Howard Bancorp reported 3Q20 net income of $4.6 million compared to the 2Q20 net loss of $(29.4) million.

This translates to EPS of $0.25 in 3Q20 compared to $(1.57) in 2Q20. The 3Q20 results were free of any significant one-time or irregular items, but there were several significant irregular or non-recurring items affecting 2Q20 results. The biggest was a goodwill impairment charge of $34.5 million or $1.84 per share. In addition, a litigation reserve and FHLB prepayment penalties amounted to $1.2 million pre-tax or a $0.05 cut to EPS. Offsetting these to some extent were securities gains of $3.0 million, which provided a boost of $0.12 to EPS. Excluding these nonrecurring items from the prior quarter, “adjusted” EPS was $0.25 in 3Q20 and $0.20 in 2Q20. Adjusted 3Q20 results exceeded our $0.20 estimate by $0.05 and the median Street estimate by $0.10. The outperformance versus our estimate was primarily due to a lower-thanexpected loan loss provision, but higher net interest income and higher noninterest income also contributed, offset partially by higher-than-expected noninterest expenses.

Highlights from the quarter include:

  • Net interest income was $18.3 million in 3Q20, up 0.8% compared to the prior sequential quarter. Average earning assets climbed 1.8% from the prior quarter while the NIM contracted 7 basis points sequentially to 3.15%. Fair value adjustments on acquired loans contributed 10 bps to the NIM this quarter, up from 9 bps in the prior quarter. The main driver of the NIM contraction was a 14 bps decrease in the average yield on loans. Average residential mortgage loan yields fell 30 bps sequentially and consumer loan yields declined 21 bps sequentially. In addition, a full quarter of low-yielding PPP loans reduced average loan portfolio yields by 18 bps, up from 13 bps in the preceding quarter. Meanwhile, AFS securities suffered a 54 bps decline in average yields. This drove a 19 bps reduction in average earning asset yields. Meanwhile, the cost of interest bearing liabilities was down 18 bps compared to 2Q20, as a 21 bps drop in the average cost of deposits combined with a 13 bps drop in the cost of FHLB borrowings.
  • Noninterest income fell $2.7 million or 56.1% linked-quarter to $2.1 million. The decrease was primarily due to $3.1 million in securities gains recognized during the prior quarter. Excluding securities gains, “core” noninterest income rose $0.4 million or 22.2% linkedquarter due to a $0.2 million rise loan-related income, a $0.1 million increase in “other” fees and noninterest income, and growth of $0.1 million in service charges on deposit accounts.
  • Noninterest expenses decreased $34.9 million or 73.3% sequentially. The main causes were a $34.5 million goodwill impairment charge, a $1.0 million accrual for legal expenses related to pre-merger First Mariner mortgage loans and $224k in FHLB prepayment penalties, all of which were incurred in 2Q20. Absent these items, “core” noninterest expenses were up $805k or 6.8% compared to 2Q20. An increase of $877k in compensation was the primary driver.
  • The provision for loan losses in 3Q20 was $1.7 million, down 43.3% compared to the $3.0 million recorded in 2Q20. HBMD still operates under the incurred loss model, rather than the CECL model adopted by many larger banks at the beginning of 2020. The bank experienced modest net charge-offs of $78k or 0.02% of average loans during the quarter, compared to $28k or 0.01% of average loans in 2Q20. The loan loss reserve climbed $1.3 million or 8.0% from the prior quarter to $17.7 million. Reserve coverage of total loans (excluding PPP loans) advanced to 1.05% from 0.96% at June 30, 2020, while reserve coverage of NPLs grew to 104.0% from 88.6%.
  • NPLs fell $1.5 million or 8.0% sequentially while OREO decreased $1.0 million or 46.0%. Total NPAs (including performing TDRs) declined 12.0% LQ to 0.71% of total assets from 0.84% at June 30, 2020.
  • Gross loans held-for investment decreased $14.2 million or 0.7% from the prior quarter. The change included $2.0 million of additional PPP loans originated during the quarter. Absent PPP loans, “portfolio” loans declined $16.6 million to $1.69 billion. The decrease was concentrated in Construction and Land loans, which fell $24.2 million, and residential mortgages, which were down $23.0 million. Partially offsetting these declines was a $22.4 million rise in CRE loans.
  • Total deposits advanced $142.1 million or 7.8% in 3Q20. The deposit growth occurred entirely in interest bearing accounts, which rose $156.6 million, while noninterest bearing accounts declined $14.6 million. The bank increased its brokered and other non-customer deposits by $172.1 million sequentially. Management reduced FHLB advances by $46.0 million. The net growth of almost $100.0 million in funding while loans were declining led to an increase of $100.6 million in the AFS securities portfolio. The loans-to-deposits ratio slipped to 95.5% from 103.7% at June 30, 2020.
  • Tangible book value per share rose to $13.43 at September 30, 2020 from $13.08 at June 30, 2020. Tangible common equity-to-tangible assets was 9.98% at September 30, 2020 compared to 10.09% at June 30, 2020.
  • The total risk-based capital ratio rose 16 bps sequentially to 14.25% while the Tier 1 leverage ratio advanced 34 bps to 9.07%. All of the regulatory ratios remain well above the levels needed to be considered “well capitalized”.

Earnings Estimates:

Howard displayed a number of encouraging signs in 3Q20 results, including fairly stable loan balances and increasing line-of-credit utilization. In addition, credit quality shows no signs of deterioration from the pandemic so far. While we still expect to see growing NPLs and net charge-offs beginning in 4Q20 and throughout 2021, the bank has boosted its allowance considerably through the first three quarters of 2020 and we believe that a significant portion of the future COVID-a9-related charge-offs have already been reserved for. As a result, we reduced our provisioning forecast slightly going forward. Expenses grew a bit more than we expected, and staffing additions for the expansion into the Washington market is likely to drive further expense growth. We have boosted our projections of noninterest expenses in 2021 by roughly $2.4 million to $51.2 million. The excess liquidity on HBMD’s balance sheet is likely to decline gradually and remain a drag on the NIM in the meantime. We have reduced our NIM forecast for 2021 to 3.10% from 3.22%. Still, we expect some help for the NIM over the next few quarters as low-yielding PPP loans are forgiven and thus removed from the balance sheet while at the same time accelerating the recognition of origination fees.

After making these adjustments, we are raising our 2020 EPS forecast from $(0.94) to $(0.89). If we exclude the goodwill impairment and other “non-core” items from 1Q20 and 2Q20 results, our estimate for “core” 2020 EPS is $0.84, up from $0.78 previously. We are maintaining our 2021 estimate at $0.91 and reducing our 2022 estimate modestly from $1.07 to $1.02.

Outlook:

Howard Bancorp appears to be gaining some traction with its positioning as the locally-based business bank for the Greater Baltimore area. The loan portfolio is holding its own in this difficult time, while providing a base for expansion into the Washington, DC metro area. Asset quality remains solid, and the high proportion of fixed-rate loans in the portfolio is providing some stability to the NIM. With the bank trading well below tangible book value, we believe HBMD remains an attractive investment.

While we have enjoyed covering Howard Bancorp, Inc., shifting corporate responsibilities do not allow us time to provide the same level of diligence to our equity research as we would like. Consequently, we are discontinuing coverage of Howard Bancorp, Inc.

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