Company Quick10K Filing
Howard Bancorp
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 19 $283
10-Q 2019-11-08 Quarter: 2019-09-30
10-Q 2019-08-09 Quarter: 2019-06-30
10-Q 2019-05-10 Quarter: 2019-03-31
10-K 2019-03-15 Annual: 2018-12-31
10-Q 2018-11-07 Quarter: 2018-09-30
10-Q 2018-08-09 Quarter: 2018-06-30
10-Q 2018-05-10 Quarter: 2018-03-31
10-K 2018-03-15 Annual: 2017-12-31
10-Q 2017-11-07 Quarter: 2017-09-30
10-Q 2017-08-09 Quarter: 2017-06-30
10-Q 2017-05-10 Quarter: 2017-03-31
10-K 2017-03-16 Annual: 2016-12-31
10-Q 2016-11-14 Quarter: 2016-09-30
10-Q 2016-08-15 Quarter: 2016-06-30
10-Q 2016-05-12 Quarter: 2016-03-31
10-K 2016-03-30 Annual: 2015-12-31
10-Q 2015-11-16 Quarter: 2015-09-30
10-Q 2015-08-13 Quarter: 2015-06-30
10-Q 2015-05-14 Quarter: 2015-03-31
10-K 2015-03-27 Annual: 2014-12-31
10-Q 2014-11-13 Quarter: 2014-09-30
10-Q 2014-08-13 Quarter: 2014-06-30
10-Q 2014-05-14 Quarter: 2014-03-31
10-K 2014-03-27 Annual: 2013-12-31
10-Q 2013-11-14 Quarter: 2013-09-30
10-Q 2013-08-14 Quarter: 2013-06-30
10-Q 2013-05-15 Quarter: 2013-03-31
10-K 2013-03-27 Annual: 2012-12-31
10-Q 2012-11-09 Quarter: 2012-09-30
10-Q 2012-08-14 Quarter: 2012-06-30
10-Q 2012-06-27 Quarter: 2012-03-31
8-K 2020-02-06 Officers, Regulation FD, Exhibits
8-K 2020-01-21 Earnings, Regulation FD, Exhibits
8-K 2019-10-23 Earnings, Regulation FD, Exhibits
8-K 2019-07-24 Earnings, Regulation FD, Exhibits
8-K 2019-05-22 Amend Bylaw, Shareholder Vote, Exhibits
8-K 2019-04-23 Earnings, Regulation FD, Exhibits
8-K 2019-01-30 Regulation FD, Exhibits
8-K 2019-01-30 Earnings, Exhibits
8-K 2018-12-06 Enter Agreement, Off-BS Arrangement, Regulation FD, Other Events, Exhibits
8-K 2018-10-24 Regulation FD, Exhibits
8-K 2018-10-24 Earnings, Exhibits
8-K 2018-09-05 Regulation FD, Exhibits
8-K 2018-07-31 Regulation FD, Exhibits
8-K 2018-07-25 Earnings, Exhibits
8-K 2018-06-15 Officers, Exhibits
8-K 2018-05-23 Shareholder Vote
8-K 2018-04-30 Earnings, Exhibits
8-K 2018-02-26 M&A, Officers, Regulation FD, Exhibits
8-K 2018-01-24 Amend Bylaw, Exhibits
8-K 2018-01-22 Earnings, Exhibits
HBMD 2019-09-30
Part I
Item 1. Financial Statements
Note 1: Summary of Significant Accounting Policies
Note 2: Business Combinations
Note 3: Investment Securities
Note 4: Loans and Leases
Note 5: Credit Quality Assessment
Note 6: Derivatives and Hedging Activities
Note 7: Goodwill and Other Intangible Assets
Note 8: Leases
Note 9: Deposits
Note 10: Stock Options and Stock Awards
Note 11: Benefit Plans
Note 12: Income (Loss) per Common Share
Note 13: Risk-Based Capital
Note 14: Fair Value
Note 15: Revenue Recognition
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4.Controls and Procedures
Part II - Other Information
Item 1.Legal Proceedings
Item 1A.Risk Factors
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.Defaults Upon Senior Securities
Item 4.Mine Safety Disclosures
Item 5.Other Information
Item 6.Exhibits
EX-31.A tm1919497d1_ex31a.htm
EX-31.B tm1919497d1_ex31b.htm
EX-32 tm1919497d1_ex32.htm

Howard Bancorp Earnings 2019-09-30

HBMD 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
MRLN 298 1,280 1,074 12 0 24 54 150 0% 2.8 2%
FRBK 295 2,941 2,690 7 0 5 35 295 0% 8.5 0%
SMBK 294 2,391 2,092 0 0 25 49 94 1.9 1%
CVCY 289 1,613 1,382 0 0 22 34 241 7.1 1%
HBMD 283 2,296 1,992 3 0 10 34 311 0% 9.2 0%
CSTR 282 2,018 1,756 4 0 13 42 126 0% 3.0 1%
PCB 278 1,726 1,503 2 0 26 65 144 0% 2.2 2%
MFSF 277 2,091 1,874 0 0 22 46 244 5.3 1%
SFST 274 2,116 1,926 7 0 25 54 157 0% 2.9 1%
FNLC 273 1,999 1,794 0 0 25 56 266 4.7 1%

10-Q 1 tm1919497d1_10q.htm FORM 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2019

 

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.)

 

3301 Boston Street, Baltimore, MD   21224
(Address of principal executive offices)   (Zip Code)

 

(410) 750-0020

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.01 per share   HBMD   Nasdaq Capital Market

 

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 every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

 

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

 

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company x Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

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 October 31, 2019.

 

Common Stock, $0.01 par value – 19,081,777 shares

 

 

 

 

 

 

HOWARD BANCORP, INC.

TABLE OF CONTENTS

 

    Page
PART I Financial Information 4
Item 1. Financial Statements 4
  Consolidated Balance Sheets (Unaudited) 4
  Consolidated Statements of Operations (Unaudited) 5
  Consolidated Statements of Comprehensive (Loss) Income (Unaudited) 6
  Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) 6
  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 35
     
Item 3. Quantitative and Qualitative Disclosure about Market Risk 52
     
Item 4. Controls and Procedures 53
     
PART II Other Information 53
Item 1. Legal Proceedings 53
     
Item 1A. Risk Factors 53
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 53
     
Item 3. Defaults Upon Senior Securities 53
     
Item 4. Mine Safety Disclosures 53
     
Item 5. Other Information 54
     
Item 6. Exhibits 54
     
Signatures   54

 

2

 

 

FORWARD-LOOKING STATEMENTS

 

This report contains “forward-looking statements,” as that phrase is defined in the Private Securities Litigation Reform Act of 1995, 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 opening of additional branches, expansion into new markets, potential acquisitions, increasing capital, market share, loan, investments and asset growth, revenue and profit growth and expanding client relationships. Actual results could differ materially from those anticipated in such forward-looking statements. Factors that might cause such differences include, but are not limited to:

 

·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;
·our ability to fully realize the expected benefits and other impacts of acquisitions;
·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 U.S. Securities and Exchange Commission (the “SEC”) and the Public Company Accounting Oversight Board;
·changes in our organization, compensation and benefit plans;
·loss of key personnel;
·the impact of recent branch closures and the opening of new branches on expenses;
·our ability to maintain the asset quality of our investment portfolios and the anticipated recovery and collection of unrealized losses on securities available for sale;
·our ability to continue our expected focus on commercial customers as well as continuing to originate residential real estate loans and both maintaining our residential mortgage loan portfolio and continuing to sell loans into the secondary market;
·the impact of the Tax Cuts and Jobs Act (the “TCJA”) of 2017;
·changes in our expected occupancy and equipment expenses;
·changes to our allowance for credit losses, and the adequacy thereof;
·our ability to maintain adequate liquidity levels and future sources of liquidity;
·our ability to retain a large portion of maturing certificates of deposit;
·the impact on us of recent changes to accounting standards;
·the impact of future cash requirements relating to commitments to extend credit;
·the impact of interest rate changes on our net interest income; and
·the effects of other factors, including those discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 and the other documents filed by the Company with the SEC from time to time.

 

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. 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.

 

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

 

3

 

 

PART I

Item 1.   Financial Statements

 

Howard Bancorp, Inc. and Subsidiary

 

Consolidated Balance Sheets

 

   Unaudited     
   September 30,   December 31, 
(in thousands, except share data)  2019   2018 
ASSETS          
Cash and due from banks  $74,655   $100,976 
Federal funds sold   354    522 
Total cash and cash equivalents   75,009    101,498 
Securities available for sale, at fair value   164,026    223,858 
Securities held to maturity, at amortized cost   9,750    9,250 
Nonmarketable equity securities   13,642    11,786 
Loans held for sale, at fair value   46,713    21,261 
Loans and leases, net of unearned income   1,729,880    1,649,751 
Allowance for credit losses   (9,598)   (9,873)
Net loans and leases   1,720,282    1,639,878 
Bank premises and equipment, net   42,693    45,137 
Goodwill   65,949    70,697 
Core deposit intangible   9,186    11,482 
Bank owned life insurance   75,364    74,153 
Other real estate owned   3,926    4,392 
Deferred tax assets, net   36,049    35,285 
Interest receivable and other assets   30,886    17,837 
Total assets  $2,293,475   $2,266,514 
LIABILITIES          
Noninterest-bearing deposits  $442,549   $429,200 
Interest-bearing deposits   1,213,074    1,256,606 
Total deposits   1,655,623    1,685,806 
Short-term borrowings   274,161    134,576 
Long-term borrowings   28,191    142,077 
Accrued expenses and other liabilities   26,748    9,372 
Total liabilities   1,984,723    1,971,831 
COMMITMENTS AND CONTINGENCIES          
STOCKHOLDERS' EQUITY          
Common stock - par value of $0.01 authorized 20,000,000 shares; issued and outstanding 19,081,777 shares at September 30, 2019 and 19,039,347 at December 31, 2018   191    190 
Capital surplus   276,431    275,843 
Retained earnings   29,258    18,277 
Accumulated other comprehensive income   2,872    373 
Total stockholders’ equity   308,752    294,683 
Total liabilities and stockholders’ equity  $2,293,475   $2,266,514 

 

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

 

4

 

 

Consolidated Statements of Operations

 

   Unaudited 
   For the nine months ended   For the three months ended 
   September 30,   September 30, 
(in thousands, except share data)  2019   2018   2019   2018 
INTEREST INCOME                    
Interest and fees on loans and leases  $62,880   $54,293   $21,183   $20,927 
Interest and dividends on securities   5,095    2,856    1,499    1,172 
Other interest income   909    812    273    337 
Total interest income   68,884    57,961    22,955    22,436 
INTEREST EXPENSE                    
Deposits   11,630    5,401    4,062    2,322 
Short-term borrowings   2,539    1,980    1,204    573 
Long-term borrowings   2,672    1,905    474    894 
Total interest expense   16,841    9,286    5,740    3,789 
NET INTEREST INCOME   52,043    48,675    17,215    18,647 
Provision for credit losses   3,443    3,241    608    696 
Net interest income after provision for credit losses   48,600    45,434    16,607    17,951 
NONINTEREST INCOME                    
Service charges on deposit accounts   2,037    1,567    726    651 
Realized and unrealized gains on mortgage banking activity   5,847    4,424    2,054    986 
Gain (loss) on the sale of securities   658    (139)   -    - 
(Loss) Gain on the disposal of bank premises & equipment   (83)   236    -    236 
Income from bank owned life insurance   1,392    1,159    485    454 
Loan fee income   3,022    4,768    984    843 
Other operating income   2,537    2,162    784    686 
Total noninterest income   15,410    14,177    5,033    3,856 
NONINTEREST EXPENSE                    
Compensation and benefits   24,245    26,171    7,939    8,691 
Occupancy and equipment   8,196    6,157    1,442    1,990 
Amortization of core deposit intangible   2,296    2,056    745    834 
Marketing and business development   1,486    2,649    545    540 
Professional fees   2,250    1,766    747    743 
Data processing fees   3,697    2,800    1,172    1,152 
Merger and restructuring expense   -    15,461    -    (212)
FDIC assessment   604    844    36    430 
Other real estate owned   524    102    393    83 
Loan production expense   1,981    2,932    761    680 
Other operating expense   4,438    3,750    1,625    1,465 
Total noninterest expense   49,717    64,688    15,405    16,396 
INCOME (LOSS) BEFORE INCOME TAXES   14,293    (5,077)   6,235    5,411 
Income tax expense (benefit)   3,312    (1,103)   1,598    1,432 
NET INCOME (LOSS)  $10,981   $(3,974)  $4,637   $3,979 
NET INCOME (LOSS) PER COMMON SHARE                    
Basic  $0.58   $(0.23)  $0.24   $0.21 
Diluted  $0.58   $(0.23)  $0.24   $0.21 

 

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

 

5

 

 

Consolidated Statements of Comprehensive (Loss) Income

 

   Unaudited 
   Nine months ended   Three months ended 
   September 30,   September 30, 
(in thousands)  2019   2018   2019   2018 
Net Income (Loss)  $10,981   $(3,974)  $4,637   $3,979 
Other comprehensive income (loss)                    
Investments available-for-sale:                    
Reclassification adjustment for (gain) loss   (658)   139    -    - 
Related income tax   181    (38)   -    - 
Unrealized holding gains (losses)   4,106    (434)   516    (146)
Related income tax (expense) benefit   (1,130)   129    (141)   58 
Comprehensive income (loss)  $13,480   $(4,178)  $5,012   $3,891 

 

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

 

Consolidated Statements of Changes in Stockholders’ Equity Unaudited

 

                   Accumulated     
                   other     
   Number of   Common   Capital   Retained   comprehensive     
(dollars in thousands, except share data)  shares   stock   surplus   earnings   income (loss)   Total 
Nine months ended                              
Balances at January 1, 2018   9,820,592   $98   $110,387   $22,105   $(337)  $132,253 
Net loss   -    -    -    (3,974)   -    (3,974)
Net unrealized loss on securities   -    -    -    -    (204)   (204)
Acquisition of First Mariner Bank   9,143,222    92    164,486    -    -    164,578 
Director stock awards   11,868    -    217    -    -    217 
Exercise of options   6,590    -    71    -    -    71 
Stock-based compensation   51,592    -    609    -    -    609 
Balances at September 30, 2018   19,033,864   $190   $275,770   $18,131   $(541)  $293,550 
                               
Balances at January 1, 2019   19,039,347   $190   $275,843   $18,277   $373   $294,683 
Net income   -    -    -    10,981    -    10,981 
Net unrealized gain on securities   -    -    -    -    2,499    2,499 
Director stock awards   9,202    -    127    -    -    127 
Exercise of options   13,418    1    115    -    -    116 
Employee stock purchase plan   19,539    -    280    -    -    280 
Repurchased shares   (4,900)   -    (68)   -    -    (68)
Stock-based compensation   5,171    -    134    -    -    134 
Balances at September 30, 2019   19,081,777   $191   $276,431   $29,258   $2,872   $308,752 

 

6

 

 

                   Accumulated     
                   other     
   Number of   Common   Capital   Retained   comprehensive     
(dollars in thousands, except share data)  shares   stock   surplus   earnings   income (loss)   Total 
Three months ended                              
Balances at June 30, 2018   19,008,960   $190   $275,581   $14,152   $(453)  $289,470 
Net income   -    -    -    3,979    -    3,979 
Net unrealized loss on securities   -    -    -    -    (88)   (88)
Acquisition of First Mariner Bank   -    -    -    -    -    - 
Director stock awards   7,068    -    116    -    -    116 
Exercise of options   3,306    -    36    -    -    36 
Stock-based compensation   14,530    -    37    -    -    37 
Balances at September 30, 2018   19,033,864   $190   $275,770   $18,131   $(541)  $293,550 
                               
Balances at June 30, 2019   19,063,080   $191   $276,218   $24,621   $2,497   $303,527 
Net income   -    -    -    4,637    -    4,637 
Net unrealized gain on securities   -    -    -    -    375    375 
Director stock awards   4,400    -    65    -    -    65 
Exercise of options   1,269    -    11    -    -    11 
Employee stock purchase plan   12,757    -    183    -    -    183 
Repurchased shares   (4,900)   -    (68)   -    -    (68)
Stock-based compensation   5,171    -    22    -    -    22 
Balances at September 30, 2019   19,081,777   $191   $276,431   $29,258   $2,872   $308,752 

 

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

 

7

 

 

Consolidated Statements of Cash Flows

 

   Unaudited 
   Nine months ended 
   September 30 
(in thousands)  2019   2018 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income (loss)  $10,981   $(3,974)
Adjustments to reconcile net income (loss) to net cash from operating activities:          
Provision for credit losses   3,443    3,241 
Deferred income tax   3,034    1,528 
Provision for other real estate owned   367    - 
Depreciation and amortization   1,785    1,849 
Stock-based compensation   529    826 
Net (accretion) amortization of investment securities   (39)   29 
Net accretion of discount on purchased loans   (1,309)   (1,825)
(Gain) loss on sales of securities   (658)   139 
Loss (gain) on the sale of property   83    (236)
Net amortization of intangible asset   2,296    2,056 
Loans originated for sale   (419,588)   (497,678)
Proceeds from sale of loans originated for sale   399,983    544,191 
Realized and unrealized gains on mortgage banking activity   (5,847)   (4,424)
Loss (gain) on sales of other real estate owned, net   1    (50)
Cash surrender value of BOLI   (1,392)   (1,159)
Decrease in interest receivable   192    - 
Increase in interest payable   110    462 
Decrease in other assets   825    4,681 
Increase (decrease) in other liabilities   1,517    (3,639)
Net cash (used in) provided by operating activities   (3,687)   46,017 
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchases of investment securities available-for-sale   (24,046)   (44,535)
Purchases of investment securities held-to-maturity   (500)   - 
Proceeds from sale/maturities of investment securities available-for-sale   87,365    116,916 
Net increase in loans and leases outstanding   (83,078)   (24,062)
Proceeds from the sale of other real estate owned   1,028    978 
Purchase of premises and equipment   (539)   (1,943)
Proceeds from the sale of premises and equipment   1,392    1,659 
Cash acquired in acquisition   -    29,285 
Net cash (used in) provided by investing activities   (18,378)   78,298 
CASH FLOWS FROM FINANCING ACTIVITIES:          
Net (decrease) increase in deposits   (30,183)   54,287 
Net increase (decrease) in short-term borrowings   139,586    (215,048)
Net (decrease) increase in long term debt   (113,886)   109,061 
Net proceeds from issuance of common stock, net of cost   127    71 
Repurchase of common stock   (68)   - 
Net cash used in financing activities   (4,424)   (51,629)
           
Net (decrease) increase in cash and cash equivalents   (26,489)   72,686 
Cash and cash equivalents at beginning of period   101,498    28,972 
Cash and cash equivalents at end of period  $75,009   $101,658 
SUPPLEMENTAL INFORMATION          
Cash payments for interest  $16,732   $8,549 
Cash payments for income taxes   -    - 
Transferred from loans to other real estate owned   375    174 
Cash payments for operating leases   1,069    2,464 
Assets acquired in business combination (net of cash received)   -    971,431 
Liabilities assumed in business combination   -    897,569 
Lease liabilities arising from obtaining right of use assets (see Note 8)   18,009    - 

 

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 stockholders 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 stockholders of the Bank became the stockholders of Bancorp. The Bank has seven subsidiaries, six of which are intended to hold foreclosed real estate (three of which are inactive) 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, the 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, the 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”).

 

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.

 

On December 6, 2018, the Company entered into Subordinated Note Purchase Agreements with certain institutional accredited investors (the “Purchasers”) pursuant to which the Company sold and issued $25,000,000 in aggregate principal amount of 6.00% Fixed-to-Floating Rate Subordinated Notes due December 6, 2028 (the “Notes”). The Notes were issued by the Company to the Purchasers at a price equal to 100% of their face amount in a private offering in reliance on the exemptions from registration available under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and the provisions of Regulation D thereunder. The Company used the net proceeds from this offering for general corporate purposes, to provide for continued growth and to supplement its regulatory capital ratios.

 

On March 1, 2018, Bancorp completed its previously announced merger (the “First Mariner merger”) with First Mariner Bank, a Maryland chartered trust company (“First Mariner”), pursuant to the Agreement and Plan of Reorganization dated as August 14, 2017, and as amended by Amendment No. 1 on November 8, 2017, by and among Bancorp, the Bank and First Mariner (as amended, the “First Mariner Merger Agreement”). At the effective time of the First Mariner merger, First Mariner merged with and into the Bank, with the Bank continuing as the surviving bank of the First Mariner merger and a wholly owned subsidiary of the Company. At the effective time of the First Mariner merger, each outstanding share of First Mariner common stock and First Mariner Series A Non-Voting Non-Cumulative Perpetual Preferred Stock issued and outstanding was cancelled and converted into the right to receive 1.6624 shares of Bancorp common stock, provided that cash was paid in lieu of any fractional shares. The aggregate merger consideration of $173.8 million included $9.2 million of cash and 9,143,222 shares of our common stock, which was valued at approximately $164.6 million based on Bancorp’s closing stock price of $18.00 on February 28, 2018.

 

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. The parent company only financial statements report investments in the subsidiary bank under the equity method.

 

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, goodwill, deferred tax assets, other-than-temporary impairment of investment securities and the fair value of loans held for sale.

 

9

 

 

Allowance for Credit Losses

 

The allowance for credit losses is maintained at a level believed adequate by management to absorb probable losses inherent in the loan portfolio and is based on the size and current risk characteristics of the loan portfolio, an assessment of individual problem loans, actual loss experience, current economic events in specific industries and geographic areas including unemployment levels and other pertinent factors including general economic conditions. Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogenous loans based on historical loss experience and consideration of economic trends, all of which may be susceptible to significant change. Credit losses are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for credit losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors. Evaluations are conducted at least quarterly and more often if deemed necessary.

 

The allowance for credit losses consists of a specific component and a nonspecific component. The components of the allowance for credit losses represent an estimation done pursuant to either the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) Topic 450 Contingencies or ASC Topic 310 Receivables. The specific component of the allowance for credit losses reflects expected losses resulting from analysis developed through credit allocations for individual loans. The credit allocations are based on a regular analysis of all loans over a fixed-dollar amount where the internal credit rating is at or below a predetermined classification. The specific component of the allowance for credit losses also includes management’s determination of the amounts necessary given concentrations and changes in portfolio mix and volume.

 

The nonspecific portion of the allowance is determined based on management’s assessment of general economic conditions, as well as economic factors in the individual markets in which the Company operates including the strength and timing of economic cycles and concerns over the effects of a prolonged economic downturn in the current cycle. This determination inherently involves a higher risk of uncertainty and considers current risk factors that may not have yet manifested themselves in the Bank’s historical loss factors used to determine the nonspecific component of the allowance, and it recognizes knowledge of the portfolio may be incomplete. The Bank’s historic loss factors are based upon actual losses incurred by portfolio segment over the preceding 24-month period. In portfolio segments where no actual losses have been incurred within the most recent 24-month period, industry loss data for that portfolio segment, as provided by the Federal Deposit Insurance Corporation (“FDIC”), are utilized. In addition to historic loss factors, the Bank’s methodology for the allowance for credit losses also incorporates other risk factors that may be inherent within the portfolio segments. For each portfolio segment, in addition to the historic loss experience, the other factors that are measured and monitored in the overall determination of the allowance include:

 

·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 the Small Business Administration 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 management considers relevant to the quality or performance of the loan portfolio.

 

Each of these qualitative risk factors is measured based upon data generated either internally, or in the case of economic conditions utilizing independently provided data on items such as unemployment rates, commercial real estate vacancy rates, or other market data deemed relevant to the business conditions within the markets served.

 

The Company’s 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 Company’s 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.

 

10

 

 

Goodwill, Other Intangible Assets and Long-Lived Assets

 

Goodwill represents the excess of the purchase price over the sum of the estimated fair values of tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed. Core deposit intangibles represent the estimated value of long-term deposit relationships acquired in a business combination. The core deposit intangible is amortized over the estimated useful lives of the long-term deposits acquired, and the remaining amounts of the core deposit intangible are periodically reviewed for impairment. Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. Long-lived assets are those that provide the Company with a future economic benefit beyond the current year or operating period. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset is greater than the fair value of the asset. Assets to be disposed of are reported at the lower of the cost or the fair value, less costs to sell. An impairment analysis is performed annually.

 

Management has determined that Bancorp has one reporting unit, and based upon the annual impairment analysis, it was determined that there was not an impairment of the carrying value of either the goodwill, core deposit intangible or other long-lived assets for 2018. The Company is not aware of any issues that have arisen since our last impairment analysis performed in the fourth quarter of 2018.

 

Income Taxes

 

The Company uses the asset/liability method of accounting for income taxes. Under the asset/liability method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities (i.e., temporary differences) and are measured at the enacted rates that will be in effect when these differences reverse.

 

As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. In addition, deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or the entire deferred tax asset will not be realized.

 

The Company does not have uncertain tax positions that are deemed material, and did not recognize any adjustments for unrecognized tax benefits. The Company’s policy is to recognize interest and penalties on income taxes in other noninterest expenses. The Company remains subject to examination by federal and state taxing authorities for income tax returns for the years ending after December 31, 2015.

 

Share-Based Compensation

 

Compensation cost is recognized for stock options issued to directors and employees. Compensation cost is measured as the fair value of these awards on their date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option awards. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. When an award is granted to an employee who is retirement eligible, the compensation cost of these awards is recognized over the period up to when the director or employee first becomes eligible to retire.

 

Compensation expense for non-vested common stock awards is based on the fair value of the awards, which is generally the market price of the common stock on the measurement date, which, for the Company, is the date of grant, and is recognized ratably over the service period of the award.

 

Reclassifications

 

Certain items in prior financial statements have been reclassified to conform to the current presentation. These reclassifications did not affect previously reported net income or total stockholders’ equity.

 

New Accounting Pronouncements

 

The Financial Accounting Standards Board (“FASB”) has issued Accounting Standards Update (“ASU”) 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (“SOFR”) Overnight Index Swap (“OIS”) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. This ASU permits use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes. Alternative Reference Rates Committee has proposed that the SOFR is the rate that represents best practice as the alternative to derivatives currently indexed to London Inter-Bank Offered Rate (“LIBOR”). The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments should be adopted on a prospective basis for qualifying new or re-designated hedging relationships entered into on or after the date of adoption. The Company has non-designated hedge contracts that are indexed to LIBOR and is monitoring this activity and evaluating the related risks as they relate to derivatives.

 

The FASB has issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework— Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reason for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019; early adoption is permitted. Entities are also allowed to elect early adoption of the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. ASU 2018-13 is not expected have a material impact on the Company’s Consolidated Financial Statements.

 

11

 

 

The FASB has issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.  The amendments in this Update simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The Company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. Impairment charges should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The impairment charge is limited to the amount of goodwill allocated to that reporting unit. The amendments in this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company will evaluate the guidance in this Update but does not expect it to have a significant impact on the Company’s financial position or results of operations.

 

The FASB has issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the guidance in this Update replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. In July 2019, the FASB proposed changes to the effective date for smaller reporting companies, as defined by the SEC that would delay the effective date to fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods. On October 16, 2019, the FASB approved its proposal to delay the effective date for smaller reporting companies and plan to release a final ASU in mid-November. As the Company is a smaller reporting company for fiscal year 2019, the proposed delay would be applicable. The Company has engaged a third party vendor and is currently gathering historical data and reviewing the methodologies and assumptions utilized to determine the impact of this update on the Company’s Consolidated Financial Statements.

 

Note 2: Business Combinations

 

First Mariner Acquisition

 

On March 1, 2018, Howard Bancorp completed its previously announced merger with First Mariner into the Bank, pursuant to the First Mariner Merger Agreement. At the effective time of the First Mariner merger, First Mariner merged with and into the Bank, with the Bank continuing as the surviving bank of the First Mariner merger. At the effective time of the First Mariner merger, pursuant to the terms of the First Mariner Merger Agreement, each outstanding share of First Mariner common stock and First Mariner Series A Non-Voting Non-Cumulative Perpetual Preferred Stock issued and outstanding was cancelled and converted into the right to receive 1.6624 shares of Howard Bancorp common stock, provided that cash was paid in lieu of any fractional shares. The aggregate merger consideration of $173.8 million included $9.2 million of cash and 9,143,222 shares of our common stock, which was valued at approximately $164.6 million based on Howard Bancorp’s closing stock price of $18.00 on February 28, 2018.

 

The Company has accounted for the First Mariner 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 Howard Bancorp at their estimated fair values as of their acquisition date.

 

Management made significant estimates and exercised significant judgment in accounting for the acquisition of First Mariner. 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.

 

12

 

 

The following table provides the purchase price as of the date of the First Mariner merger (the “acquisition date”), the identifiable assets acquired and liabilities assumed at their estimated fair values, and the resulting goodwill of $65.3 million recorded from the acquisition:

 

(in thousands)

 

Purchase Price Consideration        
Cash consideration  $9,245     
Purchase price assigned to shares exchanged for stock   164,578      
Total purchase price for First Mariner acquisition  $173,823      
           
Assets acquired at fair value:          
Cash and cash equivalents  $38,889      
Interest bearing deposits with banks   3,920      
Investment securities available for sale   130,302      
Loans held for sale   28,189      
Loans   664,338      
Accrued interest receivable   3,023      
Other assets   124,797      
Core deposit intangible   12,588      
Total fair value of assets acquired  $1,006,046      
Liabilities assumed at fair value:          
Deposits   706,435      
Borrowings   185,020      
Accrued expenses and other liabilities   6,114      
Total fair value of liabilities assumed  $897,569      
           
Net assets acquired at fair value:       $108,477 
Transaction consideration paid to First Mariner        173,823 
Amount of goodwill recorded from First Mariner Acquisition       $65,346 

 

The goodwill resulting from the First Mariner merger at September 30, 2019 of $65.3 million is lower than the $70.1 million reflected at December 31, 2018 due to a change in the acquired value of the net deferred tax asset included in other assets above. At the acquisition date, wording of the Tax Cut Jobs Act (“TCJA”) appeared to indicate that appreciation in the cash value of acquired BOLI would not be considered exempt from taxation.  However, industry groups and congress had urged the IRS to issue regulations to clarify how this section of the TCJA would be applied.  In the first quarter of 2019, the IRS issued new guidance which clarified the new law and made it more likely than not that the appreciated value of the BOLI acquired by the Company would be tax exempt. The final regulation maintaining the tax exemption for acquired BOLI was issued in October 2019.

 

Pro Forma Condensed Combined Financial Information:

 

The following table presents unaudited pro forma information as if the First Mariner Merger had been completed on January 1, 2018. The pro forma information does not necessarily reflect the results of operations that would have occurred had the First Mariner Merger occurred at the beginning of 2018. Supplemental pro forma earnings were adjusted to exclude merger related costs. The expected future amortizations of the various fair value adjustments were included beginning of the period. Cost savings are not reflected in the unaudited pro forma amounts for the periods presented. The pro forma financial information does not include the impact of possible business model changes, nor does it consider any potential impacts of current market conditions on revenues, expense efficiencies, or other factors.

 

   Nine months ended   Three months ended 
   September 30, 2018   September 30, 2018 
Net interest income after provision  $51,442   $17,951 
Noninterest income   16,207    3,856 
Noninterest expense   58,647    16,608 
Net income   6,525    3,768 
Net income per share  $0.34   $0.20 

 

13

 

 

Note 3: Investment Securities

 

The Bank holds securities classified as available for sale and held to maturity.

 

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

 

   September 30, 2019   December 31, 2018 
       Gross   Gross           Gross   Gross     
   Amortized   Unrealized   Unrealized   Estimated   Amortized   Unrealized   Unrealized   Estimated 
(in thousands)  Cost   Gains   Losses   Fair Value   Cost   Gains   Losses   Fair Value 
Available for sale                                        
U.S. Government Agencies  $65,698   $1,165   $1   $66,862   $130,088   $428   $119   $130,397 
Mortgage-backed   91,354    2,860    39    94,175    90,242    364    146    90,460 
Other investments   3,010    -    21    2,989    3,011    -    10    3,001 
   $160,062   $4,025   $61   $164,026   $223,341   $792   $275   $223,858 
Held to maturity                                        
Corporate debentures  $9,750   $174   $-   $9,924   $9,250   $45   $42   $9,253 

 

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 September 30, 2019 and December 31, 2018 are presented below:

 

September 30, 2019

   Less than 12 months   12 months or more   Total 
       Gross       Gross       Gross 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
(in thousands)  Value   Losses   Value   Losses   Value   Losses 
Available for sale                              
U.S. Government Agencies  $4,527   $1   $999   $-   $5,526   $1 
Mortgage-backed   8,003    30    981    9    8,984    39 
Other investments   2,989    21    -    -    2,989    21 
   $15,519   $52   $1,980   $9   $17,499   $61 
Held to maturity                              
Corporate debentures  $-   $-   $-   $-   $-   $- 

 

December 31, 2018

 

   Less than 12 months   12 months or more   Total 
       Gross       Gross       Gross 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
(in thousands)  Value   Losses   Value   Losses   Value   Losses 
Available for sale                              
U.S. Government Agencies  $3,049   $3   $13,887   $116   $16,936   $119 
Mortgage-backed   26,197    54    2,107    92    28,304    146 
Other investments   3,001    10    -    -    3,001    10 
   $32,247   $67   $15,994   $208   $48,241   $275 
Held to maturity                              
Corporate debentures  $2,458   $42   $-   $-   $2,458   $42 

 

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 the (1) duration and magnitude of the decline in value, (2) financial condition of the issuer or issuers and (3) structure of the security. The portfolio contained 8 securities with unrealized losses and 31 securities with unrealized losses at September 30, 2019 and December 31, 2018, respectively.

 

14

 

 

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 stockholders’ equity as a component of other comprehensive income, net of deferred tax.

 

The amortized cost and estimated fair values of investment securities by contractual maturity are shown below:

 

   September 30, 2019   December 31, 2018 
   Amortized   Estimated Fair   Amortized   Estimated Fair 
(in thousands)  Cost   Value   Cost   Value 
Amounts maturing:                    
One year or less  $2,496   $2,494   $38,936   $38,892 
After one through five years   60,206    61,263    88,175    88,513 
After five through ten years   20,329    20,845    19,873    19,921 
After ten years   86,781    89,348    85,607    85,785 
   $169,812   $173,950   $232,591   $233,111 

 

At September 30, 2019 and December 31, 2018, $12.7 million and $42.3 million in fair value of securities, respectively, were pledged as collateral for both repurchase agreements and deposits of local government entities that require pledged collateral as a condition of maintaining these deposit accounts. No single issuer of securities, except for government agency and mortgage backed securities, had outstanding balances that exceeded ten percent of stockholders’ equity at September 30, 2019.

 

 

Note 4: Loans and Leases

 

The Company makes loans and leases to customers primarily in the Greater Baltimore 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 September 30, 2019 and December 31, 2018 are presented in the following table:

 

   September 30, 2019   December 31, 2018 
(in thousands)  Total   % of
Total
   Total   % of
Total
 
Real estate                    
Construction and land  $124,326    7.2%  $123,671    7.5%
Residential - first lien   415,688    24.0    383,044    23.2 
Residential - junior lien   76,272    4.4    89,645    5.4 
Total residential real estate   491,960    28.4    472,689    28.6 
Commercial - owner occupied   239,464    13.8    234,102    14.2 
Commercial - non-owner occupied   442,813    25.6    427,747    25.9 
Total commercial real estate   682,277    39.4    661,849    40.1 
Total real estate loans   1,298,563    75.0    1,258,209    76.2 
Commercial loans and leases   383,557    22.2    336,876    20.5 
Consumer   47,760    2.8    54,666    3.3 
Total loans  $1,729,880    100.0%  $1,649,751    100.0%

 

Net loan origination fees, which are included in the amounts above, totaled $1.2 million and $307 thousand at September 30, 2019 and December 31, 2018, respectively.

 

15

 

 

Acquired Impaired Loans

 

The following table documents changes in the accretable discount on acquired impaired loans:

 

   For the nine months ended   For the three months ended 
   September 30,   September 30, 
(in thousands)  2019   2018   2019   2018 
Balance at beginning of period  $877   $-   $767   $1,021 
Impaired loans acquired   -    1,055    -    - 
Accretion of fair value discounts   (156)   (92)   (46)   (58)
Balance at end of period  $721   $963   $721   $963 

 

The table below presents the outstanding balances and related carrying amounts for all acquired impaired loans at the end of the respective periods.

 

   Contractually     
   Required     
   Payments   Carrying 
(in thousands)  Receivable   Amount 
At September 30, 2019  $11,409   $9,147 
At December 31, 2018   15,463    11,446 
At September 30, 2018   16,479    12,503 

 

Note 5: Credit Quality Assessment

 

Allowance for Credit Losses

 

The following tables provide information on the activity in the allowance for credit losses by the respective loan portfolio segment for the periods ended September 30, 2019 and September 30, 2018:

 

   September 30, 2019 
               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:                                        
Nine months ended:                                        
Beginning balance  $741   $1,170   $292   $735   $4,057   $2,644   $234   $9,873 
Charge-offs   (282)   (453)   (508)   (46)   (2,026)   (622)   (23)   (3,960)
Recoveries   79    -    114    -    12    35    2    242 
Provision for credit losses   810    1,246    535    245    787    (320)   140    3,443 
Ending balance  $1,348   $1,963   $433   $934   $2,830   $1,737   $353   $9,598 
                                         
Three months ended:                                        
Beginning balance  $1,128   $1,790   $437   $893   $2,799   $1,695   $378   $9,120 
Charge-offs   -    (91)   (37)   (2)   -    (97)   (5)   (232)
Recoveries   79    -    10    -    9    3    1    102 
Provision for credit losses   141    264    23    43    22    136    (21)   608 
Ending balance  $1,348   $1,963   $433   $934   $2,830   $1,737   $353   $9,598 

 

16

 

 

   September 30, 2018 
               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:                                        
Six months ended:                                        
Beginning balance  $735   $668   $177   $617   $1,410   $2,529   $23   $6,159 
Charge-offs   (202)   (121)   (195)   (1)   (749)   (977)   (59)   (2,304)
Recoveries   -    8    7    -    31    77    5    128 
Provision for credit losses   125    454    304    82    1,261    743    272    3,241 
Ending balance  $658   $1,009   $293   $698   $1,953   $2,372   $241   $7,224 
                                         
Three months ended:                                        
Beginning balance  $661   $680   $213   $726   $1,623   $2,667   $49   $6,619 
Charge-offs   -    (19)   (46)   -    (3)   (65)   (10)   (143)
Recoveries   -    7    7    -    29    9    -    52 
Provision for credit losses   (3)   341    119    (28)   304    (239)   202    696 
Ending balance  $658   $1,009   $293   $698   $1,953   $2,372   $241   $7,224 

 

The following tables provide additional information on the allowance for credit losses at September 30, 2019 and December 31, 2018:

 

   September 30, 2019 
               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:                                        
individually evaluated for impairment  $-   $-   $-   $-   $-   $-   $-   $- 
collectively evaluated for impairment  $1,348   $1,963   $433   $934   $2,830   $1,737   $353   $9,598 
Loans:                                        
Ending balance  $124,326   $415,688   $76,272   $239,464   $442,813   $383,557   $47,760   $1,729,880 
individually evaluated for impairment  $493   $13,773   $1,012   $569   $1,782   $2,086   $288   $20,003 
collectively evaluated for impairment  $123,833   $401,915   $75,260   $238,895   $441,031   $381,471   $47,472   $1,709,877 

 

   December 31, 2018 
               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:                                        
individually evaluated for impairment  $-   $-   $-   $-   $2,195   $200   $-   $2,395 
collectively evaluated for impairment  $741   $1,170   $292   $735   $1,862   $2,444   $234    7,478 
Loans:                                        
Ending balance  $123,671   $383,044   $89,645   $234,102   $427,747   $336,876   $54,666   $1,649,751 
individually evaluated for impairment  $1,449   $13,259   $1,137   $1,268   $5,018   $2,455   $174    24,760 
collectively evaluated for impairment  $122,222   $369,785   $88,508   $232,834   $422,729   $334,421   $54,492   $1,624,991 

 

Acquired loans from the First Mariner merger in 2018 were evaluated for impairment subsequent to the merger. No allowance was required on these loans due to the assigned credit marks on these loans.

 

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.  

 

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 Bank’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.

 

17

 

 

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

 

   September 30, 2019 
               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:                                        
Not classified  $123,958   $402,887   $75,260   $238,895   $440,954   $381,864   $47,472   $1,711,290 
Special mention   -    -    -    -    -    -    -    - 
Substandard   368    12,801    1,012    569    1,859    1,693    288    18,590 
Doubtful   -    -    -    -    -    -    -    - 
Total  $124,326   $415,688   $76,272   $239,464   $442,813   $383,557   $47,760   $1,729,880 

 

   December 31, 2018 
               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:                                        
Not classified  $122,270   $370,766   $88,507   $228,408   $422,591   $334,152   $54,492   $1,621,186 
Special mention   78    -    -    3,877    -    -    -    3,955 
Substandard   1,323    12,278    1,138    1,817    5,156    2,724    174    24,610 
Doubtful   -    -    -    -    -    -    -    - 
Total  $123,671   $383,044   $89,645   $234,102   $427,747   $336,876   $54,666   $1,649,751 

 

·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.

 

An aged analysis of past due loans is as follows:

 

   September 30, 2019 
               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:                                        
Accruing loans current  $123,958   $400,454   $73,993   $238,376   $440,775   $381,717   $47,292   $1,706,565 
Accruing loans past due:                                        
30-59 days past due   -    -    1,157    168    204    48    69    1,646 
60-89 days past due   -    2,311    110    -    -    99    111    2,631 
Greater than 90 days past due   -    122    -    351    52    -    -    525 
Total past due   -    2,433    1,267    519    256    147    180    4,802 
                                         
Non-accrual loans 1   368    12,801    1,012    569    1,782    1,693    288    18,513 
                                         
Total loans  $124,326   $415,688   $76,272   $239,464   $442,813   $383,557   $47,760   $1,729,880 

 

18

 

 

   December 31, 2018 
               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:                                        
Accruing loans current  $121,831   $361,522   $86,884   $232,834   $422,297   $334,058   $54,483   $1,613,909 
Accruing loans past due:                                        
30-59 days past due   -    6,433    937    -    432    94    9    7,905 
60-89 days past due   166    2,241    687    -    -    307    -    3,401 
Greater than 90 days past due   351    570    -    -    -    -    -    921 
Total past due   517    9,244    1,624    -    432    401    9    12,227 
                                         
Non-accrual loans 1   1,323    12,278    1,137    1,268    5,018    2,417    174    23,615 
                                         
Total loans  $123,671   $383,044   $89,645   $234,102   $427,747   $336,876   $54,666   $1,649,751 

 

(1)Included are purchased credit impaired loans where the Company amortizes the accretable discount into interest income, however these loans do not accrue interest based on the terms of the loan.

 

Total loans either in non-accrual status or in excess of 90 days delinquent totaled $19.0 million or 1.1% of total loans outstanding at September 30, 2019, which represents a decrease from $24.5 million, or 1.5%, at December 31, 2018.

 

The following tables reflect impaired loans at September 30, 2019 and December 31, 2018:

 

   September 30, 2019 
               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:                                        
Recorded investment 1  $493   $13,773   $1,012   $569   $1,782   $2,086   $288   $20,003 
With an allowance recorded   -    -    -    -    -    -    -    - 
With no related allowance recorded   493    13,773    1,012    569    1,782    2,086    288    20,003 
Related allowance   -    -    -    -    -    -    -    - 
Unpaid principal   679    15,028    1,229    586    2,083    3,321    302    23,228 
Nine months ended:                                        
Average balance of impaired loans   818    16,107    1,532    596    2,115    3,650    313    25,131 
Interest income recognized   4    287    69    28    11    38    5    442 
Three months ended:                                        
Average balance of impaired loans   810    16,036    1,508    590    2,102    3,680    313    25,039 
Interest income recognized   2    144    37    20    2    21    -    226 
                                         

 

   December 31, 2018 
               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:                                        
Recorded investment 1  $1,449   $13,259   $1,137   $1,268   $5,018   $2,455   $174   $24,760 
With an allowance recorded   -    -    -    -    2,816    200    -    3,016 
With no related allowance recorded   1,449    13,259    1,137    1,268    2,202    2,255    174    21,744 
Related allowance   -    -    -    -    2,195    200    -    2,395 
Unpaid principal   1,873    14,425    1,456    1,569    5,295    4,868    185    29,671 
Average balance of impaired loans   1,873    15,446    1,448    1,569    5,340    5,556    185    31,417 
Interest income recognized   -    474    51    16    5    125    5    676 

 

(1)Included are purchased credit impaired loans where the Company amortizes the accretable discount into interest income, however these loans do not accrue interest based on the terms of the loan.

 

Included in the total impaired loans above were non-accrual loans of $18.5 million and $23.6 million at September 30, 2019 and December 31, 2018, respectively. Interest income that would have been recorded if non-accrual loans had been current and in accordance with their original terms was $657 thousand and $1.1 million for the nine months ended September 30, 2019 and 2018, respectively.

 

19

 

 

 

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 TDRs 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 September 30, 2019 and December 31, 2018 are as follows:

 

   September 30, 2019 
   Number   Non-Accrual   Number   Accrual   Total 
(dollars in thousands)  of Loans   Status   of Loans   Status   TDRs 
Construction and land   -   $-    1   $125   $125 
Residential real estate - first lien   2    279    2    972    1,251 
Commercial loans and leases   1    514    1    350    864 
    3   $793    4   $1,447   $2,240 

 

   December 31, 2018 
   Number   Non-Accrual   Number   Accrual   Total 
(dollars in thousands)  of Loans   Status   of Loans   Status   TDRs 
Construction and land   -   $-    1   $125   $125 
Residential real estate - first lien   2    291    2    982    1,273 
Commercial - non-owner occupied   2    2,815    -    -    2,815 
Commercial loans and leases   1    514    -    -    514 
    5   $3,620    3   $1,107   $4,727 

 

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

 

   September 30, 2019 
       Not Performing   Performing     
   Related   to Modified   to Modified   Total 
(in thousands)  Allowance   Terms   Terms   TDRs 
Construction and land                    
Extension or other modification  $-   $-   $125   $125 
Residential real estate - first lien                    
Extension or other modification   -    279    972    1,251 
Commercial loans                    
Extension or other modification                 -    -    350    350 
Forbearance   -    514    -    514 
Total troubled debt restructured loans  $-   $793   $1,447   $2,240 

 

20

 

 

   December 31, 2018 
       Not Performing   Performing     
   Related   to Modified   to Modified   Total 
(in thousands)  Allowance   Terms   Terms   TDRs 
Construction and land                    
Extension or other modification  $-   $-   $125   $125 
Residential real estate - first lien                    
Extension or other modification   -    291    982    1,273 
Commercial RE - non-owner occupied                    
Rate modification   2,195    2,815    -    2,815 
Commercial loans                    
Forbearance   -    514    -    514 
Total troubled debt restructured loans  $2,195   $3,620   $1,107   $4,727 

 

There was one new commercial loan with its term extended and its payment restructured during the nine months ended September 30, 2019. There was one new loan restructured during the nine months ended September 30, 2018. In the second quarter of 2018 the Bank extended the terms of a residential real estate loan that was non-performing.

 

Performing TDRs were in compliance with their modified terms and there are no further commitments associated with these loans. During the nine months ended September 30, 2019 there were no TDRs that defaulted within the twelve month period after their modification dates.

 

Management routinely evaluates other real estate owned (“OREO”) based upon periodic appraisals. For the nine months ended September 30, 2019 there were two residential first mortgage loans totaling $375 thousand transferred from loans to OREO and for the same period in 2018 there was one residential first mortgage loan totaling $174 thousand transferred from loans to OREO. In the first nine months of 2019 the Bank recorded a $367 thousand valuation allowance on several properties because the current appraised value, less estimated cost to sell, was lower than the recorded carrying value of the OREO’. There was no allowance recorded in the same period of 2018. The Company sold two land parcels held in OREO in the third quarter of 2019 with a carrying value of $49 thousand, recording a loss on the sale of approximately $1 thousand. Additionally, the Bank sold one commercial real estate asset at the its carrying amount of $589 thousand. At September 30, 2019 there were seven loans secured by residential first liens totaling $4.3 million in the process of foreclosure.

 

Note 6: Derivatives and Hedging Activities

 

Non-designated Hedges of Interest Rate Risk

 

The Company maintains interest rate swap contracts with customers that are classified as non-designated hedges and are not speculative in nature. These agreements are designed to convert customers’ variable rate loans with the Company to fixed rate. These interest rate swaps are executed with loan customers to facilitate a respective risk management strategy and allow the customer to pay a fixed rate interest to the Company. These interest rate swaps are simultaneously hedged by executing offsetting interest rate swaps with unrelated market counterparties to minimize the net risk exposure to the Company resulting from the transactions and allow the Company to receive a variable rate interest. The interest rate swaps pay and receive interest based on a floating rate based on one month LIBOR plus credit spread with payment being calculated on the notional amount. The interest rate swaps are settled with varying maturities.

 

As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of September 30, 2019 and December 31, 2018, the interest rate swaps had an aggregate notional amount of approximately $5.8 million and $6.2 million, respectively. The fair value of the interest swap derivatives are recorded in other assets and other liabilities. All changes in fair value are recorded through earnings as noninterest income. For the nine months ended September 30, 2019, the Company recorded a net loss of $9 thousand related to the change in fair value of these interest rate swap derivatives.

 

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018.

 

21

 

 

          September 30, 2019 
   Balance Sheet  Notional   Estimated Fair Value 
(dollars in thousands)  Location  Amount   Gain   Loss 
Not designated hedges of interest rate risk:                  
Customer related interest rate contracts:                  
Matched interest rate swaps with borrowers  Other assets and other liabilities  $2,905   $270   $- 
Matched interest rate swaps with counterparty  Other assets and other liabilities  $2,905   $-   $285 

 

          December 31, 2018 
   Balance Sheet  Notional   Estimated Fair Value 
(dollars in thousands)  Location  Amount   Gain   Loss 
Not designated hedges of interest rate risk:                  
Customer related interest rate contracts:                  
Matched interest rate swaps with borrowers  Other assets and other liabilities  $3,061   $100   $- 
Matched interest rate swaps with counterparty  Other assets and other liabilities  $3,061   $-   $106 

 

Note 7: Goodwill and Other Intangible Assets

 

Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset would more-likely-than-not reduce the fair value below the carrying amount. The Bank has one reporting unit, which is the core banking operation.

 

The table below shows goodwill balances at September 30, 2019 and December 31, 2018.

 

   September 30,   December 31, 
(in thousands)  2019   2018 
Goodwill          
Banking  $65,949   $70,697 

 

Based upon updated information the goodwill was adjusted downward in the first quarter of 2019 by $4.7 million to reflect revised valuations as detailed in Note 2.

 

Core deposit intangible consists of premiums paid for the acquisition of core deposits and are amortized based upon the estimated economic benefits received. The gross carrying amount and accumulated amortization of other intangible assets are as follows:

 

   September 30, 2019   Weighted 
   Gross       Net   Average 
   Carrying   Accumulated   Carrying   Remaining Life 
(in thousands)  Amount   Amortization   Amount   (Years) 
Amortizing intangible assets:                    
Core deposit intangible  $16,135   $6,949   $9,186    4.0 

 

   December 31, 2018   Weighted 
   Gross       Net   Average 
   Carrying   Accumulated   Carrying   Remaining Life 
(in thousands)  Amount   Amortization   Amount   (Years) 
Amortizing intangible assets:                    
Core deposit intangible  $16,135   $4,653   $11,482    4.7 

 

22

 

 

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

 

(in thousands)    
2019  $717 
2020   2,674 
2021   2,326 
2022   1,915 
2023   1,298 
Thereafter   256 
Total amortizing intangible assets  $9,186 

 

Note 8: Leases

 

On January 1, 2019, the Company adopted the requirements of ASU 2016-02, Leases (Topic 842). The objective of this ASU, along with several related ASUs issued subsequently, is to increase transparency and comparability between organizations that enter into lease agreements. The most significant change is the requirement to recognize right of use (“ROU”) assets and lease liabilities for leases classified as operating leases. The standard requires disclosures to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. As part of the transition to the new standard, the Company was required to measure and recognize leases that existed at January 1, 2019, and the Company elected a modified retrospective approach. For leases existing at the effective date, the Company elected the package of three transition practical expedients and therefore did not reassess whether an arrangement is or contains a lease, did not reassess lease classification, and did not reassess what qualifies as an initial direct cost.

 

The adoption of Topic 842 resulted in the initial recognition of operating ROU assets and related lease liabilities of $18.0 million on January 1, 2019, which were recorded in other assets and other liabilities, respectively. As of the adoption date, there were no lease incentives that would have impacted the ROU asset balance.

 

In the first nine months of 2019, with the execution of our branch optimization initiative, under which we announced the closing of three additional branch locations and the consolidation of two other existing branch locations we incurred $3.6 million in expenses, primarily related to the early termination of existing lease arrangements for the closing locations. All of the costs associated with this initiative were recognized in the second quarter of 2019. The closing of the three locations occurred in September 2019, and the consolidation of the two branch locations into a single new location is expected to occur in the first quarter of 2020. The early termination of these leases reduced the initial $18.0 million in ROU assets recorded on January 1, 2019 to $14.5 million at September 30, 2019.

 

The Company has operating leases on land and buildings with remaining lease terms ranging from 2020 to 2030. Many of the leases include renewal options, with renewal terms generally extending up to 10 years.

 

Operating leases included the following at:

 

(in thousands)  September 30, 2019 
Operating Leases     
Operating leases ROU  $14,463 
Operating lease liabilities  $14,845 

 

The components of lease expense were as follows:

 

   Nine months ended September 30,   Three months ended September 30, 
(in thousands)  2019   2018   2019   2018 
Operating lease cost  $1,508   $2,857   $428   $897 
Sublease income   (437)   (393)   (144)   (142)
Amortization of ROU assets   116    -    34    - 
   $1,187   $2,464   $318   $755 

 

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Lease liability maturities are as follows:

 

(in thousands)    
2019  $437 
2020   1,636 
2021   1,546 
2022   1,404 
2023   1,257 
Thereafter   12,396 
Total future lease payments  $18,676 
Discount of cash flows   (3,831)
Present value on net future lease payments  $14,845 
      
Weighted average remaining term in years   7.01 
Weighted average discount rate   3.02%

 

Note 9: Deposits

 

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

 

  September 30, 2019   December 31, 2018 
       % of       % of 
(dollars in thousands)  Amount   Total   Amount   Total 
Noninterest-bearing demand  $442,549    27%  $429,200    26%
Interest-bearing checking   174,645    10    227,322    13 
Money market accounts   360,218    22    356,130    21 
Savings   131,064    8    134,893    8 
Certificates of deposit $250 and over   81,639    5    82,511    5 
Certificates of deposit under $250   465,508    28    455,750    27 
Total deposits  $1,655,623    100%  $1,685,806    100%

 

Note 10: 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. As of September 30, 2019, 572,414 shares are reserved for issuance pursuant to future grants under our stock incentive plan. 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 Company’s Board of Directors (the “Board”) as compensation for attendance and participation at meetings of the Board and meetings of the various committees of the Board. For the nine months ended September 30, 2019 and 2018, Bancorp issued 9,202 and 11,868 shares of common stock, respectively, to directors as compensation for their service.

 

Stock Options

 

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 is calculated using the Black-Scholes option-pricing model under which the Company estimates expected market price volatility and expected term of the options based on historical data and other factors. There were 25,000 stock options granted during the nine months ended September 30, 2019, while no stock options were granted for the year ended December 31, 2018.

 

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

 

   September 30, 2019   December 31, 2018 
       Weighted       Weighted 
       Average       Average 
       Exercise       Exercise 
   Shares   Price   Shares   Price 
Balance at January 1,   15,268   $8.76    30,991   $9.69 
Granted   25,000    14.54    -    - 
Exercised   (13,418)   8.58    (9,123)   10.63 
Forfeited   (1,850)   10.10    (6,600)   10.52 
Balance at period end   25,000   $14.54    15,268   $8.76 
Exercisable at period end   -   $-    15,268   $8.76 
Weighted average fair value of options granted during the year       $5.83        $- 

 

The cash received from the exercise of stock options during the nine months ended September 30, 2019 was $116 thousand, while $71 thousand was received during the nine months ended September 30, 2018. 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 $16.69 at September 30, 2019, the options outstanding had an aggregate intrinsic value of $54 thousand. At December 31, 2018, based upon fair market value of $14.30, the outstanding options outstanding had an aggregate intrinsic value of $85 thousand.

 

Restricted Stock Units

 

RSUs are equity awards where 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 the Company’s 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 valuation of the Company’s RSU is the closing price per share of the Company’s common stock on the date of grant.

 

The Company granted 18,500 RSUs during the first nine months of 2019, subject to a three-year vesting schedule. The Company granted 20,732 RSUs during the same period of 2018, which immediately vested upon grant.

 

A summary of the activity for the Company’s RSUs for the periods indicated is presented in the following table:

 

   September 30, 2019   December 31, 2018 
       Weighted       Weighted 
       Average       Average 
       Grant Date       Grant Date 
   Shares   Fair Value   Shares   Fair Value 
Balance at January 1,   9,731   $17.29    52,155   $15.09 
Granted   18,500    14.54    20,732    19.90 
Vested   (6,699)   16.38    (54,542)   16.63 
Forfeited   (1,500)   14.54    (8,614)   14.41 
Balance at period end   20,032   $15.34