HBMD - Howard Bancorp Inc. Reports Second Quarter 2019 Results

Howard Bancorp, Inc. (“Howard Bancorp” or the “Company”) (Nasdaq: HBMD), the parent company of Howard Bank (“Howard Bank” or the “Bank”), today reported its financial results for the quarter ended June 30, 2019. A summary of results and other developments during the second quarter of 2019 is as follows:

• Net income was $2.1 million for the three months ended June 30, 2019, compared to $4.3 million for the three month period ended March 31, 2019, and a net loss of $2.3 million for the second quarter of 2018. This represented earnings of $0.11 per basic and diluted common share for the three months ended June 30, 2019, compared to $0.22 per share for the three months ended March 31, 2019 and a loss of $0.12 per share for the second quarter of 2018. Pretax income for the second quarter of 2019 was reduced by $3.6 million with the execution of the most recent steps in our branch optimization initiative, under which we announced the closing of three additional branch locations and the consolidation of two other existing branch locations into a new smaller branch location. All of the costs associated with this initiative were recognized in the second quarter of 2019, with an estimated $2 million in annualized expense reductions to commence when the current locations are closed in September of 2019. This $3.6 million decrease in pretax income, net of tax, reduced second quarter 2019 net income by $2.6 million or $0.14 per basic and diluted share.

• Total assets at June 30, 2019 were $2.30 billion, which increased by $45.1 million or two percent compared to assets of $2.25 billion at March 31, 2019. Total portfolio loans grew by $53.8 million or 3.3% during the second quarter of 2019, increasing from $1.65 billion at March 31, 2019 to $1.70 billion at June 30, 2019. This return to a more historically normal growth was fueled by over $119 million in new loan originations during the quarter.

• Deposit levels also increased during the second quarter of 2019, ending the quarter at $1.72 billion, which represented growth of $43.7 million or 2.6% compared to total deposits of $1.67 billion at March 31, 2019. The composition of our deposits shifted during the second quarter as transaction deposits of $654 million representing 39.1% of our total deposits at March 31, 2019 declined by $48.2 million or 7% in the second quarter due to our largest deposit relationship reducing their balances by $61.6 million during the quarter to fund new opportunities and investments. This customer remains with the Bank but with balances more in line with other commercial clients. As a result of this large transaction deposit outflow, our transaction deposits of $606 million at June 30, 2019 represented 35.3% of our total deposits. The decline in transaction deposits necessitated an increase in our higher cost deposit sources, which increased by $91.9 million or 9% during the second quarter. Borrowed funds were relatively unchanged with $248.8 million at June 30, 2019 compared to $250.4 million at March 31, 2019.

• Total common shareholders’ equity increased by $3.0 million or 1%, from $300.5 million at March 31, 2019 to $303.5 million at June 30, 2019. Our capital position remains strong as indicated in the following table. During the second quarter, Howard Bancorp announced that its primary regulator, the Federal Reserve, had provided the Company with a non-objection to their announcement of a share buyback program that will allow the Company to purchase up to $7 million in common shares if deemed beneficial to the Company’s long-term value.

• The strength of the Company’s capital position was a foundational element of this share buyback program:

• Given the changes in our period end and average balance sheets along with the earnings achieved during the second quarter, the following table summarizes our key performance metrics:

For the Three Months Ended June 30, 2019

Interest income of $23.1 million for the second quarter of 2019 increased by $361 thousand or 1.6% from the $22.8 million recorded in the first quarter of 2019 primarily due to an increase in portfolio loan related interest income of $435 thousand as the quarterly average balance of our portfolio loans increased by $29.1 million or 1.8% for the second quarter of 2019 compared to the first quarter. The additional loan income was partially offset by lower levels of interest income from our investment portfolio, due to a decline in the average balance of our securities portfolio of $15.6 million during the second quarter of 2019 compared to the first quarter.

Interest expense of $5.8 million increased by $481 thousand or 9% for the second quarter of 2019 compared to the first quarter of 2019. Interest expense on deposits increased by $440 thousand for the second quarter of 2019 over the first quarter in 2019 due to both a $21 million or 1.6% increase in the average balance of interest bearing deposits, and a reduction in the average balance of transaction accounts by $21.9 million with a cost of 90 basis points shifted into higher cost CD’s, with an average cost of 214 basis points. Because of this growth and compositional shift, the second quarter of 2019 cost of interest bearing deposits increased by 11 basis points compared to the first quarter of 2019.

Overall, net interest income of $17.4 million for the second quarter of 2019 was lower than the $17.5 million in the first quarter of 2019 by $120 thousand as the increased interest expense outpaced the growth in interest income during the first quarter of 2019. We had a net interest margin (“NIM”) of 3.53% for the second quarter of 2019 which given the increased funding costs was down from the first quarter of 2019 NIM of 3.64%. Because of the volatility of the additional interest income from purchase accounting adjustments, the NIM can fluctuate from period to period.

The following table represents the NIM as reported each quarter, and the more stable NIM excluding the impact of the additional interest income due to the purchase accounting measures:

Our provision for credit losses for the second quarter of 2019 was $1.1 million compared to $1.7 million for the first quarter of 2019. The second quarter provision was primarily affected by higher loan growth achieved in the quarter along with a charge-off of nearly $300 thousand resulting from a claim on the guaranteed portion of an SBA loan that was denied. The first quarter provision was the result of a large charge-off of a loan that had been reserved during 2018. Although we reserved in 2018 for the amount of the loss incurred, charging off that loan in the first quarter increased our historic loss rates, which impacted the calculation of our general loan loss allowance.

Continuing active asset quality management has resulted in a decrease in our non-performing loans of $1.6 million or 8%, from $20.9 million in non-performing loans at March 31, 2019 to $19.3 million at June 30, 2019. The ratio of non-performing loans to total loans decreased from 1.27% at March 31, 2019 to 1.13% at June 30, 2019, and the ratio of non-performing assets to total assets similarly declined from 1.13% to 1.05% at the same dates.

Second quarter 2019 noninterest revenues of $5.8 million were $1.3 million or 29% higher than the $4.5 million recorded in the first quarter of 2019. Given the typical seasonal increase in mortgage activities, mortgage related revenues were $1.2 million or 59% higher for the second quarter of 2019 compared to the first quarter of 2019, largely due to increased mortgage originations which totaled $185 million for the second quarter of 2019 compared to $116 million for the first quarter. Also impacting noninterest income for the second quarter of 2019 was a gain on the sale of securities of $658 thousand which was part of an overall interest rate positioning strategy. The first quarter of 2019 benefitted from the receipt of a $300 thousand prepayment penalty on one large loan that paid off early during the first quarter of 2019.

Our total noninterest expenses of $19.5 million for the second quarter of 2019 represent a $4.6 million increase from the $14.9 million in the first quarter of 2019. Second quarter 2019 expenses include $3.6 million in expenses related to the costs of our branch delivery optimization initiatives as well as $651 thousand of expense related to the early prepayment of a few higher rate FHLB advances. The $651 thousand in FHLB prepayment penalties were more than offset by the $658 thousand in gains on the sales of securities noted above. Excluding the impact of these two expense items, total expenses for the second quarter were $15.2 million for the second quarter of 2019, which was $305 thousand or 2% higher than the $14.9 million for the first quarter of 2019.

Chairman and CEO Mary Ann Scully noted “Howard Bank continues to make significant progress in realizing the benefits associated with our greater scale and unique market positioning. Loan growth, as anticipated, reflects primarily very solid origination activity that is now significant enough to more than offset continuing challenges in the shifting nature of a very competitive pricing and structuring environment especially in the commercial real estate sector. The pipeline remains strong and Howard’s presence as both the largest locally headquartered bank and reputation as a bank solidly focused on advising the Small and Medium Enterprise (“SME”) sector continues to impact favorably balance sheet size and mix.

“Transaction deposit funding is still very strong but the shrinkage of some concentrated balances has in the short term raised funding costs. The Bank has a number of initiatives in place whose execution is helping to mitigate the higher funding costs and the core balances in the DDA portfolio are now more distributed. The quality of the loan portfolio is consistently improving as well and a strong capital position has allowed us to add an additional capital management tool in optimizing shareholder value.

“The Company has also moved aggressively to acknowledge permanent shifts in customer behaviors and utilization of physical delivery systems. The anticipated earnback on the most recent branch closures and relocations provides us with not only a more efficient delivery model but a more relevant one as the average deposits will be in excess of $100 million per branch location.

“We intend to continue focusing on our points of differentiation as well as additional opportunities to improve all of our return metrics. Each of our initiatives is centered around driving the value of the Company’s growth for all stakeholders - employees with opportunities to grow with a larger and more differentiated leader in their communities; clients with a very experienced group of advisors and a product set focused on their evolving needs; as well as shareholders with targeted strategies to continue to improve returns.”

This press release contains estimates, predictions, opinions, projections and other "forward-looking statements" as that phrase is defined in the Private Securities Litigation Reform Act of 1995. Such statements include, without limitation, references to Howard’s predictions or expectations of future business or financial performance as well as its goals and objectives for future operations, financial and business trends, business prospects, and management’s outlook or expectations for earnings, revenues, expenses, capital levels, liquidity levels, asset quality or other future financial or business performance, strategies or expectations. Such forward-looking statements are based on various assumptions (some of which may be beyond Howard’s control) and are subject to risks and uncertainties (which change over time) and other factors which could cause actual results to differ materially from those currently anticipated. Such risks and uncertainties include, but are not limited to, those related to difficult market conditions and unfavorable economic trends in the United States generally, and particularly in the markets in which Howard operates and in which its loans are concentrated, including the effects of declines in housing markets, an increase in unemployment levels and slowdowns in economic growth; Howard’s level of nonperforming assets and the costs associated with resolving problem loans including litigation and other costs; changes in market interest rates which may increase funding costs and reduce earning asset yields and thus reduce margin; the impact of changes in interest rates and the credit quality and strength of underlying collateral; the credit risk associated with the substantial amount of commercial real estate, construction and land development, and commercial and industrial loans in our loan portfolio; the extensive federal and state regulation, supervision and examination governing almost every aspect of Howard’s operations including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations issued in accordance with this statute and potential expenses associated with complying with such regulations; possible additional loan losses and impairment of the collectability of loans; Howard’s ability to comply with applicable capital and liquidity requirements (including the finalized Basel III capital standards), including our ability to generate liquidity internally or raise capital on favorable terms; any impairment of Howard's goodwill or other intangible assets; system failure or cybersecurity breaches of Howard's network security; Howard's ability to recruit and retain key employees; the effects of weather and natural disasters such as floods, droughts, wind, tornadoes and hurricanes as well as effects from geopolitical instability and man-made disasters including terrorist attacks; the effects of any reputation, credit, interest rate, market, operational, legal, liquidity, regulatory and compliance risk resulting from developments related to any of the risks discussed above; and the costs associated with resolving any problem loans, litigation and other risks and uncertainties, including those discussed in the Howard’s Form 10-K for the year ended December 31, 2018 and other documents filed by Howard with the Securities and Exchange Commission from time to time. Forward-looking statements are as of the date they are made, and Howard does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of Howard.

Additional information is available at www.howardbank.com.