Company Quick10K Filing
Quick10K
Howard Bancorp
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$15.03 19 $286
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
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 Earnings, Exhibits
8-K 2019-01-30 Regulation FD, Exhibits
8-K 2018-12-06 Enter Agreement, Off-BS Arrangement, Regulation FD, Other Events, Exhibits
8-K 2018-10-24 Earnings, Exhibits
8-K 2018-10-24 Regulation FD, 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
OLLI Ollie's Bargain Outlet 6,240
UTHR United Therapeutics 4,240
TDAC Trident Acquisitions 269
COCP Cocrystal Pharma 81
ONTX Onconova Therapeutics 24
GNMX Aevi Genomic Medicine 14
NOBH Nobility Homes 0
VIST Vist Financial 0
ILAI International Land Alliance 0
ORNC Oranco 0
HBMD 2019-06-30
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 tv525839_ex31a.htm
EX-31.B tv525839_ex31b.htm
EX-32 tv525839_ex32.htm

Howard Bancorp Earnings 2019-06-30

HBMD 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv525839_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 June 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 July 31, 2019.

 

Common Stock, $0.01 par value – 19,081,008 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) 7
  Notes to Consolidated Financial Statements (Unaudited) 8
     
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 52
     
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 53
     
Item 6. Exhibits 53
     
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 our acquisition of First Mariner Bank;
·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     
   June 30,   December 31, 
(in thousands, except share data)  2019   2018 
ASSETS          
Cash and due from banks  $124,868   $100,976 
Federal funds sold   193    522 
Total cash and cash equivalents   125,061    101,498 
Securities available for sale, at fair value   151,685    223,858 
Securities held to maturity, at amortized cost   9,750    9,250 
Nonmarketable equity securities   11,220    11,786 
Loans held for sale, at fair value   37,680    21,261 
Loans and leases, net of unearned income   1,701,020    1,649,751 
Allowance for credit losses   (9,120)   (9,873)
Net loans and leases   1,691,900    1,639,878 
Bank premises and equipment, net   42,876    45,137 
Goodwill   65,949    70,697 
Core deposit intangible   9,932    11,482 
Bank owned life insurance   75,060    74,153 
Other real estate owned   4,702    4,392 
Deferred tax assets, net   37,803    35,285 
Interest receivable and other assets   32,016    17,837 
Total assets  $2,295,634   $2,266,514 
LIABILITIES          
Noninterest-bearing deposits  $422,117   $429,200 
Interest-bearing deposits   1,295,099    1,256,606 
Total deposits   1,717,216    1,685,806 
Short-term borrowings   220,669    134,576 
Long-term borrowings   28,142    142,077 
Accrued expenses and other liabilities   26,080    9,372 
Total liabilities   1,992,107    1,971,831 
COMMITMENTS AND CONTINGENCIES          
STOCKHOLDERS' EQUITY          
Common stock - par value of $0.01 authorized 20,000,000 shares; issued and outstanding 19,063,080 shares at June 30, 2019 and 19,039,347 at December 31, 2018   191    190 
Capital surplus   276,218    275,843 
Retained earnings   24,621    18,277 
Accumulated other comprehensive income   2,497    373 
Total stockholders’ equity   303,527    294,683 
Total liabilities and stockholders’ equity  $2,295,634   $2,266,514 

 

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

 

 4 

 

 

Consolidated Statements of Operations

 

   Unaudited 
   For the six months ended   For the three months ended 
   June 30,   June 30, 
(in thousands, except share data)  2019   2018   2019   2018 
INTEREST INCOME                    
Interest and fees on loans and leases  $41,697   $33,366   $21,131   $19,788 
Interest and dividends on securities   3,596    1,684    1,740    1,116 
Other interest income   636    475    274    261 
Total interest income   45,929    35,525    23,145    21,165 
INTEREST EXPENSE                    
Deposits   7,568    3,079    4,004    1,729 
Short-term borrowings   1,335    1,407    754    717 
Long-term borrowings   2,198    1,011    1,033    839 
Total interest expense   11,101    5,497    5,791    3,285 
NET INTEREST INCOME   34,828    30,028    17,354    17,880 
Provision for credit losses   2,835    2,545    1,110    1,425 
Net interest income after provision for credit losses   31,993    27,483    16,244    16,455 
NONINTEREST INCOME                    
Service charges on deposit accounts   1,311    916    684    590 
Realized and unrealized gains on mortgage banking activity   3,793    3,439    2,308    1,623 
Gain (loss) on the sale of securities   658    (139)   658    - 
Loss on the disposal of bank premises & equipment   (83)   -    (83)   - 
Income from bank owned life insurance   907    705    460    420 
Loan fee income   2,038    3,925    995    2,059 
Other operating income   1,752    1,475    819    925 
Total noninterest income   10,376    10,321    5,841    5,617 
NONINTEREST EXPENSE                    
Compensation and benefits   16,306    17,480    8,272    9,911 
Occupancy and equipment   6,754    4,167    5,183    2,617 
Amortization of core deposit intangible   1,551    1,222    767    863 
Marketing and business development   941    2,109    484    1,104 
Professional fees   1,503    1,023    718    717 
Data processing fees   2,525    1,648    1,147    1,047 
Merger and restructuring expense   -    15,673    -    5,698 
FDIC assessment   568    414    281    261 
Other real estate owned   131    19    104    (3)
Loan production expense   1,220    2,252    700    1,309 
Other operating expense   2,812    2,285    1,798    1,616 
Total noninterest expense   34,311    48,292    19,454    25,140 
INCOME (LOSS) BEFORE INCOME TAXES   8,058    (10,488)   2,631    (3,068)
Income tax expense (benefit)   1,714    (2,535)   543    (791)
NET INCOME (LOSS)  $6,344   $(7,953)  $2,088   $(2,277)
NET INCOME (LOSS) PER COMMON SHARE                    
Basic  $0.33   $(0.50)  $0.11   $(0.12)
Diluted  $0.33   $(0.50)  $0.11   $(0.12)

 

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

 

 5 

 

 

Consolidated Statements of Comprehensive (Loss) Income

 

   Unaudited 
   Six months ended   Three months ended 
   June 30,   June 30, 
(in thousands)  2019   2018   2019   2018 
Net Income (Loss)  $6,344   $(7,953)  $2,088   $(2,277)
Other comprehensive income (loss)                    
Investments available-for-sale:                    
Reclassification adjustment for (gain) loss   (658)   139    (658)   - 
Related income tax   180    (38)   180    - 
Unrealized holding gains (losses)   3,590    (288)   1,790    18 
Related income tax (expense) benefit   (988)   71    (492)   (69)
Comprehensive income (loss)  $8,468   $(8,069)  $2,908   $(2,328)

 

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 
Six months ended                        
Balances at January 1, 2018   9,820,592   $98   $110,387   $22,105   $(337)  $132,253 
Net loss   -    -    -    (7,953)   -    (7,953)
Net unrealized loss on securities   -    -    -    -    (116)   (116)
Acquisition of First Mariner Bank   9,143,222    92    164,486    -    -    164,578 
Director stock awards   4,800    -    101    -    -    101 
Exercise of options   3,284    -    35    -    -    35 
Stock-based compensation   37,062    -    572    -    -    572 
Balances at June 30, 2018   19,008,960   $190   $275,581   $14,152   $(453)  $289,470 
                               
Balances at January 1, 2019   19,039,347   $190   $275,843   $18,277   $373   $294,683 
Net income   -    -    -    6,344    -    6,344 
Net unrealized gain on securities   -    -    -    -    2,124    2,124 
Director stock awards   4,802    -    62    -    -    62 
Exercise of options   12,149    1    104    -    -    105 
Employee stock purchase plan   6,782    -    97    -    -    97 
Stock-based compensation   -    -    112    -    -    112 
Balances at June 30, 2019   19,063,080   $191   $276,218   $24,621   $2,497   $303,527 

  

                   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 March 31, 2018   18,991,026   $190   $275,489   $16,429   $(401)  $291,707 
Net loss   -    -    -    (2,277)   -    (2,277)
Net unrealized loss on securities   -    -    -    -    (52)   (52)
Acquisition of First Mariner Bank   -    -    -    -    -    - 
Director stock awards   -    -    -    -    -    - 
Exercise of options   1,604    -    17    -    -    17 
Stock-based compensation   16,330    -    75    -    -    75 
Balances at June 30, 2018   19,008,960   $190   $275,581   $14,152   $(453)  $289,470 
                               
Balances at March 31, 2019   19,059,485   $191   $276,128   $22,533   $1,677   $300,529 
Net income   -    -    -    2,088    -    2,088 
Net unrealized gain on securities   -    -    -    -    820    820 
Director stock awards   -    -    -    -    -    - 
Exercise of options   3,595    -    28    -    -    28 
Employee stock purchase plan   -    -    -    -    -    - 
Stock-based compensation   -    -    62    -    -    62 
Balances at June 30, 2019   19,063,080   $191   $276,218   $24,621   $2,497   $303,527 

 

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

 

 6 

 

 

Consolidated Statements of Cash Flows

 

   Unaudited 
   Six months ended 
   June 30 
(in thousands)  2019   2018 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income (loss)  $6,344   $(7,953)
Adjustments to reconcile net income (loss) to net cash from operating activities:          
Provision for credit losses   2,835    2,545 
Deferred income tax   1,422    1,852 
Provision for other real estate owned   65    - 
Depreciation and amortization   1,209    1,200 
Stock-based compensation   112    572 
Net (accretion) amortization of investment securities   (51)   25 
Net accretion of discount on purchased loans   (925)   (628)
(Gain) loss on sales of securities   (658)   139 
Loss on the sale of property   83    - 
Net amortization of intangible asset   1,551    1,222 
Loans originated for sale   (259,868)   (337,290)
Proceeds from sale of loans originated for sale   247,241    355,115 
Realized and unrealized gains on mortgage banking activity   (3,793)   (3,439)
Gain on sales of other real estate owned, net   -    (45)
Cash surrender value of BOLI   (907)   (705)
(Increase) decrease in interest receivable   (214)   431 
Increase in interest payable   31    340 
Decrease in other assets   3,008    2,470 
Increase (decrease) in other liabilities   928    (355)
Net cash (used in) provided by operating activities   (1,587)   15,496 
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchases of investment securities available-for-sale   (6,002)   (44,535)
Purchases of investment securities held-to-maturity   (500)   - 
Proceeds from sale/maturities of investment securities available-for-sale   81,159    112,039 
Net increase in loans and leases outstanding   (54,308)   (10,662)
Proceeds from the sale of other real estate owned   -    954 
Purchase of premises and equipment   (422)   (1,773)
Proceeds from the sale of premises and equipment   1,392    - 
Cash acquired in acquisition   -    29,285 
Net cash provided by investing activities   21,319    85,308 
CASH FLOWS FROM FINANCING ACTIVITIES:          
Net increase (decrease) in deposits   31,410    (4,699)
Net increase (decrease) in short-term borrowings   86,093    (126,293)
Net (decrease) increase in long term debt   (113,935)   109,041 
Net proceeds from issuance of common stock, net of cost   263    136 
Net cash provided by (used in) financing activities   3,831    (21,815)
           
Net increase in cash and cash equivalents   23,563    78,989 
Cash and cash equivalents at beginning of period   101,498    28,972 
Cash and cash equivalents at end of period  $125,061   $107,961 
SUPPLEMENTAL INFORMATION          
Cash payments for interest  $11,070   $4,881 
Cash payments for income taxes   -    - 
Transferred from loans to other real estate owned   375    174 
Cash payments for operating leases   785    1,710 
Assets acquired in business combination (net of cash received)   -    970,709 
Liabilities assumed in business combination   -    897,569 
Lease liabilities arising from obtaining right of use assets (see Note 8)   15,183    - 

 

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

 

 7 

 

 

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 intends to use 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.

 

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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.

 

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.

 

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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. Since ASU 2018-13 only revises disclosure requirements, it will not have a material impact on the Company’s Consolidated Financial Statements.

 

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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 result 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. The guidance in this update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. 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.

 

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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 June 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 TCJA appeared to indicate that appreciation in the cash value of acquired BOLI would not be consider 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 proposed 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.

 

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.

 

   Six months ended   Three months ended 
   June 30, 2018   June 30, 2018 
         
Net interest income after provision  $32,953   $17,064 
Noninterest income   12,351    5,617 
Noninterest expense   41,304    20,190 
Net income   2,899    1,805 
Net income per share  $0.15   $0.10 

 

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Note 3: Investment Securities

 

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

 

As part of the Bank’s overall interest rate position strategies, the Bank sold $35.4 million of held for sale investment securities in the second quarter of 2019 recording a gain on the sale of $658 thousand. In 2018 the Bank sold $33.0 million of pre-acquisition investment securities and recorded a loss on the sale of $139 thousand. Because of the composition and remaining duration of the securities portfolio acquired in the First Mariner merger, management deemed it prudent for interest rate risk management purposes to liquidate the majority of the acquired portfolio. Thus, in the first quarter of 2018, the Bank sold nearly $69.37 million of First Mariner securities, with no gains or losses incurred upon the liquidation, as the sales were executed within days of the merger.

 

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

 

(in thousands)  June 30, 2019   December 31, 2018 
       Gross   Gross           Gross   Gross     
   Amortized   Unrealized   Unrealized   Estimated   Amortized   Unrealized   Unrealized   Estimated 
   Cost   Gains   Losses   Fair Value   Cost   Gains   Losses   Fair Value 
Available for sale                                        
U.S. Government Agencies  $60,684   $1,089   $4   $61,769   $130,088   $428   $119   $130,397 
Mortgage-backed   84,542    2,407    22    86,927    90,242    364    146    90,460 
Other investments   3,010    -    21    2,989    3,011    -    10    3,001 
   $148,236   $3,496   $47   $151,685   $223,341   $792   $275   $223,858 
Held to maturity Corporate debentures  $9,750   $165   $-   $9,915   $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 June 30, 2019 and December 31, 2018 are presented below:

 

June 30, 2019                        
(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 
Available for sale                              
U.S. Government Agencies  $1,001   $-   $1,995   $4   $2,996   $4 
Mortgage-backed   -    -    2,149    22    2,149    22 
Other investments   2,989    21    -    -    2,989    21 
   $3,990   $21   $4,144   $26   $8,134   $47 
Held to maturity Corporate debentures  $-   $-   $-   $-   $-   $- 

 

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December 31, 2018                        
(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 
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 7 securities with unrealized losses and 31 securities with unrealized losses at June 30, 2019 and December 31, 2018, respectively.

 

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:

 

(in thousands)  June 30, 2019   December 31, 2018 
   Amortized   Estimated Fair   Amortized   Estimated Fair 
   Cost   Value   Cost   Value 
Amounts maturing:                    
One year or less  $1,999   $1,995   $38,936   $38,892 
After one through five years   53,691    54,692    88,175    88,513 
After five through ten years   22,347    22,794    19,873    19,921 
After ten years   79,949    82,119    85,607    85,785 
   $157,986   $161,600   $232,591   $233,111 

 

At June 30, 2019 and December 31, 2018, $13.4 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 June 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 June 30, 2019 and December 31, 2018 are presented in the following table:

 

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   June 30, 2019   December 31, 2018 
(in thousands)  Total   % of
Total
   Total   % of
Total
 
Real estate                    
Construction and land  $115,753    6.8%  $123,671    7.5%
Residential - first lien   411,213    24.2    383,044    23.2 
Residential - junior lien   80,303    4.7    89,645    5.4 
Total residential real estate   491,516    28.8    472,689    28.6 
Commercial - owner occupied   232,771    13.7    234,102    14.2 
Commercial - non-owner occupied   442,449    26.0    427,747    25.9 
Total commercial real estate   675,220    39.7    661,849    40.1 
Total real estate loans   1,282,489    75.3    1,258,209    76.2 
Commercial loans and leases   367,856    21.6    336,876    20.5 
Consumer   50,675    3.0    54,666    3.3 
Total loans  $1,701,020    100.0%  $1,649,751    100.0%

 

Net loan origination fees, which are included in the amounts above, totaled $975 thousand and $307 thousand at June 30, 2019 and December 31, 2018, respectively.

 

Acquired Impaired Loans

 

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

 

   For the six months ended   For the three months ended 
   June 30,   June 30, 
(in thousands)  2019   2018   2019   2018 
Balance at beginning of period  $877   $-   $835   $1,052 
Impaired loans acquired   -    1,055    -    - 
Accretion of fair value discounts   (110)   (34)   (68)   (31)
Balance at end of period  $767   $1,021   $767   $1,021 

 

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 June 30, 2019  $12,246   $9,816 
At December 31, 2018   15,463    11,446 
At June 30, 2018   17,116    12,611 

 

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 June 30, 2019 and June 30, 2018:

 

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   June 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:                                        
Six months ended:                                        
Beginning balance  $741   $1,170   $292   $735   $4,057   $2,644   $234   $9,873 
Charge-offs   (282)   (362)   (471)   (44)   (2,026)   (525)   (18)   (3,728)
Recoveries   -    -    104    -    3    32    1    140 
Provision for credit losses   669    982    512    202    765    (456)   161    2,835 
Ending balance  $1,128   $1,790   $437   $893   $2,799   $1,695   $378   $9,120 
Three months ended:                                        
Beginning balance  $1,220   $1,372   $390   $817   $3,188   $1,543   $224   $8,754 
Charge-offs   (62)   (238)   (221)   (44)   -    (298)   (11)   (874)
Recoveries   -    -    99    -    1    30    -    130 
Provision for credit losses   (30)   656    169    120    (390)   420    165    1,110 
Ending balance  $1,128   $1,790   $437   $893   $2,799   $1,695   $378   $9,120 

 

   June 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)   (102)   (149)   (1)   (746)   (912)   (49)   (2,161)
Recoveries   -    1    -    -    2    68    5    76 
Provision for credit losses   128    113    185    110    957    982    70    2,545 
Ending balance  $661   $680   $213   $726   $1,623   $2,667   $49   $6,619 
Three months ended:                                        
Beginning balance  $563   $736   $186   $698   $1,470   $2,472   $23   $6,148 
Charge-offs   -    (3)   (60)   -    (212)   (644)   (45)   (964)
Recoveries   -    2    -    -    -    7    1    10 
Provision for credit losses   98    (55)   87    28    365    832    70    1,425 
Ending balance  $661   $680   $213   $726   $1,623   $2,667   $49   $6,619 

 

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

 

   June 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  $1,128   $1,790   $437   $893   $2,799   $1,695   $378   $9,120 
Loans:                                        
Ending balance  $115,753   $411,213   $80,303   $232,771   $442,449   $367,856   $50,675   $1,701,020 
individually evaluated for impairment  $933   $12,530   $914   $225   $2,608   $1,862   $287   $19,359 
collectively evaluated for impairment  $114,820   $398,683   $79,389   $232,546   $439,841   $365,994   $50,388   $1,681,661 

 

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   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.  

 

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 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.

 

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

 

   June 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  $114,945   $399,658   $79,389   $232,546   $439,764   $366,049   $50,388   $1,682,739 
Special mention   -    -    -    -    -    -    -    - 
Substandard   808    11,555    914    225    2,685    1,807    287    18,281 
Doubtful   -    -    -    -    -    -    -    - 
Total  $115,753   $411,213   $80,303   $232,771   $442,449   $367,856   $50,675   $1,701,020 

 

   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.

 

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·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:

 

   June 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  $114,945   $396,863   $78,091   $232,539   $439,289   $365,687   $50,035   $1,677,449 
Accruing loans past due:                                        
30-59 days past due   -    -    836    7    204    361    14    1,422 
60-89 days past due   -    1,355    378    -    -    -    339    2,072 
Greater than 90 days past due   -    1,440    84    -    348    -    -    1,872 
Total past due   -    2,795    1,298    7    552    361    353    5,366 
                                         
Non-accrual loans 1   808    11,555    914    225    2,608    1,808    287    18,205 
                                         
Total loans  $115,753   $411,213   $80,303   $232,771   $442,449   $367,856   $50,675   $1,701,020 

 

   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 $20.1 million or 1.2% of total loans outstanding at June 30, 2019, which represents a decrease from $24.5 million, or 1.5%, at December 31, 2018.

 

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

 

   June 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  $933   $12,530   $914   $225   $2,608   $1,862   $287   $19,359 
With an allowance recorded   -    -    -    -    -    -    -    - 
With no related allowance recorded   933    12,530    914    225    2,608    1,862    287    19,359 
Related allowance   -    -    -    -    -    -    -    - 
Unpaid principal   1,322    13,818    1,135    246    4,363    3,097    302    24,283 
Six months ended:                                        
Average balance of impaired loans   1,459    15,171    1,385    247    4,480    3,536    313    26,591 
Interest income recognized   -    138    33    8    13    14    5    211 
Three months ended:                                        
Average balance of impaired loans   1,454    15,154    1,370    247    4,457    3,525    313    26,520 
Interest income recognized   -    86    26    8    6    10    4    140 

 

   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 $18.2 million and $23.6 million at June 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 $534 thousand and $1.0 million for the six months ended June 30, 2019 and 2018, respectively.

 

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.    

  

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

 

   June 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    285    2    975    1,260 
Commercial - non-owner occupied   1    800    -    -    800 
Commercial loans and leases   1    514    -    -    514 
    4   $1,599    3   $1,100   $2,699 

 

   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:

 

   June 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   -    285    975    1,260 
Commercial RE - non-owner occupied                    
Rate modification   -    800    -    800 
Commercial loans                    
Forbearance   -    514    -    514 
Total troubled debt restructured loans  $-   $1,599   $1,100   $2,699 

 

   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 were no new loans restructured during the six months ended June 30, 2019. There was one new loan restructured during the six months ended June 30, 2018. In the second quarter of 2018 the Bank extended the terms of a residential real estate loan that was non-performing.

 

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Performing TDRs were in compliance with their modified terms and there are no further commitments associated with these loans. During the six months ended June 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 six months ended June 30, 2019 there was one residential first mortgage totaling $375 thousand transferred from loans to OREO and for the same period in 2018 there was one residential first mortgage totaling $174 thousand transferred from loans to OREO. In the second quarter 2019 the Bank recorded a $65 thousand valuation allowance on one property because the current appraised value, less estimated cost to sell, was lower than the recorded carrying value of the OREO. In the first half of 2018 there were no such valuation allowances. The Company did not sell any properties held in OREO in the first half of 2019. The Company sold one commercial property in Sussex County Delaware during the second quarter of 2018 with a carrying value was $593 thousand. The Company recorded a $45 thousand gain from the sale of this property. At June 30, 2019 there were seven loans secured by residential first liens totaling $4.5 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 customer’s 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 June 30, 2019 and December 31, 2018, the interest rate swaps had an aggregate notional amount of approximately $5.9 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 six months ended June 30, 2019, the Company recorded a net loss of $6 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 Sheet as of June 30, 2019 and December 31, 2018.

 

          June 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  $2,958   $222   $- 
Matched interest rate swaps with counterparty  Other assets and other liabilities  $2,958   $-   $234 

 

          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 

 

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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.

 

At December 31, 2018 the Company had $70.7 million in goodwill compared to $65.9 million at June 30, 2019. 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.

 

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

 

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

 

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:

 

   June 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   $6,203   $9,932    4.2 

 

   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 

 

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

 

(in thousands)    
2019  $1,463 
2020   2,674 
2021   2,326 
2022   1,915 
2023   1,298 
Thereafter   256 
Total amortizing intangible assets  $9,932 

 

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.

 

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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, 2109, 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 second quarter 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 and the locations are expected to close in September of 2019. The early termination of these leases reduced the initial $18.0 million in ROU assets recorded on January 1, 2019 to $14.8 million at June 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)  June 30, 2019 
Operating Leases     
Operating leases ROU  $14,837 
Operating lease liabilities  $15,183 

 

The components of lease expense were as follows:

 

   Six months ended June 30,   Three months ended June 30, 
(in thousands)  2019   2018   2019   2018 
Operating lease cost  $1,080   $1,960   $530   $1,228 
Sublease income   (293)   (251)   (108)   (113)
Amortization of ROU assets   82    -    82    - 
   $869   $1,709   $504   $1,115 

 

Lease liability maturities are as follows:

 

(in thousands)    
2019  $876 
2020   1,636 
2021   1,546 
2022   1,404 
2023   1,257 
Thereafter   12,396 
Total future lease payments  $19,115 
Discount of cash flows   (3,932)
Present value on net future lease payments  $15,183 
      
Weighted average remaining term in years   7.14 
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:

 

(dollars in thousands)  June 30, 2019   December 31, 2018 
       % of       % of 
   Amount   Total   Amount   Total 
Noninterest-bearing demand  $422,117    24%  $429,200    26%
Interest-bearing checking   184,060    11    227,322    13 
Money market accounts   357,833    21    356,130    21 
Savings   137,346    8    134,893    8 
Certificates of deposit $250 and over   78,619    5    82,511    5 
Certificates of deposit under $250   537,241    31    455,750    27 
Total deposits  $1,717,216    100%  $1,685,806    100%

 

 23 

 

 

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 June 30, 2019, 575,314 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 six months ended June 30, 2019 and 2018, Bancorp issued 4,802 and 4,800 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 six months ended June 30, 2019, while no stock options were granted for the year ended December 31, 2018.

 

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

 

   June 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   (12,149)   8.59    (9,123)   10.63 
Forfeited   (1,850)   10.10    (6,600)   10.52 
Balance at period end   26,269   $14.25    15,268   $8.76 
Exercisable at period end   1,269   $8.50    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 six months ended June 30, 2019 was $105 thousand, while $35 thousand was received during the six months ended June 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 $15.17 at June 30, 2019, the options outstanding had an aggregate intrinsic value of $24 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 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 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.

 

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The Company granted 18,500 RSUs during the first half of 2019, subject to a three-year vesting schedule. The Company granted 20,732 RSUs during 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:

 

   June 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   -    -    (54,542)   16.63 
Forfeited   -    -    (8,614)   14.41 
Balance at period end   28,231   $15.49    9,731   $17.29 

 

At June 30, 2019, based on RSUs outstanding at that time, the total unrecognized pre-tax compensation expense related to unvested RSUs was $292 thousand. Based upon the contractual terms, this expense is expected to be recognized as follows:

 

(in thousands)    
2019  $75 
2020   120 
2021   90 
2022   7 
   $292 

 

Stock-Based Compensation Expense

Stock-based compensation is recognized as compensation cost in the statement of operations based on their fair values on the measurement date, which, for the Company, is the date of the grant. The amount that the Company recognized in stock-based compensation expense related to the issuance of restricted stock and RSUs and for director compensation paid in stock is presented in the following table:

 

   Six months ended   Three months ended 
   June 30   June 30 
(in thousands)  2019   2018   2019   2018 
Stock-based compensation expense                    
Related to the issuance of restricted stock and RSUs  $112   $572   $62   $75 
Director compensation paid in stock  $62   $101   $-   $- 

 

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Note 11: 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 $540 thousand and $587 thousand, respectively, for the six months ended June 30, 2019 and 2018. 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 2016. Under the defined benefit SERP, Mary Ann 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 SERP totaled $105 thousand and $139 thousand for the six month periods ending June 30, 2019 and 2018, respectively.

 

Employee Stock Purchase Plan

The 2017 Employee Stock Purchase Plan (the “Plan”) provides eligible employees of the Company and certain of its subsidiaries with opportunities to purchase shares of the Company’s common stock at a discounted price, with the Company contributing up to a fifteen percent discount per offering period. An aggregate of 250,000 shares of the Company’s common stock was approved for issuance under the Plan. The Plan is intended to qualify as an “employee stock purchase plan” as defined in Section 423 of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder, and shall be interpreted consistent therewith. The first offering period under the Plan commenced on October 1, 2018 and ended on December 31, 2018, and the 2018 expense related to the Plan totaled $11 thousand. The current offering period began on January 1, 2019 ending on June 30, 2019, and the expense related to the Company’s contribution to the Plan totaled $19 thousand for the six months ended June 30, 2019.

 

Note 12: Income (Loss) per Common Share

 

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

 

   Six months ended   Three months ended 
   June 30,   June 30, 
(dollars in thousands, except per share data)  2019   2018   2019   2018 
Net income  $6,344   $(7,953)  $2,088   $(2,277)
Preferred stock dividends   -    -    -    - 
Net income (loss) available to common stockholders (numerator)  $6,344   $(7,953)  $2,088   $(2,277)
BASIC                    
Basic average common shares outstanding (denominator)   19,056,953    16,058,092    19,061,164    19,002,851 
Basic income (loss) per common share  $0.33   $(0.50)  $0.11   $(0.12)
DILUTED                    
Average common shares outstanding   19,056,953    16,058,092    19,061,164    19,002,851 
Dilutive effect of common stock equivalents   14,367    -    6,460    - 
Diluted average common shares outstanding (denominator)   19,071,320    16,058,092    19,067,624    19,002,851 
Diluted income (loss) per common share  $0.33   $(0.50)  $0.11   $(0.12)
                     
Common stock equivalents outstanding that are anti-dilutive and thus excluded from calculation of diluted number of shares presented above   25,000    25,326    25,000    27,245 

 

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Note 13: Risk-Based Capital

 

Bancorp and the Bank are subject to various regulatory capital requirements administered by the federal bank regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Bancorp and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Bancorp and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Bancorp’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

In July 2013, 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 final rule created a new common equity Tier 1 (“CET1”) minimum capital requirement (4.5% of risk-weighted assets), increased the minimum Tier 1 capital ratio (from 4% to 6% of risk-weighted assets), imposed a minimum leverage ratio of 4.0%, and changed 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 the Company elects to opt-out from this treatment. The Company has elected to permanently opt out of this treatment in the Company’s capital calculations, as permitted by the final rule.

 

Additionally, subject to a transition schedule, the rule limits Bancorp’s and the Bank’s ability to make capital distributions, engage in share repurchases and pay certain discretionary bonus payments if the they do 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.

 

In addition, under revised prompt corrective action requirements, in order to be considered “well-capitalized,” Bancorp and the Bank must have a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a common equity Tier 1 ratio of 6.5% or greater, a leverage capital ratio of 5.0% or greater, and not be subject to any written agreement, order, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure.

 

There are three main categories of capital under the regulatory capital guidelines. Common equity tier 1 capital consists of paid-in common stock, retained earnings and certain common equity Tier 1 minority interests. Various items, including certain amounts of goodwill, intangible assets, deferred tax assets, must be deducted from common equity Tier 1 before capital ratios are calculated. Tier 1 capital (which, together with common equity tier 1 capital, makes up Tier 1 capital) generally consists of perpetual preferred stock and, in certain circumstances and subject to certain limitations, minority investments in certain subsidiaries, less goodwill and other non-qualifying intangible assets, and certain other deductions. Tier 2 capital consists of perpetual preferred stock that is not otherwise eligible to be included as Tier 1 capital, hybrid capital instruments, term subordinated debt and intermediate-term preferred stock and, subject to limitations, general allowances for credit losses. At least half of total capital must consist of Tier 1 capital. Accumulated other comprehensive income (positive or negative) must be reflected in regulatory 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 June 30, 2019 and December 31, 2018, Bancorp and the Bank met all capital adequacy requirements to which they are subject.

 

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The following table reflects Bancorp’s and the Bank’s capital at June 30, 2019 and December 31, 2018:

 

                   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 June 30, 2019:                        
Total capital (to risk-weighted assets)                              
Howard Bank  $225,871    12.37%  $146,133    8.00%  $182,666    10.00%
Howard Bancorp  $231,176    12.55%  $147,415    8.00%   N/A      
Common equity tier 1 capital                              
(to risk-weighted assets)                              
Howard Bank  $216,751    11.87%  $82,200    4.50%  $118,733    6.50%
Howard Bancorp  $193,914    10.52%  $82,921    4.50%   N/A      
Tier 1 capital (to risk-weighted assets)                              
Howard Bank  $216,751    11.87%  $109,599    6.00%  $146,133    8.00%
Howard Bancorp  $193,914    10.52%  $110,561    6.00%   N/A      
Tier 1 capital (to average assets)                              
(Leverage ratio)                              
Howard Bank  $216,751    10.14%  $85,502    4.00%  $106,878    5.00%
Howard Bancorp  $193,914    9.06%  $85,586    4.00%   N/A      
As of December 31, 2018:                              
Total capital (to risk-weighted assets)                              
Howard Bank  $212,099    11.80%  $143,810    8.00%  $179,762    10.00%
Howard Bancorp  $218,425    12.14%  $143,889    8.00%   N/A      
Common equity tier 1 capital                              
(to risk-weighted assets)                              
Howard Bank  $202,226    11.25%  $80,893    4.50%  $116,846    6.50%
Howard Bancorp  $179,935    10.00%  $80,938    4.50%   N/A      
Tier 1 capital (to risk-weighted assets)                              
Howard Bank  $202,226    11.25%  $107,857    6.00%  $143,810    8.00%
Howard Bancorp  $179,935    10.00%  $107,917    6.00%   N/A      
Tier 1 capital (to average assets)                              
(Leverage ratio)                              
Howard Bank  $202,226    9.84%  $82,212    4.00%  $102,765    5.00%
Howard Bancorp  $179,935    8.77%  $82,046    4.00%   N/A      

 

Note 14: 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:

 

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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 an industry-wide valuation service and therefore 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, proprietary 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 borrowers lock 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 3 of the fair value hierarchy. The rate lock commitments are deemed as Level 3 inputs because the Company applies an estimated pull-through rate, which is deemed an unobservable measure. The pull-through rate utilized is based upon historic pull-through rates that ranged from 70 percent to 80 percent.

 

For loans held for investment that were originally intended to be sold and previously included as loans held for sale, fair value is determined 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.

 

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The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis at June 30, 2019 and December 31, 2018.

 

June 30, 2019      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) 
Assets                    
Available for sale securities:                    
U.S. Government agencies  $61,769   $     -   $61,769   $- 
Mortgage-backed securities   86,927    -    86,927    - 
Other investments   2,989    -    2,989    - 
Loans held for sale   37,680    -    37,680    - 
Loans held for investment   1,343    -    1,343    - 
Rate lock commitments   466    -    -    466 
Interest rate swap assets   222    -    222    - 
Liabilities                    
Interest rate swap liabilities   234    -    234    - 

 

December 31, 2018      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) 
Assets                    
Available for sale securities:                    
U.S. Government agencies  $130,397   $      -   $130,397   $- 
Mortgage-backed securities   90,460    -    90,460    - 
Other investments   3,001    -    3,001    - 
Loans held for sale   21,261    -    21,261    - 
Loans held for investment   1,303    -    1,303    - 
Rate lock commitments   126    -    -    126 
Interest rate swap assets   100    -    100    - 
Liabilities                    
Interest rate swap liabilities   106    -    106    - 

 

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

 

   June 30,   December 31, 
   2019   2018 
Balance, beginning of period  $126   $530 
Privately held equity investment   -    (72)
Net gains (losses) included in realized and unrealized gains on mortgage banking activity in noninterest income   340    (332)
Balance, end of period  $466   $126 

 

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Assets under fair value option:

 

June 30, 2019  Carrying   Aggregate     
   Fair Value   Unpaid     
(in thousands)  Amount   Principal   Difference 
Loans held for sale  $37,680   $36,710   $970 
Loans held for investment   1,343    1,312    31 

 

December 31, 2018  Carrying   Aggregate     
   Fair Value   Unpaid     
(in thousands)  Amount   Principal   Difference 
Loans held for sale  $21,261   $20,785   $476 
Loans held for investment   1,303    1,342    (39)

 

The Company elected to measure the loans held for sale and the loans held for investment that were originally intended for sale, but instead were added to the Bank’s portfolio at fair value, to better align reported results with the underlying economic changes in value of the loans on the Company’s balance sheet.

 

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 fair value, less selling costs. Any write-downs to fair value at the time of transfer to OREO are charged to noninterest expense subsequent to foreclosure. Values are derived from appraisals of underlying collateral and discounted cash flow analysis. There was a $65 thousand valuation loss recognized during the six months ended June 30, 2019, and no valuation losses were recognized during the six months ended June 30, 2018. 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 nonrecurring basis at the periods presented. OREO is carried at fair value less anticipated costs to sell. Impaired loans are measured using the fair value of collateral, if applicable.

 

June 30, 2019      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  $4,702   $     -   $     -   $4,702 
Impaired loans:                    
Construction and land   933    -    -    933 
Residential - first lien   12,530    -    -    12,530 
Residential - junior lien   914    -    -    914 
Commercial - owner occupied   225    -    -    225 
Commercial - non-owner occupied   2,608    -    -    2,608 
Commercial loans and leases   1,862    -    -    1,862 
Consumer   287    -    -    287 

 

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December 31, 2018      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  $4,392   $     -   $     -   $4,392 
Impaired loans:                    
Construction and land   1,449    -    -    1,449 
Residential - first lien   13,259    -    -    13,259 
Residential - junior lien   1,137    -    -    1,137 
Commercial - owner occupied   1,268    -    -    1,268 
Commercial - non-owner occupied   2,823    -    -    2,823 
Commercial loans and leases   2,255    -    -    2,255 
Consumer   174    -    -    174 

 

OREO consisted of an outstanding balance at June 30, 2019 of $7.0 million, less valuation allowance of $2.3 million, and at December 31, 2018 of $6.6 million, less valuation allowance of $2.2 million. There was no related allowance on impaired loans at June 30, 2019; however, there was an allowance of $2.4 million on impaired loans at December 31, 2018.

 

Various techniques are used to value 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 loans utilize a liquidation approach to the impairment analysis.

 

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.

 

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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The following table presents the estimated fair value of the Company’s financial instruments at the dates indicated:

 

   June 30, 2019 
           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                         
Available for sale securities  $151,685   $151,685   $       -   $151,685   $- 
Held to maturity securities   9,750    9,915    -    -    9,915 
Nonmarketable equity securities   11,220    11,220    -    11,220    - 
Loans held for sale   37,680    37,680    -    37,680    - 
Loans held for investment   1,343    1,343    -    1,343    - 
Rate lock commitments   466    466    -    -    466 
Loans and leases 1   1,690,557    1,687,688    -    -    1,687,688 
Interest rate swap   222    222    -    222    - 
Financial Liabilities                         
Deposits   1,717,216    1,716,079    -    1,716,079    - 
Short-term borrowings   220,669    220,669    -    220,669    - 
Long-term borrowings   28,142    28,043    -    28,043    - 
Interest rate swap   234    234    -    234    - 

 

   December 31, 2018 
           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                         
Available for sale securities  $223,858   $223,858   $       -   $223,858   $- 
Held to maturity securities   9,250    9,253    -    -    9,253 
Nonmarketable equity securities   11,786    11,786    -    11,786    - 
Loans held for sale   21,261    21,261    -    21,261    - 
Loans held for investment   1,303    1,303    -    1,303    - 
Rate lock commitments   126    126    -    -    126 
Loans and leases 1   1,638,575    1,613,506    -    -    1,613,506 
Interest rate swap   100    100    -    100    - 
Financial Liabilities                         
Deposits   1,685,806    1,681,295    -    1,681,295    - 
Short-term borrowings   134,576    134,576    -    134,576    - 
Long-term borrowings   142,077    142,296    -    142,296    - 
Interest rate swap   106    106    -    106    - 

 

(1)Carrying amount is net of unearned income and allowance for loan and lease losses. In accordance with the prospective adoption of ASU No. 2016-01, the fair value of loans were measured using an exit price notion at periods presented.

 

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Note 15: Revenue Recognition

 

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of account analysis fees, monthly service fees, check orders, and other deposit account related fees. The Banks’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Banks’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

 

Other Operating Income

Other operating income is primarily comprised of debit and credit card income, ATM fees, merchant services income, revenue streams such as safety deposit box rental fees, and other miscellaneous service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Banks’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Bank’s cardholder uses a non-Bank ATM or a non-Bank cardholder uses a Bank ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Bank determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Bank’s performance obligation for fees, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

 

The following presents noninterest income, segregated by revenue streams in scope and out of scope of Topic 606, for the six and three months ended June 30, 2019 and 2018.

 

   Unaudited 
   Six months ended   Three months ended 
   June 30,   June 30, 
(in thousands)  2019   2018   2019   2018 
NONINTEREST INCOME                    
Service charges on deposit accounts  $413   $247   $239   $152 
Fees and other services charges   1,314    1,094    685    689 
Other   39    39    15    20 
Noninterest income in scope of Topic 606   1,766    1,380    939    861 
Noninterest income out of scope of Topic 606   8,610    8,941    4,902    4,756 
Total noninterest income  $10,376   $10,321   $5,841   $5,617 

 

Contract Balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Bank’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals. Consideration is often received immediately or shortly after the Bank satisfies its performance obligation and revenue is recognized. The Bank does not typically enter into long term revenue contracts with customers, and therefore, does not experience significant contract balances. As of June 30, 2019 and December 31, 2018, the Bank did not have any significant contract balances.

 

Contract Acquisition Costs

In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Bank did not capitalize any contract acquisition cost.

 

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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 June 30, 2019 and December 31, 2018 and our consolidated results of operations for the periods ended June 30, 2019 and 2018. 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 was formed in 2004. Howard Bank’s 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 continue our origination of one- to four-family residential mortgage loans, maintaining our portfolio of mortgage lending and also selling select loans into the secondary markets.

 

We are headquartered in Baltimore, Maryland. 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 primarily to small- and 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 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, 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 December 6, 2018, the Company entered into Subordinated Note Purchase Agreements with certain 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 were issued by the Company to the Purchasers at a price equal to 100% of their face amount in reliance on the exemptions from registration available under Section 4(a)(2) of the Securities Act and the provisions of Regulation D thereunder. The Company intends to use the net proceeds for general corporate purposes, to provide for continued growth and to supplement its regulatory capital ratios.

 

On March 1, 2018, we acquired First Mariner through the completion of our previously announced merger 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 and a wholly owned subsidiary of the Company. 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.

 

Financial highlights during the six months ended June 30, 2019 are as follows:

·Assets - $2.3 billion, primarily from:
·Investment securities - $172.7 million
·Loans held for investment - $1.7 billion
·Liabilities - $2.0 billion, primarily from:
·Deposits - $1.7 billion
·Borrowings - $248.8 million
·Stockholders equity - $303.5 million

·Net Income increased $14.3 million for the six month period ended June 30, 2019 compared to the same period in 2018. A net loss of $8.0 million for the first half of 2018 was driven by merger related expenses of $15.7 million, while there were no such merger related expenses during the first six months of 2019. However, the first six month period of 2019 included additional expenses related to our branch optimization initiative under which a total of $3.6 million in expenses were recorded in increased occupancy expense for the closing of branch locations. The $6.3 million in net income recorded for the first six month period of 2019 generated basic and diluted earnings per share of $0.33 compared to a loss of $0.50 per common share for the six month period ended June 30, 2018.

  

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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 requires 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, acquisition accounting, 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, 2018. There have been no material 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.

 

Balance Sheet Analysis and Comparison of Financial Condition

 

A comparison between the June 30, 2019 and December 31, 2018 balance sheets is presented below.

 

General

 

Total assets increased $29.1 million, or 1.3%, to $2.296 billion at June 30, 2019 as compared to $2.267 billion at December 31, 2018. This asset growth consisted primarily of increases in our loan portfolio of $51.3 million and cash and cash equivalents of $23.6 million, offset by a $72.2 million decrease in investment securities. Total deposits increased $31.4 million or 1.9%, while total borrowings decreased $27.8 million, when comparing balances at June 30, 2019 to balances at December 31, 2018.

 

Investment Securities

 

Available for sale

Available for sale securities are reported at fair value. We currently hold U.S. agency securities, mortgage backed securities and corporate investments in our securities portfolio, which are categorized as available for sale. We use our securities portfolio to provide the required collateral for funding via commercial customer overnight securities sold under agreement to repurchase (“repurchase agreements”) as well as to provide sufficient liquidity to fund our loans and provide funds for withdrawals of deposits.

 

Held to maturity

Held to maturity securities are reported at amortized cost. The only investments that we have classified as held to maturity are corporate debentures. These investments are intended to be held until maturity.

 

Nonmarketable equity

At June 30, 2019 and December 31, 2018, we held an investment in stock of the Federal Home Loan Bank (“FHLB”) of $11.2 million and $11.8 million, respectively. This investment is required for continued FHLB membership and is based partially upon the amount of borrowings outstanding from the FHLB. This FHLB stock is carried at cost.

 

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

 

  June 30, 2019   December 31, 2018 
   Amortized   Estimated   Amortized   Estimated 
(in thousands)  Cost   Fair Value   Cost   Fair Value 
Available for sale                    
U.S. Government Agencies  $60,684   $61,769   $130,088   $130,397 
Mortgage-backed   84,542    86,927    90,242    90,460 
Other investments   3,010    2,989    3,011    3,001 
   $148,236   $151,685   $223,341   $223,858 
Held to maturity                    
Corporate debentures  $9,750   $9,915   $9,250   $9,253 

 

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We had available for sale securities of $151.7 million and $223.9 million at June 30, 2019 and December 31, 2018, respectively, which were recorded at fair value. This represents a decrease of $72.2 million or 32.2% at June 30, 2019 from the prior year end primarily as a result of us selling $36.1 million in securities during the second quarter of 2019 recording a gain of $658 thousand on the sale. We intentionally decreased the size of our available for sale portfolio given the increased rate of growth in our loan portfolio and also because of the minimal spread given the yields on new investments compared to the incremental cost of funds. In 2018, all acquired First Mariner investment securities were classified as available for sale, and were acquired at their fair values. For interest rate sensitivity reasons, we elected to immediately liquidate a portion of acquired securities portfolio upon the closing of the First Mariner merger and because we sold these securities acquired within days of the closing of the transaction, we did not record any gain or loss on the sale. In 2018, we sold approximately $69.7 million of the acquired securities and retained nearly $51.0 million in our portfolio. Additionally in 2018, the Bank took the opportunity to reposition a portion of its pre-acquisition portfolio through the sale of primarily shorter duration agency debenture bonds with maturities over one year.  In the first quarter of 2018, the Bank sold $33.0 million of securities at a loss of $139 thousand.

 

We had securities held to maturity of $9.7 million and $9.3 million at June 30, 2019 and December 31, 2018, consisting of corporate debentures recorded at amortized cost.

 

With respect to our portfolio of securities available for sale, the portfolio contained 7 securities with unrealized losses of $47 thousand and 31 securities with unrealized losses of $275 thousand at June 30, 2019 and December 31, 2018, 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. There were no held to maturity securities in a loss position at June 30, 2019, while three securities were in a loss position at December 31, 2018.

 

Loan and Lease Portfolio

 

Total loans and leases increased $51.3 million, or 3.1%, to $1.7 billion at June 30, 2019 from $1.6 million at December 31, 2018. Organic growth was primarily from increases in commercial loans and leases of $31.0 million, residential first lien loans of $28.2 million and commercial real estate loans of $13.4 million from December 31, 2018 as we continue to focus on the needs of small to mid-size businesses in our market area. This growth was offset by decreases on construction and land loans of $7.7 million and consumer loans of $4.0 million from December 31, 2018.

 

The following table sets forth the composition of our loan portfolio at the dates indicated.

 

   June 30, 2019   December 31, 2018 
(in thousands)  Total   % of
Total
   Total   % of
Total
 
Real estate                    
Construction and land  $115,753    6.8%  $123,671    7.5%
Residential - first lien   411,213    24.2    383,044    23.2 
Residential - junior lien   80,303    4.7    89,645    5.4 
Total residential real estate   491,516    28.8    472,689    28.6 
Commercial - owner occupied   232,771    13.7    234,102    14.2 
Commercial - non-owner occupied   442,449    26.0    427,747    25.9 
Total commercial real estate   675,220    39.7    661,849    40.1 
Total real estate loans   1,282,489    75.3    1,258,209    76.2 
Commercial loans and leases   367,856    21.6    336,876    20.5 
Consumer   50,675    3.0    54,666    3.3 
Total loans  $1,701,020    100.0%  $1,649,751    100.0%

 

Loan Held for Sale

 

We sell the majority of residential mortgage loans originated by the Bank. Loans held for sale increased $16.4 million to $37.7 million at June 30, 2019 from $21.3 million at December 31, 2018. The volume of mortgage loans originated for sale into the secondary market continues to be strong, with $259.9 million in loans originated in the first half of 2019 compared to $337.3 million for the same period of 2018. The 2018 levels were influenced by our consumer direct unit of our mortgage division that was closed in the second quarter of 2018, and as we previously announced, we expected this decline in levels of mortgage originations.

 

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Leases

 

As a result of the Company adopting requirements of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), we recognized $14.8 million in right-of-use assets and $15.18 million lease liabilities for operating leases. These amounts are reflected in other assets and other liabilities on our Consolidated Balance Sheet at June 30, 2019, and primarily account for the net changes in both other assets and liabilities from the amounts reported at December 31, 2018.

 

Deposits

 

Deposits increased from $1.686 billion at December 31, 2018 to $1.717 billion at June 30, 2019, an increase of $31.4 million or 1.9%. The primary increase in deposits was the $77.6 million increase in certificates of deposit and to a lesser extent an increase in money market accounts of $1.7 million and savings accounts of $2.4 million. This growth was offset by a $43.3 million decrease in interest-bearing checking and $7.1 million decrease in noninterest-bearing checking. The composition of our deposits shifted during the second quarter of 2019 as transaction deposits of $606 million at June 30, 2019 declined by $50.3 million or 7.7% as our largest deposit relationship, reduced their balances by $61.6 million during the second quarter to fund new opportunities and investments. The decline in the transaction deposits necessitated an increase in our higher cost deposit sources, primarily certificates of deposit.

 

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

 

  June 30, 2019   December 31, 2018 
       % of       % of 
(dollars in thousands)  Amount   Total   Amount   Total 
Noninterest-bearing demand  $422,117    24%  $429,200    26%
Interest-bearing checking   184,060    11    227,322    13 
Money market accounts   357,833    21    356,130    21 
Savings   137,346    8    134,893    8 
Certificates of deposit $250 and over   78,619    5    82,511    5 
Certificates of deposit under $250   537,241    31    455,750    27 
Total deposits  $1,717,216    100%  $1,685,806    100%

 

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, repurchase agreements, FHLB advances and subordinated debentures. Repurchase agreements consist of overnight electronic sweep products that move customer excess funds from noninterest-bearing deposit accounts to an interest-bearing repurchase agreement, which is classified as a borrowing. Master notes similarly sweep funds from the Bank’s customer accounts to the Company but do not require pledged collateral. Repurchase agreements sweep funds within the Bank and are secured primarily by pledges of U.S. Government Agency securities, based upon their fair value, as collateral for 100% of the principal and accrued interest of its repurchase agreements.

 

Subordinated Debt

On December 6, 2018, the Company entered into Subordinated Note Purchase Agreements with certain 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 were issued by the Company to the Purchasers at a price equal to 100% of their face amount in reliance on the exemptions from registration available under Section 4(a)(2) of the Securities Act and the provisions of Regulation D thereunder. The Company used the net proceeds of this offering for general corporate purposes, to provide for continued growth and to supplement its regulatory capital ratios.

 

The Notes have been structured to qualify initially as Tier 2 capital for regulatory capital purposes. The Notes will initially bear interest at a rate of 6.00% per annum from and including December 6, 2018, to but excluding December 6, 2023, with interest during this period payable semi-annually in arrears. From and including December 6, 2023, to but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an annual floating rate equal to three-month LIBOR, plus 302 basis points, with interest during this period payable quarterly in arrears. The Notes are redeemable by the Company at its option, in whole or in part, on or after December 6, 2023.

 

Patapsco Statutory Trust I, a Connecticut statutory business trust and an unconsolidated wholly-owned subsidiary of Howard Bancorp (the “Trust”), issued $5 million of capital trust pass-through securities to investors. The interest rate currently adjusts on a quarterly basis at the rate of the three month LIBOR plus 1.48%. The Trust purchased $5,155,000 of junior subordinated deferrable interest debentures from Patapsco Bancorp. The debentures are the sole asset of the Trust. Patapsco Bancorp also fully and unconditionally guaranteed the obligations of the Trust under the capital securities, which guarantee became an obligation of Howard Bancorp upon our acquisition of Patapsco Bancorp. The capital securities are redeemable by the Company at par. The capital securities must be redeemed upon final maturity of the subordinated debentures on December 31, 2035.

 

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Our borrowings totaled $248.8 million at June 30, 2019 compared to $276.7 million at December 31, 2018, reflecting a decrease of $27.8 million. Short-term borrowings at June 30, 2019 consisted of repurchase agreements and master notes of $4.7 million, and nine short-term FHLB advances totaling $216.0 million. Long-term borrowings totaled $28.1 million at June 30, 2019, consisting only of subordinated debt, compared to long term borrowings of $142.1 million at December 31, 2018. In the second quarter 2019 we repaid $85 million of long-term FHLB borrowings, recording a pre-payment penalty of $651 thousand in our other operating expenses. The early repayment of these advances was primarily for asset/liability management purposes and a result of the current rate environment.

 

Stockholders’ Equity

 

Total stockholders’ equity increased $8.8 million, or approximately 3.0%, from $294.7 million at December 31, 2018 to $303.5 million at June 30, 2019. The increase in stockholders’ equity is primarily the result of the retention of the earnings for the first half of 2019 as well as market interest rate changes which increased the level of unrealized gains in our investment portfolio.

 

Total stockholders’ equity at June 30, 2019 represents a capital to asset ratio of 13.2%, compared to 13.0% at December 31, 2018. Book value per share was $15.92 at June 30, 2019 and $15.48 at December 31, 2018. Leverage ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio were 9.06%, 10.52% and 12.55%, respectively at June 30, 2019.

 

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.

 

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   Six months ended June 30, 
   2019   2018 
   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  $337,331   $8,703    5.20%  $290,828   $7,094    4.92%
Commercial real estate   657,035    16,517    5.07    572,846    13,448    4.73 
Construction and land   121,358    3,507    5.83    97,780    2,571    5.30 
Residential real estate   486,882    11,170    4.63    395,712    8,410    4.29 
Consumer   52,424    1,288    4.95    31,442    860    5.52 
Total loans and leases   1,655,030    41,185    5.02    1,388,608    32,383    4.70 
Loans held for sale   23,530    512    4.38    50,857    983    3.90 
Other earning assets 2   65,031    636    1.97    66,322    475    1.44 
Securities: 3                              
U.S. Treasury   -    -         1,494    6    0.83 
U.S Gov agencies   104,233    1,431    2.77    58,239    487    1.69 
Mortgage-backed   88,764    1,426    3.24    37,775    555    2.96 
Corporate debentures   9,264    286    6.22    9,250    285    6.22 
Other investments   13,436    453    6.79    16,886    351    4.19 
Total securities   215,697    3,596    3.36    123,644    1,684    2.75 
Total earning assets   1,959,288    45,929    4.73    1,629,431    35,525    4.40 
Cash and due from banks   14,248              14,914           
Bank premises and equipment, net   44,791              41,058           
Other assets   223,198              149,283           
Less: allowance for credit losses   (9,470)             (5,093)          
Total assets  $2,232,055             $1,829,593           
Interest-bearing liabilities                              
Deposits:                              
Interest-bearing demand accounts  $216,305    542    0.51%  $123,915   $141    0.23%
Money market   355,429    1,282    0.73    344,685    934    0.55 
Savings   138,703    124    0.18    117,947    86    0.15 
Time deposits   547,256    5,620    2.07    378,235    1,918    1.02 
Total interest-bearing deposits   1,257,693    7,568