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HBMD > SEC Filings for HBMD > Form 10-Q/A on 9-Nov-2012All Recent SEC Filings

Show all filings for HOWARD BANCORP INC



Quarterly Report

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

This section is intended to help potential investors understand our financial performance through a discussion of the factors affecting our consolidated financial condition. This section should be read in conjunction with the Consolidated Financial Statements and notes to the consolidated financial statements.


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

We are headquartered in Ellicott City, Maryland and we consider our primary market area to be Howard County, Maryland and Anne Arundel County, Maryland. Our secondary market area, primarily for commercial lending, includes the Maryland counties of Baltimore, Carroll, Frederick, Montgomery and Prince George's as well as Baltimore City. We engage in a general commercial banking business, making various types of loans and accepting deposits. We market our financial services to small to medium sized businesses and their owners, professionals and executives, and high-net-worth individuals. Our loans are primarily funded by core deposits of customers in our market.

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

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 law, regulations or government policies may materially affect our financial condition and results of operations.

Bancorp's total assets increased by over $45 million or 14.1% when comparing September 30, 2012 assets of $368.5 million to the $323.1 million at December 31, 2011. Total loans outstanding of $298.8 million at the end of September 2012, showed an increase of 8.1% compared to total loans of $276.5 million on December 31, 2011. Demand deposits, which not only represent the lowest cost source of funding available to a bank, but also are most reflective of the core customer relationships targeted by the Bank, grew from $62.0 million at December 31, 2011 to $79.9 million at the end of the third quarter of 2012, representing growth in this highly coveted deposit category of $17.9 million or 28.8%. Total deposits grew by $24.8 million or 9.4% when comparing September 30, 2012 to December 31, 2011. Because of the significant increases in deposits, even after funding the 8.1% loan growth, the Bank was able to utilize the additional deposits to increase our balance sheet liquidity measures.

Through the end of the third quarter of 2012 net income was $1.2 million, which represents an increase of 14.6% over net income for the nine months ended September 30, 2011. Net interest income for the first nine months of 2012 was $10.0 million versus $9.3 million for the first nine months of 2011, an increase of approximately $639 thousand or 6.9%. Noninterest income for the first nine months of 2012 compared to the first nine months of 2011 increased $46 thousand or 9.2% while noninterest expense increased $486 thousand or 6.6%. Total noninterest income was $549 thousand for the nine months ended September 30, 2012, compared to a total of $503 thousand for the same period in 2011. For 2012, noninterest income would have reflected a $177 thousand or 35.2% increase over the prior year, but 2012 was impacted by a loss on the sale of one property classified as other real estate owned ("OREO") of $131 thousand in the first quarter of 2012. Total noninterest expenses for the nine months ended September 30, 2012 was $7.8 million compared to $7.4 million for the same period in 2011. This represent a $486 thousand or a 6.6% increase.

We closed our initial public offering and a concurrent private placement, pursuant to which we issued a total of 1,396,364 shares of our common stock, for total gross proceeds of $10.2 million on July 20, 2012. The net proceeds of the offering increased our capital levels, which will permit additional growth in our loan levels and asset size. This growth may be either organic growth, which could take a longer time to occur, or growth that could come more quickly via merger or acquisition of other financial institutions. As such growth is realized, our operating results will reflect the additional income generated from the higher levels of earning assets.

Critical Accounting Policies

Our accounting and financial reporting policies conform to the accounting principles generally accepted in the United States of America ("GAAP") and general practice within the banking industry. Accordingly, the financial statements require management to exercise significant judgment or discretion or make significant assumptions 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. We consider the allowance for credit losses to be our most significant accounting policy, which is further described in the Notes to the financial statements.

The allowance for credit losses is established through a provision for credit losses charged against income. Loans are charged against the allowance for credit losses when management believes that the collectability of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that represents the amount of probable and reasonably estimable known and inherent losses in the loan portfolio, based on evaluations of the collectability of loans. The evaluations take into consideration such factors as changes in the types and amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, estimated losses relating to specifically identified loans, and current economic conditions. This evaluation is inherently subjective as it requires material estimates including, among others, exposure at default, the amount and timing of expected future cash flows on impacted loans, value of collateral, estimated losses on our loan portfolios as well as consideration of general loss experience. Based on our estimate of the level of allowance for credit losses required, we record a provision for credit losses to maintain the allowance for credit losses at an appropriate level.

We cannot predict with certainty the amount of loan charge-offs that we will incur. We do not currently determine a range of loss with respect to the allowance for credit losses. In addition, our regulatory agencies, as an integral part of their examination processes, periodically review our allowance for credit losses. Such agencies may require that we recognize additions to the allowance for credit losses based on their judgments about information available to them at the time of their examination. To the extent that actual outcomes differ from management's estimates, additional provisions to the allowance for credit losses may be required that would adversely impact earnings in future periods.

We account for income taxes under the asset/liability method. We recognize deferred tax assets for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, as well as operating loss and tax credit carry-forwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize the effect on deferred tax assets and liabilities of a change in tax rates in income in the period indicated by the enactment date. We establish a valuation allowance for deferred tax assets when, in the judgment of management, it is more likely than not that such deferred tax assets will not become realizable. The judgment about the level of future taxable income is dependent to a great extent on matters that may, at least in part, be beyond our control. It is at least reasonably possible that management's judgment about the need for a valuation allowance for deferred tax assets could change in the near term.

We follow the provisions of ASC Topic 718 "Compensation," which requires the expense recognition over a service period for the fair value of share based compensation awards, such as stock options, restricted stock, and performance based shares. This standard allows management to establish modeling assumptions as to expected stock price volatility, option terms, forfeiture rates and dividend rates which directly impact estimated fair value. The accounting standard also allows for the use of alternative option pricing models which may impact fair value as determined. Our practice is to utilize reasonable and supportable assumptions which are reviewed with the appropriate Board Committee.

Balance Sheet Analysis and Comparison of Financial Condition

A comparison between September 30, 2012 and December 31, 2011 balance sheets are presented below.


Total assets increased $45.4 million, or 14.1%, to $368.5 million at September 30, 2012 compared to $323.1 million at December 31, 2011. This asset growth was primarily due to a $22.6 million increase in investment securities and growth of $22.3 million in total loans. The asset growth was funded primarily from increases in customer deposits and commercial customers overnight sweep agreements. Deposits increased from $262.6 million at December 31, 2011 to $287.4 million at September 30, 2012, an increase of $24.8 million or 9.4%. From a funding perspective, most important was the growth in noninterest-bearing deposits of $17.9 million or 28.8% from $62.0 million at December 31, 2011 to $79.9 million at September 30, 2012. Additional funding for asset growth came from securities sold under agreement to repurchase and other short term borrowings which increased $14.6 million to $27.6 million at September 30, 2012 from $13.0 million at December 31, 2011.

Securities Available for Sale

We currently hold both U.S. agency securities and mortgage backed securities in our securities portfolio, all of which are classified as available for sale. Our securities portfolio is used to provide the required collateral for funding via commercial customer repurchase agreements as well as to provide sufficient liquidity to fund our loans and provide funds for withdrawals of deposited funds. At September 30, 2012 we held an investment in stock of the Federal Home Loan Bank of Atlanta ("FHLB") of $1.2 million compared to $1.3 million held at December 31, 2011. This investment, which is required for continued membership, is based partially upon the dollar amount of borrowings outstanding from the FHLB. These investments are carried at cost. We have never held stock in Fannie Mae or Freddie Mac.

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

(in thousands)              September 30, 2012             December 31, 2011
                        Amortized       Estimated      Amortized       Estimated
                           Cost        Fair Value         Cost        Fair Value
U.S. Federal agencies   $   35,536     $    35,544     $   12,774     $    12,773
Mortgage-backed                380             408            568             603
Total                   $   35,916     $    35,952     $   13,342     $    13,376

We had securities available for sale of $36.0 million and $13.4 million at September 30, 2012 and December 31, 2011, respectively, which were recorded at fair value. This represents an increase of $22.6 million, or 168.8%, from the prior year end. We did not record any gains or losses on the sales or calls of securities or mortgage backed securities in either period presented. At September 30, 2012 and December 31, 2011, $16.2 million and $5.8 million fair value of securities, respectively, was pledged as collateral for repurchase agreements.

With respect to our total portfolio of securities available for sale, we held certain securities that had unrealized losses of $2 thousand at both September 30, 2012 and December 31, 2011. The minimal 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 consider all of the unrealized losses to be temporary impairment losses.

Loan and Lease Portfolio

Total loans and leases increased by $22.3 million or 8.1%, to $298.8 million at September 30, 2012 from $276.5 million at December 31, 2011. At September 30, 2012, total loans and leases were 81.1% of total assets, down slightly compared to 85.6% of total assets at December 31, 2011. Loan and leases growth throughout the banking industry has been impacted by decreased loan demand resulting from uncertain economic conditions.

The following table sets forth the composition of our loan and lease portfolio at the dates indicated. We had loans held for sale of $573 thousand at September 30, 2012, and $646 thousand at December 31, 2011.

                                        September 30,                   December 31,
(in thousands)                      2012         % of Total        2011         % of Total
Real estate
Construction and land             $  35,889             12.0 %   $  39,268             14.2 %
Residential - first lien             23,074              7.7        22,087              8.0
Residential - junior lien             8,162              2.7         9,242              3.3
Total residential real estate        31,236             10.5        31,329             11.3
Commercial - owner occupied          58,793             19.7        46,588             16.8
Commercial - non-owner occupied      86,116             28.8        76,880             27.8
Total commercial real estate        144,909             48.5       123,468             44.6
Total real estate loans             212,034             71.0       194,065             70.2
Commercial loans and leases          85,409             28.6        81,243             29.4
Consumer                              1,371              0.5         1,223              0.4
Total loans and leases            $ 298,814            100.0 %   $ 276,531            100.0 %


Our deposits increased from $262.6 million at December 31, 2011 to $287.4 million at September 30, 2012, an increase of $24.8 million or 9.4%. The increase resulted primarily from a $17.9 million or 28.8% increase in noninterest-bearing checking accounts, which increased from $62.0 million at December 31, 2011 to $79.9 million at September 30, 2012. In addition, with the exception of certificates of deposit all other interest bearing accounts increased $8.3 million or 9.3% from December 31, 2011 to September 30, 2012. Certificates of deposits declined $1.4 million or 1.3% to $109.6 million at September 30, 2012 from $111.0 million at December 31, 2011. The growth in the non-maturity deposits and other sources was more than sufficient to fund the growth in loans and assets during the nine month period.

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

                                                   September 30,                   December 31,
(dollars in thousands)                         2012         % of Total         2011         % of Total
Noninterest-bearing demand                  $   79,934               28 %   $   62,044               24 %
Interest-bearing checking                       18,946                7         17,687                7
Money market accounts                           66,707               23         61,267               23
Savings                                         12,262                4         10,644                4
Certificates of deposit $100,000 and over       74,844               26         79,718               30
Certificates of deposit under $100,000          34,733               12         31,282               12
Total deposits                              $  287,426              100 %   $  262,642              100 %


Customer deposits remain the primary source utilized to meet funding needs. Borrowings consist of overnight unsecured master notes, overnight securities sold under agreement to repurchase ("repurchase agreements") and FHLB advances. Our borrowings totaled $33.6 million at September 30, 2012 and $23.0 million at December 31, 2011, respectively. Short-term borrowings totaled $27.6 million at September 30, 2012 and $13.0 million at December 31, 2011. Short term borrowing at September 30, 2012 consisted of master notes, repurchase agreements and FLHB advances totaling $1.5 million, $16.1 million and $10.0 million, respectively compared to these borrowings at December 31, 2011 totaling $1.2 million, $5.8 million and $6.0 million, respectively. We had three long-term FHLB advances outstanding totaling $6.0 million at September 30, 2012 compared to five FHLB advances outstanding totaling $10 million at December 31, 2011.

Shareholders' Equity

Total shareholders' equity increased by $9.7 million or 26.5% from $36.6 million at December 31, 2011 to $46.3 million at September 30, 2012. The increase in shareholders' equity is primarily the result of the common stock offering and retention of the earnings for the first nine months of 2012, net of preferred dividends paid. On July 20, 2012, Bancorp closed its previously announced common stock offering, pursuant to an effective registration statement, and concurrent private placement of its common stock. Bancorp raised $10.2 million in gross proceeds and issued 1,396,364 shares of its common stock as of the closing date of the offerings.

Total shareholders' equity at September 30, 2012 represents a capital to asset ratio of 12.57%, while the total shareholders' equity at December 31, 2011 represents a capital to asset ratio of 11.34%. Even though capital levels increased, the overall growth in asset levels resulted in a decline in the capital to asset ratio.

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.

                                                        Nine months ended September 30,
                                               2012                                        2011
                               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   $  79,080     $     3,226          5.45 %   $  85,156     $     3,595          5.64 %
Commercial real estate          131,227           5,412          5.51       104,857           4,604          5.87
Construction and land            38,107           1,544          5.41        33,164           1,240          5.00
Residential real estate          31,138           1,147          4.92        33,101           1,242          5.02
Consumer                          1,679              58          4.62         1,266              47          4.96
Total loans and leases          281,231          11,386          5.41       257,544          10,728          5.57
Federal funds sold               27,827              46          0.22        11,484              17          0.20
Securities: 2
U.S Gov agencies                 21,835              39          0.24        13,399              36          0.36
Mortgage-backed                     504              18          4.69           865              32          4.95
Other investments                 1,190              18          1.98         1,489              14          1.26
Total securities                 23,529              74          0.42        15,753              82          0.70
Total earning assets            332,586          11,506          4.62       284,781          10,827          5.08
Cash and due from banks           3,690                                       3,040
Bank premises and
equipment, net                    9,664                                       9,201
Other assets                      6,445                                       9,369
Less: allowance for credit
losses                           (3,269 )                                    (3,840 )
Total assets                  $ 349,116                                   $ 302,551
Interest-bearing demand
accounts                      $  17,678              47          0.36     $  16,024              52          0.43
Money market                     64,321             280          0.58        62,725             329          0.70
Savings                          11,576              47          0.54        12,340              61          0.66
Time deposits $100,000 and
over                             61,815             554          1.20        57,911             530          1.22
Other time deposits              51,747             442          1.14        40,548             328          1.08
Total interest-bearing
deposits                        207,137           1,371          0.88       189,548           1,300          0.92
Short-term borrowings            23,303             125          0.72        24,219             137          0.76
Long-term borrowings              7,248              53          0.97         6,872              72          1.40
Total interest-bearing
funds                           237,689           1,549          0.87       220,639           1,509          0.91
deposits                         71,017                                      51,050
Other liabilities and
accrued expenses                    842                                         807
Total liabilities               309,547                                     272,496
Shareholders' equity             39,569                                      30,055
Total liabilities &
shareholders' equity          $ 349,116                                   $ 302,551
Net interest rate spread 3                  $     9,957          3.75 %                 $     9,318          4.17 %
Effect of
noninterest-bearing funds                                        0.25                                        0.21
Net interest margin on
earning assets 4                                                 4.00 %                                      4.37 %

(1) Loan fee income is included in the interest income calculation, and nonaccrual loans are included in the average loan base upon which the interest rate earned on loans is calculated.

(2) Available for sale securities are presented at amortized cost

(3) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(4) Net interest margin represents net interest income divided by average total interest-earning assets.

                                                       Three months ended September 30,
                                               2012                                        2011
                               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   $  81,412     $     1,084          5.30 %   $  85,734     $     1,172          5.42 %
Commercial real estate          136,046           1,861          5.44       106,898           1,605          5.96
Construction and land            37,577             510          5.40        34,839             453          5.16
Residential real estate          31,296             381          4.84        33,476             421          4.99
Consumer                          1,615              18          4.43         1,196              15          4.98
Total loans and leases          287,946           3,854          5.32       262,143           3,666          5.55
Federal funds sold               25,944              15          0.22        11,482               6          0.21
Securities: 2
U.S. Gov agencies                29,198              18          0.24        13,879              13          0.37
Mortgage-backed                     434               5          4.64           779               9          4.58
Other investments                 1,051               6          2.18         1,451               8          2.19
Total securities                 30,683              29          0.37        16,109              30          0.74
Total earning assets            344,573           3,897          4.50       289,734           3,702          5.07
Cash and due from banks           3,762                                       3,469
Bank premises and
equipment, net                    9,740                                       9,192
Other assets                      6,244                                       9,569
Less: allowance for credit
losses                           (2,831 )                                    (3,966 )
Total assets                  $ 361,488                                   $ 307,998
Interest-bearing demand
. . .
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