UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2016

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  

Commission File Number: 001-35489

  

HOWARD BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Maryland   20-3735949
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

6011 University Blvd. Suite 370, Ellicott City, MD   21043
(Address of principal executive offices)   (Zip Code)

 

(410) 750-0020

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x    No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company in Rule 12b-2 of the Exchange Act.  

 

  Large accelerated filer ¨   Accelerated filer ¨
  Non-accelerated filer ¨   Small reporting company x

 

 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨     No x

 

The number of outstanding shares of common stock outstanding as of April 30, 2016.

 

Common Stock, $0.01 par value – 6,967,883 shares

 

 

 

  

HOWARD BANCORP, INC.

TABLE OF CONTENTS

 

Page
PART I Financial Information  
Item 1. Financial Statements  
  Consolidated Balance Sheets (Unaudited) 4
  Consolidated Statements of Operations (Unaudited) 5
  Consolidated Statements of Comprehensive Income (Unaudited) 6
  Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) 7
  Consolidated Statements of Cash Flows (Unaudited) 8
  Notes to Consolidated Financial Statements (Unaudited) 9
     
Item 2. Management’s Discussion and Analysis of Financial Condition and   Results of Operations 31
     
Item 3. Quantitative and Qualitative Disclosure about Market Risk 44
     
Item 4. Controls and Procedures 44
     
PART II Other Information 44
Item 1. Legal Proceedings 44
     
Item 1A. Risk Factors 45
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 45
     
Item 3. Defaults upon Senior Securities 45
     
Item 4. Mine Safety Disclosures 45
     
Item 5. Other Information 45
     
Item 6. Exhibits 45
     
Signatures   46

 

2 

 

  

As used in this report, “Bancorp” refers to Howard Bancorp, Inc., references to the “Company,” “we,” “us,” and “ours” refer to Howard Bancorp, Inc. and its subsidiaries, collectively, and references to the “Bank” refer to Howard Bank.

 

This report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may,” “should” and words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.

 

These forward-looking statements include, but are not limited to:

 

·statements of our goals, intentions and expectations, particularly with respect to our business plan and strategies, including continuing to focus on commercial customers, continuing to increase our originations of one-to four-family residential mortgage loans, increasing our mortgage lending portfolio and selling loans into the secondary markets;
·statements regarding the asset quality of our investment portfolios and anticipated recovery and collection of unrealized losses on securities available for sale;
·statements with respect to our allowance for credit losses, and the adequacy thereof;
·statement with respect to having adequate liquidity levels;
·our belief that we will retain a large portion of maturing certificates of deposit; and
·future cash requirements relating to commitments to extend credit.

 

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not undertake any obligation to update any forward-looking statements after the date of this report.

 

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

·deterioration in general economic conditions, either nationally or in our market area, or a return to recessionary conditions;
·competition among depository and other financial institutions;
·inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;
·adverse changes in the securities markets;
·changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
·our ability to enter new markets successfully and capitalize on growth opportunities, and to otherwise implement our growth strategy;
·our ability to successfully integrate acquired entities, if any;
·changes in consumer spending, borrowing and savings habits;
·changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission (“SEC”) and the Public Company Accounting Oversight Board;
·loss of key personnel; and
·other risks discussed in this report, in our annual report on Form 10-K for the year ended December 31, 2015, as filed with the SEC, and in other reports we may file.

 

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. You should not put undue reliance on any forward-looking statements.

 

3 

 

  

PART I

Item 1. Financial Statements

 

Howard Bancorp, Inc. and Subsidiary

 

Consolidated Balance Sheets

 

   Unaudited     
   March 31,   December 31, 
(in thousands)  2016   2015 
ASSETS          
Cash and due from banks  $50,725   $31,818 
Federal funds sold   4,246    6,522 
Total cash and cash equivalents   54,971    38,340 
Securities available-for-sale, at fair value   70,150    49,573 
Nonmarketable equity securities   3,849    4,163 
Loans held for sale, at fair value   40,027    49,677 
Loans and leases, net of unearned income   774,229    760,002 
Allowance for credit losses   (5,256)   (4,869)
Net loans and leases   768,973    755,133 
Bank premises and equipment, net   20,758    20,765 
Goodwill   603    603 
Core deposit intangible   2,726    2,903 
Bank owned life insurance   20,899    18,548 
Other real estate owned   2,369    2,369 
Interest receivable and other assets   5,113    4,685 
           
Total assets  $990,438   $946,759 
LIABILITIES          
Noninterest-bearing deposits  $177,621   $173,689 
Interest-bearing deposits   625,555    573,719 
Total deposits   803,176    747,408 
Short-term borrowings   50,149    69,121 
Long-term borrowings   36,185    29,707 
Deferred tax liability   1,572    1,667 
Accrued expenses and other liabilities   5,410    5,957 
Total liabilities   896,492    853,860 
COMMITMENTS AND CONTINGENCIES          
SHAREHOLDERS' EQUITY          
Preferred stock—par value $0.01  (liquidation preference of $1,000 per share) authorized 5,000,000;  shares issued and outstanding 12,562 series AA at March 31, 2016 and December 31, 2015   12,562    12,562 
Common stock - par value of $0.01 authorized 10,000,000 shares; issued and  outstanding 6,964,918 shares at March 31, 2016 and 6,962,139 at December 31, 2015   70    70 
Capital surplus   70,698    70,587 
Retained earnings   10,615    9,712 
Accumulated other comprehensive income (loss)   1    (32)
           
Total shareholders’ equity   93,946    92,899 
           
Total liabilities and shareholders’equity  $990,438   $946,759 

 

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

 

4 

 

  

Consolidated Statements of Operations

 

   Unaudited 
   For the three months ended 
   March 31, 
(in thousands)  2016   2015 
INTEREST INCOME          
Interest and fees on loans  $9,507   $7,358 
Interest and dividends on securities   72    55 
Other interest income   33    13 
Total interest income   9,612    7,426 
INTEREST EXPENSE          
Deposits   775    577 
Short-term borrowings   65    29 
Long-term borrowings   129    53 
Total interest expense   969    659 
NET INTEREST INCOME   8,643    6,767 
Provision for credit losses   385    250 
Net interest income after provision for credit losses   8,258    6,517 
NONINTEREST INCOME          
Service charges on deposit accounts   160    216 
Realized and unrealized gains on mortgage banking activity   1,550    1,372 
Income from bank owned life insurance   151    86 
Loan fee income   776    468 
Other operating income   215    207 
Total noninterest income   2,852    2,349 
NONINTEREST EXPENSE          
Compensation and benefits   4,584    3,850 
Occupancy and equipment   1,614    975 
Amortization of core deposit intangible   177    83 
Marketing and business development   723    628 
Professional fees   358    345 
Data processing fees   367    390 
Merger and restructuring   -    406 
FDIC Assessment   208    90 
Loan production expense   823    345 
Other operating expense   822    723 
Total noninterest expense   9,676    7,835 
INCOME BEFORE INCOME TAXES   1,434    1,031 
Income tax expense   474    382 
NET INCOME  $960   $649 
Preferred stock dividends   57    31 
Net income available to common shareholders  $903   $618 
NET INCOME PER COMMON SHARE          
Basic  $0.13   $0.15 
Diluted  $0.13   $0.15 

 

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

 

5 

 

  

Consolidated Statements of Comprehensive Income

 

   Unaudited 
   For the three months ended 
   March 31, 
(in thousands)  2016   2015 
Net Income  $960   $649 
Other comprehensive income          
Investments available-for-sale:          
Unrealized holding gains   55    48 
Related income tax expense   (22)   (19)
Comprehensive income  $993   $678 

 

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

 

6 

 

  

Consolidated Statements of Changes in Shareholders’ Equity

 

                       Accumulated     
                       other     
   Preferred   Number of   Common   Capital   Retained   comprehensive     
(dollars in thousands, except share data)  stock   shares   stock   surplus   earnings   income/loss   Total 
                             
Balances at January 1, 2015  $12,562    4,145,547   $41   $38,360   $8,696   $(16)  $59,643 
Net income   -    -    -    -    649    -    649 
Net unrealized gain on securities   -    -    -    -    -    29    29 
Dividends paid on preferred stock   -    -    -    -    (31)   -    (31)
Issuance of common stock:                                   
Stock awards   -    2,086    -    24    -    -    24 
Stock-based compensation   -    -    -    70    -    -    70 
Balances at March 31, 2015  $12,562    4,147,633   $41   $38,454   $9,314   $13   $60,384 
                                    
Balances at January 1, 2016  $12,562    6,962,139   $70   $70,587   $9,712   $(32)  $92,899 
Net income   -    -    -    -    960    -    960 
Net unrealized gain on securities   -    -    -    -    -    33    33 
Dividends paid on preferred stock   -    -    -    -    (57)   -    (57)
Issuance of common stock:                                   
Stock awards   -    2,779    -    33    -    -    33 
Stock-based compensation   -    -    -    78    -    -    78 
Balances at March 31, 2016  $12,562    6,964,918   $70   $70,698   $10,615   $1   $93,946 

 

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

 

7 

 

  

Consolidated Statements of Cash Flows

 

   Unaudited 
   Three months ended 
   March 31 
(in thousands)  2016   2015 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income  $960   $649 
Adjustments to reconcile net income to net cash from operating activities:          
Provision for credit losses   385    250 
Deferred income tax benefit   (145)   (504)
Depreciation   305    213 
Stock-based compensation   111    94 
Net amortization of investment securities   (11)   (2)
Net amortization of intangible asset   177    83 
Loans originated for sale   (110,325)   (123,589)
Proceeds from sale of loans originated for sale   121,526    118,683 
Realized and unrealized gains on mortgage banking activity   (1,550)   (1,372)
Cash surrender value of BOLI   (151)   (86)
(Decrease) increase in interest receivable   (216)   35 
Increase in interest payable   39    14 
Decrease (increase) in other assets   80    (2,021)
Decrease in other liabilities   (534)   (703)
Net cash provided by (used in)  operating activities   10,651    (8,256)
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchases of investment securities available-for-sale   (40,528)   (8,499)
Proceeds from maturities of investment securities available-for-sale   20,014    19,017 
Net increase in loans and leases outstanding   (14,225)   (17,534)
Purchase of bank owned life insurance   (2,200)   - 
Purchase of premises and equipment   (297)   (189)
Net cash used in investing activities   (37,236)   (7,205)
CASH FLOWS FROM FINANCING ACTIVITIES:          
Net increase (decrease) in noninterest-bearing deposits   3,931    (5,440)
Net increase in interest-bearing deposits   51,836    32,056 
Net decrease in short-term borrowings   (18,972)   (7,595)
Proceeds from issuance of long-term debt   8,978    500 
Repayment of long-term debt   (2,500)   - 
Cash dividends on preferred stock   (57)   (31)
Net cash provided by financing activities   43,216    19,490 
           
Net increase in cash and cash equivalents   16,631    4,029 
Cash and cash equivalents at beginning of period   38,340    24,517 
Cash and cash equivalents at end of period  $54,971   $28,546 
SUPPLEMENTAL INFORMATION          
Cash payments for interest  $930   $645 
Cash payments for income taxes   -    - 
Transferred from loans to other real estate owned   -    - 

 

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

 

8 

 

  

Notes to Consolidated Financial Statements (unaudited)

 

Note 1: Summary of Significant Accounting Policies

 

Nature of Operations

 

On December 15, 2005, Howard Bancorp, Inc. (“Bancorp”) acquired all of the stock and became the holding company of Howard Bank (the “Bank”) pursuant to the Plan of Reorganization approved by the shareholders of the Bank and by federal and state regulatory agencies. Each share of the Bank’s common stock was converted into two shares of Bancorp common stock effected by the filing of Articles of Exchange on that date, and the shareholders of the Bank became the shareholders of Bancorp. The Bank has four subsidiaries, three of which hold foreclosed real estate and the other owns and manages real estate that is used as a branch location and has office and retail space. The accompanying consolidated financial statements of Bancorp and its wholly-owned subsidiary bank (collectively the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

 

Bancorp was incorporated in April of 2005 under the laws of the State of Maryland and is a bank holding company registered under the Bank Holding Company Act of 1956. Bancorp is a single bank holding company with one subsidiary, Howard Bank, which operates as a state trust company with commercial banking powers regulated by the Maryland Office of the Commissioner of Financial Regulation (the “Commissioner”).

 

On August 28, 2015, Bancorp completed its acquisition of Patapsco Bancorp, Inc. (“Patapsco Bancorp”), the parent company of The Patapsco Bank (“Patapsco Bank”), through the merger of Patapsco Bancorp with and into Bancorp (the “Merger”). The Merger was consummated pursuant to the Agreement and Plan of Merger dated as of March 2, 2015, by and between Bancorp and Patapsco Bancorp, as amended (the “Merger Agreement”). As a result of the Merger, each share of common stock of Patapsco Bancorp was converted into the right to receive, at the holder’s election, $5.09 in cash or 0.3547 shares of the Bancorp’s common stock, par value $0.01 per share (“Common Stock”), provided that (i) cash was paid in lieu of any fractional shares of Common Stock and (ii) 20% of the shares of common stock of Patapsco Bancorp outstanding at the time of the Merger was exchanged for cash in the Merger, with the remaining shares of Patapsco Bancorp common stock exchanged for 560,891 shares of Common Stock. The aggregate Merger consideration was $10.064 million. In connection with the Merger, the parties have caused Patapsco Bank to merge with and into the Bank, with the Bank the surviving bank.

 

The Company is a diversified financial services company providing commercial banking, mortgage banking and consumer finance through banking branches, the internet and other distribution channels to businesses, business owners, professionals and other consumers located primarily in the Greater Baltimore Metropolitan Area.

 

The following is a description of the Company’s significant accounting policies.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Bancorp, its subsidiary bank and the bank’s subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications may have been made to the prior year’s consolidated financial statements to conform to current period presentation.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near-term relate to the determination of the allowance for credit losses, other-than-temporary impairment of investment securities, and the fair value of loans held for sale.

 

Loans Held-For-Sale

 

The Company engages in sales of residential mortgage loans originated by the Bank. Loans held for sale are carried at fair value. Fair value is based on outstanding investor commitments or, in the absence of such commitments, on current investor yield requirements or on third party models. Gains and losses on sales of these loans are recorded as a component of noninterest income in the Consolidated Statements of Operations. The Company’s current practice is to sell residential mortgage loans on a servicing released basis, and, therefore, it has no intangible asset recorded for the value of such servicing.

 

9 

 

  

Upon sale and delivery, loans are legally isolated from the Company and the Company has no ability to restrict or constrain the ability of third party investors to pledge or exchange the mortgage loans. The Company does not have the entitlement or ability to repurchase the mortgage loans or unilaterally cause third party investors to put the mortgage loans back to the Company. Unrealized and realized gains on loan sales are determined using the specific identification method and are recognized through mortgage banking activity in the Consolidated Statements of Operations.

 

The Company enters into commitments to originate residential mortgage loans whereby the interest rate on the loan is determined prior to funding (i.e. rate lock commitment). Such rate lock commitments on mortgage loans to be sold in the secondary market are considered to be derivatives. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 15 to 60 days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the Company commits to sell a loan at a premium at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the loan.

 

For purposes of calculating fair value of rate lock commitments, we estimate loan closing and investor delivery rate based on historical experience. The measurement of the estimated fair value of the rate lock commitments is presented as realized and unrealized gains from mortgage banking activities.

 

New Accounting Pronouncements

 

The FASB has issued ASU 2016-09, Compensation—Stock Compensation (Topic 718). The purpose of the update is to simplify the accounting for share-based payment transactions, including the income tax consequences of these transactions. Under the provisions of the update the income tax consequences of excess tax benefits and deficiencies should be recognized in income tax expense in the reporting period in which the awards vest. Currently, excess tax benefits and deficiencies impact shareholders’ equity directly to the extent there is a cumulative excess tax benefit. In the event that a tax deficiency has occurred during the reporting period and a cumulative tax benefit does not exist, the tax deficiency is recognized in income tax expense under current GAAP. The update also provides that entities may continue to estimate forfeitures in accounting for stock based compensation or recognize them as they occur. The provision of this update becomes effective for interim and annual periods beginning after December 15, 2016. The adoption of this guidance is not expected to be material to the Company’s financial position, results of operations or cash flows.

 

The FASB has issued ASU 2016-02, Leases (Topic 842). The new guidance requires lessees to recognize lease assets and lease liabilities related to certain operating leases on the balance sheet by lessees and disclose key information about leasing arrangements. This guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.

 

The FASB has issued ASU No. 2016-01, Financial Instruments – Recognition and Measurement of Financial Assets and Liabilities. ASU No. 2016-01 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 for disclosure 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. ASU No. 2016-01 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting the new guidance on its consolidated financial statements.

 

The FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. This update eliminates the requirement to retrospectively adjust the provisional amounts recognized at the acquisition date with a corresponding adjustment to goodwill. These adjustments are required when new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts initially recognized or would have resulted in the recognition of additional assets or liabilities. The update also requires the nature of and reason for the business combination, to be disclosed in the consolidated financial statements. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company will evaluate this amendment but does not believe it will have a material impact on its financial position or results of operations.

 

The FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606): The guidance requires an entity to 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. The amendments in this update are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted, but not before the original effective date of December 15, 2016. The Company will evaluate the amendments in this update but does not believe they will have a material impact on its financial position or results of operations.

 

10 

 

  

Note 2: Business Combinations

 

Patapsco Bancorp Acquisition

 

On August 28, 2015, Bancorp completed its acquisition of Patapsco Bancorp, Inc. through the merger of Patapsco Bancorp, the parent company of The Patapsco Bank, with and into Bancorp pursuant to the Agreement and Plan of Merger dated as of March 2, 2015, as amended, by and between the Company and Patapsco Bancorp. As a result of the merger, each share of common stock of Patapsco Bancorp was converted into the right to receive, at the holder’s election, $5.09 in cash or 0.3547 shares of Bancorp common stock, provided that (i) cash was paid in lieu of any fractional shares of Bancorp common stock and (ii) 20% of the shares of common stock of Patapsco Bancorp outstanding at the time of the merger were exchanged for cash in the merger, with the remaining shares of Patapsco Bancorp common stock exchanged for 560,891 shares of Bancorp common stock. The aggregate merger consideration was $10.064 million. In connection with the merger, immediately thereafter Patapsco Bank was merged with and into the Bank, with the Bank the surviving bank.

 

The Company has accounted for the merger under the acquisition method of accounting in accordance with FASB ASC Topic 805, “Business Combinations,” whereby the acquired assets and assumed liabilities were recorded by Bancorp at their estimated fair values as of their acquisition date. Fair value estimates for loans and deposits were based on management’s acceptance of a fair market valuation analysis performed by an independent third party firm.

 

The acquired assets and assumed liabilities of Patapsco Bancorp were measured at estimated fair value. Management made significant estimates and exercised significant judgment in accounting for the acquisition of Patapsco Bancorp. Management judgmentally assigned risk ratings to loans based on appraisals and estimated collateral values, expected cash flows, prepayment speeds and estimated loss factors to measure fair values for loans. Deposits and borrowings were valued based upon interest rates, original and remaining terms and maturities, as well as current rates for similar funds in the same markets. Premises and equipment was valued based on recent appraised values. Management used quoted or current market prices to determine the fair value of investment securities.

 

The following table provides the purchase price as of the acquisition date, the identifiable assets acquired and liabilities assumed at their estimated fair values, and the resulting goodwill of $603 thousand recorded from the acquisition:

 

(in thousands)

 

Purchase Price Consideration    
Cash consideration  $2,015 
Purchase price assigned to shares exchanged for stock   8,049 
Total purchase price for Patapsco acquisition  $10,064 

 

Assets acquired at fair value:         
         
Cash and cash equivalents  $19,047     
Investment securities available for sale   26,255     
Loans   156,907     
Accrued interest receivable   602     
Other assets   9,090     
Core deposit intangible   1,974     
Total fair value of assets acquired  $213,875     
          
Liabilities assumed at fair value:         
Deposits   175,083     
Borrowings   17,737     
Accrued expenses and other liabilities   11,594     
Total fair value of liabilities assumed  $204,414     
          
Net assets acquired at fair value:       $9,461 
           
Transaction consideration paid to Patapsco Bancorp        10,064 
           
Amount of goodwill recorded from Patapsco acquisition       $603 

 

11 

 

  

Acquired loans

 

The following table outlines the contractually required payments receivable, cash flows we expect to receive, non-accretable credit adjustments and the accretable yield for all Patapsco Bancorp loans as of the acquisition date.

(in thousands)

 

   Contractually                 
   Required   Non-Accretable   Cash Flows       Carrying Value 
   Payments   Credit   Expected To Be   Accretable FMV   of Loans 
   Receivable   Adjustments   Collected   Adjustments   Receivable 
                     
Performing Loans Acquired  $156,393   $-   $156,393   $866   $155,527 
                          
Impaired Loans Acquired   3,465    1,713    1,752    372    1,380 
                          
Total  $159,858   $1,713   $158,145   $1,238   $156,907 

 

At our acquisition of Patapsco Bancorp, we recorded all loans acquired at the estimated fair value on the purchase date with no carryover of the related allowance for loan losses. On the acquisition date, we segregated the loan portfolio into two loan pools, performing and non-performing loans to be retained in our portfolio.

 

We had an independent third party determine the net discounted value of cash flows on approximately 1,000 performing loans totaling $156.4 million. The valuation took into consideration the loans’ underlying characteristics, including account types, remaining terms, annual interest rates, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan-to-value ratios, loss exposures, and remaining balances. These performing loans were segregated into pools based on loan and payment type and in some cases, risk grade. The effect of this fair valuation process was a net accretable discount adjustment of $866 thousand at acquisition.

 

We also individually evaluated 13 impaired loans totaling $3.5 million to determine the fair value as of the August 28, 2015 measurement date. In determining the fair value for each individually evaluated impaired loan, we considered a number of factors including the remaining life of the acquired loan, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral and net present value of cash flows we expect to receive, among others.

 

We established a credit risk related non-accretable difference of $1.7 million relating to these acquired, credit impaired loans, reflected in the recorded net fair value. We further estimated the timing and amount of expected cash flows in excess of the estimated fair value and established an accretable discount adjustment of $372 thousand at acquisition relating to these impaired loans.

Pro forma financial information is not provided because amounts are not meaningful to the Company’s consolidated financial statements.

 

Note 3: Investment Securities

 

The amortized cost and estimated fair values of investments available for sale are as follows:

 

(in thousands)  March 31, 2016   December 31, 2015 
       Gross   Gross           Gross   Gross     
   Amortized   Unrealized   Unrealized   Estimated   Amortized   Unrealized   Unrealized   Estimated 
   Cost   Gains   Losses   Fair Value   Cost   Gains   Losses   Fair Value 
U.S. Government                                        
Agencies  $68,506   $9   $13   $68,502   $48,467   $-   $45   $48,422 
Mortgage-backed   39    2    -    41    54    3    -    57 
Other investments   1,600    7    -    1,607    1,100    -    6    1,094 
   $70,145   $18   $13   $70,150   $49,621   $3   $51   $49,573 

 

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Gross unrealized losses and fair value by investment category and length of time the individual securities have been in a continuous unrealized loss position at March 31, 2016 and December 31, 2015 are presented below:

 

March 31, 2016                        
(in thousands)  Less than 12 months   12 months or more   Total 
       Gross       Gross       Gross 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
U.S. Government                              
Agencies  $35,001   $13   $-   $-   $35,001   $13 
Mortgage-backed   -    -    -    -    -    - 
Other investments   -    -    -    -    -    - 
   $35,001   $13   $-   $-   $35,001   $13 

 

December 31, 2015                        
(in thousands)  Less than 12 months   12 months or more   Total 
       Gross       Gross       Gross 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
U.S. Government                              
Agencies  $39,431   $45   $-   $-   $39,431   $45 
Mortgage-backed   -    -    -    -    -    - 
Other investments   1,000    6    -    -    1,000    6 
   $40,431   $51   $-   $-   $40,431   $51 

 

The unrealized losses that existed were 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 a quarterly basis. 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 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.

 

The amortized cost and estimated fair values of investments available for sale by contractual maturity are shown below:

 

(in thousands)  March 31, 2016   December 31, 2015 
   Amortized   Estimated Fair   Amortized   Estimated Fair 
   Cost   Value   Cost   Value 
Amounts maturing:                    
One year or less  $66,011   $66,000   $43,465   $43,425 
After one through five years   2,495    2,502    5,002    4,997 
After five through ten years   39    41    54    57 
After ten years   1,600    1,607    1,100    1,094 
   $70,145   $70,150   $49,621   $49,573 

 

There were no sales of investment securities during the three months ended March 31, 2016. At March 31, 2016 and December 31, 2015, $18.1 million and $22.8 million respectively, in fair value of securities were pledged as collateral for repurchase agreements. No single issuer of securities, except for U.S. Government agency securities had outstanding balances that exceeded ten percent of shareholders’ equity at March 31, 2016.

 

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Note 4: Loans and Leases

 

The Company makes loans to customers primarily in the Greater Baltimore Maryland metropolitan area and surrounding communities. A substantial portion of the Company’s loan portfolio consists of loans to businesses secured by real estate and/or other business assets.

 

The loan portfolio segment balances at March 31, 2016 and December 31, 2015 are presented in the following table:

 

   March 31, 2016   December 31, 2015 
(in thousands)  Legacy   Acquired   Total   Legacy   Acquired   Total 
Real estate                              
Construction and land  $63,832   $6,022   $69,854   $63,085   $6,300   $69,385 
Residential - first lien   99,525    91,250    190,775    89,649    93,339    182,988 
Residential - junior lien   17,813    11,236    29,049    15,098    12,379    27,477 
Total residential real estate   117,338    102,486    219,824    104,747    105,718    210,465 
Commercial - owner occupied   94,937    34,811    129,748    94,392    36,722    131,114 
Commercial - non-owner occupied   122,473    58,351    180,824    122,304    59,057    181,361 
Total commercial real estate   217,410    93,162    310,572    216,696    95,779    312,475 
Total real estate loans   398,580    201,670    600,250    384,528    207,797    592,325 
Commercial loans and leases   132,731    36,235    168,966    124,981    38,443    163,424 
Consumer   2,290    2,723    5,013    1,302    2,951    4,253 
Total loans  $533,601   $240,628   $774,229   $510,811   $249,191   $760,002 

 

There were $40.0 million in loans held for sale at March 31, 2016 and $49.7 million at December 31, 2015.

 

Note 5: Credit Quality Assessment

 

Allowance for Credit Losses

 

The following table provides information on the activity in the allowance for credit losses by the respective loan portfolio segment for the three month periods ended March 31, 2016 and 2015 and information on the allowance for credit losses by segment at March 31, 2016 and December 31, 2015:

 

   March 31, 2016 
               Commercial   Commercial   Commercial         
   Construction   Residential   Residential   owner   non-owner   loans   Consumer     
(in thousands)  and land   first lien   junior lien   occupied   occupied   and leases   loans   Total 
Allowance for credit losses:                                        
Beginning balance  $265   $300   $47   $309   $728   $3,094   $126   $4,869 
Charge-offs   -    -    -    -    -    (7)   (11)   (18)
Recoveries   -    -    -    -    2    9    9    20 
Provision for credit losses   97    49    9    234    108    (53)   (59)   385 
Ending balance  $362   $349   $56   $543   $838   $3,043   $65   $5,256 

 

   March 31, 2015 
               Commercial   Commercial   Commercial         
   Construction   Residential   Residential   owner   non-owner   loans   Consumer     
(in thousands)  and land   first lien   junior lien   occupied   occupied   and leases   loans   Total 
Allowance for credit losses:                                        
Beginning balance  $174   $272   $55   $160   $562   $2,366   $13   $3,602 
Charge-offs   -    -    -    -         (13)   (4)   (17)
Recoveries   -    3    -    -    -    1    -    4 
Provision for credit losses   (10)   3    -    15    63    173    6    250 
Ending balance  $164   $278   $55   $175   $625   $2,527   $15   $3,839 

 

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   March 31, 2016 
               Commercial   Commercial   Commercial         
   Construction   Residential   Residential   owner   non-owner   loans   Consumer     
(in thousands)  and land   first lien   junior lien   occupied   occupied   and leases   loans   Total 
Allowance allocated to:                                        
Legacy Loans:                                        
individually evaluated for impairment  $-   $-   $-   $-   $-   $1,159   $-   $1,159 
collectively evaluated for impairment   335    307    44    301    713    1,733    32    3,465 
Acquired Loans:                                        
individually evaluated for impairment   -    23    -    173    -    39    -    235 
collectively evaluated for impairment   27    19    12    69    125    112    33    397 
Loans:                                        
Legacy Loans:                                        
Ending balance  $63,832   $99,525   $17,813   $94,937   $122,473   $132,731   $2,290   $533,601 
individually evaluated for impairment   -    299    -    -    2,667    11,662    -    14,628 
collectively evaluated for impairment   63,832    99,226    17,813    94,937    119,806    121,069    2,290    518,973 
Acquired Loans:                                        
Ending balance   6,022    91,250    11,236    34,811    58,351    36,235    2,723    240,628 
individually evaluated for impairment   -    518    -    468    280    2,877    140    4,283 
collectively evaluated for impairment   6,022    90,732    11,236    34,343    58,071    33,358    2,583    236,345 

 

   December 31, 2015 
               Commercial   Commercial   Commercial         
   Construction   Residential   Residential   owner   non-owner   loans   Consumer     
(in thousands)  and land   first lien   junior lien   occupied   occupied   and leases   loans   Total 
Allowance for credit losses:                                        
Legacy Loans:                                        
individually evaluated for impairment  $-   $-   $-   $-   $-   $1,160   $-   $1,160 
collectively evaluated for impairment   257    289    40    262    621    1,799    30    3,298 
Acquired Loans:                                        
individually evaluated for impairment   -    -    -    -    -    48    75    123 
collectively evaluated for impairment Loans:   8    11    7    47    107    87    21    288 
Legacy Loans:                                        
Ending balance  $63,085   $89,649   $15,098   $94,393   $122,304   $124,981   $1,302   $510,811 
individually evaluated for impairment   -    631    63    -    2,838    5,086    -    8,618 
collectively evaluated for impairment   63,085    89,018    15,035    94,393    119,466    119,895    1,302    502,193 
Acquired Loans:                                        
Ending balance   6,300    93,339    12,379    36,722    59,057    38,443    2,951    249,191 
individually evaluated for impairment   -    363    -    232    151    1,728    150    2,624 
collectively evaluated for impairment   6,300    92,976    12,379    36,490    58,906    36,715    2,801    246,565 

 

When potential losses are identified, a specific provision and/or charge-off may be taken, based on the then current likelihood of repayment, that is at least in the amount of the collateral deficiency, and any potential collection costs, as determined by the independent third party appraisal.  

 

All loans that are considered impaired are subject to the completion of an impairment analysis.  This analysis highlights any potential collateral deficiencies. A specific amount of impairment is established based on the Company’s calculation of the probable loss inherent in the individual loan. The actual occurrence and severity of losses involving impaired credits can differ substantially from estimates.

 

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Credit risk profile by portfolio segment based upon internally assigned risk assignments are presented below:

 

   March 31, 2016 
               Commercial   Commercial   Commercial         
   Construction   Residential   Residential   owner   non-owner   loans   Consumer     
(in thousands)  and land   first lien   junior lien   occupied   occupied   and leases   loans   Total 
Credit quality indicators:                                        
Legacy Loans:                                        
Not classified  $63,832   $99,226   $17,813   $94,937   $118,747   $129,724   $2,290   $526,569 
Special mention   -    -    -    -    614    -    -    614 
Substandard   -    299    -    -    2,518    4    -    2,821 
Doubtful   -    -    -    -    594    3,003    -    3,597 
Total  $63,832   $99,525   $17,813   $94,937   $122,473   $132,731   $2,290   $533,601 
                                         
Acquired Loans:                                        
Not classified  $6,022   $90,624   $11,236   $34,343   $56,889   $33,358   $2,583   $235,055 
Special mention   -    -    -    -    -    -    -    - 
Substandard   -    108    -    -    1,182    694    -    1,984 
Doubtful   -    518    -    468    280    2,183    140    3,589 
Total  $6,022   $91,250   $11,236   $34,811   $58,351   $36,235   $2,723   $240,628 

 

   December 31, 2015 
               Commercial   Commercial   Commercial         
   Construction   Residential   Residential   owner   non-owner   loans   Consumer     
(in thousands)  and land   first lien   junior lien   occupied   occupied   and leases   loans   Total 
Credit quality indicators:                                        
Legacy Loans:                                        
Not classified  $63,085   $89,081   $15,035   $94,393   $119,637   $121,288   $1,302   $503,820 
Special mention   -    -    -    -    -    614    -    614 
Substandard   -    410    -         2,073    7    -    2,490 
Doubtful   -    158    63    -    594    3,072    -    3,887 
Total  $63,085   $89,649   $15,098   $94,393   $122,304   $124,981   $1,302   $510,811 
                                         
Acquired Loans:                                        
Not classified  $6,300   $92,975   $12,379   $36,484   $58,393   $36,731   $2,801   $246,063 
Special mention   -    -    -    -    -    -    -    - 
Substandard   -    -    -    -    519    -    -    519 
Doubtful   -    364    -    238    145    1,712    150    2,609 
Total  $6,300   $93,339   $12,379   $36,722   $59,057   $38,443   $2,951   $249,191 

 

·Special Mention - A Special Mention asset 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 asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.
·Substandard - Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
·Doubtful - Loans classified Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

 

Loans classified Special Mention, Substandard, Doubtful or Loss are reviewed at least quarterly to determine their appropriate classification. All commercial loan relationships are reviewed annually. Non-classified residential mortgage loans and consumer loans are not evaluated unless a specific event occurs to raise the awareness of possible credit deterioration.

 

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An aged analysis of past due loans are as follows:

 

   March 31, 2016 
               Commercial   Commercial   Commercial         
   Construction   Residential   Residential   owner   non-owner   loans   Consumer     
(in thousands)  and land   first lien   junior lien   occupied   occupied   and leases   loans   Total 
Analysis of past due loans:                                        
Legacy Loans:                                        
Accruing loans current  $63,824   $99,525   $17,813   $94,937   $121,434   $128,494   $2,290   $528,317 
Accruing loans past due:                                        
31-59 days past due   -    -    -    -    -    585    -    585 
60-89 days past due   -    -    -    -    -    34    -    34 
Greater than 90 days past due   8    -    -    -    445    615    -    1,068 
Total past due   8    -    -    -    445    1,234    -    1,687 
                                         
Non-accrual loans   -    -    -    -    594    3,003    -    3,597 
                                         
Total loans  $63,832   $99,525   $17,813   $94,937   $122,473   $132,731   $2,290   $533,601 
                                         
Acquired Loans:                                        
Accruing loans current  $6,022   $89,442   $11,170   $33,883   $57,268   $34,019   $2,567   $234,371 
Accruing loans past due:                                        
31-59 days past due   -    1,043    24    -    135    33    -    1,235 
60-89 days past due   -    247    -    -    -    -    16    263 
Greater than 90 days past due   -    -    42    460    668    -    -    1,170 
Total past due   -    1,290    66    460    803    33    16    2,668 
Non-accrual loans   -    518    -    468    280    2,183    140    3,589 
Total loans  $6,022   $91,250   $11,236   $34,811   $58,351   $36,235   $2,723   $240,628 

 

   December 31, 2015 
               Commercial   Commercial   Commercial         
   Construction   Residential   Residential   owner   non-owner   loans   Consumer     
(in thousands)  and land   first lien   junior lien   occupied   occupied   and leases   loans   Total 
Analysis of past due loans:                                        
Legacy Loans:                                        
Accruing loans current  $63,070   $89,319   $15,034   $94,141   $121,094   $120,025   $1,301   $503,983 
Accruing loans past due:                                        
31-59 days past due   -    -    1    252    -    24    1    278 
60-89 days past due   -    -    -    -    -    725    -    725 
Greater than 90 days past due   15    -    -    -    445    -    -    460 
Total past due   15    -    1    252    445    749    1    1,463 
                                         
Non-accrual loans   -    330    63    -    765    4,207    -    5,365 
                                         
Total loans  $63,085   $89,649   $15,098   $94,393   $122,304   $124,981   $1,302   $510,811 
                                         
Acquired Loans:                                        
Accruing loans current  $5,924   $91,936   $12,290   $35,574   $58,369   $36,568   $2,765   $243,426 
Accruing loans past due:                                        
31-59 days past due   67    89    59    73    337    -    11    636 
60-89 days past due   309    10    -    607    200    -    23    1,149 
Greater than 90 days past due   -    941    30    236    -    147    2    1,356 
Total past due   376    1,040    89    916    537    147    36    3,141 
Non-accrual loans   -    363    -    232    151    1,728    150    2,624 
Total loans  $6,300   $93,339   $12,379   $36,722   $59,057   $38,443   $2,951   $249,191 

 

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Total loans either in non-accrual status or in excess of ninety days delinquent totaled $9.4 million or 1.2% of total loans outstanding at March 31, 2016, which represents a decrease from $9.8 million or 1.3% at December 31, 2015.

 

The impaired loans at March 31, 2016 and December 31, 2015 are as follows:

 

   March 31, 2016 
               Commercial   Commercial   Commercial         
   Construction   Residential   Residential   owner   non-owner   loans   Consumer     
(in thousands)  & land   first lien   junior lien   occupied   occupied   and leases   loans   Total 
Impaired loans:                                        
Legacy Loans:                                        
Recorded investment  $-   $299   $-   $-   $2,667   $3,853   $-   $6,819 
With an allowance recorded   -    -    -    -    -    1,721    -    1,721 
With no related allowance recorded   -    299    -    -    2,667    2,132    -    5,098 
                                         
Related allowance   -    -    -    -    -    1,159    -    1,159 
                                         
Unpaid principal   -    299    -    -    2,667    3,853    -    6,819 
                                         
Average balance of impaired loans   -    325    -    -    2,667    4,244    -    7,236 
Interest income recognized   -    5    -    -    -    34    -    39 
                                         
Acquired Loans:                                        
Recorded investment  $-   $518   $-   $468   $280   $2,877   $140   $4,283 
With an allowance recorded   -    168    -    187    -    1,544    -    1,899 
With no related allowance recorded   -    350    -    281    280    1,333    140    2,384 
                                         
Related allowance   -    23    -    173    -    39    -    235 
                                         
Unpaid principal   -    552    -    630    433    3,902    146    5,663 
                                         
Average balance of impaired loans   -    610    -    781    552    9,523    148    11,614 
Interest income recognized   -    9    -    -    -    44    1    54 

 

   December 31, 2015 
               Commercial   Commercial   Commercial         
   Construction   Residential   Residential   owner   non-owner   loans   Consumer     
(in thousands)  & land   first lien   junior lien   occupied   occupied   and leases   loans   Total 
Impaired loans:                                        
Legacy Loans:                                        
Recorded investment  $-   $631   $63   $-   $2,838   $5,086   $-   $8,618 
With an allowance recorded   -    -    -    -    -    1,160    -    1,160 
With no related allowance recorded   -    631    63    -    2,838    3,926    -    7,458 
                                         
Related allowance   -    -    -    -    -    1,160    -    1,160 
                                         
Unpaid principal   -    631    63    -    2,838    5,086    -    8,618 
                                         
Average balance of impaired loans   -    622    74    -    3,417    7,198    -    11,311 
Interest income recognized   -    29    -    -    119    284    -    432 
                                         
Acquired Loans:                                        
Recorded investment  $-   $363   $-   $232   $151   $1,728   $150   $2,624 
With an allowance recorded   -    -    -    -    -    48    75    123 
With no related allowance recorded   -    363    -    232    151    1,680    75    2,501 
                                         
Related allowance   -    -    -    -    -    48    75    123 
                                         
Unpaid principal   -    426    -    402    302    2,742    150    4,022 
                                         
Average balance of impaired loans   -    444    -    197    63    901    106    1,711 
Interest income recognized   -    8    -    8    -    3    6    25 

 

18 

 

  

Included in the total impaired loans above were non-accrual loans of $7.2 million and $8.0 million at March 31, 2016 and December 31, 2015, respectively. Interest income that would have been recorded if non-accrual loans had been current and in accordance with their original terms was $60 thousand for the first three months of 2016.

 

Management routinely evaluates other real estate owned (“OREO”) based upon periodic appraisals. For the three months ended March 31, 2016 and 2015 there were no additional valuation allowances recorded as the current appraised value, less estimated cost to sell, was sufficient to cover the recorded OREO amount. For the three months ended March 31, 2016 and 2015 there were no new loans transferred from loans to OREO. For the first three months of 2016 or 2015, the Company did not sell any properties held as OREO.

 

Loans may have their terms restructured (e.g., interest rates, loan maturity date, payment and amortization period, etc.) in circumstances that provide payment relief to a borrower experiencing financial difficulty. Such restructured loans are considered trouble debt restructured loans (“TDRs”) that may either be impaired loans that may either be in accruing status or non-accruing status.  Non-accruing restructured loans may return to accruing status provided there is a sufficient period of payment performance in accordance with the restructure terms.  Loans may be removed from the restructured category in the year subsequent to the restructuring if a) the restructuring agreement specifies an interest rate equal to or greater than the rate that the creditor was willing to accept at the time of restructuring for a new loan with comparable risk and; b) the loan is not impaired based on the terms specified by the restructuring agreement.  

 

TDRs at March 31, 2016 and December 31, 2015 are as follows:

 

   March 31, 2016 
   Number   Non-Accrual   Number   Accrual   Total 
(dollars in thousands)  of Loans   Status   of Loans   Status   TDRs 
Residential real estate - first lien   -   $-    1   $299   $299 
Commercial - non-owner occupied   1    594    1    2,073    2,667 
Commercial loans and leases   1    231    1    4    235 
Consumer   1    140    -    -    140 
    3   $965    3   $2,376   $3,341 

 

   December 31, 2015 
   Number   Non-Accrual   Number   Accrual   Total 
(dollars in thousands)  of Loans   Status   of Loans   Status   TDRs 
Residential real estate - first lien   -   $-    1   $301   $301 
Commercial - non-owner occupied   1    594    1    2,073    2,667 
Commercial loans and leases   -    -    1    7    7 
Consumer   1    150    -    -    150 
    2   $744    3   $2,381   $3,125 

 

A summary of TDR modifications outstanding and performing under modified terms are as follows:

 

   March 31, 2016 
   Not Performing   Performing     
   to Modified   to Modified   Total 
(in thousands)  Terms   Terms   TDRs 
Residential real estate (RE) - first lien               
Forbearance  $-   $299   $299 
Commercial RE - non-owner occupied               
Rate modification   594    2,073    2,667 
Commercial loans               
Forbearance   231    -    231 
Extension or other modification   -    4    4 
Consumer               
Extension or other modification   140    -    140 
Total trouble debt restructure loans  $965   $2,376   $3,341 

 

19 

 

  

   December 31, 2015 
   Not Performing   Performing     
   to Modified   to Modified   Total 
(in thousands)  Terms   Terms   TDRs 
Residential real estate (RE) - first lien               
Forbearance  $-   $301   $301 
Commercial RE - non-owner occupied               
Rate modification   594    2,073    2,667 
Commercial loans               
Extension or other modification   -    7    7 
Consumer               
Extension or other modification   150    -    150 
Total trouble debt restructure loans  $744   $2,381   $3,125 

 

There was one new loan for $231 thousand restructured during the three months ended March 31, 2016.

 

Note 6: Goodwill and Other Intangible Assets

 

The Bank has one unit, which is the core banking operation. The table below shows goodwill balances at March 31, 2016.

 

   March 31 
(in thousands)  2016 
Goodwill     
Banking  $603 

 

The gross carrying amount and accumulated amortization of other intangible assets are as follows:

 

   March 31, 2016   Weighted 
   Gross       Net   Average 
   Carrying   Accumulated   Carrying   Remaining Life 
(in thousands)  Amount   Amortization   Amount   (Years) 
Amortizing intangible assets:                    
Core deposit intangible  $3,540   $814   $2,726    7.36 

 

   December 31, 2015   Weighted 
   Gross       Net   Average 
   Carrying   Accumulated   Carrying   Remaining Life 
(in thousands)  Amount   Amortization   Amount   (Years) 
Amortizing intangible assets:                    
Core deposit intangible  $3,540   $637   $2,903    7.61 

 

Estimated future amortization expense for amortizing intangibles for the years ending December 31, are as follows:

 

(in thousands)    
2016  $478 
2017   506 
2018   396 
2018   314 
2020   269 
Thereafter   763 
Total amortizing intangible assets  $2,726 

 

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Note 7: Deposits

 

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

 

(dollars in thousands)  March 31, 2016   December 31, 2015 
       % of       % of 
   Amount   Total   Amount   Total 
Noninterest-bearing demand  $177,621    22%  $173,689    23%
Interest-bearing checking   56,902    7    54,014    7 
Money market accounts   262,202    33    230,661    31 
Savings   55,382    7    51,989    7 
Certificates of deposit $100,000 and over   160,851    20    142,599    19 
Certificates of deposit under $100,000   90,218    11    94,456    13 
Total deposits  $803,176    100%  $747,408    100%

 

Note 8: Stock Options and Stock Awards

 

The Company’s equity incentive plan provides for awards of nonqualified and incentive stock options as well as vested and non-vested common stock awards. Employee stock options can be granted with exercise prices at the fair market value (as defined within the plan) of the stock at the date of grant and with terms of up to ten years. Except as otherwise permitted in the plan, upon termination of employment for reasons other than retirement, permanent disability or death, the option exercise period is reduced or the options are canceled.

 

Stock awards may also be granted to non-employee members of the Board of Directors as compensation for attendance and participation at meetings of the Board of Directors and meetings of the various committees of the Board. For the three months ended March 31, 2016 our Directors earned 2,125 shares of stock as compensation for their service.

 

The following table summarizes the Company’s stock option activity and related information for the periods ended:

 

   March 31, 2016   December 31, 2015 
       Weighted       Weighted 
       Average       Average 
       Exercise       Exercise 
   Shares   Price   Shares   Price 
Balance at January 1,   137,463   $12.30    264,652   $11.75 
Granted   -    -    -    - 
Exercised   (900)   11.00    (62,287)   10.48 
Forfeited   (1,250)   12.43    (64,902)   11.83 
Balance at period end   135,313   $12.31    137,463   $12.30 
Exercisable at period end   135,313   $12.31    137,463   $12.30 
Weighted average fair value of options granted during the year       $-        $- 

 

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 $12.03 at March 31, 2016 the options outstanding had an aggregate intrinsic value or $113 thousand. At December 31, 2015, based upon fair market value of $13.24, the options outstanding had an aggregate intrinsic value of $185 thousand.

 

Restricted Stock

 

In the second quarter of 2013, 50,000 shares of restricted stock were granted, with 30,000 of the shares subject to a three year vesting schedule with one-third of the shares vesting each year on the grant date anniversary. The remaining 20,000 awarded shares also are subject to a three year vesting schedule, however they only vest if certain annual performance measures are satisfactorily achieved.

 

21 

 

  

The following table presents a summary of the activity in the Company’s restricted stock for the periods ended:

 

   March 31, 2016   December 31, 2015 
       Weighted       Weighted 
       Average       Average 
       Grant Date       Grant Date 
   Shares   Fair Value   Shares   Fair Value 
Balance at January 1,   8,330   $6.92    33,330   $6.89 
Granted   -    -    -    - 
Vested   -    -    (18,336)   6.89 
Forfeited   -    -    (6,664)   6.85 
Balance at period end   8,330   $6.92    8,330   $6.92 

 

At March 31, 2016, based on restricted stock awards outstanding, all of the pre-tax compensation expense related to unvested restricted stock awards has been recognized. 

 

Restricted Stock Units

 

Restricted stock units (“RSUs”) are similar to restricted stock, except the recipient does not receive the stock immediately, but instead receives it according to a vesting plan and distribution schedule after achieving required performance milestones or upon remaining with the employer for a particular length of time. Each RSU that vests entitles the recipient to receive one share of common stock on a specified issuance date. The recipient does not have any stockholder rights, including voting, dividend or liquidation rights, with respect to the shares underlying awarded RSUs until the recipient becomes the record holder of those shares.

 

The Company did not grant any RSUs in the first quarter of 2016. During 2015, 73,500 RSUs were granted, with 43,500 of the RSUs subject to a three year vesting schedule with one-third of the RSUs vesting each year on the grant date anniversary. The remaining 30,000 awarded RSUs also are subject to a three year vesting schedule; they only vest, however, if certain annual performance measures are satisfactorily achieved.

 

In 2014, 44,500 RSUs were granted, with 19,500 of the RSUs subject to a three year vesting schedule with one-third of the RSUs vesting each year on the grant date anniversary. The remaining 25,000 awarded RSUs also are subject to a three year vesting schedule; they only vest, however, if certain annual performance measures are satisfactorily achieved.

 

The following table presents a summary of the activity in the Company’s RSUs for the periods ended:

 

   March 31, 2016   December 31, 2015 
       Weighted       Weighted 
       Average       Average 
       Grant Date       Grant Date 
   Shares   Fair Value   Shares   Fair Value 
Balance at January 1,   74,828   $13.23    44,500   $11.21 
Granted   -    -    73,500    14.00 
Vested   -    -    (19,836)   11.64 
Forfeited   -    -    (23,336)   (12.84)
Balance at period ended   74,828   $13.23    74,828   $13.23 

 

At March 31, 2016, based on RSU awards outstanding at that time, the total unrecognized pre-tax compensation expense related to unvested RSU awards was $770 thousand. This expense is expected to be recognized through 2018. 

 

Stock-Based Compensation Expense:   Stock-based compensation is recognized as compensation cost in the statement of operations based on the fair values on the measurement date, which, for the Company, is the date of the grant. The Company recognized stock-based compensation expense related to the issuance of restricted stock and restricted stock units of $78 thousand as well as $33 thousand for director compensation paid in stock for the period ended March 31, 2016. The Company recognized stock-based compensation expense related to the issuance of restricted stock and RSUs of $375 thousand as well as $95 thousand for director compensation paid in stock for the year ended December 31, 2015.

   

Valuation of Stock-Based Compensation:   The fair value of the Company’s stock options granted as compensation is estimated on the measurement date, which, for the Company, is the date of grant. The fair value of stock options was calculated using the Black-Scholes option-pricing model. There were not any stock options granted during the three months ended March 31, 2016 or in 2015.

 

22 

 

  

Note 9: Benefit Plans

 

Profit Sharing Plan

 

The Company sponsors a defined contribution retirement plan through a Section 401(k) profit sharing plan. Employees may contribute up to 15% of their pretax compensation. Participants are eligible for matching Company contributions up to 4% of eligible compensation dependent on the level of voluntary contributions. Company matching contributions totaled $150 thousand and $126 thousand, respectively, for the three months ended March 31, 2016 and 2015. The Company’s matching contributions vest immediately.

 

Supplemental Executive Retirement Plan (SERP)

 

In 2014, the Bank created a SERP for the Chief Executive Officer. This plan was amended in 2015. Under the defined benefit SERP, Ms. Scully will receive $150,000 each year for 15 years after attainment of the Normal Retirement Age (as defined in the SERP). Ms. Scully will earn vesting on a graduated schedule in which she will become fully vested on August 25, 2019, which has been established for purposes of the SERP as her retirement date. Expense related to this plan totaled $61 thousand and $23 thousand for the three month periods ending March 31, 2016 and 2015, respectively.

 

Note 10: Income per Common Share

 

The table below shows the presentation of basic and diluted income per common share for the periods indicated:

 

   Three months ended 
   March 31 
(dollars in thousands, except per share data)  2016   2015 
Net income  $960   $649 
Preferred stock dividends   (57)   (31)
Net income available to common shareholders (numerator)  $903   $618 
BASIC          
Basic average common shares outstanding (denominator)   6,955,462    4,112,379 
Basic income per common share  $0.13   $0.15 
DILUTED          
Average common shares outstanding   6,955,462    4,112,379 
Dilutive effect of common stock equivalents   92,525    116,014 
Diluted average common shares outstanding (denominator)   7,047,987    4,228,393 
Diluted income per common share  $0.13   $0.15 
           
Common stock equivalents outstanding that are  anti-dilutive and thus excluded from calculation of  diluted number of shares presented above   79,911    110,463 

 

23 

 

  

Note 11: Risk-Based Capital

 

In July 2013, the Federal Deposit Insurance Corporation (the “FDIC”) and the other federal bank regulatory agencies issued a final rule that revised their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision (“Basel III”) and certain provisions of the Dodd-Frank Act. The final rule, which became effective on January 1, 2015, applies to all depository institutions, top-tier bank holding companies with total consolidated assets of $1 billion or more and top-tier savings and loan holding companies. The Company will become subject to the final rule as administered by the Board of Governors of the Federal Reserve if and when the Company reaches $1 billion in total consolidated assets. The final rule creates a new common equity Tier 1 (“CET1”) minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital ratio (from 4% to 6% of risk-weighted assets), imposes a minimum leverage ratio of 4.0%, and changes the risk-weight of certain assets to better reflect credit risk and other risk exposures. These include, among other things, a 150% risk weight for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in non-accrual status, and a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital unless Howard Bank elects to opt-out from this treatment. The Bank has elected to permanently opt out of this treatment in our capital calculations, as permitted by the final rule.

 

The final rule will limit the Bank’s capital distributions and certain discretionary bonus payments if the Bank does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.

 

In addition, under revised prompt corrective action requirements, in order to be considered “well-capitalized,” the Bank must have a CET1 risk-based capital ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a total risk-based capital ratio of 10.0% or greater and a leverage ratio of 5.0% or greater.

 

There are two main categories of capital under the regulatory capital guidelines. Tier 1 capital includes common shareholders’ equity, qualifying preferred stock and trust preferred securities, less goodwill and certain other deductions (including the unrealized net gains and losses, after applicable income taxes, on securities available for sale carried at fair value). Tier 2 capital includes preferred stock not qualifying as Tier 1 capital, subordinated debt, the allowance for credit losses and net unrealized gains on marketable equity securities, subject to limitations by the guidelines. Tier 2 capital is limited to the amount of Tier 1 capital (i.e., at least half of total capital must be in the form of Tier 1 capital). Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, one of several risk weights is applied to the different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. For example, claims guaranteed by the U.S. government or one of its agencies are risk-weighted at 0%. Off-balance sheet items, such as loan commitments, are also applied a risk weight after calculating balance sheet equivalent amounts. One of four credit conversion factors (0%, 20%, 50% and 100%) is assigned to loan commitments based on the likelihood of the off-balance sheet item becoming an asset. For example, certain loan commitments are converted at 50% and then risk-weighted at 100%. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

Management believes that, as of March 31, 2016 and December 31, 2015, Bancorp and the Bank met all capital adequacy requirements to which they are subject.

 

24 

 

  

                   To be well 
                   capitalized under 
                   the FDICIA 
           For capital   prompt corrective 
   Actual   adequacy purposes   action provisions 
(dollars in thousands)  Amount   Ratio   Amount   Ratio   Amount   Ratio 
As of March 31, 2016:                              
Total capital                              
(to risk-weighted assets)                              
Howard Bank  $89,923    11.17%  $64,395    8.00%  $80,493    10.00%
Howard Bancorp  $97,742    12.14%  $64,420    8.00%   N/A      
Common equity tier 1 capital                              
(to risk-weighted assets)                              
Howard Bank  $84,664    10.52%  $36,222    4.50%  $52,321    6.50%
Howard Bancorp  $92,486    11.49%  $36,236    4.50%   N/A      
Tier 1 capital (to risk-weighted assets)                              
Howard Bank  $84,664    10.52%  $48,296    6.00%  $64,395    8.00%
Howard Bancorp  $92,486    11.49%  $48,315    6.00%   N/A      
Tier 1 capital (to average assets)                              
(Leverage ratio)                              
Howard Bank  $84,664    9.04%  $37,465    4.00%  $46,831    5.00%
Howard Bancorp  $92,486    9.87%  $37,473    4.00%   N/A      
As of December 31, 2015:                              
Total capital                              
(to risk-weighted assets)                              
Howard Bank  $87,860    11.07%  $63,482    8.00%  $79,353    10.00%
Howard Bancorp  $95,737    12.09%  $63,370    8.00%   N/A      
Common equity tier 1 capital                              
(to risk-weighted assets)                              
Howard Bank  $82,991    10.46%  $35,709    4.50%  $51,579    6.50%
Howard Bancorp  $90,868    11.47%  $35,646    4.50%   N/A      
Tier 1 capital (to risk-weighted assets)                              
Howard Bank  $82,991    10.46%  $47,612    6.00%  $63,482    8.00%
Howard Bancorp  $90,868    11.47%  $47,528    6.00%   N/A      
Tier 1 capital (to average assets)                              
(Leverage ratio)                              
Howard Bank  $82,991    9.04%  $36,703    4.00%  $45,879    5.00%
Howard Bancorp  $90,868    9.90%  $36,710    4.00%   N/A      

 

Note 12: Preferred Stock

 

On September 22, 2011, we entered into a Securities Purchase Agreement with the Secretary of the Treasury, pursuant to which Bancorp issued and sold to the Treasury 12,562 shares of our Senior Non-Cumulative Perpetual Preferred Stock, Series AA, having a liquidation preference of $1,000 per share, for aggregate proceeds of $12,562,000. The issuance was pursuant to the Treasury’s Small Business Lending Fund (SBLF) program, a $30 billion fund established under the Small Business Jobs Act of 2010, which encourages lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion. The Series AA Preferred Stock holders were entitled to receive non-cumulative dividends payable quarterly on each January 1, April 1, July 1 and October 1, beginning October 1, 2011. The dividend rate for future dividend periods was set based upon the percentage change in qualified lending between each dividend period and the baseline QSBL level established at the time the Agreement was entered into. Such dividend rate could vary from 1% per annum to 5% per annum for the second through tenth dividend periods and from 1% per annum to 7% per annum for the eleventh through the eighteenth dividend periods and through March 22, 2016 with respect to the nineteenth dividend period. If the Series AA Preferred Stock remained outstanding for more than four-and-one-half years, the dividend rate was fixed at 9%. As of March 22, 2016, the dividend rate was fixed at 9%. Such dividends were not cumulative, but Bancorp could only declare and pay dividends on its common stock (or any other equity securities junior to the Series AA Preferred Stock) if it had declared and paid dividends for the current dividend period on the Series AA Preferred Stock, and was subject to other restrictions on its ability to repurchase or redeem other securities. In addition, if (i) we have not timely declared and paid dividends on the Series AA Preferred Stock for six dividend periods or more, whether or not consecutive, the Treasury (or any successor holder of Series AA Preferred Stock) could designate a representative to attend all meetings of Bancorp’s Board of Directors in a nonvoting observer capacity and Bancorp must give such representative copies of all notices, minutes, consents and other materials that Bancorp provide to its directors in connection with such meetings.

 

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On May 6, 2016, after receiving all required regulatory approvals, Howard Bancorp, Inc., the parent company of Howard Bank, redeemed its outstanding 12,562 shares of Series AA Preferred Stock that it had previously issued to the U.S. Department of the Treasury under its Small Business Lending Fund (“SBLF”) program, for $12,562,000 in accordance with its terms. Howard Bancorp used the proceeds of a $12,562,000 term loan with Raymond James Bank, N.A. to fund the redemption of the Series AA Preferred Stock.

 

Note 13: Fair Value

 

FASB ASC Topic 820 “Fair Value Measurements” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC Topic 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

 

Under FASB ASC Topic 820, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine the fair value. These hierarchy levels are:

 

Level 1: Valuations for assets and liabilities traded in active exchange markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

 

Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

A financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

Recurring Fair Value Measurements

 

All classes of investment securities available for sale are recorded at fair value using reliable an unbiased evaluations by an industry wide valuation service and therefor fall into a Level 2 of the fair value hierarchy. The service uses evaluated pricing models that vary based on asset class and include available trade, bid and other market information. Various methodologies include broker quotes, propriety models, descriptive terms and conditions databases, and quality control programs.

 

Fair value of loans held for sale is based upon outstanding investor commitments or, in the absence of such commitments, based on current investor yield requirements or third party pricing models and are considered Level 2. Gains and losses on loan sales are determined using specific identification method. Changes in fair value are recognized in the Consolidated Statement of Operations as part of realized and unrealized gain on mortgage banking activities.

 

Interest rate lock commitments are recorded at fair value determined as the amount that would be required to settle each of these derivatives at the balance sheet date. In the normal course of business, the Company enters into contractual interest rate lock commitments to extend credit to borrowers with fixed expiration dates. The commitment becomes effective when the borrower locks in a specified interest rate within the time frames established by the mortgage division. All borrowers are evaluated for credit worthiness prior to the extension of the commitment. Market risk arises if interest rates move adversely between the time interest rate is locked by the borrower and the sale date of the loan to an investor. To mitigate this interest rate risk inherent in providing rate lock commitments to borrowers, the Company enters into best effort forward sales contracts to sell loans to investors. The forward sales contracts lock in an interest rate price for the sale of loans similar to the specific rate lock commitment. Rate lock commitments to the borrowers through to the date the loan closes are undesignated derivatives and accordingly, are marked to fair value in earnings. These valuations fall into a Level 2 of the fair value hierarchy.

 

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Non-recurring Fair Value Measurements

 

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management's best estimate is used.

 

Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or market value. Market value is measured based on the value of the collateral securing these loans and is classified at a Level 3 in the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable. The value of real estate collateral is determined based on appraisal by qualified licensed appraisers hired by the Company. The value of business equipment, inventory and accounts receivable collateral is based on the net book value on the business' financial statements and, if necessary, discounted based on management's review and analysis. Appraised and reported values may be discounted based on management's historical knowledge, changes in market conditions from the time of valuation, and/or management's expertise and knowledge of the client and client's business. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

 

Other real estate owned acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at the lower of cost or fair value, less selling costs. Any write-downs to fair value at the time of transfer to OREO are charged to the allowance for credit losses subsequent to foreclosure. Values are derived from appraisals of underlying collateral and discounted cash flow analysis. There were no valuation losses recognized during the three months ended March 31, 2016 and valuation losses of $736 thousand recognized for the year ended December 31, 2015. OREO is classified within Level 3 of the hierarchy.

 

The following table sets forth the Company's financial assets and liabilities that were accounted for or disclosed at fair value on a recurring basis at March 31, 2016 and December 31, 2015:

 

March 31, 2016      Quoted Price in   Significant     
       Active Markets   Other   Significant 
   Carrying   for Identical   Observable   Unobservable 
   Value   Assets   Inputs   Inputs 
(in thousands)  (Fair Value)   (Level 1)   (Level 2)   (Level 3) 
Investment securities:                    
U.S. Government agencies  $68,502   $-   $68,502   $- 
Mortgage-backed securities   41    -    41    - 
Other investments   1,607    -    1,607    - 
Loans held for sale   40,027    -    40,027    - 
Loans held for investment   5,984    -    5,984    - 
Rate lock commitments   491    -    491    - 

 

December 31, 2015      Quoted Price in   Significant     
       Active Markets   Other   Significant 
   Carrying   for Identical   Observable   Unobservable 
   Value   Assets   Inputs   Inputs 
(in thousands)  (Fair Value)   (Level 1)   (Level 2)   (Level 3) 
Investment securities:                    
U.S. Government agencies  $48,422   $-   $48,422   $- 
Mortgage-backed securities   57    -    57    - 
Other investments   1,094    -    1,094    - 
Loans held for sale   49,677    -    49,677    - 
Rate lock commitments   508    -    508    - 

 

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Assets under fair value option:

 

March 31, 2016  Carrying   Aggregate     
   Fair Value   Unpaid     
(in thousands)  Amount   Principal   Difference 
Loans held for sale  $40,027   $38,996   $1,031 
Loans held for investment   5,984    5,831    153 

 

December 31, 2015  Carrying   Aggregate     
   Fair Value   Unpaid     
(in thousands)  Amount   Principal   Difference 
Loans held for sale  $49,677   $48,395   $1,282 

 

There were no loans held for sale that were in non-accrual status or 90 days or more past due and still accruing interest at the end of either period presented. Net gain (loss) from the changes included in earnings in fair value of loans held for sale was $(99) thousand and $69 thousand during the three months ended March 31, 2016 and the year ended December 31, 2015, respectively.

 

The following table sets forth the Company's financial assets and liabilities that were accounted for or disclosed at fair value on a nonrecurring basis at March 31, 2016 and December 31, 2015. OREO is carried at fair value less anticipated costs to sell. Impaired loans are measured using the fair value of collateral, if applicable.

 

March 31, 2016      Quoted Price in   Significant     
       Active Markets   Other   Significant 
   Carrying   for Identical   Observable   Unobservable 
   Value   Assets   Inputs   Inputs 
(in thousands)  (Fair Value)   (Level 1)   (Level 2)   (Level 3) 
Other real estate owned  $2,369   $-   $-   $2,369 
Impaired loans:                    
Construction and land   -    -    -    - 
Residential - first lien   794    -    -    794 
Residential - junior lien   -    -    -    - 
Commercial - owner occupied   295    -    -    295 
Commercial - non-owner occupied   2,947    -    -    2,947 
Commercial loans and leases   5,532    -    -    5,532 
Consumer   140    -    -    140 

 

December 31, 2015      Quoted Price in   Significant     
       Active Markets   Other   Significant 
   Carrying   for Identical   Observable   Unobservable 
   Value   Assets   Inputs   Inputs 
(in thousands)  (Fair Value)   (Level 1)   (Level 2)   (Level 3) 
Other real estate owned  $2,369   $-   $-   $2,369 
Impaired loans:                    
Construction and land   -    -    -    - 
Residential - first lien   994    -    -    994 
Residential - junior lien   63    -    -    63 
Commercial - owner occupied   232    -    -    232 
Commercial - non-owner occupied   2,989    -    -    2,989 
Commercial loans and leases   5,606    -    -    5,606 
Consumer   75    -    -    75 

 

At March 31, 2016 and December 31, 2015, OREO consisted of the outstanding balance of $5.2 million, less valuation allowance of $2.9 million. Related allowance on impaired loans was $1.4 million and $1.3 million at March 31, 2016 and December 31, 2015 respectively.

 

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Various techniques are used to valuate OREO and impaired loans.  All loans for which the underlying collateral is real estate, either construction, land, commercial, or residential, an independent appraisal is used to identify the value of the collateral.  The approaches within the appraisal report include sales comparison, income, and replacement cost analysis.  The resulting value will be adjusted by a selling cost of 9.5% and the residual value will be used to determine if there is an impairment. Commercial loans and leases and consumer utilize a liquidation approach to the impairment analysis

 

The following table presents required information in accordance with ASC Topic 825 “Financial Instruments” at March 31, 2016 and December 31, 2015. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are based on quoted market prices where available or calculated using present value techniques. Since quoted market prices are not available on many of our financial instruments, estimates may be based on the present value of estimated future cash flows and estimated discount rates. These financial assets and liabilities have not been recorded at fair value.

 

The following methods and assumptions were used to estimate the fair value of financial instruments where it is practical to estimate fair value:

 

Securities available-for-sale: Based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

 

Nonmarketable equity securities: Because these securities are not marketable, the carrying amount approximates the fair value.

 

Loans held for sale: Loans held for sale are carried at fair value. Based on outstanding investor commitments or, in the absence of such commitments, on current investor yield requirements on third party models.

 

Derivative financial instruments: Based on estimate loan closing and investor delivery rate based on historical experience.

 

Loans: For variable rate loans the carrying amount approximates the fair value. For fixed rate loans the fair value is calculated by discounting estimated cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The estimated cash flows do not anticipate prepayments.

 

Deposits: The carrying amount of non-maturity deposits such as demand deposits, money market and saving deposits approximates the fair value. The fair value of deposits with predetermined maturity dates such as certificate of deposits is estimated by discounting the future cash flows using current rates of similar deposits with similar remaining maturities.

 

Short-term borrowing: Variable rate repurchase agreements carrying amounts approximate the fair values at the reporting date.

 

Long-term borrowing: Because the borrowing is a variable rate instrument, the carrying amount approximates the fair value.

 

Management has made estimates of fair value discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, management has no basis to determine whether the fair value presented for loans would be indicative of the value negotiated in an actual sale.

 

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   March 31, 2016 
           Quoted Price in   Significant     
           Active Markets   Other   Significant 
           for Identical   Observable   Unobservable 
   Carrying   Fair   Assets   Inputs   Inputs 
(in thousands)  Amount   Value   (Level 1)   (Level 2)   (Level 3) 
Financial Assets                         
Investment securities  $70,150   $70,150   $-   $70,150   $- 
Nonmarketable equity securities   3,849    3,849    -    3,849    - 
Loans held for sale   40,027    40,027    -    40,027    - 
Loans held for investment   5,984    5,984    -    5,984    - 
Rate lock commitments   491    491    -    491    - 
Loans and leases   762,989    764,460    -    -    764,460 
Financial Liabilities                         
Deposits   803,176    802,646    -    -    802,646 
Short-term borrowings   50,149    50,149    -    50,149    - 
Long-term borrowings   36,185    36,401    -    36,401    - 

 

   December 31, 2015 
           Quoted Price in   Significant     
           Active Markets   Other   Significant 
           for Identical   Observable   Unobservable 
   Carrying   Fair   Assets   Inputs   Inputs 
(in thousands)  Amount   Value   (Level 1)   (Level 2)   (Level 3) 
Financial Assets                         
Investment securities  $49,573   $49,573   $-   $49,573   $- 
Nonmarketable equity securities   4,163    4,163    -    4,163    - 
Loans held for sale   49,677    49,677    -    49,677    - 
Rate lock commitments   508    508    -    508    - 
Loans and leases   755,133    760,562    -    -    760,562 
Financial Liabilities                         
Deposits   747,408    747,938    -    -    747,938 
Short-term borrowings   69,121    69,121    -    69,121    - 
Long-term borrowings   29,707    29,911    -    29,911    - 

 

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This section is intended to help our stockholders and potential investors understand our financial performance through a discussion of the factors affecting our consolidated financial condition at March 31, 2016 and December 31, 2015 and our consolidated results of operations for the periods ended March 31, 2016 and March 31, 2015. This section should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements.

 

Overview

 

Howard Bancorp, Inc. is the holding company for Howard Bank. Howard Bank is a trust company chartered under Subtitle 2 of Title 3 of the Financial Institutions Article of the Annotated Code of Maryland. The Bank was formed in March 2004 and commenced banking operations on August 9, 2004. Howard Bank does not exercise trust powers, and our regulatory structure is the same as a Maryland-chartered commercial bank. As such, our business has consisted primarily of originating both commercial and real estate loans secured by property in our market area. Typically, commercial real estate and business loans involve a higher degree of risk and carry a higher yield than one-to four-family residential loans. Although we plan to continue to focus on commercial customers, we intend to increase our originations of one- to four-family residential mortgage loans going forward, increasing our portfolio of mortgage lending and also selling select loans into the secondary markets.

 

We are headquartered in Ellicott City, Maryland and we consider our primary market area to be The Greater Baltimore Metropolitan Area. We engage in a general commercial banking business, making various types of loans and accepting deposits. We market our financial services to small to medium sized businesses and their owners, professionals and executives, and high-net-worth individuals. Our loans are primarily funded by core deposits of customers in our market.

 

Our core business strategy is to deliver superior customer service that is supported by an extremely high level of banking sophistication. Our specialized community banking focus on both local markets and small business related market segments is combined with a broad array of products, new technology and seasoned banking professionals which positions the Bank differently than most competitors. Our experienced executives establish a relationship with each client and bring value to all phases of a client’s business and personal banking needs.

 

Our results of operations depend mainly on our net interest income, which is the difference between the interest income we earn on our loan and investment portfolios and the interest expense we pay on deposits and borrowings. Results of operations are also affected by provisions for credit losses, noninterest income and noninterest expense. Our noninterest expense consists primarily of compensation and employee benefits, as well as office occupancy, loan production expense, deposit insurance and general administrative and data processing expenses. Our operations are significantly affected by general economic and competitive conditions, particularly with respect to changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially affect our financial condition and results of operations.

 

On August 28, 2015, Bancorp completed its acquisition of Patapsco Bancorp, Inc., the parent company of The Patapsco Bank, through the merger of Patapsco Bancorp with and into Bancorp.

 

Total assets increased by over $43.7 million or 4.6% when comparing March 31, 2016 assets of $990.4 million to the $946.8 million at December 31, 2015. Total loans outstanding of $774.2 million at the end of March 2016 showed an increase of $14.2 million or 1.9% compared to total loans of $760.0 million on December 31, 2015. Total deposits grew by $55.8 million or 7.5% when comparing March 31, 2016 to December 31, 2015.

 

The first quarter of 2016 net income was $960 thousand, which represents an increase of $311 thousand or 47.9% over net income for the first quarter of 2015. Net interest income for the quarter ended March 31, 2016 was $8.6 million versus $6.8 million for the first three months of 2015, an increase of approximately $1.9 million or 27.7%. Total noninterest income was $2.9 million for the first quarter of 2016, compared to $2.3 million for the same period in 2015. Total noninterest expenses increased to $9.7 million from $7.8 million for the three months ended March 31, 2016 and 2015, respectively.

 

Critical Accounting Policies

 

Our accounting and financial reporting policies conform to GAAP and general practice within the banking industry. Accordingly, preparation of the financial statements require management to exercise significant judgment or discretion or make significant assumptions and estimates based on the information available that have, or could have, a material impact on the carrying value of certain assets or on income. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. In reviewing and understanding financial information for us, you are encouraged to read and understand the significant accounting policies used in preparing our financial statements. The accounting policies we view as critical are those relating to the allowance for credit losses, goodwill and other intangible assets, business combinations, income taxes and share based compensation. Significant accounting policies are discussed in detail in “Notes to Consolidated Financial Statements - Note 1: Summary of Significant Account Policies” in our Annual Report on Form 10-K for the year ended December 31, 2015. There have been no changes to the significant accounting policies as described in the Annual Report. Disclosures regarding the effects of new accounting pronouncements are included in Note 1 of this report.

 

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Balance Sheet Analysis and Comparison of Financial Condition

 

A comparison between March 31, 2016 and December 31, 2015 balance sheets is presented below.

 

Assets

 

Total assets increased $43.7 million, or 4.6%, to $990.4 million at March 31, 2016 compared to $946.8 million at December 31, 2015. This asset growth was a result of increases in cash and cash equivalents of $16.6 million or 43.4%, investment securities of $20.6 million or 41.5%, and net total loans of $13.8 million or 1.8%, partially offset by a decline in loans held for sale of $9.7 million or 19.4%. The loan portfolio growth was a result of our ongoing focus on organic growth. The asset growth was funded from increases in customer deposits, which increased by $55.8 million or 7.5%. Because of the significant growth in deposits during the quarter ended March 31, 2016, overall borrowing levels at March 31, 2016 were reduced $12.5 million or 12.6% from December 31, 2015.

 

Securities Available for Sale

 

We currently hold U.S. agency securities, mortgage backed securities, stock in another small financial institution and mutual fund investments in our securities portfolio, all of which are categorized as available for sale. The investment in a mutual fund is a supplement to our community reinvestment program activities. We use our securities portfolio to provide the required collateral for funding via commercial customer repurchase agreements as well as to provide sufficient liquidity to fund our loans and provide funds for withdrawals of deposited funds. At March 31, 2016 and December 31, 2015 we held an investment in stock of the Federal Home Loan Bank of Atlanta (“FHLB”) of $3.8 million and $4.2 million, respectively. This investment, which is required for continued FHLB membership, is based partially upon the dollar amount of borrowings outstanding from the FHLB. These investments are carried at cost.

 

The following tables set forth the composition of our investment securities portfolio at the dates indicated.

 

(in thousands)  March 31, 2016   December 31, 2015 
   Amortized   Estimated   Amortized   Estimated 
   Cost   Fair Value   Cost   Fair Value 
U.S. Government                    
Agencies  $68,506   $68,502   $48,467   $48,422 
Mortgage-backed   39    41    54    57 
Other investments   1,600    1,607    1,100    1,094 
   $70,145   $70,150   $49,621   $49,573 

 

We had securities available for sale of $70.1 million and $49.6 million at March 31, 2016 and December 31, 2015, respectively, which were recorded at fair value. This represents an increase of $20.6 million, or 41.5%, from year end 2015. Nearly $66.0 million of our securities portfolio matures in one year or less, giving us the capacity to fund future loan growth while maintaining an appropriate amount of securities to collateralize our repurchase agreements at March 31, 2016. We did not record any gains or losses on the sales or calls of securities for the three months ended March 31, 2016.

 

With respect to our portfolio of securities available for sale, the portfolio contained 13 securities with unrealized losses of $13 thousand and 18 securities with unrealized losses of $45 thousand at March 31, 2016 and December 31, 2015, respectively. Changes in the fair value of these securities resulted primarily from interest rate fluctuations. We do not intend to sell these securities nor is it more likely than not that we would be required to sell these securities before their anticipated recovery, and we believe the collection of the investment and related interest is probable. Based on this analysis, we do not consider any of the unrealized losses to be other than temporary impairment losses.

 

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Loan and Lease Portfolio

 

Total loans and leases (which excludes loans held for sale) increased by $14.2 million or 1.9%, to $774.2 million at March 31, 2016 from $760.0 million at December 31, 2015. At March 31, 2016, total loans and leases represented 78.2% of total assets, down slightly compared to 80.3% of total assets at December 31, 2015. Total residential real estate loans registered the largest organic growth during the first quarter of 2016, increasing $9.4 million or 4.5% from December 31, 2015 levels. This growth is primarily a result of the expansion of our mortgage banking activities that we began in 2014. Commercial loans and leases increased $5.5 million during the quarter as we continue to focus on the needs of small to mid-size business and their owners. Commercial real estate loans declined approximately $1.9 million during the three months ended March 31, 2016. Historically, commercial real estate has shown some of the largest increases and represents the largest loan segment in our portfolio.

 

The following table sets forth the composition of our loan portfolio at the dates indicated. In addition to the amounts below, we had loans held for sale of $40.0 million at March 31, 2016 and $49.7 million at December 31, 2015.

 

(dollars in thousands)  March 31, 2016   December 31, 2015 
   Amount   Percent   Amount   Percent 
Real Estate                    
Construction and land  $69,854    9.0%  $69,385    9.1%
Residential - first lien   190,775    24.6    182,988    24.1 
Residential - junior lien   29,049    3.8    27,477    3.6 
Total residential real estate   219,824    28.4    210,465    27.7 
Commercial - owner occupied   129,748    16.8    131,114    17.3 
Commercial - non-owner occupied   180,824    23.4    181,361    23.9 
Total commercial real estate   310,572    40.2    312,475    41.1 
Total real estate loans   600,250    77.6    592,325    77.9 
Commercial loans and leases   168,966    21.8    163,424    21.4 
Consumer loans   5,013    0.6    4,253    0.6 
Total loans and leases  $774,229    100.0%  $760,002    100.0%

 

Deposits

 

Our deposits increased from $747.4 million at December 31, 2015 to $803.2 million at March 31, 2016, an increase of $55.8 million or 7.4%. Deposit increases were as follows: certificates of deposit $14.0 million or 5.9%; saving and money market accounts $34.9 million or 12.4%; interest bearing demand deposits $2.9 million or 5.4%; and non-interest bearing demand deposits $3.9 million or 2.3%.

 

The following tables set forth the distribution of total deposits, by account type, at the dates indicated:

 

(dollars in thousands)  March 31, 2016   December 31, 2015 
           % of           % of 
   Amount   Total   Amount   Total 
Noninterest-bearing demand  $177,621    22%  $173,689    23%
Interest-bearing checking   56,902    7    54,014    7 
Money market accounts   262,202    33    230,661    31 
Savings   55,382    7    51,989    7 
Certificates of deposit $100,000 and over   160,851    20    142,599    19 
Certificates of deposit under $100,000   90,218    11    94,456    13 
Total deposits  $803,176    100%  $747,408    100%

 

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Borrowings

 

Customer deposits remain the primary source we utilize to meet funding needs, but we supplement this with short-term and long-term borrowings. Borrowings consist of overnight unsecured master notes, overnight securities sold under agreement to repurchase (“repurchase agreements”), FHLB advances, and a junior subordinated debenture assumed in the Patapsco Bancorp acquisition. Our borrowings totaled $86.3 million at March 31, 2016 and $98.8 million at December 31, 2015. Short-term borrowings totaled $50.1 million at March 31, 2016 and $69.1 million at December 31, 2015. At March 31, 2016, we had nine long-term FHLB advances outstanding totaling $32.8 million. Additionally we had $3.4 million in junior subordinated debt associated with the Patapsco Bancorp acquisition at March 31, 2016.

 

Shareholders’ Equity

 

Total shareholders’ equity increased by $1.0 million, or approximately 1.1%, from $92.9 million at December 31, 2015 to $93.9 million at March 31, 2016. The increase in shareholders’ equity is the result of the retention of the earnings for the first quarter of 2016.

 

Total shareholders’ equity at March 31, 2016 represents a capital to asset ratio of 9.5%, while the total shareholders’ equity at December 31, 2015 represented a capital to asset ratio of 9.8%. Even though capital levels increased, the overall growth in asset levels resulted in a slight decline in the capital to asset ratio.

 

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Average Balance and Yields

 

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, and have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

 

   Three months ended March 31, 
   2016   2015 
   Average   Income   Yield   Average   Income   Yield 
(dollars in thousands)  Balance   / Expense   / Rate   Balance   / Expense   / Rate 
Earning assets                              
Loans and leases: 1                              
Commercial loans and leases  $164,493   $2,197    5.37%  $131,415   $1,679    5.18%
Commercial real estate   311,015    3,753    4.85    242,986    3,168    5.29 
Construction and land   69,907    827    4.76    62,747    724    4.68 
Residential real estate   212,422    2,269    4.30    111,750    1,350    4.90 
Consumer   4,152    69    6.67    4,343    60    5.57 
Total loans and leases   761,989    9,115    4.81    553,241    6,981    5.12 
Loans held for sale   45,310    392    3.48    41,351    377    3.70 
Federal funds sold   30,463    33    0.44    22,951    13    0.24 
Securities: 2                              
U.S. Treasury   -    -    -    3,998    -    - 
U.S. Gov agencies   42,390    27    0.25    30,256    28    0.37 
Mortgage-backed   51    1    4.30    93    1    4.51 
Other investments   4,851    44    3.67    2,739    26    3.81 
Total securities   47,292    72    0.61    37,086    55    0.60 
Total earning assets   885,054    9,612    4.37    654,629    7,426    4.60 
Cash and due from banks   6,838              7,513           
Bank premises and equipment, net   20,879              12,124           
Other assets   30,527              20,241           
Less: allowance for credit losses   (5,008)             (3,681)          
Total assets  $938,290             $690,826           
Interest-bearing liabilities                              
Deposits:                              
Interest-bearing demand accounts  $54,613    31    0.23%  $47,851   $24    0.20%
Money market   235,202    252    0.43    142,381    173    0.49 
Savings   53,418    18    0.14    32,726    14    0.17 
Time deposits   234,625    474    0.81    200,370    366    0.74 
Total interest-bearing deposits   577,858    775    0.54    423,328    577    0.55 
Short-term borrowings   55,953    65    0.47    47,138    29    0.25 
Long-term borrowings   34,281    129    1.51    17,750    53    1.21 
Total interest-bearing funds   668,092    969    0.58    488,216    659    0.55 
Noninterest-bearing deposits   171,212              135,699           
Other liabilities and accrued expenses   6,779              8,233           
Total liabilities   846,083              632,148           
Shareholders' equity   92,207              58,678           
Total liabilities & shareholders' equity  $938,290             $690,826           
Net interest rate spread 3       $8,643    3.79%       $6,767    4.05%
Effect of noninterest-bearing funds             0.14              0.14 
Net interest margin on earning assets 4             3.93%             4.19%

  

(1)Loan fee income is included in the interest income calculation, and non-accrual loans are included in the average loan base upon which the interest rate earned on loans is calculated.
(2)Available for sale securities are presented at amortized cost.
(3)Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(4)Net interest margin represents net interest income divided by average total interest-earning assets.

 

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Rate/Volume Analysis

 

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total of the changes set forth in the rate and volume columns are presented in the total column.

 

   Three months ended March 31, 
   2016 vs. 2015 
   Due to variances in 
(in thousands)  Total   Rates   Volumes 1 
Interest earned on:               
Loans and leases:               
Commercial loans and leases  $518   $253   $265 
Commercial real estate   585    (1,066)   1,651 
Construction and land   103    49    54 
Residential real estate   919    (681)   1,600 
Consumer   9    48    (39)
Loans held for sale   15    (90)   105 
Taxable securities   17    5    12 
Federal funds sold   20    48    (28)
Total interest income   2,186    (1,434)   3,620 
                
Interest paid on:               
Savings deposits   4    (11)   15 
Interest-bearing demand deposits   7    15    (8)
Money market accounts   79    (87)   166 
Time deposits   108    145    (37)
Short-term borrowings   36    103    (67)
Long-term borrowings   76    55    21 
Total interest expense   310    220    90 
Net interest earned  $1,876   $(1,654)  $3,530 

 

(1)Change attributed to mix (rate and volume) are included in volume variance

 

Comparison of Results of Operations

 

A comparison between the three months ended March 31, 2016 and March 31, 2015 is presented below.

 

General

 

Net income available to common shareholders increased $285 thousand, or 46.1%, to $903 thousand for the three months ended March 31, 2016 compared to $618 thousand for the three months ended March 31, 2015. The increase in net income available to common shareholders was primarily due to the $2.4 million increase in revenues (net interest income plus non-interest income) partially offset by a $1.8 million increase in non-interest expense. Much of this revenue growth and the increased operating expenses are attributable to our continued strategic and organic growth initiatives.

 

Interest Income

 

Interest income increased $2.2 million, or 29.4%, to $9.6 million for the three months ended March 31, 2016 compared to $7.4 million for the same period in 2015. The increase was due primarily to a $2.1 million, or 29.2% increase in interest income on loans and leases. The increase in interest income on loans was almost entirely due to a $208.7 million or 37.7% increase in the average balance of portfolio loans quarter over quarter, largely as a result of the Patapsco Bancorp acquisition, partially offset by a decrease in the yield on the loan portfolio.

 

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Interest Expense

 

Interest expense increased $310 thousand, or 47.1%, to $969 thousand for the three months ended March 31, 2016, compared to $659 thousand for the same period in 2015. We experienced a 36.5% increase in average interest-bearing deposits that corresponds to a $198 thousand or 34.4% increase in interest expense quarter over quarter. The average rate paid on these interest-bearing deposits dropped from 0.55% for the first quarter of 2015 to 0.54% for the same period in 2016, and therefore had a minimal impact on the change in interest expense quarter over quarter. Our ability to maintain the average rate on interest-bearing deposits was principally driven by our continuing ability to attract and maintain lower-cost funding sources, in particular, money market accounts. The balance of the increase in interest expense was due to a $112 thousand increase in interest expense on borrowings comparing the three months ended March 31, 2016 to the three months ended March 31, 2015, as the average balance of borrowings over these periods increased $25.3 million and the average rate increased 52 basis points.

 

Net Interest Income

 

Net interest income is our largest source of operating revenue. Net interest income is affected by various factors including changes in interest rates and the composition of interest-earning assets and interest-bearing liabilities and maturities. Net interest income is determined by the interest rate spread (i.e., the difference between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income increased $1.9 million, or 27.7%, during the three months ended March 31, 2016 compared to the three months ended March 31, 2015.

 

Provision for Credit Losses

 

We establish a provision for credit losses, which is a charge to earnings, in order to maintain the allowance for credit losses at a level we consider adequate to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. In determining the level of the allowance for credit losses, management considers past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of nonperforming loans. The amount of the allowance is based on estimates and actual losses may vary from such estimates as more information becomes available or economic conditions change. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as circumstances change as more information becomes available. The allowance for credit losses is assessed on a quarterly basis and provisions are made for credit losses as required in order to maintain the allowance.

 

Based on management’s evaluation of the above factors, we had a provision for credit losses of $385 thousand for the three months ended March 31, 2016 compared to $250 thousand for the same period in 2015, an increase of $135 thousand. The provision for 2016 reflects additional general provisions that are required given our continued growth in the size of the loan portfolio, while maintaining specific provisions required on loans that are individually evaluated and deemed to be impaired.

 

Management analyzes the allowance for credit losses as described in the section entitled “Allowance for Credit Losses.” The provision that is recorded is sufficient, in management’s judgment, to bring the allowance for credit losses to a level that reflects the losses inherent in our loan portfolio relative to loan mix, economic conditions and historical loss experience. Management believes, to the best of its knowledge, that all known losses as of the balance sheet dates have been recorded. However, although management uses the best information available to make determinations with respect to the provisions for credit losses, additional provisions for credit losses may be required to be established in the future should economic or other conditions change substantially. In addition, as an integral part of their examination process, the Commissioner and the FDIC will periodically review the allowance for credit losses. The Commissioner and the FDIC may require us to recognize additions to the allowance based on their analysis of information available to them at the time of their examination.

 

Noninterest Income

 

Noninterest income was $2.9 million for the three months ended March 31, 2016 compared to $2.3 million for the three months ended March 31, 2015, a $503 thousand or 21.4% increase. As reflected in the results for the first quarter of 2016, increases in our noninterest income continue to be driven by growth in our mortgage banking activities. Due to higher levels of mortgage originations, total gains recorded on the sales of loans produced approximately $1.6 million in noninterest revenues for the first quarter of 2016 and $1.4 million for the first quarter of 2015. Earnings on bank owned life insurance (“BOLI”) increased $65 thousand comparing the first three months of 2016 to the first three months of 2015 as a result of the Bank purchasing an additional $2.2 million in BOLI, as well as the addition of the BOLI acquired in the Patapsco Bancorp acquisition. Other operating income, which consists mainly of non-depository account fees for customer related services such as wire, merchant card and ATM activity, remained relatively flat quarter over quarter, increasing $8 thousand. These increases were partially offset by a $56 thousand or 25.9% decrease in service charges on deposit accounts. Service charges on deposit accounts, which consist of account activity fees such as overdraft fees and other traditional banking fees, decreased quarter over quarter primarily as a result of lower levels of overdraft activity.

 

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Noninterest Expenses

 

Noninterest expenses increased $1.8 million or 23.49%, to $9.7 million for the three months ended March 31, 2016 from $7.8 million for the three months ended March 31, 2015. Compensation related expenses and occupancy cost continue to represent the largest percentage of noninterest expense. Comparing the three months ended March 31, 2016 to the three months ended March 31, 2015 these categories increased $734 thousand or 19.1% and $639 thousand or 65.5%, respectively. The primary driver of the increase in compensation and benefits was our acquisition of Patapsco Bancorp in August 2015, which added four additional branch locations to our network and the attendant branch staff to our employee count, and required us to retain additional back-office personnel to support this growth. Occupancy expense for the 2016 period increased due to $430 thousand accrued during the quarter for lease payments remaining on three less active branches we have decided to close during the second quarter of 2016, as well as the addition of the four former Patapsco Bank branches.

 

In addition, loan production expense, which includes costs related to originating, closing and securitizing loans, including both loans placed in our portfolio and loans held for sale, increased $478 thousand or 138.6% to $823 thousand during the three months ended March 31, 2016. These expenses increased as a result of the greater number of loans originated during the three months ended March 31, 2016 compared to the three months ending March 31, 2015. FDIC assessment costs increased $118 thousand or 131.1% during the three months ended March 31, 2016 compared to the same period last year, which increase is directly related to our $222.5 million or 38.3% growth in deposits since March 31, 2015.

 

These increases were partially offset by the lack of any merger and restructuring costs during the three months ended March 31, 2016, compared to $406 thousand of such costs during the three months ended March 31, 2015 associated with our acquisition of NBRS Financial Bank in 2014 and of Patapsco Bancorp in August 2015.

 

Net Income Available to Common Shareholders

 

Net income available to common shareholders for the three months ended March 31, 2016 increased $285 thousand, or 46.1%, to $903 thousand compared to net income available to common shareholders of $618 thousand for the three months ended March 31, 2015. The increase in net income available to common shareholders was primarily due to the $2.4 million increase in revenues (net interest income plus non-interest income) partially offset by the $1.8 million increase in non-interest expense. Much of this revenue growth and the increased operating expenses are attributable to our continued growth initiatives.

 

Pretax income increased by $403 thousand from $1.0 million in the first quarter of 2015 to $1.4 million in the first quarter of 2016. Income tax expense amounted to $474 thousand during the first three months of 2016 compared to $382 thousand for the first three months of 2015.

 

Earnings per common share for the first three months of 2016 were $0.13 per share compared to $0.15 for the same period of 2015. Per-share earnings were negatively impacted by the issuance of $25 million of new common equity in the second quarter of 2015.

 

Nonperforming and Problem Assets

 

Management performs reviews of all delinquent loans and our loan officers contact customers to attempt to resolve potential credit issues in a timely manner. When in the best interests of the Bank and the customer, we will do a troubled debt restructure with respect to a particular loan. When not possible, we are aggressively moving loans through the legal and foreclosure process within applicable legal constraints.

 

Loans are generally placed on non-accrual status when payment of principal or interest is 90 days or more past due and the value of the collateral securing the loan, if any, is less than the outstanding balance of the loan. Loans are also placed on non-accrual status if management has serious doubt about further collectability of principal or interest on the loan, even though the loan is currently performing. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received. The loan may be returned to accrual status if the loan is brought current, has performed in accordance with the contractual terms for a reasonable period of time and ultimate collectability of the total contractual principal and interest is no longer in doubt.

 

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The table below sets forth the amounts and categories of our nonperforming assets, which consist of non-accrual loans, troubled debt restructurings and OREO (which includes real estate acquired through, or in lieu of, foreclosure), at the dates indicated.

 

(in thousands)  March 31, 2016   December 31, 2015 
Non-accrual loans:          
Real estate loans:          
Residential - First Lien  $518   $693 
Residential - Junior Lien   -    63 
Commercial   1,342    1,148 
Commercial and leases   5,186    5,935 
Consumer   140    150 
Total non-accrual loans   7,186    7,989 
Accruing troubled debt restructured loans:          
Real estate loans:          
Residential - First Lien  $299   $301 
Residential - Junior Lien   -    - 
Commercial   2,073    2,073 
Commercial and leases   4    7 
Consumer   -    - 
Total accruing troubled debt restructured loans   2,376    2,381 
Total non-performing loans   9,562    10,370 
Other real estate owned:          
Land   964    964 
Commercial   1,405    1,405 
Total other real estate owned   2,369    2,369 
Total non-performing assets  $11,931   $12,739 
Ratios:          
Non-performing loans to total gross loans   1.24%   1.36%
Non-performing assets to total assets   1.20%   1.35%

 

Included in non-accrual loans at March 31, 2016 are three troubled debt restructured loans totaling $965 thousand that were not performing in accordance with their modified terms, and the accrual of interest has ceased. Further, there were three troubled debt restructured loans totaling $2.4 million performing subject to their modified terms at March 31, 2016. At March 31, 2016, loans 90 days or more past due and still accruing interest consisted:

 

·Construction and land loans totaling $8 thousand.
·Residential junior liens totaling $42 thousand.
·Commercial real estate owner occupied loans totaling $460 thousand.
·Commercial real estate non-owner occupied loans totaling $1.1 million.
·Commercial loans totaling $615 thousand.
·Consumer loans totaling $16 thousand.

 

Under GAAP, we are required to account for certain loan modifications or restructurings as “troubled debt restructurings.” In general, the modification or restructuring of a debt constitutes a troubled debt restructuring if the Bank, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession, such as a reduction in the effective interest rate, to the borrower that we would not otherwise consider. A debt restructuring or loan modification for a borrower, however, does not necessarily constitute a troubled debt restructuring.

 

Nonperforming assets amounted to $11.9 million, or 1.20% of total assets, at March 31, 2016 compared to $12.7 million, or 1.35% of total assets, at December 31, 2015. Total nonperforming assets decreased $808 thousand or 6.3% during the first quarter of 2016. There were no changes to OREO carrying amounts during the quarter ended March 31, 2016.

 

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The composition of our nonperforming loans at March 31, 2016 is further described below:

 

Non-Accrual Loans:

·Four residential first lien loans totaling $518 thousand, one with a $23 thousand specific reserve.
·Five commercial owner occupied loans totaling $468 thousand, representing three credit relationships, one with a $173 thousand specific reserve.
·Four commercial non-owner occupied loans totaling $875 thousand.
·29 commercial loans totaling $5.2 million, three with a Small Business Administration (“SBA”) guarantee and four that include a specific reserve totaling $1.2 million.
·One consumer loan in the amount of $140 thousand.

 

Accruing Trouble Debt Restructured Loans:

·One residential first lien for $299 thousand.
·One non-owner occupied commercial real estate loan for $2.1 million.
·One commercial loan for $4 thousand.

 

Allowance for Credit Losses

 

We provide for credit losses based upon the consistent application of our documented allowance for credit loss methodology. All credit losses are charged to the allowance for credit losses and all recoveries are credited to it. Additions to the allowance for credit losses are provided by charges to income based on various factors which, in our judgment, deserve current recognition in estimating probable losses. We regularly review the loan portfolio and make provisions for credit losses in order to maintain the allowance for credit losses in accordance with GAAP. The allowance for credit losses consists primarily of two components:

 

1)Specific allowances are established for loans classified as Substandard or Doubtful. For loans classified as impaired, the allowance is established when the net realizable value (collateral value less costs to sell) of the impaired loan is lower than the carrying amount of the loan. The amount of impairment provided for as a specific allowance is represented by the deficiency, if any, between the underlying collateral value and the carrying value of the loan. Impaired loans for which the estimated fair value of the loan, or the loan’s observable market price or the fair value of the underlying collateral, if the loan is collateral dependent, exceeds the carrying value of the loan are not considered in establishing specific allowances for credit losses; and

 

2)General allowances established for credit losses on a portfolio basis for loans that do not meet the definition of impaired loans. The portfolio is grouped into similar risk characteristics, primarily loan type and regulatory classification. We apply an estimated loss rate to each loan group. The loss rates applied are based upon our loss experience adjusted, as appropriate, for the qualitative factors discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions.

 

The allowance for credit losses is maintained at a level to provide for losses that are probable and can be reasonably estimated. Management’s periodic evaluation of the adequacy of the allowance is based on Howard Bank’s past credit loss experience, known and inherent losses in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans.

 

A loan is considered past due or delinquent when a contractual payment is not paid on the day it is due. A loan is considered impaired when, based on current information and events, it is probable that Howard Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. The impairment of a loan may be measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if repayment is expected to be provided by the collateral. Generally, Howard Bank’s impairment on such loans is measured by reference to the fair value of the collateral. Interest income on impaired loans is recognized on the cash basis.

 

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Our loan policies state that after all collection efforts have been exhausted, and the loan is deemed to be a loss, then the remaining loan balance will be charged to the established allowance for credit losses. All loans are evaluated for loss potential once it has been determined by the Watch Committee that the likelihood of repayment is in doubt. When a loan is past due for at least 90 days or a deterioration in debt service coverage ratio, guarantor liquidity, or loan-to-value ratio has occurred that would cause concern regarding the likelihood of the full repayment of principal and interest, and the loan is deemed not to be well secured, the loan should be moved to non-accrual status and a specific reserve is established if the net realizable value is less than the principal value of the loan balance(s). Once the actual loss value has been determined a charge-off against the allowance for credit losses for the amount of the loss is taken. Each loss is evaluated on its specific facts regarding the appropriate timing to recognize the loss.

 

The adjustments to historical loss experience are based on our evaluation of several qualitative factors, including:

 

·changes in lending policies, procedures, practices or personnel;
·changes in the level and composition of construction portfolio and related risks;
·changes and migration of classified assets;
·changes in exposure to subordinate collateral lien positions;
·levels and composition of existing guarantees on loans by SBA or other agencies;
·changes in national, state and local economic trends and business conditions;
·changes and trends in levels of loan payment delinquencies; and
·any other factors that managements considers relevant to the quality or performance of the loan portfolio.

 

We evaluate the allowance for credit losses based upon the combined total of the specific and general components. Generally when the loan portfolio increases, absent other factors, the allowance for credit loss methodology results in a higher dollar amount of estimated probable losses than would be the case without the increase. Generally when the loan portfolio decreases, absent other factors, the allowance for credit loss methodology results in a lower dollar amount of estimated probable losses than would be the case without the decrease.

 

Commercial and commercial real estate loans generally have greater credit risks compared to the one- to four-family residential mortgage loans we originate, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of the related business and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy. Actual credit losses may be significantly more than the allowance for credit losses we have established, which could have a material negative effect on our financial results.

 

Generally, we underwrite commercial loans based on cash flow and business history and receive personal guarantees from the borrowers where appropriate. We generally underwrite commercial real estate loans and residential real estate loans at a loan-to-value ratio of 85% or less at origination. Accordingly, in the event that a loan becomes past due and, randomly with respect to performing loans, we will conduct visual inspections of collateral properties and/or review publicly available information, such as online databases, to ascertain property values. We will also obtain formal appraisals on a regular basis even if we are not considering liquidation of the property to repay a loan. It is our practice to obtain updated appraisals if there is a material change in market conditions or if we become aware of new or additional facts that indicate a potential material reduction in the value of any individual property collateral.

 

For impaired loans, we utilize the appraised value in determining the appropriate specific allowance for credit losses attributable to a loan. In addition, changes in the appraised value of multiple properties securing our loans may result in an increase or decrease in our general allowance for credit losses as an adjustment to our historical loss experience due to qualitative and environmental factors, as described above.

 

At March 31, 2016 and December 31, 2015, nonperforming loans were $9.6 million and $10.4 million, respectively. The amount of impaired loans requiring specific reserves totaled $3.6 million at March 31, 2016 and $1.3 million at December 31, 2015. The amount of impaired loans with no specific valuation allowance totaled $6.0 million and $9.1 million, respectively, at such dates.

 

Nonperforming loans are evaluated and valued at the time the loan is identified as impaired on a case by case basis, at the lower of cost or market value. Market value is measured based on the value of the collateral securing the loan. The value of real estate collateral is determined based on an appraisal by qualified licensed appraisers hired by us. Appraised values may be discounted based on management’s historical experience, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. The difference between the appraised value and the principal balance of the loan will determine the specific allowance valuation required for the loan, if any. Nonperforming loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly.

 

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We evaluate the loan portfolio on at least a quarterly basis, more frequently if conditions warrant, and the allowance is adjusted accordingly. While we use the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, the Commissioner and the FDIC will periodically review the allowance for credit losses. The Commissioner and the FDIC may require us to recognize additions to the allowance based on their analysis of information available to them at the time of their examination.

 

The following table sets forth activity in our allowance for credit losses for the periods ended:

 

(in thousands)  March 31, 2016   December 31, 2015 
Balance at beginning of year  $4,869   $3,602 
Charge-offs:          
Real estate          
Construction and land loans   -    - 
Residential first lien loans   -    (23)
Residential junior lien loans   -    (12)
Commercial owner occupied loans   -    - 
Commercial non-owner occupied loans   -    (82)
Commercial loans and leases   (7)   (825)
Consumer loans   (11)   (5)
    (18)   (947)
Recoveries:          
Real estate          
Construction and land loans   -    - 
Residential first lien loans   -    3 
Residential junior lien loans   -    1 
Commercial owner occupied loans   -    - 
Commercial non-owner occupied loans   2    318 
Commercial loans and leases   9    52 
Consumer loans   9    4 
    20    378 
Net charge-offs   2    (569)
Provision for credit losses   385    1,836 
Balance at end of year  $5,256   $4,869 
           
Net charge-offs to average loans and leases   0.00%   0.09%

 

Allocation of Allowance for Credit Losses

 

The following tables set forth the allowance for credit losses allocated by loan category and the percent of loans in each category to total loans at the dates indicated. The allowance for credit losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

 

   March 31, 2016   December 31, 2015 
(dollars in thousands)  Amount   Percent 1   Amount   Percent 1 
Real estate                    
Construction and land loans  $362    9.0%  $265    9.1%
Residential first lien loans   349    24.6    300    24.1 
Residential junior lien loans   56    3.8    47    3.6 
Commercial owner occupied loans   543    16.8    309    17.3 
Commercial non-owner occupied loans   838    23.4    728    23.9 
Commercial loans and leases   3,043    21.8    3,094    21.5 
Consumer loans   65    0.6    126    0.6 
Total  $5,256    100.0%  $4,869    100.0%

  

(1)Represents the percent of loans in each category to total loans, not the composition of the allowance for credit losses.

 

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Liquidity and Capital Resources

 

Liquidity is the ability to meet current and future financial obligations. Our primary sources of funds consist of deposit inflows, loan repayments, advances from the FHLB, principal repayments and the sale of securities available for sale. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset Liability Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of March 31, 2016 and December 31, 2015. We regularly monitor and adjust our investments in liquid assets based upon our assessment of:

 

1)Expected loan demand;
2)Expected deposit flows and borrowing maturities;
3)Yields available on interest-earning deposits and securities; and
4)The objectives of our asset/liability management program.

 

Excess liquid assets are invested generally in interest-earning deposits and short-term securities.

 

Our most liquid assets are cash and cash equivalents. The level of these assets is dependent on our operating, financing, lending and investing activities during any given period. At March 31, 2016 and December 31, 2015, cash and cash equivalents totaled $55.0 million and $38.3 million, respectively.

 

Our cash flows are derived from operating activities, investing activities and financing activities as reported in our statements of cash flows included in our financial statements.

 

At March 31, 2016 and December 31, 2015, we had $137.6 million and $167.7 million, respectively, in loan commitments outstanding, including commitments issued to originate loans of $58.1 million and $95.0 million at March 31, 2016 and December 31, 2015, respectively, and $79.6 million and $72.7 million in unused lines of credit to borrowers at March 31, 2016 and December 31, 2015, respectively. In addition to commitments to originate loans and unused lines of credit we had $6.1 million and $7.8 million in letters of credit at March 31, 2016 and December 31, 2015, respectively. Certificates of deposit due within one year of March 31, 2016 totaled $166.2 million, or 20.7% of total deposits. If we do not retain these deposits, we may be required to seek other sources of funds, including loan and securities sales, and FHLB advances. Depending on market conditions, we may be required to pay higher rates on our deposits or other borrowings than we currently pay on the certificates of deposit. We believe, however, based on historical experience and current market interest rates that we will retain upon maturity a large portion of our certificates of deposit with maturities of one year or less.

 

Our primary investing activity is originating loans. During the three months ended March 31, 2016 cash was utilized to increase our portfolio of loans by $14.2 million. For the three month period ended March 31, 2015, these amounts were $17.5 million and $6.3 million, respectively. During the first quarter of 2016 we utilized cash to purchase additional securities totaling $40.5 million while receiving $20.0 million as a result of securities maturing. For the same period in 2015 we purchase additional securities totaling $8.5 million and we received $19.0 in security maturities.

 

Financing activities consist primarily of activity in deposit accounts and FHLB advances. We experienced a net increase in deposits of $55.8 million during the three months ended March 31, 2016. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors.

 

Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB that provide an additional source of funds. FHLB advances were $70.5 million at March 31, 2016 compared to $78.5 million at December 31, 2015. At March 31, 2016, we had the ability to borrow up to a total of $208.6 million based upon our credit availability at the FHLB, subject to collateral requirements.

 

The Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At March 31, 2016 and December 31, 2015, the Bank exceeded all regulatory capital requirements. The Bank is considered “well capitalized” under regulatory guidelines.

 

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Commitments, Contingent Liabilities, and Off-Balance Sheet Arrangements

 

We are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our customers. These financial instruments are limited to commitments to originate loans and involve, to varying degrees, elements of credit, interest rate, and liquidity risk. These do not represent unusual risks, and management does not anticipate any losses which would have a material effect on us.

 

Outstanding loan commitments and lines of credit at March 31, 2016 and December 31, 2015 are as follows:

 

(in thousands)  March 31, 2016   December 31, 2015 
         
Unfunded loan commitments  $58,058   $95,009 
Unused lines of credit   79,584    72,664 
Letters of credit   6,130    7,848 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. We generally require collateral to support financial instruments with credit risk on the same basis as we do for balance sheet instruments. Management generally bases the collateral required on the credit evaluation of the counterparty. Commitments generally have interest rates at current market rates, expiration dates or other termination clauses and may require payment of a fee. Available credit lines represent the unused portion of lines of credit previously extended and available to the customer so long as there is no violation of any contractual condition. These lines generally have variable interest rates. Since we expect many of the commitments to expire without being drawn upon, and since it is unlikely that all customers will draw upon their lines of credit in full at any one time, the total commitment amount or line of credit amount does not necessarily represent future cash requirements. We evaluate each customer’s credit-worthiness on a case-by-case basis. Because we conservatively underwrite these facilities at inception, we have not had to withdraw any commitments. We are not aware of any loss that we would incur by funding our commitments or lines of credit.

 

The credit risk involved in these financial instruments is essentially the same as that involved in extending loan facilities to customers. No amount has been recognized in the statement of financial condition at March 31, 2016 or December 31, 2015 as a liability for credit loss related to these commitments.

 

Impact of Inflation and Changing Prices

 

Our financial statements and related notes have been prepared in accordance with GAAP. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.

 

Item 3.Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable

 

Item 4.Controls and Procedures

 

As of the end of the period covered by this quarterly report on Form 10-Q Bancorp’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of Bancorp’s disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, Bancorp’s Chief Executive Officer and Chief Financial Officer concluded that Bancorp’s disclosure controls and procedures are effective as of March 31, 2016. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by Bancorp in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

In addition, there were no changes in Bancorp’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2016, that have materially affected, or are reasonably likely to materially affect Bancorp’s internal control over financial reporting.

 

PART II - Other Information

 

Item 1.Legal Proceedings

 

From time to time, we may be involved in litigation relating to claims arising out of our normal course of business. As of the date of this report, we are not aware of any material pending litigation matters.

 

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Item 1A.Risk Factors

 

There have been no material changes in the risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC on March 30, 2016.

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

 

None

 

Item 3.Defaults upon Senior Securities

 

None

 

Item 4.Mine Safety Disclosures

 

Not applicable

 

Item 5.Other Information

 

On May 6, 2016, after receiving all required regulatory approvals, Howard Bancorp, Inc., the parent company of Howard Bank, redeemed its outstanding 12,562 shares of Series AA Preferred Stock that it had previously issued to the U.S. Department of the Treasury under its Small Business Lending Fund (“SBLF”) program, for $12,562,000 in accordance with its terms. Howard Bancorp used the proceeds of a $12,562,000 term loan with Raymond James Bank, N.A. to fund the redemption of the Series AA Preferred Stock.

 

Item 6.Exhibits

 

10.28* First Amendment to the Howard Bank Supplemental Executive Retirement Plan effective January 19, 2016 - incorporated by reference from Exhibit 10.28 of Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC on March 30, 2016
   
31(a) Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - filed herewith
   
31(b) Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - filed herewith
   
32 Certifications pursuant to 18 U.S.C. Section 1350, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith
   
101 Extensible Business Reporting Language (“XBRL”) – filed herewith
101.INS XBRL Instance File
101.SCH XBRL Schema File
101.CAL XBRL Calculation File
101.DEF XBRL Definition File
101.LAB XBRL Label File
101.PRE XBRL Presentation File

 

* Management compensatory plan, contract or arrangement

 

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Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

    HOWARD BANCORP, INC.
    (Registrant)
     
May 12, 2016   /s/ Mary Ann Scully
Date   MARY ANN SCULLY
    PRESIDENT AND CEO
     
May 12, 2016   /s/ George C. Coffman
Date   GEORGE C. COFFMAN
    EVP AND CFO

 

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