Orrstown Financial Services (ORRF) 8-K/A Completion of Acquisition or Disposition of Assets

Exhibit 99.1

Hamilton Bancorp, Inc., and Subsidiary

Financial Statements

March 31, 2019

Hamilton Bancorp, Inc., and Subsidiary

Index

Report of Independent Registered Public Accounting Firm	2
Consolidated Statements of Financial Condition	3
Consolidated Statements of Operations	4
Consolidated Statements of Comprehensive Income (Loss)	5
Consolidated Statements of Changes in Shareholders’ Equity	6
Consolidated Statements of Cash Flows	7
Notes to Consolidated Financial Statements	9

1

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Orrstown Financial Services, Inc.

as successor of Hamilton Bancorp, Inc.

Towson, Maryland

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated statements of financial condition of Hamilton Bancorp, Inc. and Subsidiary (the “Company”) as of March 31, 2019 and 2018 and the related consolidated statements of operations, comprehensive (loss) income, changes in shareholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2019 and 2018, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting policies.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits also included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement. We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company’s auditor since 2016.

/s/ Dixon Hughes Goodman LLP

Baltimore, Maryland

June 11, 2019

2

HAMILTON BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Financial Condition

March 31, 2019 and March 31, 2018

	March 31, 2019			March 31, 2018
Assets
Assets
Cash and due from banks	$	29,560,057		$	15,488,396
Federal funds sold		8,782,739			7,880,019
Cash and cash equivalents		38,342,796			23,368,415
Certificates of deposit held as investment		499,099			499,189
Securities available for sale, at fair value		62,517,441			75,404,136
Federal Home Loan Bank stock, at cost		2,657,600			3,122,400
Loans		365,419,255			390,420,885
Allowance for loan losses		(3,088,425	)		(2,821,903	)
Net loans and leases		362,330,830			387,598,982
Premises and equipment, net		3,676,725			3,945,825
Foreclosed real estate		335,009			457,778
Accrued interest receivable		1,457,579			1,468,382
Bank-owned life insurance		17,911,040			17,455,850
Income taxes refundable		5,622			40,000
Goodwill and other intangible assets		9,050,699			9,176,764
Other assets		1,766,437			2,995,741
Total Assets	$	500,550,877		$	525,533,462
Liabilities and Shareholders’ Equity
Liabilities
Noninterest-bearing deposits	$	26,585,256		$	29,557,943
Interest-bearing deposits		360,218,689			375,585,032
Total deposits		386,803,945			405,142,975
Borrowings		51,050,000			60,672,140
Advances by borrowers for taxes and insurance		1,725,584			1,962,665
Other liabilities		3,751,571			3,679,550
Total liabilities		443,331,100			471,457,330
Commitments and contingencies		—			—
Shareholders’ Equity
Common stock, $.01 par value, 100,000,000 shares authorized. Issued and outstanding: 3,410,983 shares at March 31, 2019 and 3,407,613 shares at March 31, 2018		34,110			34,076
Additional paid in capital		32,541,993			32,113,534
Retained earnings		27,206,418			25,920,490
Unearned ESOP shares		(1,925,560	)		(2,073,680	)
Accumulated other comprehensive loss		(637,184	)		(1,918,288	)
Total shareholders’ equity		57,219,777			54,076,132
Total Liabilities and Shareholders’ Equity	$	500,550,877		$	525,533,462

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

3

HAMILTON BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Operations

Years Ended March 31, 2019 and 2018

	2019		2018
Interest revenue
Loans, including fees	$	17,311,294	$	16,088,774
U.S. treasuries, government agencies and FHLB stock		215,100		188,600
Municipal and corporate bonds		345,927		420,737
Mortgage-backed securities		1,043,565		1,246,963
Federal funds sold and other bank deposits		513,541		134,542
Total interest revenue		19,429,427		18,079,616
Interest expense
Deposits		3,934,904		2,836,925
Borrowed funds		1,183,440		750,092
Total interest expense		5,118,344		3,587,017
Net interest income		14,311,083		14,492,599
Provision for loan losses		766,496		1,575,000
Net interest income after provision for loan losses		13,544,587		12,917,599
Noninterest revenue
Service charges		481,489		459,688
Loss on sale of investment securities		—		(2,354	)
Gain on sale of loans held for sale		34,482		—
Gain on sale of property and equipment		—		97,604
Earnings on bank-owned life insurance		455,190		484,030
Earnings on death benefit from bank-owned life insurance		—		834,610
Other		156,005		122,770
Total noninterest revenue		1,127,166		1,996,348
Noninterest expenses
Salaries		5,972,562		5,733,065
Employee benefits		1,487,692		1,535,442
Occupancy		1,037,552		1,045,589
Advertising		81,229		86,865
Furniture and equipment		355,028		343,624
Data processing		818,305		716,458
Legal services		193,702		491,900
Other professional services		414,458		851,660
Merger related expenses		812,956		—
Deposit insurance premiums		326,632		324,325
Foreclosed real estate expense and losses		121,065		44,197
Other operating		1,730,266		1,737,727
Total noninterest expense		13,351,447		12,910,852
Income before income taxes		1,320,306		2,003,095
Income tax expense		34,378		8,052,038
Net income (loss)	$	1,285,928	$	(6,048,942	)
Net income (loss) per common share:
Basic	$	0.40	$	(1.90	)
Diluted	$	0.40	$	(1.90	)

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

4

HAMILTON BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (Loss)

Years Ended March 31, 2019 and 2018

	2019			2018
Net income (loss)	$	1,285,928		$	(6,048,942	)
Other comprehensive income (loss):
Unrealized gain (loss) on investment securities available for sale		1,529,814			(678,270	)
Reclassification adjustment for realized loss on investment securities available for sale included in net income		—			2,354
Total unrealized gain (loss) on investment securities available for sale		1,529,814			(675,916	)
Unrealized (loss) gain on derivative transactions		(248,710	)		300,023
Income tax benefit relating to investment securities available for sale and derivative transactions		—			(104,353	)
Other comprehensive income (loss)		1,281,104			(271,540	)
Total comprehensive income (loss)	$	2,567,032		$	(6,320,482	)

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

5

HAMILTON BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity

Years Ended March 31, 2019 and 2018

	Common stock			Additional paid-in capital		Retained earnings			Unearned ESOP shares			Accumulated other comprehensive loss			Total shareholders’ equity
Balances at April 1, 2017	$	34,111		$	31,656,235	$	31,730,673		$	(2,221,800	)	$	(1,407,989	)	$	59,791,230
Net loss		—			—		(6,048,942	)		—			—			(6,048,942	)
Unrealized loss on available for sale securities, net of tax effect of $(156,640)		—			—		—			—			(519,276	)		(519,276	)
Unrealized gain on derivative transactions net of tax effect of $52,287		—			—		—			—			247,736			247,736
Reclassification of tax effect under ASU 2018-02							238,759			—			(238,759	)		—
Stock based compensation—options		—			229,569		—			—			—			229,569
Restricted stock—compensation and activity		(35	)		176,911		—			—			—			176,876
ESOP shares allocated for release		—			50,819		—			148,120			—			198,939
Balances at March 31, 2018	$	34,076		$	32,113,534	$	25,920,490		$	(2,073,680	)	$	(1,918,288	)	$	54,076,132
Net income		—			—		1,285,928			—			—			1,285,928
Unrealized gain on available for sale securities, net of tax effect of $-0-		—			—		—			—			1,529,814			1,529,814
Unrealized loss on derivative transactions, net of tax effect of $-0-		—			—		—			—			(248,710	)		(248,710	)
Stock based compensation—options		—			211,187		—			—			—			211,187
Restricted stock—compensation and activity		34			159,505		—			—			—			159,539
ESOP shares allocated for release		—			57,767		—			148,120			—			205,887
Balances at March 31, 2019	$	34,110		$	32,541,993	$	27,206,418		$	(1,925,560	)	$	(637,184	)	$	57,219,777

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

6

HAMILTON BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Years Ended March 31, 2019 and 2018

	2019			2018
Cash flows from operating activities
Interest received	$	19,946,777		$	18,587,764
Fees and commissions received		631,810			583,757
Interest paid		(5,522,468	)		(4,427,190	)
Cash paid to suppliers and employees		(10,817,139	)		(13,059,738	)
Origination of loans held for sale		(1,733,400	)		—
Proceeds from sale of loans held for sale		1,767,882			—
Income taxes paid, net of refunds received		—			(10,835	)
Net cash provided by operating activities		4,273,462			1,673,758
Cash flows from investing activities
Proceeds from sale of securities available for sale		—			11,608,699
Proceeds from maturing and called securities available for sale, including principal pay downs		15,781,118			15,124,739
Purchase of investment securities available for sale		(1,985,000	)		(1,208,990	)
Redemption of Federal Home Loan Bank stock		592,300			—
Purchase of Federal Home Loan Bank stock		(127,500	)		(1,102,200	)
Proceeds from Bank Owned Life Insurance death benefit		—			2,116,138
Loan principal repayments, net of loans originated		24,465,537			2,256,439
Loans purchased		—			(54,556,249	)
Purchase of premises and equipment		(63,665	)		(719,105	)
Proceeds from sale of premises and equipment		—			767,728
Proceeds from sale of foreclosed real estate		164,674			35,896
Net cash provided (used) by investing activities		38,827,464			(25,676,905	)
Cash flows from financing activities
Net (decrease) increase in
Deposits		(18,082,376	)		(7,295,252	)
Advances by borrowers for taxes and insurance		(237,081	)		94,555
Proceeds from borrowings		24,000,000			40,000,000
Payments of borrowings		(33,500,000	)		(15,027,250	)
Interest rate swap on FHLB borrowings		(248,710	)		300,023
Issuance of restricted stock		88			(35	)
Redemption of restricted stock		(58,466	)		(54,400	)
Net cash (used) provided by financing activities		(28,126,545	)		18,017,641
Net increase (decrease) in cash and cash equivalents		14,974,381			(5,985,506	)
Cash and cash equivalents at beginning of period		23,368,415			29,353,921
Cash and cash equivalents at end of period	$	38,342,796		$	23,368,415

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

7

HAMILTON BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Continued)

	2019			2018
Reconciliation of net income (loss) to net cash provided by operating activities
Net income (loss)	$	1,285,928		$	(6,048,942	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Amortization of premiums on certificates of deposit		90	��		91
Amortization of premiums on securities		620,390			822,270
Loss on sale of investment securities and certificates of deposit		—			2,354
(Gain) loss on sale of foreclosed real estate		(5,684	)		1,299
Write-down of foreclosed real estate		113,832			31,955
Gain on loans held for sale		(34,482	)		—
Loan discount accretion		(78,170	)		(225,587	)
Deposit premium amortization		(256,654	)		(417,547	)
Borrowing premium amortization		(122,140	)		(425,509	)
Core deposit intangible asset amortization		126,065			126,064
Premises and equipment depreciation and amortization		332,765			325,320
Gain on death benefit from bank-owned life insurance		—			(834,610	)
Gain on sale of premises and equipment		—			(97,604	)
Stock based compensation		429,104			460,880
Provision for loan losses		766,496			1,575,000
ESOP shares allocated for release		205,887			198,939
Decrease (increase) in
Accrued interest receivable		10,803			(158,302	)
Loans held for sale		34,482			—
Cash surrender value of life insurance		(455,190	)		(484,030	)
Income taxes refundable and deferred income taxes		34,378			8,041,203
Other assets		1,229,304			(1,074,989	)
(Decrease) increase in
Accrued interest payable		(25,330	)		2,883
Deferred loan origination fees		(35,763	)		69,676
Other liabilities		97,351			(217,056	)
Net cash provided by operating activities	$	4,273,462		$	1,673,758
Noncash investing activity
Real estate acquired through foreclosure	$	150,052		$	23,835

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

8

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

March 31, 2019

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 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 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.

9

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

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.

Reclassifications. There were no reclassifications to prior year amounts in order to conform to current period classifications.

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 derivatives and investment securities, and other than temporary impairment of investment securities.

Cash and Cash Equivalents. For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks with original maturities of less than 90 days, brokerage money market accounts, and federal funds sold. Generally, federal funds are sold as overnight investments.

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 March 31, 2019 and 2018 are 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.

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.

Federal Home Loan Bank Stock. Federal Home Loan Bank of Atlanta (the “FHLB”) stock is an equity interest in the FHLB, which does not have a readily determinable fair value for purposes of generally accepted accounting principles, because its ownership is restricted and it lacks a market. FHLB stock is carried at cost, which approximates fair value and can be sold back only at par value of $100 per share and only to the FHLB or another member institution. As a member of the FHLB, the Bank is required to purchase stock based on its total assets. Additional stock is purchased and redeemed based on the outstanding FHLB advances to the Bank. As of March 31, 2019 and 2018, the Company owned shares totaling $2,657,600 and $3,122,400, respectively.

10

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

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:

• Reduction of the stated interest rate;

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

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

• 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.

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

11

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

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. In addition, we also adjusted the environmental factors for both the acquired loan portfolio and the legacy loan portfolio which will be evaluated on their own merits so as to stand on their own characteristics. These changes which became effective as of 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.

Bank-Owned Life Insurance (BOLI). The Bank purchased single premium life insurance policies on certain employees of the Bank. The net cash surrender value of those policies is included in the accompanying statement of financial position. Appreciation in the value of the insurance policies is recognized as noninterest revenue and is nontaxable. Upon the death of an employee covered under one or more BOLI policies, the full amount of the insurance policy is paid-out to the Bank and the difference between the policy amount and the cash surrender value of the policy or policies is recognized as noninterest revenue. This income is also nontaxable.

Premises and Equipment. Land is carried at cost. Buildings, land improvements, leasehold improvements, and furniture and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the lease term or the useful lives of the improvements. Maintenance and normal repairs are charged to noninterest expense as incurred, while additions and improvements to buildings and furniture and equipment are capitalized. Gains and losses on disposition of assets are reflected in earnings.

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 a derivative contract is entered into and are 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.

12

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

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.

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.

Off-Balance-Sheet Credit-Related Financial Instruments. In the ordinary course of business, the Bank enters into commitments to extend credit, including commitments under standby letters of credit. Such financial instruments are recorded when they are funded or otherwise required to be recognized.

Advertising Costs. Advertising costs are expensed as incurred and included in non-interest expenses.

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.

13

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

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.

Subsequent Events. On May 1, 2019, the Company completed its sale to Orrstown Financial Services, Inc. (“Orrstown”), the parent company of Orrstown Bank located in Shippensburg, Pennsylvania pursuant to the Agreement and Plan of Merger dated October 23, 2018, by and between the Company and Orrstown. As a result of the merger, each shareholder of the Company received (1) cash payment equal to four dollars and ten cents ($4.10) and (2) 0.54 shares of Orrstown common stock for each share of Hamilton common stock owned. Immediately following the merger of the Company into Orrstown, Hamilton Bank was merged with and into Orrstown Bank, with Orrstown Bank as the surviving entity.

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 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. 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.

14

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 was evaluating this guidance to determine the impact adoption would have on its consolidated financial statements. Hamilton Bancorp was in the process of implementing a committee and had begun to gather loan information and consider acceptable methodologies to comply with this ASU. The plan was for the implementation team to meet periodically to discuss the latest developments and updates via webcasts, publications, and conferences. However, due to the merger with Orrstown effective May 1, 2019, we will not be exploring the impact of this guidance or entering into a contract with an outside vendor as originally planned to assist with implementing CECL.

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.

ASU 2016-02 was later updated under ASU 2018-11. The update was put in place to address stakeholders concerns regarding comparative reporting and separating components of a lease contract for lessors. For comparative reporting, entities were originally 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 currently has four leases for respective branches that will fall under this guidance. All leases relating to equipment are either 12 months or less and do not apply under this guidance. The Company is estimating it will have to record a ROU asset and liability approximating $1.3 million in correlation to its four branch leases under this guidance. For public entities, this guidance is effective for the first interim or annual period beginning after December 15, 2018. Early adoption is permitted.

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.

15

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 March 31, 2019 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 (see Fair Value Measurements – Footnote Disclosure #18]. 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.

ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220). ASU 2018-02 allows an entity to elect a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act that changed our federal income tax rate from 35% to 21%. The amount of that reclassification should include the effect of changes in the tax rate on the deferred tax amount in AOCI. The ASU requires an entity to state if an election to reclassify the tax effect to retained earnings is made along with the description of other income tax effects that are reclassified from AOCI. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years with early

16

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

adoption permitted. Hamilton Bancorp early adopted ASU 2018-02 in the last quarter of fiscal 2018. The change in accounting principal was accounted for as a cumulative effect adjustment to the balance sheet resulting in a reclassification of $238,759 from AOCI to retained earnings during the last quarter of fiscal 2018.

Note 3: Earnings per Share

Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. 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.

Both the basic and diluted earnings per share for the years ended March 31, 2019 and 2018 are summarized below:

	Year Ended March 31, 2019		Year Ended March 31, 2018
Net income (loss)	$	1,285,928	$	(6,048,942	)
Weighted average common shares outstanding—basic		3,211,962		3,192,011
Weighted average common shares outstanding—diluted		3,228,081		3,192,011
Income (loss) per common share—basic and diluted	$	0.40	$	(1.90	)
Anti-dilutive shares		212,611		175,177

During the year ended March 31, 2018, none of the common stock equivalents were dilutive due to the loss reported for that period.

Note 4: Cash and Due From Banks

Regulation D of the Federal Reserve Act requires that banks maintain reserve balances with the Federal Reserve Bank based principally on the type and amount of their deposits. During fiscal years 2019 and 2018, the Company maintained balances at the Federal Reserve (in addition to vault cash) to meet the reserve requirements, as well as balances to partially compensate for services. Additionally, the Company maintained balances with the Federal Home Loan Bank and other domestic correspondent financial institutions as partial compensation for services they provided to the Company. The Bank normally carries balances with other correspondent financial institutions that exceed the federally insured limit.

17

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

Note 5: Investment Securities Available for Sale

The amortized cost and fair value of securities at March 31, 2019 and 2018, is summarized as follows:

March 31, 2019	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
U.S. government agencies	$	744,186	$	—	$	6,479	$	737,707
Municipal bonds		11,785,808		—		340,720		11,445,088
Corporate bonds		2,000,000		—		36,324		1,963,676
Mortgage-backed securities		49,320,577		31,537		981,144		48,370,970
	$	63,850,571	$	31,537	$	1,364,667	$	62,517,441
March 31, 2018	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair 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 fiscal year ended March 31, 2019. Proceeds from sales of investment securities were $11,608,699 during the fiscal year ended March 31, 2018 with gains of $57,099 and losses of $59,455 for that period.

As of March 31, 2019 and 2018, all mortgage-backed securities are backed by U.S. Government- Sponsored Enterprises (GSE), except one private label mortgage-backed security that was acquired in the Fraternity acquisition in May 2016 with a book value of $37,106 and fair value of $37,636 as of March 31, 2019.

As of March 31, 2019 and 2018, the Company had pledged one security to the Federal Reserve Bank with a book value of $744,186 for both periods and a fair value of $737,707 and $723,032, respectively.

The amortized cost and estimated fair value of debt securities by contractual maturity at March 31, 2019 and 2018 follow. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.

18

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

	Available for Sale
	March 31, 2019				March 31, 2018
	Amortized cost		Fair value		Amortized cost		Fair value
Maturing
Within one year	$	—	$	—	$	2,009,160	$	1,995,625
Over one to five years		1,225,702		1,208,191		1,231,928		1,196,368
Over five to ten years		4,128,733		4,007,026		3,578,827		3,500,641
Over ten years		9,175,559		8,931,254		10,368,499		9,686,082
Mortgage-backed, in monthly installments		49,320,577		48,370,970		61,078,665		59,025,420
	$	63,850,571	$	62,517,441	$	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 March 31, 2019 and 2018.

	Less than 12 months				12 months or longer				Total
March 31, 2019	Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value
U.S. government agencies	$	—	$	—	$	6,479	$	737,707	$	6,479	$	737,707
Municipal bonds		—		—		340,720		11,445,088		340,720		11,445,088
Corporate bonds		—		—		36,324		1,963,676		36,324		1,963,676
Mortgage-backed securities		48,772		1,731,749		932,372		43,587,414		981,144		45,319,163
	$	48,772	$	1,731,749	$	1,315,895	$	57,733,885	$	1,364,667	$	59,465,634
	Less than 12 months				12 months or longer				Total
March 31, 2018	Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair 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.

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

19

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

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 must be recognized in earnings, with the remaining portion being recognized in shareholders’ equity as a component of other comprehensive income, net of deferred tax.

Note 6: Loans Receivable and Allowance for Loan Losses

Loans receivable at March 31, 2019 and March 31, 2018, consisted of the following:

	March 31, 2019											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)	$	81,160,366		$	64,716,589		$	145,876,955			40%	$	85,248,184		$	72,749,066		$	157,997,250			41%
Residential construction		4,911,612			—			4,911,612			1%		5,450,827			—			5,450,827			1%
Investor (3)		7,073,653			14,826,479			21,900,132			6%		9,275,031			17,460,809			26,735,840			7%
Commercial		108,392,592			7,583,882			115,976,474			32%		100,403,769			11,762,485			112,166,254			29%
Commercial construction		689,762			937,250			1,627,012			1%		5,763,784			1,352,019			7,115,803			2%
Total real estate loans		202,227,985			88,064,200			290,292,185			80%		206,141,595			103,324,379			309,465,974			80%
Commercial business (4)		36,293,766			1,656,594			37,950,360			10%		38,302,739			1,841,226			40,143,965			10%
Home equity loans		14,609,391			4,702,903			19,312,294			5%		13,956,327			6,039,462			19,995,789			5%
Consumer (5)		15,904,267			646,570			16,550,837			5%		18,849,448			766,063			19,615,511			5%
Total Loans		269,035,409			95,070,267			364,105,676			100%		277,250,109			111,971,130			389,221,239			100%
Net deferred loan origination fees and costs		(176,983	)		—			(176,983	)				(212,746	)		—			(212,746	)
Loan premium (discount)		1,649,216			(158,658	)		1,490,562					1,922,428			(510,036	)		1,412,392
	$	270,507,642		$	94,911,609		$	365,419,255				$	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 purchased loan pools, respectively.

(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 last 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.

20

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 tables detail activity in the allowance for loan losses by portfolio segment for the fiscal years ended March 31, 2019 and 2018. 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.

	March 31, 2019
	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		(35,124	)		(41,020	)		(31,320	)		—			(506,353	)		—		(31,294	)		—		(645,111	)
Recoveries		61,757			33,674			31,320			—			12,515			—		5,871			—		145,137
Provision for credit losses		105,156			134,632			64,247			(29,816	)		468,452			9,548		8,204			6,073		766,496
Ending balance	$	740,512		$	178,976		$	1,317,630		$	3,614		$	648,596		$	79,007	$	114,017		$	6,073	$	3,088,425
Allowance allocated to:
Legacy Loans:
Individually evaluated for impairment	$	260,539		$	—		$	—		$	—		$	1,650		$	—	$	—		$	—	$	262,189
Collectively evaluated for impairment		273,275			47,598			1,269,177			3,311			641,679			59,574		113,935			6,073		2,414,622
Acquired Loans:
Individually evaluated for impairment	$	—		$	1,392		$	—		$	—		$	—		$	—	$	—		$	—	$	1,392
Collectively evaluated for impairment		206,698			129,986			48,453			303			5,267			19,433		82			—		410,222

21

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

	March 31, 2018
	Residential Real Estate			Investor Real Estate			Commercial Real Estate			Commercial Construction		Commercial Business			Home Equity			Consumer			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		(19,868	)		(315,663	)		(244,014	)		—		(378,694	)		—			(17,013	)		(975,252	)
Recoveries		3,937			18,129			—			—		770			—			4,504			27,340
Provision for credit losses		71,115			313,949			121,503			24,399		902,445			(612	)		142,201			1,575,000
Ending balance	$	608,723		$	51,690		$	1,253,383		$	33,430	$	673,982		$	69,459		$	131,236		$	2,821,903
Allowance allocated to:
Legacy Loans:
Individually evaluated for impairment	$	266,256		$	—		$	—		$	—	$	—		$	—		$	—		$	266,256
Collectively evaluated for impairment		342,467			51,690			1,253,383			33,430		673,982			69,459			131,236			2,555,647
Acquired Loans:
Individually evaluated for impairment	$	—		$	—		$	—		$	—	$	—		$	—		$	—		$	—
Collectively evaluated for impairment		—			—			—			—		—			—			—			—

Our recorded investment in loans at March 31, 2019 and 2018 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:

	March 31, 2019
	Residential Real Estate		Investor Real Estate		Commercial Real Estate		Commercial Construction		Commercial Business		Home Equity		Consumer		Total
Loans:
Legacy Loans:
Individually evaluated for impairment	$	1,733,537	$	—	$	4,071,867	$	—	$	929,240	$	5,834	$	57,600	$	6,798,078
Collectively evaluated for impairment		84,338,441		7,073,653		104,320,725		689,762		35,364,526		14,603,557		15,846,667		262,237,331
Ending balance	$	86,071,978	$	7,073,653	$	108,392,592	$	689,762	$	36,293,766	$	14,609,391	$	15,904,267	$	269,035,409
Acquired Loans:
Individually evaluated for impairment	$	281,721	$	255,847	$	—	$	—	$	—	$	—	$	52,874	$	590,442
Collectively evaluated for impairment		64,434,868		14,570,632		7,583,882		937,250		1,656,594		4,702,903		593,696		94,479,825
Ending balance	$	64,716,589	$	14,826,479	$	7,583,882	$	937,250	$	1,656,594	$	4,702,903	$	646,570	$	95,070,267

22

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

	March 31, 2018
	Residential Real Estate		Investor Real Estate		Commercial Real Estate		Commercial Construction		Commercial Business		Home Equity		Consumer		Total
Loans:
Legacy Loans:
Individually evaluated for impairment	$	1,827,040	$	60,949	$	4,356,264	$	—	$	795,410	$	20,595	$	34,266	$	7,094,524
Collectively evaluated for impairment		88,871,971		9,214,082		96,047,505		5,763,784		37,507,329		13,935,732		18,815,182		270,155,585
Ending balance	$	90,699,011	$	9,275,031	$	100,403,769	$	5,763,784	$	38,302,739	$	13,956,327	$	18,849,448	$	277,250,109
Acquired Loans:
Individually evaluated for impairment	$	922,252	$	444,254	$	198,938	$	—	$	—	$	—	$	60,011	$	1,625,455
Collectively evaluated for impairment		71,826,814		17,016,555		11,563,547		1,352,019		1,841,226		6,039,462		706,052		110,345,675
Ending balance	$	72,749,066	$	17,460,809	$	11,762,485	$	1,352,019	$	1,841,226	$	6,039,462	$	766,063	$	111,971,130

23

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

Past due loans, segregated by age and class of loans, as March 31, 2019 and 2018, were as follows:

	March 31, 2019						March 31, 2018
	Legacy		Acquired		Total		Legacy		Acquired		Total
Current	$	263,440,172	$	94,377,045	$	357,817,217	$	270,807,643	$	109,972,473	$	380,780,116
Accruing past due loans:
30-59 days past due:
Real estate loans:
Residential		91,690		—		91,690		63,618		689,364		752,982
Investor		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Commercial construction		—		—		—		—		—		—
Commercial business		152,488		—		152,488		135,502		—		135,502
Home equity loans		—		—		—		—		—		—
Consumer		60,074		87,650		147,724		148,876		—		148,876
Total 30-59 days past due		304,252		87,650		391,902		347,996		689,364		1,037,360
60-89 days past due:
Real estate loans:
Residential		102,269		—		102,269		70,291		—		70,291
Investor		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Commercial construction		—		158,879		158,879		—		—		—
Commercial business		162,080		—		162,080		134,524		—		134,524
Home equity loans		—		—		—		—		—		—
Consumer		—		—		—		28,300		—		28,300
Total 60-89 days past due		264,349		158,879		423,228		233,115		—		233,115
90 or more days past due:
Real estate loans:
Residential		—		—		—		—		—		—
Investor		220,639		47,005		267,644		734,818		471,423		1,206,241
Commercial		—		—		—		—		—		—
Commercial construction		—		—		—		—		—		—
Commercial business		—		—		—		—		—		—
Home equity loans		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total 90 or more days past due		220,639		47,005		267,644		734,818		471,423		1,206,241
Total accruing past due loans		789,240		293,534		1,082,774		1,315,929		1,160,787		2,476,716
Non-accruing loans:
Real estate loans:
Residential		344,699		264,100		608,799		526,584		338,060		864,644
Investor		—		135,492		135,492		60,949		300,872		361,821
Commercial		4,071,867		—		4,071,867		4,356,264		198,938		4,555,202
Commercial construction		—		—		—		—		—		—
Commercial business		331,831		—		331,831		165,285		—		165,285
Home equity loans		—		96		96		12,605		—		12,605
Consumer		57,600		—		57,600		4,850		—		4,850
Non-accruing loans:		4,805,997		399,688		5,205,685		5,126,537		837,870		5,964,407
Total Loans	$	269,035,409	$	95,070,267	$	364,105,676	$	277,250,109	$	111,971,130	$	389,221,239
Nonaccrual interest not accrued:
Real estate loans:
Residential	$	13,430	$	52,008	$	65,438	$	8,250	$	53,120	$	61,370
Investor		—		18,454		18,454		8,513		15,604		24,117
Commercial		715,195		—		715,195		294,619		—		294,619
Commercial construction		—		—		—		—		—		—
Commercial business		33,636		—		33,636		12,891		—		12,891
Home equity loans		14		—		14		436		—		436
Consumer		3,104		—		3,104		385		—		385
Total nonaccrual interest not accrued	$	765,379	$	70,462	$	835,841	$	325,094	$	68,724	$	393,818

24

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

Impaired Loans as of March 31, 2019 and 2018 were as follows:

	Impaired Loans at March 31, 2019
Legacy:	Unpaid Contractual Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Real estate loans:
Residential	$	612,233	$	428,970	$	—	$	438,448	$	7,581
Investor		2,902		—		—		353		1,332
Commercial		6,357,777		4,071,867		—		4,140,832		53,278
Commercial construction		—		—		—		—		—
Commercial business		1,672,616		878,090		—		1,100,757		67,311
Home equity loans		32,728		5,834		—		6,436		189
Consumer		86,429		57,600		—		64,648		—
With an allowance recorded:
Real estate loans:
Residential		1,327,147		1,304,567		260,539		1,316,104		37,854
Investor		—		—		—		—
Commercial		—		—		—		—		—
Commercial construction		—		—		—		—		—
Commercial business		172,842		51,150		1,650		79,785		—
Home equity loans		—		—		—		—		—
Consumer		—		—		—		—		—
Total legacy impaired		10,264,674		6,798,078		262,189		7,147,363		167,545
Acquired (1):
With no related allowance recorded:
Real estate loans:
Residential		298,928		281,721		—		282,169		1,727
Investor		279,843		195,865		—		195,584		12,981
Commercial		—		—		—		—		—
Commercial construction		—		—		—		—		—
Commercial business		—		—		—		—		—
Home equity loans		37,615		—		—		—		1,104
Consumer		86,187		52,874		—		54,756		3,789
With an allowance recorded:
Real estate loans:
Residential		—		—		—		—		—
Investor		119,421		59,982		1,392		59,472		—
Commercial		—		—		—		—		—
Commercial construction		—		—		—		—		—
Commercial business		—		—		—		—		—
Home equity loans		—		—		—		—		—
Consumer		—		—		—		—		—
Total acquired impaired		821,994		590,442		1,392		591,981		19,601
Total impaired	$	11,086,668	$	7,388,520	$	263,581	$	7,739,344	$	187,146

(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.

25

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

	Impaired Loans at March 31, 2018
Legacy:	Unpaid Contractual Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
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.

26

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

The following table documents changes in the carrying amount of acquired impaired loans (Purchase Credit Impaired of “PCI”) for the years ended March 31, along with the outstanding balance at the end of the period:

	2019			2018
Recorded investment at beginning of period	$	1,021,424		$	1,341,935
Accretion		31,895			27,744
Reductions for payments		(672,577	)		(348,255	)
Recorded investment at end of period	$	380,742		$	1,021,424
Outstanding principal balance at end of period	$	446,959		$	1,274,022

A summary of changes in the accretable yield for PCI loans for the years ended March 31, is as follows:

	2019			2018
Accretable yield, beginning of period	$	31,895		$	59,639
Accretion		(31,895	)		(27,744	)
Reclassification from nonaccretable difference		—			—
Accretable yield, end of period	$	—		$	31,895

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 March 31, 2019 and 2018 follows:

March 31, 2019	Number of contracts		Performing		Nonperforming		Total
Real estate loans:
Residential		16	$	1,286,569	$	208,636	$	1,495,205
Investor		—		—		—		—
Commercial		2		—		1,195,421		1,195,421
Commercial construction		—		—		—		—
Commercial business		1		597,409		—		597,409
Home equity loans		—		—		—		—
Consumer		—		—		—		—
		19	$	1,883,978	$	1,404,057	$	3,288,035

27

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

March 31, 2018	Number of 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 years ended March 31, 2019 and 2018. The amount shown reflects the outstanding loan balance at the time of the modification.

	Loans Modified as a TDR for the fiscal year ended
	March 31, 2019				March 31, 2018
Troubled Debt Restructurings	Number of contracts		Outstanding recorded investment		Number of contracts		Outstanding recorded investment
Real estate loans:
Residential		1	$	20,565		3	$	52,363

There are no TDRs that defaulted over the twelve-month period ended March 31, 2019 and 2018. 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. There are no commitments to extend credit under existing TDRs as of March 31, 2019.

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.

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.

28

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

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.

The following tables present the March 31, 2019 and 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 March 31, 2019 or 2018.

29

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

	March 31, 2019						March 31, 2018
	LEGACY		ACQUIRED		TOTAL		LEGACY		ACQUIRED		TOTAL
Risk Rating:
Rating - Pass:
Real estate loans:
Residential	$	83,317,696	$	63,366,329	$	146,684,025	$	87,863,805	$	70,901,293	$	158,765,098
Investor		7,073,653		14,302,832		21,376,485		9,214,082		16,719,346		25,933,428
Commercial		103,857,113		7,583,882		111,440,995		92,955,370		11,563,547		104,518,917
Commercial construction		689,762		937,250		1,627,012		5,763,784		1,352,019		7,115,803
Commercial Business		34,135,406		1,656,594		35,792,000		37,978,293		1,841,226		39,819,519
Home Equity		14,603,558		4,598,050		19,201,608		13,935,732		5,928,787		19,864,519
Consumer		15,806,059		618,571		16,424,630		18,733,489		733,669		19,467,158
Total Pass		259,483,247		93,063,508		352,546,755		266,444,555		109,039,887		375,484,442
Rating - Special Mention:
Real estate loans:
Residential		2,307,630		1,068,539		3,376,169		2,365,652		925,521		3,291,173
Investor		—		267,799		267,799		—		297,209		297,209
Commercial		463,612		—		463,612		3,092,135		—		3,092,135
Commercial construction		—		—		—		—		—		—
Commercial Business		1,900,498		—		1,900,498		134,524		—		134,524
Home Equity		—		104,853		104,853		—		110,675		110,675
Consumer		40,608		—		40,608		96,474		—		96,474
Total Special Mention		4,712,348		1,441,191		6,153,539		5,688,785		1,333,405		7,022,190
Rating - Substandard:
Real estate loans:
Residential		446,652		281,721		728,373		469,554		922,252		1,391,806
Investor		—		255,848		255,848		60,949		444,254		505,203
Commercial		4,071,867		—		4,071,867		4,356,264		198,938		4,555,202
Commercial construction		—		—		—		—		—		—
Commercial Business		257,862		—		257,862		189,922		—		189,922
Home Equity		5,833		—		5,833		20,595		—		20,595
Consumer		57,600		27,999		85,599		19,485		32,394		51,879
Total - Substandard		4,839,814		565,568		5,405,382		5,116,769		1,597,838		6,714,607
Rating - Doubtful		—		—		—		—		—		—
Rating - Loss		—		—		—		—		—		—
TOTAL LOANS	$	269,035,409	$	95,070,267	$	364,105,676	$	277,250,109	$	111,971,130	$	389,221,239

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.

30

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

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 March 31, 2019 and 2018 totaled $56,500 and $50,200, respectively. At March 31, 2019, 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 March 31, 2019 and 2018:

	March 31, 2019		March 31, 2018
Unused commercial lines of credit	$	13,609,929	$	9,187,810
Unused home equity lines of credit		23,377,072		22,560,376
Unused consumer lines of credit		77,829		29,331
Residential construction loan commitments		8,316,672		4,234,076
Commercial construction loan commitments		2,061,541		8,968,416
Home equity loan commitments		100,000		389,600
Commercial loan commitments		2,454,945		5,125,000
Standby letter of credit		762,183		250,224

Note 7: Related Party Transactions

The officers and directors of the Bank enter into loan transactions with the Bank in the ordinary course of business. The terms of these transactions are similar to the terms provided to other borrowers entering into similar loan transactions. All related party loans are subject to review by management and the board of directors.

Activity in these loans during the years ended March 31, 2019 and 2018 was as follows:

	2019			2018
Balance—Beginning of year	$	129,954		$	345,314
New loans and lines of credit advances		31,800			1,600
Principal repayments		(40,662	)		(216,960	)
Balance—End of year	$	121,092		$	129,954

At March 31, 2019 there were $31,000 of new loans made to related parties during the fiscal year and $5,600 of credit available under certain lines of credit. At March 31, 2018 there were no new loans made to related parties during the fiscal year and $6,150 of credit available under lines of credit. Deposits from officers and directors of the Bank totaled $1,070,507 and $1,033,558 at March 31, 2019 and 2018, respectively.

31

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

Note 8: Premises and Equipment

A summary of premises and equipment and the related depreciation and amortization as of March 31, is as follows:

	Estimated Useful Life		2019			2018
Land			$	1,064,046		$	1,064,046
Office buildings and improvements		3 - 39 years		3,902,037			3,899,584
Furniture and equipment		3 - 7 years		2,781,552			2,711,893
Automobiles		5 years		43,505			43,505
Assets not in service				—			8,448
				7,791,140			7,727,476
Accumulated depreciation and amortization				(4,114,415	)		(3,781,651	)
Net premises and equipment			$	3,676,725		$	3,945,825
Depreciation and amortization expense			$	332,765		$	325,320

At March 31, 2019, the Bank had four operating leases that include three branches acquired from Fraternity and the administrative office lease in Baltimore County. The administrative office lease was renewed under a five-year option in December 2016, while two of the acquired branches renewed leases due to relocation during fiscal 2018. Each of the lease agreements have options to renew at the end of the lease term. Rental expense under the four leases for the year ended March 31, 2019 was $521,912 compared to lease expense of $511,884 for March 31, 2018. The minimum future rental commitment under the current lease agreements at March 31, 2019 is as follows:

Year ending March 31,	Payments
2020		543,727
2021		480,779
2022		353,841
2023		75,926
2024		32,217
Thereafter		—
	$	1,486,490

Note 9: Goodwill and Other Intangible Assets

The Company’s intangible assets (goodwill and core deposit intangible) at March 31, 2019 consists of assets recorded in December 2009 associated with the acquisition of a branch office in Pasadena, Maryland and the acquisition of Fairmount and Fraternity in September 2015 and May 2016, respectively. Only the goodwill related to the branch office acquisition in the amount of $2.7 million is deductible for tax purposes. We conducted our annual impairment test of goodwill in the fourth quarter of fiscal 2019 utilizing Company information as of December 31, 2018. Based upon the impairment tests performed as of December 31, 2018, the fair values exceeded the carrying values of our only reporting unit. As a result, no impairment to goodwill was recorded for the period ended March 31, 2019. The core deposit intangible asset is being amortized straight-line over a life of eight years.

32

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

The following table presents the changes in net book value of intangible assets for the years ended March 31, 2019 and 2018:

	Goodwill		Core deposit intangible
Balance April 1, 2017	$	8,563,530	$	739,298
Amortization		—		(126,064	)
Balance March 31, 2018		8,563,530		613,234
Amortization		—		(126,065	)
Balance March 31, 2019	$	8,563,530	$	487,169

At March 31, 2019, future expected annual amortization associated with the core deposit intangible is as follows:

Year ending March 31,	Amount
2020		123,737
2021		98,070
2022		98,070
2023		98,070
2024		64,180
2025		5,042
	$	487,169

Note 10: Derivative – Interest Rate Swap Agreements

The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. The Company posted $767,000 and $751,000 under collateral arrangements as of March 31, 2019 and 2018, respectively, to satisfy collateral requirements associated with the risk exposure associated with all interest rate swap agreements.

Interest Rate SWAPS Designated as Cash Flow Hedges

During fiscal 2017, the Company entered into several interest rate swaps that were designated as cash flow hedges. The interest rate swaps have notional amounts totaling $11.6 million as of March 31, 2019 and were designated as cash flow hedges of certain Federal Home Loan Bank advances. The purpose of the cash flow hedges is to match-fund longer- term assets with longer-term borrowings to reduce potential interest rate risk and cost by swapping a variable rate borrowing for a fixed rate borrowing. The aggregate fair value of the swaps is recorded in other assets (liabilities) with changes in fair value associated with the effective portion recorded in other comprehensive income (loss) and the ineffective portion recorded in other non-interest income. The cash flow hedges were determined to be ineffective during the quarter ended September 30, 2017. As such, a loss of $17,060 and a gain of $1,075 of ineffectiveness has been reported in noninterest revenue for the periods ending March 31, 2019 and 2018, respectively.

33

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

Summary information about the interest-rate swaps designated as cash flow hedges as of year-end is as follows:

Interest Rate Swap	Notional Amount		Effective Start Date	Maturity Date	Pay Fixed Rate		Receive Floating Rate
FHLB Advance Swap 1	$	1,850,000	March 9, 2017	March 9, 2022		2.24%	3-Month LIBOR
FHLB Advance Swap 2		1,850,000	March 9, 2017	March 9, 2024		2.41%	3-Month LIBOR
FHLB Advance Swap 3		1,850,000	March 9, 2017	March 9, 2027		2.57%	3-Month LIBOR
FHLB Advance Swap 4		2,000,000	March 29, 2017	March 29, 2022		2.08%	3-Month LIBOR
FHLB Advance Swap 5		2,000,000	March 29, 2017	March 29, 2024		2.24%	3-Month LIBOR
FHLB Advance Swap 6		2,000,000	March 29, 2017	March 29, 2027		2.40%	3-Month LIBOR
Total Notional Amount	$	11,550,000

Interest expense recorded on the swap transactions totaled $4,177 and $110,926 for the fiscal years ending March 31, 2019 and 2018 and is reported as a component of interest expense relating to borrowed funds.

The following table reflects cash flow hedges included in the Consolidated Statements of Financial Condition as of March 31, 2019 and 2018:

	March 31, 2019				March 31, 2018
	Notional Amount		Fair Value		Notional Amount		Fair Value
Included in assets:
Interest rate swaps related to FHLB Advances					$	11,550,000	$	217,464
Included in liabilities:
Interest rate swaps related to FHLB Advances	$	11,550,000	$	48,305

The following tables present the net gains (losses) recorded in accumulated other comprehensive income (loss) and the Consolidated Statements of Operations relating to the cash flow derivative instruments for the fiscal years ended March 31, 2019 and 2018:

	Fiscal Year Ended March 31, 2019
	Amount of Gain (Loss) Recognized in OCI (Effective Portion)			Amount of Gain (Loss) Reclassified from OCI to Interest Income		Amount of Gain (Loss) Recognized in Other Noninterest Income (Ineffective Portion)
Interest Rate Contracts	$	(248,710	)	$	—	$	(17,060	)
	Fiscal Year Ended March 31, 2018
	Amount of Gain (Loss) Recognized in OCI (Effective Portion)			Amount of Gain (Loss) Reclassified from OCI to Interest Income		Amount of Gain (Loss) Recognized in Other Noninterest Income (Ineffective Portion)
Interest Rate Contracts	$	300,023		$	—	$	1,075

34

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

Interest Rate SWAPS Designated as Fair Value Hedges

The derivative position relates to a transaction in which the Bank entered into an interest rate swap with another financial institution using a fixed rate commercial real estate loan as an offset. The Bank agrees to pay the other financial institution a fixed interest rate on a notional amount based upon the commercial real estate loan and in return receive a variable interest rate on the same notional amount. This transaction allows the Bank to effectively convert a fixed rate loan to a variable rate. Because the terms of the swap with the other financial institution and the commercial real estate loan offset each other, with the only difference being credit risk associated with the loan, changes in the fair value of the underlying derivative contract and the commercial real estate loan are not materially different and do not significantly impact the Bank’s results of operations.

During the second quarter of fiscal 2016, the Company entered into the interest rate swap agreement with a $3.3 million notional amount to convert a fixed rate commercial real estate loan at 3.99% into a variable rate for a term of approximately 10 years. The notional amount of the interest rate swap and the offsetting commercial real estate loan were $3.0 and $3.1 million at March 31, 2019 and 2018, respectively. The derivative is designated as a fair value hedge.

Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. The Bank’s exposure is limited to the replacement value of the contract rather than the notional amount, principal, or contract amount. There are provisions in the agreement with the counterparty that allow for certain unsecured credit exposure up to an agreed threshold. Exposures in excess of the agreed threshold are collateralized. In addition, the Bank minimizes credit risk through credit approvals, limits, and monitoring procedures.

The fair value hedge is summarized below:

	March 31, 2019						March 31, 2018
	Notional Amount		Principal Amount		Fair Value		Notional Amount		Principal Amount		Fair Value
Included in Loans and Leases:
Commercial real estate loan	$	—	$	3,005,312	$	3,010,057	$	—	$	3,091,892	$	3,022,744
Included in Other Assets:
Interest Rate Swap	$	—	$	—	$	—	$	3,091,892		—	$	69,148
Included in Other Liabilities:
Interest Rate Swap	$	3,005,312		—	$	4,745	$	—	$	—	$	—

No gain or loss was recognized in earnings for the years ended March 31, 2019 and 2018 related to the interest rate swap due to the fact the gain or increase in the fair value of the commercial real estate was offset by the loss or decrease in the fair value of interest rate swap.

35

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

Note 11: Deposits

The following table details the composition of deposits and the related percentage mix of total deposits, respectively:

	March 31, 2019					March 31, 2018
	Amount		% of Total			Amount		% of Total
Savings	$	43,784,453		11	%	$	42,499,381		11	%
Noninterest-bearing checking		26,585,256		7	%		29,557,943		7	%
Interest-bearing checking		27,669,399		7	%		27,219,285		7	%
Money market accounts		49,032,547		13	%		58,466,228		14	%
Time deposits		239,577,419		62	%		246,988,613		61	%
	$	386,649,074		100	%	$	404,731,450		100	%
Premium on deposits assumed		154,871					411,525
Total deposits	$	386,803,945				$	405,142,975

The aggregate amount of time deposits in denominations of $250,000 or more is $19,912,732 and $20,633,911 at March 31, 2019 and 2018, respectively.

A schedule of maturity of time deposits at March 31 is as follows:

Maturity period	2019		2018
Within one year	$	110,582,815	$	125,075,179
Over one year through two years		78,176,757		64,229,103
Over two years through three years		27,611,441		26,460,307
Over three years through four years		12,293,918		18,157,709
Over four years through five years		10,912,488		13,066,315
Greater than five years		—		—
	$	239,577,419	$	246,988,613

Note 12: Federal Home Loan Bank Advances and Lines of Credit

The Bank may borrow up to $5,000,000 from a correspondent bank under a secured federal funds line of credit and $1,000,000 under an unsecured federal funds line of credit. The Bank would be required to pledge investment securities to draw upon the secured line of credit. There were no borrowings under these lines of credit at March 31, 2019 and 2018. The Bank also maintained a note payable on an automobile purchased during fiscal 2017. The original amount of the note was $28,805 with an interest rate of 1.95% for 36 months. The note was paid-off in January 2018.

Borrowings consist of advances from the Federal Home Loan Bank (FHLB). The Bank may borrow up to 25 percent of its assets under a line of credit agreement with the FHLB. Advances under the line of credit are secured by certain loans owned by the Bank. As of March 31, 2019 and 2018, the Bank had $72.7 million and $68.3 million, respectively, of available credit from the FHLB. Advances are limited by the balance of loans available for pledge. The amount of loans that were deemed eligible to pledge as collateral totaled $110.9 million at March 31, 2019 and $127.1 million at March 31, 2018. As a condition of obtaining the line of credit from the FHLB, the FHLB also requires the Bank purchase shares of capital stock in the FHLB. Information relating to borrowings at March 31, 2019 and 2018 is presented below.

36

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

	March 31, 2019							March 31, 2018
	Amount		Rate			Maturity Date		Amount		Rate			Maturity Date
FHLB advance (1)	$	5,550,000		2.58	%		6/10/2019	$	5,550,000		1.84	%		6/11/2018
FHLB advance (2)		6,000,000		2.58	%		7/1/2019		6,000,000		1.90	%		6/29/2018
FHLB advance		3,000,000		1.59	%		8/26/2019		1,000,000		2.60	%		7/2/2018
FHLB advance		3,000,000		2.67	%		8/26/2019		1,000,000		3.05	%		7/3/2018
FHLB advance		1,500,000		1.95	%		11/25/2019		5,000,000		3.94	%		7/23/2018
FHLB advance		3,000,000		2.31	%		2/3/2020		1,000,000		1.74	%		7/31/2018
FHLB advance		1,000,000		2.86	%		8/4/2020		1,000,000		1.40	%		8/21/2018
FHLB advance		2,000,000		2.56	%		8/27/2020		4,000,000		1.94	%		8/27/2018
FHLB advance		1,000,000		2.15	%		11/30/2020		3,000,000		1.41	%		8/27/2018
FHLB advance		2,000,000		2.28	%		12/28/2020		5,000,000		3.38	%		9/19/2018
FHLB advance		2,000,000		2.49	%		2/1/2021		1,000,000		2.60	%		10/2/2018
FHLB advance		3,000,000		2.93	%		7/26/2021		1,000,000		1.95	%		12/31/2018
FHLB advance		2,000,000		3.01	%		8/4/2021		3,000,000		1.38	%		7/31/2019
FHLB advance		1,000,000		2.88	%		8/23/2021		3,000,000		1.96	%		8/26/2019
FHLB advance		3,000,000		1.48	%		8/25/2021		3,000,000		1.59	%		8/26/2019
FHLB advance		2,000,000		2.68	%		8/27/2021		3,000,000		1.42	%		8/26/2019
FHLB advance		3,000,000		2.79	%		8/29/2022		1,500,000		1.95	%		11/25/2019
FHLB advance		2,000,000		3.14	%		9/19/2022		1,500,000		1.78	%		11/27/2019
FHLB advance		3,000,000		2.70	%		8/28/2023		3,000,000		2.31	%		2/3/2020
FHLB advance		2,000,000		3.20	%		9/19/2023		1,000,000		2.15	%		11/30/2020
FHLB advance		—							2,000,000		2.28	%		12/28/2020
FHLB advance		—							2,000,000		2.49	%		2/1/2021
FHLB advance		—							3,000,000		1.48	%		8/25/2021
		51,050,000							60,550,000
Premium on FHLB advances assumed		—							122,140
Total borrowings	$	51,050,000						$	60,672,140

(1)  - FHLB Advance is tied to three derivative cash flow hedges in increments of $1.85 million each. The three individual cash flow hedges are for an original term of five, seven and ten years, respectively and are tied to the 3-month LIBOR rate. In order for the cash flow hedges to remain effective, the corresponding FHLB Advance will have to be renewed every three months until the respective cash flow hedge matures.

(2)  - FHLB Advance is tied to three derivative cash flow hedges in increments of $2.0 million each. The three individual cash flow hedges are for an original term of five, seven and ten years, respectively and are tied to the 3-month LIBOR rate. In order for the cash flow hedges to remain effective, the corresponding FHLB Advance will have to be renewed every three months until the respective cash flow hedge matures.

Note 13: Income Taxes

The provisions for income taxes for the years ended March 31, 2019 and 2018 consist of the following components:

	Year Ended March 31,
	2019		2018
Tax expense (benefit):
Current:
Federal	$	34,378	$	(22,566	)
State		—		(6,599	)
Deferred tax		—		8,081,203
Total tax expense	$	34,378	$	8,052,038

37

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

A reconciliation of the provision for taxes on income from the statutory federal income tax rate to the effective income tax rates follows:

	Year Ended March 31,
	2019			2018
Tax at statutory federal income tax rate	$	277,264		$	615,952
Tax effect of:
Tax-exempt income		(134,068	)		(491,456	)
State income taxes, net of federal impact		94,598			42,442
Valuation allowance on income tax benefits		(442,176	)		5,790,102
Impact of the Tax Act		—			2,318,118
Nondeductible expenses and other		208,353			55,397
Other		30,407			(278,517	)
Income tax expense (benefit)	$	34,378		$	8,052,038

The following is a summary of the tax effects of the temporary differences and tax attributes between financial and income tax accounting that give rise to deferred tax assets and deferred tax liabilities as of March 31:

Deferred tax assets:	2019			2018
Allowance for loan losses	$	842,292		$	627,297
Nonaccrual interest		276,985			219,172
Deferred compensation		520,077			547,968
Foreclosed real estate write down and holding costs		194,297			162,973
Deferred loan costs		24,808			34,870
Capital loss carryforward		15,839			—
Charitable contribution carryforward		11,955			28,272
Net operating loss carryforward		2,766,624			3,227,274
Stock based payment awards		89,424			66,968
Unrealized loss on investment securities available for sale		353,552			728,266
AMT credit carryover		279,398			245,260
Acquisition activity		267,127			510,506
Other		54,181			39,692
		5,696,559			6,438,518
Valuation allowance on deferred tax asset		(5,044,625	)		(5,790,102	)
		651,934			648,416
Deferred tax liabilities:
FHLB stock dividends		54,035			63,486
Goodwill and other intangible assets		545,144			522,993
Accumulated depreciation		52,755			61,937
		651,934			648,416
Net deferred tax asset	$	—		$	—

Deferred income taxes reflect the impact of “temporary differences” between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. The largest component of our net deferred tax asset at March 31, 2019 was our net operating loss carryforward and temporary differences related to the activity in our allowance for loan losses, goodwill, and deferred compensation. The Company records a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not, that some or all of the deferred tax assets will not be realized. In March 2018, due to the Company remaining in a cumulative loss position for three consecutive years, management concluded that it was more likely-than-not that the Company will be

38

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

unable to realize its deferred tax assets in the foreseeable future, and accordingly established a full valuation allowance of $5.8 million which equals 100% of the net deferred tax assets at March 31, 2018. At March 31, 2019, the Company again concluded it was more likely-than-not that the Company will be unable to realize its deferred tax asset in the foreseeable future and continued to record a valuation allowance equal to 100% of the net deferred tax assets at March 31, 2019. If, in the future, the Company generates taxable income on a sustained basis sufficient to support the deferred tax assets, the need for a deferred tax valuation allowance could change, resulting in the reversal of all or a portion of the deferred tax asset valuation at that time.

The Company has a federal net operating loss carryforward (NOL) of $10.2 million as of March 31, 2019, which will expire within the period of the years ending March 31, 2030 through 2037, including $4.9 million and $1.9 million of federal NOL assumed in the acquisition of Fraternity and Fairmount, respectively. As a result of the change in ownership, the utilization of Fraternity and Fairmount’s NOL carryforwards is subject to limitations imposed under Code Section 382 of the Internal Revenue Code. The state NOL for the Company is $9.6 million and also expires within the same period as the federal NOL. In addition, other tax attributes consisted of charitable contribution carryforwards of $43,446 and AMT credit carryovers of $279,398 at March 31, 2019. Under the Tax Act, the AMT credit carryovers are refundable over a period beginning after December 31, 2107. Charitable contribution carryovers have a limited life of five years.

On December 22, 2017, the Tax Act was passed into law. The Tax Act included a broad range of tax reform including changes to tax rates and deductions that were effective January 1, 2018. The primary change for the Company was the lowering of the federal corporate income tax rate to 21% from a maximum rate of 35%. The decrease in the enacted corporate tax rate expected to apply when the Company’s temporary differences are realized or settled resulted in a revaluation of the Company’s net deferred tax asset of $2.3 million with a corresponding charge to income tax expense.

The Company’s tax returns are subject to review and examination by federal and state taxing authorities. The Company’s tax returns are currently open to audit under the applicable statutes of limitations by the Internal Revenue Service for the years ended March 31, 2016 through March 31, 2018. Years in which an NOL is created though are still open for examination. The establishment of a valuation allowance on our deferred tax assets for financial reporting purposes does not affect how the net operating loss carryforwards may be utilized on our subsequent income tax returns. The Company does not have any uncertain tax positions that are deemed material, and did not recognize any adjustments for unrecognized tax benefits.

Note 14: Regulatory Capital Ratios

Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.

The Basel III Capital Rules became effective for Hamilton Bank on January 1, 2015 (subject to a phase-in period for certain provisions). Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of Common Equity Tier 1 capital, Tier 1 capital and Total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined).

In connection with the adoption of the Basel III Capital Rules, we elected to opt-out of the requirement to include accumulated other comprehensive income in Common Equity Tier 1. Common Equity Tier 1 for Hamilton Bank is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities and subject to transition provisions.

Under the revised prompt corrective action requirements, as of January 1, 2015, insured depository institutions are required to meet the following in order to qualify as “well capitalized:” (1) a common equity Tier 1 risk-based capital ratio of 6.5%; (2) a Tier 1 risk-based capital ratio of 8%; (3) a total risk-based capital ratio of 10% and (4) a Tier 1 leverage ratio of 5%. As of March 31, 2019, the Bank met all capital adequacy requirements under the Basel III Capital Rules to be considered “well capitalized” under prompt corrective action rules.

39

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and was phased in over a four-year period until it reached 2.5% on January 1, 2019. The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to Hamilton Bank.

As a result of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”), banking regulatory agencies must adopt a revised definition of “well capitalized” for financial institutions and holding companies with assets of less than $10 billion and that are not determined to be ineligible by their primary federal regulator due to their risk profile (a “qualifying community bank”). The new definition will expand the ways that a qualifying community bank may meet its capital requirements and be deemed “well qualified.” The new rule will establish a “community bank leverage ratio” equal to the tangible equity capital divided by the average total consolidated assets. A qualifying community bank that exceeds a to-be-determined threshold for this new leverage ratio, which regulators must set at between 8% and 10%, will be considered to be well capitalized and to have met generally applicable leverage capital requirements, generally applicable risk-based capital requirements, and any other capital or leverage requirements to which such financial institution or holding company is subject.

In addition, as a result of the Act, the Federal Reserve Board amended its small bank holding company and savings and loan holding company policy statement to provide that holding companies with consolidated assets of less than $3 billion that are (i) not engaged in significant nonbanking activities, (ii) do not conduct significant off-balance sheet activities, and (iii) do not have a material amount of SEC-registered debt or equity securities, other than trust preferred securities, that contribute to an organization’s complexity, are no longer subject to regulatory capital requirements.

The following table presents actual and required capital ratios as of March 31, 2019 and March 31, 2018 for Hamilton Bank and the Company under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of January 1, 2015 based on the phase-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules became fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.

						Minimum Capital					Minimum Capital
	Actual					Required - Basel III					Required - Basel III					To be well capitalized (1)
						Phase-In Schedule					Fully Phased-In
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
						(dollars in thousands)					(dollars in thousands)
March 31, 2019
Common equity tier 1 capital (to risk-weighted assets)
Hamilton Bank	$	43,827		12.63	%	$	24,285		7.000	%	$	24,285		7.00	%	$	22,551		6.50	%
Hamilton Bancorp		49,196		14.15	%		24,331		7.000	%		24,331		7.00	%		22,593		6.50	%
Total risk-based capital (to risk-weighted assets)
Hamilton Bank		46,972		13.54	%		36,428		10.500	%		36,428		10.50	%		34,693		10.00	%
Hamilton Bancorp		52,341		15.06	%		36,496		10.500	%		36,496		10.50	%		34,758		10.00	%
Tier 1 capital (to risk-weighted assets)
Hamilton Bank		43,827		12.63	%		29,489		8.500	%		29,489		8.50	%		27,755		8.00	%
Hamilton Bancorp		49,196		14.15	%		29,544		8.500	%		29,544		8.50	%		27,806		8.00	%
Tier 1 capital (to adjusted total assets)
Hamilton Bank		43,827		8.96	%		19,564		4.000	%		19,564		4.00	%		24,455		5.00	%
Hamilton Bancorp		49,196		10.06	%		19,569		4.000	%		19,569		4.00	%		24,461		5.00	%

40

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

	Actual					Minimum Capital Required - Basel III Phase-In Schedule					Minimum Capital Required - Basel III Fully Phased-In					To be well capitalized (1)
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
						(dollars in thousands)					(dollars in thousands)
March 31, 2018
Common equity tier 1 capital (to risk-weighted assets)
Hamilton Bank	$	39,126		10.61	%	$	23,498		6.375	%	$	25,802		7.00	%	$	23,959		6.50	%
Hamilton Bancorp		47,308		12.79	%		23,582		6.375	%		25,894		7.00	%		24,044		6.50	%
Total risk-based capital (to risk-weighted assets)
Hamilton Bank		41,998		11.39	%		36,399		9.875	%		38,703		10.50	%		36,860		10.00	%
Hamilton Bancorp		50,180		13.57	%		36,529		9.875	%		38,841		10.50	%		36,992		10.00	%
Tier 1 capital (to risk-weighted assets)
Hamilton Bank		39,126		10.61	%		29,027		7.875	%		31,331		8.50	%		29,488		8.00	%
Hamilton Bancorp		47,308		12.79	%		29,131		7.875	%		31,443		8.50	%		29,593		8.00	%
Tier 1 capital (to adjusted total assets)
Hamilton Bank		39,126		7.64	%		20,497		4.000	%		20,497		4.00	%		25,621		5.00	%
Hamilton Bancorp		47,308		8.15	%		20,674		4.000	%		20,674		4.00	%		25,843		5.00	%

(1)  - Under prompt corrective action

Tier 1 capital consists of total shareholders’ equity less goodwill, intangible assets, and deferred tax net operating loss carryforwards. Total capital includes a limited amount of the allowance for loan losses and a portion of any unrealized gain on equity securities. In calculating risk-weighted assets, specified risk percentages are applied to each category of asset and off-balance-sheet items.

In its regulatory report filed as of March 31, 2019, the Bank exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory guidelines. Management is not aware of any events that would have caused this classification to change. Failure to meet the capital requirements could affect, among other things, the Bank’s ability to accept brokered deposits and may significantly affect the operations of the Bank. Management has no plans that should change the classification of the capital adequacy.

Note 15: Defined Contribution Retirement Plan

The Bank offers a retirement plan qualifying under section 401(k) of the Internal Revenue Code to its employees. The Plan covers all full-time employees with one year of service who have reached 18 years of age. The Bank contributes three percent of each participant’s eligible compensation to the Plan. The Bank may make elective deferrals as well, upon Board of Directors approval. During the years ended March 31, 2019 and 2018, the Bank recorded expense of $173,673 and $174,065, respectively, related to the 401(k) Plan.

Note 16: Employee Stock Ownership Plan

In connection with the conversion to stock form in October 2012, the Company established an Employee Stock Ownership Plan (ESOP) for the exclusive benefit of eligible employees. Eligible employees include all employees over the age of 21 that have completed 1,000 hours of service over a continuous twelve-month period. The ESOP borrowed funds from the Company in the amount of $2,962,400, which was sufficient to purchase 296,240 shares or 8% of the Common Stock issued in the offering. The shares were acquired at a price of $10.00 per share.

41

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

The loan is secured by the shares purchased with the loan proceeds and will be repaid by the ESOP over the 20-year term of the loan with funds from the Bank’s contributions to the ESOP and dividends paid on the stock, if any. The interest rate on the ESOP loan is an adjustable rate equal to the lowest prime rate, as published in the Wall Street Journal. The interest rate will adjust annually and will be the prime rate on the first business day of the calendar year. The interest rate on the loan as of March 31, 2019 is 5.50%.

Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants in proportion to their annual salaried wages, relative to total salaried wages of all active participants. Participants will vest their accrued benefits under the employee stock ownership plan at a rate of 20% per year, such that the participants will be 100% vested upon completion of five years of credited service. Vesting is accelerated upon retirement, death, or disability of the participant, or a change in control of the Bank. Forfeitures will be reallocated to remaining plan participants. Benefits may be payable upon retirement, death, disability, separation of service, or termination of the ESOP. Participants may elect to receive benefits in cash in lieu of common stock.

The debt of the ESOP, in accordance with generally accepted accounting principles, is eliminated in consolidation and the shares pledged as collateral are reported as unearned ESOP shares in the Consolidated Statement of Financial Condition. Contributions to the ESOP shall be sufficient to pay principal and interest currently due under the loan agreement. As shares are committed to be released from collateral, the Company reports compensation expense equal to the fair market price of the shares as they are committed to be released from the unallocated suspense account to participants’ accounts. The shares allocated will then become outstanding shares for earnings per share computations. The ESOP compensation expense for the year ended March 31, 2019 and 2018 was $211,294 and $224,481, respectively.

A summary of ESOP shares at March 31, 2019 and 2018 is as follows:

	2019		2018
Shares allocated to employees		103,684		88,872
Unearned shares		192,556		207,368
Total ESOP shares		296,240		296,240
Fair value of unearned shares	$	2,869,084	$	2,954,994

Note 17: Stock Based Compensation

In November 2013, the Company’s shareholders approved a new Equity Incentive Plan (the “2013 Equity Incentive Plan’’). The 2013 Equity Incentive Plan allows for up to 148,120 shares to be issued to employees, executive officers or Directors in the form of restricted stock, and up to 370,300 shares to be issued to employees, executive officers or Directors in the form of stock options. At March 31, 2019, there were 91,403 restricted stock awards issued and outstanding and 268,204 stock option awards granted under the 2013 Equity Incentive Plan.

Stock Options:

Under the above plan, the exercise price for stock options is the market price at date of grant. The maximum option term is ten years and the options granted shall vest in five equal annual installments of 20% with the first installment becoming exercisable on the first anniversary of the date of grant and succeeding installments on each anniversary thereafter. The Company plans to issue new shares to satisfy share option exercises. The total cost that has been incurred for the stock option plan was $211,187 and $229,569 for the years ended March 31, 2019 and 2018, respectively.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black- Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical data. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury rate equal to the expected term of the option in effect at the time of the grant.

42

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

The fair value of options granted to date was determined using the following weighted-average assumptions as of grant date.

Grant Date	Number of Options Granted		Risk Free Interest Rate			Expected Term (in years)		Expected Stock Price Volatility			Dividend Yield			Fair Value of Options Granted
February 3, 2014		225,150		2.07	%		7.0		27.30	%		0.00	%	$	4.65
November 1, 2016		19,000		1.61	%		7.0		27.17	%		0.00	%	$	4.35
February 3, 2017		3,700		2.27	%		7.0		27.26	%		0.00	%	$	5.18
April 1, 2018		20,354		2.67	%		7.0		19.61	%		0.00	%	$	4.05

A summary of stock option activity for the year ended March 31, 2019 and 2018 is as follows:

March 31, 2019:	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)
Outstanding at April 1, 2018		242,350		$	13.84		6.1
Granted		20,354			14.25		9.0
Exercised		—			—		—
Forfeited, exchanged or expired		(2,308	)		14.25		—
Outstanding at March 31, 2019		260,396		$	13.87		5..4
Vested at March 31, 2019		228,730		$	13.85		4.9

March 31, 2018:	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)
Outstanding at April 1, 2017		242,350	$	13.84		7.1
Granted		—		—		—
Exercised		—		—		—
Forfeited, exchanged or expired		—		—		—
Outstanding at March 31, 2018		242,350	$	13.84		6.1
Vested at March 31, 2018		180,260	$	13.84		5.8

As of March 31, 2019, there was $119,518 of total unrecognized compensation cost related to nonvested stock options granted under the Plan. The expense is expected to be recognized over a weighted-average period of 3.4 years. The intrinsic value of a stock option is the amount that the market value of the underlying stock exceeds the exercise price of the option. Based upon a fair market value of $14.90 at March 31, 2019, the options outstanding had an intrinsic value of $268,962.

43

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

Restricted Stock:

The specific terms of each restricted stock award are determined by the Compensation Committee at the date of the grant. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at the grant date. Restricted stock awards granted shall vest in five equal annual installments of 20% with the first installment becoming vested on the first anniversary of the date of grant and succeeding installments on each anniversary thereafter.

A summary of changes in the Company’s nonvested shares for the year is as follows:

				Weighted-Average Fair Value
March 31, 2019:	Shares
Nonvested shares at April 1, 2018		19,440		$	13.74
Granted		8,801			14.25
Vested		(16,780	)		13.78
Forfeited		(1,298	)		14.25
Nonvested shares at March 31, 2019		10,163		$	14.08
Fair Value of shares vested at March 31, 2019	$	1,210,476
March 31, 2018:	Shares			Weighted-Average Fair Value
Nonvested shares at April 1, 2017		36,220		$	13.76
Granted		—			—
Vested		(16,780	)		13.78
Forfeited		—			—
Nonvested shares at March 31, 2018		19,440		$	13.74
Fair Value of shares vested at March 31, 2018	$	918,555

The following table outlines the vesting schedule of the nonvested restricted stock awards as of March 31, 2019:

Year Ending	Number of
March 31,	Restricted Shares
2020		3,041
2021		2,041
2022		1,961
2023		1,561
2024		1,559
		10,163

The Company recorded restricted stock awards expense of $217,917 and $231,276 for the years ended March 31, 2019 and 2018, respectively. As of March 31, 2019, there was $117,944 of total unrecognized compensation expense related to nonvested shares granted under the 2013 stock incentive plan. The cost is expected to be recognized over a weighted-average period of 3.5 years.

44

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

Note 18: Fair Value Measurements

Generally accepted accounting principles define fair value, establish a framework for measuring fair value, and establish a hierarchy for determining fair value measurement. The hierarchy includes three levels and is based upon the valuation techniques used to measure assets and liabilities. The three levels are as follows:

Level 1: Valuation is based on quoted prices (unadjusted) for identical assets or liabilities in active markets;

Level 2: Valuation is determined from quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market; and

Level 3: Valuation is derived from model-based techniques in which at least one significant input is unobservable and based on the Company’s own estimates about the assumptions that market participants would use to value the asset or liability.

The following is a description of the valuation methods used for instruments measured at fair value as well as the general classification of such instruments pursuant to the applicable valuation method.

Fair value measurements on a recurring basis

Securities available for sale – If quoted prices are available in an active market for identical assets, securities are classified within Level 1 of the hierarchy. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. As of March 31, 2019 and 2018, the Bank has categorized its investment securities available for sale as follows:

March 31, 2019	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total
U.S. government agencies	$	—	$	737,707	$	—	$	737,707
Municipal bonds		—		11,445,088		—		11,445,088
Corporate bonds				—		1,963,676		1,963,676
Mortgage-backed securities		—		48,370,970		—		48,370,970
Total investment securities available for sale	$	—	$	60,553,765	$	1,963,676	$	62,517,441
March 31, 2018	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total
U.S. government agencies	$	—	$	2,718,649	$	—	$	2,718,649
Municipal bonds		—		11,705,991		—		11,705,991
Corporate bonds				—		1,954,076		1,954,076
Mortgage-backed securities		—		59,025,404		16		59,025,420
Total investment securities available for sale	$	—	$	73,450,044	$	1,954,092	$	75,404,136

Derivative – Interest rate swap agreements – The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). The quantitative models that are used utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. As of March 31, 2019 and 2018, the bank has categorized its interest rate swaps and related loan as follows:

45

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

March 31, 2019	Level 1 inputs		Level 2 inputs			Level 2 inputs		Total
Loans – Commercial real estate loan	$	—	$	3,010,057		$	—	$	3,010,057
Derivative – Interest rate swap designated as fair value hedge		—		(4,745	)		—		(4,745	)
Derivatives – Interest rate swaps designated as cash flow hedge		—		(48,305	)		—		(48,305	)
March 31, 2018	Level 1 inputs		Level 2 inputs			Level 3 inputs		Total
Loans – Commercial real estate loan	$	—	$	3,022,744		$	—	$	3,022,744
Derivative – Interest rate swap designated as fair value hedge		—		69,148			—		69,148
Derivatives – Interest rate swaps designated as cash flow hedge		—		217,464			—		217,464

The following table presents the valuation and unobservable inputs for Level 3 assets measured at fair value on a recurring basis at March 31, 2019:

		Valuation	Unobservable	Range of
Description	Fair Value	Methodology	Inputs	Inputs
Investment securities	$1,963,676	3rd party valuation	Discount to reflect current market conditions	0.00% – 10.00%

The following table presents a reconciliation of the investments which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods presented:

	March 31, 2019		March 31, 2018
Balance, beginning of year	$	1,954,092	$	1,930,786
Transfers in:
Corporate bonds		—		1,954,076
Mortgage-backed securities		—		16
Municipal bonds		—		—
Transfers out:
Corporate bonds		16		—
Mortgage-backed securities		—		2,473
Municipal bonds		—		1,928,313
Change in valuation		9,600		—
Balance, end of year	$	1,963,676	$	1,954,092

46

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

Fair value measurements on a nonrecurring basis

Impaired Loans — The Bank has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values. At March 31, 2019 and 2018, the fair values consist of loan balances of $7,388,520 and $8,720,339 that have been written down by $263,581 and $266,256, respectively, as a result of specific loan loss allowances.

Foreclosed real estate — The Bank’s foreclosed real estate is measured at the lower of carrying value or fair value less estimated cost to sell. At March 31, 2019 and 2018, the fair value of foreclosed real estate was estimated to be $335,009 and $457,778, respectively. Fair value was determined based on offers and/or appraisals. Cost to sell the assets was based on standard market factors. The Company has categorized its foreclosed assets as Level 3.

	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total
March 31, 2019
Impaired loans	$	—	$	—	$	7,124,939	$	7,124,939
Foreclosed real estate		—		—		335,009		335,009
	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total
March 31, 2018
Impaired loans	$	—	$	—	$	8,454,083	$	8,454,083
Foreclosed real estate		—		—		457,778		457,778

The following table presents the valuation and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis at March 31, 2019:

Description	Fair Value		Valuation Methodology	Unobservable Inputs	Range of Inputs
Impaired loans, net of allowance	$	7,124,939	Appraised value	Discount to reflect current market conditions		0.00% - 25.00%
			Discounted cash flows	Discount rates		2.63% - 7.25%
Foreclosed real estate	$	335,009	Appraised value	Discount to reflect current market conditions		0.00% - 25.00%

47

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

The following table summarizes changes in foreclosed real estate for the years ended March 31, 2019 and 2018, which is measured on a nonrecurring basis using significant unobservable, level 3, inputs:

	Year Ended March 31,
	2019			2018
Balance at beginning of period	$	457,778		$	503,094
Transfer to foreclosed real estate		150,052			23,834
Write-down of foreclosed real estate		(113,832	)		(31,955	)
Proceeds from sale of foreclosed real estate		(164,674	)		(35,896	)
Gain on sale of foreclosed real estate		5,684			(1,299	)
Balance at end of period	$	335,008		$	457,778

The remaining financial assets and liabilities are not reported on the balance sheets at fair value on a recurring basis. The calculation of estimated fair values is based on market conditions at a specific point in time and may not reflect current or future fair values.

	March 31, 2019				March 31, 2018
	Carrying amount		Fair value		Carrying amount		Fair value
Financial assets
Level 1 inputs
Cash and cash equivalents	$	38,342,796	$	38,342,796	$	23,368,415	$	23,368,415
Level 2 inputs
Federal Home Loan Bank stock		2,657,600		2,657,600		3,122,400		3,122,400
Bank-owned life insurance		17,911,040		17,911,040		17,455,850		17,455,850
Level 3 inputs
Certificates of deposit held as investment		499,099		492,278		499,189		492,751
Loans receivable, net of unearned income		362,413,943		351,381,237		387,328,993		385,818,260
Financial liabilities
Level 3 inputs
Deposits		386,803,945		387,719,979		405,142,975		405,026,957
Advance payments by borrowers for taxes and insurance		1,725,584		1,725,584		1,962,665		1,962,665
Borrowings		51,050,000		51,038,479		60,672,140		60,494,922

The fair values of cash and cash equivalents and advances by borrowers for taxes and insurance are estimated to equal the carrying amount.

The fair values of Federal Home Loan Bank stock and bank-owned life insurance are estimated to equal carrying amounts, which are based on repurchase prices of the FHLB stock and the insurance company.

Beginning in the first quarter 2018, the fair value of loans is determined using an exit price methodology as prescribed by ASU 2016-01, which became effective for the Company during in the first quarter ended June 30, 2018. The exit price estimation of fair value is based on the present value of the expected cash flows. The projected cash flows are based on the contractual terms of the loans, adjusted for prepayments and use of a discount rate based on the relative risk of the cash flows, taking into account the loan type, maturity of the loan, liquidity risk, servicing costs, and a required return on debt and capital (Level 3). In addition, an incremental liquidity discount is applied to certain loans, using historical sales of loans during periods of similar economic conditions as a benchmark. In comparison, loan fair values as of March 31, 2018 were estimated based on an entrance price methodology. As a result, the fair value adjustments as of March 31, 2019 and 2018 are not comparable.

48

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

The fair value of certificates of deposit held as investments is estimated based on interest rates currently offered for certificates of deposit with similar remaining maturities.

The fair value of interest-bearing checking, savings, and money market deposit accounts is equal to the carrying amount due to these products having no stated maturity. The fair value of fixed-maturity time deposits is estimated based on interest rates currently offered for deposits of similar remaining maturities.

The fair value of borrowings is estimated based on interest rates currently offered for borrowings of similar remaining maturities.

The fair value of outstanding loan commitments and unused lines of credit are considered to be the same as the contractual amounts and are not included in the table above. These commitments generate fees that approximate those currently charged to originate similar commitments.

Note 19: Condensed Financial Statements of Parent Company

Presented below are the condensed statements of financial condition as of March 31, 2019 and 2018, and the related condensed statements of operations and condensed statements of cash flows for Hamilton Bancorp, Inc. for the years ended March 31, 2019 and 2018.

Condensed Statements of Financial Condition

	March 31, 2019			March 31, 2018
Assets
Cash and due from bank	$	2,822,555		$	3,421,827
Investment securities available-for-sale		—			1,995,625
Loans and leases, net of unearned income		384,594			433,222
ESOP loan receivable		2,097,338			2,214,298
Investment in bank subsidiary		51,847,102			45,903,508
Other assets		99,249			107,652
Total Assets	$	57,250,838		$	54,076,132
Liabilities	$	31,061		$	—
Shareholders’ Equity
Common stock		34,110			34,076
Additional paid in capital		32,541,993			32,113,534
Retained earnings		27,206,418			25,920,490
Unearned ESOP shares		(1,925,560	)		(2,073,680	)
Accumulated other comprehensive loss		(637,184	)		(1,918,288	)
Total Shareholders’ Equity		57,219,777			54,076,132
Total Liabilities and Shareholders’ Equity	$	57,250,838		$	54,076,132

49

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

Condensed Statements of Operations

Years Ended March 31, 2019 and 2018

	March 31, 2019			March 31, 2018
Interest revenue
Interest on loans, including fees	$	19,140		$	21,213
Interest on bank deposits		5,674			3,059
Interest on investments		15,437			21,967
Interest on ESOP loan		103,571			90,526
Total interest revenue		143,822			136,765
Noninterest expenses
Legal		481,358			45,466
Other professional services		227,691			—
Other operating		248,256			159,870
Total noninterest expenses		957,305			205,336
Loss before income tax expense and equity in net income (loss) of bank subsidiary		(813,483	)		(68,571	)
Income tax expense		—			58,014
Loss before equity in net loss of bank subsidiary		(813,483	)		(126,585	)
Equity in net income (loss) of bank subsidiary		2,099,411			(5,922,357	)
Net income (loss)	$	1,285,928		$	(6,048,942	)

50

HAMILTON BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Continued)

Condensed Statements of Cash Flows

Years Ended March 31, 2019 and 2018

	March 31, 2019			March 31, 2018
Cash flows from operating activities:
Net income (loss)	$	1,285,928		$	(6,048,942	)
Adjustments to reconcile net income (loss) to net cash (used) provided by operating activities:
Equity in undistributed net loss of subsidiary		(2,099,411	)		5,922,357
Amortization of premium on investment securities		9,160			13,034
Decrease in other assets		8,368			119,768
Increase in other liabilities		31,061			—
Net cash (used) provided by operating activities		(764,894	)		6,217
Cash flows from investing activities:
Principal collected on ESOP loan		116,960			118,694
Principal repayments on loans		48,628			46,251
Proceeds from maturing and called securities available for sale, including principal pay downs		2,000,000			—
Net cash provided by investing activities		2,165,588			164,945
Cash flows from financing activities:
Dividend to Bank subsidiary		(2,000,000	)		—
Issuance of restricted stock		88			—
Redemption of restricted stock		(54	)		(35	)
Net cash (used) by financing activities		(1,999,966	)		(35	)
Net (decrease) increase in cash and cash equivalents		(599,272	)		171,127
Cash and cash equivalents at beginning of period		3,421,827			3,250,700
Cash and cash equivalents at end of period	$	2,822,555		$	3,421,827

51