Consolidated Statements of ~~Changes in Stockholders’ Equity~~Cash Flows~~Unaudited~~

Unaudited

Six months ended

June 30,
(in thousands)

2020

2019
CASH FLOWS FROM OPERATING ACTIVITIES:




Net (loss) income

$
(26,066)

$
6,344
Adjustments to reconcile net (loss) income to net cash from operating activities:




Provision for credit losses

6,445

2,835
Deferred income tax

481

1,422
Provision for other real estate owned

257

65
Depreciation and amortization

1,108

1,209
Stock-based compensation

378

112
Net accretion of discount on purchased loans

(590)

(925)
Gain on sale of securities

(3,044)

(658)
(Gain) loss on the sale of premises and equipment

(6)

83
Net amortization of intangible asset

1,379

1,551
Goodwill impairment

34,500

—
Loans originated for sale

(79,847)

(259,868)
Proceeds from sale of loans originated for sale

111,593

247,241
Realized and unrealized gains on mortgage banking activity

(1,036)

(3,793)
Loss on sale of other real estate owned, net

28

-
Cash surrender value of BOLI

(886)

(907)
Decrease in interest receivable and other assets

4,046

2,794
(Decrease) increase in accrued expenses and other liabilities

(1,666)

959
Other, net

31

14
Net cash provided by (used in) operating activities

47,105

(1,522)
CASH FLOWS FROM INVESTING ACTIVITIES:




Purchases of investment securities

(179,695)

(6,502)
Proceeds from sales, maturities and calls of investment securities

130,815

81,159
Net increase in loans and leases outstanding

(153,067)

(54,308)
Proceeds from the sale of other real estate owned

727

—
Purchase of premises and equipment

(69)

(422)
Proceeds from the sale of premises and equipment

743

1,392
Net cash (used in) provided by investing activities

(200,546)

21,319
CASH FLOWS FROM FINANCING ACTIVITIES:

Net increase in deposits

116,309

31,410
Net increase (decrease) customer repurchase agreements and other borrowings

31,707

(11,907)
Net decrease in FHLB advances

(39,000)

(16,000)
Proceeds from issuance of common stock, net of cost

195

263
Repurchase of common stock

(6,677)

—
Net cash provided by financing activities

102,534

3,766


Net (decrease) increase in cash and cash equivalents

(50,907)

23,563
Cash and cash equivalents at beginning of period

109,977

101,498
Cash and cash equivalents at end of period

$
59,070

$
125,061
SUPPLEMENTAL INFORMATION



Cash payments for interest

$
8,103

$
11,070
Cash payments for income taxes

15

—
Transferred from loans to other real estate owned

51

375
Cash payments for operating leases

441

785
Lease liabilities arising from obtaining right of use assets (see Note 8)

2,011

15,183
Liability for unsettled securities purchases

10,238

—
Goodwill reduction for adjustments to acquired net deferred tax assets

—

4,748
Accumulated
other
Preferred Number of Common Capital Retained comprehensive
(dollars in thousands, except share data) stock shares stock surplus earnings income/(loss) Total

Balances at January 1, 2016 $ 12,562 6,962,139 $ 70 $ 70,587 $ 9,712 $ (32 ) $ 92,899
Net income - - - - 4,349 - 4,349
Net unrealized gain on securities - - - - - 61 61
Dividends paid on preferred stock - - - - (166 ) - (166 )
Redemption of preferred stock (12,562 ) - - - - - (12,562 )
Issuance of common stock:
Director stock awards - 5,629 - 72 - - 72
Exercise of options - 1,740 - 19 - - 19
Stock-based compensation - 18,672 - 219 - - 219
Balances at September 30, 2016 $ - 6,988,180 $ 70 $ 70,897 $ 13,895 $ 29 $ 84,891

Balances at January 1, 2017 $ - 6,991,072 $ 70 $ 71,021 $ 14,849 $ (150 ) $ 85,790
Net income - - - - 5,317 - 5,317
Net unrealized gain on securities - - - - - 16 16
Issuance of common stock:
Common stock offering - 2,760,000 28 38,355 - - 38,383
Director stock awards - 11,404 - 205 - - 205
Exercise of options - 20,179 - 240 - - 240
Stock-based compensation - 29,337 - 362 - - 362
Balances at September 30, 2017 $ - 9,811,992 $ 98 $ 110,183 $ 20,166 $ (134 ) $ 130,313

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

6
7

~~Consolidated Statements of Cash Flows~~
Unaudited
Nine months ended
September 30
(in thousands) 2017 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,317 $ 4,349
Adjustments to reconcile net income to net cash from operating activities:
Provision for credit losses 1,031 1,302
Deferred income tax (benefit) 153 (241 )
Provision for other real estate owned 99 83
Depreciation 974 927
Stock-based compensation 567 291
Net accretion (amortization) of investment securities 61 (8 )
Net amortization of discount on purchased loans (466 ) (592 )
Loss on disposal of furniture, fixtures & equipment - 70
Net amortization of intangible asset 399 519
Loans originated for sale (495,805 ) (418,828 )
Proceeds from sale of loans originated for sale 502,874 429,148
Realized and unrealized gains on mortgage banking activity (8,698 ) (6,984 )
Gain on sales of other real estate owned, net (19 ) -
Gain on sales of portfolio loans, net (48 ) (612 )
Cash surrender value of BOLI (555 ) (461 )
Increase in interest receivable (344 ) (253 )
Increase in interest payable 152 19
Increase in other assets (1,253 ) (270 )
Decrease in other liabilities (59 ) (1,202 )
Net cash provided by operating activities 4,380 7,257
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of interest bearing deposits with banks - (19,513 )
Proceeds from maturities of interest bearing deposits with banks 19,019 -
Purchases of investment securities available-for-sale (46,714 ) (65,569 )
Purchases of investment securities held-to-maturity (3,000 ) (6,250 )
Proceeds from sale/maturities of investment securities available-for-sale 17,520 77,526
Net increase in loans and leases outstanding (75,732 ) (53,017 )
Purchase of bank owned life insurance (6,500 ) (2,200 )
Proceeds from the sale of other real estate owned 139 -
Proceeds from the sale of portfolio loans 3,759 3,090
Purchase of premises and equipment (450 ) (520 )
Net cash used in investing activities (91,959 ) (66,453 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 53,351 56,365
Net increase in short-term borrowings 21,414 11,580
Proceeds from issuance of long-term debt 12 21,498
Repayment of long-term debt (13,977 ) (12,000 )
Net proceeds from issuance of common stock, net of cost 38,623 19
Redemption of preferred stock - (12,562 )
Cash dividends on preferred stock - (166 )
Net cash provided by financing activities 99,423 64,734

Net increase in cash and cash equivalents 11,844 5,538
Cash and cash equivalents at beginning of period 39,366 38,340
Cash and cash equivalents at end of period $ 51,210 $ 43,878
SUPPLEMENTAL INFORMATION
Cash payments for interest $ 3,533 $ 3,304
Cash payments for income taxes 2,230 925
Transferred from loans to other real estate owned - 256
~~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
Howard Bancorp, Inc. (“Bancorp” or the “Company”) was incorporated in April 2005 under the laws of the State of Maryland. 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~~2 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~~Bancorp is used as a branch location and has office and retail space. The accompanying consolidated financial statements of Bancorp and its wholly-owned subsidiary 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~~now a bank holding company registered under the Bank Holding Company Act of ~~1956. Bancorp is~~1956, with a single bank ~~holding company with one~~ subsidiary, Howard 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”).
~~On May~~ The Bank has 9 subsidiaries—6 ~~2016, Bancorp redeemed all~~were formed to hold foreclosed real estate (3 of the 12,562 shares of the Series AA Preferred Stock that it had previously issued to the U.S. Department of the Treasury (the “Treasury”) under its Small Business Lending Fund (“SBLF”) program. The aggregate redemption price of the Series AA Preferred Stock was approximately $12.7 million, including dividends accrued but unpaid through the redemption date. The redemption of the Series AA Preferred Stock was funded with variable rate debt with Raymond James Bank, N.A.which are currently inactive), ~~which was~~2 own and manage real estate used for ~~a one-year period, with interest only payments based upon 30 day LIBOR plus 300 basis points. This debt was repaid on February~~corporate purposes, and 1 ~~2017 from a portion of the proceeds of the stock offering described below.~~
On February 1, 2017, Bancorp closed an underwritten public offering, including the exercise in full by the underwriters of their option to purchase an additional 360,000 shares, at the public offering price of $15.00 per share. The exercise of the option to purchase additional shares brought the total number of shares of common stock sold by Bancorp to 2,760,000 shares and increased the amount of gross proceeds raised in the offering, before underwriting discounts and expenses of the offering, to approximately $41.4 million.
On August 14, 2017, Bancorp entered into an Agreement and Plan of Reorganization with the Bank and First Mariner Bank, a Maryland chartered trust company (“First Mariner”), providing for, among other things, the merger of First Mariner with and into the Bank (the “Merger”). Under the terms of the agreement, the total transaction is valued at approximately $163.4 million based on Bancorp’s closing stock price of $16.85 on August 14, 2017. Upon consummation of the Merger, each stockholder of First Mariner will be entitled to receive, for each of his, her or its shares of First Mariner common stock and preferred stock, 1.6624 shares of Bancorp common stock. The Merger is subject to customary closing conditions, including regulatory approvals and approvals of the stockholders of Howard Bancorp and First Mariner.
holds historic tax credit investments.
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.
These statements should be read in conjunction with the financial statements and accompanying notes included in the Company’s 2019 Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on March 16, 2020. There have been no significant changes to the Company’s accounting policies as disclosed in the 2019 Annual Report on Form 10-K.
The following is a description of the Company’s significant accounting policies.
Basis of Presentation
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and prevailing practices within the financial services industry for financial information.
Principles of Consolidation
The consolidated financial statements include the accounts of Bancorp, ~~its subsidiary bank~~the 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~~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.
8
8

Table of Contents

~~Loans Held For Sale~~Allowance for Credit Losses

The ~~Company engages~~allowance for credit losses is maintained at a level believed adequate by management to absorb probable losses inherent in ~~sales of residential mortgage loans originated by~~ the ~~Bank. The Company has elected to measure loans held for sale at fair value. Fair value~~loan and lease portfolio and is based on ~~outstanding investor commitments~~the size and current risk characteristics of the loan and lease portfolio, an assessment of individual problem loans and leases, 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 and leases, estimated losses on pools of homogenous loans and leases 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 and leases. The credit allocations are based on a regular analysis of all loans and leases 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 that 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 incorporates other risk factors that may be inherent within the portfolio segments. For each portfolio segment, in addition to the historic loss experience, the qualitative factors that are measured and monitored in the overall determination of the allowance include:

●	changes in lending policies, procedures, and practices;

●	changes in international, national, state and local economic and business conditions and developments that affect the collectibility of the portfolio, including the condition of various market segments;

●	changes in the nature and volume of the loan portfolio;

●	changes in the experience, ability and depth of the lending staff;

●	changes in the volume and severity of past due, nonaccrual, and adversely classified loans;

●	changes in the quality of our loan review system;

●	changes in the value of underlying collateral for collateral-dependent loans;

●	the existence of any concentrations of credit, and changes in the level of such concentrations;

●	the effect of other external factors such as competition and legal and regulatory requirements; 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 ~~absence~~case of economic conditions utilizing independently provided data on items such ~~commitments,~~as unemployment rates, commercial real estate vacancy rates, or other market data deemed relevant to the business conditions within the markets served.

Table of Contents

The Company’s loan and lease policies state that after all collection efforts have been exhausted, and the loan or lease is deemed to be a loss, then the remaining loan or lease balance will be charged to the Company’s established allowance for credit losses. All loans and leases 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 or lease is deemed not to be well secured, the loan or lease would 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 ~~current investor yield requirements based on third party models. Gains and losses on sales of these~~its specific facts regarding the appropriate timing to recognize the loss.

Acquired Loans

Acquired loans are recorded at fair value at the date of acquisition, and accordingly, no allowance for loan losses is transferred to the acquiring entity under the acquisition method. The fair values of loans with evidence of credit deterioration (acquired credit impaired loans) are initially recorded at fair value, but thereafter accounted for differently than purchased, non-credit-impaired loans. For acquired credit impaired loans, the excess of all cash flows estimated to be collectable at the date of acquisition over the initial investment in the acquired credit impaired loan is recognized as interest income, using a ~~component~~level-yield basis over the life of ~~noninterest~~the loan. This amount is referred to as the accretable yield. The acquired credit impaired loan’s contractually-required payments receivable estimated to be in excess of the amount of its future cash flows expected at the date of acquisition is referred to as the non-accretable difference, and is not reflected as an adjustment to the yield, but in the form of a loss accrual or a valuation allowance.

Subsequent to the acquisition date, management continues to monitor cash flows on a quarterly basis, to determine the performance of each acquired credit impaired loan in comparison to management’s initial performance expectations. Subsequent decreases in the present value of expected cash flows will be recorded as an increase in the allowance for credit losses through a provision for loan losses. Subsequent significant increases in cash flows result in a reversal of the provision for loan losses to the extent of prior provisions or a reclassification of amount from non-accretable difference to accretable yield, with a positive impact on the accretion of interest income in future periods.

Goodwill, Other Intangible Assets and Long-Lived Assets

Goodwill represents the Consolidated Statements of Operations. The Company’s current practice is to sell residential mortgage loans on a servicing released basis, and, therefore, it has no intangible asset recorded for the value of such servicing. Interest on loans held for sale is credited to income based on the principal amounts outstanding.

Upon sale and delivery, loans are legally isolated from the Company and the Company has no ability to restrict or constrain the ability of third party investors to pledge or exchange the mortgage loans. The Company does not have the entitlement or ability to repurchase the mortgage loans or unilaterally cause third party investors to put the mortgage loans back to the Company. Unrealized and realized gains on loan sales are determined using the specific identification method and are recognized through mortgage banking activity in the Consolidated Statements of Operations.

The Company enters into commitments to originate residential mortgage loans whereby the interest rate on the loan is determined prior to funding (i.e. rate lock commitment). Such rate lock commitments on mortgage loans to be sold in the secondary market are considered to be derivatives. The period of time between issuance of a loan commitment and closing and saleexcess of the ~~loan generally ranges from 15 to 60 days. The Company protects itself from changes in interest rates through~~purchase price over the ~~use~~sum of ~~best efforts forward delivery commitments, whereby~~ the ~~Company commits to sell a loan at a premium at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the loan.~~

~~For purposes~~estimated fair values of ~~calculating fair value of rate lock commitments, the Bank estimates loan closing~~tangible and ~~investor delivery rate based on historical experience. The measurement of~~identifiable intangible assets acquired less the estimated fair value of the ~~rate lock commitments~~liabilities assumed. Core deposit intangibles represent the estimated value of long-term deposit relationships acquired in a business combination. The core deposit intangible is ~~presented~~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.

Effective April 1, 2020, the Company adopted ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that reporting unit.

Table of Contents

Management has determined that the Company has one reporting unit. The sudden and continuing decline in economic conditions triggered by the Coronavirus ("COVID-19") pandemic included a significant decline in stock market valuations and the stock price of the Company and peer banks. These events indicated that goodwill may be impaired and resulted in us performing a goodwill impairment assessment. As a result, a goodwill impairment charge of $34.5 million was recorded as ~~realized and unrealized gains from mortgage banking activities with~~ the ~~corresponding balance sheet amount presented as part of other assets.~~Company's estimated fair value was less than its book value.

Income Taxes

The Company ~~has elected~~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 ~~measure loans held~~recognize interest and penalties on income taxes in other noninterest expenses. The Company remains subject to examination by federal and state taxing authorities for ~~sale at~~income tax returns for the years ending after December 31, 2015.

Share-Based Compensation

Compensation cost is recognized for stock options and restricted stock 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 ~~better align reported results~~estimate the fair value of stock options. The market price of the Company’s common stock at the date of grant is used for restricted stock awards, which include restricted stock units. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the ~~underlying economic changes in~~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 ~~loans~~awards, which is generally the market price of the common stock on the ~~Company’s balance sheet. Loans held~~measurement date, which, for ~~sale~~the Company, is the date of grant, and is recognized ratably over the service period of the award.

Reclassifications

Certain reclassifications to prior financial presentation were made to conform to the 2020 presentation. These reclassifications did not affect previously reported net income or total stockholders’ equity.

Recent Accounting Pronouncements

The FASB has issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform, on financial reporting. The risk of termination of the London Interbank Offered Rate (LIBOR), has caused regulators to undertake reference rate reform initiatives to identify alternative reference rates that are ~~not ultimately sold, but instead~~more observable or transaction based that are ~~placed into the Bank’s portfolio, are reclassified as loans held for investment and continue~~less susceptible to ~~be recorded at fair value.~~manipulation.

~~New Accounting Pronouncements~~Table of Contents

The ~~Financial Accounting Standards Board (the “FASB”)~~FASB has issued ~~Accounting Standards Update (“ASU”) 2017-12,~~ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815)~~: Targeted Improvements~~, and Leases (Topic 842). This ASU amends the effective date of the credit loss standard (ASU 2016-13) for smaller reporting companies, as defined by the SEC. The one-time determination of whether an entity is eligible to ~~Accounting for Hedging Activities.~~ ~~This ASU’s objectives are to 1) improve the transparency and understanding of information conveyed to financial statements users about~~be a smaller reporting company is based on an entity’s ~~risk management activities by better aligning~~most recent determination as of November 15, 2019, in accordance with SEC regulations. The Company met this definition of smaller reporting company based on its most recent determination as of November 15, 2019. As a result, the ~~entity’s financial reporting~~effective date of this ASU for ~~hedging relationships with those risk management activities; and 2) reduce~~ the ~~complexity of and simplify the application of hedge accounting by preparers. ASU 2017-12 is effective for~~Company has been amended from fiscal years beginning after December 15, ~~2018; early adoption is permitted.~~2019, and interim periods within those fiscal years, to fiscal years beginning after December 31, 2022, and interim periods within those fiscal years. In addition, this ASU amended the mandatory effective date for the elimination of Step 2 from the goodwill impairment test (ASU 2017-04 discussed below). As a smaller reporting company, the effective date of the goodwill impairment standard for the Company has been amended from fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, to fiscal years beginning after December 31, 2022, and interim periods within those fiscal years.

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 ~~currently does~~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 ~~designate any derivative financial instruments~~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. As discussed above, this ASU, as ~~formal hedging relationships and therefore, does not utilize hedge accounting.~~amended by ASU 2019-10, was to be effective for the Company on January 1, 2023. However, the Company ~~is currently evaluating this~~adopted ASU to determine whether its provision will enhance the Company’s ability to employ risk management strategies, while improving the transparency and understanding of those strategies for financial statement users.

2017-04 on April 1, 2020.

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~~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~~As discussed above, this ~~update is~~ASU, as amended by ASU 2019-10, will be effective for ~~fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.~~the Company on January 1, 2023. The Company has engaged a third party vendor and is currently ~~evaluating this guidance~~gathering historical data and reviewing the methodologies and assumptions utilized to determine the impact ~~on its consolidated financial statements.~~

~~The FASB has issued ASU 2016-09,~~~~Compensation—Stock Compensation (Topic 718).~~ ~~The purpose~~ of this ~~guidance is to simplify the accounting for share-based payment transactions, including the income tax consequences of these transactions. Under the provisions of the~~ update the income tax consequences of excess tax benefits and deficiencies should be recognized in income tax expense in the reporting period in which the awards vest. Currently, excess tax benefits and deficiencies impact stockholders’ equity directly to the extent there is a cumulative excess tax benefit. In the event that a tax deficiency has occurred during the reporting period and a cumulative tax benefit does not exist, the tax deficiency is recognized in income tax expense under current GAAP. The update also provides that entities may continue to estimate forfeitures in accounting for stock based compensation or recognize them as they occur. This update became effective for interim and annual periods beginning after December 15, 2016. The Company adopted this standard effective January 1, 2017 and elected to apply this adoption prospectively. The recognition of excess tax benefits is in the provision for income taxes within the Consolidated Statements of Operations rather than paid-in capital where it had previously been recorded. Additionally, the Consolidated Statements of Cash Flows now present excess tax benefits in operating activity. The Company has elected to account for forfeitures when they occur. As allowed by the ASU the Company’s adoption was prospective, therefore, prior periods have not been adjusted.

~~The FASB has issued ASU 2016-02,~~~~Leases (Topic 842).~~ The new guidance requires lessees to recognize lease assets and lease liabilities related to certain operating leases on their balance sheet and disclose key information about leasing arrangements. This guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements. The Company leases certain properties under operating leases that will result in recognition on the Company’s balance sheet. At September 30, 2017, the Company had contractual operating lease commitments of approximately $9.7 million, before considering any renewal options.

~~The FASB has issued ASU No. 2016-01,~~~~Financial Instruments – Recognition and Measurement of Financial Assets and Liabilities~~. ASU No. 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income, excluding equity investments that are consolidated or accounted for under the equity method of accounting. The guidance allows equity investments without readily determinable fair values to be measured at cost minus impairment, with a qualitative assessment required to identify impairment. The guidance also: requires public companies to use exit prices to measure the fair value of financial instruments for disclosure purposes; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; and eliminates the disclosure requirements related to measurement assumptions for the fair value of instruments measured at amortized cost. In addition, the guidance requires that for liabilities measured at fair value under the fair value option, changes in fair value due to changes in instrument-specific credit risk be presented in other comprehensive income. ASU No. 2016-01 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company has not finalized its evaluation of the impact of adopting ASU No. 2016-01, however, adoption is not expected to have a material impact on the Company’s Consolidated Financial Statements.

COVID-19 Risks and Uncertainties

In December 2019, a novel strain of coronavirus (COVID-19) surfaced in China, and has since spread to many other countries, including the United States. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. The ~~FASB~~COVID-19 pandemic has ~~issued ASU No. 2014-09,~~~~Revenue from Contracts with Customers (Topic 606)~~~~. The guidance requires an entity~~severely restricted the level of economic activity in the Company’s markets. In response to ~~recognize revenue~~the COVID-19 pandemic, the State of Maryland and most other states took preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to ~~depict the transfer~~limit or forego their time outside of ~~promised goods or services to customers in an amount~~their homes, and ordering temporary closures of businesses that ~~reflects the consideration to which the entity expects~~were deemed to be ~~entitled in exchange for those goods or services. The guidance in this update is effective for annual reporting periods beginning after December 15, 2017,~~non-essential. Although many businesses have begun to reopen, some states, including interim periods within that reporting period. As allowed by this ASU the Company is permitted to adopt using the full retrospective transition method for all periods presented, or modified retrospective method where the guidance would only be applied to existing contracts in effect at the adoption dateMaryland, have since experienced a resurgence of COVID-19 cases, which may further slow overall economic activity and ~~new contracts going forward. The Company is evaluating~~recovery. Uncertainty also remains regarding if, how and when schools will reopen and the impact of ~~guidance~~such reopening decisions on the economy.

Table of Contents

The impact of the COVID-19 pandemic is fluid and continues to evolve. The unprecedented and rapid spread of COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in ~~this update, including method of implementation, but does not believe it will have a material impact on its consolidated~~less economic activity, lower equity market valuations and significant volatility and disruption in financial statements. The Company’s revenue stream within the scope of ASU No. 2014-09 is primarily from service charges on deposit accounts. The Company is currently planning the use a modified retrospective approach to uncompleted contracts at the date of adoption. Periods priormarkets. In addition, due to the ~~date~~COVID-19 pandemic, market interest rates have declined significantly, with the 10-year Treasury bond falling below 1.00% on March 3, 2020 for the first time, and declining further to 0.65% as of ~~adoption are not retrospectively revised, but a cumulative~~June 30, 2020. On March 3, 2020, the Federal Open Market Committee reduced the targeted federal funds interest rate range by 50 basis points to 1.00% to 1.25%. This range was further reduced to 0% to 0.25% percent on March 16, 2020. These reductions in interest rates and the other effects of the COVID-19 pandemic has had and is expected to continue to have, possibly materially, an adverse effect on the Company’s business, financial condition, and results of ~~adoption is recognized for~~operations. The ultimate extent of the impact of the ~~ASU~~COVID-19 pandemic on ~~uncompleted~~the Company’s business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and the Company’s customers, employees and vendors.

Note 2:  Exit of Mortgage Banking Activities
On December 18, 2019, the Company entered into an agreement to release certain management members of the mortgage division from their employment contracts atand allow those individuals to create a limited liability company (“LLC”) for the ~~date~~purpose of ~~adoption.~~hiring all remaining mortgage employees. The Company also agreed to transfer ownership of the domain name “VAmortgage.com” to the newly created LLC. In consideration of the release of the employment agreements, the transfer of the mortgage employees, and the sale of the domain name, the LLC paid the Company $750 thousand. Under the agreement, there was a transition period of approximately 45 days, after which the Company agreed to cease originating residential first lien mortgage loans and exit all mortgage banking activities. Accordingly, all of the residential first lien mortgage pipeline loans were processed by the end of the first quarter of 2020 and the remaining loans held for sale were sold during the second quarter of 2020. In order to manage loan run-off within the residential mortgage loan portfolio, the Company plans on buying first lien residential mortgage loans, on a servicing released basis, from both the LLC and other third-party originators.
The following table presents a roll forward of loans held for sale, showing loans originated for sale and loans sold into the secondary market, for the periods ended June 30, 2020 and, December 31, 2019. In addition, the volume of loans originated for the Company’s loan portfolio as well as a statement of operations for the mortgage banking activities for the same periods is presented. Since the mortgage banking activities were conducted within a division of the Bank, formal financial statements were not prepared. The statement of operations presented below reflects only the direct costs associated with the Company’s mortgage banking activities and is thus representative of the incremental after tax impact of exiting this activity.

(in thousands)

June 30, 2020

December 31, 2019
Loans held for sale, January 1

$
30,710

$
21,261
Loans originated for sale

79,847

573,306
Loans sold into the secondary market

(110,557)

(563,857)
Loans held for sale, at end of period

$
—

$
30,710
Loans originated for the Bank's portfolio

$
11,378

$
114,561

Table of Contents

For the six months ended June 30,

For the three months ended June 30,
($ in thousands)

2020

2019

2020

2019
Statement of Operations:








Net interest income

$
143

$
340

$
—

$
193

Realized and unrealized gains on mortgage banking activity

1,036

3,737

—

2,296
Loan related fees and service charges

389

1,320

—

816
Total noninterest income

1,425

5,057

—

3,112

Salaries and benefits

928

3,063

—

1,456
Occupancy

20

154

—

75
All other operating expenses

490

1,050

—

582
Total noninterest expense

1,438

4,267

—

2,113
Pretax contribution

130

1,130

—

1,192
Income tax expense

36

311

—

328
After tax contribution

$
94

$
819

$
—

$
864

Since the Bank's 91 employees that were engaged in mortgage banking activities were hired by the LLC under the terms of the agreement, 0 severance costs were recorded. However, in the fourth quarter of 2019, the Company recorded $288 thousand of exit costs associated with change in control and retention agreements. Back office employees remained with the bank for a portion of the first quarter in order to process the pipeline. The LLC is subleasing the office space that was used by these employees; therefore, 0 exit costs associated with lease terminations were required.

Note 2:3:  Investment Securities
The ~~Company~~Bank holds securities classified as available for sale and held to maturity.
The amortized cost and estimated fair values of ~~investment securities~~investments are as follows:

(in thousands) September 30, 2017 December 31, 2016

June 30, 2020

December 31, 2019
Gross Gross Gross Gross
Amortized Unrealized Unrealized Estimated Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value Cost Gains Losses Fair Value




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 $ 63,183 $ 3 $ 148 $ 63,038 $ 34,584 $ 5 $ 126 $ 34,463

$
77,835

$
1,780

$
—

$
79,615

$
66,428

$
963

$
79

$
67,312
Treasuries 1,507 - 9 1,498 1,512 - 8 1,504
Mortgage-backed 1,336 1 37 1,300 1,366 1 69 1,298

188,099

4,029

302

191,826

139,918

2,848

67

142,699
Other investments 2,068 - 21 2,047 1,500 - 37 1,463

5,509

13

74

5,448

5,510

4

20

5,494
$ 68,094 $ 4 $ 215 $ 67,883 $ 38,962 $ 6 $ 240 $ 38,728

$
271,443

$
5,822

$
376

$
276,889

$
211,856

$
3,815

$
166

$
215,505
Held to maturity








Corporate debentures $ 9,250 $ 95 $ - $ 9,345 $ 6,250 $ 334 $ - $ 6,584

$
7,250

$
65

$
120

$
7,195

$
7,750

$
147

$
-

$
7,897

10
14

Table of Contents

Gross unrealized losses and fair value by investment category and length of time the individual securities have been in a continuous unrealized loss position at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~2019 are presented below:

September 30, 2017

June 30, 2020

(in thousands) Less than 12 months 12 months or more Total

Less than 12 months

12 months or more

Total
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses




Gross



Gross



Gross

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Value

Losses

Value

Losses

Value

Losses
Available for sale












U.S. Government












Agencies $ 51,559 $ 110 $ 3,486 $ 38 $ 55,045 $ 148

$
—

$
—

$
—

$
—

$
—

$
—
Treasuries 1,498 9 - - 1,498 9
Mortgage-backed 1,282 37 - - 1,282 37

106,747

302

—

—

106,747

302
Other investments 2,000 21 - - 2,000 21

1,444

56

2,991

18

4,435

74
$ 56,339 $ 177 $ 3,486 $ 38 $ 59,825 $ 215

$
108,191

$
358

$
2,991

$
18

$
111,182

$
376
Held to maturity











Corporate debentures

$
880

$
120

$
—

$
—

$
880

$
120

December 31, 2016

December 31, 2019

(in thousands) Less than 12 months 12 months or more Total

Less than 12 months

12 months or more

Total
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses




Gross



Gross



Gross

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Value

Losses

Value

Losses

Value

Losses
Available for sale












U.S. Government












Agencies $ 17,492 $ 126 $ - $ - $ 17,492 $ 126

$
10,689

$
79

$
-

$
-

$
10,689

$
79
Treasuries 1,501 8 - - 1,501 8
Mortgage-backed 1,273 69 - - 1,273 69

35,512

60

975

7

36,487

67
Other investments 1,463 37 - - 1,463 37

-

-

2,990

20

2,990

20
$ 21,729 $ 240 $ - $ - $ 21,729 $ 240

$
46,201

$
139

$
3,965

$
27

$
50,166

$
166
Held to maturity










Corporate debentures

$
-

$
-

$
-

$
-

$
-

$
-

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 33~~Company had 22 securities ~~with unrealized losses and 12 securities~~in the portfolio with unrealized losses at ~~September~~June 30, ~~2017 and~~2020 compared to 15 at December 31, ~~2016, respectively.~~
2019.
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.

Table of Contents

The amortized cost and estimated fair values of ~~investment~~available for sale and held to maturity securities by contractual maturity are shown below:

(in thousands) September 30, 2017 December 31, 2016

June 30, 2020

December 31, 2019
Amortized Estimated Fair Amortized Estimated Fair
Cost Value Cost Value


Amortized

Estimated Fair

Amortized

Estimated Fair

Cost

Value

Cost

Value
Amounts maturing:








One year or less $ 28,169 $ 28,152 $ 16,988 $ 16,993

$
5,535

$
5,634

$
1,497

$
1,500
After one through five years 36,530 36,394 19,120 18,985

46,780

48,337

49,166

50,048
After five through ten years 9,258 9,353 6,262 6,596

34,529

34,883

33,576

33,915
After ten years 3,387 3,329 2,842 2,738

191,849

195,230

135,367

137,939
$ 77,344 $ 77,228 $ 45,212 $ 45,312

$
278,693

$
284,084

$
219,606

$
223,402

At ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016, $31.2~~2019, $99.7 million and ~~$26.8~~$11.6 million ~~respectively,~~ in fair value of securities, respectively, were pledged as ~~collateral~~collateral. These securities were pledged at the Federal Reserve’s Discount Window as well as 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~~government agency and mortgage backed securities, had outstanding balances that exceeded ten percent of stockholders’ equity at ~~September~~June 30, ~~2017.~~2020.

11
Note 3:4:  Loans and Leases
The Company ~~originates~~makes loans and leases to customers primarily in the Greater Baltimore ~~Maryland metropolitan area~~Metropolitan Area and surrounding communities. A substantial portion of the Company’s loan portfolio consists of loans to businesses secured by real estate and/or other business assets.
The loan portfolio segment balances at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~2019 are presented in the following table:

June 30, 2020

December 31, 2019




% of



% of

(in thousands) September 30,
2017 % of
Total December 31,
2016 % of
Total

Total

Total

Total

Total

Real estate









Construction and land $ 79,064 8.9 % $ 72,973 8.9 %

$
128,567

6.8
%
$
128,285

7.3
%
Residential - first lien 199,674 22.4 195,032 23.7

409,402

21.6

437,409

25.1

Residential - junior lien 41,023 4.6 35,009 4.3

67,430

3.6

74,164

4.2

Total residential real estate 240,697 27.0 230,041 28.0

476,832

25.1

511,573

29.3

Commercial - owner occupied 155,958 17.4 134,213 16.3

244,802

12.9

241,795

13.9

Commercial - non-owner occupied 228,095 25.6 216,781 26.4

455,051

24.0

444,052

25.4

Total commercial real estate 384,053 43.0 350,994 42.7

699,853

36.9

685,847

39.3

Total real estate loans 703,814 78.9 654,008 79.6

1,305,252

68.7

1,325,705

75.9

Commercial loans and leases 183,979 20.6 162,715 19.8
Commercial loans and leases ¹

352,999

18.6

372,872

21.4

Consumer 4,420 0.5 4,801 0.6

46,660

2.5

46,936

2.7

Total loans $ 892,213 100.0 % $ 821,524 100.0 %
Paycheck Protection Program

193,719

10.2

—

—

Total loans and leases

$
1,898,630

100.0
%
$
1,745,513

100.0
%

¹
Includes leases of $4,949 and $6,382 at June 30, 2020 and December 31, 2019, respectively.

Table of Contents

The Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) was established under the Coronavirus Aid, Relief and Economic Security Act (“CARES” Act). On March 27, 2020, the CARES Act was signed into law, providing, financial relief and funding opportunities for small businesses under the SBA’s PPP program from approved SBA lenders. In response to the COVID-19 pandemic, the Bank, a SBA lender, has actively assisted its qualified customers with applications and lending through this program, as amended by subsequent legislation. During the quarter ended June 30, 2020, the Bank funded 1,028 loans totaling $199.0 million; net of unamortized deferred fees and origination costs, PPP loans totaled $193.7 million at June 30, 2020. Loans funded through the PPP program are fully guaranteed by the U.S. government and the Company anticipates that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program.
Net loan origination fees, which are included in the amounts in the table above, totaled $3.9 million and $1.3 million at June 30, 2020 and December 31, 2019, respectively. At June 30, 2020, net loan origination fees attributable to PPP loans totaled $5.3 million, consisting of unamortized processing fees of $6.0 million and $0.7 million in unamortized loan origination costs.
Acquired Credit Impaired Loans
The following table documents changes in the accretable discount on acquired credit impaired loans ~~during the nine months ended September 30, 2017 and 2016, along with~~at:

For the six months ended

For the three months ended

June 30,

June 30,
(in thousands)

2020

2019

2020

2019
Balance at beginning of period

$
689

$
877

$
673

$
835
Impaired loans acquired

—

—

—

—
Accretion of fair value discounts

(115)

(110)

(99)

(68)
Balance at end of period

$
574

$
767

$
574

$
767

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

(in thousands) September 30, 2017 September 30, 2016
Balance at beginning of period $ 60 $ 335
Accretion of fair value discounts (60 ) (239 )
Balance at end of period $ - $ 96


Contractually


Required

Payments

Carrying
(in thousands)

Receivable

Amount
At June 30, 2020

$
8,670

$
6,993
At December 31, 2019

10,929

8,706

Contractually
Required
Payments Carrying
(in thousands) Receivable Amount
At September 30, 2017 $ 1,307 $ 862
At December 31, 2016 1,695 1,023
At September 30, 2016 1,741 1,023
At December 31, 2015 3,105 1,708

12
Note 4:5:  Credit Quality Assessment
Allowance for Credit Losses

Summary information on the allowance for credit loss activity for the period indicated is presented in the following table:

For the six months ended

For the three months ended

June 30,

June 30,
(in thousands)

2020

2019

2020

2019
Beginning balance

$
10,401

$
9,873

$
13,384

$
8,754
Charge-offs

(614)

(3,728)

(31)

(874)
Recoveries

124

140

3

130
Net charge-offs

(490)

(3,588)

(28)

(744)
Provision for credit losses

6,445

2,835

3,000

1,110
Ending balance

$
16,356

$
9,120

$
16,356

$
9,120

Table of Contents

The June 30, 2020 allowance reflects the Company’s assessment of the impact of COVID-19 on the national and local economies and the impact on various categories of our loan portfolio. Management’s approach to COVID-19 and the evaluation of the allowance considered the following: (1) any change in historical loss rates resulting from COVID-19; (2) any risk rating downgrades related to COVID-19; and (3) any changes to collateral valuations or cash flow assumptions for impaired loans. Based on this review, the Company determined that some risk rating downgrades had occurred and were factored into the quantitative allowance at June 30, 2020.
The Company then reviewed its qualitative factors and identified three factors that warranted further evaluation:
● Changes in international, national, regional, and local economic and business conditions and developments that affect the collectibility of the portfolio, including the condition of various market segments;
● The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and
● Changes in the value of underlying collateral for collateral-dependent loans.
The Company’s evaluation of changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments, considered the abrupt slowdown in commercial economic activity resulting from actions announced by the State of Maryland between the March 5 disclosure of the first confirmed cases of COVID-19 in the state and the March 23 executive order closing all non-essential businesses in the state. In addition, management considered the dramatic rise in the unemployment rate in the Company’s market area. Based on U.S. Department of Labor weekly initial unemployment claims by state, management noted that the average weekly initial unemployment claims for the State of Maryland during the two weeks ending March 28, 2020 were 19 times higher than the average weekly claims for the first eleven weeks of 2020. While the rate of change in average weekly initial unemployment claims slowed during the second quarter of 2020, they were still 13 times higher than the average weekly claims for the first eleven weeks of 2020. While the Maryland economy has substantially reopened, the decline in economic activity during the second quarter and the heightened risk of setbacks in the pace of reopening the economy resulted in an increase in this qualitative factor applied to all loan portfolio categories.
The Company also evaluated the existence and effect of any concentrations of credit, and changes in the level of such concentrations. Management performed an analysis of the loan portfolio to identify the Company’s exposure to industry segments that may potentially be the most highly impacted by COVID-19. Based on this evaluation, the following table identifies those industry segments within the Company’s loan portfolio that management believes may potentially be most highly impacted by COVID-19. Loan balances and total credit exposures are as of June 30, 2020 while the modification and PPP loan balances are as of July 24, 2020; note that the column “SBA PPP Loan Relief” indicates the amount of PPP loans received by the Company’s borrowers in each of the identified loan segments.

  As % of


As % of

Balance

As % of


As % of

($in millions)

Loan

Total

Total

Total

with

Total

SBA PPP

Loans

Loan Category

Balance

Loans

Exposure (1)

Exposure

Modifications

Category

Loan Relief

Category

CRE - retail

$
109.1

5.7
%
$
109.1

4.8
%
$
27.2

24.9
%
$
—

0.0
%
Hotels

60.8

3.2
%

62.8

2.8
%

52.7

86.6
%

1.5

2.5
%
CRE - residential rental

47.8

2.5
%

47.8

2.1
%

8.8

18.4
%

—

0.0
%
Nursing and residential care

39.7

2.1
%

44.8

2.0
%

2.5

6.4
%

2.2

5.6
%
Retail trade

23.6

1.2
%

38.3

1.7
%

2.1

8.9
%

12.9

54.7
%
Restaurants and caterers

28.4

1.5
%

32.0

1.4
%

19.5

68.5
%

14.7

51.6
%
Religious and similar organizations

29.1

1.5
%

31.1

1.4
%

3.3

11.4
%

6.1

20.8
%
Arts, entertainment, and recreation

15.0

0.8
%

17.6

0.8
%

7.5

49.9
%

3.2

21.0
%
Total - selected categories

$
353.6

18.6
%
$
383.5

17.0
%
$
123.6

35.0
%
$
40.5

11.5
%
(1)    Includes unused lines of credit, unfunded commitments, and letters of credit

Table of Contents

The breakdown by loan portfolio segment is as follows:




As % of

As % of

($ in millions)

Loan

Total

Total "High

Loan Portfolio Segment

Balance

Loans

Impacts"

Commercial real estate - non-owner occupied

$
206.9

10.9
%
58.5
%
Commercial real estate - owner occupied

65.4

3.4
%
18.5
%
Construction and land

51.9

2.7
%
14.7
%
Commercial loans and leases

28.7

1.5
%
8.1
%
Other

0.6

—
%
0.2
%
Total

$
353.6

18.6
%
100.0
%

The potentially highly impacted loan exposures noted in the above tables (the “high impacts”) were concentrated in non-owner-occupied commercial real estate (58.5% of total high impacts), owner-occupied commercial real estate (18.5% of total high impacts), construction and land (14.7% of total high impacts), and commercial loans (8.1% of total high impacts). An increase in this qualitative factor was applied to these high impact loan portfolio categories.
The Company’s evaluation of potential changes in the value of underlying collateral for collateral-dependent loans considered the potential impact of the economic fallout from COVID-19 on commercial property values due to rent relief and possible business failures resulting in vacancies. In addition, the need for office space may diminish in the future as work from home policies have allowed much office-oriented business activity to continue. Excluding the high impact portfolios, management concluded that 55% of the Company’s non-owner-occupied commercial real estate portfolio was not included in the high impact exposure. An increase in this qualitative factor was applied to the Company’s non-owner-occupied commercial real estate portfolio.
Loans funded through the PPP program are fully guaranteed by the U.S. government and the Company anticipates that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. Therefore, 0 allowance for credit losses is attributable to this loan portfolio segment.

Table of Contents

The following table provides information ~~by the respective loan portfolio segment, about~~on the activity in the allowance for credit losses by the respective loan portfolio segment for ~~both~~ the six and three months ended June 30, 2020 and ~~nine month periods~~2019 and the year ended ~~September 30, 2017 and 2016:~~
September 30, 2017
Commercial Commercial Commercial
Construction Residential Residential owner non-owner loans Consumer
(in thousands) and land first lien junior lien occupied occupied and leases loans Total
Allowance for credit losses:
Nine months ended:
Beginning balance $ 511 $ 454 $ 89 $ 327 $ 1,120 $ 3,800 $ 127 $ 6,428
Charge-offs - (132 ) (31 ) - - (1,605 ) (108 ) (1,876 )
Recoveries - - 1 - 5 43 29 78
Provision for credit losses 146 222 58 103 328 130 44 1,031
Ending balance $ 657 $ 544 $ 117 $ 430 $ 1,453 $ 2,368 $ 92 $ 5,661
Three months ended:
Beginning balance $ 562 $ 543 $ 111 $ 401 $ 1,176 $ 2,490 $ 102 $ 5,385
Charge-offs - - - - - (239 ) - (239 )
Recoveries - - - - 2 15 7 24
Provision for credit losses 95 1 6 29 275 102 (17 ) 491
Ending balance $ 657 $ 544 $ 117 $ 430 $ 1,453 $ 2,368 $ 92 $ 5,661
September 30, 2016
Commercial Commercial Commercial
Construction Residential Residential owner non-owner loans Consumer
(in thousands) and land first lien junior lien occupied occupied and leases loans Total
Allowance for credit losses:
Nine months ended:
Beginning balance $ 265 $ 300 $ 47 $ 309 $ 728 $ 3,094 $ 126 $ 4,869
Charge-offs (216 ) - - (191 ) - (233 ) (15 ) (655 )
Recoveries - - - 40 4 45 29 118
Provision for credit losses 531 150 40 175 373 18 15 1,302
Ending balance $ 580 $ 450 $ 87 $ 333 $ 1,105 $ 2,924 $ 155 $ 5,634
Three months ended:
Beginning balance $ 448 $ 365 $ 70 $ 578 $ 841 $ 3,283 $ 159 $ 5,744
Charge-offs (216 ) - - (191 ) - (167 ) (4 ) (578 )
Recoveries - - - 40 1 19 6 66
Provision for credit losses 348 85 17 (94 ) 263 (211 ) (6 ) 402
Ending balance $ 580 $ 450 $ 87 $ 333 $ 1,105 $ 2,924 $ 155 $ 5,634
~~The following table provides additional information on the allowance for credit losses at September 30, 2017 and~~ December 31, ~~2016:~~2019:

September 30, 2017
Commercial Commercial Commercial
Construction Residential Residential owner non-owner loans Consumer

At June 30, 2020








Commercial real estate

Commercial



Paycheck


Construction

Residential real estate

owner

non-owner

loans

Consumer

Protection

(in thousands) and land first lien junior lien occupied occupied and leases loans Total

and land

first lien

junior lien

occupied

occupied

and leases

loans

Program

Total
Allowance for credit losses:


















Six months ended:

Beginning balance

$
1,256

$
2,256

$
478

$
788

$
2,968

$
2,103

$
552

$
—

$
10,401
Charge-offs

—

(33)

—

—

(23)

(549)

(9)

—

(614)
Recoveries

—

3

52

—

—

67

2

—

124
Provision for credit losses

269

488

394

1,018

2,645

1,435

196

—

6,445
Ending balance

$
1,525

$
2,714

$
924

$
1,806

$
5,590

$
3,056

$
741

$
—

$
16,356

Three months ended:

Beginning balance

$
1,192

$
2,204

$
863

$
1,254

$
4,130

$
2,950

$
791

$
—

$
13,384
Charge-offs

—

—

—

—

(23)

—

(8)

—

(31)
Recoveries

—

—

1

—

—

1

1

—

3
Provision for credit losses

333

510

60

552

1,483

105

(43)

—

3,000
Ending balance

$
1,525

$
2,714

$
924

$
1,806

$
5,590

$
3,056

$
741

$
—

$
16,356

Allowance allocated to:


















individually evaluated for impairment $ 182 $ 2 $ - $ 251 $ 30 $ 453 $ - $ 918

$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—
collectively evaluated for impairment 475 542 117 179 1,423 1,915 92 4,743

$
1,525

$
2,714

$
924

$
1,806

$
5,590

$
3,056

$
741

$
—

$
16,356
Loans:
Loans and leases:




Ending balance $ 79,064 $ 199,674 $ 41,023 $ 155,958 $ 228,095 $ 183,979 $ 4,420 $ 892,213

$
128,567

$
409,402

$
67,430

$
244,802

$
455,051

$
352,999

$
46,660

$
193,719

$
1,898,630
individually evaluated for impairment 1,049 1,929 6 949 5,910 3,258 - 13,101

$
347

$
13,679

$
1,365

$
800

$
576

$
1,619

$
102

$
—

$
18,488
collectively evaluated for impairment 78,015 197,745 41,017 155,009 222,185 180,721 4,420 879,112

$
128,220

$
395,723

$
66,065

$
244,002

$
454,475

$
351,380

$
46,558

$
193,719

$
1,880,142

13
20

Table of Contents

December 31, 2016
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 $ - $ 7 $ - $ - $ - $ 2,076 $ 72 $ 2,155
collectively evaluated for impairment 511 447 89 327 1,120 1,724 55 4,273
Loans:
Ending balance $ 72,973 $ 195,032 $ 35,009 $ 134,213 $ 216,781 $ 162,715 $ 4,801 $ 821,524
individually evaluated for impairment 125 785 37 509 3,148 5,142 167 9,913
collectively evaluated for impairment 72,848 194,247 34,972 133,704 213,633 157,573 4,634 811,611

At June 30, 2019








Commercial real estate

Commercial




Construction

Residential real estate

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

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 and leases:




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

At December 31, 2019








Commercial real estate

Commercial




Construction

Residential real estate

owner

non-owner

loans

Consumer

(in thousands)

and land

first lien

junior lien

occupied

occupied

and leases

loans

Total
Allowance for credit losses:















Beginning balance

$
741

$
1,170

$
292

$
735

$
4,057

$
2,644

$
234

$
9,873
Charge-offs

(282)

(518)

(532)

(46)

(2,026)

(622)

(210)

(4,236)
Recoveries

80

-

115

-

17

357

2

571
Provision for credit losses

717

1,604

603

99

920

(276)

526

4,193
Ending balance

$
1,256

$
2,256

$
478

$
788

$
2,968

$
2,103

$
552

$
10,401
Allowance allocated to:















individually evaluated for impairment

$
-

$
-

$
-

$
-

$
-

$
500

$
-

$
500
collectively evaluated for impairment

$
1,256

$
2,256

$
478

$
788

$
2,968

$
1,603

$
552

9,901
Loans and leases:













Ending balance

$
128,285

$
437,409

$
74,164

$
241,795

$
444,052

$
372,872

$
46,936

$
1,745,513
individually evaluated for impairment

$
481

$
13,131

$
786

$
566

$
1,725

$
2,360

$
127

$
19,176
collectively evaluated for impairment

$
127,804

$
424,278

$
73,378

$
241,229

$
442,327

$
370,512

$
46,809

$
1,726,337

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~~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.

Table of Contents

Credit risk profile by portfolio segment based upon internally assigned ~~risk assignments~~credit quality indicators are presented below:

September 30, 2017
Commercial Commercial Commercial
Construction Residential Residential owner non-owner loans Consumer

June 30, 2020








Commercial real estate

Commercial



Paycheck


Construction

Residential real estate

owner

non-owner

loans

Consumer

Protection

(in thousands) and land first lien junior lien occupied occupied and leases loans Total

and land

first lien

junior lien

occupied

occupied

and leases

loans

Program

Total
Credit quality indicators:


















Not classified $ 78,139 $ 197,753 $ 41,018 $ 155,009 $ 222,096 $ 180,034 $ 4,420 $ 878,469

$
128,220

$
396,686

$
66,065

$
241,501

$
453,361

$
341,285

$
46,558

$
193,719

$
1,867,395
Special mention - - - - - - - -

—

—

—

2,501

1,064

10,477

—

—

14,042
Substandard - 1,543 5 508 3,750 2,820 - 8,626

347

12,716

1,365

800

626

1,237

102

—

17,193
Doubtful 925 378 - 441 2,249 1,125 - 5,118

—

—

—

—

—

—

—

—

—
Total $ 79,064 $ 199,674 $ 41,023 $ 155,958 $ 228,095 $ 183,979 $ 4,420 $ 892,213
Total loans and leases

$
128,567

$
409,402

$
67,430

$
244,802

$
455,051

$
352,999

$
46,660

$
193,719

$
1,898,630

December 31, 2016
Commercial Commercial Commercial
Construction Residential Residential owner non-owner loans Consumer

December 31, 2019








Commercial real estate

Commercial






Construction

Residential real estate

owner

non-owner

loans

Consumer

(in thousands) and land first lien junior lien occupied occupied and leases loans Total

and land

first lien

junior lien

occupied

occupied

and leases

loans

Total
Credit quality indicators:
















Not classified $ 72,973 $ 193,748 $ 34,972 $ 133,704 $ 212,765 $ 157,567 $ 4,634 $ 810,363

$
127,804

$
425,247

$
73,378

$
241,229

$
442,327

$
370,837

$
46,809

$
1,727,631
Special mention - - - - - 524 - 524

—

—

—

—

—

—

—

—
Substandard - 793 - - 2,941 - - 3,734

481

12,162

786

566

1,725

2,035

127

17,882
Doubtful - 491 37 509 1,075 4,624 167 6,903

—

—

—

—

—

—

—

—
Total $ 72,973 $ 195,032 $ 35,009 $ 134,213 $ 216,781 $ 162,715 $ 4,801 $ 821,524
Total loans and leases

$
128,285

$
437,409

$
74,164

$
241,795

$
444,052

$
372,872

$
46,936

$
1,745,513

·● 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 and leases are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans and leases so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
·● Doubtful- Loans and leases 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.
14
Loans and leases classified Special Mention, Substandard, Doubtful or Loss are reviewed at least quarterly to determine their appropriate classification. All commercial loan and lease 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 a possible credit deterioration.

Table of Contents

An aged analysis of past due loans isare as follows:

September 30, 2017
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 $ 78,139 $ 196,581 $ 40,968 $ 154,820 $ 220,290 $ 180,251 $ 4,420 $ 875,469
Accruing loans past due:
31-59 days past due - 753 - 58 303 96 - 1,210
60-89 days past due - 586 50 131 - 692 - 1,459
Greater than 90 days past due - 114 - - 1,592 128 - 1,834
Total past due - 1,453 50 189 1,895 916 - 4,503

Non-accrual loans 925 1,640 5 949 5,910 2,812 - 12,241

Total loans $ 79,064 $ 199,674 $ 41,023 $ 155,958 $ 228,095 $ 183,979 $ 4,420 $ 892,213

June 30, 2020








Commercial real estate

Commercial



Paycheck


Construction

Residential real estate

owner

non-owner

loans

Consumer

Protection

(in thousands)

and land

first lien

junior lien

occupied

occupied

and leases

loans

Program

Total
Analysis of past due loans and leases:


















Accruing loans and leases current

$
128,220

$
394,957

$
64,873

$
244,002

$
454,217

$
351,466

$
46,414

$
193,719

$
1,877,868
Accruing loans and leases past due:

30‑59 days past due

—

—

1,068

—

76

264

9

—

1,417
60‑89 days past due

—

1,306

124

—

182

32

135

—

1,779
Greater than 90 days past due

—

423

—

—

—

—

—

—

423
Total past due

—

1,729

1,192

—

258

296

144

—

3,619

Non-accrual loans and leases ¹

347

12,716

1,365

800

576

1,237

102

—

17,143














Total loans and leases

$
128,567

$
409,402

$
67,430

$
244,802

$
455,051

$
352,999

$
46,660

$
193,719

$
1,898,630

December 31, 2016
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 $ 72,775 $ 191,216 $ 34,634 $ 133,638 $ 212,537 $ 157,464 $ 4,631 $ 806,895
Accruing loans past due:
31-59 days past due - 2,653 334 66 466 593 1 4,113
60-89 days past due 197 374 4 - - 34 1 610
Greater than 90 days past due 1 298 - - 2,703 - 1 3,003
Total past due 198 3,325 338 66 3,169 627 3 7,726

Non-accrual loans - 491 37 509 1,075 4,624 167 6,903

Total loans $ 72,973 $ 195,032 $ 35,009 $ 134,213 $ 216,781 $ 162,715 $ 4,801 $ 821,524

December 31, 2019








Commercial real estate

Commercial






Construction

Residential real estate

owner

non-owner

loans

Consumer

(in thousands)

and land

first lien

junior lien

occupied

occupied

and leases

loans

Total
Analysis of past due loans and leases:
















Accruing loans and leases current

$
127,804

$
418,668

$
71,634

$
241,062

$
442,132

$
370,877

$
46,776

$
1,718,953
Accruing loans and leases past due:

30‑59 days past due

—

3,312

748

—

195

35

19

4,309
60‑89 days past due

—

3,220

996

167

—

—

14

4,397
Greater than 90 days past due

—

47

—

—

—

—

—

47
Total past due

—

6,579

1,744

167

195

35

33

8,753

Non-accrual loans and leases ¹

481

12,162

786

566

1,725

1,960

127

17,807

Total loans and leases

$
128,285

$
437,409

$
74,164

$
241,795

$
444,052

$
372,872

$
46,936

$
1,745,513

¹
Included are acquired 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 ~~and still accruing~~ totaled ~~$14.1~~$17.6 million or ~~1.6% of total loans outstanding and $9.9 million or 1.2%~~0.93% of total loans outstanding at ~~September~~June 30, ~~2017~~2020, which represents a decrease from $17.9 million, or 1.0%, at December 31, 2019.

Table of Contents

The Company had no impaired leases or PPP loans at June 30, 2020, June 30, 2019, and December 31, ~~2016, respectively.~~
15
2019. The ~~following tables set forth our~~ impaired loans at ~~the dates indicated:~~June 30, 2020, June 30, 2019, and December 31, 2019 are as follows:

September 30, 2017
Commercial Commercial Commercial
Construction Residential Residential owner non-owner loans Consumer

June 30, 2020








Commercial real estate

Commercial




Construction

Residential real estate

owner

non-owner

loans

Consumer

(in thousands) & land first lien junior lien occupied occupied and leases loans Total

and land

first lien

junior lien

occupied

occupied

and leases

loans

Total
Impaired loans:
















Recorded investment $ 1,049 $ 1,929 $ 6 $ 949 $ 5,910 $ 3,258 $ - $ 13,101
Recorded investment ¹

$
347

$
13,679

$
1,365

$
800

$
576

$
1,619

$
102

$
18,488
With an allowance recorded 931 206 - 446 2,249 1,547 - 5,379

—

—

—

—

—

—

—

—
With no related allowance recorded 118 1,723 6 503 3,661 1,711 - 7,722

347

13,679

1,365

800

576

1,619

102

18,488
Related allowance 182 2 - 251 30 453 - 918

—

—

—

—

—

—

—

-
Unpaid principal 1,055 1,969 6 955 5,927 4,817 - 14,729

533

14,893

1,564

811

615

2,161

105

20,682
Nine months ended:
Six months ended:

Average balance of impaired loans 1,047 2,014 6 965 5,966 5,513 - 15,511

667

16,052

1,765

817

648

2,544

105

22,598
Interest income recognized 26 28 - 14 108 96 - 272

—

204

29

5

11

21

—

270
Three months ended:

Average balance of impaired loans 1,055 2,008 6 965 5,943 5,375 - 15,352

666

16,026

1,758

816

647

2,538

105

22,556
Interest income recognized 2 20 - 2 17 57 - 98

—

93

21

5

7

11

—

137

December 31, 2016
Commercial Commercial Commercial
Construction Residential Residential owner non-owner loans Consumer

June 30, 2019








Commercial real estate

Commercial




Construction

Residential real estate

owner

non-owner

loans

Consumer

(in thousands) & land first lien junior lien occupied occupied and leases loans Total

and land

first lien

junior lien

occupied

occupied

and leases

loans

Total
Impaired loans:
















Recorded investment $ 125 $ 785 $ 37 $ 509 $ 3,148 $ 5,142 $ 167 $ 9,913
Recorded investment ¹

$
933

$
12,530

$
914

$
225

$
2,608

$
1,862

$
287

$
19,359
With an allowance recorded - 214 - - - 3,477 140 3,831

—

—

—

—

—

—

—

—
With no related allowance recorded 125 571 37 509 3,148 1,665 27 6,082

933

12,530

914

225

2,608

1,862

287

19,359
Related allowance - 7 - - - 2,076 72 2,155

—

—

—

—

—

—

—

—
Unpaid principal 125 1,323 38 509 3,286 5,694 174 11,149

1,322

13,818

1,135

246

4,363

3,097

302

24,283
Six months ended:

Average balance of impaired loans 378 835 38 536 3,452 6,455 176 11,870

1,459

15,171

1,385

247

4,480

3,536

313

26,591
Interest income recognized 4 29 - 24 47 234 1 339

—

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

September 30, 2016
Commercial Commercial Commercial
Construction Residential Residential owner non-owner loans Consumer

December 31, 2019








Commercial real estate

Commercial




Construction

Residential real estate

owner

non-owner

loans

Consumer

(in thousands) & land first lien junior lien occupied occupied and leases loans Total

and land

first lien

junior lien

occupied

occupied

and leases

loans

Total
Impaired loans:
















Nine months ended:
Recorded investment ¹

$
481

$
13,131

$
786

$
566

$
1,725

$
2,360

$
127

$
19,176
With an allowance recorded

—

—

—

—

—

554

—

554
With no related allowance recorded

481

13,131

786

566

1,725

1,806

127

18,622
Related allowance

—

—

—

—

—

500

—

500
Unpaid principal

667

14,371

986

583

2,023

3,584

130

22,344
Average balance of impaired loans $ 762 $ 801 $ 28 $ 992 $ 3,141 $ 5,519 $ 140 $ 11,383

814

15,586

1,338

594

2,105

4,392

141

24,970
Interest income recognized 9 23 - 24 29 207 - 292

5

400

106

30

11

195

1

748
Three months ended:
Average balance of impaired loans $ 635 $ 793 $ 28 $ 965 $ 3,144 $ 5,346 $ 140 $ 11,051
Interest income recognized 7 9 - 15 21 45 - 97

Table of Contents

¹
Included are acquired 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 ~~$12.2~~$17.1 million and ~~$6.9~~$17.8 million at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, respectively. Interest income that would have been recorded if non-accrual loans had been current and in accordance with their original terms was ~~$263~~$338 thousand and ~~$252~~$534 thousand for the ~~first nine~~six months ~~of 2017~~ended June 30, 2020 and ~~2016,~~2019, respectively.
16
~~The following table outlines the acquired impaired loans at September 30, 2017 and December 31, 2016:~~
September 30, 2017
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
Acquired Impaired Loans:
Substandard
Contractual payment receivable $ - $ - $ - $ - $ 307 $ 984 $ - $ 1,291
Non-Accretable adjustment - - - - - 429 - 429
Cash flow expected - - - - 307 555 - 862
Accretable yield - - - - - - - -
Loan receivable $ - $ - $ - $ - $ 307 $ 555 $ - $ 862

Doubtful
Contractual payment receivable $ - $ - $ - $ - $ - $ 16 $ - $ 16
Non-Accretable adjustment - - - - - 16 - 16
Cash flow expected - - - - - - - -
Accretable yield - - - - - - - -
Loan receivable $ - $ - $ - $ - $ - $ - $ - $ -
December 31, 2016
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
Acquired Impaired Loans:
Doubtful
Contractual payment receivable $ - $ - $ - $ - $ 619 $ 1,075 $ - $ 1,694
Non-Accretable adjustment - - - - 125 485 - 610
Cash flow expected - - - - 494 590 - 1,084
Accretable yield - - - - 13 48 - 61
Loan receivable $ - $ - $ - $ - $ 481 $ 542 $ - $ 1,023
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 restructured loans 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 impairedif they have performed based on all of the ~~terms specified by the restructuring agreement.~~
restructured loan terms.
The ~~following table outlines the TDRs~~Company had no troubled debt restructured (“TDR”) leases or PPP loans at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016:~~2019. The TDR loans at June 30, 2020 and December 31, 2019 are as follows:

September 30, 2017
Number Non-Accrual Number Accrual Total

June 30, 2020


Number

Non-Accrual

Number

Accrual

Total
(dollars in thousands) of Loans Status of Loans Status TDRs

of Loans

Status

of Loans

Status

TDRs
Construction and land - $ - 1 $ 124 $ 124
Residential real estate - first lien 2 893 1 289 1,182

2

$
261

2

$
963

$
1,224
Commercial - non-owner occupied 2 2,839 - - 2,839
Commercial loans and leases 1 514 2 359 873

1

414

2

363

777
5 $ 4,246 4 $ 772 $ 5,018

3

$
675

4

$
1,326

$
2,001

17

December 31, 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

274

2

968

1,242
Commercial loans and leases

1

414

2

367

781

4

$
813

4

$
1,335

$
2,148
December 31, 2016
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 1 214 1 294 508
Commercial - non-owner occupied 1 594 1 2,073 2,667
Commercial loans and leases 1 913 1 183 1,096
Consumer 1 140 - - 140
4 $ 1,861 4 $ 2,675 $ 4,536

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

September 30, 2017
Not Performing Performing
Related to Modified to Modified Total

June 30, 2020




Not Performing

Performing


Related

to Modified

to Modified

Total
(in thousands) Allowance Terms Terms TDRs

Allowance

Terms

Terms

TDRs
Construction and land
Extension or other modification $ - $ - $ 124 $ 124
Residential real estate - first lien






Extension or other modification 2 893 289 1,182

$
—

$
261

$
963

$
1,224
Commercial RE - non-owner occupied
Rate modification - 2,839 - 2,839
Commercial loans








Extension or other modification - - 214 214

—

—

363

363
Forbearance - 514 145 659

—

414

—

414
Total troubled debt restructure loans $ 2 $ 4,246 $ 772 $ 5,018
Total troubled debt restructured loans

$
—

$
675

$
1,326

$
2,001

December 31, 2016
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 7 214 294 508
Commercial RE - non-owner occupied
Rate modification - 594 2,073 2,667
Commercial loans
Extension or other modification 913 913 183 1,096
Consumer
Extension or other modification 72 140 - 140
Total troubled debt restructure loans $ 992 $ 1,861 $ 2,675 $ 4,536

Table of Contents

December 31, 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

—

274

968

1,242
Commercial loans








Extension or other modification

—

—

367

367
Forbearance

—

414

—

414
Total troubled debt restructured loans

$
—

$
813

$
1,335

$
2,148

~~At September 30, 2017 TDRs consisted~~The CARES Act permits financial institutions to suspend requirements under GAAP for certain loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs. In addition, federal banking regulators issued, shortly before the CARES Act was enacted, an interagency statement that included guidance on their approach for the accounting of loan modifications in light of the ~~following:~~economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.
· ~~Two commercial loans for an aggregate amount of $359 thousand for which the Bank extended the maturity and allowed for a principal and interest payment over time.~~
· One land development loan in the amount of $125 thousand that included a paydown from the guarantor, partial debt forgiveness by the Bank and a reduction of the interest rate on the remaining balance of the loan, which the Bank anticipates will be fully repaid.
· ~~One residential first lien mortgage in the amount of $214 thousand that was restructured with an extension of the original term.~~
· ~~A $913 thousand commercial loan, which was restructured through a forbearance agreement that deferred payments.~~
· One residential first lien mortgage in the amount of $687 thousand that was restructured with both an extension of the original term and a reduction of the interest rate on the remaining balance of the loan.

18
The Company provided COVID-19 related 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. As of June 30, 2020, a total of $291.4 million of loans (or 17.1% of total loans and leases) were performing under some form of deferral or other payment relief. This compares to $347.0 million (19.7% of total loans and leases) that the Company disclosed as of May 8, 2020. As of August 6, 2020, $159.0 million of loans (or 8.4% of total loans and leases) were performing under some form of deferral or other payment relief.
There were ~~two~~0 new ~~loans restructured~~TDRs during the ~~nine~~six months ended ~~September~~June 30, ~~2017, consisting of $214 thousand for one of the above commercial loans~~2020 and ~~the $687 thousand residential mortgage loan.~~
As a part of the modification of the land development loan restructured during 2016, the Bank agreed to forgive $215 thousand in debt, and recorded this amount as a loss. The pre-modification principal amount on this loan was $340 thousand, while the post-modification principal amount was reduced to $125 thousand. The other modifications consisted of interest rate concessions and payment term extensions, not principal reductions that resulted in a partial charge off.
June 30, 2019.
Performing TDRs were in compliance with their modified terms and there are no further commitments associated with these loans. During the ~~nine~~three months ended ~~September~~June 30, ~~2017~~2020 and 2019 there were no TDRs that subsequently defaulted within twelve months of their modification dates. There was one consumer loan restructured in 2015 in the amount of $150 thousand that defaulted during the first three months of 2017. Additionally, there was one restructured credit the status of which changed from performing to non-performing during the second quarter 2017.
Management routinely evaluates other real estate owned (“OREO”) based upon periodic appraisals. For the ~~nine~~six months ended ~~September~~June 30, ~~2017 and 2016 there were additional allowances~~2020 the Bank recorded a $257 thousand valuation allowance on three unimproved parcels of ~~$99 thousand and $83 thousand, respectively, as~~land because the current appraised value (based on a new appraisal), less estimated ~~cost~~costs to sell, was ~~not sufficient to cover~~lower than the recorded ~~OREO amount.~~carrying value of the OREO. For the ~~nine~~six months ended ~~September~~June 30, ~~2017 and 2016~~2020 there ~~were no new loans~~was one residential first mortgage loan totaling $51 thousand transferred from loans to OREO. The Company sold ~~two properties~~several parcels of land and one commercial real estate property held as OREO during the ~~second quarter~~six months ended June 30, 2020, reducing OREO by $405 thousand and resulting in a loss of ~~2017 for~~$28 thousand. For the six month period ending June 30, 2019, there was one residential first mortgage loan totaling $375 thousand transferred from loans to OREO, a ~~net gain totaling $19 thousand. There~~valuation allowance of $65 thousand was recorded, and no OREO properties were ~~no such properties sold during the same period of 2016. The Company held no~~sold. At June 30, 2020 there was one loan secured by a residential first lien ~~loans in OREO at either September 30, 2017 or December 31, 2016. At September 30, 2017 there were two residential first lien loans totaling $302~~of $2.3 million and one commercial real estate loan of $42 thousand in the process of ~~foreclosure, while~~foreclosure.

Table of Contents

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 of 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 of 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. The fair value of the interest rate 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, 2020 and June 30, 2019, the Company recorded a net loss of $9 thousand and $6 thousand, respectively 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 at June 30, 2020 and December 31, ~~2016 no residential first lien loans were in the process of foreclosure.~~2019:

June 30, 2020

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

$
2,748

$
404

$
—
Matched interest rate swaps with counterparty

Other assets and other liabilities

$
2,748

$
—

$
423

December 31, 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

$
2,853

$
217

$
—
Matched interest rate swaps with counterparty

Other assets and other liabilities

$
2,853

$
—

$
228

Note 5:7:  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 ~~might be impaired. An impairment loss is recognized to~~would more-likely-than-not reduce the ~~extent that~~fair value below the carrying ~~amount exceeds the asset’s fair value.~~
amount. The Bank has ~~one~~1 reporting unit, which is the core banking operation. The Company performs its annual impairment evaluation in the fourth quarter.

Table of Contents

Due to the COVID-19 pandemic and the related economic fallout, including most specifically, declining stock prices at both the Company and peer banks, the Federal Reserve’s significant reduction in interest rates, and other business and market considerations, the Company performed an interim goodwill impairment analysis as of June 30, 2020. Based on this analysis, the estimated fair value of the Company was less than book value, resulting in a $34.5 million impairment charge, recorded in noninterest expense, in the second quarter of 2020. This was a non-cash charge to earnings and had no impact on the Company’s regulatory capital ratios, cash flows, or liquidity position.
The table below shows goodwill balances ~~at September 30, 2017~~at:



(in thousands)

Goodwill:


December 31, 2019

$
65,949
Goodwill impairment

(34,500)
June 30, 2020

$
31,449

Core deposit intangibles represent the estimated value of long-term deposit relationships acquired in either business combinations or other purchases of deposits and ~~December 31, 2016.~~
(in thousands)
Goodwill
Banking $ 603
are amortized based upon the estimated economic benefits received. The gross carrying amount and accumulated amortization of other intangible assets are as follows:

September 30, 2017 Weighted
Gross Net Average
Carrying Accumulated Carrying Remaining Life

June 30, 2020

Weighted


Gross



Net

Average

Carrying

Accumulated

Carrying

Remaining Life
(in thousands) Amount Amortization Amount (Years)

Amount

Amortization

Amount

(Years)
Amortizing intangible assets:








Core deposit intangible $ 3,540 $ 1,691 $ 1,849 5.86

$
16,135

$
9,045

$
7,090

3.2

December 31, 2016 Weighted
Gross Net Average
Carrying Accumulated Carrying Remaining Life

December 31, 2019

Weighted


Gross



Net

Average

Carrying

Accumulated

Carrying

Remaining Life
(in thousands) Amount Amortization Amount (Years)

Amount

Amortization

Amount

(Years)
Amortizing intangible assets:








Core deposit intangible $ 3,540 $ 1,292 $ 2,248 6.61

$
16,135

$
7,666

$
8,469

3.7
19

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

(in thousands)


2017 $ 106
2018 396
2019 314
2020 269

$
1,295
2021 258

2,326
Thereafter 506
2022

1,915
2023

1,298
2024

256
Total amortizing intangible assets $ 1,849

$
7,090

Note 8:  Leases
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.

Table of Contents

In 2019, with the execution of the Company’s branch optimization initiative, under which the closing of three branch locations and the consolidation of two other existing branch locations was announced, a $3.6 million charge to noninterest expenses, primarily related to the early termination of existing lease arrangements for the closing locations, was recorded in the second quarter of 2019. The closing of the three locations occurred in the third quarter of 2019, and the consolidation of the two branch locations into a single new location occurred in the first quarter of 2020. The early termination of these leases reduced the initial $18.0 million in right-of-use (“ROU”) assets recorded on January 1, 2019 to $14.5 million at December 31, 2019. In the first quarter of 2020, the opening of the new location noted above increased ROU assets by $2.0 million.
Operating leases included the following at:

(in thousands)

June 30, 2020

December 31, 2019
Operating Leases

Operating leases ROU assets

$
15,312

$
14,092
Operating lease liabilities

$
15,805

$
14,507

The components of lease expense were as follows:

Six months ended June 30,

Three months ended June 30,
(in thousands)

2020

2019

2020

2019
Operating lease cost

$
784

$
1,080

$
420

$
530
Sublease income

(344)

(293)

(176)

(108)
Amortization of ROU assets

77

82

32

82

$
517

$
869

$
276

$
504

Lease liability maturities are as follows:

(in thousands)




2020

$
855

2021

1,662

2022

1,520

2023

1,372

2024

1,170

Thereafter

13,033

Total future lease payments

$
19,612

Discount of cash flows

(3,807)

Present value on net future lease payments

$
15,805

Weighted average remaining term in years

6.47

Weighted average discount rate

2.89
%

Table of Contents

Note 6:9:  Deposits
The following table details the composition of deposits and the related percentage mix of total deposits, respectively, at the dates indicated:

June 30, 2020

December 31, 2019

% of

% of

(dollars in thousands) September 30, 2017 December 31, 2016

Amount

Total

Amount

Total

% of % of
Amount Total Amount Total
Noninterest-bearing demand $ 212,519 25 % $ 182,880 23 %

$
671,598

37
%
$
468,975

27
%
Interest-bearing checking 67,796 8 62,538 8

186,768

10

183,447

11

Money market accounts 275,619 32 247,858 31

383,031

21

360,711

21

Savings 53,168 6 50,495 6

146,148

7

130,141

7

Certificates of deposit $250,000 and over 11,046 1 12,495 1
Certificates of deposit under $250,000 241,937 28 252,468 31
Certificates of deposit $250 and over

65,769

4

77,782

5

Certificates of deposit under $250

377,360

21

493,309

29

Total deposits $ 862,085 100 % $ 808,734 100 %

$
1,830,674

100
%
$
1,714,365

100
%

Note 7:10:  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, 2020, 417,844 shares are reserved for issuance pursuant to future grants under the Company’s 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.~~years and typically vest over a three to five year period. 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 ~~Board~~Company’s board of ~~Directors~~directors (the “Board of Directors” or “Board”) as compensation for attendance and participation at meetings of the Board of Directors and meetings of the various committees of the Board. For the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016, Bancorp~~2019, the Company issued ~~11,404~~8,151 and ~~5,629~~4,802 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 no0 stock options granted during the ~~first nine~~six months ~~of 2017 or~~ended June 30, 2020, while there were 25,000 options granted for the year ended December 31, ~~2016. The valuation~~2019.

Table of ~~the Company’s restricted stock and restricted stock units is the closing price per share of Bancorp’s common stock on the date of grant.~~Contents

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

September 30, 2017 December 31, 2016
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price

June 30, 2020

December 31, 2019




Weighted



Weighted

Average

Average

Exercise

Exercise

Shares

Price

Shares

Price
Balance at January 1, 123,593 $ 12.36 137,463 $ 12.30

25,000

$
14.54

15,268

$
8.76
Granted - - - -

—

—

25,000

14.54
Exercised (20,179 ) 11.91 (3,020 ) 11.64

—

—

(13,418)

8.58
Forfeited (65,039 ) 13.95 (10,850 ) 11.77

—

—

(1,850)

10.10
Balance at period end 38,375 $ 9.92 123,593 $ 12.36

25,000

$
14.54

25,000

$
14.54
Exercisable at period end 38,375 $ 9.92 123,593 $ 12.36

8,337

$
14.54

—

$
—
Weighted average fair value of options granted during the year $ - $ -



N/A



$
5.83

NaN stock options were exercised for the six months ended June 30, 2020. The cash received from the exercise of stock options ~~during the nine months ended September 30, 2017~~ was ~~$240 thousand, compared to $19~~$105 thousand for the ~~first nine~~six months ~~of 2016.~~ended June 30, 2019. 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 ~~$20.90~~$10.62 at ~~September~~June 30, ~~2017,~~2020, the options outstanding had 0 aggregate intrinsic value. At December 31, 2019, based upon a fair market value of $16.88, the options outstanding had an aggregate intrinsic value of ~~$421~~$59 thousand. At ~~December 31, 2016,~~June 30, 2020, based ~~upon fair market value of $15.10, the outstanding~~on stock options outstanding ~~had an aggregate intrinsic value of $338 thousand.~~
~~Restricted Stock~~
Inat the ~~second quarter of 2013, 50,000 shares of restricted stock were granted, with 30,000 of~~time, the shares subject to a three year vesting schedule with one-third of the shares vesting each year on the grant date anniversary. The remaining 20,000 awarded shares also are subject to a three year vesting schedule, however, they only vest if certain annual performance measures are satisfactorily achieved.
~~The following table presents a summary of the activity in the Company’s restricted stock for the periods ended:~~
December 31, 2016
Weighted
Average
Grant Date
Shares Fair Value
Balance at January 1, 8,330 $ 6.92
Granted - -
Vested (8,330 ) 6.92
Forfeited - -
Balance at period end - $ -
~~At September 30, 2017, there were no restricted stock awards granted or outstanding, and all of the~~total unrecognized pre-tax compensation expense related to ~~restricted stock awards has been recognized.~~ unvested options was $77 thousand.

Restricted Stock Units (“RSU”)
~~Restricted stock units (“RSUs”)~~
RSUs are ~~similar to restricted stock, except~~equity awards where the recipient does not receive the stock immediately, but instead receives it according to a vesting plan and distribution schedule after achieving required performance milestones or upon remaining with the employer for a particular length of time.Each RSU that vests entitles the recipient to receive one share of ~~Bancorp~~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 RSUs is the closing price per share of the Company’s common stock on the date of grant.
~~For~~The Company granted 156,947 RSUs during the first ~~nine~~six months of ~~2017, 18,500 RSUs were granted~~2020, subject to a ~~three year~~five-year vesting schedule. The Company granted ~~27,000~~18,500 RSUs during ~~2016, all~~the first six months of ~~which are~~2019, subject to a three-year vesting schedule.
21
~~The following table presents a~~A summary of the activity infor the Company’s RSUs for the periods ~~ended:~~indicated is presented in the following table:

September 30, 2017 December 31, 2016
Weighted Weighted
Average Average
Grant Date Grant Date
Shares Fair Value Shares Fair Value

June 30, 2020

December 31, 2019




Weighted



Weighted

Average

Average

Grant Date

Grant Date

Shares

Fair Value

Shares

Fair Value
Balance at January 1, 65,491 $ 13.23 74,828 $ 13.21

11,032

$
17.48

9,731

$
17.29
Granted 18,500 17.41 27,000 12.91

156,947

14.87

26,500

15.16
Vested (30,170 ) 12.70 (17,838 ) 12.95

(834)

19.85

(6,699)

16.13
Forfeited - - (18,499 ) 12.96

—

(18,500)

14.54
Balance at period end 53,821 $ 14.96 65,491 $ 13.23

167,145

$
15.02

11,032

$
17.48

Table of Contents

At ~~September~~June 30, ~~2017,~~2020, based on ~~RSU awards~~RSUs outstanding at that time, the total unrecognized pre-tax compensation expense related to unvested ~~RSU awards~~RSUs was ~~$609 thousand. This~~$2.0 million. Based upon the contractual terms, this expense is expected to be recognized ~~through 2020.~~ as follows:

(in thousands)


2020

$
269
2021

509
2022

480
2023

390
2024

363
2025

32

$
2,043

Stock-Based Compensation ~~Expense:~~Expense
Stock-based compensation expense attributable to stock options and RSUs 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. This cost is then recognized in noninterest expense on a straight-line basis over the vesting period of the respective stock options and RSUs. The amount that the Company recognized in stock-based compensation expense related to the issuance of ~~restricted~~ stock options and RSUs ~~and for~~as well as director compensation paid in stock is presented in the following table:

Nine months ended Three months ended
September 30, September 30,

Six months ended

Three months ended

June 30,

June 30,
(in thousands) 2017 2016 2017 2016

2020

2019

2020

2019
Stock-based compensation expense








Related to the issuance of restricted stock and RSUs $ 362 $ 219 $ 126 $ 51

$
217

$
112

$
126

$
62
Related to the issuance of stock options

24

—

12

—
Director compensation paid in stock $ 205 $ 72 $ 95 $ 22

137

62

—

—
Total stock-based compensation expense

$
378

$
174

$
138

$
62

Note 8:11: 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 ~~$596~~$468 thousand and ~~$469~~$540 thousand, respectively, for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016.~~2019. The Company’s matching contributions vest immediately.
Supplemental Executive Retirement Plan ~~(SERP)~~(“SERP”)
In 2014, the Bank created a SERP for the Chief Executive ~~Officer.~~Officer ("CEO"). This plan was amended in ~~2015.~~2016. Under the defined benefit SERP, ~~Ms. Scully~~the CEO 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~~The CEO earned vesting on a graduated schedule ~~in which~~and she ~~will become~~became fully vested on August 25, 2019, which ~~has~~had been established for purposes of the SERP as ~~her retirement date.~~the commencement date for SERP distributions. Expense related to this ~~plan~~SERP totaled ~~$208~~$37 thousand and ~~$182~~$105 thousand ~~respectively,~~ for the ~~nine month periods and $67 thousand and $68 thousand, respectively, for the three~~six month periods ending ~~September~~June 30, 2020 and 2019, respectively.
Employee Stock Purchase Plan
The 2017 Employee Stock Purchase Plan (the “Plan”) provides eligible employees of the Company and ~~2016.~~certain of its subsidiaries with opportunities to purchase shares of the Company’s common stock. 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. There was 0 expense related to this plan for the six months ended June 30, 2020. The expense related to the Company's contribution to the Plan totaled $19 thousand for the six months ended June 30, 2019.
22
32

Table of Contents

Note 9:12: Net (Loss) Income per Common Share
The table below shows the presentation of basic and diluted net (loss) income per common share for the periods indicated:

Nine months ended Three months ended
September 30, September 30,

Six months ended

Three months ended

June 30,

June 30,
(dollars in thousands, except per share data) 2017 2016 2017 2016

2020

2019

2020

2019
Net income $ 5,317 $ 4,349 $ 1,713 $ 1,748
Preferred stock dividends - (166 ) - -
Net income available to common stockholders (numerator) $ 5,317 $ 4,183 $ 1,713 $ 1,748
Net (loss) income available to common stockholders (numerator)

$
(26,066)

$
6,344

$
(29,409)

$
2,088
BASIC








Basic average common shares outstanding (denominator) 9,468,577 6,970,714 9,808,542 6,985,559

18,791,378

19,056,953

18,715,669

19,061,164
Basic income per common share $ 0.56 $ 0.60 $ 0.17 $ 0.25
Basic (loss) income per common share

$
(1.39)

$
0.33

$
(1.57)

$
0.11
DILUTED

Average common shares outstanding 9,468,577 6,970,714 9,808,542 6,985,559

18,791,378

19,056,953

18,715,669

19,061,164
Dilutive effect of common stock equivalents 38,905 101,475 46,280 91,861

—

14,367

—

6,460
Diluted average common shares outstanding (denominator) 9,507,482 7,072,189 9,854,822 7,077,420

18,791,378

19,071,320

18,715,669

19,067,624
Diluted income per common share $ 0.56 $ 0.59 $ 0.17 $ 0.25

Diluted (loss) income per common share

$
(1.39)

$
0.33

$
(1.57)

$
0.11








Because the Company reported a loss for both 2020 periods, common stock equivalents were excluded from the calculation of diluted average shares outstanding, as their inclusion would have resulted in a lower diluted loss per share.

81,761

—

59,466

—
Common stock equivalents outstanding that are anti-dilutive and thus excluded from calculation of diluted number of shares presented above - 74,911 - 79,911

25,000

25,000

25,000

25,000

Table of Contents

Note ~~10: Risk-Based~~13: Regulatory 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.The following table reflects Bancorp’s and the Bank’s capital ~~amounts~~at June 30, 2020 and ~~classifications are also subject to qualitative judgments by~~December 31, 2019:

To be well

capitalized under

the FDICIA

For capital

prompt corrective

Actual

adequacy purposes (1)

action provisions

(dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of June 30, 2020:













Total capital (to risk-weighted assets)













Howard Bank

$
256,374

14.00
%
$
146,503

8.00
%
$
183,129

10.00
%
Howard Bancorp

$
258,943

14.09
%
$
147,022

8.00
%

N/A

Common equity tier 1 capital

(to risk-weighted assets)

Howard Bank

$
240,018

13.11
%
$
82,408

4.50
%
$
119,034

6.50
%
Howard Bancorp

$
214,249

11.66
%
$
82,700

4.50
%

N/A

Tier 1 capital (to risk-weighted assets)

Howard Bank

$
240,018

13.11
%
$
109,877

6.00
%
$
146,503

8.00
%
Howard Bancorp

$
214,249

11.66
%
$
110,267

6.00
%

N/A

Tier 1 capital (to average assets)

(Leverage ratio)

Howard Bank

$
240,018

10.33
%
$
92,931

4.00
%
$
116,163

5.00
%
Howard Bancorp

$
214,249

9.18
%
$
93,308

4.00
%

N/A

As of December 31, 2019:

Total capital (to risk-weighted assets)

Howard Bank

$
238,384

12.86
%
$
148,314

8.00
%
$
185,392

10.00
%
Howard Bancorp

$
247,761

13.14
%
$
150,872

8.00
%

N/A

Common equity tier 1 capital

(to risk-weighted assets)

Howard Bank

$
227,983

12.30
%
$
83,427

4.50
%
$
120,505

6.50
%
Howard Bancorp

$
209,119

11.09
%
$
84,866

4.50
%

N/A

Tier 1 capital (to risk-weighted assets)

Howard Bank

$
227,983

12.30
%
$
111,235

6.00
%
$
148,314

8.00
%
Howard Bancorp

$
209,119

11.09
%
$
113,154

6.00
%

N/A

Tier 1 capital (to average assets)

(Leverage ratio)

Howard Bank

$
227,983

10.43
%
$
87,434

4.00
%
$
109,293

5.00
%
Howard Bancorp

$
209,119

9.55
%
$
87,599

4.00
%

N/A

(1)  Amounts shown exclude 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 provisionsconservation buffer 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.
23
There are two main categories of capital under the regulatory capital guidelines. Tier 1 capital includes common stockholders’ equity, qualifying preferred stock and trust preferred securities, less goodwill and certain other deductions (including the unrealized net gains and losses, after applicable income taxes, on securities available for sale carried at fair value). Tier 2 capital includes preferred stock not qualifying as Tier 1 capital, subordinated debt, the allowance for credit losses and net unrealized gains on marketable equity securities, subject to limitations set by the guidelines. Tier 2 capital is limited to the amount of Tier 1 capital (i.e., at least half of total capital must be in the form of Tier 1 capital)2.50%. Under the ~~guidelines, capital~~Federal Reserve’s Small Bank Holding Company Policy Statement, Bancorp is ~~compared~~not subject to the ~~relative risk related to~~minimum capital adequacy and capital conservation buffer capital requirements at 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 guaranteedholding company level, unless otherwise advised by the ~~U.S. government or one of~~FRB (such capital requirements are applicable only at the Bank level). Although the minimum regulatory capital requirements are not applicable to Bancorp, the Company calculates these ratios for 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%own planning 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.monitoring purposes.

~~Management believes that, as of September 30, 2017 and December 31, 2016,~~ Bancorp and the Bank met all capital adequacy requirements to which they are ~~subject.~~subject as of June 30, 2020 and December 31, 2019.

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 September 30, 2017:
Total capital (to risk-weighted assets)
Howard Bank $ 122,631 12.98 % $ 75,608 8.00 % $ 94,510 10.00 %
Howard Bancorp $ 136,898 14.36 % $ 76,259 8.00 % N/A
Common equity tier 1 capital (to risk-weighted assets)
Howard Bank $ 116,970 12.38 % $ 42,530 4.50 % $ 61,432 6.50 %
Howard Bancorp $ 127,723 13.40 % $ 42,896 4.50 % N/A
Tier 1 capital (to risk-weighted assets)
Howard Bank $ 116,970 12.38 % $ 56,706 6.00 % $ 75,608 8.00 %
Howard Bancorp $ 127,723 13.40 % $ 57,194 6.00 % N/A
Tier 1 capital (to average assets)
(Leverage ratio)
Howard Bank $ 116,970 10.76 % $ 43,497 4.00 % $ 54,371 5.00 %
Howard Bancorp $ 127,723 11.74 % $ 43,506 4.00 % N/A
As of December 31, 2016:
Total capital (to risk-weighted assets)
Howard Bank $ 94,696 11.02 % $ 68,722 8.00 % $ 85,902 10.00 %
Howard Bancorp $ 93,278 10.83 % $ 68,903 8.00 % N/A
Common equity tier 1 capital (to risk-weighted assets)
Howard Bank $ 88,267 10.28 % $ 38,656 4.50 % $ 55,836 6.50 %
Howard Bancorp $ 83,643 9.71 % $ 38,758 4.50 % N/A
Tier 1 capital (to risk-weighted assets)
Howard Bank $ 88,267 10.28 % $ 51,541 6.00 % $ 68,722 8.00 %
Howard Bancorp $ 83,643 9.71 % $ 51,677 6.00 % N/A
Tier 1 capital (to average assets)
(Leverage ratio)
Howard Bank $ 88,267 8.82 % $ 40,022 4.00 % $ 50,027 5.00 %
Howard Bancorp $ 83,643 8.36 % $ 40,030 4.00 % N/A
24
34

Table of Contents

Note ~~11: Preferred Stock~~14: Contingencies

~~On September 22, 2011, Bancorp entered into a Securities Purchase Agreement with~~In the ~~Secretary~~ordinary course of business, the Company and its subsidiaries are routinely defendants in or parties to pending and threatened legal and regulatory actions and proceedings. The most significant of these is described below. In view of the ~~Treasury, pursuant~~inherent difficulty of predicting the outcome of such matters, particularly where the claimants seek very large or indeterminate damages or where the matters present novel legal theories or involve a large number of parties, the Company generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to ~~which Bancorp issued~~each matter may be. The Company establishes an accrued liability when those matters present loss contingencies that are both probable and ~~sold~~estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. The Company thereafter continues to monitor such matters for further developments that could affect the ~~Treasury 12,562 shares~~amount of the accrued liability that has been previously established.

Potential mortgage origination claims

The Bank has been notified of potential claims stemming from certain mortgages originated at First Mariner Bank prior to its ~~Senior Non-Cumulative Perpetual Preferred Stock, Series AA, having a liquidation preference of $1,000 per share, for aggregate proceeds of $12,562,000. The issuance was pursuant to~~merger into the SBLF program, a $30 billion fund established under the Small Business Jobs Act of 2010, which encourages lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion. The Series AA Preferred Stock holders were entitled to receive non-cumulative dividends payable quarterly on each January 1, April 1, July 1 and October 1, beginning October 1, 2011. The dividend rate was initially set at 5% per annum and thereafter was set based upon the percentage change in qualified lending between each dividend period and the baseline “Qualified Small Business Lending” level established at the time the agreement was entered into. Such dividend rate could vary from 1% per annum to 5% per annum for the second through tenth dividend periods and from 1% per annum to 7% per annum for the eleventh through the eighteenth dividend periods and through March 22, 2016Bank. While 0 lawsuit has been filed with respect to such potential claims, the nineteenth dividend period. If the Series AA Preferred Stock remained outstanding for more than four-and-one-half years, the dividend rate was fixed at 9%. As of March 22, 2016, the dividend rate was fixed at 9%. Such dividends were not cumulative, but Bancorp could only declare and pay dividends on its common stock (or any other equity securities juniorBank has engaged in confidential discussions related to the ~~Series AA Preferred Stock)~~potential claims. Significant management judgment, which involves a variety of assumptions, estimates and known and unknown uncertainties, is required to assess whether a related loss resulting from such potential claims is probable and estimable, such that an accrued liability should be established. The Company has accrued a liability of $1.0 million with respect to these potential claims. It is not possible to determine the outcome of these potential claims, and the amount of the accrued liability is subject to change as additional information becomes available. The Company believes it is reasonably possible that the amount of the actual loss may be greater than the amount accrued. However, the Company is currently unable to reasonably estimate the amount or range of additional loss, if ~~it had declared~~any, that is reasonably possible, due in significant part to (a) the preliminary nature of the potential claims, (b) the fact that no complaint has been filed and, ~~paid dividends for~~accordingly, no discovery has been conducted, (c) potential damages related to the claims are currently unsubstantiated, and (d) uncertainty as to the legal and factual determinations that would be made during any potential litigation related to the claims.

Based on current ~~dividend period~~knowledge, management does not believe that losses resulting from these potential claims in excess of the accrued liability, if any, will have a material adverse effect on the ~~Series AA Preferred Stock, and was subject to other restrictions on its ability to repurchase~~consolidated financial position or redeem other securities. In addition, if Bancorp had not timely declared and paid dividends on the Series AA Preferred Stock for six dividend periods or more, whether or not consecutive, the Treasury (or any successor holder of Series AA Preferred Stock) could have designated a representative to attend all meetings of Bancorp’s Board of Directors in a nonvoting observer capacity and Bancorp would have been required to give such representative copies of all notices, minutes, consents and other materials that Bancorp provided to its directors in connection with such meetings.

On May 6, 2016, after receiving all required regulatory approvals, Bancorp redeemed the 12,562 shares of Series AA Preferred Stock for $12,562,000 in accordance with its terms. Bancorp used the proceeds of a $12,562,000 term loan with Raymond James Bank, N.A. to fund the redemptionliquidity of the ~~Series AA Preferred Stock. This debt was repaid on February 1, 2017.~~Company. However, in light of the inherent uncertainties involved, some of which are beyond the Company’s control, an adverse outcome or settlement with respect to these potential claims could be material to the Company’s results of operations for any particular reporting period.

Note ~~12:~~15: 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.

Table of Contents

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:

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~~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

~~Except for one privately held equity investment, all other~~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. ~~The privately held equity investment utilizes peer market information to estimate the unobservable inputs and then these inputs are applied to the asset.~~

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.

Table of Contents

The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016.~~2019.

September 30, 2017 Quoted Price in Significant
Active Markets Other Significant
Carrying for Identical Observable Unobservable
Value Assets Inputs Inputs

June 30, 2020



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)

(Fair Value)

(Level 1)

(Level 2)

(Level 3)
Assets








Available for sale securities:








U.S. Government agencies $ 63,038 $ - $ 63,038 $ -

$
79,615

$
—

$
79,615

$
—
U.S. Government treasuries 1,498 - 1,498 -
Mortgage-backed securities 1,300 - 1,300 -

191,826

—

191,826

—
Other investments 2,047 - 1,979 68

5,448

—

5,448

—
Loans held for sale 52,683 - 52,683 -
Loans held for investment 1,674 - 1,674 -

3,346

—

3,346

—
Rate lock commitments 703 - - 703
Interest rate swap assets

404

—

404

—
Liabilities








Interest rate swap liabilities

423

—

423

—

December 31, 2016 Quoted Price in Significant
Active Markets Other Significant
Carrying for Identical Observable Unobservable
Value Assets Inputs Inputs

December 31, 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)

(Fair Value)

(Level 1)

(Level 2)

(Level 3)
Assets

Available for sale securities:








U.S. Government agencies $ 34,463 $ - $ 34,463 $ -

$
67,312

$
—

$
67,312

$
—
U.S. Government treasuries 1,504 - 1,504 -
Mortgage-backed securities 1,298 - 1,298 -

142,699

—

142,699

—
Other investments 1,463 - 1,463 -

5,494

—

5,494

—
Loans held for sale 51,054 - 51,054 -

30,710

—

30,710

—
Loans held for investment 6,580 - 6,580 -

997

—

997

—
Rate lock commitments 528 - - 528

60

—

—

60
Interest rate swap assets

217

—

217

—
Liabilities

Interest rate swap liabilities

228

—

228

—

26
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,
(in thousands)

2020

2019
Balance, beginning of period

$
60

$
126
Net losses included in realized and unrealized gains

on mortgage banking activity in noninterest income

(60)

(66)
Balance, end of period

$
—

$
60

37

Table of Contents

Assets under fair value option:

September 30, 2017 Carrying Aggregate
Fair Value Unpaid

June 30, 2020

Carrying

Aggregate


Fair Value

Unpaid

(in thousands) Amount Principal Difference

Amount

Principal

Difference
Loans held for sale $ 52,683 $ 51,144 $ 1,539
Loans held for investment 1,674 1,623 51

3,346

3,283

63

December 31, 2016 Carrying Aggregate
Fair Value Unpaid

December 31, 2019

Carrying

Aggregate


Fair Value

Unpaid

(in thousands) Amount Principal Difference

Amount

Principal

Difference
Loans held for sale $ 51,054 $ 49,709 $ 1,345

$
30,710

$
29,969

$
741
Loans held for investment 6,580 6,794 (214 )

997

966

31

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.
~~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:~~
September 30, December 31
2017 2016
Balance, beginning of period $ 528 $ 508
Privately held equity investment 68 -
Net gains included in realized and unrealized gains on mortgage banking activity in noninterest income 175 20
Balance, end of period $ 771 $ 528
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 (“OREO”) 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 the allowance for credit losses. Values are derived from appraisals of underlying collateral and discounted cash flow analysis. ~~There were~~A valuation ~~losses~~loss of ~~$99~~$257 thousand ~~recognized during the three months ended September 30, 2017 and $83 thousand~~was recognized for the ~~year~~six months ended ~~December 31, 2016. These charges~~June 30, 2020 and a $65 thousand valuation loss was recorded for the six months ended June 30, 2019. Charges were for declines in the value of OREO subsequent to foreclosure. OREO is classified within Level 3 of the hierarchy.
~~There was one loan for $206 thousand that was originally classified as held for sale that was downgraded to non-accrual status~~Net (loss)/gain included in ~~2016. Net gain~~earnings from the changes ~~included in earnings~~ in fair value of loans held for sale was ~~$194~~$(274) thousand and $290 thousand at ~~September~~June 30, ~~2017. Net~~2020 and 2019, respectively. There was a net gain included in earnings from the ~~changes included in earnings~~change in fair value of loans held for investment ~~was $90~~of $63 thousand ~~at September~~for the six months ended June 30, ~~2017.~~2020 and $31 thousand for the six months ended June 30, 2019.
27
38

Table of Contents

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 ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016.~~2019:

September 30, 2017 Quoted Price in Significant
Active Markets Other Significant
Carrying for Identical Observable Unobservable
Value Assets Inputs Inputs

June 30, 2020



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)

(Fair Value)

(Level 1)

(Level 2)

(Level 3)
Other real estate owned $ 2,133 $ - $ - $ 2,133

$
2,137

$
—

$
—

$
2,137
Impaired loans:





Construction and land 867 - - 867

347

—

—

347
Residential - first lien 1,927 - - 1,927

13,679

—

—

13,679
Residential - junior lien 6 - - 6

1,365

—

—

1,365
Commercial - owner occupied 698 - - 698

800

—

—

800
Commercial - non-owner occupied 5,880 - - 5,880

576

—

—

576
Commercial loans and leases 2,805 - - 2,805

1,619

—

—

1,619
Consumer - - - -

102

—

—

102
Total impaired loans

18,488

18,488

December 31, 2016 Quoted Price in Significant
Active Markets Other Significant
Carrying for Identical Observable Unobservable
Value Assets Inputs Inputs

December 31, 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)

(Fair Value)

(Level 1)

(Level 2)

(Level 3)
Other real estate owned $ 2,350 $ - $ - $ 2,350

$
3,098

$
—

$
—

$
3,098
Impaired loans:






Construction and land 125 - - 125

481

—

—

481
Residential - first lien 778 - - 778

13,131

—

—

13,131
Residential - junior lien 37 - - 37

786

—

—

786
Commercial - owner occupied 509 - - 509

566

—

—

566
Commercial - non-owner occupied 3,148 - - 3,148

1,725

—

—

1,725
Commercial loans and leases 3,066 - - 3,066

1,860

—

—

1,860
Consumer 95 - - 95

127

—

—

127
Total impaired loans

18,676

18,676

At June 30, 2020, OREO consisted of ~~the~~an outstanding balance of ~~$4.7~~$3.5 million, less a valuation allowance of ~~$2.6~~$1.4 million. At December 31, 2019, OREO consisted of an outstanding balance of $4.6 million, ~~at September 30, 2017, and $5.0 million,~~ less a valuation allowance of ~~$2.7 million,~~$1.5 million. A specific allocation of the allowance for credit losses attributable to impaired loans at December 31, ~~2016. Related allowance on impaired loans~~2019 was ~~$918 thousand and $2.2 million at September 30, 2017 and December 31, 2016, respectively.~~
$500 thousand.
Various techniques are used to ~~valuate~~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.

~~The following methods and assumptions were used to estimate the fair value~~Table of ~~financial instruments where it is practical to estimate fair value:~~Contents

~~Securities available for sale:~~~~Based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.~~

~~Securities held to maturity:~~~~The fair value of debt securities is based upon quoted prices for similar assets or externally developed models that use significant observable inputs.~~

~~Nonmarketable equity securities:~~~~Because these securities are not marketable, the carrying amount approximates the fair value.~~

~~Loans held for sale~~~~: Loans held for sale are carried at fair value based on outstanding investor commitments or, in the absence of such commitments, on current investor yield requirements on third party models.~~

~~Loans held for investment~~~~: 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~~

~~Rate lock commitments:~~ ~~Based on estimated loan closing and investor delivery rate based on historical experience.~~

~~Loans:~~For variable rate loans the carrying amount approximates the fair value. For fixed rate loans the fair value is calculated 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. The estimated cash flows do not anticipate prepayments.

~~Deposits:~~The carrying amount of non-maturity deposits such as demand deposits, money market and saving deposits approximates the fair value. The fair value of deposits with predetermined maturity dates such as certificate of deposits is estimated by discounting the future cash flows using current rates of similar deposits with similar remaining maturities.

~~Short-term borrowing:~~~~The carrying amounts approximate the fair values at the reporting date.~~

~~Long-term borrowing:~~At September 30, 2017 all of the long term debt was variable rate and the carrying amounts approximate the fair values. At December 31, 2016, the fair value was based on quoted market prices or, if quoted market price is not available, discounted cash flow analyses based on current incremental borrowing rates for similar types of instruments.

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.

Management has made estimates of fair value discount rates that it believes to be reasonable. Because there is no market for many of these financial instruments, however, management has no basis to determine whether the fair value presented for loans would be indicative of the value negotiated in an actual sale.

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

September 30, 2017
Quoted Price in Significant
Active Markets Other Significant
for Identical Observable Unobservable
Carrying Fair Assets Inputs Inputs

June 30, 2020






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)

Amount

Value

(Level 1)

(Level 2)

(Level 3)
Financial Assets










Available for sale securities $ 67,883 $ 67,883 $ - $ 67,815 $ 68

$
276,889

$
276,889

$
—

$
276,889

$
—
Held to maturity securities 9,250 9,345 - - 9,345

7,250

7,195

—

—

7,195
Nonmarketable equity securities 5,982 5,982 - 5,982 -

12,592

12,592

—

12,592

—
Loans held for sale 52,683 52,683 - 52,683 -
Loans held for investment 1,674 1,674 - 1,674 -

3,346

3,346

—

3,346

—
Rate lock commitments 703 703 - - 703
Loans and leases 884,878 880,668 - - 880,668
Loans and leases ¹

1,878,928

1,889,696

—

—

1,889,696
Interest rate swap

404

404

—

404

—
Financial Liabilities



Deposits 862,085 863,236 - 863,236 -

1,830,674

1,828,613

—

1,828,613

—
Short-term borrowings 128,471 128,471 - 128,471 -
Long-term borrowings 6,552 6,552 - 6,552 -
Customer repos and other borrowings

37,834

37,834

5,321

FHLB advances

246,000

249,079

—

249,079

—
Subordinated debt

28,339

28,339

—

28,339

—
Interest rate swap

423

423

—

423

—

29

December 31, 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

$
215,505

$
215,505

$
—

$
215,505

$
—
Held to maturity securities

7,750

7,897

—

—

7,897
Nonmarketable equity securities

14,152

14,152

—

14,152

—
Loans held for sale

30,710

30,710

—

30,710

—
Loans held for investment

997

997

—

997

—
Rate lock commitments

60

60

—

—

60
Loans and leases ¹

1,734,115

1,735,013

—

—

1,735,013
Interest rate swap

217

217

—

217

—
Financial Liabilities








Deposits

1,714,365

1,713,081

—

1,713,081

—
Customer repos and other borrowings

6,127

6,127

6,127

FHLB advances

285,000

288,731

—

288,731

—
Subordinated debt

28,241

28,241

—

28,241

—
Interest rate swap

228

228

—

228

—

(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.

40
December 31, 2016
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 $ 38,728 $ 38,728 $ - $ 38,728 $ -
Held to maturity securities 6,250 6,584 - - 6,584
Nonmarketable equity securities 5,103 5,103 - 5,103 -
Loans held for sale 51,054 51,054 - 51,054 -
Loans held for investment 6,580 6,580 - 6,580 -
Rate lock commitments 528 528 - - 528
Loans and leases 808,516 813,981 - - 813,981
Financial Liabilities
Deposits 808,734 809,703 - 809,703 -
Short-term borrowings 107,056 107,056 - 107,056 -
Long-term borrowings 20,517 20,554 - 20,554 -
30
Table of Contents
Item 2.          Management’s Discussion and Analysis of Financial Condition and Results of Operations
~~This section~~The following 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 September~~as of June 30, ~~2017 and~~2020, as compared to December 31, ~~2016~~2019, and our ~~consolidated~~ results of operations for the ~~nine~~six and three month periods ended ~~September~~June 30, ~~2017~~2020 and ~~September~~June 30, ~~2016.~~2019. This ~~section~~discussion and analysis should be read in conjunction with our unaudited Consolidated Financial Statements and related notes as well as the ~~consolidated~~ financial and statistical data appearing elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2019. Historical results of operations and the percentage relationships among any amounts included, and any trends that may appear, may not indicate results of operations for any future periods.
We have made, and will continue to make, various forward-looking statements with respect to financial, business and ~~notes~~economic matters. Comments regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding our cautionary disclosures, see the cautionary note regarding “Forward-Looking Statements” at the beginning of this report.
In this report, unless the context suggests otherwise, references to the ~~consolidated financial statements.~~“Company” refer to Howard Bancorp, Inc. and references to “we,” “us,” and “our” mean the combined business of the Company and the Bank and its wholly-owned subsidiaries.
~~Overview~~
General
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. We plan to continue to focus both on commercial customers and our origination of one- to four-family residential mortgage loans going forward, maintaining our portfolio of mortgage lending and also selling select loans into the secondary markets.
We are headquartered in ~~Ellicott City, Maryland and we~~Baltimore, Maryland. We consider our primary market area to be ~~The~~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 to medium sized~~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.
Recent Business Developments
~~Our core business strategy is~~On December 18, 2019, we entered into an agreement to ~~deliver superior customer service~~release certain management members of our mortgage division from their employment contracts and allow those individuals to create a limited liability company (“LLC”) for the purpose of hiring our 91 remaining mortgage employees. We also agreed to transfer ownership of the domain name “VAmortgage.com” to the newly created LLC. In consideration of the release of the employment agreements, the transfer of our mortgage employees, and the sale of the domain name, the LLC paid us $750 thousand. Under the agreement, there was a transition period of approximately 45 days, after which we agreed to cease originating residential first lien mortgage loans and exit our mortgage banking activities. Accordingly, we completed processing the residential first lien mortgage pipeline by the end of the first quarter of 2020 and the remaining loans held for sale were sold during the second quarter of 2020. In order to manage future loan run-off within our residential mortgage loan portfolio, we plan on buying first lien residential mortgage loans, on a servicing released basis, from both the LLC and other third-party originators.
While our mortgage banking activities were marginally profitable in two of the last three years and our decision to exit this activity eliminates that ~~is supported by an extremely high level~~source of ~~banking sophistication. Our specialized community banking focus on both local markets and small business related market segments is combined with~~income, we believe that the exit of these activities will have 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.
~~Our results of operations depend mainly~~negligible impact on our net ~~interest~~ income ~~which is~~over the ~~difference between~~next twelve months and will improve our efficiency ratio. Most importantly, we believe that exiting these activities will allow us to focus resources on growing our more profitable and less volatile commercial banking business that represents our core competency. We expect that this renewed focus will more than replace the ~~interest~~marginal levels of net income from our mortgage banking activities within the next twelve months. While we ~~earn~~estimate that the after tax income from these activities in 2019 was $1.6 million, the operating expenses we attributed to the mortgage banking activities represented only direct costs and did not include shared services expense for staff and support activities such as loan operations, wire transfer operations, human resources, finance, internal audit, and compliance. If we had allocated these shared services expenses to our mortgage banking activities, the financial returns on our ~~loan~~mortgage banking activities would have been even less. The exit of our mortgage banking activities is discussed in Note 2 to the Consolidated Financial Statements.
41
Table of Contents
Recent Events - COVID-19
In December 2019, a novel strain of coronavirus (COVID-19) surfaced in China, and ~~investment portfolios~~has since spread to many other countries, including the United States. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. The COVID-19 pandemic has severely restricted the level of economic activity in our markets. In response to the COVID-19 pandemic, the State of Maryland and most other states took preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of businesses that were deemed to be non-essential. Although many businesses have begun to reopen, some states, including Maryland, have since experienced a resurgence of COVID-19 cases, which may further slow overall economic activity and recovery. Uncertainty also remains regarding if, how and when schools will reopen and the impact of such reopening decisions on the economy.
The impact of the COVID-19 pandemic is fluid and continues to evolve. The unprecedented and rapid spread of COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower equity market valuations and significant volatility and disruption in financial markets. In addition, due to the COVID-19 pandemic, market interest ~~expense we pay~~rates have declined significantly, with the 10-year Treasury bond falling below 1.00% on ~~deposits~~March 3, 2020 for the first time, and ~~borrowings. Results~~declining further to 0.65% as of ~~operations are also affected~~June 30, 2020. On March 3, 2020, the Federal Open Market Committee reduced the targeted federal funds interest rate range 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, loan production expense, deposit insurance and general administrative and data processing expenses. Our operations are significantly affected by general economic and competitive conditions, particularly with respect50 basis points to ~~changes~~1.00% to 1.25%. This range was further reduced to 0% to 0.25% percent on March 16, 2020. These reductions in interest rates ~~government policies~~ and ~~actions~~the other effects of ~~regulatory authorities. Future changes in applicable laws, regulations or government policies may~~the COVID-19 pandemic have had, and are expected to continue to have, possibly materially, ~~affect~~an adverse effect on our business, financial condition, and results of operations. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and our customers, employees and vendors.
Our business, financial condition and results of operations generally rely upon the ability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and demand for loans and other products and services we offer, which are highly dependent on the business environment in our primary market and in the United States as a whole.
~~On August 14, 2017, Howard Bancorp entered into~~Our COVID-19 Operational Response
Our response has continued to evolve since the first confirmed case of COVID-19 was reported in Maryland on March 5. We have implemented the following measures in an ~~Agreement~~effort to ensure the safety of both our customers and ~~Plan~~employees while continuing to serve our customers during this challenging period:
● Twelve of the Bank’s fifteen branches remain accessible to customers – nine through drive thru capabilities and all twelve through pre-scheduled meetings.
● Encouraged utilization of our mobile, online, ATM, and other banking channels to limit personal contact.
● Implemented a work-from-home policy for substantially all employees other than branch personnel.
● Added one week of paid time off to all full-time employees to be used in either 2020 or 2021, to acknowledge long hours devoted to providing extraordinary customer service.
● Implemented deep cleaning procedures at all branch locations and other bank facilities.
● Instituted mandatory social distancing policies and wearing of masks for employees working in bank facilities.
● Held the annual meeting of stockholders as a virtual meeting.
42
Table of ~~Reorganization with Howard Bank~~Contents
Lending Operations and ~~First Mariner Bank, a Maryland chartered trust company~~Accommodations to Borrowers
We have actively participated in the Small Business Administration’s (“~~First Mariner”~~SBA”)~~, providing~~ Paycheck Protection Program (“PPP”) established under the Coronavirus Aid, Relief and Economic Security Act (“CARES” Act) that was enacted on March 27, 2020. Among other provisions, the CARES Act created the $349 billion PPP loan program for loans to small businesses for, among other things, payroll, group health care benefit costs and qualifying mortgage, rent and utility payments. The Paycheck Protection Program and Healthcare Enhancement Act of 2020 (the “PPPHE Act”), was enacted on April 24, 2020. Among other things, the ~~merger~~PPPHE Act provided an additional $310 billion of ~~First Mariner with~~funding for the PPP of which, $30 billion is specifically allocated for use by banks and ~~into Howard Bank~~other insured depository institutions that have assets between $10 billion and $50 billion.
The Paycheck Protection Program Flexibility Act of 2020” (the ~~“Merger”~~“PPPF Act”)~~. Under~~ was enacted in June 2020 and modifies the ~~terms~~PPP as follows: (i) establishes a minimum maturity of five years for all loans made after the enactment of the ~~agreement, the total transaction is valued at approximately $163.4 million based on Howard Bancorp’s closing stock price of $16.85 on August 14, 2017. Upon consummation~~PPPF Act and permits an extension of the ~~Merger, each stockholder~~maturity of ~~First Mariner will be entitled~~existing loans to ~~receive, for each of his, her or its shares of First Mariner common stock~~five years if the borrower and ~~preferred stock, 1.6624 shares of Howard Bancorp common stock. The Merger is subject to customary closing conditions, including regulatory approvals and approvals~~lender agree; (ii) extends the “covered period” of the ~~stockholders~~CARES Act from June 30, 2020, to December 31, 2020; (iii) extends the eight-week “covered period” for expenditures that qualify for forgiveness to the earlier of ~~Howard Bancorp~~24 weeks following loan origination or December 31, 2020; (iv) extends the deferral period for payment of principal, interest and ~~First Mariner.~~
~~On February 1, 2017, Howard Bancorp closed an underwritten public offering, including~~fees to the ~~exercise in full~~date on which the forgiveness amount is remitted to the lender by the ~~underwriters of their option~~SBA; (v) requires the borrower to ~~purchase an additional 360,000 shares,~~use at ~~the public offering price of $15.00 per share. The exercise~~least 60% (down from 75%) of the ~~option~~proceeds of the loan for payroll costs, and up to ~~purchase additional shares brought~~40% (up from 25%), for other permitted purposes, as a condition to obtaining forgiveness of the ~~total number of shares of common stock sold~~loan; (vi) delays from June 30, 2020 to December 31, 2020 the date by ~~the Company~~which employees must be rehired to ~~2,760,000 shares and increased~~avoid a reduction in the amount of ~~gross proceeds raised~~forgiveness of a loan, and creates a “rehiring safe harbor” that allows businesses to remain eligible for loan forgiveness if they make a good-faith attempt to rehire employees or hire similarly qualified employees, but are unable to do so, or are able to document an inability to return to pre-COVID-19 levels of business activity due to compliance with social distancing measures; and (vii) allows borrowers to receive both loan forgiveness under the PPP and the payroll tax deferral permitted under the CARES Act, rather than having to choose which of the two would be more advantageous.
In July 2020, the CARES Act was amended to extend, through August 8, 2020, the SBA’s authority to make commitments under the PPP. The SBA’s existing authority had previously expired on June 30, 2020. We are continuing to monitor the potential development of additional legislation and further actions taken by the U.S. government.
At June 30, 2020, we had originated $199.0 million of loans under the PPP. During the first phase of the program, which commenced on April 3, we funded 777 loans totaling $178.7 million. During phase 2, which commenced on April 27, we funded an additional 251 loans totaling $20.3 million through June 30. The average loan size under phase 1 and phase 2 of the PPP program was $230 thousand and $82 thousand, respectively. We will continue to support our customers throughout the duration of this program. Total processing fees from the SBA for the PPP loans originated through June 30 were $6.6 million and were deferred. In addition, $770 thousand of origination costs were deferred. The net deferred fees are being accreted as a yield adjustment over the contractual term of the underlying PPP loans. The effective yield of our PPP portfolio is 2.53%. The PPP loans generated pretax income of $1.0 million, or $0.04 after tax per share, in the second quarter of 2020. PPP loans, net of unearned income, totaled $193.7 million at June 30, 2020.
During this unprecedented situation, we have also established client assistance programs, including offering commercial and retail customers loan modifications, on a case by case basis, in the form of payment deferrals for periods up to six months, as discussed below.
Certain information in this report is presented with respect to “portfolio loans,” a non-GAAP measure defined as total loans (which term includes leases), but excluding our PPP loans. We believe that portfolio loan related measures provide additional useful information for purposes of evaluating our results of operations and financial condition with respect to the second quarter of 2020 and comparing it to other periods, since the PPP loans are guaranteed by the SBA, 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 in the next six to nine months. We commenced making loans under the PPP program in the second quarter of 2020. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is presented below under “Use of Non-GAAP Measures.”
43
Table of Contents
As of June 30, 2020, a total of $291.4 million of loans (representing 15.3% of total loans and leases or 17.1% of portfolio loans) were performing under some form of deferral or other payment relief. By comparison, $347.0 million (representing 19.7% of total loans and leases at March 31, 2020) were performing under some form of deferral or other payment relief as of May 8, 2020. As of August 6, 2020, $159.0 million of loans (representing 8.4% of total loans and leases or 9.3% of portfolio loans at June 30, 2020) were performing under some form of deferral or other payment relief. We expect that some requests for payment deferral extensions will continue during the third quarter while other borrowers currently on payment deferral will resume payments.
The CARES Act permits financial institutions to suspend requirements under GAAP for certain loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs. In addition, federal banking regulators issued, shortly before ~~underwriting discounts and expenses~~the CARES Act was enacted, an interagency statement that included guidance on their approach for the accounting of loan modifications in light of the ~~offering,~~economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to ~~approximately $41.4 million.~~COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.
We have also temporarily ceased making collection calls, are temporarily waiving a higher proportion of late fees assessed for consumer loans, and have paused new foreclosure and repossession actions. We will continue to re-evaluate these temporary actions based on the ongoing COVID-19 pandemic. These programs may negatively impact our revenue and other results of operations in the near term and, if not effective in mitigating the effect of COVID-19 on our customers, may adversely affect our business and results of operations more substantially over a longer period of time. Future governmental actions may require these and other types of customer-related responses.
~~On May 6, 2016,~~Impact on Our Results of Operation and Financial Condition
We are monitoring the impact of the COVID-19 pandemic on our results of operation and financial condition. While it has not yet had a significant impact to our financial condition as of June 30, 2020, in the form of incurred losses or any communications from our borrowers that significant losses were imminent, we ~~redeemed~~nevertheless determined it prudent to increase our allowance for credit losses by $6.0 million in the first six months of 2020, related to changes in qualitative factors, primarily as a result of the abrupt slowdown in commercial economic activity related to COVID-19, as well as the dramatic rise in the unemployment rate in our market area.Our allowance for credit losses for periods ending after June 30, 2020 may be materially impacted by the COVID-19 pandemic.
In addition, due to the pandemic and the related economic fallout, including most specifically, declining stock prices at both the Company and peer banks, the Federal Reserve’s significant reduction in interest rates, and other business and market considerations, we performed an interim goodwill impairment analysis as of June 30, 2020. Based on this analysis, the estimated fair value of the Company was less than book value, resulting in a $34.5 million impairment charge, recorded in noninterest expense, in the second quarter of 2020. This was a non-cash charge to earnings and had no impact on our regulatory capital ratios, cash flows, or liquidity position.
Capital and Liquidity
As of June 30, 2020, all of our capital ratios were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession brought about by the ~~12,562 shares~~COVID-19 pandemic, our reported and regulatory capital ratios could be adversely impacted by credit losses.
We anticipated potential stresses on liquidity management as a result of the ~~Series AA Preferred Stock~~COVID-19 pandemic and our participation in the PPP. We built on-balance sheet liquidity during the first quarter of 2020 in anticipation of a possible increase in the utilization of existing lines of credit or decreases in customer deposits. Since these events didn’t materialize, in part due to the various actions initiated by the Federal Reserve to provide market liquidity, we reduced this on-balance sheet liquidity to pre-COVID-19 levels during the second quarter of 2020.
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The Federal Reserve created the Paycheck Protection Program Lending Facility (“PPPLF”), a lending facility that will allow us to obtain funding specifically for loans that we make under the PPP, and allow us to retain existing sources of liquidity for our traditional operations. Borrowings under the Federal Reserve Bank of Richmond’s (“FRB”) PPPLF were $31.1 million at June 30, 2020. While we had ~~previously issued~~originally planned to use the ~~Treasury under its SBLF program. The aggregate redemption price~~PPPLF as the funding source for all PPP loans, strong customer deposit growth and the availability of alternative short-term funding sources at a lower cost resulted in the ~~Series AA Preferred Stock was approximately $12.7 million, including dividends accrued but unpaid through~~limited usage during the ~~redemption date. The redemption of the Series AA Preferred Stock was funded with variable rate debt with Raymond James Bank, N.A. This debt was repaid on February 1, 2017.~~quarter.
Financial Highlights
Financial highlights during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 are as follows:
·● ~~Primarily as~~We reported a ~~result~~net loss of ~~the capital offering, our total stockholders’ equity increased $44.5~~$26.1 million, or ~~51.9%. As anticipated, all~~a loss of ~~our regulatory capital ratios increased dramatically as a result~~$1.39 per diluted common share in the first six months of 2020; this compares to net income of $6.3 million, or $0.33 per diluted common share in the ~~offering. We used $12.7 million~~first six months of ~~the approximately $38.4 million in net proceeds of the offering to repay the loan to Raymond James Bank, N.A, with the remainder intended to provide funding for future growth.~~2019.
·● ~~Total assets increased $105.6~~A goodwill impairment charge of $34.5 million (or a loss of $1.84 per share) was recorded in the second quarter of 2020. The impairment charge is a non-cash charge that does not affect regulatory capital ratios, liquidity, or ~~10.3%, to $1.1 billion at September 30, 2017.~~our overall financial strength.
·● ~~Loans and leases held in our portfolio grew $70.7~~We recorded a provision for credit losses of $6.4 million, ~~or 8.6%, to $892.2~~a $3.6 million ~~at September 30, 2017.~~
31
· ~~Deposits increased $53.4 million or 6.6% to $862.1 million at September 30, 2017, including noninterest-bearing deposit growth~~increase from the first six months of ~~$29.6 million or 16.2%.~~2019.
·● ~~Net income available~~Our net interest margin was 3.28% in the first six months of 2020, a decrease of 30 basis points (“bp”) from the first six months of 2019, due primarily to ~~common stockholders increased $1.1 million or 27.1% compared to~~a 71 bp decrease in the ~~same period~~yield on our earning assets, partially offset by a 46 bp decrease in ~~2016.~~the average rate paid on our interest-bearing liabilities.
·● ~~Tangible~~Total assets were $2.46 billion at June 30, 2020, up $88.8 million from year end 2019 with this asset growth attributable to securities available for sale, up $61.4 million, and loans and leases, net of unearned income, up $153.1 million. Offsetting this growth were interest bearing deposits with banks, down $50.6 million, loans held for sale, down $30.7 million, and goodwill, down $34.5 million.
● Total loans and leases, net of unearned income, were $1.90 billion at June 30, 2020, up $153.1 million from December 31, 2019. We originated $193.7 million (net of unamortized deferred fees and costs) of PPP loans in the second quarter of 2020; all other loan portfolios decreased by $40.6 million from year end 2019.
● Total deposits were $1.83 billion at June 30, 2020, up $116.3 million from year end 2019, with customer deposits up $194.5 million from year end 2019.
● Our borrowings of $312.2 million at June 30, 2020 decreased by $7.2 million since year end 2019 as strong customer deposit growth and our reduction of on-balance sheet liquidity reduced our need for this source of funds.
● We completed our $7.0 million stock repurchase program on February 24, 2020; a total of 372,801 shares were repurchased during the first quarter for $6.7 million.
● We remain “well capitalized” by all regulatory measures.
● Our book value ~~increased to $13.03~~per common share was $15.14 at June 30, 2020, down $1.71 per share ~~at September 30, 2017 compared to $11.72~~from March 31, 2020 and down $1.44 from December 31, 2020. The decrease in book value per share ~~at September 30, 2016.~~was driven by the goodwill impairment charge in the second quarter 2020 of $1.84 per common share.
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● Our tangible book value per common share (a non-GAAP financial measure – refer to the “Use of Non-GAAP Financial Measures” section for additional detail) was $13.17 at June 30, 2020, up $0.15 per share from March 31, 2020 and up $0.49 per share from December 31, 2020. The goodwill impairment charge did not impact tangible book value.
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, income taxes, share based compensation, accounting for business combinations ~~income taxes~~ and ~~share based compensation. Significant~~loans acquired in business combinations. These critical accounting policies and the significant assumptions and estimates made by management related to them are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2019. Our 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, ~~2016.~~2019. There have been no material changes to the significant accounting policies as described in the Annual ~~Report.~~Report on Form 10-K for the year ended December 31, 2019. Disclosures regarding the effects of new accounting pronouncements are ~~also~~ included in Note 1 ~~to our financial statements.~~of this report.
~~Balance Sheet Analysis and Comparison of~~ Financial Condition
A comparison between ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~2019 balance sheets is presented below.
General
Total assets increased ~~$105.6~~$88.8 million, or ~~10.3%~~3.7%, to ~~$1.133~~$2.46 billion at ~~September~~June 30, ~~2017~~2020 compared to ~~assets of $1.027~~$2.37 billion at December 31, ~~2016. This~~2019. Our asset growth consisted primarily of increases in ~~our loan portfolio~~loans and leases of ~~$70.7 million, investment securities of $33.0~~$153.1 million and ~~bank owned life insurance~~securities available for sale of ~~$7.1~~$61.4 million. ~~Cash~~The growth in these assets was partially offset by decreases in interest-bearing deposits with banks of $50.6 million, goodwill of $34.5 million, and ~~cash equivalents increased $11.8 million primarily as a result~~loans held for sale of ~~the $19.0 million decline in interest bearing deposits in banks, as these investments were not reinvested upon their maturity.~~$30.7 million. The primary source of funding net asset growth was ~~funded from increases~~deposits. Total deposits increased by $116.3 million, including an increase in customer deposits of ~~$53.4~~$194.5 million. Borrowings decreased by $7.2 million ~~or 6.6%~~ and ~~short term borrowings of $21.4~~stockholders’ equity decreased by $30.9 million, ~~or 20.0%.~~
with the decrease in stockholders’ equity due primarily to the goodwill impairment charge to earnings.
Securities Available for Sale and Held to Maturity
Available for sale
~~Available~~Our available for sale securities are reported at fair value. ~~We currently hold~~At both June 30, 2020 and December 31, 2019, we held U.S. agency ~~and treasury securities,~~debentures, mortgage backed securities, and ~~mutual fund investments in our securities~~corporate debentures. This portfolio ~~which are categorized as available for sale. The investment in mutual funds~~ is ~~a supplement to our community reinvestment program activities. We use our securities portfolio~~used primarily to provide ~~the required~~sufficient liquidity to fund our loans and provide funds for withdrawals of deposits. In addition, this portfolio is used as collateral for funding via commercial customer overnight securities sold under agreement to repurchase (“repurchase agreements”) and as a source of earnings. At June 30, 2020 and December 31, 2019, $99.7 million and $11.6 million in fair value of available for sale securities, respectively, were pledged as collateral. These securities were pledged at the Federal Reserve’s Discount Window as well as ~~to provide sufficient liquidity to fund our loans~~for repurchase agreements and ~~provide funds for withdrawals~~deposits of ~~deposits.~~local government entities that require pledged collateral as a condition of maintaining these deposit accounts.
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Held to maturity
Held to maturity securities are reported at amortized cost. The only investments that we have classified as held to maturity are certain corporate debentures. These investments are intended to be held until maturity.
32
The following ~~tables set~~table sets forth the composition of our investment securities portfolio at the dates indicated.

June 30, 2020

December 31, 2019

Amortized

Estimated

Amortized

Estimated

$ Change in

(in thousands) September 30, 2017 December 31, 2016

Cost

Fair Value

Cost

Fair Value

Fair Value

% Change

Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
Available for sale













U.S. Government
Agencies $ 63,183 $ 63,038 $ 34,584 $ 34,463
Treasuries 1,507 1,498 1,512 1,504
U.S. Government Agencies

$
77,835

$
79,615

$
66,428

$
67,312

$
12,303

18.3
%
Mortgage-backed 1,336 1,300 1,366 1,298

188,099

191,826

139,918

142,699

49,127

34.4

Other investments 2,068 2,047 1,500 1,463

5,509

5,448

5,510

5,494

(46)

(0.8)

$ 68,094 $ 67,883 $ 38,962 $ 38,728

$
271,443

$
276,889

$
211,856

$
215,505

$
61,384

28.5
%
Held to maturity













Corporate debentures $ 9,250 $ 9,345 $ 6,250 $ 6,584

$
7,250

$
7,195

$
7,750

$
7,897

$
(702)

(8.9)
%

During the quarter ended June 30, 2020, we embarked on a strategy to monetize certain unrealized gains in our mortgage-backed securities (“MBS”) portfolio by selling $105 million of MBS with high prepayment speeds, resulting in net gains of $3.0 million. We ~~had securities~~then purchased $125 million of lower coupon MBS. The total available for sale securities portfolio of ~~$67.9 million and $38.7~~$276.9 million at ~~September~~June 30, ~~2017 and~~2020 increased by $61.4 million, or 28.5%, since December 31, ~~2016, respectively, which were recorded at fair value. This represents an increase~~2019. Our portfolio growth, consisting of ~~$29.2 million, or 75.3%, from year-end 2016. Nearly $28.2 million~~both MBS and U.S. Government agency securities, was part of our overall earnings and interest rate risk management strategies.
Our securities portfolio matures in one year or less, giving us the capacity to fund future loan growth while maintaining an appropriate amount of securities to provide the required collateral under our repurchase agreements. We did not record any gains or losses on sales or calls of securities for the nine months ended September 30, 2017.
We had securities held to maturity of $9.3 million and $6.3 million at September 30, 2017 and December 31, 2016, respectively, which were recorded at amortized cost. This represents an increase of $3.0 million during the first nine months of 2017, consisting of additional investments in corporate debentures.
~~With respect to our portfolio of securities available for sale, the portfolio~~ contained 3322 securities with unrealized losses of ~~$215~~$496 thousand at June 30, 2020, and 1215 securities with unrealized losses of ~~$240~~$166 thousand at ~~September 30, 2017 and~~ December 31, ~~2016, respectively.~~2019. Changes in the fair value of these securities resulted primarily from ~~fluctuations in market~~ interest ~~rates.~~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. Held~~impairments. Note 3 to ~~maturity securities~~our Consolidated Financial Statements provides more detail concerning the composition of our portfolio and our process for evaluating the portfolio for other-than-temporary impairment.
Loan and Lease Portfolio
Total loans and leases were ~~all~~$1.90 billion at June 30, 2020, an increase of $153.1 million, or 8.8% from $1.75 billion at December 31, 2019. We originated $193.7 million of PPP loans, net of unamortized deferred fees and origination costs, during the quarter ended June 30, 2020. Our portfolio loans, which exclude PPP loans (a non-GAAP financial measure – refer to the “Use of Non-GAAP Financial Measures” section for additional detail), decreased by $40.6 million, or 2.3%, to $1.70 billion at June 30, 2020 from $1.74 billion at December 31, 2019. Commercial real estate loans increased $14.0 million, or 2.0%, with our continued focus on the needs of small to mid-size businesses in our market area. Our commercial loan and lease portfolio decreased by $19.9 million, as commercial line utilization dropped due to higher liquidity levels at many borrowers.
Our residential mortgage portfolio decreased by $34.7 million, or 6.8%, as a result of a substantially higher level of prepayments due to the lower level of mortgage market rates that led to strong mortgage refinance activity in the first six months of 2020. The level of mortgage runoff was partially mitigated by new loan originations, but the wind down of our mortgage banking activities during the first quarter of 2020 resulted in a ~~gain position~~lower level of new mortgage originations than in prior quarters. In order to manage loan run-off within our residential mortgage loan portfolio, we plan on buying first lien residential mortgage loans on a servicing released basis. In that regard, we are currently negotiating investor agreements that may provide a future flow of new mortgage originations.
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The following table sets forth the composition of our loan portfolio at ~~September~~the dates indicated.

June 30, 2020

December 31, 2019

(in thousands)

Total

% of Total

Total

% of Total

$ Change

% Change

Real estate













Construction and land

$
128,567

6.8
%
$
128,285

7.3
%
$
282

0.2
%
Residential - first lien

409,402

21.6

437,409

25.1

(28,007)

(6.4)

Residential - junior lien

67,430

3.6

74,164

4.2

(6,734)

(9.1)

Total residential real estate

476,832

25.1

511,573

29.3

(34,741)

(6.8)

Commercial - owner occupied

244,802

12.9

241,795

13.9

3,007

1.2

Commercial - non-owner occupied

455,051

24.0

444,052

25.4

10,999

2.5

Total commercial real estate

699,853

36.9

685,847

39.3

14,006

2.0

Total real estate loans

1,305,252

68.7

1,325,705

75.9

(20,453)

(1.5)

Commercial loans and leases ¹

352,999

18.6

372,872

21.4

(19,873)

(5.3)

Consumer

46,660

2.5

46,936

2.7

(276)

(0.6)

Paycheck Protection Program

193,719

10.2

—

—

193,719

NM

Total loans and leases

$
1,898,630

100.0
%
$
1,745,513

100.0
%
$
153,117

8.8
%

¹ Includes leases of $4,984 and $6,382 at June 30, ~~2017~~2020 and December 31, ~~2016.~~2019, respectively.
Paycheck Protection Program Loans
On March 27, 2020, the CARES Act was signed into law, providing, financial relief and funding opportunities for small businesses under the SBA’s PPP program from approved SBA lenders. In response to the COVID-19 pandemic, the Bank, a SBA lender, began accepting applications and has originated PPP loans within the guidelines of the CARES Act, as amended by subsequent legislation. During the quarter ended June 30, 2020, the Bank had funded 1,028 loans totaling $199.0 million; net of unamortized deferred fees and origination costs, PPP loans totaled $193.7 million at June 30, 2020.
Loan Held for Sale
We completed the processing of our remaining residential first lien mortgage pipeline during the first quarter of 2020 and sold the remaining loans held for sale during the second quarter of 2020, each in connection with exiting our mortgage banking activities. As a result, we did not have any loans held for sale at June 30, 2020 compared to $30.7 million at December 31, 2019.
Interest-Bearing Deposits with Banks
Interest-bearing deposits with banks, primarily with the Federal Reserve Bank of Richmond (“FRB”), were $46.4 million at June 30, 2020, a decrease of $50.6 million from the December 31, 2019 balance of $97.0 million. As the threat of market disruption in response to the pandemic appeared during the first quarter of 2020, including possible increases in the utilization of existing lines of credit or decreases in customer deposits, we built on-balance sheet liquidity, increasing interest-bearing deposits with banks to $180.0 million at March 31, 2020. Since these events didn’t materialize, in part due to the various actions initiated by the Federal Reserve to provide market liquidity, we reduced this on-balance sheet liquidity to pre-COVID-19 levels during the second quarter of 2020.
Nonmarketable Equity Securities
At ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~2019, we held an investment in stock of the Federal Home Loan Bank (“FHLB”) of ~~$6.0~~$12.6 million and ~~$5.1~~$14.2 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.
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~~Loan and Lease Portfolio~~Table of Contents
Deposits
Total ~~loans and leases (which excludes loans held for sale) increased $70.7~~deposits were $1.83 billion at June 30, 2020, a $116.3 million, or ~~8.6%~~6.8%, ~~to $892.2 million at September 30, 2017~~increase from ~~$821.5 million~~$1.71 billion at December 31, ~~2016. At September~~2019. Customer deposits, which excludes brokered deposits and other non-customer deposits, were up $194.5 million, or 13.2%, in the first six months of 2020. Our transaction accounts (noninterest-bearing demand and interest-bearing checking) increased by $205.9 million. Brokered and other non-customer deposits were $161.8 million at June 30, ~~2017, total loans~~2020, a $78.2 million decrease since year end 2019. Brokered and ~~leases represented 78.8%~~other non-customer deposits were $347.1 million at March 31, 2020, with the first quarter 2020 growth in this deposit funding source supporting the increase in our on-balance sheet liquidity as the threat of ~~total assets, down slightly compared~~market disruption in response to ~~80.0% of total assets at December 31, 2016. Of all our loan categories, real estate loans reflected~~ the ~~largest growth~~pandemic appeared during the first nine months of 2017, increasing $49.8 million or 7.6% from December 31, 2016 levels. This growth consists of increases of $33.1 million in commercial mortgages, $10.7 million in residential real estate loans and $6.1 million in construction and land loans. Commercial loans and leases increased $21.3 millionquarter. We reduced this funding source during the ~~first nine months of 2017 as we continue~~second quarter due to ~~focus on~~ the ~~needs of small to mid-size businesses in our market area.~~
33
~~The following table sets forth the composition of our loan portfolio at the dates indicated.~~
(dollars in thousands) September 30, 2017 December 31, 2016
Amount Percent Amount Percent
Real Estate
Construction and land $ 79,064 8.9 % $ 72,973 8.9 %
Residential - first lien 199,674 22.4 195,032 23.7
Residential - junior lien 41,023 4.6 35,009 4.3
Total residential real estate 240,697 27.0 230,041 28.0
Commercial - owner occupied 155,958 17.5 134,213 16.3
Commercial - non-owner occupied 228,095 25.6 216,781 26.4
Total commercial real estate 384,053 43.0 350,994 42.7
Total real estate loans 703,814 78.9 654,008 79.6
Commercial loans and leases 183,979 20.6 162,715 19.8
Consumer loans 4,420 0.5 4,801 0.6
Total loans and leases $ 892,213 100.0 % $ 821,524 100.0 %
~~Loans Held for Sale~~
We sell the majority of residential mortgage loans originated by the Bank. Loans held for sale increased $1.6 million to $52.7 million at September 30, 2017 from $51.1 million at December 31, 2016. Mortgage loan origination volumes continue to be strong ~~with $495.8 million in loans originated in the first nine months of 2017 compared to $418.8 million for the same period of 2016.~~
~~Deposits~~
Deposits increased from $808.7 million at December 31, 2016 to $862.1 million at September 30, 2017, an increase of $53.4 million or 6.6%. Deposit increases during the first nine months of 2017 were as follows: noninterest-bearing demand deposits $29.6 million; interest-bearing demand deposits $5.3 million; money market accounts $27.8 million; and savings accounts $2.7 million. These increases were partially offset by a $12.0 million decrease in certificates of deposit.
customer deposit growth.
The following tables set forth the distribution of total deposits, by account type, at the dates indicated:

June 30, 2020

December 31, 2019

% of

% of

(dollars in thousands) September 30, 2017 December 31, 2016

Amount

Total

Amount

Total

$ Change

% Change

% of % of
Amount Total Amount Total
Noninterest-bearing demand $ 212,519 25 % $ 182,880 23 %

$
671,598

37
%
$
468,975

27
%
$
202,623

43.2
%
Interest-bearing checking 67,796 8 62,538 8

186,768

10

183,447

11

3,321

1.8

Money market accounts 275,619 32 247,858 31

383,031

21

360,711

21

22,320

6.2

Savings 53,168 6 50,495 6

146,148

7

130,141

7

16,007

12.3

Certificates of deposit 252,982 29 264,963 32
Certificates of deposit $250 and over

65,769

4

77,782

5

(12,013)

(15.4)

Certificates of deposit under $250

377,360

21

493,309

29

(115,949)

(23.5)

Total deposits $ 862,085 100 % $ 808,734 100 %

$
1,830,674

100
%
$
1,714,365

100
%
$
116,309

6.8
%

By deposit source:











Customer deposits

$
1,668,908

91
%
$
1,474,393

86
%
$
194,515

13.2
%
Brokered and other non-customer deposits

161,766

9

239,972

14

(78,206)

(32.6)

Total deposits

$
1,830,674

100
%
$
1,714,365

100
%
$
116,309

6.8
%

FHLB Advances
Our primary source of non-deposit funding is FHLB advances. We use a variety of term structures in order to manage liquidity and interest rate risk. FHLB advances were $246.0 million at June 30, 2020, a decrease of $39.0 million from December 31, 2019. As of June 30, 2020, $200.0 million of FHLB advances have maturities beyond one year. In the second quarter of 2020, we repaid $5.0 million of long-term FHLB borrowings, recording a prepayment penalty of $224 thousand in other operating expenses. The early repayment of this advance was primarily for asset/liability management purposes and a result of the ~~significant demand deposit growth, coupled with more modest growth in other deposit categories~~current rate environment.
PPPLF Borrowings
The Federal Reserve has created the PPPLF, a lending facility that will allow us to obtain funding specifically for loans that we make under the PPP, and allow us to retain existing sources of liquidity for our traditional operations. During the ~~proceeds~~second quarter of ~~the capital raise,~~2020 we ~~intentionally allowed certificates of deposit levels to decline during the first nine months of 2017.~~
~~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 a junior subordinated debenture assumed as part of our acquisition of Patapsco Bancorp, Inc. in 2015.~~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,~~certain PPP loans as collateral for ~~100%~~PPPLF borrowings, with $31.1 million of PPPLF borrowings at June 30, 2020. While we had originally planned to use the PPPLF as the funding source for all PPP loans, strong customer deposit growth and the availability of alternative short-term funding sources at a lower cost resulted in the limited usage during the quarter. We will continue to evaluate additional utilization of the ~~principal and accrued interest~~PPPLF during the remainder of ~~its repurchase agreements.~~2020.
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Table of Contents
Stockholders’ Equity
Patapsco Statutory Trust I, a Connecticut statutory business trust and an unconsolidated wholly-owned subsidiary of Howard Bancorp, 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%. Patapsco Statutory Trust I 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 the Company 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.
~~Our borrowings totaled $135.0~~Total stockholders’ equity was $283.3 million at ~~September~~June 30, ~~2017 versus $127.6~~2020, a $30.9 million decrease from $314.1 million at December 31, ~~2016, reflecting~~2019. Our decrease in stockholders’ equity was primarily the result of our $26.1 million net loss for the six months ended June 30, 2020; included in this net loss was a $34.5 million goodwill impairment charge. On February 24, 2020, we completed our stock repurchase program authorized by the Board of Directors on April 24, 2019. A total of 392,565 shares at an ~~increase~~average price paid per share of ~~$7.4~~$17.83, for an aggregate amount of $7.0 million, ~~or 5.8%. Short-term borrowings at September 30, 2017 consisted~~were repurchased under the program. A total of ~~repurchase agreements~~372,801 shares were repurchased during the first quarter of ~~$11.4 million, master notes totaling $1.1 million, and 12 short-term FHLB advances totaling $116.0~~2020 for an aggregate amount of $6.7 million. ~~Long-term borrowing totaled $6.5 million at September 30, 2017, consisting of one long-term variable rate FHLB advance of $3.0 million and junior subordinated debt of $3.5 million.~~
~~Stockholders’ Equity~~
Total stockholders’ equity ~~increased $44.5 million, or approximately 51.9%, from $85.8 million~~ at ~~December 31, 2016~~June 30, 2020 represents an equity to $130.3 million at September 30, 2017. As previously disclosed, the increase in stockholders’ equity is primarily the result of the proceeds from our common stock offering that closed in the first quarter of 2017.
~~As a result of this offering, our capital position increased dramatically. Total stockholders’ equity at September 30, 2017 represents a capital to asset~~assets ratio of 11.5%, compared to ~~8.4%~~13.2% at December 31, ~~2016. Book~~2019. Our book value per common share was $15.14 at June 30, 2020, down $1.71 per share from March 31, 2020 and down $1.44 from December 31, 2019. The decrease in book value per share was ~~$13.28 at September~~driven by the goodwill impairment charge in the second quarter 2020 of $1.84 per common share.
Results of Operations
A comparison between the six months ended June 30, 2020 and June 30, 2019 is presented below.
In the second quarter of 2020 we recorded a $34.5 million goodwill impairment charge that resulted in a net loss for the first six months of 2020 of $26.1 million, or a loss of $1.39 per diluted common share. This compares to net income for the first six months of 2019 of $6.3 million, or $0.33 per diluted common share. The goodwill impairment charge, which was not tax deductible, reduced earnings for the first six months of 2020 by $34.5 million, or $1.84 per diluted common share. Outside of the goodwill impairment, earnings increased $2.1 million, or $0.12 per diluted common share, in the first six months of 2020, compared to the same period in 2019, primarily as a result of the following: (a) a $2.4 million increase in securities gains in the first six months of 2020 (or $0.10 after tax per common share), (b) a $1.2 million tax benefit (or $0.06 per diluted common share) in the first six months of 2020 resulting from a net operating loss carryback provision in the CARES Act; (c) a $427 thousand reduction in prepayment penalties on FHLB advances in the first six months of 2020 (or $0.02 after tax per diluted common share); (d) $3.6 million of branch optimization expenses in the first six months of 2019 (or $0.14 after tax per diluted common share); and (e) $1.0 million in pretax income from PPP loans in the second quarter of 2020 (or $0.04 after tax per diluted common share). These items were partially offset by: (a) a higher loan loss provision of $3.6 million for the first six months of 2020 (or $0.14 after tax per diluted common share) as we increased our allowance for loan losses due to the current economic environment; (b) a $1.0 million decrease in pretax income as a result of exiting our mortgage banking activities of (or $0.04 after tax per diluted common share); and (c) a $1.0 million accrual related to potential litigation claims and $788 thousand of expenses attributable to the departure of our former CFO, each in the first six months of 2020 (combined, a $0.07 after tax decrease per diluted common share).
The Federal Reserve’s Federal Open Market Committee’s target for federal funds increased 125 basis points in 2017 and ~~$12.27~~100 basis points in 2018 to a range of 2.25% to 2.50% for the year ended December 31, 2018. During 2019, the federal funds target rate remained at the 2.25% to 2.50% range until July 2019 when the Federal Reserve began to drop the federal funds target rate. In the last half of 2019, the Federal Reserve dropped the federal funds target rate 75 basis points to the range of 1.50% to 1.75% at December 31, ~~2016. Leverage ratio, Tier1 risk-based capital ratio~~2019. In March 2020, in response to the COVID19 pandemic, the Federal Reserve then dropped the federal funds target rate 150 basis points to a range of 0.00% to 0.25%.
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Net Interest Income
Net interest income for the first six months of 2020 was $35.6 million, an increase of $817 thousand from the first six months of 2019. Our net interest margin was 3.28% for the first six months of 2020, a decrease of 30 bp from the net interest margin of 3.58% in the first six months of 2019. Average earning assets for the first six months of 2020 were $2.19 billion, an increase of $227.7 million, or 11.6%, while total interest income decreased by $2.2 million when compared to the same period in 2019, as the 71 bp decrease in the yield on our earning assets more than offset growth in balances. Our average interest-bearing liabilities for the first six months of 2020 increased by $64.1 million while interest expense decreased by $3.0 million when compared to the same period in 2019, as the 46 bp decrease in the average rate paid on our interest-bearing liabilities also more than offset growth in balances. The net accretion of fair value adjustments on acquired loans added 9 bp to our net interest margin in the first six months of 2020, a 1 bp decrease from 10 bp in the first six months of 2019. We expect the impact of this net accretion to continue declining in future periods. PPP loans, with an average yield of 2.52% and an interest spread (net of an assumed funding cost at 0.35%) of 2.17%, reduced the net interest margin by 3 bp for the first six months of 2020.
Interest Income
Interest income decreased $2.2 million, or 4.8%, to $43.7 million for the first six months of 2020 compared to $45.9 million for the same period in 2019. Interest income on loans and leases decreased $1.7 million, or 4.0%, for the first six months of 2020, compared to the same period in 2019, while average loans and leases increased by 9.9% to $1.82 billion for the first six months of 2020 when compared to the same period in 2019. The average yield on loans and leases of 4.37% for the first six months of 2020 was down 65 bp from the same period in 2019, driven primarily by the lower interest rate environment as well as the impact of the lower-yielding PPP loans. PPP loans reduced the average loan yield by 5 bp for the first six months of 2020. The average yield on available for sale securities decreased by 57 bp to 2.50%, as we added $81.6 million of MBS in the first six months of 2020, compared to the same period in 2019, at lower yields. Higher prepayment speeds within this portfolio also adversely impacted the portfolio’s yield. Reflective of the significant decline in the federal funds target rate, the average yield on our interest-bearing deposits with banks fell 137 bp to 0.60% in the first six months of 2020 compared to the same period in 2019.
Interest Expense
Interest expense decreased by $3.0 million, or 27.5%, to $8.1 million for the first six months of 2020, compared to $11.1 million for the same period in 2019. The average rate on interest-bearing liabilities decreased by 46 bp to 1.04% for the first six months of 2020 compared to the same period in 2019. Interest expense on deposits decreased by $2.0 million for the first six months of 2020 compared to the same period in 2019, while average interest-bearing deposits decreased by $27.5 million and the average rate paid on total ~~risk-based capital ratio were 11.74%, 13.40% and 14.36%, respectively~~interest-bearing deposits was down 30 bp for the first six months of 2020, compared to the same period in 2019. We lowered the interest rates paid on interest-bearing deposits in response to the lower prevailing competitive market rates starting in late February, with the full impact of those rate actions to be reflected in future periods as maturing time deposits reprice at ~~September 30, 2017.~~
lower market interest rates. In addition, our interest expense on FHLB advances decreased $1.0 million while the average balance increased by $90.6 million for the first six months of 2020 when compared to the same period in 2019. The average rate paid on FHLB advances of 1.07% for the first six months of 2020 decreased by 153 bp when compared to the same period in 2019.
Average ~~Balance~~Balances, Yields and ~~Yields~~
Rates
The following tables set forth average ~~balance sheets, average~~balances, yields and ~~costs,~~rates, 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.~~expense as well as any amortization and accretion of fair value adjustments.
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Nine months ended September 30,
2017 2016
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 $ 173,801 $ 5,905 4.54 % $ 158,729 $ 5,921 4.98 %
Commercial real estate 366,689 12,920 4.71 317,631 11,608 4.88
Construction and land 79,718 2,857 4.79 71,909 2,508 4.66
Residential real estate 232,981 7,561 4.34 221,839 7,050 4.25
Consumer 4,505 189 5.61 4,421 181 5.47
Total loans and leases 857,694 29,432 4.59 774,529 27,268 4.70
Loans held for sale 33,574 942 3.75 44,109 1,130 3.42
Other earning assets² 47,070 321 0.91 31,268 98 0.42
Securities:³
U.S. Treasury 1,494 9 0.84 630 4 0.83
U.S Gov agencies 45,513 385 1.13 46,835 145 0.41
Mortgage-backed 1,303 26 2.62 41 1 4.42
Corporate debentures 8,582 398 6.20 4,228 194 6.13
Other investments 5,941 175 3.95 5,012 149 3.96
Total securities 62,833 993 2.11 56,746 493 1.16
Total earning assets 1,001,171 31,688 4.23 906,652 28,989 4.27
Cash and due from banks 8,835 7,230
Bank premises and equipment, net 19,794 20,677
Other assets 35,179 30,704
Less: allowance for credit losses (5,717 ) (5,428 )
Total assets $ 1,059,262 $ 959,835
Interest-bearing liabilities
Deposits:
Interest-bearing demand accounts $ 66,645 119 0.24 % $ 57,032 $ 97 0.23 %
Money market 264,727 855 0.43 249,488 871 0.47
Savings 52,855 55 0.14 52,876 54 0.14
Time deposits 245,339 1,849 1.01 238,525 1,536 0.86
Total interest-bearing deposits 629,566 2,878 0.61 597,921 2,558 0.57
Short-term borrowings 82,022 574 0.94 57,803 380 0.88
Long-term borrowings 10,482 233 2.98 30,889 385 1.66
Total interest-bearing funds 722,070 3,685 0.68 686,613 3,323 0.65
Noninterest-bearing deposits 211,054 180,209
Other liabilities and accrued expenses 4,420 6,253
Total liabilities 937,544 873,075
Shareholders' equity 121,718 86,760
Total liabilities & shareholders' equity $ 1,059,262 $ 959,835
Net interest rate spread⁴ $ 28,003 3.55 % $ 25,666 3.62 %
Effect of noninterest-bearing funds 0.19 0.16
Net interest margin on earning assets⁵ 3.74 % 3.78 %

Six months ended June 30,

2020

2019

Average

Income /

Yield /

Average

Income /

Yield /

Change

(dollars in thousands)

Balance

Expense

Rate

Balance

Expense

Rate

Prior Yr

Earning assets

Loans and leases: (1)

Commercial loans and leases

$
376,517

$
8,034

4.29
%
$
337,331

$
8,703

5.20
%
(0.91)
%
Commercial real estate

692,772

16,589

4.82

657,035

16,517

5.07

(0.25)

Construction and land

132,194

2,750

4.18

121,358

3,507

5.83

(1.64)

Residential real estate

499,572

10,193

4.10

486,882

11,170

4.63

(0.52)

Consumer

45,641

1,056

4.65

52,424

1,288

4.95

(0.30)

Paycheck Protection Program

71,357

896

2.52

—

—

2.52

Total loans and leases

1,818,053

39,518

4.37

1,655,030

41,185

5.02

(0.65)

Securities available for sale: (2)













U.S Gov agencies

75,523

1,024

2.73

104,233

1,431

2.77

(0.04)

Mortgage-backed

170,409

1,923

2.27

88,764

1,426

3.24

(0.97)

Corporate debentures

5,515

184

6.72

2,990

124

8.36

(1.64)

Total available for sale securities

251,447

3,131

2.50

195,987

2,981

3.07

(0.56)

Securities held to maturity: (2)

7,747

225

5.83

9,264

286

6.23

(0.39)

FHLB Atlanta stock, at cost

14,361

393

5.51

10,446

329

6.35

(0.85)

Interest bearing deposit in banks

85,521

254

0.60

65,031

636

1.97

(1.37)

Loans held for sale

9,894

179

3.64

23,530

512

4.39

(0.75)

Total earning assets

2,187,023

43,700

4.02
%

1,959,288

45,929

4.73
%
(0.71)
%
Cash and due from banks

14,833





14,248





Bank premises and equipment, net

42,560





44,791





Other assets

217,474





223,198





Less: allowance for credit losses

(12,068)





(9,470)





Total assets

$
2,449,822





$
2,232,055





Interest-bearing liabilities













Deposits:













Interest-bearing demand accounts

$
185,043

214

0.23
%
$
216,305

$
542

0.51
%
(0.27)
%
Money market

367,218

1,047

0.57

355,429

1,282

0.73

(0.15)

Savings

137,240

70

0.10

138,703

124

0.18

(0.08)

Time deposits

540,691

4,262

1.59

547,256

5,620

2.07

(0.49)

Total interest-bearing deposits

1,230,192

5,593

0.91

1,257,693

7,568

1.21

(0.30)

Borrowings:













FHLB advances

288,407

1,532

1.07

197,763

2,548

2.60

(1.53)

Fed funds and other borrowings

11,707

17

0.29

10,950

26

0.48

(0.19)

Subordinated debt

28,282

913

6.49

28,094

959

6.88

(0.39)

Total borrowings

328,396

2,462

1.51

236,807

3,533

3.01

(1.50)

Total interest-bearing funds

1,558,588

8,055

1.04
%

1,494,500

11,101

1.50
%
(0.46)
%
Noninterest-bearing deposits

548,390





416,647





Other liabilities

25,864





20,336





Total liabilities

2,132,842





1,931,483





Stockholders' equity

316,980





300,572





Total liabilities & equity

$
2,449,822





$
2,232,055





Net interest rate spread (3)



$
35,645

2.98
%



$
34,828

3.23
%

Effect of noninterest-bearing funds

0.30

0.35

Net interest margin on earning assets (4)

3.28
%

3.58
%

~~(1)~~ ~~Loan fee income is included in the interest income calculation, and non-accrual loans are included in the average loan base upon which the interest rate earned on loans is calculated.~~
~~(2)~~ ~~Includes Federal funds sold and interest-bearing deposits with banks.~~
~~(3)~~ ~~Available for sale securities are presented at fair value, held to maturity securities are presented at amortized cost.~~
~~(4)~~ ~~Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.~~
~~(5)~~ ~~Net interest margin represents net interest income divided by average total interest-earning assets.~~
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52
Three months ended September 30,
2017 2016
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 $ 182,448 $ 2,243 4.88 % $ 154,844 $ 1,844 4.74 %
Commercial real estate 377,265 4,409 4.64 327,110 4,096 4.98
Construction and land 81,350 994 4.85 72,654 827 4.53
Residential real estate 237,448 2,538 4.24 228,963 2,389 4.15
Consumer 4,460 64 5.70 5,213 70 5.34
Total loans and leases 882,971 10,248 4.60 788,784 9,226 4.65
Loans held for sale 41,313 384 3.69 44,739 373 3.32
Other earning assets² 38,939 113 1.15 29,405 34 0.46
Securities:³
U.S. Treasury 1,477 3 0.84 1,515 3 0.79
U.S Gov agencies 48,181 142 1.17 39,353 52 0.53
Mortgage-backed 1,305 9 2.62 33 - -
Corporate debentures 9,250 144 6.16 5,326 85 6.35
Other investments 6,482 69 4.25 4,835 51 4.20
Total securities 66,695 367 2.18 51,062 191 1.49
Total earning assets 1,029,918 11,112 4.28 913,990 9,824 4.28
Cash and due from banks 8,562 7,421
Bank premises and equipment, net 19,606 20,447
Other assets 37,646 30,821
Less: allowance for credit losses (5,453 ) (5,896 )
Total assets $ 1,090,277 $ 966,783
Interest-bearing liabilities
Deposits:
Interest-bearing demand accounts $ 68,142 42 0.24 % $ 57,396 $ 33 0.23 %
Money market 277,356 305 0.44 257,133 300 0.46
Savings 53,501 18 0.14 51,487 17 0.13
Time deposits 247,105 688 1.10 238,791 541 0.90
Total interest-bearing deposits 646,104 1,053 0.65 604,807 891 0.59
Short-term borrowings 92,855 238 1.02 57,768 169 1.16
Long-term borrowings 6,545 66 4.02 26,656 116 1.73
Total interest-bearing funds 745,504 1,357 0.72 689,231 1,176 0.68
Noninterest-bearing deposits 212,153 189,194
Other liabilities and accrued expenses 4,833 6,159
Total liabilities 962,490 884,584
Shareholders' equity 127,787 82,199
Total liabilities & shareholders' equity $ 1,090,277 $ 966,783
Net interest rate spread⁴ $ 9,755 3.56 % $ 8,648 3.60 %
Effect of noninterest-bearing funds 0.20 0.17
Net interest margin on earning assets⁵ 3.76 % 3.76 %
~~(1)~~ ~~Loan fee income is included in the interest income calculation, and non-accrual loans are included in the average loan base upon which the interest rate earned on loans is calculated.~~
~~(2)~~ ~~Includes Federal funds sold and interest-bearing deposits with banks.~~
~~(3)~~ ~~Available for sale securities are presented at fair value, held to maturity securities are presented at amortized cost.~~
~~(4)~~ ~~Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.~~
~~(5)~~ ~~Net interest margin represents net interest income divided by average total interest-earning assets.~~
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Table of Contents
(1)Loan fee income is included in the interest income calculation, and non-accrual loans are included in the average loan balance; they have been reflected as loans carrying a zero yield.
(2)Available for sale securities are presented at fair value, held to maturity 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.
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate) as well as any impact of number of days and mix.
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The total of the changes set forth in the rate and volume columns are presented in the total column.

Six months ended June 30,

2020 vs. 2019

Due to variances in
(in thousands)

Total

Rates

Volumes
Interest income on earning assets:






Loans and leases:






Commercial loans and leases

$
(669)

$
(1,529)

$
860
Commercial real estate

72

(830)

902
Construction and land

(757)

(992)

235
Residential real estate

(977)

(1,267)

290
Consumer

(232)

(79)

(153)
Paycheck Protection Program

896

—

896
Total interest on loans and leases

(1,667)

(4,697)

3,030
Securities available for sale:






U.S. Gov agencies

(407)

(22)

(385)
Mortgage-backed

497

(429)

926
Corporate debentures

60

(24.44)

84
Total interest on available for sale securities

150

(475)

625
Securities held to maturity

(61)

(18)

(43)
FHLB Atlanta stock, at cost

64

(44)

108
Interest bearing deposit in banks

(382)

(444)

62
Loans held for sale

(333)

(88)

(245)
Total interest income

(2,229)

(5,766)

3,537
Interest expense on interest-bearing liabilities:






Deposits:




Interest-bearing demand accounts

(328)

(293)

(35)
Money market

(235)

(272)

37
Savings

(54)

(53)

(1)
Time deposits

(1,358)

(1,322)

(36)
Total deposit on deposits

(1,975)

(1,940)

(35)
Borrowings:






FHLB advances

(1,016)

(1,505)

489
Fed funds and other borrowings

(9)

(10)

1
Subordinated debt

(46)

(55)

9
Totaal interest on borrowings

(1,071)

(1,570)

499
Total interest expense

(3,046)

(3,510)

464
Net interest earned

$
817

$
(2,256)

$
3,073

Provision for Credit Losses
We recorded a provision for credit losses of $6.4 million for the first six months of 2020, compared to a $2.8 million provision for the first six months of 2019, an increase of $3.6 million. The first six months of 2020 provision, net of net charge-offs of $490 thousand, resulted in an increase in the allowance for credit losses of $6.0 million. The first six months of 2019 provision, net of net charge-offs of $3.6 million, resulted in a decrease in the allowance of $753 thousand. The increase in our allowance for credit losses is more fully discussed below under the sections entitled “Nonperforming and Problem Assets” and “Allowance for Credit Losses” of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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Table of Contents
Noninterest Income
The following table presents the major categories of noninterest income for the six months ended June 30, 2020 and 2019:

Six months ended

June 30,

(in thousands)

2020

2019

Change

% Change

Service charges on deposit accounts

$
1,075

$
1,311

$
(236)

(18.0)
%
Realized and unrealized gains on mortgage banking activity

1,036

3,793

(2,757)

(72.7)

Gain on the sale of securities

3,044

658

2,386

(362.6)

Gain (loss) on the disposal of bank premises & equipment

6

(83)

89

107.2

Income from bank owned life insurance

886

907

(21)

(2.3)

Loan related fees and service charges

755

2,038

(1,283)

(63.0)

Other operating income

1,323

1,752

(429)

(24.5)

Total noninterest income

$
8,125

$
10,376

$
(2,251)

(21.7)
%

Noninterest income was $8.1 million for the six months ended June 30, 2020, a decrease of $2.3 million, or 21.7%, compared to $10.4 million for the same period in 2019. Two primary components contributing to the change in noninterest income for the first six months of 2020 were the $3.6 million decrease in noninterest income attributable to exiting our mortgage banking activities, partially offset by the $2.4 million increase in gain on the sale of investment securities. Outside of noninterest income from mortgage banking activities and securities gains, noninterest income was $3.7 million for the first six months of 2020, down $1.0 million compared to the same period in 2019.
Noninterest income from our mortgage banking activities consisted of realized and unrealized gains on mortgage banking activity as well as a portion of the line item “loan related fees and service charges.” Noninterest income attributable to our mortgage banking activities was $1.4 million in the first six months of 2020, compared to $5.1 million in the first six months of 2019. In connection with the exit of our mortgage banking activities, we completed the processing of the remaining residential first lien mortgage pipeline during the first quarter of 2020 and the remaining loans held for sale were sold during the second quarter of 2020.
During the quarter ended June 30, 2020, we embarked on a strategy to monetize certain unrealized gains in our mortgage-backed securities (“MBS”) portfolio by selling $105 million of MBS with high prepayment speeds, resulting in net gains of $3.0 million. Securities gains increased by $2.4 million over the $658 thousand recorded in the same period of 2019.
Service charges on deposit accounts, which consisted of account activity fees such as nonsufficient funds (”NSF”) and overdraft fees in addition to other traditional banking fees, decreased $236 thousand in the first six months of 2020. While the traditional banking fee component was up $121 thousand, NSF and overdraft fees were down $356 thousand from the first six months of 2019, with a portion of this reduction representing accommodations to COVID-19 impacted customers.
Loan related fees and service charges decreased $1.3 million in the first six months of 2020, compared to the same period in 2019, which included $389 thousand and $1.3 million related to our now exited mortgage banking activities in the first six months of 2020 and 2019, respectively. Outside of our mortgage banking activities, we had loan related fees and service charges of $366 thousand in the first six months of 2020, compared to $718 thousand in the same period of 2019, a reduction of $352 thousand. The first six months of 2019 also included an early loan payoff fee of $308 thousand.
Other operating income, which consisted mainly of non-depository account fees such as interchange, wire, merchant card and ATM services, decreased $429 thousand in the first six months of 2020 compared to the first six months of 2019. Fee income from merchant card activity declined by $281 thousand, with a portion of the decline in transaction volumes attributable to the COVID-19 related drop in economic activity. Additionally, the first six months of 2019 included a one-time refund of $100 thousand.
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Noninterest Expenses
The following table presents the major categories of noninterest expense for the six months ended June 30, 2020 and 2019:

Six months ended

June 30,

(in thousands)

2020

2019

Change

% Change

Compensation and benefits

$
14,700

$
16,306

$
(1,606)

(9.8)
%
Occupancy and equipment

2,275

6,754

(4,479)

(66.3)

Marketing and business development

903

941

(38)

(4.0)

Professional fees

1,360

1,503

(143)

(9.5)

Data processing fees

1,776

2,525

(749)

(29.7)

FDIC assessment

499

568

(69)

(12.1)

Other real estate owned

346

131

215

164.1

Loan production expense

660

1,220

(560)

(45.9)

Amortization of core deposit intangible

1,379

1,551

(172)

(11.1)

Other operating expense

3,789

2,812

977

34.7

Total noninterest expense before goodwill impairment

27,687

34,311

(6,624)

(19.3)

Goodwill impairment

34,500

—

34,500

N/M

Total noninterest expense

$
62,187

$
34,311

$
27,876

81.2
%

Noninterest expenses were $62.2 million for the first six months of 2020, an increase of $27.9 million compared to $34.3 million for the first six months of 2019. In the second quarter of 2020 we recorded a $34.5 million goodwill impairment charge. Noninterest expenses attributable to our now exited mortgage banking activities were $1.4 million for the first six months of 2020, down $2.8 million from the same period in 2019. Outside of our goodwill impairment charge and mortgage banking expenses, noninterest expenses were $26.2 million for the first six months of 2020, down $3.8 million, or 12.6%, from the same period in 2019. The first six months of 2019 included a $3.6 million branch optimization charge, while the first six months of 2020 included $788 thousand of expenses attributable to the departure of our former CFO and a $1.0 million accrual related to potential litigation claims.
Compensation and benefits expense are the largest component of our noninterest expenses, and decreased by $1.6 million in the first six months of 2020, compared to the same period in 2019. Compensation and benefits expense attributable to our now exited mortgage banking activities were $928 thousand in the first six months of 2020, compared to $3.1 million in the first six months of 2019, a $2.1 million decrease. Compensation and benefits other than from mortgage banking activities were $13.8 million in the first six months of 2020 compared to $13.2 million in the first six months of 2019, an increase of $529 thousand. Included in this increase was $698 thousand of expenses attributable to the departure of our former CFO. In addition, the compensation expense savings resulting from our branch optimization initiative in 2019 were offset by increased compensation costs as we continued to build our commercial banking team. Offsetting this increase was net loan origination costs deferred on PPP loans of $242 thousand.
Occupancy and equipment expense decreased $4.5 million in the first six months of 2020 compared to the same period in 2019, primarily related to a branch optimization charge of $3.6 million in the first six month of 2019. The projected cost savings from our 2019 branch optimization initiative have been realized, as we closed three branch locations in 2019 and consolidated two other existing branch locations into a new smaller branch location during the first six months of 2020.
Data processing expenses decreased by $749 thousand for the first six months of 2020 as we realize the benefits from our renegotiated core processing contract. Loan production expenses decreased by $560 thousand, with $352 thousand of the decrease attributable to our now exited mortgage banking activities. Other real estate owned expenses increased by $215 thousand in the first six months of 2020, compared to the same period in 2019, as a result of an increase in OREO valuation allowances of $192 thousand.
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Other operating expenses increased by $977 thousand in the first six months of 2020 compared to the same period in 2019. Other operating expenses consist mainly of a variety of general expenses such as telephone and data lines, supplies and postage, courier services, general insurance, director fees, litigation-related accruals, prepayment penalties and other miscellaneous expenses. The increase in other expenses in the first six months of 2020, compared to the same period in 2019, primarily resulted from a $1.0 million accrual for potential litigation claims stemming from certain mortgages originated by First Mariner Bank before its merger with Howard Bank. We also reevaluated certain expense accruals during the first quarter of 2020 and recorded $403 thousand of additional expenses within this expense category. These increases were partially offset by a $427 thousand decrease in prepayment penalties on FHLB advances in the first six months of 2020, compared to the same period in 2019.
Income Tax Expense
For the first six months of 2020, we recorded an income tax expense of $1.2 million compared to $1.7 million for the first six months of 2019. The goodwill impairment charge of $34.5 million recorded during the second quarter of 2020 was not tax deductible. The first six months of 2020 was favorably impacted by certain provisions of the CARES Act that was signed into law on March 27, 2020. The CARES Act permits corporate taxpayers to recover prior period taxes paid by carrying back net operating losses incurred in tax years ending after December 31, 2017, to tax years ending up to five years earlier. As a result, we will be able to carryback the 2018 tax net operating loss of $9.1 million to tax years 2013-2015. The $1.2 million tax benefit represents the difference between the current federal statutory tax rate of 21% and the 34% statutory federal tax rate applicable during the carryback years. Our effective tax rate for the first six months of 2020 was (4.8)%; outside the impact of the $34.5 million non-deductible goodwill impairment charge and the $1.2 million benefit from the CARES Act, the effective tax rate for the first six months of 2020 would have been 24.7%.
Income tax expense for the first six months of 2019 was favorably impacted by a 2019 U.S. Treasury Department change in tax regulations that provided for retroactive application to the taxability of income from BOLI contracts that were acquired in certain tax-free merger transactions. As a result of this change, we recognized a $232 thousand net reduction in income tax expense in the first quarter of 2019 pertaining to BOLI income that was earned, and initially treated as subject to income tax, in 2018. Our effective tax rate for the first six months of 2019 was 21.3%; outside the impact of this item, the effective tax rate for the first six months of 2019 would have been 24.1%.
A comparison between the three months ended June 30, 2020 and June 30, 2019 is presented below.
In the second quarter of 2020, we recorded a $34.5 million goodwill impairment charge that resulted in a net loss of $29.4 million, or a loss of $1.57 per diluted common share. This compares to net income for the second quarter of 2019 of $2.1 million, or $0.11 per diluted common share. The goodwill impairment charge, which was not tax deductible, reduced earnings for the second quarter of 2020 by $34.5 million, or $1.84 per diluted common share. Outside of the goodwill impairment, earnings increased $3.0 million, or $0.16 per diluted common share, in the second quarter of 2020, compared to 2019, primarily as a result of the following: (a) a $2.4 million increase in securities gains ($0.10 after tax per common share) in the second quarter of 2020, (b) a $427 thousand reduction in prepayment penalties on FHLB advances (or $0.02 after tax per diluted common share) in the second quarter of 2020; (c) a $3.6 million branch optimization charge (or $0.14 after tax per diluted common share)in the second quarter of 2019; and (d) $1.0 million in pretax income from PPP loans in the second quarter of 2020 (or $0.04 after tax per diluted common share). These items were partially offset by: (a) a higher loan loss provision of $1.9 million for the second quarter of 2020 (or $0.08 after tax per diluted common share) as we increased our allowance for loan losses due to the current economic environment; (b) a $1.2 million decrease in pretax income in the second quarter of 2020, as a result of exiting our mortgage banking activities (or $0.05 after tax per diluted common share); and (c) a $1.0 million accrual related to potential litigation claims in the second quarter of 2020 (or $0.04 after tax decrease per diluted common share).
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Table of Contents
Net Interest Income
Net interest income for the second quarter of 2020 was $18.1 million, an increase of $766 thousand from the second quarter of 2019. Our net interest margin was 3.22% for the second quarter of 2020, a decrease of 31 bp from the net interest margin of 3.53% in the second quarter of 2019. Average earning assets for the second quarter of 2020 were $2.27 billion, an increase of $294.7 million, or 15.0%, while total interest income decreased by $1.7 million when compared to the same period in 2019, as the 90 bp decrease in the average yield on our interest-earning assets more than offset growth in balances. Our average interest-bearing liabilities for the second quarter of 2020 increased by $48.1 million while interest expense decreased by $2.4 million when compared to the same period in 2019, as the 67 bp decrease in the average rate paid on our interest-bearing liabilities more than offset the growth in balances. The net accretion of fair value adjustments on acquired loans added 9 bp to our net interest margin in the second quarter of 2020, a 3 bp decrease from 12 bp in the second quarter of 2019. We expect the impact of this net accretion to continue declining in future periods. PPP loans, with an average yield of 2.53% and an interest spread (net of an assumed funding cost at 0.35%) of 2.18%, reduced the net interest margin by 7 bp in the second quarter of 2020.
Interest Income
Interest income decreased by $1.7 million, or 7.2%, to $21.5 million for the second quarter of 2020, compared to $23.1 million for the second quarter of 2019. Interest income on loans and leases decreased by $1.3 million, or 6.1%, for the second quarter of 2020, compared to the second quarter of 2019, while average loans and leases increased by 12.7% to $1.88 billion for the second quarter of 2020, compared to the second quarter of 2019. The average yield on loans and leases of 4.18% for the second quarter of 2020 was down 82 bp from the second quarter of 2019, primarily driven by the lower interest rate environment as well as the impact of the lower-yielding PPP loans. PPP loans reduced the average loan yield by 13 bp for the second quarter of 2020. The average yield on available for sale securities decreased by 76 bp to 2.29%, as we added $101.5 million in MBS for the second quarter of 2020, compared to the same period in 2019, at lower yields. Higher prepayment speeds within this portfolio also adversely impacted the portfolio’s yield. Reflective of the significant decline in the federal funds target rate, the average yield on our interest-bearing deposits with banks fell 166 bp to 0.09% in the second quarter of 2020 compared to the same period in 2019.
Interest Expense
Interest expense decreased by $2.4 million, or 42.1%, to $3.4 million for the second quarter of 2020, compared to $5.8 million for the same period in 2019. The average rate on our interest-bearing liabilities decreased by 67 bp to 0.87% for the second quarter of 2020 compared to the second quarter of 2019. Interest expense on deposits decreased by $1.6 million for the second quarter of 2020 compared to the same period in 2019, while our average interest-bearing deposits decreased by $17.2 million and the average rate on total interest-bearing deposits was down 50 bp. We lowered the interest rates paid on interest-bearing deposits in response to the lower prevailing competitive market rates starting in late February, with the full impact of those rate actions to be reflected in future periods as maturing time deposits reprice at lower market interest rates. In addition, our interest expense on FHLB advances decreased $788 thousand while the average balance increased $55.8 million. The average rate on FHLB advances dropped 179 bp to 0.80% in the second quarter of 2020, compared to the same period in 2019.
Average Balances, Yields and Rates
The following tables set forth average balances, yields and rates, 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 as well as any amortization and accretion of fair value adjustments.

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Table of Contents


Three months ended June 30,

2020

2019

Average

Income

Yield

Average

Income

Yield

Change

(dollars in thousands)

Balance

/ Expense

/ Rate

Balance

/ Expense

/ Rate

Prior Yr

Earning assets




















Loans and leases: (1)















Commercial loans and leases

$
375,835

$
3,730

3.99
%
$
345,180

$
4,478

5.20
%
(1.21)
%
Commercial real estate

694,613

8,143

4.71

664,079

8,407

5.08

(0.36)

Construction and land

132,899

1,287

3.89

116,057

1,686

5.83

(1.93)

Residential real estate

490,110

4,948

4.06

493,003

5,598

4.55

(0.49)

Consumer

45,619

536

4.73

51,174

641

5.02

(0.30)

Paycheck Protection Program

142,715

896

2.53

—

—

—

2.53

Total loans and leases

1,881,791

19,540

4.18

1,669,493

20,810

5.00

(0.82)

Securities available for sale: (2)















U.S Gov agencies

80,217

532

2.67

97,128

669

2.76

(0.10)

Mortgage-backed

189,419

945

2.01

87,954

699

3.19

(1.18)

Corporate debentures

5,507

92

6.72

2,979

62

8.35

(1.63)

Total available for sale securities

275,143

1,569

2.29

188,061

1,430

3.05

(0.76)

Securities held to maturity: (2)

7,745

112

5.82

9,278

143

6.18

(0.37)

FHLB Atlanta stock, at cost

13,015

220

6.78

10,615

167

6.31

0.47

Interest bearing deposit in banks

86,181

20

0.09

62,629

274

1.75

(1.66)

Loans held for sale

1,365

13

3.83

30,432

321

4.23

(0.40)

Total earning assets

2,265,240

21,474

3.81
%

1,970,508

23,145

4.71
%
(0.90)
%
Cash and due from banks

16,056



13,853







Bank premises and equipment, net

42,431



44,567







Other assets

219,487



226,852







Less: allowance for credit losses

(13,417)



(8,980)







Total assets

$
2,529,797



$
2,246,800







Interest-bearing liabilities















Deposits:















Interest-bearing demand accounts

$
186,781

57

0.12
%
$
207,159

$
248

0.48
%
(0.36)
%
Money market

365,658

342

0.38

354,808

670

0.76

(0.38)

Savings

140,904

25

0.07

139,673

66

0.19

(0.12)

Time deposits

557,401

1,959

1.41

566,284

3,020

2.14

(0.73)

Total interest-bearing deposits

1,250,744

2,383

0.77

1,267,924

4,004

1.27

(0.50)

Borrowings:















FHLB advances

255,945

506

0.80

200,186

1,294

2.59

(1.80)

Fed funds and other borrowings

16,747

13

0.30

7,468

13

0.70

(0.40)

Subordinated debt

28,307

452

6.42

28,112

480

6.85

(0.43)

Total borrowings

300,999

971

1.30

235,766

1,787

3.04

(1.74)

Total interest-bearing funds

1,551,743

3,354

0.87
%

1,503,690

5,791

1.54
%
(0.68)
%
Noninterest-bearing deposits

632,080



414,502







Other liabilities

26,822



25,009







Total liabilities

2,210,645



1,943,201







Stockholders' equity

319,152



303,599







Total liabilities & equity

$
2,529,797



$
2,246,800







Net interest rate spread (3)

$
18,120

2.94
%

$
17,354

3.17
%


Effect of noninterest-bearing funds

0.28





0.36



Net interest margin on earning assets (4)

3.22
%





3.53
%


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Table of Contents
(1) Loan fee income is included in the interest income calculation, and non-accrual loans are included in the average loan balance; they have been reflected as loans carrying a zero yield.
(2) Available for sale securities are presented at fair value, held to maturity 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.
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate) as well as any impact of number of days and mix.
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Table of Contents
The total of the changes set forth in the rate and volume columns are presented in the total column.

Nine months ended September 30, Three months ended September 30,
2017 vs. 2016 2017 vs. 2016
Due to variances in Due to variances in


Three months ended June 30,

2020 vs. 2019

Due to variances in
(in thousands) Total Rates Volumes¹ Total Rates Volumes¹

Total

Rates

Volumes
Interest earned on:
Interest income on earning assets:






Loans and leases:






Commercial loans and leases $ (16 ) $ (523 ) $ 507 $ 399 $ 54 $ 345

$
(748)

$
(1,040)

$
292
Commercial real estate 1,312 (406 ) 1,718 313 (284 ) 597

(264)

(599)

335
Construction and land 349 72 277 167 59 108

(399)

(557)

158
Residential real estate 511 156 355 �� 149 52 97

(650)

(605)

(45)
Consumer 8 5 3 (6 ) 5 (11 )

(105)

(38)

(67)
Paycheck Protection Program

896

—

896
Total interest on loans and leases

(1,270)

(2,840)

1,570
Securities available for sale:






U.S. Gov agencies

(137)

(23)

(114)
Mortgage-backed

246

(258)

504
Corporate debentures

30

(12)

42
Total interest on available for sale securities

139

(293)

432
Securities held to maturity

(31)

(8)

(23)
FHLB Atlanta stock, at cost

53

12

41
Interest bearing deposit in banks

(254)

(259)

5
Loans held for sale (188 ) 108 (296 ) 11 42 (31 )

(308)

(30)

(278)
Taxable securities 500 404 96 176 89 87
Other earning assets 223 115 108 79 51 28
Total interest income 2,699 (69 ) 2,768 1,288 68 1,220

(1,671)

(3,418)

1,747

Interest paid on:
Savings deposits 1 1 (0 ) 1 0 1
Interest bearing checking 22 5 17 9 2 7
Money market accounts (16 ) (65 ) 49 5 (18 ) 23

Interest expense on interest-bearing liabilities:






Deposits:






Interest-bearing demand accounts

(191)

(184)

(7)
Money market

(328)

(336)

8
Savings

(41)

(41)

—
Time deposits 313 263 50 147 122 25

(1,061)

(1,022)

(39)
Short-term borrowings 194 25 169 69 (21 ) 90
Long-term borrowings (152 ) 303 (455 ) (50 ) 154 (204 )
Total deposit on deposits

(1,621)

(1,583)

(38)
Borrowings:






FHLB advances

(788)

(895)

107
Fed funds and other borrowings

—

(7)

7
Subordinated debt

(28)

(30)

2
Totaal interest on borrowings

(816)

(932)

116
Total interest expense 362 532 (170 ) 181 239 (58 )

(2,437)

(2,515)

78
Net interest earned $ 2,337 $ (601 ) $ 2,938 $ 1,107 $ (171 ) $ 1,278

$
766

$
(903)

$
1,669
~~(1)~~ ~~Change attributed to mix (rate and volume) are included in volume variance~~

~~Comparison~~Provision for Credit Losses
We recorded a provision for credit losses of $3.0 million for the second quarter of 2020, compared to a $1.1 million provision for the second quarter of 2019, an increase of $1.9 million. The second quarter of 2020 provision, net of net charge-offs of $28 thousand, resulted in an increase in the allowance for credit losses of $3.0 million. The second quarter of 2019 provision, net of net charge-offs of $744 thousand, resulted in an increase in the allowance of $366 thousand. The increase in our allowance for credit losses is more fully discussed below under the sections entitled “Nonperforming and Problem Assets” and “Allowance for Credit Losses” of this Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operations.
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Table of Contents
Noninterest Income
~~A comparison between~~The following table presents the ~~nine~~major categories of noninterest income for the three months ended ~~September~~June 30, ~~2017~~2020 and ~~September~~2019:

Three months ended

June 30,

(in thousands)

2020

2019

$ Change

% Change

Service charges on deposit accounts

$
432

$
684

$
(252)

(36.8)
%
Realized and unrealized gains on mortgage banking activity

—

2,308

(2,308)

(100.0)

Gain (loss) on the sale of securities

3,044

658

2,386

362.6

Loss on the disposal of bank premises & equipment

6

(83)

89

(107.2)

Income from bank owned life insurance

441

460

(19)

(4.1)

Loan related fees and service charges

175

995

(820)

(82.4)

Other operating income

661

819

(158)

(19.3)

Total noninterest income

$
4,759

$
5,841

$
(1,082)

(18.5)
%

Noninterest income was $4.8 million for the quarter ended June 30, ~~2016 is presented below.~~
~~General~~
~~Net income available to common stockholders increased~~2020, a decrease of $1.1 million, or ~~27.1%~~18.5%, ~~to $5.3 million for the nine months ended September 30, 2017~~ compared to ~~$4.2~~$5.8 million for the same period in ~~2016. The increase~~2019. Two primary components contributed to the change in ~~net~~noninterest income ~~available~~in the second quarter of 2020 were the $3.1 million decrease in noninterest income attributable to ~~common stockholders resulted from a $5.4~~exiting our mortgage banking activities, partially offset by the $2.4 million increase in ~~revenues (net interest~~gain on the sale of investment securities. Outside of noninterest income plus non-interest income), partially offset by a $3.9 million increase in noninterest expense. Net interest income increased primarily as a result of our continued asset growth as well as growth in lower-cost sources of funding,from mortgage banking activities and ~~the increase in~~securities gains, noninterest income was largely driven by our mortgage banking operations. The increase in noninterest expenses is primarily attributable to increased compensation-related expenses resulting from our expanding business development initiatives, as well as increases in administrative and support functions.
~~Earnings per basic common share~~$1.7 million for the first ~~nine~~six months of ~~2017 was $0.56~~2020, down $356 thousand compared to $0.60 for the same period of 2016, representing a per share decrease of $0.04 or 6.7%. While net income available to common stockholders increased $1.1 million or 27.1% for the 2017 period versus the same period of 2016, we experienced a decline in earnings per share because our average shares outstanding increased by over 2.5 million or 36% when comparing the first nine months of 2017 to the same period in 2016, primarily as a result of our common stock offering during the first quarter of this year. Also impacting the decline in earnings per share for the first nine months of 2017 was approximately $378 thousand in merger-related expenses associated with the pending Merger with First Mariner. These merger costs, net of taxes, reduced earnings per share by approximately $0.03 for the first nine months of 2017.
38
~~Interest Income~~
~~Interest income increased $2.7 million, or 9.3%, to $31.7 million for the nine months ended September 30, 2017 compared to $29.0~~$2.1 million for the same period in ~~2016. This increase~~2019.
Noninterest income from our mortgage banking activities consisted of ~~increases~~realized and unrealized gains on mortgage banking activity as well as a portion of ~~$2.0~~the line item “loan related fees and service charges.” We had no noninterest income attributable to our mortgage banking activities in the second quarter of 2020, compared to $3.1 million in ~~interest and fees on loans (including loans held for sale) and leases, a $500 thousand increase in securities income and an increase of $223 thousand in other interest income. Growth in~~ the ~~average balances was~~second quarter 2019. In connection with the ~~reason for these increases, as the average balance of loans (excluding loans held for sale) and leases increased $83.2 million, the average balance~~exit of our ~~securities portfolio grew $6.1 million~~mortgage banking activities, we completed the processing of the remaining residential first lien mortgage pipeline during the first quarter of 2020 and the ~~average balance of other earning assets grew $15.8 million, partially offset by a decrease of $10.5 million in average loans held for sale. While average yields increased 33 basis points on our~~remaining loans held for sale ~~95 basis points~~were sold during the second quarter of 2020.
During the quarter ended June 30, 2020, we embarked on a strategy to monetize certain unrealized gains in our ~~securities~~MBS portfolio, ~~and 49 basis points on our other earnings assets, these increases were offset~~selling $105 million of MBS with high prepayment speeds, resulting in net gains of $3.0 million. Securities gains increased by ~~an 11 basis point decrease~~$2.4 million over the $658 thousand recorded in the ~~average yield~~same period of 2019.
Service charges on ~~our portfolio loans~~deposit accounts, which consisted of account activity fees such as nonsufficient funds (”NSF”) and ~~leases, primarily as a result of decreases~~overdraft fees in addition to other traditional banking fees, decreased $252 thousand in the ~~average rates on our commercial loans and leases and commercial real estate loans due~~second quarter of 2020, compared to the ~~loans we have recently originated being made at lower rates than existing loans as~~same period in 2019. While the traditional banking fee component was up slightly, NSF and overdraft fees were down $273 thousand from the second quarter of 2019, with a ~~result~~portion of ~~market competition, resulting in a four basis point decrease~~this reduction representing accommodations to COVID-19 impacted customers.
Loan related fees and service charges decreased $822 thousand in the ~~average yield on all interest earning assets during nine-month~~second quarter of 2020, compared to the same period ~~ended September 30, 2017.~~in 2019, which included $816 thousand related to our now exited mortgage banking activities in the second quarter of 2019. We had no noninterest income attributable to mortgage banking activities in the second quarter of 2020. Outside of our mortgage banking activities, loan related fees and service charges was $175 thousand for the second quarter of 2020, a reduction of $4 thousand from the second quarter of 2019.
Other operating income, which consisted mainly of non-depository account fees such as interchange, wire, merchant card and ATM services, decreased $158 thousand in the second quarter of 2020 compared to the second quarter of 2019. Fee income from merchant card activity declined by $171 thousand, with a portion of the decline in transaction volumes attributable to the COVID-19 related drop in economic activity.
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Table of Contents
~~Interest Expense~~Noninterest Expenses
~~Interest~~The following table presents the major categories of noninterest expense ~~increased $362 thousand, or 10.9%, to $3.7~~for the three months ended June 30, 2020 and 2019:

Three months ended

June 30,

(in thousands)

2020

2019

$ Change

% Change

Compensation and benefits

$
6,259

$
8,272

$
(2,013)

(24.3)
%
Occupancy and equipment

1,242

5,183

(3,941)

(76.0)

Marketing and business development

453

484

(31)

(6.4)

Professional fees

634

718

(84)

(11.7)

Data processing fees

849

1,147

(298)

(26.0)

FDIC assessment

287

281

6

2.1

Other real estate owned

268

104

164

157.7

Loan production expense

192

700

(508)

(72.6)

Amortization of core deposit intangible

680

767

(87)

(11.3)

Other operating expense

2,264

1,798

466

25.9

Total noninterest expense before goodwill impairment

13,128

19,454

(6,326)

(32.5)

Goodwill impairment

34,500

—

34,500

N/M

Total noninterest expense

$
47,628

$
19,454

$
28,174

144.8
%

Noninterest expenses were $47.6 million for the ~~nine months ended September 30, 2017,~~second quarter of 2020, an increase of $28.2 million compared to ~~$3.3~~$19.5 million for the second quarter of 2019. In the second quarter of 2020 we recorded a $34.5 million goodwill impairment charge. We recorded no noninterest expenses attributable to our now exited mortgage banking activities in the second quarter of 2020, compared to $2.1 million for the same period in ~~2016. Interest expense on deposits increased by $320 thousand as a result~~2019. Outside of ~~increases in the average rate paid on interest-bearing deposits, primarily~~ our ~~time deposits due to market competition,~~goodwill impairment charge and to a lesser extent growth in our interest-bearing deposits. In addition, our interest expense on borrowings increased $42 thousand for the first nine months of 2017 compared to the first nine months of 2016. Average short-term borrowings increased by $24.2 million with a six basis point increase in the average interest rates on these borrowings while the average rate on long-term borrowings increased by 132 basis points, as lower cost fixed rate long-term borrowingsmortgage banking expenses, noninterest expenses were ~~reduced, leaving only higher cost variable rate debt.~~
~~Net Interest Income~~
Net interest income is our largest source of operating revenue. Net interest income is affected by various factors including changes in interest rates and the composition of interest-earning assets and interest-bearing liabilities and maturities. Net interest income is determined by the interest rate spread (i.e., the difference between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. As a result of the changes in interest income and interest expense described above, net interest income increased $2.3 million, or 9.1%, during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.
~~Provision for Credit Losses~~
We establish a provision for credit losses, which is a charge to earnings, in order to maintain the allowance for credit losses at a level we consider adequate to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. In determining the level of the allowance for credit losses, management considers past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of nonperforming loans. The amount of the allowance is based on estimates and actual losses may vary from such estimates as more information becomes available or economic conditions change. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as circumstances change as more information becomes available. The allowance for credit losses is assessed on a quarterly basis and provisions are made for credit losses as required in order to maintain the allowance.
~~Based on management’s evaluation of the above factors, we had a provision for credit losses of $1.0~~$13.1 million for the ~~nine months ended September 30, 2017 compared to $1.3~~second quarter of 2020, down $4.2 million, ~~for~~or 24.3%, from the same period in ~~2016,~~2019. The second quarter of 2019 included a ~~decrease~~$3.6 million branch optimization charge, while the second quarter of $271 thousand. The provision level for 2016 was impacted by the migration of acquired loans into our allowance for credit losses measurement process, as well as some specific provisions on individual loans. For 2017, the majority of the acquired loans were fully incorporated into our allowance for credit losses adequacy measures. During 2017, we charged off two nonperforming loans, each of which had specific reserves held against them at December 31, 2016. After receiving updated valuations in 2017, the amount charged off was less than the specific reserves maintained at December 31, 2016. Thus, even though we continued to experience organic loan growth, the lowering of the specific provisions, reflecting solid credit quality, resulted in2020 included a ~~provision for the first nine months of 2017 that was less than the same period of the prior year.~~$1.0 million litigation accrual.
Management analyzes the allowance for credit losses as described in the section entitled “Allowance for Credit Losses.” The provision that is recorded is sufficient, in management’s judgment, to bring the allowance for credit losses to a level that reflects the losses inherent in our loan portfolio relative to loan mix, economic conditions and historical loss experience. Management believes, to the best of its knowledge, that all known losses as of the balance sheet dates have been recorded. However, although management uses the best information available to make determinations with respect to the provisions for credit losses, additional provisions for credit losses may be required to be established in the future should economic or other conditions change substantially. In addition, as an integral part of their examination process, the Commissioner and the FDIC will periodically review the allowance for credit losses. The Commissioner and the FDIC may require us to recognize additions to the allowance based on their analysis of information available to them at the time of their examination.
39
~~Noninterest Income~~
Noninterest income was $14.9 million for the nine months ended September 30, 2017 compared to $11.8 million for the nine months ended September 30, 2016, a $3.0 million or 25.8% increase. Noninterest income levels during 2017 continue to be driven by growth in our mortgage banking activities. Due to higher levels of mortgage loans sold into the secondary market, realized and unrealized gains on the sale of loans produced $8.7 million in noninterest revenues for the first nine months of 2017 compared to $7.0 million for the same period of 2016. Similarly, loan fee income increased $1.5 million period over period, with $1.4 million of the increase being attributable to mortgage-related activities. In addition, service charges on deposit accounts, which consist of account activity fees such as overdraft fees and other traditional banking fees, increased $166 thousand period over period, primarily as a result of increased overdraft fees resulting from the deposit growth we continue to experience. Partially offsetting these increases was a reduction in gains on the sale of portfolio loans, which for the first nine months of 2016 consisted of the sale of an acquired impaired loan that resulted in a gain of approximately $675 thousand. The $48 thousand net gain recorded in 2017 is comprised of a $222 thousand gain related to the sale of the guaranteed portion of small business loans held in our portfolio, partially offset by a $174 thousand loss on the sale of residential mortgages held in our portfolio that were carried at fair value.
~~Noninterest Expenses~~
~~Noninterest expenses increased $3.9 million, or 13.4%, to $33.4 million for the nine months ended September 30, 2017 from $29.4 million for the same period of 2016.~~ Compensation and benefit expenses, which account for the majority of this increase, increased $3.2 million or 22.3% when comparing the nine months ended September 30, 2017 to the nine months ended September 30, 2016, and continue to representbenefits expense are the largest percentage of noninterest expense. The primary driver of the increase in compensation and benefits was the expanded size of our staff, in particular, our second and third quarter 2016 team lift-outs of lending and other business development professionals. As we have continued to grow, manycomponent of our noninterest expenses, ~~have increased to support our expanding infrastructure, growth initiatives~~ and ~~enhanced delivery strategies. Other noninterest expense increases were also related to this continued expansion, including increases~~decreased by $2.0 million in second quarter of $642 thousand in marketing and business development and $248 thousand in data processing when comparing the nine months ended September 30, 2017 to the same period last year. Loan production expense, which includes costs related to originating and closing loans, including both loans placed in our portfolio and loans held for sale, increased $537 thousand period over period as a result of the greater number of loans originated during the nine months ended September 30, 20172020, compared to the same period in ~~2016. Partially offsetting these increases~~2019. We recorded no compensation and benefits expense attributable to our now exited mortgage banking activities in the second quarter of 2020, compared to $1.5 million in the second quarter of 2019. Compensation and benefits not related to mortgage banking were ~~various reductions~~$6.3 million in ~~certain~~the second quarter of 2020 compared to $6.8 million in the second quarter of 2019, a decrease of $557 thousand. Compensation and benefits expense ~~categories.~~ was reduced in the second quarter of 2020 as a result of the net loan origination costs deferred on PPP loans of $242 thousand.
Occupancy and equipment expense ~~for~~decreased $3.9 million in the ~~2017 period decreased $504 thousand~~second quarter of 2020 compared to the ~~nine months ended September 30, 2016; included~~second quarter of 2019, primarily related to a $3.6 million branch optimization charge in the ~~2016 period were $430 thousand in occupancy costs relating to~~second quarter of 2019. The projected cost savings from our ~~decision to close~~2019 branch optimization initiative have been realized, as we closed three ~~of our less active~~ branch locations ~~for which there was no comparable expense~~ in ~~the 2017 period. FDIC insurance expenses decreased $131 thousand period over period, largely due to the additional capital raised~~2019 and consolidated two other existing branch locations into a new smaller branch location during the first quarter of ~~2017. Additionally, noninterest~~2020.
Data processing expenses decreased by $298 thousand for the second quarter of 2020 as we realize the benefits from our renegotiated core processing contract. Loan production expenses decreased by $508 thousand, with $338 thousand of the decrease attributable to our now exited mortgage banking activities. Other real estate owned expenses increased by $164 thousand in the ~~third~~second quarter of ~~2017 were impacted by merger-related cost of $378 thousand; there were no merger-related expenses during the 2016 period.~~
~~A comparison between the three months ended September 30, 2017 and September 30, 2016 is presented below.~~
~~General~~
Net income available to common stockholders decreased $35 thousand, or 2.0%, to $1.713 million for the three months ended September 30, 2017 compared to $1.748 million for the three months ended September 30, 2016. Basic and diluted earnings per common share were $0.17 for the third quarter of 2017 compared to $0.25 in the same period of 2016. This decrease in earnings per common share was the result of the 2.8 million increase in the average number of shares outstanding primarily as a result of our issuance of common stock in the offering that closed during the first quarter of 2017. Similar to the nine month discussion above, also impacting the decline in net income available to common stockholders and earnings per share for the third quarter of 2017 were approximately $378 thousand in merger-related expenses associated with the pending Merger. These merger costs, net of taxes, reduced earnings per share by approximately $0.03 for the third quarter of 2017.
~~Interest Income~~
Interest income increased $1.3 million, or 13.1%, to $11.1 million for the three months ended September 30, 2017 compared to $9.8 million for the same period of 2016. The increase was almost entirely due to average balance sheet growth quarter over quarter, as the average yield on our interest-earning assets remained unchanged. The average balance of loans (excluding loans held for sale) and leases increased $94.2 million, the average balance of our investment securities increased $15.6 million and the average balance of our other interest earning assets increased $9.5 million quarter over quarter. These increases were partially offset by a $3.4 million decrease in the average balance of loans held for sale. Meanwhile, a 34 basis point decrease in the average yield on our commercial real estate loans, the largest segment of our loan portfolio, due to the loans we have recently originated being made at lower rates than existing loans as a result of market competition, offset increases in the average yield in all other loan categories, loans held for sale and our securities portfolio, resulting in no change in the average yield on total interest earning assets quarter over quarter.
40
~~Interest Expense~~
Interest expense increased $181 thousand, or 15.4%, to $1.4 million for the three months ended September 30, 2017, compared to $1.2 million for the same period of 2016, primarily as a result of increases in the average rate paid on our time deposits and long-term borrowings and the average volume of our short-term borrowings, partially offset by a decrease in the average volume of our long-term borrowings. The average rate paid on our time deposits increased 20 basis points quarter over quarter, partially offset by a two basis point decrease in the average rate on money market accounts and a one basis point decrease each in the average rate on our demand accounts and savings accounts, resulting in a six basis point increase in the average rate paid on our deposits quarter over quarter. For the third quarter of 20172020 compared to the same period in 2016, we shifted our borrowings toward more short-term borrowings. Average short term borrowings increased by $35.1 million or 61% while our average long-term borrowings decreased by 75.5%. The average rate paid on our long-term borrowings, however, increased 229 basis points for the same reasons2019 as ~~during the nine month period of 2017. The overall cost of funds during the third quarter of 2017 was 72 basis points compared to 68 basis points for the same period of 2016.~~
~~Net Interest Income~~
As a result of an increase in OREO valuation allowances of $171 thousand.
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Other operating expenses increased by $466 thousand in the ~~changes in our interest income and interest expense as discussed above, our net interest income increased $1.1 million, or 12.8%, during the three months ended September 30, 2017~~second quarter of 2020 compared to ~~the three months ended September 30, 2016.~~
~~Provision for Credit Losses~~
Based on management’s evaluation of all of the relevant loan loss methodology factors, we had a provision for credit losses of $491 thousand for the three months ended September 30, 2017 compared to $402 thousand for the same period in ~~2016, an~~2020. Other operating expenses consist mainly of a variety of general expenses such as telephone and data lines, supplies and postage, courier services, general insurance, director fees, litigation-related accruals, prepayment penalties and other miscellaneous expenses. The increase ~~of $89 thousand. The provision reflects both additional general provisions that are required given the continued growth~~in other expenses in the ~~size of our loan portfolio additional specific expense during the third~~second quarter of ~~2017 partially related~~2020, compared to the third quarter addition of two non-performing loans that required specific provisions based upon an evaluation of potential credit losses. We expect the larger of these two loans to be resolved by the end of the firstsecond quarter of ~~2018.~~
~~Noninterest Income~~
~~Noninterest income was $5.1~~2019, primarily resulted from a $1.0 million accrual for the three months ended September 30, 2017 compared to $4.4 million for the three months ended September 30, 2016, a $720 thousand or 16.4% increase. This increase was primarily due to increases of $267 thousand in net gains on the sale of portfolio loans and $472 thousand in loan fees,potential litigation claims stemming from certain mortgages originated by First Mariner Bank before its merger with Howard Bank, partially offset by a ~~$117~~$427 thousand decrease in ~~gains~~prepayment penalties on ~~mortgage banking activities.~~FHLB advances.
Income Tax Expense
~~Noninterest Expenses~~
~~Noninterest expenses increased $1.8~~For the second quarter of 2020, we recorded an income tax expense of $1.7 million ~~or 17.8%,~~compared to $543 thousand for the second quarter of 2019. The goodwill impairment charge of $34.5 million recorded during the three months ended September 30, 2017 compared to the three months ended September 30, 2016. This includes approximately $378 thousand in merger-related expenses associated with the pending Merger. The primary reasonsecond quarter of 2020 was not tax deductible. Our effective tax rate for the ~~increase in noninterest expenses~~second quarter of 2020 was ~~a $1.0~~(6.0%); outside the impact of the $34.5 million ~~increase in compensation and employee benefits, which increased~~non-deductible goodwill impairment charge, our effective tax rate for the same reasons as discussed above with respect to the nine-month period. In addition, loan production expense increased $235 thousand, marketing and business development expense increased $127 thousand and data processing cost increased $41 thousandsecond quarter ~~over quarter, again~~of 2020 would have been 24.6%. Our effective tax rate for the ~~reasons discussed with respect to the nine-month period. Partially offsetting these increases were small decreases~~second quarter ~~over quarter in most other categories~~ of ~~non-interest expenses as we continue to focus on expense control.~~
2019 was 20.6%.
Nonperforming and Problem Assets
~~Management performs~~We perform reviews of all delinquent loans and our loan officers contact customers to attempt to resolve potential credit issues in a timely manner. When in the best interests of the Bank and the customer, we will do a troubled debt restructuring with respect to a particular loan. When not possible, we are aggressively moving loans through the legal and foreclosure process within applicable legal constraints.
Loans are ~~generally~~ placed on non-accrual status when payment of principal or interest is 90 days or more past due and the value of the collateral securing the loan, if any, is less than the outstanding balance of the loan. Loans are also placed on non-accrual status if ~~management has~~we have serious doubt about further collectability of principal or interest on the loan, even though the loan is currently performing. When loans are placed on a non-accrual status, unpaid accrued interest is fully reversed, and ~~further~~subsequent income, if any, is recognized only to the extent received. The loan may be returned to accrual status if the loan is brought current, has performed in accordance with the contractual terms for a reasonable period of time and ultimate collectability of the total contractual principal and interest is no longer in doubt.
Under GAAP we are required to account for certain loan modifications or restructurings as troubled debt restructurings (“TDRs”). In general, the modification or restructuring of a debt constitutes a TDR if we, for economic or legal reasons related to the borrower’s financial difficulties, grant a concession, such as a reduction in the effective interest rate, to the borrower that we would not otherwise consider. However, all debt restructurings or loan modifications for a borrower do not necessarily constitute troubled debt restructurings. We believe loan modifications will potentially result in a lower level of loan losses and loan collection costs than if we proceeded immediately through the foreclosure process with these borrowers.
41
The CARES Act permits financial institutions to suspend requirements under GAAP for certain loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs. In addition, federal banking regulators issued, shortly before the CARES Act was enacted, an interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.

As noted above, the term “portfolio loans,” represents a non-GAAP measure defined as total loans (which term includes leases), but excluding our PPP loans. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is presented below under “Use of Non-GAAP Measures.” We commenced making loans under the PPP program in the second quarter of 2020.

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Table of Contents
As of June 30, 2020, a total of $291.4 million of loans (representing 15.3% of total loans and leases or 17.1% of portfolio loans were performing under some form of deferral or other payment relief. By comparison, $347.0 million of loans (representing 19.7% of March 31, 2020 total loans and leases) were performing under some form of deferral or other payment relief as of May 8, 2020. As of August 6, 2020, $159.0 million of loans (representing 8.4% of total loans and leases or 9.3% of portfolio loans) were performing under some form of deferral or other payment relief. We expect that some requests for payment deferral extensions will continue during the third quarter while other borrowers currently on payment deferral will resume payments.

The table below sets forth the amounts and categories of our nonperforming assets, which consist of non-accrual loans, troubled debt restructurings and OREO (which includes real estate acquired through, or in lieu of, foreclosure), at the dates indicated.


June 30,

December 31,

(in thousands)

2020

2019

Non-accrual loans:





Real estate loans:





Construction and land

$
347

$
481

Residential - first lien

12,716

12,162

Residential - junior lien

1,365

786

Commercial owner occupied

800

566

Commercial non-owner occupied

576

1,725

Commercial and leases

1,237

1,960

Consumer

102

127

Total non-accrual loans

17,143

17,807

Accruing troubled debt restructured loans:





Real estate loans:





Residential - first lien

963

968

Commercial and leases

363

367

Total accruing troubled debt restructured loans

1,326

1,335

Total non-performing loans

18,469

19,142

Other real estate owned:





Land

1,092

1,559

Residential - first lien

1,045

1,344

Commercial non-owner occupied

—

195

Total other real estate owned

2,137

3,098

Total non-performing assets

$
20,606

$
22,240

Ratios:





Non-performing loans to total loans and leases

0.97
%

1.10
%
Non-performing loans to portfolio loans (1)

1.08
%

1.10
%
Non-performing assets to total assets

0.84
%

0.94
%
Loans past due 90 days still accruing:





Real estate loans:





Residential - first lien

$
423

$
47

Total loans past due 90 days and still accruing

$
423

$
47

September 30 December 31,
(in thousands) 2017 2016
Non-accrual loans:
Real estate loans:
Construction and land $ 925 $ -
Residential - first lien 1,640 491
Residential - junior lien 5 37
Commercial 6,859 1,584
Commercial and leases 2,812 4,624
Consumer - 167
Total non-accrual loans 12,241 6,903
Accruing troubled debt restructured loans:
Real estate loans:
Construction and land 124 125
Residential - first lien 289 294
Commercial - 2,073
Commercial and leases 359 183
Total accruing troubled debt restructured loans 772 2,675
Total non-performing loans 13,013 9,578
Other real estate owned:
Land 1,121 1,220
Commercial 1,012 1,130
Total other real estate owned 2,133 2,350
Total non-performing assets $ 15,146 $ 11,928
Ratios:
Non-performing loans to total gross loans 1.46 % 1.17 %
Non-performing assets to total assets 1.34 % 1.16 %
(1) Portfolio loans is a non-GAAP measure defined as total loans and leases excluding the PPP loans (refer to the “Use of Non-GAAP Financial Measures” section for additional detail).

Nonperforming Loans
Included in non-accrual loans at ~~September~~June 30, ~~2017~~2020 are ~~five troubled debt restructured loans (“TDRs”)~~four TDRs with a new carrying balance totaling ~~$4.2 million~~$675 thousand that were not performing in accordance with their modified terms, and the accrual of interest has ceased. ~~Further,~~In addition, there were four TDRs totaling ~~$772 thousand~~$1.3 million that were performing ~~subject to~~in accordance with their modified terms at ~~September~~June 30, ~~2017.~~2020. There were ~~two~~no additional ~~loans restructured~~TDRs during the first ~~nine~~six months of ~~2017 totaling $901 thousand and one commercial real estate credit for $2.2~~2020.
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Nonperforming loans were $18.5 million, ~~that was downgraded from performing to non-performing in the second quarter~~or 0.97% of ~~2017. At September 30, 2017,~~total loans and leases ~~90 days~~and 1.08% of portfolio loans, at June 30, 2020. Nonperforming loans were down $673 thousand from $19.1 million, or ~~more past due~~1.10% of total loans and ~~still accruing interest totaled $1.8~~leases, at December 31, 2019. The decrease was the result of $3.6 million in payoffs and ~~primarily consisted~~$614 thousand of ~~one commercial real estate~~charge-offs, offset by $3.5 million of new nonaccruals in 2020. $564 thousand of the 2020 nonperforming loan ~~in the amount of $1.6 million.~~
Under GAAP, we are required to account for certain loan modifications or restructurings as “troubled debt restructurings.” In general, the modification or restructuring of a debt constitutes a troubled debt restructuring if the Bank, for economic or legal reasons relatedcharge-offs were attributable to the ~~borrower’s financial difficulties, grants~~full charge-off of loans to one borrower during the first quarter of 2020 where we had recorded a ~~concession, such as a reduction in~~specific allocation of the ~~effective interest rate, to the borrower that we would not otherwise consider. A debt restructuring or loan modification~~allowance for ~~a borrower, however, does not necessarily constitute a troubled debt restructuring.~~credit losses of $500 thousand at December 31, 2019.
The composition of our nonperforming loans at June 30, 2020 is further described below:
Non-Accrual Loans:
● One construction and land loan
● 52 residential first lien loans, two with a combined fair value of $2.4 million in the process of foreclosure
● 27 residential junior lien loans, one with a fair value of $23 thousand in the process of foreclosure
● Three commercial owner-occupied loans
● Five commercial non-owner-occupied loans
● Six commercial loans
● One consumer loan
Accruing TDRs:
● Two residential real estate loans
● Two commercial loans
Nonperforming Assets
Our nonperforming assets ~~amounted to $15.1~~were $20.6 million, or ~~1.34%~~0.84% of total assets, at ~~September~~June 30, ~~2017~~2020 compared to ~~$11.9~~$22.2 million, or ~~1.16%~~0.94% of total assets, at December 31, ~~2016. Total~~2019. Nonperforming assets consist of nonperforming loans and other real estate owned. Nonperforming assets ~~increased $3.2~~decreased $1.6 million during the first ~~nine~~six months of ~~2017.~~2020, with $673 thousand of the decrease attributable to nonperforming loans and $961 thousand attributable to a decrease in other real estate owned.
~~The composition of our nonperforming assets at September 30, 2017 is further described below:~~
~~Non-Accrual Loans:~~
· ~~Two construction and land loans totaling $925 thousand, both with specific reserves totaling $182 thousand.~~
· ~~Nine residential first lien loans totaling $1.7 million, one with a specific reserve of $2 thousand.~~
· ~~One residential junior lien loan in the amount of $5 thousand.~~
· ~~Three commercial owner occupied loans totaling $949 thousand, one with a specific reserve of $251 thousand.~~
· ~~Eight commercial non-owner occupied loans totaling $5.9 million, three of which represent one relationship, one with a specific reserve of $30 thousand.~~
42
· 29 commercial loans totaling $2.8 million, seven with a Small Business Administration (“SBA”) guarantee, eight that include specific aggregate reserves of $1.5 million and two totaling $1.1 million that have been partially charged-off.
~~Accruing Troubled Debt Restructured Loans:~~
· ~~One construction and land loan in the amount of $124 thousand.~~
· ~~One residential real estate loan in the amount of $289 thousand.~~
· ~~Two commercial loans totaling $359 thousand.~~
Other Real Estate ~~Owned:~~
· ~~Several parcels of unimproved land in Baltimore County, Maryland.~~
· ~~One commercial building in Carroll County, Maryland.~~
· ~~One commercial building in Sussex County, Delaware.~~
· ~~Several lots of non-residential property in Anne Arundel County, Maryland.~~
Owned
~~We had~~Real estate we acquire as a result of foreclosure is classified as Other Real Estate Owned (“OREO”). When a property is acquired as a result of foreclosure, it is recorded at fair value less the anticipated costs to sell at the date of foreclosure. If there is a subsequent change in the value of OREO, we record a valuation allowance to adjust the carrying value of the real estate to its current fair value less estimated disposal costs. Costs relating to holding such real estate are expensed in the current period while costs relating to improving such real estate are capitalized up to the property’s net realizable value until a saleable condition is reached. Costs in excess of the property’s net realizable value would be expensed in the current period.
Our OREO totaled $2.1 million at ~~September~~June 30, ~~2017 and $2.4~~2020, a $961 thousand decrease from $3.1 million at December 31, ~~2016. Cost relating to OREO recorded~~2019. Included in noninterest expenses was $149 thousand and $165 thousand for the nine months periods ended September 30, 2017 and 2016 respectively, and $32 thousand and $43 thousand for the three months ended September 30, 2017 and 2016, respectively. Included in these expenses, was a $98 thousand and $83 thousand valuation allowance recorded induring the first ~~nine~~six months of ~~2017 and 2016, respectively,~~2020 was $257 thousand attributable to net increases in valuation allowances as the current appraised value of OREO properties, less estimated ~~cost~~costs to sell, was insufficient to cover the recorded OREO amount. There was a $65 thousand increase in valuation allowances for the same period of 2019. In addition, we sold several parcels of land, one commercial real estate property, and one residential real estate property with a combined net carrying balance of $755 thousand. These sales resulted in a $28 thousand net loss on the disposition of OREO in 2020. We added one new residential real estate property with a carrying balance of $51 thousand in 2020.
OREO at June 30, 2020 consisted of:
● Several parcels of unimproved land.
● Four residential 1-4 family properties.
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Allowance for Credit Losses
Our allowance for credit losses (the “allowance”) at June 30, 2020 was $16.4 million, up $6.0 million from $10.4 million at December 31, 2019. Net charge-offs for the first six months of 2020 were $490 thousand while we recorded a $6.4 million provision for credit losses. The allowance was 0.86% of total loans and leases and 0.96% of portfolio loans at June 30, 2020, compared to 0.60% of total loans and leases at December 31, 2019. The allowance was also 88.56% of nonperforming loans at June 30, 2020, an increase of 34.22% from 54.34% of nonperforming loans at December 31, 2019. The $6.0 million increase in our allowance was primarily the result of management’s response to the COVID-19 pandemic and changes in the qualitative factors discussed below.
COVID-19 and Our Evaluation of the Allowance
The June 30, 2020 allowance reflects management’s assessment of the impact of COVID-19 on the national and local economies and the impact on various categories of our loan portfolio. Our approach to COVID-19 and the evaluation of the allowance considered the following: (1) any change in historical loss rates resulting from COVID-19; (2) any risk rating downgrades related to COVID-19; and (3) any changes to collateral valuations or cash flow assumptions for impaired loans. Based on our review, we determined that some risk rating downgrades had occurred and were factored into the quantitative allowance at June 30, 2020.
We then reviewed our qualitative factors and identified three factors that warranted further evaluation:
● Changes in international, national, regional, and local economic and business conditions and developments that affect the collectibility of the portfolio, including the condition of various market segments;
● The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and
● Changes in the value of underlying collateral for collateral-dependent loans.
Our evaluation of changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments, considered the abrupt slowdown in commercial economic activity resulting from actions announced by the State of Maryland between the March 5 disclosure of the first confirmed cases of COVID-19 in the state and the March 23 executive order closing all non-essential businesses in the state. In addition, we considered the dramatic rise in the unemployment rate in our market area. Based on U.S. Department of Labor weekly initial unemployment claims by state, we noted that the average weekly initial unemployment claims for the State of Maryland during the two weeks ending March 28, 2020 were 19 times higher than the average weekly claims for the first eleven weeks of 2020. While the rate of change in average weekly initial unemployment claims slowed during the second quarter of 2020, they were still 13 times higher than the average weekly claims for the first eleven weeks of 2020. While the Maryland economy has substantially reopened, the decline in economic activity during the second quarter and the heightened risk of setbacks in the pace of reopening the economy resulted in an increase in this qualitative factor applied to all loan portfolio categories.
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We also evaluated the existence and effect of any concentrations of credit, and changes in the level of such concentrations. We performed an analysis of our loan portfolio to identify our exposure to industry segments that we believe may potentially be the most highly impacted by COVID-19. Based on our evaluation, the following table identifies those industry segments within our loan portfolio that we believe may potentially be most highly impacted by COVID-19. Loan balances and total credit exposures are as of June 30, 2020 while the modification and SBA PPP balances are as of July 24, 2020; note that the column “SBA PPP Loan Relief” indicates the amount of PPP loans received by the Company’s borrowers in each of the identified loan segments.

As % of

As % of

Balance

As % of


    As % of

($in millions)

Loan

Total

Total

Total

with

Total

SBA PPP

Loans

Loan Category

Balance

Loans (1)

Exposure (2)

Exposure


Modifications

Category

Loan Relief

Category

CRE - retail

$
109.1

6.4
%
$
109.1

5.3
%
$
27.2

24.9
%
$
—

0.0
%
Hotels

60.8

3.6
%

62.8

3.0
%

52.7

86.6
%

1.5

2.5
%
CRE - residential rental

47.8

2.8
%

47.8

2.3
%

8.8

18.4
%

—

0.0
%
Nursing and residential care

39.7

2.3
%

44.8

2.2
%

2.5

6.4
%

2.2

5.6
%
Retail trade

23.6

1.4
%

38.3

1.9
%

2.1

8.9
%

12.9

54.7
%
Restaurants and caterers

28.4

1.7
%

32.0

1.6
%

19.5

68.5
%

14.7

51.6
%
Religious and similar organizations

29.1

1.7
%

31.1

1.5
%

3.3

11.4
%

6.1

20.8
%
Arts, entertainment, and recreation

15.0

0.9
%

17.6

0.9
%

7.5

49.9
%

3.2

21.0
%
Total - selected categories

$
353.6

20.7
%
$
383.5

18.6
%
$
123.6

35.0
%
$
40.5

11.5
%

(1) Portfolio loans is a non-GAAP financial measure – refer to the “Use of Non-GAAP Financial Measures” section for additional detail

(2) Includes unused lines of credit, unfunded commitments, and letters of credit
The breakdown by loan portfolio segment is as follows:




As % of

($in millions)

Loan

Total

Loan Portfolio Segment

Balance

Loans (1)

Commercial real estate - non-owner occupied

$
206.9

12.1
%
Commercial real estate - owner occupied

65.4

3.8
%
Construction and land

51.9

3.0
%
Commercial loans and leases

28.7

1.7
%
Other

0.6

—
%
Total

$
353.6

20.7
%

(1) Portfolio loans is a non-GAAP financial measure �� refer to the “Use of Non-GAAP Financial Measures” section for additional detail
The potentially highly impacted loan exposures noted in the above tables (the “high impacts”) were concentrated in non-owner-occupied commercial real estate (58.5% of total high impacts), owner-occupied commercial real estate (18.5% of total high impacts), construction and land (14.7% of total high impacts), and commercial loans (8.1% of total high impacts). An increase in this qualitative factor was applied to these high impact loan portfolio categories.
Our evaluation of potential changes in the value of underlying collateral for collateral-dependent loans considered the potential impact of the economic fallout from COVID-19 on commercial property values due to rent relief and possible business failures resulting in vacancies. In addition, the need for office space may diminish in the future as work from home policies have allowed much office-oriented business activity to continue. Excluding the high impact portfolios, we concluded that 55% of our non-owner-occupied commercial real estate portfolio was not included in the high impact exposure. An increase in this qualitative factor was applied to our non-owner-occupied commercial real estate portfolio.
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Credit Risk Management and Allowance Methodology
We provide for credit losses based upon the consistent application of our documented allowance for credit loss methodology. All credit losses are charged to the allowance for credit losses and all recoveries are credited to it. Additions to the allowance for credit losses are provided by charges to income based on various factors that, in our judgment, deserve current recognition in estimating probable losses. We regularly review the loan portfolio and make provisions for credit losses in order to maintain the allowance for credit losses in accordance with GAAP. ~~The~~
In accordance with accounting guidance for business combinations, there was no allowance for credit losses ~~consists~~brought forward on any acquired loans in our acquisitions. For acquired performing loans, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value and the discount is accreted to interest income over the life of the loan. Subsequent to the purchase date, the method used to evaluate the sufficiency of the credit discount is similar to originated loans, and if necessary, additional reserves are recognized in the allowance for credit losses.
We recorded acquired credit impaired loans in our acquisitions net of purchase accounting adjustments. Subsequent to the acquisition date, management continues to monitor cash flows on a quarterly basis, to determine the performance of each acquired credit impaired loan in comparison to management’s initial performance expectations. Subsequent decreases in the present value of expected cash flows will be recorded as an increase in the allowance for credit losses through a provision for loan losses. Subsequent significant increases in cash flows result in a reversal of the provision for loan losses to the extent of prior provisions or a reclassification of amount from non-accretable difference to accretable yield, with a positive impact on the accretion of interest income in future periods.
1)Specific allowances are established for loans classified as Substandard or Doubtful. For loans classified as impaired, the allowance is established when the net realizable value (collateral value less costs to sell) of the impaired loan is lower than the carrying amount of the loan. The amount of impairment provided for as a specific allowance is represented by the deficiency, if any, between the underlying collateral value and the carrying value of the loan. Impaired loans for which the estimated fair value of the loan, or the loan’s observable market price or the fair value of the underlying collateral, if the loan is collateral dependent, exceeds the carrying value of the loan are not considered in establishing specific allowances for credit losses; and
2)General allowances established for credit losses on a portfolio basis for loans that do not meet the definition of impaired loans. The portfolio is grouped into similar risk characteristics, primarily ~~of two components:~~
1) Specific allowances are established for loans classified as impaired. For loans classified as impaired, the allowance is established when the net realizable value (collateral value less costs to sell) of the impaired loan is lower than the carrying amount of the loan. The amount of impairment provided for as a specific allowance is represented by the deficiency, if any, between the underlying collateral value and the carrying value of the loan. Impaired loans for which the estimated fair value of the loan, or the loan’s observable market price or the fair value of the underlying collateral, if the loan is collateral dependent, exceeds the carrying value of the loan are not considered in establishing specific allowances for credit losses; and
2) General allowances established for credit losses on a portfolio basis for loans that do not meet the definition of impaired loans. The portfolio is grouped into similar risk characteristics, primarily loan type and regulatory classification. We apply an estimated loss rate to each loan group. The loss rates applied are based upon our loss experience adjusted, as appropriate, for the qualitative factors discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions.
loan type and regulatory classification. We apply an estimated loss rate to each loan group. The loss rates applied are based upon our loss experience adjusted, as appropriate, for the qualitative factors discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions.
The allowance for credit losses is maintained at a level to provide for losses that are probable and can be reasonably estimated. ~~Management’s~~Our periodic evaluation of the adequacy of the allowance is based on ~~Howard Bank’s~~ past credit loss experience, known and inherent losses in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans.
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Table of Contents
A loan is considered past due or delinquent when a contractual payment is not paid on the day it is due. A loan is considered impaired when, based on current information and events, it is probable that ~~Howard Bank~~we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. ~~Management determines~~We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. The impairment of a loan may be measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if repayment is expected to be provided by the collateral. Generally, ~~Howard Bank’s~~our impairment on such loans is measured by reference to the fair value of the collateral. Interest income on impaired loans is recognized on the cash basis.
43
Our 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 established allowance for credit losses. All loans are evaluated for loss potential once it has been determined by our 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.
The adjustments to historical loss experience are based on our evaluation of several qualitative factors, including:
·● changes in lending policies, procedures, ~~practices or personnel;~~and practices;
·● 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 SBA or other agencies;~~
· ~~changes in~~international, national, state and local economic ~~trends~~ and business ~~conditions;~~conditions and developments that affect the collectibility of the portfolio, including the condition of various market segments;
·● changes in the nature and ~~trends in levels~~volume of the loan ~~payment delinquencies; and~~portfolio;
·● changes in the experience, ability and depth of the lending staff;
● changes in the volume and severity of past due, nonaccrual, and adversely classified loans;
● changes in the quality of our loan review system;
● changes in the value of underlying collateral for collateral-dependent loans;
● the existence of any concentrations of credit, and changes in the level of such concentrations;
● the effect of other external factors such as competition and legal and regulatory requirements; and
● any other factors that ~~managements~~management considers relevant to the quality or performance of the loan portfolio.
We evaluate the allowance for credit losses based upon the combined total of the specific and general components. Generally when the loan portfolio increases, absent other factors, the allowance for credit loss methodology results in a higher dollar amount of estimated probable losses than would be the case without the increase. Generally when the loan portfolio decreases, absent other factors, the allowance for credit loss methodology results in a lower dollar amount of estimated probable losses than would be the case without the decrease.
Commercial and commercial real estate loans generally have greater credit risks compared to the one- to four-family residential mortgage loans we originate, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of the related business and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy. Actual credit losses may be significantly more than the allowance for credit losses we have established, which could have a material negative effect on our financial results.
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Table of Contents
Generally, we underwrite commercial loans based on cash flow and business history and receive personal guarantees from the borrowers where appropriate. We generally underwrite commercial real estate loans and residential real estate loans at a loan-to-value ratio of 85% or less at origination. Accordingly, in the event that a loan becomes past due and, randomly with respect to performing loans, we will conduct visual inspections of collateral properties and/or review publicly available information, such as online databases, to ascertain property values. We will also obtain formal appraisals on a regular basis even if we are not considering liquidation of the property to repay a loan. It is our practice to obtain updated appraisals if there is a material change in market conditions or if we become aware of new or additional facts that indicate a potential material reduction in the value of any individual property collateral.
For impaired loans, we utilize the appraised value or present value of expected cash flows in determining the appropriate specific allowance for credit losses attributable to a loan. In addition, changes in the appraised value of multiple properties securing our loans may result in an increase or decrease in our general allowance for credit losses as an adjustment to our historical loss experience due to qualitative and environmental factors, as described above.
At September 30, 2017 and December 31, 2016, impaired loans were $13.1 million and $9.9 million, respectively. The amount of impaired loans requiring specific reserves totaled $5.4 million at September 30, 2017 and $3.8 million at December 31, 2016. The increase in specific reserve during the first nine months of 2017 was primarily driven by the downgrade of five credits during the third quarter totaling $4.0 million with specific reserves totaling $637 thousand. The amount of impaired loans without a specific valuation allowance totaled $7.7 million and $6.1 million, respectively, at September 30, 2017 and December 31, 2016.
Nonperforming loans are evaluated and valued at the time the loan is identified as impaired on a case by case basis, at the lower of cost or market value. Market value is measured based on the value of the collateral securing the loan. The value of real estate collateral is determined based on an appraisal by qualified licensed appraisers hired by us. Appraised values may be discounted based on management’s historical experience, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and ~~the~~ client’s business. The difference between the appraised value and the principal balance of the loan will determine the specific allowance valuation required for the loan, if any. Nonperforming loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly.
44
We evaluate the loan portfolio on at least a quarterly basis, more frequently if conditions warrant, and the allowance is adjusted accordingly. While we use the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, the Commissioner and the FDIC will periodically review the allowance for credit losses. The Commissioner and the FDIC may require us to recognize additions to the allowance based on their analysis of information available to them at the time of their examination.
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Table of Contents
The following table sets forth activity in our allowance for credit losses for the periods ~~indicated:~~ended:


June 30,

December 31,

(in thousands)

2020

2019

Balance at beginning of year

$
10,401

$
9,873

Charge-offs:





Real estate





Construction and land loans

—

(282)

Residential first lien loans

(33)

(518)

Residential junior lien loans

—

(532)

Commercial owner occupied loans

—

(46)

Commercial non-owner occupied loans

(23)

(2,026)

Commercial loans and leases

(549)

(622)

Consumer loans

(9)

(210)

Total charge-offs

(614)

(4,236)

Recoveries:





Real estate





Construction and land loans

—

80

Residential first lien loans

3

—

Residential junior lien loans

52

115

Commercial non-owner occupied loans

—

17

Commercial loans and leases

67

357

Consumer loans

2

2

Total recoveries

124

571

Net charge-offs

(490)

(3,665)

Provision for credit losses

6,445

4,193

Balance at end of year

$
16,356

$
10,401





Allowance as a % of total loans and leases

0.86
%

0.60
%
Allowance as a % of portfolio loans (1)

0.96

0.60

Allowance as a % of nonperforming loans

88.56

54.34

Net charge-offs to average loans and leases (2)

0.06

0.22

Provision for credit losses to average loans and leases (2)

0.74

0.25

Nine months ended Twelve months ended
(in thousands) September 30, 2017 December 31, 2016
Balance at beginning of year $ 6,428 $ 4,869
Charge-offs:
Real estate
Construction and land loans - (216 )
Residential first lien loans (132 ) -
Residential junior lien loans (31 ) -
Commercial owner occupied loans - (191 )
Commercial non-owner occupied loans - -
Commercial loans and leases (1,605 ) (234 )
Consumer loans (108 ) (20 )
(1,876 ) (661 )
Recoveries:
Real estate
Construction and land loans - -
Residential first lien loans - -
Residential junior lien loans 1 -
Commercial owner occupied loans - 40
Commercial non-owner occupied loans 5 5
Commercial loans and leases 43 101
Consumer loans 29 37
78 183
Net charge-offs (1,798 ) (478 )
Provision for credit losses 1,031 2,037
Balance at end of year $ 5,661 $ 6,428
Net charge-offs to average loans and leases 0.21 % 0.06 %
(1) Portfolio loans is a non-GAAP measure defined as total loans and leases excluding the PPP loans (refer to the “Use of Non-GAAP Financial Measures” section for additional detail).
(2) Annualized
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Table of Contents
Allocation of Allowance for Credit Losses
The following tables set forth the allowance for credit losses allocated by loan category and the percent of loans in each category to total loans at the dates indicated. The allowance for credit losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories. Loans funded through the PPP program are fully guaranteed by the U.S. government and the Company anticipates that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. Therefore, no allowance for credit losses is attributable to this loan portfolio segment.

June 30, 2020

December 31, 2019

(in thousands)

Amount

Percent ⁽¹⁾

Amount

Percent ⁽¹⁾

Real estate loans:









Construction and land loans

$
1,525

6.8
%
$
1,256

7.3
%
Residential first lien loans

2,714

21.5

2,256

25.1

Residential junior lien loans

924

3.5

478

4.2

Commercial owner occupied loans

1,806

12.9

788

13.9

Commercial non-owner occupied loans

5,590

24.0

2,968

25.4

Total real estate loans

12,559

68.7

7,746

75.9

Commercial loans and leases

3,056

18.6

2,103

21.4

Consumer loans

741

2.5

552

2.7

Paycheck Protection Program

—

10.2

—

—

Total

$
16,356

100.0
%
$
10,401

100.0
%

September 30, 2017 December 31, 2016
(dollars in thousands) Amount Percent¹ Amount Percent¹
Real estate
Construction and land loans $ 657 8.9 % $ 511 8.9 %
Residential first lien loans 544 22.4 454 23.7
Residential junior lien loans 117 4.6 89 4.3
Commercial owner occupied loans 430 17.4 327 16.3
Commercial non-owner occupied loans 1,453 25.6 1,120 26.4
Commercial loans and leases 2,368 20.6 3,800 19.8
Consumer loans 92 0.5 127 0.6
Total $ 5,661 100.0 % $ 6,428 100.0 %
~~(1)~~ ~~Represents the percent of loans in each category to total loans, not the composition of the allowance for credit losses.~~
45
(1)Represents the percent of loans in each category to total loans and leases
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations. Our primary sources of funds consist of deposit inflows, loan repayments, advances from the FHLB, ~~principal repayments~~ and the sale of securities available for sale. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. Our ~~Asset~~ Asset/Liability Committee (“ALCO”) is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016.~~ 2019.
We regularly monitor and adjust our investments in liquid assets based upon our assessment of:
1)● Expected loan demand;
2)● Expected deposit flows and borrowing maturities;
3)● Yields available on interest-earning deposits and securities; and
4)● The objectives of our asset/liability management program.
~~Excess liquid assets are invested generally in interest-earning deposits and short-term securities.~~
Our most liquid assets are cash and cash equivalents. The level of these assets is dependent on our operating, financing, lending and investing activities during any given period. At September 30, 2017 and December 31, 2016, cash and cash equivalents totaled $51.2 million and $39.4 million, respectively.
Our cash flows are derived from operating activities, investing activities and financing activities as reported in our statements of cash flows included in our financial statements.
Excess liquid assets are generally invested in interest-bearing deposits in banks (primarily the FRB) and short-term investment securities. The level of these assets is dependent on our operating, financing, lending and investing activities during any given period. At ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016, we had $173.9~~2019, interest-bearing deposits in banks totaled $46.4 million and ~~$127.1~~$97.0 million, ~~respectively,~~respectively. As the threat of market disruption in ~~loan commitments outstanding,~~response to the pandemic appeared during the first quarter of 2020, including ~~commitments issued~~possible increases in the utilization of existing lines of credit or decreases in customer deposits, we built on-balance sheet liquidity, increasing interest-bearing deposits with banks to ~~originate loans of $55.6 million and $46.2~~$180.0 million at ~~September~~March 31, 2020. Since these events didn’t materialize, in part due to the various actions initiated by the Federal Reserve to provide market liquidity, we have reduced this on-balance sheet liquidity to pre-COVID-19 levels during the second quarter of 2020.
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Table of Contents
Our total commitments to extend credit and available credit lines are discussed in the following section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, including a table presenting our comparative exposure at June 30, ~~2017~~2020 and December 31, 2016, respectively, and $118.2 million and $80.9 million in unused lines of credit to borrowers at September 30, 2017 and December 31, 2016, respectively. In addition to commitments to originate loans and unused lines of credit, we had $10.7 million and $9.7 million in letters of credit at September 30, 2017 and December 31, 2016, respectively. Certificates of deposit2019.
CDs due within one year ~~of September 30, 2017~~ totaled ~~$176.7~~$369.3 million, or ~~20.5%~~20.2% of total ~~deposits.~~deposits, and $458.9 million, or $26.8% of total deposits, at June 30, 2020 and December 31, 2019, respectively. If we do not retain these deposits, we may be required to seek other sources of funds, including loan and securities sales and FHLB advances. Depending on market conditions, we may be required to pay higher rates on our deposits or other borrowings than we currently pay on the ~~certificates of deposit.~~CDs held in our portfolio. We believe, however, based on historical experience and current market interest rates that we will retain upon maturity a large portion of our ~~certificates of deposit~~CDs with maturities of one year or ~~less.~~
less as of June 30, 2020.
Our primary investing activity is originating loans. During the first ~~nine~~six months of ~~2017 and 2016~~2020, cash used to fund net loan growth was ~~$75.7~~$153.1 million, up $98.8 million from $54.3 million of cash used to fund net loan growth for the first six months of 2019. PPP loans originated during the second quarter of 2020, net of unamortized deferred fees and ~~$53.0~~origination costs, accounted for $193.7 million ~~respectively.~~of the net loan growth. During the first ~~nine~~six months of ~~2017~~2020 we ~~utilized cash to purchase additional securities totaling $49.7~~purchased $189.9 million ~~while receiving $17.5 million as a result~~ of securities ~~maturing.~~while securities sales, maturities, calls, and principal repayments totaled $130.8 million; this resulted in net securities purchases of $59.1 million. For the same period in ~~2016~~2019, we ~~purchase additional~~purchased $6.5 million of securities ~~totaling $71.8 million~~while securities sales, maturities, calls, and ~~we received $77.5 million from security maturities. Additionally, during 2017 we have received $19.0 million~~principal repayments totaled $81.2 million; this resulted in ~~cash from the~~net securities sales, maturities, calls and principal repayments of ~~interest bearing deposits with banks, while there were no such maturities during the same period of 2016.~~
$74.7 million.
Financing activities consist primarily of activity in deposit accounts and FHLB advances. ~~We experienced a net increase in deposits~~For the first six months of ~~$53.4~~2020, our deposit growth was $116.3 million compared to $31.4 million during the ~~nine~~first six months ~~ended September 30, 2017.~~of 2019. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors.
Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB, ~~that~~which provide an additional source of funds. FHLB advances ~~were $119.0~~decreased to $246.0 million at ~~September~~June 30, ~~2017~~2020 compared to ~~$100.0~~$285.0 million at December 31, ~~2016.~~2019. At ~~September~~June 30, ~~2017,~~2020, we had an available line of credit for $626.9 million at the ~~ability to borrow up~~FHLB, with borrowings limited to a total of ~~$244.9~~$510.4 million based ~~upon our credit~~on pledged collateral. This provides us with $264.4 million of borrowing availability at June 30, 2020. We also utilized the ~~FHLB, subject to collateral requirements.~~PPPLF during the second quarter of 2020, with total borrowings outstanding of $31.1 million at June 30, 2020. We have additional PPPLF borrowing capacity, based on the principal balance of unpledged PPP loans, totaling $157.9 million at June 30, 2020.
~~Bancorp and the~~The Bank ~~are~~is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, we exceeded all regulatory capital requirements. We are considered “well capitalized” under regulatory guidelines.
46
Commitments, Contingent Liabilities, and Off-Balance Sheet Arrangements
We are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our customers. These financial instruments are limited to commitments to originate loans and involve, to varying degrees, elements of credit, interest rate, and liquidity risk. These do not represent unusual risks, and management does not anticipate any losses that would have a material effect on us.
~~Outstanding loan~~Total commitments to extend credit and available credit lines ~~of credit~~ at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~2019 are as follows:


June 30,

December 31,
(in thousands)

2020

2019
Unfunded loan commitments

$
94,370

$
77,314
Unused lines of credit

276,070

309,519
Letters of credit

14,529

13,853
Total commitments to extend credit and available credit lines

$
384,969

$
400,686
74
(in thousands) September 30, 2017 December 31, 2016

Unfunded loan commitments $ 55,626 $ 46,194
Unused lines of credit 118,243 80,876
Letters of credit 10,729 9,660
Table of Contents

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. We generally require collateral to support financial instruments with credit risk on the same basis as we do for balance sheet instruments. Management generally bases the collateral required on the credit evaluation of the counterparty. Commitments generally have interest rates at current market rates, expiration dates or other termination clauses and may require payment of a fee. Available credit lines represent the unused portion of lines of credit previously extended and available to the customer so long as there is no violation of any contractual condition. These lines generally have variable interest rates. Since we expect many of the commitments to expire without being drawn upon, and since it is unlikely that all customers will draw upon their lines of credit in full at any one time, the total commitment amount or line of credit amount does not necessarily represent future cash requirements. We evaluate each customer’s credit-worthiness on a case-by-case basis. Because we conservatively underwrite these facilities at inception, we have not had to withdraw any commitments. We are not aware of any loss that we would incur by funding our commitments or lines of credit.
The credit risk involved in these financial instruments is essentially the same as that involved in extending loan facilities to customers. No amount has been recognized in ~~the~~ consolidated balance sheets at ~~September~~June 30, ~~2017~~2020 or December 31, ~~2016~~2019 as a liability for credit loss related to these commitments.
Impact of Inflation and Changing Prices
Our financial statements and related notes have been prepared in accordance with GAAP. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
Use of Non-GAAP Financial Measures
This report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include the presentation of our tangible book value per share, portfolio loans and related asset quality ratios, core noninterest income and core noninterest expense.
Management believes that the presentation of these non-GAAP financial measures (a) provides important supplemental information that contributes to a proper understanding of our operating performance and provides a meaningful comparison to our peers, (b) enables a more complete understanding of factors and trends affecting our business, and (c) allows investors to evaluate our performance in a manner similar to management, the financial services industry, bank stock analysts, and bank regulators. Management uses non-GAAP measures as follows: in the preparation of our operating budgets, monthly financial performance reporting, and in our presentation to investors of our performance. However, non-GAAP financial measures have a number of limitations. Limitations associated with non-GAAP financial measures include the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently. These disclosures should not be considered in isolation or as an alternative to our GAAP results. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is presented below.
Tangible book value per common share is calculated by dividing tangible common stockholders' equity by total common shares outstanding. Tangible common stockholders' equity is calculated by subtracting goodwill and our net core deposit intangible from total stockholders' equity.
Portfolio loans is calculated by subtracting PPP loans (net of unamortized deferred fees and origination costs) from total loans and leases. The change in portfolio loans is then calculated. In addition, nonperforming loans and the allowance for credit losses are calculated as a percentage of portfolio loans.
The tables below provide a reconciliation of these non-GAAP financial measures with financial measures defined under GAAP.
75
Table of Contents
Tangible Book Value per Common Share

June 30,

March 31,

December 31,

June 30,
($in thousands except per share data)

2020

2020

2019

2019
Total stockholders' equity

$
283,281

$
315,358

$
314,148

$
303,527
Subtract:








Goodwill

31,449

65,949

65,949

65,949
Core deposit intangible, net of deferred tax liability

5,358

5,802

6,339

7,414
Total subtractions

36,807

71,751

72,288

73,363
Tangible common stockholders' equity

$
246,474

$
243,607

$
241,860

$
230,164
Total common shares outstanding at end of period

18,715,678

18,714,844

19,066,913

19,063,080
Book value per common share

$
15.14

$
16.85

$
16.48

$
15.92
Tangible book value per common share

$
13.17

$
13.02

$
12.68

$
12.07

Portfolio Loans And Related Asset Quality Ratios

($ in thousands)

June 30, 2020

December 31, 2019

June 30, 2019

$ change

% change

Total loans and leases

$
1,898,630

$
1,745,513

$
1,701,020

$
153,117

8.8
%
Subtract PPP loans, net

193,719

—

—

193,719

N/M

Total portfolio loans

$
1,704,911

$
1,745,513

$
1,701,020

$
(40,602)

(2.3)
%
Nonperformng loans

$
18,469

$
19,142

$
19,305





As a % of:





Total loans and leases

0.97
%

1.10
%

1.13
%

Portfolio loans

1.08

1.10

1.13





Allowance for credit losses

$
16,356

$
10,401

$
9,120





As a % of:

0.86
%

0.60
%

0.54
%





Total loans and leases

Portfolio loans

0.96

0.60

0.54





Item 3.          Quantitative and Qualitative Disclosures about Market Risk
Liquidity and Funding
~~Not applicable~~The objective of effective liquidity management is to ensure that we can meet customer loan requests, customer deposit maturities/withdrawals, and other cash commitments efficiently under both normal operating conditions as well as under unforeseen and unpredictable circumstances of industry or market stress. To achieve this objective, ALCO establishes and monitors liquidity guidelines requiring sufficient asset based liquidity to cover potential funding requirements and to avoid over-dependence on volatile, less reliable funding markets. We manage liquidity at both the parent and subsidiary levels through active management of the balance sheet.
The additional information called for by this item is incorporated herein by reference to the “Liquidity and Capital Resources” section of Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Quarterly Report on Form 10-Q.
76
Table of Contents
Interest Rate Risk
Interest rate risk, one of the more prominent risks in terms of potential earnings impact, is an inevitable part of being a financial intermediary. It can occur for any one or more of the following reasons: (a) assets and liabilities may mature or reprice at different times (for example, if assets reprice faster than liabilities and interest rates are generally falling, our earnings will initially decline); (b) assets and liabilities may re-price at the same time but by different amounts (when the general level of interest rates is falling, we may choose for customer management, competitive, or other reasons to reduce the rates paid on checking and savings deposit accounts by an amount that is less than the general decline in market interest rates); (c) short-term and long-term market interest rates may change by different amounts (i.e. the shape of the yield curve may impact new loan yields and funding costs differently); or (d) the remaining maturity of various assets or liabilities may shorten or lengthen as interest rates change (for example, mortgage-backed securities held in the securities available for sale portfolio may prepay significantly earlier than anticipated – with an associated reduction in portfolio yield and income – if long-term mortgage rates decline sharply). In addition to the direct impact of interest rate changes on net interest income through these categories, interest rates indirectly impact earnings through their effect on loan demand, credit losses, mortgage origination fees, and other sources of our earnings.
In determining the appropriate level of interest rate risk, we consider the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. We believe that short term interest rate risk is best measured by simulation modeling. We prepare a current base case and standard alternative scenarios at least once quarterly and report the analysis both internally to the ALCO and to the Board of Directors. More frequent or alternative scenarios are often prepared at our discretion.
The balance sheet is subject to quarterly testing for the standard alternative interest rate shock possibilities to indicate the inherent interest rate risk. Current and forward rates are shocked by +/- 100, +/- 200, +300, and +400 bp. Certain scenarios may be impractical under different economic circumstances. We seek to structure the balance sheet so that net interest income at risk over a twelve month period does not exceed policy guidelines at the various interest rate shock levels.
Measures of the net interest income at risk produced by the simulation analysis are indicators of an institution’s short-term performance in alternative rate environments. The measures are typically based upon a relatively brief period, usually one year, and do not provide meaningful insight into the institution’s long-term performance. Our net interest income exposure to these rate shocks at both June 30, 2020 and December 31, 2019 are presented in the following table. Due to low current market interest rates, it was not possible to calculate the down 200 bp scenario because many of the market interest rates would fall below zero in that scenario. In addition, the down 100 bp scenarios assumes no market interest rates fall below zero. All measures were in compliance with our policy limits.

Estimated Change in Net Interest Income

Change in interest rates:

+ 400 bp

+ 300 bp

+ 200 bp

+ 100 bp

- 100 bp

- 200 bp

Policy limits

(15)
%
(12)
%
(10)
%
(10)
%
(10)
%
(12)
%
June 30, 2020

1.5
%
1.7
%
1.6
%
1.4
%
(1.4)
%
na

December 31, 2019

(13.1)
%
(9.7)
%
(6.3)
%
(3)
%
(0.6)
%
na

Item 4.          Controls and Procedures
As required by SEC rules, the Company’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective as of ~~September~~June 30, ~~2017.~~2020. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
77
Table of Contents
There were no material changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended ~~September~~June 30, ~~2017,~~2020, that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

47
PART II - Other Information
Item 1.           Legal Proceedings
From time to time, we ~~may be~~are involved in litigation relating to claims arising out of our normal course of business. As of the date of this report, we are not aware of any material pending ~~litigation matters.~~legal proceedings.

Item 1A.            Risk Factors
~~There have been no material changes~~Investing in ~~the risk factors from~~shares of our common stock involves certain risks, including those ~~disclosed~~identified and described in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016,~~2019, as well as cautionary statements contained in this Quarterly Report, on Form 10-Q, including those under the caption “Forward-Looking Statements,” and set forth in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.
Except as set forth in Part II, Item 1A of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and filed with the SEC on May 11, 2020, which is incorporated herein by this reference, there have been no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on March 16, ~~2017.~~2020.

Item 2.          Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Repurchases of Equity Securities
~~None~~On April 24, 2019, our Board of Directors authorized a stock repurchase program under which we were permitted to repurchase, from time to time, up to $7.0 million of our outstanding common shares. As of February 24, 2020, we had repurchased all remaining shares under the stock repurchase program, resulting in a total of 392,565 shares repurchased at an average price paid per share of $17.83. As such, we did not engage in any share repurchases in the second quarter of 2020.

Item 3. Defaults Upon Senior Securities
None

Item 4. Mine Safety Disclosures
Not applicable
Item 5.Other Information
None

78
Table of Contents
Item 6.Exhibits

10.1
~~2.1~~
Agreement and Plan of Reorganization, dated August 14, 2017 by and among Howard Bancorp, Inc., Howard Bank and First Mariner Bank (incorporated by reference from Exhibit 2.1 of the Company's Form 8-K filed on August 18, 2017) (The schedules and some exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Howard Bancorp undertakes to furnish supplemental copies of any of the omitted schedules or exhibits upon request by the Securities and Exchange Commission.)
~~10.1~~ Form of Stockholder Agreement by and among Howard Bancorp, Inc., Howard Bank and the directors, executive officers and certain stockholders of First Mariner Bank (included as Exhibit 1 to the Agreement and Plan of Reorganization filed as Exhibit 2.1 hereto)
~~10.2~~ Employment Agreement ~~between Howard Bank and Steven M. Poynot dated as of March 12, 2017 - field herewith~~
~~10.3~~ ~~First Amendment to Employment Agreement between Howard Bank and Steven M. Poynot dated as of May 24, 2017 - field herewith~~
~~10.4~~ ~~First Amendment to Employment Agreement~~entered into between Howard Bank and Robert ~~A. Altieri~~L. Carpenter dated ~~as of~~ May ~~24, 2017 - field herewith~~29, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 2, 2020)
31.1
~~10.5~~
~~First Amendment to Employment Agreement between Howard Bank and James D. Witty dated as of May 24, 2017 - field herewith~~
~~31(a)~~ Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - filed herewith
31.2
~~31(b)~~
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - filed herewith
32
32
Certifications pursuant to 18 U.S.C. Section 1350, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith
101
~~101~~
Extensible Business Reporting Language (“XBRL”) – filed herewith
~~101.INS~~

101.INS
XBRL Instance File
~~101.SCH~~

101.SCH
XBRL Schema File
~~101.CAL~~

101.CAL
XBRL Calculation File
~~101.DEF~~

101.DEF
XBRL Definition File
~~101.LAB~~

101.LAB
XBRL Label File
~~101.PRE~~

101.PRE
XBRL Presentation File

48

79
��Table of Contents
Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

HOWARD BANCORP, INC.

(Registrant)

~~November 7, 2017~~
   August 10, 2020

~~/s/~~
   /s/ Mary Ann Scully

Date

~~MARY ANN SCULLY~~
    Mary Ann Scully

~~PRESIDENT AND CEO~~
   Chairman and Chief Executive Officer

~~November 7, 2017~~
   August 10, 2020

~~/s/ George C. Coffman~~
   /s/ Robert L. Carpenter, Jr.

Date

~~GEORGE C. COFFMAN~~
    Robert L. Carpenter, Jr.

~~EVP AND CFO~~
   Executive Vice President and Chief Financial Officer

49
80

~~Maryland~~		~~20-3735949~~
Maryland	20-3735949
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

~~6011 University Blvd. Suite 370, Ellicott City, MD~~		~~21043~~

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


Title of each class:	Trading Symbol	Name of each exchange on which registered:
Common Stock, par value $0.01 per share	HBMD	The Nasdaq Stock Market LLC


Large accelerated filer¨◻		Accelerated filerx⌧
Non-accelerated filer¨◻	~~(Do not check if an accelerated filer)~~	Smaller reporting company¨
☒		Emerging ~~Growth Company~~xgrowth company ☐


	Unaudited
	June 30,		December 31,
(in thousands, except share data)	2020		2019
ASSETS
Cash and due from banks	$	12,652	$	12,992
Interest-bearing deposits with banks		46,418		96,985
Total cash and cash equivalents		59,070		109,977
Securities available for sale, at fair value		276,889		215,505
Securities held to maturity, at amortized cost		7,250		7,750
Nonmarketable equity securities		12,592		14,152
Loans held for sale, at fair value		—		30,710
Loans and leases, net of unearned income		1,898,630		1,745,513
Allowance for credit losses		(16,356)		(10,401)
Net loans and leases		1,882,274		1,735,112
Bank premises and equipment, net		42,434		42,724
Goodwill		31,449		65,949
Core deposit intangible		7,090		8,469
Bank owned life insurance		76,716		75,830
Other real estate owned		2,137		3,098
Deferred tax assets, net		35,034		36,010
Interest receivable and other assets		30,515		29,333
Total assets	$	2,463,450	$	2,374,619
LIABILITIES
Noninterest-bearing deposits	$	671,598	$	468,975
Interest-bearing deposits		1,159,076		1,245,390
Total deposits		1,830,674		1,714,365
FHLB advances		246,000		285,000
Customer repurchase agreements and other borrowings		37,834		6,127
Subordinated debt		28,339		28,241
Total borrowings		312,173		319,368
Accrued expenses and other liabilities		37,322		26,738
Total liabilities		2,180,169		2,060,471
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - par value of $0.01 authorized 20,000,000 shares; issued and outstanding 18,715,678 shares at June 30, 2020 and 19,066,913 at December 31, 2019		187		191
Capital surplus		270,056		276,156
Retained earnings		9,092		35,158
Accumulated other comprehensive income		3,946		2,643
Total stockholders’ equity		283,281		314,148
Total liabilities and stockholders’ equity	$	2,463,450	$	2,374,619

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


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

		~~Page~~
~~PART I~~	~~Financial Information~~	4 Page
~~Item 1.~~PART I	Financial ~~Statements~~Information	4 3
Item 1.	Financial Statements	3
	Consolidated Balance Sheets (Unaudited)	4 3
	Consolidated Statements of Operations (Unaudited)	5 4
	Consolidated Statements of Comprehensive (Loss) Income (Unaudited)	6 5
	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	31 41

Item 3.	Quantitative and Qualitative Disclosure about Market Risk	47 76

Item 4.	Controls and Procedures	47 77

PART II	Other Information	48 78
Item 1.	Legal Proceedings	48 78

Item 1A.	Risk Factors	48 78

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48 78

Item 3.	Defaults Upon Senior Securities	48 78

Item 4.	Mine Safety Disclosures	48 78

Item 5.	Other Information	48 78

Item 6.	Exhibits	48 79

Signatures		49 80


	Unaudited
	For the six months ended				For the three months ended
	June 30,				June 30,
(in thousands, except per share data)	2020		2019		2020		2019
INTEREST INCOME
Interest and fees on loans and leases	$	39,697	$	41,697	$	19,553	$	21,131
Interest and dividends on securities		3,749		3,596		1,901		1,740
Other interest income		254		636		20		274
Total interest income		43,700		45,929		21,474		23,145
INTEREST EXPENSE
Deposits		5,593		7,568		2,383		4,004
FHLB advances		1,532		2,549		506		1,295
Customer repurchase agreements and other borrowings		17		26		13		13
Subordinated debt		913		958		452		479
Total interest expense		8,055		11,101		3,354		5,791
NET INTEREST INCOME		35,645		34,828		18,120		17,354
Provision for credit losses		6,445		2,835		3,000		1,110
Net interest income after provision for credit losses		29,200		31,993		15,120		16,244
NONINTEREST INCOME
Service charges on deposit accounts		1,075		1,311		432		684
Realized and unrealized gains on mortgage banking activity		1,036		3,793		—		2,308
Gain on the sale of securities		3,044		658		3,044		658
Gain (loss) on the disposal of bank premises & equipment		6		(83)		6		(83)
Income from bank owned life insurance		886		907		441		460
Loan related fees and service charges		755		2,038		175		995
Other operating income		1,323		1,752		661		819
Total noninterest income		8,125		10,376		4,759		5,841
NONINTEREST EXPENSE
Compensation and benefits		14,700		16,306		6,259		8,272
Occupancy and equipment		2,275		6,754		1,242		5,183
Marketing and business development		903		941		453		484
Professional fees		1,360		1,503		634		718
Data processing fees		1,776		2,525		849		1,147
FDIC assessment		499		568		287		281
Other real estate owned		346		131		268		104
Loan production expense		660		1,220		192		700
Amortization of core deposit intangible		1,379		1,551		680		767
Goodwill impairment		34,500		—		34,500		—
Other operating expense		3,789		2,812		2,264		1,798
Total noninterest expense		62,187		34,311		47,628		19,454
(LOSS) INCOME BEFORE INCOME TAXES		(24,862)		8,058		(27,749)		2,631
Income tax expense		1,204		1,714		1,660		543
NET (LOSS) INCOME	$	(26,066)	$	6,344	$	(29,409)	$	2,088
NET (LOSS) INCOME PER COMMON SHARE
Basic	$	(1.39)	$	0.33	$	(1.57)	$	0.11
Diluted	$	(1.39)	$	0.33	$	(1.57)	$	0.11

	Unaudited
	September 30,			December 31,
(in thousands, except share data)	2017			2016
ASSETS
Cash and due from banks	$	50,715		$	29,675
Federal funds sold		495			9,691
Total cash and cash equivalents		51,210			39,366
Interest bearing deposits with banks		494			19,513
Securities available for sale, at fair value		67,883			38,728
Securities held to maturity, at amortized cost		9,250			6,250
Nonmarketable equity securities		5,982			5,103
Loans held for sale, at fair value		52,683			51,054
Loans and leases, net of unearned income		892,213			821,524
Allowance for credit losses		(5,661	)		(6,428	)
Net loans and leases		886,552			815,096
Bank premises and equipment, net		19,556			20,080
Goodwill		603			603
Core deposit intangible		1,849			2,248
Bank owned life insurance		28,427			21,371
Other real estate owned		2,133			2,350
Interest receivable and other assets		5,911			5,195
Total assets	$	1,132,533		$	1,026,957
LIABILITIES
Noninterest-bearing deposits	$	212,519		$	182,880
Interest-bearing deposits		649,566			625,854
Total deposits		862,085			808,734
Short-term borrowings		128,471			107,056
Long-term borrowings		6,552			20,517
Deferred tax liability		464			360
Accrued expenses and other liabilities		4,648			4,500
Total liabilities		1,002,220			941,167
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - par value of $0.01 authorized 20,000,000 shares; issued and outstanding 9,811,992 shares at September 30, 2017 and 6,991,072 at December 31, 2016		98			70
Capital surplus		110,183			71,021
Retained earnings		20,166			14,849
Accumulated other comprehensive loss		(134	)		(150	)
Total stockholders’ equity		130,313			85,790
Total liabilities and stockholders’ equity	$	1,132,533		$	1,026,957


								Accumulated
								other
Unaudited	Number of	Common		Capital		Retained		comprehensive
(dollars in thousands, except share data)	shares	stock		surplus		earnings		(loss) income		Total
Six months ended
Balances at December 31, 2018	19,039,347	$	190	$	275,843	$	18,277	$	373	$	294,683
Net income	—		—		—		6,344		—		6,344
Other comprehensive income	—		—		—		—		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

Balances at December 31, 2019	19,066,913	$	191	$	276,156	$	35,158	$	2,643	$	314,148
Net loss	—		—		—		(26,066)		—		(26,066)
Other comprehensive income	—		—		—		—		1,303		1,303
Director stock awards	8,151		—		137		—		—		137
Employee stock purchase plan	12,581		—		195		—		—		195
Repurchased shares	(372,801)		(4)		(6,673)		—		—		(6,677)
Stock-based compensation	834		—		241		—		—		241
Balances at June 30, 2020	18,715,678	$	187	$	270,056	$	9,092	$	3,946	$	283,281

	Unaudited
	For the nine months ended					For the three months ended
	September 30,					September 30,
(in thousands, except share data)	2017		2016			2017		2016
INTEREST INCOME
Interest and fees on loans and leases	$	30,374	$	28,398		$	10,632	$	9,599
Interest and dividends on securities		993		493			367		191
Other interest income		321		98			113		34
Total interest income		31,688		28,989			11,112		9,824
INTEREST EXPENSE
Deposits		2,878		2,558			1,053		891
Short-term borrowings		574		380			238		169
Long-term borrowings		233		385			66		116
Total interest expense		3,685		3,323			1,357		1,176
NET INTEREST INCOME		28,003		25,666			9,755		8,648
Provision for credit losses		1,031		1,302			491		402
Net interest income after provision for credit losses		26,972		24,364			9,264		8,246
NONINTEREST INCOME
Service charges on deposit accounts		667		501			213		178
Realized and unrealized gains on mortgage banking activity		8,698		6,984			2,730		2,847
Gain (loss) on the sale of portfolio loans		48		612			227		(40	)
Loss on the disposal of furniture, fixtures & equipment		-		(70	)		-		(1	)
Income from bank owned life insurance		555		461			210		156
Loan fee income		4,142		2,631			1,469		997
Other operating income		745		687			255		247
Total noninterest income		14,855		11,806			5,104		4,384
NONINTEREST EXPENSE
Compensation and benefits		17,592		14,381			5,972		4,927
Occupancy and equipment		3,121		3,625			1,025		1,062
Amortization of core deposit intangible		399		519			128		166
Marketing and business development		3,117		2,475			991		864
Professional fees		1,446		1,692			606		669
Data processing fees		1,521		1,273			565		524
Merger and restructuring expense		378		-			378		-
FDIC assessment		473		604			180		199
Other real estate owned expense		149		165			32		43
Loan production expense		2,832		2,295			952		717
Other operating expense		2,324		2,388			808		709
Total noninterest expense		33,352		29,417			11,637		9,880
INCOME BEFORE INCOME TAXES		8,475		6,753			2,731		2,750
Income tax expense		3,158		2,404			1,018		1,002
NET INCOME	$	5,317	$	4,349		$	1,713	$	1,748
Preferred stock dividends		-		166			-		-
Net income available to common stockholders	$	5,317	$	4,183		$	1,713	$	1,748
NET INCOME PER COMMON SHARE
Basic	$	0.56	$	0.60		$	0.17	$	0.25
Diluted	$	0.56	$	0.59		$	0.17	$	0.25

	Unaudited
	Nine months ended						Three months ended
	September 30,						September 30,
(in thousands)	2017			2016			2017			2016
Net Income	$	5,317		$	4,349		$	1,713		$	1,748
Other comprehensive income
Investments available-for-sale:
Unrealized holding gains (losses)		23			94			(25	)		6
Related income tax (expense) benefit		(7	)		(33	)		10			(4	)
Comprehensive income	$	5,333		$	4,410		$	1,698		$	1,750


	Unaudited
	Six months ended
	June 30,
(in thousands)	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(26,066)	$	6,344
Adjustments to reconcile net (loss) income to net cash from operating activities:
Provision for credit losses		6,445		2,835
Deferred income tax		481		1,422
Provision for other real estate owned		257		65
Depreciation and amortization		1,108		1,209
Stock-based compensation		378		112
Net accretion of discount on purchased loans		(590)		(925)
Gain on sale of securities		(3,044)		(658)
(Gain) loss on the sale of premises and equipment		(6)		83
Net amortization of intangible asset		1,379		1,551
Goodwill impairment		34,500		—
Loans originated for sale		(79,847)		(259,868)
Proceeds from sale of loans originated for sale		111,593		247,241
Realized and unrealized gains on mortgage banking activity		(1,036)		(3,793)
Loss on sale of other real estate owned, net		28		-
Cash surrender value of BOLI		(886)		(907)
Decrease in interest receivable and other assets		4,046		2,794
(Decrease) increase in accrued expenses and other liabilities		(1,666)		959
Other, net		31		14
Net cash provided by (used in) operating activities		47,105		(1,522)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities		(179,695)		(6,502)
Proceeds from sales, maturities and calls of investment securities		130,815		81,159
Net increase in loans and leases outstanding		(153,067)		(54,308)
Proceeds from the sale of other real estate owned		727		—
Purchase of premises and equipment		(69)		(422)
Proceeds from the sale of premises and equipment		743		1,392
Net cash (used in) provided by investing activities		(200,546)		21,319
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		116,309		31,410
Net increase (decrease) customer repurchase agreements and other borrowings		31,707		(11,907)
Net decrease in FHLB advances		(39,000)		(16,000)
Proceeds from issuance of common stock, net of cost		195		263
Repurchase of common stock		(6,677)		—
Net cash provided by financing activities		102,534		3,766

Net (decrease) increase in cash and cash equivalents		(50,907)		23,563
Cash and cash equivalents at beginning of period		109,977		101,498
Cash and cash equivalents at end of period	$	59,070	$	125,061
SUPPLEMENTAL INFORMATION
Cash payments for interest	$	8,103	$	11,070
Cash payments for income taxes		15		—
Transferred from loans to other real estate owned		51		375
Cash payments for operating leases		441		785
Lease liabilities arising from obtaining right of use assets (see Note 8)		2,011		15,183
Liability for unsettled securities purchases		10,238		—
Goodwill reduction for adjustments to acquired net deferred tax assets		—		4,748

													Accumulated
													other
	Preferred			Number of		Common		Capital		Retained			comprehensive
(dollars in thousands, except share data)	stock			shares		stock		surplus		earnings			income/(loss)			Total

Balances at January 1, 2016	$	12,562			6,962,139	$	70	$	70,587	$	9,712		$	(32	)	$	92,899
Net income		-			-		-		-		4,349			-			4,349
Net unrealized gain on securities		-			-		-		-		-			61			61
Dividends paid on preferred stock		-			-		-		-		(166	)		-			(166	)
Redemption of preferred stock		(12,562	)		-		-		-		-			-			(12,562	)
Issuance of common stock:
Director stock awards		-			5,629		-		72		-			-			72
Exercise of options		-			1,740		-		19		-			-			19
Stock-based compensation		-			18,672		-		219		-			-			219
Balances at September 30, 2016	$	-			6,988,180	$	70	$	70,897	$	13,895		$	29		$	84,891

Balances at January 1, 2017	$	-			6,991,072	$	70	$	71,021	$	14,849		$	(150	)	$	85,790
Net income		-			-		-		-		5,317			-			5,317
Net unrealized gain on securities		-			-		-		-		-			16			16
Issuance of common stock:
Common stock offering		-			2,760,000		28		38,355		-			-			38,383
Director stock awards		-			11,404		-		205		-			-			205
Exercise of options		-			20,179		-		240		-			-			240
Stock-based compensation		-			29,337		-		362		-			-			362
Balances at September 30, 2017	$	-			9,811,992	$	98	$	110,183	$	20,166		$	(134	)	$	130,313

	Unaudited
	Nine months ended
	September 30
(in thousands)	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	5,317		$	4,349
Adjustments to reconcile net income to net cash from operating activities:
Provision for credit losses		1,031			1,302
Deferred income tax (benefit)		153			(241	)
Provision for other real estate owned		99			83
Depreciation		974			927
Stock-based compensation		567			291
Net accretion (amortization) of investment securities		61			(8	)
Net amortization of discount on purchased loans		(466	)		(592	)
Loss on disposal of furniture, fixtures & equipment		-			70
Net amortization of intangible asset		399			519
Loans originated for sale		(495,805	)		(418,828	)
Proceeds from sale of loans originated for sale		502,874			429,148
Realized and unrealized gains on mortgage banking activity		(8,698	)		(6,984	)
Gain on sales of other real estate owned, net		(19	)		-
Gain on sales of portfolio loans, net		(48	)		(612	)
Cash surrender value of BOLI		(555	)		(461	)
Increase in interest receivable		(344	)		(253	)
Increase in interest payable		152			19
Increase in other assets		(1,253	)		(270	)
Decrease in other liabilities		(59	)		(1,202	)
Net cash provided by operating activities		4,380			7,257
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of interest bearing deposits with banks		-			(19,513	)
Proceeds from maturities of interest bearing deposits with banks		19,019			-
Purchases of investment securities available-for-sale		(46,714	)		(65,569	)
Purchases of investment securities held-to-maturity		(3,000	)		(6,250	)
Proceeds from sale/maturities of investment securities available-for-sale		17,520			77,526
Net increase in loans and leases outstanding		(75,732	)		(53,017	)
Purchase of bank owned life insurance		(6,500	)		(2,200	)
Proceeds from the sale of other real estate owned		139			-
Proceeds from the sale of portfolio loans		3,759			3,090
Purchase of premises and equipment		(450	)		(520	)
Net cash used in investing activities		(91,959	)		(66,453	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		53,351			56,365
Net increase in short-term borrowings		21,414			11,580
Proceeds from issuance of long-term debt		12			21,498
Repayment of long-term debt		(13,977	)		(12,000	)
Net proceeds from issuance of common stock, net of cost		38,623			19
Redemption of preferred stock		-			(12,562	)
Cash dividends on preferred stock		-			(166	)
Net cash provided by financing activities		99,423			64,734

Net increase in cash and cash equivalents		11,844			5,538
Cash and cash equivalents at beginning of period		39,366			38,340
Cash and cash equivalents at end of period	$	51,210		$	43,878
SUPPLEMENTAL INFORMATION
Cash payments for interest	$	3,533		$	3,304
Cash payments for income taxes		2,230			925
Transferred from loans to other real estate owned		-			256


(in thousands)	June 30, 2020		December 31, 2019
Loans held for sale, January 1	$	30,710	$	21,261
Loans originated for sale		79,847		573,306
Loans sold into the secondary market		(110,557)		(563,857)
Loans held for sale, at end of period	$	—	$	30,710
Loans originated for the Bank's portfolio	$	11,378	$	114,561


	For the six months ended June 30,				For the three months ended June 30,
($ in thousands)	2020		2019		2020		2019
Statement of Operations:
Net interest income	$	143	$	340	$	—	$	193

Realized and unrealized gains on mortgage banking activity		1,036		3,737		—		2,296
Loan related fees and service charges		389		1,320		—		816
Total noninterest income		1,425		5,057		—		3,112

Salaries and benefits		928		3,063		—		1,456
Occupancy		20		154		—		75
All other operating expenses		490		1,050		—		582
Total noninterest expense		1,438		4,267		—		2,113
Pretax contribution		130		1,130		—		1,192
Income tax expense		36		311		—		328
After tax contribution	$	94	$	819	$	—	$	864


(in thousands)	September 30, 2017								December 31, 2016								June 30, 2020								December 31, 2019
			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated		Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value
																			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	$	63,183	$	3	$	148	$	63,038	$	34,584	$	5	$	126	$	34,463	$	77,835	$	1,780	$	—	$	79,615	$	66,428	$	963	$	79	$	67,312
Treasuries		1,507		-		9		1,498		1,512		-		8		1,504
Mortgage-backed		1,336		1		37		1,300		1,366		1		69		1,298		188,099		4,029		302		191,826		139,918		2,848		67		142,699
Other investments		2,068		-		21		2,047		1,500		-		37		1,463		5,509		13		74		5,448		5,510		4		20		5,494
	$	68,094	$	4	$	215	$	67,883	$	38,962	$	6	$	240	$	38,728
																	$	271,443	$	5,822	$	376	$	276,889	$	211,856	$	3,815	$	166	$	215,505
Held to maturity
Corporate debentures	$	9,250	$	95	$	-	$	9,345	$	6,250	$	334	$	-	$	6,584	$	7,250	$	65	$	120	$	7,195	$	7,750	$	147	$	-	$	7,897


											June 30, 2020				December 31, 2019
													% of				% of
(in thousands)	September 30, 2017		% of Total			December 31, 2016		% of Total			Total		Total		Total		Total
Real estate
Construction and land	$	79,064		8.9	%	$	72,973		8.9	%	$	128,567	6.8	%	$	128,285	7.3	%
Residential - first lien		199,674		22.4			195,032		23.7			409,402	21.6			437,409	25.1
Residential - junior lien		41,023		4.6			35,009		4.3			67,430	3.6			74,164	4.2
Total residential real estate		240,697		27.0			230,041		28.0			476,832	25.1			511,573	29.3
Commercial - owner occupied		155,958		17.4			134,213		16.3			244,802	12.9			241,795	13.9
Commercial - non-owner occupied		228,095		25.6			216,781		26.4			455,051	24.0			444,052	25.4
Total commercial real estate		384,053		43.0			350,994		42.7			699,853	36.9			685,847	39.3
Total real estate loans		703,814		78.9			654,008		79.6			1,305,252	68.7			1,325,705	75.9
Commercial loans and leases		183,979		20.6			162,715		19.8
Commercial loans and leases ¹												352,999	18.6			372,872	21.4
Consumer		4,420		0.5			4,801		0.6			46,660	2.5			46,936	2.7
Total loans	$	892,213		100.0	%	$	821,524		100.0	%
Paycheck Protection Program												193,719	10.2			—	—
Total loans and leases											$	1,898,630	100.0	%	$	1,745,513	100.0	%

(in thousands)	September 30, 2017			September 30, 2016
Balance at beginning of period	$	60		$	335
Accretion of fair value discounts		(60	)		(239	)
Balance at end of period	$	-		$	96


	Contractually
	Required
	Payments		Carrying
(in thousands)	Receivable		Amount
At June 30, 2020	$	8,670	$	6,993
At December 31, 2019		10,929		8,706


			As % of				As % of		Balance		As % of				As % of
($in millions)	Loan		Total		Total		Total		with		Total		SBA PPP		Loans
Loan Category	Balance		Loans		Exposure (1)		Exposure		Modifications		Category		Loan Relief		Category
CRE - retail	$	109.1	5.7	%	$	109.1	4.8	%	$	27.2	24.9	%	$	—	0.0	%
Hotels		60.8	3.2	%		62.8	2.8	%		52.7	86.6	%		1.5	2.5	%
CRE - residential rental		47.8	2.5	%		47.8	2.1	%		8.8	18.4	%		—	0.0	%
Nursing and residential care		39.7	2.1	%		44.8	2.0	%		2.5	6.4	%		2.2	5.6	%
Retail trade		23.6	1.2	%		38.3	1.7	%		2.1	8.9	%		12.9	54.7	%
Restaurants and caterers		28.4	1.5	%		32.0	1.4	%		19.5	68.5	%		14.7	51.6	%
Religious and similar organizations		29.1	1.5	%		31.1	1.4	%		3.3	11.4	%		6.1	20.8	%
Arts, entertainment, and recreation		15.0	0.8	%		17.6	0.8	%		7.5	49.9	%		3.2	21.0	%
Total - selected categories	$	353.6	18.6	%	$	383.5	17.0	%	$	123.6	35.0	%	$	40.5	11.5	%


			As % of		As % of
($ in millions)	Loan		Total		Total "High
Loan Portfolio Segment	Balance		Loans		Impacts"
Commercial real estate - non-owner occupied	$	206.9	10.9	%	58.5	%
Commercial real estate - owner occupied		65.4	3.4	%	18.5	%
Construction and land		51.9	2.7	%	14.7	%
Commercial loans and leases		28.7	1.5	%	8.1	%
Other		0.6	—	%	0.2	%
Total	$	353.6	18.6	%	100.0	%

	September 30, 2017
									Commercial		Commercial		Commercial
	Construction		Residential			Residential			owner		non-owner		loans			Consumer
(in thousands)	and land		first lien			junior lien			occupied		occupied		and leases			loans			Total
Allowance for credit losses:
Nine months ended:
Beginning balance	$	511	$	454		$	89		$	327	$	1,120	$	3,800		$	127		$	6,428
Charge-offs		-		(132	)		(31	)		-		-		(1,605	)		(108	)		(1,876	)
Recoveries		-		-			1			-		5		43			29			78
Provision for credit losses		146		222			58			103		328		130			44			1,031
Ending balance	$	657	$	544		$	117		$	430	$	1,453	$	2,368		$	92		$	5,661
Three months ended:
Beginning balance	$	562	$	543		$	111		$	401	$	1,176	$	2,490		$	102		$	5,385
Charge-offs		-		-			-			-		-		(239	)		-			(239	)
Recoveries		-		-			-			-		2		15			7			24
Provision for credit losses		95		1			6			29		275		102			(17	)		491
Ending balance	$	657	$	544		$	117		$	430	$	1,453	$	2,368		$	92		$	5,661


	At June 30, 2019
							Commercial real estate				Commercial
	Construction		Residential real estate				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

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 and leases:
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


	At December 31, 2019
							Commercial real estate				Commercial
	Construction		Residential real estate				owner		non-owner		loans		Consumer
(in thousands)	and land		first lien		junior lien		occupied		occupied		and leases		loans		Total
Allowance for credit losses:
Beginning balance	$	741	$	1,170	$	292	$	735	$	4,057	$	2,644	$	234	$	9,873
Charge-offs		(282)		(518)		(532)		(46)		(2,026)		(622)		(210)		(4,236)
Recoveries		80		-		115		-		17		357		2		571
Provision for credit losses		717		1,604		603		99		920		(276)		526		4,193
Ending balance	$	1,256	$	2,256	$	478	$	788	$	2,968	$	2,103	$	552	$	10,401
Allowance allocated to:
individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	500	$	-	$	500
collectively evaluated for impairment	$	1,256	$	2,256	$	478	$	788	$	2,968	$	1,603	$	552		9,901
Loans and leases:
Ending balance	$	128,285	$	437,409	$	74,164	$	241,795	$	444,052	$	372,872	$	46,936	$	1,745,513
individually evaluated for impairment	$	481	$	13,131	$	786	$	566	$	1,725	$	2,360	$	127	$	19,176
collectively evaluated for impairment	$	127,804	$	424,278	$	73,378	$	241,229	$	442,327	$	370,512	$	46,809	$	1,726,337

	September 30, 2017
	Number		Non-Accrual		Number		Accrual		Total

											June 30, 2020
											Number	Non-Accrual		Number	Accrual		Total
(dollars in thousands)	of Loans		Status		of Loans		Status		TDRs		of Loans	Status		of Loans	Status		TDRs
Construction and land		-	$	-		1	$	124	$	124
Residential real estate - first lien		2		893		1		289		1,182	2	$	261	2	$	963	$	1,224
Commercial - non-owner occupied		2		2,839		-		-		2,839
Commercial loans and leases		1		514		2		359		873	1		414	2		363		777
		5	$	4,246		4	$	772	$	5,018
											3	$	675	4	$	1,326	$	2,001

	September 30, 2017
			Not Performing		Performing
	Related		to Modified		to Modified		Total

									June 30, 2020
											Not Performing		Performing
									Related		to Modified		to Modified		Total
(in thousands)	Allowance		Terms		Terms		TDRs		Allowance		Terms		Terms		TDRs
Construction and land
Extension or other modification	$	-	$	-	$	124	$	124
Residential real estate - first lien
Extension or other modification		2		893		289		1,182	$	—	$	261	$	963	$	1,224
Commercial RE - non-owner occupied
Rate modification		-		2,839		-		2,839
Commercial loans
Extension or other modification		-		-		214		214		—		—		363		363
Forbearance		-		514		145		659		—		414		—		414
Total troubled debt restructure loans	$	2	$	4,246	$	772	$	5,018
Total troubled debt restructured loans									$	—	$	675	$	1,326	$	2,001


				June 30, 2020
	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	$	2,748	$	404	$	—
Matched interest rate swaps with counterparty	Other assets and other liabilities	$	2,748	$	—	$	423




(in thousands)
Goodwill:
December 31, 2019	$	65,949
Goodwill impairment		(34,500)
June 30, 2020	$	31,449


(in thousands)
2017	$	106
2018		396
2019		314
2020		269	$	1,295
2021		258		2,326
Thereafter		506
2022				1,915
2023				1,298
2024				256
Total amortizing intangible assets	$	1,849	$	7,090


	Six months ended June 30,				Three months ended June 30,
(in thousands)	2020		2019		2020		2019
Operating lease cost	$	784	$	1,080	$	420	$	530
Sublease income		(344)		(293)		(176)		(108)
Amortization of ROU assets		77		82		32		82
	$	517	$	869	$	276	$	504


(in thousands)
2020	$	855
2021		1,662
2022		1,520
2023		1,372
2024		1,170
Thereafter		13,033
Total future lease payments	$	19,612
Discount of cash flows		(3,807)
Present value on net future lease payments	$	15,805

Weighted average remaining term in years		6.47
Weighted average discount rate		2.89	%

	September 30, 2017					December 31, 2016
				Weighted					Weighted
				Average					Average
				Exercise					Exercise
	Shares			Price		Shares			Price

											June 30, 2020			December 31, 2019
												Weighted			Weighted
												Average			Average
												Exercise			Exercise
											Shares	Price		Shares	Price
Balance at January 1,		123,593		$	12.36		137,463		$	12.30	25,000	$	14.54	15,268	$	8.76
Granted		-			-		-			-	—		—	25,000		14.54
Exercised		(20,179	)		11.91		(3,020	)		11.64	—		—	(13,418)		8.58
Forfeited		(65,039	)		13.95		(10,850	)		11.77	—		—	(1,850)		10.10
Balance at period end		38,375		$	9.92		123,593		$	12.36	25,000	$	14.54	25,000	$	14.54
Exercisable at period end		38,375		$	9.92		123,593		$	12.36	8,337	$	14.54	—	$	—
Weighted average fair value of options granted during the year				$	-				$	-			N/A		$	5.83