for credit losses			(24,321	)			(36,632	)			(31,557	)			(4,090	)			160,895				1,555				(4,214	)			18,364				80,000
Ending balance		$	682,414			$	278,639			$	1,280,884			$	8,300			$	570,657			$	74,386			$	95,729			$	40,097			$	3,031,106

 

 

Nine Months Ended December 31, 2018		Residential Real Estate				Investor Real Estate				Commercial Real Estate				Commercial Construction				Commercial Business				Home Equity				Consumer				Unallocated				Total
Allowance for credit losses:
Beginning balance		$	608,723			$	51,690			$	1,253,383			$	33,430			$	673,982			$	69,459			$	131,236			$	-			$	2,821,903
Charge-offs			(13,769	)			(41,022	)			(31,320	)			-				(208,729	)			-				(2,465	)			-				(297,305	)
Recoveries			43,301				33,675				31,320				-				10,880				-				4,836				-				124,012
Provision for credit losses			44,159				234,296				27,501				(25,130	)			94,524				4,927				(37,878	)			40,097				382,496
Ending balance		$	682,414			$	278,639			$	1,280,884			$	8,300			$	570,657			$	74,386			$	95,729			$	40,097			$	3,031,106
Allowance allocated to:
Legacy Loans:
Individually evaluated for impairment		$	253,811			$	-			$	-			$	-			$	-			$	-			$	-			$	-			$	253,811
Collectively evaluated for impairment			276,937				50,593				1,241,051				7,254				566,217				59,952				95,516				40,097				2,337,617
Acquired Loans:
Individually evaluated for impairment		$	-			$	-			$	-			$	-			$	-			$	-			$	-			$	-			$	-
Collectively evaluated for impairment			151,666				228,046				39,833				1,046				4,440				14,434				213				-				439,678

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

Three Months Ended December 31, 2017		Residential Real Estate				Investor Real Estate				Commercial Real Estate				Commercial Construction				Commercial Business				Home Equity				Consumer				Unallocated				Total
Allowance for credit losses:
Beginning balance		$	528,288			$	52,255			$	1,360,433			$	12,074			$	327,130			$	62,570			$	128,241			$	-			$	2,470,991
Charge-offs			-				(111,360	)			(100,236	)			-				-				-				-				-				(211,596	)
Recoveries			3,937				-				-				-				171				-				1,034				-				5,142
Provision for credit losses			35,875				103,790				148,707				11,100				45,987				619				(1,078	)			-				345,000
Ending balance		$	568,100			$	44,685			$	1,408,904			$	23,174			$	373,288			$	63,189			$	128,197			$	-			$	2,609,537

 

 

Nine Months Ended December 31, 2017		Residential Real Estate				Investor Real Estate				Commercial Real Estate				Commercial Construction				Commercial Business				Home Equity				Consumer				Unallocated				Total
Allowance for credit losses:
Beginning balance		$	553,539			$	35,275			$	1,375,894			$	9,031			$	149,461			$	70,071			$	1,544			$	-			$	2,194,815
Charge-offs			(8,907	)			(126,482	)			(100,236	)			-				-				-				(486	)			-				(236,111	)
Recoveries			3,937				18,129				-				-				551				-				3,216				-				25,833
Provision for credit losses			19,531				117,763				133,246				14,143				223,276				(6,882	)			123,923				-				625,000
Ending balance		$	568,100			$	44,685			$	1,408,904			$	23,174			$	373,288			$	63,189			$	128,197			$	-			$	2,609,537
Allowance allocated to:
Legacy Loans:
Individually evaluated for impairment		$	272,707			$	-			$	-			$	-			$	-			$	-			$	-			$	-			$	272,707
Collectively evaluated for impairment			295,393				44,685				1,408,904				23,174				373,288				63,189				128,197				-				2,336,830
Acquired Loans:
Individually evaluated for impairment		$	-			$	-			$	-			$	-			$	-			$	-			$	-			$	-			$	-
Collectively evaluated for impairment			-				-				-				-				-				-				-				-				-

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

Our recorded investment in loans at December 31, 2018 and 2017 related to each balance in the allowance for probable loan losses by portfolio segment and disaggregated on the basis of our impairment methodology was as follows:

 

 

December 31, 2018		Residential Real Estate				Investor Real Estate				Commercial Real Estate				Commercial Construction				Commercial Business				Home Equity				Consumer				Total
Legacy Loans:
Individually evaluated for impairment		$	1,773,176			$	31,752			$	4,139,177			$	-			$	743,160			$	6,785			$	91,662			$	6,785,712
Collectively evaluated for impairment			84,774,908				7,305,529				101,616,609				1,543,313				34,533,333				15,070,283				16,237,575				261,081,550
Ending balance		$	86,548,084			$	7,337,281			$	105,755,786			$	1,543,313			$	35,276,493			$	15,077,068			$	16,329,237			$	267,867,262
Acquired Loans:
Individually evaluated for impairment		$	440,242			$	261,659			$	-			$	-			$	-			$	164			$	55,492			$	757,557
Collectively evaluated for impairment			65,815,018				16,145,606				9,289,784				1,059,217				1,706,509				4,940,887				643,880				99,600,901
Ending balance		$	66,255,260			$	16,407,265			$	9,289,784			$	1,059,217			$	1,706,509			$	4,941,051			$	699,372			$	100,358,458

 

 

December 31, 2017		Residential Real Estate				Investor Real Estate				Commercial Real Estate				Commercial Construction				Commercial Business				Home Equity				Consumer				Total
Legacy Loans:
Individually evaluated for impairment		$	1,697,585			$	121,514			$	4,500,043			$	-			$	905,178			$	21,579			$	-			$	7,245,899
Collectively evaluated for impairment			85,532,435				7,254,483				96,357,409				3,995,441				38,083,051				13,780,512				20,075,548				265,078,879
Ending balance		$	87,230,020			$	7,375,997			$	100,857,452			$	3,995,441			$	38,988,229			$	13,802,091			$	20,075,548			$	272,324,778
Acquired Loans:
Individually evaluated for impairment		$	1,061,049			$	579,172			$	199,920			$	-			$	-			$	-			$	56,708			$	1,896,849
Collectively evaluated for impairment			73,640,662				17,629,734				11,960,924				856,970				1,928,232				6,874,136				728,392				113,619,050
Ending balance		$	74,701,711			$	18,208,906			$	12,160,844			$	856,970			$	1,928,232			$	6,874,136			$	785,100			$	115,515,899

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

Past due loans, segregated by age and class of loans, as of and for the nine months ended December 31, 2018 and as of and for the year ended March 31, 2018, were as follows:

 

		December 31, 2018												March 31, 2018
		Legacy				Acquired				Total				Legacy				Acquired				Total
Current		$	262,125,497			$	99,620,976			$	361,746,473			$	270,807,643			$	109,972,473			$	380,780,116
Accruing past due loans:
30-59 days past due:
Real estate loans:
Residential			71,020				18,488				89,508				63,618				689,364				752,982
Investor			-				29,357				29,357				-				-				-
Commercial			-				-				-				-				-				-
Commercial construction			-				-				-				-				-				-
Commercial business			120,418				-				120,418				135,502				-				135,502
Home equity loans			-				68				68				-				-				-
Consumer			23,357				25,753				49,110				148,876				-				148,876
Total 30-59 days past due			214,795				73,666				288,461				347,996				689,364				1,037,360
60-89 days past due:
Real estate loans:
Residential			72,377				121,223				193,600				70,291				-				70,291
Investor			-				-				-				-				-				-
Commercial			-				-				-				-				-				-
Commercial construction			-				-				-				-				-				-
Commercial business			460,762				-				460,762				134,524				-				134,524
Home equity loans			-				-				-				-				-				-
Consumer			5,233				-				5,233				28,300				-				28,300
Total 60-89 days past due			538,372				121,223				659,595				233,115				-				233,115
90 or more days past due:
Real estate loans:
Residential			-				-				-				-				-				-
Investor			222,485				113,029				335,514				734,818				471,423				1,206,241
Commercial			-				-				-				-				-				-
Commercial construction			-				-				-				-				-				-
Commercial business			-				-				-				-				-				-
Home equity loans			-				-				-				-				-				-
Consumer			-				-				-				-				-				-
Total 90 or more days past due			222,485				113,029				335,514				734,818				471,423				1,206,241
Total accruing past due loans			975,652				307,918				1,283,570				1,315,929				1,160,787				2,476,716
Non-accruing loans:
Real estate loans:
Residential			365,610				300,530				666,140				526,584				338,060				864,644
Investor			31,752				128,937				160,689				60,949				300,872				361,821
Commercial			4,139,177				-				4,139,177				4,356,264				198,938				4,555,202
Commercial construction			-				-				-				-				-				-
Commercial business			143,145				-				143,145				165,285				-				165,285
Home equity loans			-				97				97				12,605				-				12,605
Consumer			86,429				-				86,429				4,850				-				4,850
Non-accruing loans:			4,766,113				429,564				5,195,677				5,126,537				837,870				5,964,407
Total Loans		$	267,867,262			$	100,358,458			$	368,225,720			$	277,250,109			$	111,971,130			$	389,221,239
Nonaccrual interest not accrued:
Real estate loans:
Residential		$	2,289			$	7,237			$	9,526			$	8,250			$	53,120			$	61,370
Investor			2,066				6,490				8,556				8,513				15,604				24,117
Commercial			252,381				-				252,381				294,619				-				294,619
Commercial construction			-				-				-				-				-				-
Commercial business			8,796				-				8,796				12,891				-				12,891
Home equity loans			-				-				-				436				-				436
Consumer			1,459				-				1,459				385				-				385
Total nonaccrual interest not accrued		$	266,991			$	13,727			$	280,718			$	325,094			$	68,724			$	393,818

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

Impaired loans as of and for the three and nine months ended December 31, 2018 and 2017, and the year ended March 31, 2018, was as follows:

 

		Impaired Loans at December 31, 2018												Three months ended December 31, 2018								Nine months ended December 31, 2018
		Unpaid
		Contractual												Average				Interest				Average				Interest
		Principal				Recorded				Related				Recorded				Income				Recorded				Income
		Balance				Investment				Allowance				Investment				Recognized				Investment				Recognized
Legacy:
With no related allowance recorded:
Real estate loans:
Residential		$	706,098			$	538,723			$	-			$	558,414			$	3,719			$	538,965			$	7,666
Investor			-				-				-				-				-				-				-
Commercial			6,375,413				4,139,177				-				4,309,168				-				4,280,325				53,278
Commercial construction
Commercial business			1,369,695				743,160				-				863,260				25,781				925,694				70,558
Home equity loans			33,287				6,785				-				7,036				1,910				7,293				2,043
Consumer			91,745				91,662				-				92,474				2,542				92,822				2,542
With an allowance recorded:
Real estate loans:
Residential		$	1,248,874			$	1,234,453			$	253,811			$	1,237,197			$	12,337			$	1,246,235			$	37,255
Investor			57,831				31,752				-				32,427				1,108				32,291				1,108
Commercial			-				-				-				-				-				-				-
Commercial construction			-				-				-				-				-				-				-
Commercial business			-				-				-				-				-				-				-
Home equity loans			-				-				-				-				-				-				-
Consumer			-				-				-				-				-				-				-
Total legacy impaired			9,882,943				6,785,712				253,811				7,099,976				47,397				7,123,625				174,450
Acquired (1):
With no related allowance recorded:
Real estate loans:
Residential			456,272				440,242				-				439,495				5,457				425,256				7,179
Investor			405,538				261,659				-				263,562				4,722				246,751				13,859
Commercial
Commercial construction
Commercial business
Home equity loans			37,858				164				-				238				1,851				79				2,501
Consumer			88,545				55,492				-				56,249				1,401				57,957				3,949
With an allowance recorded:
Real estate loans:
Residential			-				-				-				-				-				-				-
Investor			-				-				-				-				-				-				-
Commercial			-				-				-				-				-				-				-
Commercial construction			-				-				-				-				-				-				-
Commercial business			-				-				-				-				-				-				-
Home equity loans			-				-				-				-				-				-				-
Consumer			-				-				-				-				-				-				-
Total acquired impaired			988,213				757,557				-				759,544				13,431				730,043				27,488
Total impaired		$	10,871,156			$	7,543,269			$	253,811			$	7,859,520			$	60,828			$	7,853,668			$	201,938

 

( 1 )

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

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

		Impaired Loans at December 31, 2017												Three months ended December 31, 2017								Nine months ended December 31, 2017
		Unpaid
		Contractual												Average				Interest				Average				Interest
		Principal				Recorded				Related				Recorded				Income				Recorded				Income
		Balance				Investment				Allowance				Investment				Recognized				Investment				Recognized
Legacy:
With no related allowance recorded:
Real estate loans:
Residential		$	513,736			$	371,312			$	-			$	376,225			$	280			$	387,772			$	1,451
Investor			127,420				121,514								122,576				-				123,362				3,772
Commercial			6,487,088				4,500,043				-				4,689,502				-				4,703,598				1,077
Commercial construction			-				-				-				-				-				-				-
Commercial business			1,303,000				905,178				-				937,594				24,038				894,330				75,926
Home equity loans			48,218				21,579				-				22,072				76				23,100				316
Consumer			-				-				-				-				-				-				-
With an allowance recorded:
Real estate loans:
Residential			1,354,169				1,326,273				272,707				1,330,015				13,248				1,341,584				39,333
Investor			-				-				-				-				-				-				-
Commercial			-				-				-				-				-				-				-
Commercial construction			-				-				-				-				-				-				-
Commercial business			-				-				-				-				-				-				-
Home equity loans			-				-				-				-				-				-				-
Consumer			-				-				-				-				-				-				-
Total legacy impaired			9,833,631				7,245,899				272,707				7,477,984				37,642				7,473,746				121,875
Acquired (1):
With no related allowance recorded:
Real estate loans:
Residential			1,211,254				1,061,049				-				1,063,445				4,247				1,077,738				26,087
Investor			687,849				579,172				-				663,538				2,893				697,174				34,582
Commercial			249,920				199,920				-				200,589				1,888				202,263				5,700
Commercial construction			-				-				-				-				-				-				-
Commercial business			-				-				-				-				-				-				-
Home equity loans			42,583				-				-				-				-				-				600
Consumer			99,349				56,708				-				58,084				1,338				62,234				4,464
With an allowance recorded:
Real estate loans:
Residential			-				-				-				-				-				-				-
Investor			-				-				-				-				-				-				-
Commercial			-				-				-				-				-				-				-
Commercial construction			-				-				-				-				-				-				-
Commercial business			-				-				-				-				-				-				-
Home equity loans			-				-				-				-				-				-				-
Consumer			-				-				-				-				-				-				-
Total acquired impaired			2,290,955				1,896,849				-				1,985,656				10,366				2,039,409				71,433
Total impaired		$	12,124,586			$	9,142,748			$	272,707			$	9,463,640			$	48,008			$	9,513,155			$	193,308

 

( 1 )

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

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

		Impaired Loans at March 31, 2018												For the Year Ended March 31, 2018
		Unpaid
		Contractual												Average				Interest
		Principal				Recorded				Related				Recorded				Income
		Balance				Investment				Allowance				Investment				Recognized
Legacy:
With no related allowance recorded:
Real estate loans:
Residential		$	665,051			$	517,600			$	-			$	548,636			$	9,257
Investor			126,389				60,949								118,175				3,772
Commercial			6,487,088				4,356,264				-				4,634,504				1,077
Commercial construction			-				-				-				-				-
Commercial business			1,562,756				795,410				-				1,082,773				103,474
Home equity loans			47,650				20,595				-				22,604				392
Consumer			48,115				34,266				-				38,514				1,576
With an allowance recorded:
Real estate loans:
Residential			1,336,078				1,309,440				266,256				1,328,919				51,928
Investor			-				-				-				-				-
Commercial			-				-				-				-				-
Commercial construction			-				-				-				-				-
Commercial business			-				-				-				-				-
Home equity loans			-				-				-				-				-
Consumer			-				-				-				-				-
Total legacy impaired			10,273,127				7,094,524				266,256				7,774,125				171,476
Acquired (1):
With no related allowance recorded:
Real estate loans:
Residential			1,082,484				922,252				-				945,602				26,437
Investor			682,045				444,254				-				659,246				37,368
Commercial			248,938				198,938				-				201,519				7,336
Commercial construction			-				-				-				-				-
Commercial business			-				-				-				-				-
Home equity loans			40,473				-				-				-				1,329
Consumer			95,986				60,371				-				64,013				6,062
With an allowance recorded:
Real estate loans:
Residential			-				-				-				-				-
Investor			-				-				-				-				-
Commercial			-				-				-				-				-
Commercial construction			-				-				-				-				-
Commercial business			-				-				-				-				-
Home equity loans			-				-				-				-				-
Consumer			-				-				-				-				-
Total acquired impaired			2,149,926				1,625,815				-				1,870,380				78,532
Total impaired		$	12,423,053			$	8,720,339			$	266,256			$	9,644,505			$	250,008

 

( 1 )

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

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

The following table documents changes in the carrying amount of acquired impaired loans (Purchased Credit Impaired or “PCI”) for the nine months ended December 31, 2018 and 2017, along with the outstanding balance at the end of the period:

 

		December 31, 2018				December 31, 2017
Recorded investment at beginning of period		$	1,021,424			$	1,341,935
Accretion			2,505				25,964
Reductions for payments			(649,168	)			(324,806	)
Recorded investment at end of period		$	374,761			$	1,043,093
Oustanding principal balance at end of period		$	470,368			$	1,297,471

 

A summary of changes in the accretable yield for PCI loans for the nine months ended December 31, 2018 and 2017 is as follows:

 

		December 31, 2018				December 31, 2017
Accretable yield, beginning of period		$	31,895			$	59,639
Accretion			(2,505	)			(25,964	)
Reclassification from nonaccretable difference			-				-
Accretable yield, end of period		$	29,390			$	33,675

 

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

 

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

 

		Number of
December 31, 2018		contracts				Performing				Nonperforming				Total
Real estate loans:
Residential			16			$	1,295,469			$	226,119			$	1,521,588
Investor			-				-				-				-
Commercial			2				-				1,195,421				1,195,421
Commercial construction			-				-				-				-
Commercial business			1				600,016				-				600,016
Home equity loans			-				-				-				-
Consumer			-				-				-				-
			19			$	1,895,485			$	1,421,540			$	3,317,025

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

		Number of
March 31, 2018		contracts				Performing				Nonperforming				Total
Real estate loans:
Residential			15			$	1,230,166			$	312,964			$	1,543,130
Investor			-				-				-				-
Commercial			2				-				1,195,421				1,195,421
Commercial construction			-				-				-				-
Commercial business			1				605,488				-				605,488
Home equity loans			-				-				-				-
Consumer			-				-				-				-
			18			$	1,835,654			$	1,508,385			$	3,344,039

 

The following table presents the number of contracts and the dollar amount of TDRs that were added during the three and nine -month periods ended December  31, 2018 and 2017. There were no TDRs added during the three -month period ended December 31, 2018. The amount shown reflects the outstanding loan balance at the time of the modification. There are no commitments to extend credit under existing TDRs as of December 31, 2018.

 

Loans Modified as a TDR for the Three Months Ended

December 31, 2018

December 31, 2017

Number of

Outstanding recorded

Number of

Outstanding recorded

Troubled Debt Restructurings

contracts

investment

contracts

investment

Real estate loans:

Residential

-

$

-

2

$

50,432

 

Loans Modified as a TDR for the nine months ended

December 31, 2018

December 31, 2017

Number of

Outstanding recorded

Number of

Outstanding recorded

Troubled Debt Restructurings

contracts

investment

contracts

investment

Real estate loans:

One-to four-family

1

$

20,565

3

$

52,363

 

There were no TDRs that defaulted in the three or nine months ended December 31, 2018 and 2017. Payment default under a TDR is defined as any TDR that is 90 days or more past due following the time that the loan was modified or the inability of the TDR to make the required payment subsequent to the modification.

 

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

 

 

Credit quality indicators

 

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

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

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

 

Pass

 

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

 

 

Special Mention

 

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

 

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

 

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

 

Substandard

 

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

 

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

 

Doubtful

 

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

 

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

 

Loss

 

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

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

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

 

		December 31, 2018												March 31, 2018
		LEGACY				ACQUIRED				TOTAL				LEGACY				ACQUIRED				TOTAL
Risk Rating:
Rating - Pass:
Real estate loans:
Residential		$	83,743,323			$	64,856,380			$	148,599,703			$	87,863,805			$	70,901,293			$	158,765,098
Investor			7,305,529				15,873,106				23,178,635				9,214,082				16,719,346				25,933,428
Commercial			101,616,609				9,289,784				110,906,393				92,955,370				11,563,547				104,518,917
Commercial construction			1,543,313				1,059,217				2,602,530				5,763,784				1,352,019				7,115,803
Commercial Business			34,835,870				1,706,509				36,542,379				37,978,293				1,841,226				39,819,519
Home Equity			15,070,123				4,805,766				19,875,889				13,935,732				5,928,787				19,864,519
Consumer			16,227,625				669,618				16,897,243				18,733,489				733,669				19,467,158
Total Pass			260,342,392				98,260,380				358,602,772				266,444,555				109,039,887				375,484,442
Rating - Special Mention:
Real estate loans:
Residential			2,327,412				958,638				3,286,050				2,365,652				925,521				3,291,173
Investor			-				273,806				273,806				-				297,209				297,209
Commercial			-				-				-				3,092,135				-				3,092,135
Commercial construction			-				-				-				-				-				-
Commercial Business			297,478				-				297,478				134,524				-				134,524
Home Equity			-				135,121				135,121				-				110,675				110,675
Consumer			9,950				-				9,950				96,474				-				96,474
Total Special Mention			2,634,840				1,367,565				4,002,405				5,688,785				1,333,405				7,022,190
Rating - Substandard:
Real estate loans:
Residential			477,349				440,242				917,591				469,554				922,252				1,391,806
Investor			31,752				260,354				292,106				60,949				444,254				505,203
Commercial			4,139,177				-				4,139,177				4,356,264				198,938				4,555,202
Commercial construction			-				-				-				-				-				-
Commercial Business			143,145				-				143,145				189,922				-				189,922
Home Equity			6,945				164				7,109				20,595				-				20,595
Consumer			91,662				29,753				121,415				19,485				32,394				51,879
Total - Substandard			4,890,030				730,513				5,620,543				5,116,769				1,597,838				6,714,607
Rating - Doubtful			-				-				-				-				-				-
Rating - Loss			-				-				-				-				-				-
TOTAL LOANS		$	267,867,262			$	100,358,458			$	368,225,720			$	277,250,109			$	111,971,130			$	389,221,239

 

 

HAMILTON BANCORP, INC., AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

 

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

 

The Bank’s maximum exposure to credit loss in the event of nonperformance by the customer is the contractual amount of the credit commitment. Loan commitments, lines of credit, and letters of credit are made on the same terms, including collateral, as outstanding loans. The Bank has established an off-balance sheet reserve for potential losses associated with any outstanding commitment or unused line of credit. The off-balance sheet reserve is a percentage of the outstanding commitment or unused line of credit that is based upon a discounted charge-off history associated with each respective loan segment. The reserve at December 31, 2018 and March 31, 2018 totaled $57,000 and $50,000, respectively. At December 31, 2018, management is not aware of any accounting loss to be incurred by funding these loan commitments at this time.

 

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

 

		December 31,				March 31,
Outstanding Commitment and Used Lines of Credit		2018				2018
Unused commercial lines of credit		$	13,004,510			$	9,187,810
Unused home equity lines of credit			23,263,860				22,560,376
Unused consumer lines of credit			26,770				29,331
Residential construction loan commitments			6,934,369				4,234,076
Commercial construction loan commitments			2,678,900				8,968,416
Home equity loan commitments			200,000				389,600
Commercial loan commitments			3,671,000				5,125,000
Standby letter of credit			766,783				250,224