Howard Bancorp, Inc. Reports First Quarter 2021 Results

BALTIMORE–(BUSINESS WIRE)–Howard Bancorp, Inc. (NASDAQ: HBMD) (“Howard Bancorp” or the “Company”), the parent company of Howard Bank (“Howard Bank” or the “Bank”), today reported its financial results for the quarter ended March 31, 2021.

First Quarter 2021 Highlights

• Strong net income growth:
  • Net income, of $6.2 million for the quarter, was up 86% from first quarter of 2020 and up 39% from fourth quarter of 2020
  • Core net income, ¹ of $6.2 million for the quarter, was up 134% from first quarter of 2020 and up 13% from fourth quarter of 2020
• Strong earnings per share growth:
  • Earnings per share (“EPS”), both basic and diluted, of $0.33 for the quarter, was up 83% from first quarter of 2020 and up 38% from fourth quarter of 2020
  • Core EPS, ¹ both basic and diluted, of $0.33 for the quarter, was up 136% from first quarter of 2020 and up 14% from fourth quarter of 2020
• Strong pre-provision net revenue (“PPNR”) ¹ growth:
  • PPNR, ¹ at $9.4 million for the quarter, was up 49% from first quarter of 2020 and up 30% from fourth quarter of 2020
  • Core PPNR, ¹ at $9.4 million for the quarter, was up 35% from first quarter of 2020 and up 7% from fourth quarter of 2020
  • Core PPNR, as a percentage of average assets, ¹ 1.50% for the quarter, was up 0.31% , or 31 basis points “BP”), from first quarter of 2020 and up 12 BP from fourth quarter of 2020
• Strong loan growth:
  • Total loan growth of $81.5 million during the quarter, including $33.9 million of Paycheck Protection Program (“PPP”) loans
  • Portfolio loan ¹ growth (which excludes PPP loans) of $47.5 million during the quarter (11.2% annualized growth rate)
• Stable / improving net interest margin:
  • Net interest margin, at 3.43% for the quarter, was up 4 BP from fourth quarter of 2020
  • Operating net interest margin, ¹ which excludes the impact of loan fair value accretion and net income from PPP lending, was 3.20% for the quarter, down 1 BP from fourth quarter of 2020
• Stable asset quality:
  • Loan deferrals of $54.2 million at March 31, 2021 (2.8% of total loans and 3.1% of portfolio loans
  • Nonperforming assets to total assets was 0.62% as of March 31, 2021, down 16 BP from first quarter of 2020 and down 17 BP from fourth quarter of 2020
  • Provision for credit losses was $1.0 million for the quarter, down $2.4 million from first quarter of 2020 and down $700 thousand from fourth quarter of 2020
  • Net charge-offs were $1.8 million for the quarter, or 0.43% of average total loans (annualized)
  • Allowance for loan losses was 0.94% of total loans and 1.05% of portfolio loans ¹ as of March 31, 2021; compared to March 31, 2020, up by 18 BP and 29 BP, respectively; compared to December 31, 2020, both down by 8 BP

• Good expense management:
  • Noninterest expenses were $12.3 million for the quarter, down 15% from both first quarter of 2020 and fourth quarter of 2020
  • Core noninterest expenses, ¹ were $12.3 million for the quarter, flat compared to first quarter of 2020 and down 5% from fourth quarter of 2020
• PPP update:
  • $95.7 million of PPP loans funded during the quarter
  • $60.1 million of 2020 PPP loan originations forgiven during the quarter

¹ These are financial measures not calculated in accordance with generally accepted accounting principles (“GAAP”). Please refer to the section entitled “Reconciliation of Non-GAAP Financial Measures” in this press release and to the financial tables entitled “GAAP to Non-GAAP reconciliation” for a reconciliation to the most directly comparable GAAP financial measures.

Mary Ann Scully, Chairman and CEO, commented, “The first quarter of 2021 demonstrated significant tangible progress towards our goal of driving revenue-led PPNR growth and returns which is, in turn, generating positive operating leverage. Revenue growth was led by commercial loan growth, through net origination of both portfolio loans and PPP loans, funded by low-cost deposits. This was accompanied by strong cost control and resource allocation devoted to customer-facing staff. We believe our low noninterest expense to average assets ratio positions us well against peers and reflects three years of focus on both branch optimization and core process improvements. However, we are proudest of our revenue growth as we believe that confirms differentiation. Our net interest margin is stable despite a very challenging low interest rate environment and, as the asset mix continues to shift toward loans, the margin should improve. Howard Bank’s historical emphasis on full commercial relationships has allowed us to significantly lower our cost of funds and that tailwind has almost completely offset the headwinds of compressed yields in both the loan and the securities portfolios. Those lower yields have been exacerbated by a higher proportion of assets in low-yielding but high-quality securities. The headwind of lower commercial line usage contributes to this excess liquidity, as does higher commercial deposit levels maintained by former net borrowers.

Strong commercial loan origination led to annualized double-digit growth in C&I balances. This growth was generated by our staff focused on our core Baltimore market and also showed early efforts of the two-person CRE team and the three-person C&I team now focused on the demographically attractive contiguous Greater Washington marketplace. The talent pipeline has been strong in both markets; approximately 20% of our commercial bankers are now focused on the Greater Washington market. We believe our loan pipelines in both markets bode well for the remainder of the year. We look forward to a general uplift in the economy and we hope to begin welcoming some staff back into the offices later in the second quarter. The loyalty of staff and existing customers has, however, given us strength, and we believe has continued to enhance the value of our brand, allowing us to acquire both new talent and new customers.”

Net Income and EPS

The Company reported net income of $6.2 million, or $0.33 per both basic and diluted common share, for the first quarter of 2021. This compares to net income of $3.3 million, or $0.18 per both basic and diluted common share, for the first quarter of 2020 and net income of $4.5 million, or $0.24 per both basic and diluted common share, for the fourth quarter of 2020.

First quarter 2021 basic and diluted EPS increased by $0.15 when compared to the first quarter of 2020 and $0.09 when compared to the fourth quarter of 2020. The following table presents an EPS rollforward for the first quarter of 2021 compared to both the first quarter of 2020 and the fourth quarter of 2020. The column noted as “FN” references each item in the rollforward to a footnote with additional information; reconciling items are presented on an after tax basis.

					First Quarter 2021 Compared to:
			FN		Q1 2020				Q4 2020
EPS, First Quarter 2020 / Fourth Quarter 2020					$	0.18			$	0.24
Decrease in the provision for credit losses			1			0.10				0.03
Pretax income from SBA Paycheck Protection Program (“PPP”)			2			0.08				0.02
CFO departure charge (first quarter 2020)			3			0.03				–
Pretax income from former mortgage banking activities (first quarter 2020)			4			(0.01	)			–
Litigation settlement charge (fourth quarter 2020)			5			–				0.04
Branch optimization charge (fourth quarter 2020)			6			–				0.02
Tax benefit resulting from CARES Act (first quarter 2020)			7			(0.06	)			(0.01	)
All other, net						0.01				(0.01	)
EPS, First Quarter 2021					$	0.33			$	0.33
CHANGE					$	0.15			$	0.09

1. The first quarter 2021 provision for credit losses was $1.0 million, a decrease of $2.4 million from the first quarter of 2020, and a decrease of $0.7 million from the fourth quarter of 2020.
2. The Company commenced originating loans under the SBA’s PPP program in the second quarter of 2020 and began the process of loan forgiveness in the fourth quarter of 2020. First quarter 2021 pretax income of $2.1 million from this program represented an increase of $388 thousand from the fourth quarter of 2020. The PPP program did not exist prior to the second quarter of 2020.
3. The first quarter of 2020 included noninterest expenses of $788 thousand attributable to the departure of the Company’s former CFO. There were no expenses attributable to the departure of any executive officers since that quarter.
4. The first quarter of 2020 included $130 thousand in pretax income from the Company’s former mortgage banking activities, which were concluded in the first quarter of 2020.
5. The fourth quarter of 2020 included a $1.0 million additional charge (total charge of $2.0 million), included within noninterest expense, for the settlement of potential litigation claims stemming from certain mortgages originated by First Mariner Bank. The settlement of this potential litigation was completed in January 2021.
6. The fourth quarter of 2020 included a branch optimization charge, included within noninterest expense, of $554 thousand. There were no branch optimization charges in the first quarters of 2021 or 2020.
7. A $1.3 million tax benefit resulting from the carryback of our 2018 net operating loss as a result of a provision in the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was recorded in 2020, with $1.2 million recorded in the first quarter of 2020 and an additional $94 thousand in the fourth quarter of 2020. There was no comparable item in the first quarter of 2021.

Core net income is a non-GAAP financial measure that excludes, if applicable, the earnings contribution of the Company’s mortgage banking activities and certain other items to provide a picture of ongoing activities deemed core to the Company’s strategy. Core net income for the first quarter of 2021, which is unchanged from reported net income, was $6.2 million, or $0.33 per both basic and diluted common share. This compares to core net income of $2.6 million, or $0.14 per both basic and diluted common share for the first quarter of 2020. The $0.19 per share increase in core EPS in the first quarter of 2021, when compared to the first quarter of 2020, was primarily the result of a lower provision for credit losses, which was down $2.4 million (+$0.10 after tax per share), and the pretax contribution from PPP lending activities of $2.1 million (+$0.08 after tax per share). This also compares to core net income of $5.5 million, or $0.29 per both basic and diluted common share, for the fourth quarter of 2020. The $0.04 per share increase in core earnings per share in the first quarter of 2021, when compared to the fourth quarter of 2020, was primarily the result of a lower provision for credit losses, which was down $0.7 million (+$0.03 after tax per share), and an increased pretax contribution from PPP lending activities of $388 thousand (+$0.02 after tax per share). *

Core pre-provision net revenue (“core PPNR”), a non-GAAP financial measure that adds back the provision for credit losses to GAAP pretax income and excludes the pretax earnings contribution of the Company’s former mortgage banking activities and certain other items, was $9.4 million for the first quarter of 2021. The first quarter of 2021 core PPNR was up $2.4 million, or 34.7%, from $7.0 million for the first quarter of 2020, and was up $617 thousand, or 7.0%, when compared to $8.8 million for the fourth quarter 2020. *

Paycheck Protection Program Loans

The Company continues to actively participate in the SBA’s PPP program. With the relaunch of the program by the SBA on January 19, 2021, $95.7 million in PPP loans were originated in the first quarter of 2021, consisting of 548 loans with an average loan size of $175 thousand. An additional 49 applications, totaling $4.2 million, were pending approval at March 31, 2021. An additional 13 loans, totaling $1.8 million, were funded through April 16, 2021.

During the second and third quarters of 2020, a total of $201.0 million in PPP loans were originated under the program, consisting of 1,062 loans with an average loan size of $189 thousand. A total of 409 loans, with an aggregate principal balance of $60.1 million, were forgiven during the first quarter of 2021. An additional 66 loans, with an aggregate principal balance of $7.2 million, were forgiven through April 16, 2021. Of the 1,062 loans originated in 2020, 611 have been forgiven totaling $97.5 million through April 16, 2021, representing 57.5% of the number of 2020 loans and 48.5% of 2020 principal balances.

During 2020, the Company deferred total processing fees from the SBA for originated PPP loans of $6.7 million. In addition, $782 thousand of origination costs were deferred. The PPP originations in the first quarter of 2021 resulted in $4.0 million of additional deferred processing fees from the SBA and $578 thousand of additional deferred origination costs. The net deferred fees are being accreted as a yield adjustment over the contractual term of the underlying PPP loans, with accelerated accretion upon forgiveness. PPP lending generated pretax income of $2.1 million, or $0.08 after tax per share, in the first quarter of 2021, an increase of $388 thousand, or $0.02 after tax per share, from the fourth quarter of 2020. PPP loans, net of unearned income, totaled $201.6 million at March 31, 2021, an increase of $33.9 million from $167.6 million at December 31, 2020. PPP loan principal balances were $206.4 million at March 31, 2021.

Certain information in this earnings release is presented with respect to “portfolio loans,” a non-GAAP financial measure defined as total loans and leases, but excluding the PPP loans. The Company believes that portfolio loan related measures provide additional useful information for purposes of evaluating the Company’s results of operations and financial condition with respect to the first quarter of 2021 when comparing to other periods, since the PPP loans are 100% guaranteed, were not subject to traditional loan underwriting standards, and a substantial portion of these loans are expected to be forgiven and repaid by the SBA within the next 12 months. *

COVID-19 Loan Modifications

The Company has provided loan modifications to both commercial and retail customers, on a case by case basis, in the form of payment deferrals for periods up to six months. Deferrals trended favorably from their peak of $315 million (17.9% of both total loans and portfolio loans) on April 24, 2020, dropping to a low of $41.4 million (2.2% of total loans and 2.4% of portfolio loans) at January 22, 2021, before increasing slightly to $55.8 million at March 12, 2021 (3.0% of total loans and 3.3% of portfolio loans), the most recent date when the Company previously disclosed deferral data. Since that date, deferrals have decreased slightly. As of both March 31 and April 16, 2021, deferrals are $54.2 million, or 2.8% of total loans and 3.1% of portfolio loans. Included in total deferrals at both March 31 and April 16, 2021 are second deferrals (including deferrals where the cumulative inception to date deferral is greater than six months) of $27.6 million. Full payment deferrals represent 36% of total deferrals while principal only deferrals represent 64% of total deferrals. *

Asset Quality and Allowance for Loan and Lease Losses

Nonperforming assets (“NPAs”) totaled $16.4 million at March 31, 2021, a decrease of $3.8 million from December 31, 2020 and a decrease of $3.2 million from March 31, 2020. NPAs consisted of $15.7 million of nonperforming loans (“NPLs”) and $629 thousand of other real estate owned (“OREO”) at March 31, 2021. NPLs were 0.81% of total loans and 0.90% of portfolio loans at March 31, 2021. NPAs represented 0.62% of total assets, 0.84% of total loans and OREO, and 0.94% of portfolio loans and OREO at March 31, 2021. *

• This compares to NPAs of $19.5 million at March 31, 2020 that consisted of $17.2 million in NPLs and $2.3 million of OREO. NPLs were 0.98% of total loans at March 31, 2020 while nonperforming assets represented 0.78% of total assets and 1.11% of total loans and OREO at March 31, 2020.

• This compares to NPAs of $20.2 million at December 31, 2020 that consisted of $19.4 million in NPLs and $743 thousand of OREO. NPLs were 1.04% of total loans and 1.14% of portfolio loans at December 31, 2020 while NPAs represented 0.79% of total assets, 1.08% of total loans and OREO, and 1.19% of portfolio loans and OREO at December 31, 2020.

Net charge-offs were $1.8 million in the first quarter of 2021 and represented 0.43% of average loans (annualized). This compares to net charge-offs of $462 thousand, or 0.11% of average loans (annualized) in the first quarter of 2020 and $195 thousand, or 0.05% of average loans (annualized) in the fourth quarter of 2020. The allowance for loan and lease losses (the “allowance”) was $18.4 million on March 31, 2021. The provision for credit losses for the first quarter of 2021 was $1.0 million. Included in first quarter 2021 net charge-offs was $677 thousand attributable to one loan relationship where the Company had established an $894 thousand specific allocation of the allowance as of December 31, 2020. There were no specific allocations of the allowance at March 31, 2021.*

Because the Company is a smaller reporting company under SEC rules, the allowance was determined under the incurred loss model. The $18.4 million allowance represented 0.94% of total loans, 1.05% of portfolio loans, and 116.8% of NPLs at March 31, 2021. *

• This compares to an allowance of $13.4 million at March 31, 2020. The March 31, 2020 allowance represented 0.76% of total loans and 77.8% of NPLs. The $5.0 million increase in the allowance at March 31, 2021 was the result of aggregate provisions for credit losses attributable to the allowance of $7.1 million partially offset by aggregate net charge-offs of $2.1 million during the four-quarter period ending March 31, 2021.

• This compares to an allowance of $19.2 million at December 31, 2020. The December 31, 2020 allowance represented 1.03% of total loans, 1.13% of portfolio loans, and 98.6% of NPLs. The $794 thousand decrease in the allowance at March 31, 2021 was the result of net charge-offs of $1.8 million during the quarter ended March 31, 2021 partially offset by a provision for credit losses of $1.0 million.

The Company’s allowance as a percentage of total loans has historically been lower than certain of our peers due to the accounting for acquired loans and their initial impact on the allowance. The allowance and unamortized fair value marks as a percentage of portfolio loans, a non-GAAP measure used by management to assess credit coverage, adds the unamortized fair value marks to total loans, portfolio loans, and the allowance. The fair value marks, unlike the allowance, are not available to absorb general losses but are only available to absorb losses for the specific loan to which they apply. However, this measure provides the Company with an additional indicator of potential loss absorption capacity. The allowance and unamortized fair value marks as a percentage of total loans plus fair value marks was 1.21% at March 31, 2021, a decrease of 4 BP from March 31, 2020 and a decrease of 16 BP from December 31, 2020. The allowance and unamortized fair value marks as a percentage of portfolio loans plus fair value marks was 1.35% at March 31, 2021, an increase of 10 BP from March 31, 2020 and a decrease of 15 BP from December 31, 2020. *

The Company’s asset quality trends indicate modest additional stress in the loan portfolio, although we believe our ongoing active management of the portfolio, COVID-19 related loan modifications, and PPP loans have reduced the short-term risk in the portfolio. With the exception of the specific allocation previously discussed, the growth in the allowance since the start of the pandemic has been based on management’s evaluation of certain qualitative factors included in the determination of the allowance, primarily economic factors driven by the unemployment rate and GDP as well as factors driven by the level of loans to potentially highly impacted industries and risk rating downgrades.

The Maryland economy, like most of the nation, is open with limited restrictions and substantial economic activity has returned; however, unemployment still remains high, and many businesses are still experiencing challenges. Continued government stimulus and the quickening pace of vaccination availability provide reason for optimism that the worst of the pandemic may soon be in the past, although there remains much uncertainty, including the ability of the Company’s customers and businesses to return to their pre-pandemic routine.

Management will continue to closely monitor portfolio conditions and reevaluate the adequacy of the allowance. While the level of payment deferrals and PPP loan assistance have reduced the short-term risk in the Company’s loan portfolio and traditional lagging indicators of delinquencies and nonperforming loans remain historically modest, management believes there is the potential for additional risk rating downgrades and an increase in charge-offs in future periods.

Stockholders’ Equity and Regulatory Capital Ratios

Stockholders’ equity at March 31, 2021 was $292.7 million, a decrease of $2.0 million from December 31, 2020. The decrease was primarily due to an $8.5 million decrease in accumulated other comprehensive income (“AOCI”), which represents the after tax impact of changes in the fair value of available-for-sale securities. The decline in the fair value of available-for-sale securities was the result of the rapid increase in intermediate and long-term treasury yields during the first quarter of 2021. The decrease in AOCI was partially offset by first quarter 2021 net income of $6.2 million. Book value per common share was $15.58 at March 31, 2021, a decrease of $0.14 per share since December 31, 2020, with the change in AOCI representing a $0.45 per share decrease partially offset by first quarter 2021 EPS of $0.33.

Tangible stockholders’ equity, a non-GAAP financial measure that deducts goodwill and other intangible assets, net of any applicable deferred tax liabilities, was $257.3 million at March 31, 2021. This compares to $258.8 million at December 31, 2020, with the $1.5 million decrease primarily due to the first quarter 2021 decrease in AOCI of $8.5 million, partially offset by first quarter 2021 net income of $6.2 million and the $449 thousand after tax effect of core deposit intangible amortization. Tangible book value per common share, a non-GAAP measure that divides tangible stockholders’ equity by the number of shares outstanding, was $13.70 per share at March 31, 2021, a decrease of $0.11 per share since December 31, 2020. *

The Company’s regulatory capital ratios are all well in excess of regulatory “well-capitalized” and internal target minimum levels. Note that the Company had adopted the regulatory AOCI opt-out election; as a result, AOCI is not a component of regulatory capital and, therefore, the change in AOCI has not impacted regulatory capital ratios. The total capital ratio was 14.47% while both the Common Equity Tier 1 (“CET 1”) and Tier 1 capital ratios were 12.06% at March 31, 2021. The Tier 1 to average assets (“leverage”) ratio was 9.53%. A comparison of the Company’s March 31, 2021 regulatory capital ratios to March 31, 2020 and December 31, 2020 is as follows:

• Regulatory capital ratios at March 31, 2020 consisted of a total capital ratio of 13.16% while both the CET 1 and Tier 1 capital ratios were 10.95%. The leverage ratio was 9.10%. All March 31, 2021 regulatory capital ratios were above the March 31, 2020 levels.

• Regulatory capital ratios at December 31, 2020 consisted of a total capital ratio of 14.32% while both the CET 1 and Tier 1 capital ratios were 11.83%. The leverage ratio was 9.26%. All March 31, 2021 regulatory capital ratios were above the December 31, 2020 levels.

Liquidity

The Company’s liquidity position remains strong. The Company has continued to experience increases in low-cost customer deposits since the end of the first quarter of 2020.

Contacts

Howard Bancorp, Inc.

Robert L. Carpenter, Jr., Executive Vice President and Chief Financial Officer

410-750-0020

[email protected]

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