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HBK > SEC Filings for HBK > Form 10-Q on 13-Nov-2013All Recent SEC Filings

Show all filings for HAMILTON BANCORP, INC.

Form 10-Q for HAMILTON BANCORP, INC.


13-Nov-2013

Quarterly Report


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

Safe Harbor Statement for Forward-Looking Statements

This report may contain forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts; rather they are statements based on the Company's current expectations regarding its business strategies and their intended results and its future performance. Forward-looking statements are preceded by terms such as "expects", "believes", "anticipates", "intends", and similar expressions.

Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could cause or contribute to the Company's actual results, performance, and achievements being materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these differences include, without limitation, general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government, legislative and regulatory changes, the quality and composition of the loan and investment securities portfolio, loan demand, deposit flows, competition, and changes in accounting principles and guidelines. Additional factors that may affect our results are discussed in item 1A of Hamilton Bancorp, Inc.'s Annual Report on Form 10-K filed June 28, 2013 with the Securities and Exchange Commission under the section titled "Risk Factors". These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company assumes no obligation and disclaims any obligation to update any forward-looking statements.

General

Hamilton Bancorp, Inc. (the "Company") is a Maryland corporation incorporated on June 7, 2012 by Hamilton Bank (the "Bank") to be its holding company following the Bank's conversion from the mutual to the stock form of organization (the "Conversion"). The Conversion was completed on October 10, 2012. On that same date, the Company completed its public stock offering and issued 3,703,000 shares of its common stock for aggregate proceeds of $37,030,000, and net proceeds of $35,640,000. The Company's business is the ownership of the outstanding capital stock of the Bank. The Company does not own or lease any property but instead uses the premises, equipment and other property of the Bank.

Founded in 1915, the Bank is a community-oriented financial institution, dedicated to serving the financial service needs of customers and businesses within its geographic area, which consists of Baltimore City, Baltimore County, and Anne Arundel County in Maryland. We offer a variety of deposit products and provide loans secured by real estate located in our market area. Our real estate loans consist primarily of one-to four-family mortgage loans, as well as commercial real estate loans, and home equity loans and lines of credit. We also offer commercial term and line of credit loans and, to a limited extent, consumer loans. We currently operate out of our corporate headquarters in Towson, Maryland and our four full-service branch offices located in Baltimore City, Cockeysville, Towson and Pasadena, Maryland. The Bank is subject to extensive regulation, examination and supervision by the Office of the Comptroller of the Currency, its primary federal regulator, and the Federal Deposit Insurance Corporation, its deposit insurer. The Company is subject to regulation and supervision by the Board of Governors of the Federal Reserve System.

The Company and the Bank maintain an Internet website at http://www.hamilton-bank.com. Information on our website should not be considered a part of this Quarterly Report on Form 10-Q.

Critical Accounting Policies

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


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

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

Goodwill Impairment. Goodwill represents the excess purchase price paid for our Pasadena branch over the fair value of the net assets acquired. Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Bank is considered the Reporting Unit for purposes of impairment testing. Impairment testing requires that the fair value of the Bank be compared to the carrying amount of the Bank's net assets, including goodwill. If the fair value of the Bank exceeds the book value, no write-down of recorded goodwill is required. If the fair value of the Bank is less than book value, an expense may be required to write-down the related goodwill to the proper carrying value. We test for impairment of goodwill during February of each year. We estimate the fair value of the Bank utilizing three valuation methods including the Comparable Transactions Approach, the Public Market Peers Approach, and the Discounted Cash Flow Approach.

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

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

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

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


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

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

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

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

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

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

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

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


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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 Bank's only interest-bearing liabilities), in particular certificates of deposit, declined faster than the average yield earned on our interest-earning assets and had a positive impact on net interest income. As a result, our interest rate spread for the three months ended September 30, 2013 increased 22 basis points to 2.71%, compared to 2.49% for the three month period ended September 30, 2012.

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

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

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


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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

Liabilities and Shareholders' Equity:
Certificates of deposit                  $ 180,557      $      472        1.05 %    $ 210,979      $      706        1.34 %
Money Market                                29,226               9        0.12 %       27,880              16        0.23 %
Statement savings                           15,393               2        0.05 %       15,208               7        0.18 %
NOW accounts                                10,245               2        0.08 %        6,650               1        0.06 %

Total interest-bearing deposits            235,421             485        0.82 %      260,717             730        1.12 %
Noninterest-bearing deposits                15,715                                     22,445
Other noninterest-bearing liabilities        1,928                                      1,828

Total liabilities                          253,064                                    284,990
Total shareholders' equity                  65,679                                     35,788

Total liabilities and shareholders'
equity                                   $ 318,743                                  $ 320,778

Net interest income                                     $    2,124                                 $    1,989

Net interest rate spread (3)                                              2.71 %                                     2.49 %

Net interest-earning assets (4)          $  59,940                                  $  41,191

Net interest margin (5)                                                   2.88 %                                     2.64 %

Average interest-earning assets to
average interest-bearing liabilities        125.46 %                                   115.80 %

(1) Loans on non-accrual status are included in average loans carrying a zero yield.

(2) Includes U.S agency securities, and to a much lesser extent, FHLMC debt securities and Federal Home Loan Bank equity securities.

(3) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(4) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

(5) Net interest margin represents net interest income divided by average total interest-earning assets.

Provision for Loan Losses. We establish provisions for loan losses that are charged to operations in order to maintain the allowance for loan losses at a level believed, to the best of management's knowledge, to cover all known and inherent losses in the portfolio both probable and reasonable to estimate at each reporting date. We recorded a $1.0 million provision for loan losses for the three months ended September 30, 2013 compared to no provision for loan losses for the three months ended September 30, 2012. The increased provision in the second quarter of 2013 was related to net charge offs totaling $586,000, largely related to three different commercial business borrowers, as well as an increase of $429,000 resulting from a reduction in the historical loss period we use in calculating average loan loss percentages for various classes of loans. These average loss percentages are applied to the various classes of loans as one factor in the


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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
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