Howard Bancorp, Inc. (NASDAQ: HBMD) (“Howard Bancorp” or the “Company”), the parent company of Howard Bank (“Howard Bank” or the “Bank”), today reported its financial results for the quarter ended June 30, 2020.

Net Loss and Loss per Share

The Company reported a net loss for the second quarter 2020 of $29.4 million, or a $1.57 loss per both basic and diluted common share due to the recording of a goodwill impairment charge of $34.5 million (or -$1.84 per basic and diluted common share). The goodwill impairment charge is a non-cash charge that has no effect on the Company’s liquidity, tangible common equity, regulatory capital, and overall financial strength. The Company’s net income excluding this charge, a non-GAAP financial measure, was $5.1 million, or $0.27 per basic and diluted common share. Second quarter results also include the impact of an increase in the allowance for credit losses (provision for credit losses in excess of net charge-offs) of $3.0 million (or -$0.12 after tax per both basic and diluted common share). *

Mary Ann Scully, Chairman and CEO, commented, “The unprecedented speed and magnitude of the economic downturn facing the Bank, our industry, our customers and our communities has fortunately been matched by an unprecedented level of government support and regulatory flexibility that has bought precious time as we collectively evaluate conditions, prepare health care responses and deal with alacrity to new customer behavior patterns. More importantly it has been matched by consistent demonstrations of the banking industry’s support for their colleagues, customers and communities. This will serve us well as we look to recovery. While there may be no templates for this type of economic instability, we are, as always, able to be guided by the principles that we have followed in this century of more rather than less volatility, uncertainty, complexity and ambiguity.

Howard Bank, as a young bank, has always operated in fast changing environments. Our primary goal has always been to maximize long term shareholder value by both preserving and positioning for growth the abundant capital – human and financial – that we possess. The starting point is strong - CET of 11.66%. Prudence suggests that we continue to bolster those financial capital levels through an appropriate allocation of earnings to loan loss provisions. Our asset quality metrics are holding up well with limited migration and the reserves to deal with any specific customer challenges have been reinforced greatly over the last two quarters.

We are, however, not just preserving but are constantly positioning so we are equally focused on appropriate strategies to increase earnings. Howard Bank’s outsized participation in the PPP program, while dilutive in the short term to asset yields, has been not only accretive to earnings but accretive to our reputation as the locally headquartered bank that met the needs of all of our customers in the second quarter of 2020. These opportunities present a very solid platform for a growing pipeline. Both the program itself and already realized related business acquisition has continued to lower our costs of funds and provided us with greater access to the most stable form of funding – transaction accounts. We believe that further opportunities to surgically grow market share are abundant and that we will acquire not only customers but talent in the region looking for a bank with a long term perspective.

We remain proud of our talented and dedicated staff, grateful to our loyal customers, and committed to a local economy that in most respects - health and economic statistics – has performed better than most. We are humble about what we don’t know, cautious about estimating short term trajectories but extremely confident about our ongoing ability to differentiate ourselves. While the marketplace reaction to our industry combined with our history as a transformational acquirer necessitated a significant accounting adjustment this quarter, it does not change the strength of either our capital or our positioning and it proves our resilience at a time when that may be the most valued corporate virtue.”

The net loss for the second quarter 2020 of $29.4 million or a $1.57 loss per both basic and diluted common share compares to net income of $2.1 million, or $0.11 per both basic and diluted common share for the second quarter of 2019, and to net income of $3.3 million, or $0.18 per both basic and diluted common share recorded in the first quarter of 2020.

The decreases in second quarter 2020 basic and diluted earnings per share of $1.68 when compared to the second quarter of 2019 and $1.75 when compared to the first quarter of 2020 were primarily attributable to the following items:

• The goodwill impairment charge of $34.5 million (-$1.84 per share; there was no tax impact) when compared to both the second quarter of 2019 and the first quarter of 2020
• Change in the provision for credit losses – an increase of $1.9 million (-$0.08 after tax per share) when compared to the second quarter of 2019; a decrease of $445 thousand (+$0.02 after tax per share) when compared to the first quarter of 2020
• An increase in securities gains - $2.4 million (+$0.10 after tax per share) when compared to the second quarter of 2019; $3.0 million (+$0.12 after tax per share) when compared to the first quarter of 2020
• Change in prepayment penalties on Federal Home Loan Bank of Atlanta (“FHLB”) advances – decrease of $427 thousand (+$0.02 after tax per share) when compared to the second quarter of 2019; increase of $224 thousand (-$0.01 after tax per share) when compared to the first quarter of 2020
• A $1.0 million litigation accrual (-$0.04 after tax per share) when compared to both the second quarter of 2019 and the first quarter of 2020 for potential litigation claims stemming from certain mortgages originated by First Mariner Bank before its merger with Howard Bank
• A decrease in the pretax income of the Company’s former mortgage banking activities, which were substantially completed in the first quarter of 2020 - $1.2 million (-$0.05 after tax per share) when compared to the second quarter of 2019; $130 thousand ($0.01 after tax per share) when compared to the first quarter of 2020
• Pretax income from the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”), established under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), of $1.0 million (+$0.04 after tax per share), included in net interest income and noninterest expenses, when compared to both the second quarter of 2019 and the first quarter of 2020
• The second quarter of 2019 included a $3.6 million branch optimization charge, included within noninterest expense. This item reduced second quarter 2019 earnings per share and thus represents a $0.14 after tax per share benefit to the second quarter of 2020 when compared to the second quarter of 2019.
• The first quarter of 2020 included a $1.2 million tax benefit resulting from the CARES Act. This item increased first quarter 2020 earnings per share and thus represents a $0.06 per share detriment to the second quarter of 2020 when compared to the second quarter of 2019.
• In addition, the first quarter of 2020 included noninterest expenses of $788 thousand attributable to the departure of the Company’s former CFO. This item reduced first quarter 2020 earnings per share and thus represents a $0.06 per share benefit to the second quarter of 2020 when compared to the second quarter of 2019.

Core net income is a non-GAAP financial measure that excludes the earnings contribution of the Company’s mortgage banking activities, the goodwill impairment charge, and certain other items to provide a picture of ongoing activities deemed core to the Company’s strategy. Core net income for the second quarter of 2020 was $3.7 million, or $0.20 per basic and diluted common share. This compares to core net income of $3.8 million, or $0.20 per both basic and diluted common share for the second quarter of 2019. The decrease included the higher provision for credit losses, reflecting the changing economic environment, which was up $1.9 million (-$0.08 after tax per share). In addition, the Company’s core noninterest expenses, a non-GAAP financial measure, decreased by $1.2 million (+$0.05 after tax per share). This also compares to core net income of $2.6 million, or $0.14 per both basic and diluted common share for the first quarter of 2020. The $0.06 per share increase in core earnings per share was primarily the result of the after tax impact of the lower provision for credit losses, which was down $445 thousand (+$0.02 per share) and the pretax contribution from PPP lending activities of $1.0 million (+$0.04 after tax per share). *

Core pre-provision net revenue (“core PPNR”), a non-GAAP financial measure that adds back the provision for credit losses to GAAP pretax income and excludes the pretax earnings contribution of the Company’s mortgage banking activities, the goodwill impairment charge, and other infrequently occurring items, was $7.9 million for the quarter ended June 30, 2020. The second quarter of 2020 core PPNR was up $1.8 million, or 29.1%, from $6.1 million for the second quarter of 2019, and was up $942 thousand, or 13.5%, when compared to the first quarter core PPNR of $7.0 million. *

The Company reported a net loss of $26.1 million, or a $1.39 loss per diluted share, for the six months ended June 30, 2020. This compared to net income of $6.3 million, or $0.33 per diluted share, for the six months ended June 30, 2019. Core net income for the six months ended June 30, 2020 was $6.4 million ($0.34 per diluted share), compared to $8.1 million ($0.43 per diluted share) for the six months ended June 30, 2019. Core PPNR for the six months ended June 30, 2020 was $14.9 million, a $1.5 million (11.7%) increase from $13.4 million for the six months ended June 30, 2019. *

Paycheck Protection Program Loans

The Company actively participated in the SBA’s PPP program during the second quarter of 2020. At June 30, 2020, $199.0 million of loans had been originated under the program. During the first phase of the program, which commenced on April 3, the Company funded 776 loans totaling $178.0 million. During phase 2, which commenced on April 27, the Company funded an additional 258 loans totaling $21.0 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. The Company will continue to support its 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 are 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 the Company’s 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.

COVID-19 Response

The Company has responded to the COVID-19 pandemic in a number of ways, with a focus on protecting our employees, strengthening our communities, and serving our customers. In addition to the funding of $199.0 million of PPP loans as of June 30, 2020, the Company has provided loan modifications to both commercial and retail customers, on a case by case basis, in the form of payment deferrals for periods up to 6 months. As of July 24, 2020, a total of $228 million of loans (or 13.4% of the loan portfolio) were performing under some form of deferral or other payment relief, an $89 million decrease from the $315 million (or 17.9% of the loan portfolio) reported as of April 24, 2020. The Bank expects that some requests for payment deferral extensions will continue during the third quarter while other borrowers currently on payment deferral will resume payments.

Asset Quality and Allowance for Credit Losses

Certain information in this earnings release is presented with respect to “portfolio loans”, a non-GAAP measure defined as total loans (which term includes leases) excluding the PPP loans. The Company believes that portfolio loan related measures provide additional useful information for purposes of evaluating the Company’s results of operations and financial condition with respect to the second quarter of 2020 and comparing it to other periods, since the PPP loans are 100% guaranteed, were not subject to traditional loan underwriting standards, and a substantial portion of these loans are expected to be forgiven and repaid by the SBA in the next six to nine months. The Company commenced making loans under the PPP program in the second quarter of 2020. *

Nonperforming assets (“NPAs”) totaled $20.6 million at June 30, 2020, an increase of $1.1 million from March 31, 2020 but a decrease of $3.4 million from June 30, 2019. NPAs consisted of $18.5 million of nonperforming loans (“NPLs”) and $2.1 million of other real estate owned (“OREO”). NPLs were 0.97% of total loans and 1.08% of portfolio loans, each at June 30, 2020. NPAs represented 0.84% of total assets, 1.08% of total loans and OREO, and 1.21% of portfolio loans and OREO, each at June 30, 2020.

• This compares to NPAs of $24.0 million at June 30, 2019 that consisted of $19.3 million in NPLs and $4.7 million of OREO. NPLs were 1.13% of total loans at June 30, 2019 while nonperforming assets represented 1.05% of total assets and 1.41% of total loans and OREO at June 30, 2019.
• This compares to NPAs of $19.5 million at March 31, 2020 that consisted of $17.2 million in NPLs and $2.3 million of OREO. NPLs were 0.98% of total loans at March 31, 2020 while NPAs represented 0.78% of total assets and 1.11% of total loans and OREO at March 31, 2020.

Net charge-offs decreased to $28 thousand in the second quarter of 2020 and represented 0.01% of average portfolio loans (annualized). This compares to net charge-offs of $746 thousand, or 0.18% of average loans (annualized) in the second quarter of 2019 and $462 thousand, or 0.11% of average portfolio loans (annualized) in the first quarter of 2020. The allowance for credit losses (the “allowance”) was $16.4 million on June 30, 2020. Because the Company is a smaller reporting company under SEC rules, the allowance was determined under the incurred loss model. The allowance represented 0.86% of total loans, 0.96% of portfolio loans, and 88.6% of NPLs at June 30, 2020.

• This compares to an allowance of $9.1 million at June 30, 2019. The June 30, 2019 allowance represented 0.54% of total loans and 47.2% of NPLs. The $7.2 million increase in the allowance was the result of aggregate provisions for credit losses of $7.8 million partially offset by aggregate net charge-offs of $564 thousand during the four quarter period since June 30, 2019. $6.4 million of the aggregate provisions for credit losses were recorded in 2020.
• This compares to an allowance of $13.4 million at March 31, 2020. The March 31, 2020 allowance represented 0.76% of total loans and 77.8% of NPLs. The $3.0 million increase in the allowance was the result of a provision for credit losses of $3.0 million partially offset by net charge-offs of $28 thousand during the quarter ended June 30, 2020.

The Company’s allowance as a percentage of total loans has historically been lower than peers due to the accounting for acquired loans and the initial impact on the allowance. The allowance for credit losses and unamortized fair value marks as a percentage of portfolio loans, a non-GAAP measure that management uses to assess credit coverage, adds the unamortized fair value marks to total loans, portfolio loans, and the allowance for credit losses. This measure was 1.28% of total loans at June 30, 2020, an increase of 0.03% from March 31, 2020 and an increase of 0.17% from June 30, 2019. This measure was 1.43% of portfolio loans at June 30, 2020, an increase of 0.18% from March 31, 2020 and an increase of 0.32% from June 30, 2019.

The Company’s asset quality trends indicate minimal additional stress in the loan portfolio, with the COVID-19 related loan modifications and PPP loans likely reducing the short-term risk in the portfolio. However, management believes it remains prudent to proactively increase the allowance given the significant stress experienced in the economy due to the COVID-19 pandemic, coupled with the Company’s expectation that these stresses will continue for the next several quarters. The Company increased the allowance for credit losses at June 30, 2020 by $3.0 million over the March 31, 2020 level. The allowance has been increased by $6.0 million since December 31, 2019. This increase was based on management’s evaluation of certain qualitative factors included in the determination of the allowance, primarily economic factors driven by the unemployment rate and GDP.

While the Maryland economy has reopened and a substantial amount of economic activity has returned, unemployment remains high, and many businesses are still experiencing significant drops in revenue. The recent rise in new COVID-19 cases and hospitalizations may lead to ongoing limitations on economic activity in the future. Management will continue to closely monitor portfolio conditions and reevaluate the adequacy of the allowance. While the level of payment deferrals and PPP loan assistance will reduce the short-term risk in the Bank’s loan portfolio, management believes there is the potential for additional risk rating downgrades and an increase in charge-offs in future periods.

Goodwill

Goodwill at June 30, 2020 totaled $31.4 million, a $34.5 million decrease from $65.9 million at both June 30, 2019 and March 31, 2020. 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 the second quarter of 2020. Goodwill is not included in tangible capital, a non-GAAP financial measure, or regulatory capital; the impairment charge does not affect cash, liquidity, or the Company’s overall financial strength. *

Stockholders’ Equity and Regulatory Capital Ratios

Stockholders’ equity at June 30, 2020 was $283.3 million, a decrease of $32.1 million from March 31, 2020. The decrease was primarily due to the goodwill impairment charge, that resulted in a net loss of $26.1 million, and a decrease in accumulated other comprehensive income, which represents the after tax impact of a $2.8 million decrease in the fair value of available-for-sale securities. $2.2 million of the decrease in accumulated other comprehensive income was attributable to the sale of securities during the second quarter that resulted in $3.0 million of pretax securities gains.

Tangible stockholders’ equity, a non-GAAP financial measure that deducts goodwill and other intangible assets, net of any applicable deferred tax liabilities, was $246.5 million at June 30, 2020. This compares to $243.6 million at March 31, 2020, with the $2.9 million increase primarily the result of the net loss for the second quarter of $29.4 million, the addback of the goodwill impairment charge of $34.5 million, and the decrease in accumulated other comprehensive income. Tangible stockholders’ equity has increased by $16.3 million since June 30, 2019. *

The Company’s regulatory capital ratios are all well in excess of regulatory “well-capitalized” and internal target minimum levels. The total capital ratio was 14.09% while both the Common Equity Tier 1 (“CET 1”) and Tier 1 capital ratios were 11.66% at June 30, 2020. The Tier 1 to average assets (leverage) ratio was 9.18%. A comparison of the Company’s regulatory capital ratios to June 30, 2019 and March 31, 2020 is as follows:

• Regulatory capital ratios at June 30, 2019 consisted of a total capital ratio of 12.55% while both the CET 1 and Tier 1 capital ratios were 10.52%. The Tier 1 to average assets (“leverage”) ratio was 9.06%. All June 30, 2020 regulatory capital ratios were above the June 30, 2019 levels.
• Regulatory capital ratios at March 31, 2020 consisted of a total capital ratio of 13.16% while both the CET 1 and Tier 1 capital ratios were 10.95%. The Tier 1 to average assets (“leverage”) ratio was 9.10%. All June 30, 2020 regulatory capital ratios were above the March 31, 2020 levels

Liquidity

The Company’s liquidity position remains strong. After building on-balance sheet liquidity in the first quarter in response to market disruptions, the Company reduced cash and cash equivalents in the second quarter to better balance liquidity with the cost of unused funds. Further, the Company has experienced a large increase in low cost customer deposits, which has enabled additional paydowns of higher cost wholesale funding during the quarter. The Company continues to build stable sources of contingency funding capacity, and management is confident that it will be able to access these funds in the event that the markets again become restricted.

Borrowings under the Federal Reserve Bank of Richmond’s (“FRB”) Paycheck Protection Program Lending Facility (“PPPLF”) were $31.1 million at June 30, 2020. While the Bank 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.

Update on Exit of Mortgage Banking Activities

The Company completed its previously announced exit of mortgage banking activities during the second quarter of 2020. As of March 31, 2020, these activities had been substantially completed, with the entire mortgage loan pipeline processed. The remaining loans held for sale were either sold or transferred to the Company’s loan portfolio, at fair value, during the second quarter. The mortgage banking activities had no impact on second quarter pretax income. There were no loans held for sale at June 30, 2020, compared to $3.8 million at March 31, 2020 and $37.7 million at June 30, 2019. The contribution of mortgage banking activities, by quarter, which are excluded from the Company’s core results, are as follows:

• First quarter of 2020 – total revenues of $1.5 million ($0.1 million of net interest income and $1.4 million of noninterest income), noninterest expenses of $1.4 million, and a contribution before taxes of $130 thousand.
• Second quarter of 2019 – total revenues of $3.3 million ($0.2 million of net interest income and $3.1 million of noninterest income), noninterest expenses of $2.1 million, and a contribution before taxes of $1.2 million.

Net Interest Income and Net Interest Margin

Net interest income was $18.1 million for the quarter ended June 30, 2020. The net interest margin (net interest income (annualized) as a percentage of average earning assets) was 3.22%. The yield on average loans was 4.18% and the yield on average earning assets was 3.81%, while the cost of average interest-bearing deposits was 0.77% and the cost of average interest-bearing liabilities was 0.87%. The cost of average deposits (including noninterest-bearing deposits) and the cost of average interest-bearing liabilities plus noninterest-bearing deposits for the second quarter of 2020 were 0.51% and 0.62%, respectively. Fair value adjustments on acquired loan portfolios increased the loan yield by 12 basis points (“BP”) and net interest margin by 9 BP in the second quarter of 2020. The PPP loans reduced the yield on average loans by 13 BP, the yield on average earnings assets by 9 BP, and net interest margin by 7 BP.

Second quarter 2020 net interest income of $18.1 million was up $595 thousand from net interest income of $17.5 million for the quarter ended March 31, 2020. The net interest margin for the second quarter of 2020 is down 12 BP from 3.34% in the first quarter of 2020. The yield on average loans was down 40 BP from 4.58% and the yield on average earning assets was down 43 BP from 4.24%, largely attributable to declines in variable rate loan yields. The cost of average interest-bearing deposits was down 30 BP from 1.07% and the cost of average interest-bearing liabilities was down 34 BP from 1.21%. The cost of average interest-bearing liabilities plus noninterest-bearing deposits was down 31 BP from 0.93% in the first quarter of 2020. Compared to the first quarter of 2020, when fair value adjustments on acquired loan portfolios increased the loan yield by 7 BP and net interest margin by 5 BP, the fair value adjustments on acquired loan portfolios for the second quarter of 2020 have increased the loan yield and net interest margin by 5 BP and 4 BP, respectively.

Second quarter 2020 net interest income of $18.1 million is up $766 thousand from $17.4 million for the quarter ended June 30, 2019. The net interest margin for the second quarter of 2020 is down 31 BP from 3.53% in the second quarter of 2019. The yield on average loans was down 82 BP from 5.00% and the yield on average earning assets was down 90 BP from 4.71%, while the cost of average interest-bearing deposits was down 50 BP from 1.27% and the cost of average interest-bearing liabilities was down 67 BP from 1.54%. The cost of average interest-bearing liabilities plus noninterest-bearing deposits was down 59 BP from 1.21% in the second quarter of 2019. Compared to the second quarter of 2019, when fair value adjustments on acquired loan portfolios increased the loan yield by 14 BP and net interest margin by 12 BP, the fair value adjustments on acquired loan portfolios for the second quarter of 2020 decreased the loan yield and net interest margin by 2 BP and 3 BP, respectively.

The decreases in the net interest margin are a continuing trend as market interest rates have fallen to historically low levels. For example:

• Average Prime rate was 3.25% for the second quarter of 2020, down 115 BP from 4.40% for the first quarter of 2020 and down 225 BP from 5.50% in the second quarter of 2019.
• Average effective fed funds rate was 0.06% for the second quarter of 2020, down 1.19% from 1.25% for the first quarter of 2020 and down 234 BP from 2.40% in the second quarter of 2019.
• Average 10 year Treasury rate was 0.69% for the second quarter of 2020, down 69 BP from 1.38% for the first quarter of 2020 and down 165 BP from 2.34% in the second quarter of 2019.
• Average 30 day LIBOR rate was 0.36% for the second quarter of 2020, down 105 BP from 1.41% for the first quarter of 2020 and down 208 BP from 2.44% in the second quarter of 2019.

Noninterest Income

Noninterest income was $4.8 million for the second quarter of 2020, a decrease of $1.0 million from the $5.8 million reported in the second quarter of 2019, and an increase of $1.4 million from the $3.4 million reported in the first quarter of 2020. Securities gains of $3.0 million were reported in the second quarter of 2020 compared to $658 thousand in the second quarter of 2019. The Company had no securities gains in the first quarter of 2020.

Core noninterest income, a non-GAAP financial measure that excludes noninterest income attributable to the Company’s mortgage banking activities and securities gains in each quarter, was $1.7 million for the second quarter of 2020, a $355 thousand decrease from the second quarter of 2019, and a $226 thousand decrease from the first quarter of 2020. *

• The $355 thousand decrease when compared to the second quarter of 2019 primarily consisted of the following: lower levels of nonsufficient funds (“NSF”) and overdraft charges, included in service charges on deposit accounts (-$273 thousand) partially due to accommodations to COVID-19 impacted customers in the current economic environment; and a decrease in interchange fees, primarily due to lower card activity volumes, included in loan related fees and service charges (-$171 thousand).
• The $226 thousand decrease when compared to the first quarter of 2020 primarily consisted of a decrease in service charges on deposit accounts due to a lower volume of NSF and overdraft charges (-$199 thousand). A portion of the reduction in NSF fees represented accommodations to COVID-19 impacted customers.

Noninterest Expenses

Noninterest expenses totaled $47.6 million for the second quarter of 2020, an increase of $28.2 million from the $19.5 million reported in the second quarter of 2019, and an increase of $33.1 million from the $14.6 million reported in the first quarter of 2020. The goodwill impairment charge of $34.5 million is included in the second quarter 2020 noninterest expenses.

Core noninterest expenses is a non-GAAP financial measure that excludes noninterest expenses attributable to the Company’s mortgage banking activities in each quarter, the $34.5 million goodwill impairment charge in the second quarter of 2020, $788 thousand of expenses related to the departure of the Company’s former CFO in the first quarter of 2020, $3.6 million of branch optimization expense in the second quarter of 2019, a $1.0 million accrual in the second quarter of 2020 for potential litigation claims stemming from certain mortgages originated by First Mariner Bank before its merger with Howard Bank, and prepayment penalties on FHLB advances recorded in both the second quarter of 2020 and 2019 of $224 thousand and $651 thousand, respectively. Core noninterest expenses were $11.9 million for the second quarter of 2020, a $1.2 million decrease from $13.1 million in the second quarter of 2019, and a $431 thousand decrease from $12.3 million in the first quarter of 2020. *

• The $1.2 million decrease when compared to the second quarter of 2019 consisted of the following: lower compensation and benefits expenses (-$556 thousand) with $242 thousand of the decrease a result of the deferral of origination costs attributable to PPP lending activities, lower occupancy and equipment expenses as a result of branch optimization initiatives implemented by the Company (-$260 thousand); and lower data processing fees due to savings generated from a renegotiated core processing contract (-$298 thousand).
• The $431 thousand decrease when compared to the first quarter of 2020 consisted of the following: lower compensation and benefits expenses (-$555 thousand) with $242 thousand of the decrease a result of the deferral of origination costs attributable to PPP lending activities, and lower data processing fees (-$77 thousand); partially offset by an increase in other real estate owned-related expenses of $191 thousand.

Income Taxes

The Company reported an income tax expense of $1.7 million for the quarter ended June 30, 2020. The effective tax rate for the second quarter of 2020 was -6.0%, and excluding the non-taxable goodwill impairment charge from pretax income, was 24.6%. As a result of a provision in the CARES Act, an income tax benefit of $1.2 million was recorded in the first quarter of 2020. The effective tax rate for the first quarter of 2020 was -15.8%, and excluding this $1.2 million tax benefit, the effective tax rate for the first quarter of 2020 was 25.0%. The effective tax rate for the second quarter of 2019 was 20.6%.

Loans

Loans totaled $1.90 billion at June 30, 2020, an increase of $137.2 million, or 31.3% annualized, of total loans at March 31, 2020. Compared to June 30, 2019, the loan portfolio grew by $197.6 million, or 11.6%. During the second quarter, the Company originated $199.0 million of loans under the SBA PPP program. Net of deferred processing fees and origination costs, the net balance of PPP loans at June 30, 2020 was $193.7 million. While the Company supported its customers through participation in this program, the Company anticipates that a substantial portion of these loans will be forgiven and repaid by the SBA within the next six to nine months.

Portfolio loans totaled $1.70 billion at June 30, 2020, a decrease of $56.5 million, or 12.9% annualized, from total loans at March 31, 2020. Compared to June 30, 2019, portfolio loans grew by $3.9 million, or 0.2%. Changes in portfolio loans were as follows: *

• Compared to June 30, 2019, the $3.9 million in portfolio loan growth was primarily driven by construction and land loans, up $12.8 million, or 11.1%, and commercial real estate loans, up $24.6 million, or 3.6%, while residential real estate loans decreased by $14.7 million, or 3.0% and commercial loans decreased by $14.9 million, or 4.0%.
• Compared to March 31, 2020, the $56.5 million decrease in portfolio loans was primarily driven by commercial loans, down $36.1 million, or 37.3% annualized, and residential real estate, down $23.0 million, or 18.5% annualized.
  • The decrease in commercial loans was primarily the result of lower line utilization during the quarter. While the Company experienced a negligible increase in commercial line of credit usage during the first quarter, with line utilization of 48.7% at March 31, 2020, line utilization dropped to 41.6% at June 30, 2020. The lower level of commercial loans reflects higher liquidity levels at many borrowers.
  • The decrease in residential real estate loans was a result of a substantially higher level of prepayments due to lower interest rates that led to another strong mortgage refinance quarter. As a result of the exit of the Company’s mortgage banking activities, the mortgage runoff was not offset by new loan originations. In order to manage loan run-off within its residential mortgage loan portfolio, the Bank plans to commence buying first lien residential mortgage loans on a servicing released basis during the third quarter of 2020.

Average loans were $1.88 billion for the second quarter of 2020, an increase of $127.5 million, or 29.2% annualized, over average loans for the first quarter of 2020, and an increase of $212.3 million, or 12.7%, over average loans for the second quarter of 2019. Average PPP loans for the second quarter of 2020 were $142.7 million. Average portfolio loans were $1.74 billion for the second quarter of 2020, a decrease of $15.2 million, or 3.4% annualized, from average loans for the first quarter of 2020. The decline was primarily in residential real estate loans. Compared to the second quarter of 2019, average portfolio loans grew by $69.6 million, or 4.2%, with the growth primarily in construction and land, commercial real estate, and commercial loans. *

Deposits

Total deposits were $1.83 billion at June 30, 2020, an increase of $41.8 million, or 9.4% annualized, over the March 31, 2020 balance of $1.79 billion. Compared to June 30, 2019, total deposits grew by $113.5 million, or 6.6%. Changes in deposits were as follows:

• Customer deposits, which exclude brokered and other non-customer deposits, were $1.67 billion at June 30, 2020, compared to $1.44 billion at March 31, 2020, an increase of $227.0 million or 63.0% annualized.
  • The increase in customer deposits was primarily the result of strong growth in low-cost, non-maturity deposits, which increased by $239.8 million, or 83.6% annualized, during the second quarter of 2020. $201.1 million of the growth was in transaction accounts, and $188.1 million of the transaction account growth was in noninterest-bearing deposits.
  • The strong non-maturity deposit growth was the result of good organic growth, the impact of delays in tax remittances to the federal government, the impact of government stimulus checks, the impact of lower consumer and business spending, and PPP funds that have not yet been used by the recipients.
  • The strong non-maturity deposit growth was partially offset by a continued decline in customer CD balances, down $12.7 million, or 17.3% annualized, due to the Company managing lower retention rates on CDs maturing at substantially higher rates than current market rates. Management made a conscious decision to not offer above-market renewal rates.
• Compared to June 30, 2019, customer deposits increased by $222.4 million, or 15.4%.
  • The increase in customer deposits was primarily the result of strong growth in low-cost, non-maturity deposits, which increased by $286.2 million, or 26.0%. $252.2 million of the growth was in transaction accounts, and $249.5 million of the transaction account growth was in noninterest-bearing deposits.
  • Customer CD balances declined by $63.8 million, or 18.5%.
• Brokered and other non-customer deposits were $161.8 million at June 30, 2020, compared to $347.1 million at March 31, 2020 and $270.7 million at June 30, 2019. The March 31, 2020 balances were the result of the Company increasing its on-balance sheet liquidity in response to the early stages of the COVID-19 pandemic and expectation of liquidity challenges that did not materialize. The $185.3 million decline in balances since March 31, 2020 is a result of reducing on-balance sheet liquidity levels.

Average customer deposits for the second quarter of 2020 were $1.61 billion, an increase of $150.8 million, or 41.2% annualized, from the first quarter 2020 average balance. Excluding customer CDs, customer non-maturity deposit balances increased by $175.1 million, or 60.9% annualized, with transaction accounts up $170.9 million; $167.4 million of the transaction account growth was in noninterest-bearing deposits.

Compared to the second quarter of 2019, average customer deposits were up by $148.9 million, or 10.2%. Excluding customer CDs, customer non-maturity deposit balances increased by $209.3 million, or 18.8%, with transaction accounts up $197.2 million; $217.6 million of the transaction account growth was in noninterest-bearing deposits.

Other Balance Sheet Comments

During the quarter ended June 30, 2020, the Company embarked on a strategy to monetize certain unrealized gains in its mortgage-backed securities (“MBS”) portfolio. $105 million of MBS with high prepayment speeds were identified and sold, resulting in net gains of $3.0 million. $125 million of lower coupon MBS were then purchased. The total available for sale securities portfolio of $276.9 million increased by $1.6 million from March 31, 2020.

Interest bearing deposits with banks (primarily balances held at the FRB) were $46.4 million at June 30, 2020, a $133.6 million decrease from March 31, 2020. This decline is a result of reducing the Company’s on-balance sheet liquidity levels.

Borrowings from the FHLB were $246.0 million at June 30, 2020, a $98.0 million decrease from March 31, 2020. During the second quarter, the Company repaid a long-term, $5.0 million advance, resulting in a prepayment penalty (recorded in noninterest expenses) of $224 thousand.

* Please refer to the section entitled “Reconciliation of Non-GAAP Financial Measures” in this press release and to the financial tables entitled “GAAP to Non-GAAP reconciliation” for a reconciliation to the most directly comparable GAAP financial measures.

Earnings Conference Call

The Company will host a conference call on Tuesday, July 28, 2020, at 10:00 a.m. (EDT) to discuss the results and presentation slides and to answer questions. Those who wish to participate may do so by calling 1-877-269-7756 and asking for the Howard Bancorp conference call. We encourage participants to call at least ten minutes prior to the scheduled start time so that you can be sure to be entered into the conference before it begins. You may also connect to the live conference and ask questions via an instant call-back from the automated conference host to the phone number you specify.

The Call-Back link will be available on our website at https://www.howardbank.com/InvestorCall until the call has ended.

A presentation will be used during the earnings call and will be available on the Investor Relations section of our website at www.howardbank.com.

An internet-based audio replay of the call will be available on the Investor Relations page of our website at www.howardbank.com shortly following the conclusion of the call and will be available until August 27, 2020.

Company management will not be available to discuss the second quarter 2020 results prior to the earnings conference call.

About the Company

Howard Bancorp, Inc. is the parent company of Howard Bank, a Maryland-chartered trust company operating as a commercial bank. Headquartered in Baltimore City, Maryland, Howard Bank operates a general commercial banking business through its 15 branches located throughout the Greater Baltimore Metropolitan Area. Additional information about Howard Bancorp, Inc. and Howard Bank are available on its website at www.howardbank.com.

Cautionary Note Regarding Forward-Looking Statements

This press release and statements by the Company’s management contains “forward-looking statements” as that phrase is defined in the Private Securities Litigation Reform Act of 1995. Forward looking statements can be identified by words such as “anticipated,” “expects,” “intends,” “believes,” “may,” “likely,” “will” or other statements that indicate future periods. Such statements include, without limitation, statements regarding management’s predictions or expectations about future economic conditions, statements about the Company’s business or financial performance, as well as management’s outlook or expectations for earnings, revenues, expenses, capital levels, liquidity levels, asset quality or other future financial or business performance, strategies or expectations. Such forward-looking statements are based on various assumptions (some of which may be beyond the Company’s control) and are subject to risks and uncertainties which change over time and other factors which could cause actual results to differ materially from those currently anticipated. These risks and uncertainties include, but are not limited to: the impact of the recent outbreak of COVID-19 on our business, including the impact of the actions taken by governmental authorities to try and contain the virus or address the impact of the virus on the United States economy (including, without limitation, the CARES Act), and the resulting effect of these items on our operations, liquidity and capital position, and on the financial condition of the Company’s borrowers and other customers; conditions in the financial markets and economic conditions generally and in the bank and non-bank financial services industries, nationally and within our local market areas, including the effects of declines in housing markets, an increase in unemployment levels and slowdowns in economic growth; the Company’s level of nonperforming assets and the costs associated with resolving problem loans including litigation and other costs; the impact of changes in interest rates; credit quality and strength of underlying collateral; the credit risk associated with the substantial amount of commercial real estate, construction and land development, and commercial and industrial loans in the Company’s loan portfolio; the extensive federal and state regulation, supervision and examination governing almost every aspect of the Company’s operations and potential expenses associated with complying with such regulations; possible additional loan losses and impairment of the collectability of loans; the Company’s ability to comply with applicable capital and liquidity requirements; any further impairment of the Company’s goodwill or other intangible assets; losses resulting from pending or potential litigation claims may exceed amounts accrued with respect to such matters; system failure or cybersecurity breaches of the Company’s network security; the Company’s ability to recruit and retain key employees; the effects of weather and natural disasters such as floods, droughts, wind, tornadoes and hurricanes as well as effects from geopolitical instability and man-made disasters including terrorist attacks; the effects of any reputation, credit, interest rate, market, operational, legal, liquidity, regulatory and compliance risk resulting from developments related to any of the risks discussed above; litigation and other risks and uncertainties. Additional risks and uncertainties are contained in the “Risk Factors” and forward-looking statements disclosure in the Company’s most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. The inclusion of this forward-looking information should not be construed as a representation by us or any person that future events, plans, or expectations contemplated by us will be achieved. Forward-looking statements are as of the date they are made, and the Company does not undertake to update any forward-looking statement, whether written or oral, whether as a result of new information, future events, or otherwise, except as required by law.

Additional information is available at www.howardbank.com.