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HBK > SEC Filings for HBK > Form 10-Q on 13-Feb-2014All Recent SEC Filings

Show all filings for HAMILTON BANCORP, INC.

Form 10-Q for HAMILTON BANCORP, INC.


13-Feb-2014

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:

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


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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 December 31, 2013 and March 31, 2013

Assets. Total assets decreased $31.5 million, or 9.5%, to $300.5 million at December 31, 2013 from $332.0 million at March 31, 2013. The decrease was primarily the result of a $17.6 million decrease in cash and cash equivalents, a $4.9 million decrease in total securities, and a $10.0 million decrease in loans receivable and loans held for sale, partially offset by a $1.6 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.

Cash and Cash Equivalents. Cash and cash equivalents decreased by $17.6 million, or 51.9%, to $16.3 million at December 31, 2013 from $34.0 million at March 31, 2013. The decrease in cash and cash equivalents funded a $23.0 million decrease in overall deposit balances and a $2.0 million payment for an unsettled security, partially offset by a $4.9 million decrease in investment securities and an overall decrease in net loans receivable of $9.8 million that included a $1.0 million loan transfer to foreclosed real estate.

Securities. Total securities decreased $4.9 million, or 4.2%, to $111.3 million at December 31, 2013, as U.S. government agency securities decreased $3.6 million and mortgage-backed securities decreased $4.6 million, which decreases were partially offset by the purchase of $3.2 million in municipal bond securities. The decrease in securities was partly due to the sale of four mortgage-backed securities with proceeds of $5.9 million and $116,000 in gains and $24,000 in losses on the sales. The remaining decrease is primarily attributable to $17.1 million in principal repayments


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and a $4.1 million decrease in the fair value of securities resulting from the increase in interest rates over the past nine months. The decreases were partially offset by the purchase of $19.5 million in mortgage-backed securities and collateralized mortgage obligations during the nine months ended December 31, 2013.

Loans. Net loans, including loans held for sale, decreased by $10.0 million, or 6.3%, to $149.3 million at December 31, 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 nine months was a $9.0 million decrease in commercial business loans. Over the past two quarters, several larger commercial loan borrowers paid off their outstanding loan balances and refinanced with other financial institutions. In addition, residential one- to four-family loans decreased $6.3 million as these loans 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 $1.7 million, or 12.2%, to $12.0 million at December 31, 2013. Commercial loans, consisting of construction, commercial business and commercial real estate loans, decreased by $1.3 million, or 2.0%, to $65.4 million at December 31, 2013. Commercial business loans, as noted earlier, decreased by 33.6% to $17.9 million at December 31, 2013. The decrease in commercial business loans was partially offset by increases of $6.6 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 over the nine months ended December 31, 2013 and the Company's continued focus on originating these types of loans.

Premises and Equipment. Premises and equipment decreased $357,000, or 14.5%, to $2.1 million at December 31, 2013 from $2.5 million at March 31, 2013. The decrease is due to the closure of the Bank's Belmar branch office in August 2013 and the final sale of the building and land in the current quarter. Management felt it made sense to close the Belmar branch due to its close proximity to one of the Bank's other four remaining branch locations.

Deposits. Total deposits decreased $23.0 million, or 8.8%, to $237.1 million at December 31, 2013 from $260.1 million at March 31, 2013. The decline in deposits was due to the continued decrease in time deposits. Time deposits decreased $23.9 million, or 12.2%, to $172.2 million at December 31, 2013 compared to $196.0 million at March 31, 2013. We have continued to allow higher costing certificates of deposit to runoff at maturity over the first nine months of fiscal 2014. The Company remains focused on changing its deposit mix to rely less on certificates of deposit as a primary funding source and attract lower costing core deposits. Checking accounts have increased $1.2 million or 5.7% from $20.4 million at March 31, 2013 during the nine months ended December 31, 2013. While checking accounts increased $5.6 million to $26.0 million at September 30, 2013 compared to March 31, 2013, such accounts declined $4.4 million to $21.6 million at December 31, 2013. The decline in checking accounts over the last quarter is primarily associated with interest-free commercial checking accounts. Money market accounts have decreased $240,000 to $28.0 million at December 31, 2013 compared to $28.2 million at March 31, 2013 and savings accounts have remained virtually unchanged since March 31, 2013 decreasing $40,000 to $15.4 million as of December 31, 2013.

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

Equity. Total equity decreased $6.0 million, or 8.8%, to $61.5 million at December 31, 2013 from $67.4 million at March 31, 2013. The decrease in equity was attributable to a 5.0% stock buyback program completed in November 2013 for $2.8 million. In addition, the Company has experienced a $629,000 net loss year-to-date and a $2.6 million decrease in accumulated other comprehensive income due to the negative impact of rising interest rates on the market value of the investment portfolio during the past nine months.


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Comparison of Asset Quality at December 31, 2013 and March 31, 2013

Non-performing assets increased slightly by $28,000 to $5.9 million at
December 31, 2013 compared to March 31, 2013. Total nonperforming assets were
2.0% of total assets at the end of the current quarter, compared to 1.8% at
March 31, 2013. Non-performing asset for the respective periods were as follow:



                                                As Of and For The       As Of and For The       As Of and For The
                                                Nine Months Ended       Six Months Ended        Fiscal Year Ended
                                                December 31, 2013      September 30, 2013        March 31, 2013
                                                                     (dollars in thousands)

Nonaccruing loans                              $             3,888     $             4,272     $             5,132
Accruing loans delinquent more than 90 days                  1,025                     675                      -
Foreclosed assets                                            1,003                   1,759                     756

Total nonperforming assets                     $             5,916     $             6,706     $             5,888


ASC 450 - Allowance for loan losses            $             2,224     $             2,346     $             1,562
ASC 310 - Impaired loan valuation allowance                    324                     313                     509

Total allowance for loan losses                $             2,548     $             2,659     $             2,071

Nonperforming loans decreased $219,000 from $5.1 million at March 31, 2013, to $4.9 million at December 31, 2013. The decrease in nonperforming loans is primarily attributable to nonaccrual loans. Nonaccrual loans decreased $1.2 million, or 24.2%, to $3.9 million at December 31, 2013 compared to $5.1 million at March 31, 2013. The $1.2 million decrease in nonaccrual loans is due to a $1.0 million nonaccrual participation loan that was transferred to foreclosed real estate in the second quarter upon foreclosure by the lead bank. Nonaccrual loans include three 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 nonaccrual by management until the borrower can show improved cash flow. Also included in nonaccrual loans at December 31, 2013 are several loans totaling $1.0 million that are on accrual status and paying under the contractually agreed upon terms, however, they are 90 days past their contractual maturity date and are therefore reported as nonperforming loans. There were no such loans reported as of March 31, 2013.

The provision for loan losses totaled $180,000 for the quarter ended December 31, 2013 compared to a $335,000 provision for the same quarter in fiscal 2013. The provision for loan losses totaled $1.5 million for the nine months ended December 31, 2013 compared to $393,000 for the same period in fiscal 2013. The provision for loan losses in the third quarter of fiscal 2014 was related to net charge offs totaling $291,000, largely related to one commercial business borrower totaling $176,000 and several smaller 1-4 family residential loans equaling $128,000. The provision for loan losses due to the net charge offs was partially offset by a declining loan portfolio.

The allowance for loan losses at December 31, 2013 totaled $2.5 million, or 1.68% of total loans, compared to $2.1 million at March 31, 2013, or 1.28% of total loans. The $477,000 increase in the allowance for loan losses was primarily the result of the $1.5 million provision for loan losses, partially offset by the $1.0 million in net charge-off of loans for the nine months ending December 31, 2013.

Foreclosed real estate increased $248,000 to $1.0 million at December 31, 2013 from $756,000 at March 31, 2013. However, since September 30, 2013, foreclosed real estate has decreased $756,000 due to the sale of one of two properties held in foreclosed real estate. The remaining property held in foreclosed real estate at December 31, 2013, consists of a partially developed parcel of land that was transferred to foreclosed real estate in the second quarter of the current year upon foreclosure by the lead bank. The property is currently being listed for sale by the lead bank.


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Comparison of Results of Operations for the Three Months Ended December 31, 2013 and 2012 (unaudited)

General. A net loss of $147,000 was reported for the three months ended December 31, 2013, compared to net income of $65,000 for the three months ended December 31, 2012. The decrease resulted primarily from a $681,000 increase in noninterest expenses, partially offset by a $123,000 increase in net interest income, a 63,000 increase in noninterest revenue, a $127,000 increase in income tax benefit and a $155,000 decrease in provision for loan losses.

Net Interest Income. Net interest income increased $123,000, or 6.4%, to $2.1 million for the three months ended December 31, 2013 compared to $1.9 million for the three months ended December 31, 2012. The increase in net interest income was due to a $ 225,000 decrease in interest expense, partially offset by a $102,000 decrease in interest income. The decrease in interest expense was primarily due to the decrease in both the average balance and cost of funds for interest bearing deposits (the Bank's only interest-bearing liabilities), in particular certificates of deposit. The decline in interest earning assets was due to declines in the average balance of interest-earning assets, despite an increase in the yield on interest-earnings assets from period to period. Our interest rate spread for the three months ended December 31, 2013 increased 55 basis points to 2.72%, compared to 2.17% for the three month period ended December 31, 2012 and the net interest margin increased 50 basis points to 2.88% for the three months ended December 31, 2013 from 2.38% for the three months ended December 31, 2012. The relatively large increase in the net interest rate spread and margin when comparing periods was primarily due to the excess cash received from the oversubscription of the initial stock offering in the third quarter of last fiscal year that reduced the overall yield on interest earning assets in that period.

Interest and Dividend Revenue. Interest and dividend revenue decreased $102,000 to $2.5 million for the three months ended December 31, 2013 from $2.6 million for the three months ended December 31, 2012. The decrease resulted primarily from a $268,000 decrease in interest revenue on loans and a $24,000 decrease in interest revenue on federal funds sold and other bank deposits, partially offset by an increase of $190,000 in interest revenue on investment securities.

Interest on loans decreased $268,000, or 12.1%, to $1.9 million for the three months ended December 31, 2013, compared to $2.2 million for the three months ended December 31, 2012. The decrease in interest revenue on loans was primarily due to a $14.3 million decrease in the net average balance of loans from $162.6 million for the three months ended December 31, 2012 to $148.3 million for the three months ended December 31, 2013 due to the payoff of several larger commercial loans bearing higher rates of interest during the current year. This resulted in both the decrease in average balance and a 19 basis point decrease in the average yield on loans from 5.45% for the three months ended December 31, 2012 to 5.26% for the three months ended December 31, 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 $190,000 to $544,000 for the three months ended December 31, 2013 from $354,000 for the three months ended December 31, 2012. The increase resulted from a $52,000 increase in interest revenue on U.S. government agency and municipal bond securities and $138,000 increase in interest revenue on mortgage-backed securities. The increase in interest revenue on U.S. government agency securities and municipal bonds was primarily due to a $11.7 million increase in the average balance of these securities to $25.8 million, including $3.2 million in newly purchased municipal bonds, partially offset by a 15 basis point decrease in the average yield to 1.95% for the period ended December 31, 2013 compared to the same period last year. The increase in interest revenue from mortgage-backed securities was primarily due to a $5.0 million increase in the average balance on mortgage-backed securities to $86.6 million and a 55 basis point increase in the average yield to 1.94% for the period ended December 31, 2013 compared to the same period last year.

Interest revenue associated with federal funds sold and other bank deposits decreased $24,000, or 66.9%, to $12,000 for the three months ended December 31, 2013 from $35,000 for the three months ended December 31, 2012. The decrease is primarily attributable to the average balance of federal funds sold and other bank deposits decreasing $41.1 million compared to the same period last year as a result of funds received in the prior year associated with the oversubscribed stock offering that was completed in October 2012.

Interest Expense. Interest expense, consisting entirely of the cost of interest-bearing deposits, decreased $225,000, or 33.3%, to $451,000 for the three months ended December 31, 2013 from $676,000 for the three months ended December 31,


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2012. The decrease in the cost of interest-bearing deposits was due to a decrease of 26 basis points in the average rate paid on interest-bearing deposits to 0.79% for the three months ended December 31, 2013 from 1.05% for the three months ended December 31, 2012. The decrease in interest expense was also due to a $29.2 million, or 11.4%, decrease in the average balance of interest-bearing deposits from $256.7 million for the three months ended December 31, 2012 to $227.5 million for the three months ended December 31, 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 $30.2 million to $172.2 million at December 31, 2013 from $202.4 million at December 31, 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 average daily balances. Amortization of net deferred loan fees are included in interest revenue on loans and are insignificant. No tax-equivalent adjustments were made. Nonaccrual loans have been included in the table as loans carrying a zero yield.

                                                                 Three Months Ended December 31,
                                                                      (dollars in thousands)
                                                         2013                                       2012
                                          Average                      Yield/        Average                      Yield/
                                          Balance        Interest       Cost         Balance        Interest       Cost
Assets:
Cash and cash equivalents                $  24,734      $        9        0.15 %    $  65,844      $       33        0.20 %
Investment securities (2)                   25,788             126        1.95 %       14,114              74        2.10 %
Mortgage-backed securities                  86,596             420        1.94 %       81,619             283        1.39 %
Loans receivable, net (1)                  148,331           1,951        5.26 %      162,606           2,217        5.45 %

Total interest-earning assets              285,449           2,506        3.51 %      324,183           2,607        3.22 %
Noninterest-earning assets                  22,937                                     19,630

Total assets                             $ 308,386                                  $ 343,813


Liabilities and Shareholders' Equity:
Certificates of deposit                  $ 173,834      $      439        1.01 %    $ 205,208      $      657        1.28 %
Money Market                                28,959               9        0.12 %       27,989              14        0.20 %
Statement savings                           15,419               2        0.05 %       15,184               4        0.11 %
NOW accounts                                 9,243               1        0.04 %        8,291               1        0.05 %

Total interest-bearing deposits            227,455             451        0.79 %      256,672             676        1.05 %
Noninterest-bearing deposits                14,935                                     18,162
Other noninterest-bearing liabilities        2,018                                      2,121

Total liabilities                          244,408                                    276,955
Total shareholders' equity                  63,978                                     66,858

Total liabilities and shareholders'
equity                                   $ 308,386                                  $ 343,813


Net interest income                                     $    2,055                                 $    1,931
. . .
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