Howard Bancorp Inc - FORM 10-Q

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EX-31.(B) - EXHIBIT 31.(B) - Howard Bancorp Inc	v471575_ex31b.htm
EX-32 - EXHIBIT 32 - Howard Bancorp Inc	v471575_ex32.htm
EX-31.(A) - EXHIBIT 31.(A) - Howard Bancorp Inc	v471575_ex31a.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2017

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

Commission File Number: 001-35489

HOWARD BANCORP, INC.

(Exact name of registrant as specified in its charter)

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
(Address of principal executive offices)		(Zip Code)

(410) 750-0020

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨		Accelerated filer x
Non-accelerated filer ¨	(Do not check if an accelerated filer)	Smaller reporting company ¨
		Emerging Growth Company x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of outstanding shares of common stock outstanding as of July 31, 2017.

Common Stock, $0.01 par value – 9,807,192 shares

HOWARD BANCORP, INC.

TABLE OF CONTENTS

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

Item 3.	Quantitative and Qualitative Disclosure about Market Risk	46

Item 4.	Controls and Procedures	46

PART II	Other Information	47
Item 1.	Legal Proceedings	47

Item 1A.	Risk Factors	47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 3.	Defaults Upon Senior Securities	47

Item 4.	Mine Safety Disclosures	47

Item 5.	Other Information	47

Item 6.	Exhibits	47

Signatures		48

As used in this report, “Bancorp” refers to Howard Bancorp, Inc., references to the “Company,” “we,” “us,” and “ours” refer to Howard Bancorp, Inc. and its subsidiaries, collectively, and references to the “Bank” refer to Howard Bank.

This report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may,” “should” and words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.

These forward-looking statements include, but are not limited to:

statements of our goals, intentions and expectations, particularly with respect to our business plan and strategies, including continuing to focus on commercial customers as well to originate residential real estate loans and maintaining our residential mortgage loan portfolio and continuing to sell loans into the secondary market;

statement regarding our anticipation that a restricted land development loan will be fully repaid;

statements regarding the asset quality of our investment portfolios and anticipated recovery and collection of unrealized losses on securities available for sale;

statements with respect to our allowance for credit losses, and the adequacy thereof;

statement with respect to having adequate liquidity levels;

our belief that we will retain a large portion of maturing certificates of deposit;

future cash requirements relating to commitments to extend credit; and

the expected impact of recent accounting pronouncements.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not undertake any obligation to update any forward-looking statements after the date of this report.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

deterioration in general economic conditions, either nationally or in our market area, or a return to recessionary conditions;

competition among depository and other financial institutions;

inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

adverse changes in the securities markets;

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

our ability to enter new markets successfully and capitalize on growth opportunities, and to otherwise implement our growth strategy;

our ability to successfully integrate acquired entities, if any;

changes in consumer spending, borrowing and savings habits;

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission (“SEC”) and the Public Company Accounting Oversight Board;

loss of key personnel; and

other risks discussed in this report, in our annual report on Form 10-K for the year ended December 31, 2016, as filed with the SEC, and in other reports we may file.

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. You should not put undue reliance on any forward-looking statements.

PART I

Item 1. Financial Statements

Howard Bancorp, Inc. and Subsidiary

Consolidated Balance Sheets

	Unaudited
	June 30,			December 31,
(in thousands, except share data)	2017			2016
ASSETS
Cash and due from banks	$	41,536		$	29,675
Federal funds sold		294			9,691
Total cash and cash equivalents		41,830			39,366
Interest bearing deposits with banks		9,633			19,513
Securities available-for-sale, at fair value		52,151			38,728
Securities held-to-maturity, at amortized cost		9,250			6,250
Nonmarketable equity securities		5,196			5,103
Loans held for sale, at fair value		53,872			51,054
Loans and leases, net of unearned income		880,137			821,524
Allowance for credit losses		(5,385	)		(6,428	)
Net loans and leases		874,752			815,096
Bank premises and equipment, net		19,599			20,080
Goodwill		603			603
Core deposit intangible		1,977			2,248
Bank owned life insurance		28,216			21,371
Other real estate owned		2,135			2,350
Interest receivable and other assets		5,108			5,195
Total assets	$	1,104,322		$	1,026,957
LIABILITIES
Noninterest-bearing deposits	$	215,124		$	182,880
Interest-bearing deposits		639,585			625,854
Total deposits		854,709			808,734
Short-term borrowings		109,770			107,056
Long-term borrowings		6,541			20,517
Deferred tax liability		520			360
Accrued expenses and other liabilities		4,394			4,500
Total liabilities		975,934			941,167
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - par value of $0.01 authorized 20,000,000 shares; issued and outstanding 9,796,103 shares at June 30, 2017 and 6,991,072 at December 31, 2016		98			70
Capital surplus		109,956			71,021
Retained earnings		18,453			14,849
Accumulated other comprehensive loss		(119	)		(150	)
Total stockholders’ equity		128,388			85,790
Total liabilities and stockholders’ equity	$	1,104,322		$	1,026,957

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

Consolidated Statements of Operations

	Unaudited
	For the six months ended						For the three months ended
	June 30,						June 30,
(in thousands, except share data)	2017			2016			2017		2016
INTEREST INCOME
Interest and fees on loans and leases	$	19,742		$	18,800		$	10,281	$	9,346
Interest and dividends on securities		626			301			340		176
Other interest income		208			64			87		31
Total interest income		20,576			19,165			10,708		9,553
INTEREST EXPENSE
Deposits		1,825			1,667			941		892
Short-term borrowings		336			210			195		145
Long-term borrowings		167			270			75		141
Total interest expense		2,328			2,147			1,211		1,178
NET INTEREST INCOME		18,248			17,018			9,497		8,375
Provision for credit losses		540			900			340		515
Net interest income after provision for credit losses		17,708			16,118			9,157		7,860
NONINTEREST INCOME
Service charges on deposit accounts		454			323			246		163
Realized and unrealized gains on mortgage banking activity		5,968			4,137			3,167		2,587
(Loss) gain on the sale of portfolio loans		(179	)		652			5		652
Loss on the disposal of furniture, fixtures & equipment		-			(69	)		-		(69	)
Income from bank owned life insurance		345			305			200		154
Loan fee income		2,673			1,634			1,412		858
Other operating income		490			440			262		225
Total noninterest income		9,751			7,422			5,292		4,570
NONINTEREST EXPENSE
Compensation and benefits		11,620			9,454			6,063		4,870
Occupancy and equipment		2,096			2,563			1,034		949
Amortization of core deposit intangible		271			353			136		176
Marketing and business development		2,126			1,611			1,185		888
Professional fees		840			1,023			417		665
Data processing fees		956			749			480		381
FDIC Assessment		293			405			76		198
Other real estate owned expense		77			83			77		83
Loan production expense		1,880			1,578			950		755
Other operating expense		1,556			1,718			797		896
Total noninterest expense		21,715			19,537			11,215		9,861
INCOME BEFORE INCOME TAXES		5,744			4,003			3,234		2,569
Income tax expense		2,140			1,402			1,196		928
NET INCOME	$	3,604		$	2,601		$	2,038	$	1,641
Preferred stock dividends		-			166			-		109
Net income available to common stockholders	$	3,604		$	2,435		$	2,038	$	1,532
NET INCOME PER COMMON SHARE
Basic	$	0.39		$	0.35		$	0.21	$	0.22
Diluted	$	0.39		$	0.35		$	0.21	$	0.22

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

Consolidated Statements of Comprehensive Income

	Unaudited
	Six months ended						Three months ended
	June 30,						June 30,
(in thousands)	2017			2016			2017			2016
Net Income	$	3,604		$	2,601		$	2,038		$	1,641
Other comprehensive income
Investments available-for-sale:
Unrealized holding gains		48			89			48			33
Related income tax expense		(17	)		(30	)		(17	)		(7	)
Comprehensive income	$	3,635		$	2,660		$	2,069		$	1,667

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

Consolidated Statements of Changes in Stockholders’ Equity Unaudited

													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		-			-		-		-		2,601			-			2,601
Net unrealized gain on securities		-			-		-		-		-			59			59
Dividends paid on preferred stock		-			-		-		-		(166	)		-			(166	)
Redemption of preferred stock		(12,562	)		-		-		-		-			-			(12,562	)
Issuance of common stock:
Director stock awards		-			4,004		-		50		-			-			50
Exercise of options		-			1,740		-		19		-			-			19
Stock-based compensation		-			10,334		-		168		-			-			168
Balances at June 30, 2016	$	-			6,978,217	$	70	$	70,824	$	12,147		$	27		$	83,068

Balances at January 1, 2017	$	-			6,991,072	$	70	$	71,021	$	14,849		$	(150	)	$	85,790
Net income		-			-		-		-		3,604			-			3,604
Net unrealized gain on securities		-			-		-		-		-			31			31
Issuance of common stock:
Common stock offering		-			2,760,000		28		38,355		-			-			38,383
Director stock awards		-			6,604		-		110		-			-			110
Exercise of options		-			19,759		-		234		-			-			234
Stock-based compensation		-			18,668		-		236		-			-			236
Balances at June 30, 2017	$	-			9,796,103	$	98	$	109,956	$	18,453		$	(119	)	$	128,388

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

Consolidated Statements of Cash Flows

	Unaudited
	Six months ended
	June 30
(in thousands)	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	3,604		$	2,601
Adjustments to reconcile net income to net cash from operating activities:
Provision for credit losses		540			900
Deferred income tax		142			(219	)
Provision for other real estate owned		96			83
Depreciation		665			613
Stock-based compensation		346			218
Net accretion (amortization) of investment securities		30			(14	)
Net amortization of discount on purchased loans		(354	)		(320	)
Loss on disposal of furniture, fixtures & equipment		-			69
Net amortization of intangible asset		271			353
Loans originated for sale		(326,920	)		(251,674	)
Proceeds from sale of loans originated for sale		330,070			254,478
Realized and unrealized gains on mortgage banking activity		(5,968	)		(4,137	)
Gain on sales of other real estate owned, net		(19	)		-
Loss (gain) on sales of loans, net		179			(652	)
Cash surrender value of BOLI		(345	)		(305	)
Increase in interest receivable		(67	)		(340	)
Increase in interest payable		51			21
Decrease in other assets		62			221
Decrease in other liabilities		(155	)		(1,161	)
Net cash provided by operating activities		2,228			735
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of interest bearing deposits with banks		9,880			-
Purchases of investment securities available-for-sale		(27,925	)		(54,036	)
Purchases of investment securities held-to-maturity		(3,000	)		(250	)
Proceeds from sale/maturities of investment securities available-for-sale		14,520			46,018
Net increase in loans and leases outstanding		(63,780	)		(38,031	)
Purchase of bank owned life insurance		(6,500	)		(2,200	)
Proceeds from the sale of other real estate owned		138			-
Proceeds from the sale of portfolio loans		3,759			2,085
Purchase of premises and equipment		(184	)		(399	)
Net cash used in investing activities		(73,092	)		(46,813	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		45,975			50,710
Net increase (decrease) in short-term borrowings		2,713			(6,974	)
Proceeds from issuance of long-term debt		-			21,519
Repayment of long-term debt		(13,977	)		(12,000	)
Net proceeds from issuance of common stock, net of cost		38,617			19
Redemption of preferred stock		-			(12,562	)
Cash dividends on preferred stock		-			(166	)
Net cash provided by financing activities		73,328			40,546

Net increase (decrease) in cash and cash equivalents		2,464			(5,532	)
Cash and cash equivalents at beginning of period		39,366			38,340
Cash and cash equivalents at end of period	$	41,830		$	32,808
SUPPLEMENTAL INFORMATION
Cash payments for interest	$	2,277		$	2,127
Cash payments for income taxes		1,930			925

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

Notes to Consolidated Financial Statements (unaudited)

Note 1: Summary of Significant Accounting Policies

Nature of Operations

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 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 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 a bank holding company registered under the Bank Holding Company Act of 1956. Bancorp is 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 6, 2016, Bancorp redeemed all 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 was for a one-year period, with interest only payments based upon 30 day LIBOR plus 300 basis points. This debt was repaid on February 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.

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.

The following is a description of the Company’s significant accounting policies.

Principles of Consolidation

The consolidated financial statements include the accounts of Bancorp, its subsidiary 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 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, other-than-temporary impairment of investment securities, and the fair value of loans held for sale.

Loans Held For Sale

The Company engages 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 is based on outstanding investor commitments or, in the absence of such commitments, on current investor yield requirements based on third party models. Gains and losses on sales of these loans are recorded as a component of noninterest income in 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 sale of the loan generally ranges from 15 to 60 days. The Company protects itself from changes in interest rates through the use 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 of calculating fair value of rate lock commitments, the Bank estimates loan closing and investor delivery rate based on historical experience. The measurement of the estimated fair value of the rate lock commitments is presented as realized and unrealized gains from mortgage banking activities with the corresponding balance sheet amount presented as part of other assets.

The Company has elected to measure loans held for sale at fair value to better align reported results with the underlying economic changes in value of the loans on the Company’s balance sheet. Loans held for sale that are not ultimately sold, but instead are placed into the Bank’s portfolio, are reclassified as loans held for investment and continue to be recorded at fair value.

New Accounting Pronouncements

The Financial Accounting Standards Board (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 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 this update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.

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 June 30, 2017, the Company had contractual operating lease commitments of approximately $10.1 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 is currently evaluating the impact of adopting the new guidance on its consolidated financial statements.

The FASB has issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects 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, 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 date and new contracts going forward. The Company is evaluating the impact of guidance in this update, including method of implementation, but does not believe it will have a material impact on its consolidated 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 prior to the date of adoption are not retrospectively revised, but a cumulative effect of adoption is recognized for the impact of the ASU on uncompleted contracts at the date of adoption.

Note 2: Investment Securities

The Company holds securities classified as available-for-sale and held-to-maturity.

The amortized cost and estimated fair values of investment securities are as follows:

(in thousands)	June 30, 2017								December 31, 2016
			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	$	47,414	$	7	$	125	$	47,296	$	34,584	$	5	$	126	$	34,463
Treasuries		1,508		-		9		1,499		1,512		-		8		1,504
Mortgage-backed		1,346		1		36		1,311		1,366		1		69		1,298
Other investments		2,068		-		23		2,045		1,500		-		37		1,463
	$	52,336	$	8	$	193	$	52,151	$	38,962	$	6	$	240	$	38,728
Held to maturity
Corporate debentures	$	9,250	$	82	$	-	$	9,332	$	6,250	$	334	$	-	$	6,584

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 June 30, 2017 and December 31, 2016 are presented below:

June 30, 2017
(in thousands)	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Available for sale
U.S. Government
Agencies	$	44,302	$	119	$	995	$	6	$	45,297	$	125
Treasuries		1,499		9		-		-		1,499		9
Mortgage-backed		1,291		36		-		-		1,291		36
Other investments		2,000		23		-		-		2,000		23
	$	49,092	$	187	$	995	$	6	$	50,087	$	193

December 31, 2016
(in thousands)	Less than 12 months				12 months or more				Total
			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
Treasuries		1,501		8		-		-		1,501		8
Mortgage-backed		1,273		69		-		-		1,273		69
Other investments		1,463		37		-		-		1,463		37
	$	21,729	$	240	$	-	$	-	$	21,729	$	240

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 29 securities with unrealized losses and 12 securities with unrealized losses at June 30, 2017 and December 31, 2016, respectively.

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.

The amortized cost and estimated fair values of investment securities by contractual maturity are shown below:

(in thousands)	June 30, 2017				December 31, 2016
	Amortized		Estimated Fair		Amortized		Estimated Fair
	Cost		Value		Cost		Value
Amounts maturing:
One year or less	$	15,577	$	15,554	$	16,988	$	16,993
After one through five years		33,355		33,251		19,120		18,985
After five through ten years		9,259		9,341		6,262		6,596
After ten years		3,395		3,337		2,842		2,738
	$	61,586	$	61,483	$	45,212	$	45,312

At June 30, 2017 and December 31, 2016, $23.2 million and $26.8 million in fair value of securities were pledged as collateral for repurchase agreements, respectively. No single issuer of securities, except for Government agency securities, had outstanding balances that exceeded ten percent of stockholders’ equity at June 30, 2017.

Note 3: Loans and Leases

The Company originates loans and leases to customers primarily in the Greater Baltimore Maryland 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 June 30, 2017 and December 31, 2016 are presented in the following table:

(in thousands)	June 30, 2017		% of Total			December 31, 2016		% of Total
Real estate
Construction and land	$	82,966		9.4	%	$	72,973		8.9	%
Residential - first lien		196,392		22.3			195,032		23.7
Residential - junior lien		38,873		4.4			35,009		4.3
Total residential real estate		235,265		26.7			230,041		28.0
Commercial - owner occupied		154,584		17.6			134,213		16.3
Commercial - non-owner occupied		219,263		24.9			216,781		26.4
Total commercial real estate		373,847		42.5			350,994		42.7
Total real estate loans		692,078		78.6			654,008		79.6
Commercial loans and leases		183,537		20.9			162,715		19.8
Consumer		4,522		0.5			4,801		0.6
Total loans	$	880,137		100.0	%	$	821,524		100.0	%

Acquired Impaired Loans

The following table documents changes in the accretable discount on acquired impaired loans during the six months ended June 30, 2017 and 2016, along with the outstanding balances and related carrying amounts for the beginning and end of those respective periods.

(in thousands)	June 30, 2017			June 30, 2016
Balance at beginning of period	$	60		$	335
Accretion of fair value discounts		(53	)		(186	)
Balance at end of period	$	7		$	149

	Contractually
	Required
	Payments		Carrying
(in thousands)	Receivable		Amount
At June 30, 2017	$	1,343	$	862
At December 31, 2016		1,695		1,023
At June 30, 2016		2,199		1,294
At December 31, 2015		3,105		1,708

Note 4: Credit Quality Assessment

Allowance for Credit Losses

The following table provides information, by the respective loan portfolio segment, about the activity in the allowance for credit losses for the three and six month periods ended June 30, 2017 and 2016:

	June 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:
Six months ended:
Beginning balance	$	511	$	454		$	89		$	327	$	1,120	$	3,800		$	127		$	6,428
Charge-offs		-		(132	)		(31	)		-		-		(1,366	)		(108	)		(1,637	)
Recoveries		-		-			1			-		3		28			22			54
Provision for credit losses		51		221			52			74		53		28			61			540
Ending balance	$	562	$	543		$	111		$	401	$	1,176	$	2,490		$	102		$	5,385
Three months ended:
Beginning balance	$	534	$	504		$	99		$	395	$	1,098	$	2,661		$	69		$	5,360
Charge-offs		-		(82	)		(8	)		-		-		(254	)		-			(344	)
Recoveries		-		-			1			-		2		16			10			29
Provision for credit losses		28		121			19			6		76		67			23			340
Ending balance	$	562	$	543		$	111		$	401	$	1,176	$	2,490		$	102		$	5,385

	June 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:
Six months ended:
Beginning balance	$	265	$	300	$	47	$	309	$	728	$	3,094		$	126		$	4,869
Charge-offs		-		-		-		-		-		(66	)		(11	)		(77	)
Recoveries		-		-		-		-		3		26			23			52
Provision for credit losses		183		65		23		269		110		229			21			900
Ending balance	$	448	$	365	$	70	$	578	$	841	$	3,283		$	159		$	5,744
Three months ended:
Beginning balance	$	362	$	349	$	56	$	543	$	838	$	3,043		$	65		$	5,256
Charge-offs		-		-		-		-		-		(59	)		-			(59	)
Recoveries		-		-		-		-		1		17			14			32
Provision for credit losses		86		16		14		35		2		282			80			515
Ending balance	$	448	$	365	$	70	$	578	$	841	$	3,283		$	159		$	5,744

The following table provides additional information on the allowance for credit losses at June 30, 2017 and December 31, 2016:

	June 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 allocated to:
individually evaluated for impairment	$	-	$	6	$	-	$	-	$	-	$	538	$	-	$	544
collectively evaluated for impairment		562		537		111		401		1,176		1,952		102		4,841
Loans:
Ending balance	$	82,966	$	196,392	$	38,873	$	154,584	$	219,263	$	183,537	$	4,522	$	880,137
individually evaluated for impairment		125		1,795		196		508		3,660		3,118		-		9,402
collectively evaluated for impairment		82,841		194,597		38,677		154,076		215,603		180,419		4,522		870,735

	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

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 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.

Credit risk profile by portfolio segment based upon internally assigned risk assignments are presented below:

	June 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
Credit quality indicators:
Not classified	$	82,966	$	194,605	$	38,677	$	154,076	$	215,513	$	179,517	$	4,522	$	869,876
Special mention		-		-		-		-		-		-		-		-
Substandard		-		1,549		196		508		3,750		2,804		-		8,807
Doubtful		-		238		-		-		-		1,216		-		1,454
Total	$	82,966	$	196,392	$	38,873	$	154,584	$	219,263	$	183,537	$	4,522	$	880,137

	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
Credit quality indicators:
Not classified	$	72,973	$	193,748	$	34,972	$	133,704	$	212,765	$	157,567	$	4,634	$	810,363
Special mention		-		-		-		-		-		524		-		524
Substandard		-		793		-		-		2,941		-		-		3,734
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

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 are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans 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 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.

Loans classified Special Mention, Substandard, Doubtful or Loss are reviewed at least quarterly to determine their appropriate classification. All commercial loan 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 possible credit deterioration.

An aged analysis of past due loans are as follows:

	June 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	$	82,966	$	194,181	$	38,509	$	154,076	$	215,603	$	179,658	$	4,521	$	869,514
Accruing loans past due:
31-59 days past due		-		240		168		-		-		223		-		631
60-89 days past due		-		390		-		-		-		789		1		1,180
Greater than 90 days past due		-		77		-		-		-		-		-		77
Total past due		-		707		168		-		-		1,012		1		1,888

Non-accrual loans		-		1,504		196		508		3,660		2,867		-		8,735

Total loans	$	82,966	$	196,392	$	38,873	$	154,584	$	219,263	$	183,537	$	4,522	$	880,137

	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

Total loans either in non-accrual status or in excess of 90 days delinquent and still accruing totaled $8.8 million or 1.0% of total loans outstanding and $9.9 million or 1.2% of total loans outstanding at June 30, 2017 and December 31, 2016, respectively.

The impaired loans at June 30, 2017 and December 31, 2016 are as follows:

	June 30, 2017
							Commercial		Commercial		Commercial
	Construction		Residential		Residential		owner		non-owner		loans		Consumer
(in thousands)	& land		first lien		junior lien		occupied		occupied		and leases		loans		Total
Impaired loans:
Recorded investment	$	125	$	1,795	$	196	$	508	$	3,660	$	3,118	$	-	$	9,402
With an allowance recorded		-		210		-		-		-		1,582		-		1,792
With no related allowance recorded		125		1,585		196		508		3,660		1,536		-		7,610
Related allowance		-		6		-		-		-		538		-		544
Unpaid principal		125		1,835		196		509		3,677		4,729		-		11,071
Six months ended:
Average balance of impaired loans		125		1,870		196		519		3,681		5,335		-		11,726
Interest income recognized		3		15		3		-		39		55		-		115
Three months ended:
Average balance of impaired loans		125		1,866		196		519		3,679		5,881		-		12,266
Interest income recognized		2		8		-		-		1		25		-		36

	December 31, 2016
							Commercial		Commercial		Commercial
	Construction		Residential		Residential		owner		non-owner		loans		Consumer
(in thousands)	& 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
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
Related allowance		-		7		-		-		-		2,076		72		2,155
Unpaid principal		125		1,323		38		509		3,286		5,694		174		11,149

	June 30, 2016
							Commercial		Commercial		Commercial
	Construction		Residential		Residential		owner		non-owner		loans		Consumer
(in thousands)	& land		first lien		junior lien		occupied		occupied		and leases		loans		Total
Impaired loans:
Six months ended:
Average balance of impaired loans	$	-	$	696	$	-	$	637	$	3,596	$	12,063	$	148	$	17,140
Interest income recognized		-		20		-		-		8		177		1		206
Three months ended:
Average balance of impaired loans	$	-	$	695	$	-	$	634	$	3,592	$	11,927	$	147	$	16,995
Interest income recognized		-		16		-		-		8		99		1		124

Included in the total impaired loans above were non-accrual loans of $8.7 million and $6.9 million at June 30, 2017 and December 31, 2016, respectively. Interest income that would have been recorded if non-accrual loans had been current and in accordance with their original terms was $258 thousand and $252 thousand for the first six months of 2017 and 2016, respectively.

The following table outlines the acquired impaired loans at June 30, 2017 and December 31, 2016:

	June 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	$	-	$	-	$	-	$	-	$	459	$	996	$	-	$	1,455
Non-Accretable adjustment		-		-		-		-		-		434		-		434
Cash flow expected		-		-		-		-		459		562		-		1,021
Accretable yield		-		-		-		-		17		7		-		24
Loan receivable	$	-	$	-	$	-	$	-	$	442	$	555	$	-	$	997

Doubtful
Contractual payment receivable	$	-	$	-	$	-	$	-	$	-	$	38	$	-	$	38
Non-Accretable adjustment		-		-		-		-		-		38		-		38
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:
Substandard
Contractual payment receivable	$	-	$	-	$	-	$	-	$	466	$	-	$	-	$	466
Non-Accretable adjustment		-		-		-		-		-		-		-		-
Cash flow expected		-		-		-		-		466		-		-		466
Accretable yield		-		-		-		-		18		-		-		18
Loan receivable	$	-	$	-	$	-	$	-	$	448	$	-	$	-	$	448

Doubtful
Contractual payment receivable	$	-	$	-	$	-	$	-	$	619	$	1,777	$	-	$	2,396
Non-Accretable adjustment		-		-		-		-		125		486		-		611
Cash flow expected		-		-		-		-		494		1,291		-		1,785
Accretable yield		-		-		-		-		13		65		-		78
Loan receivable	$	-	$	-	$	-	$	-	$	481	$	1,226	$	-	$	1,707

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 impaired based on the terms specified by the restructuring agreement.

TDRs at June 30, 2017 and December 31, 2016 are as follows:

	June 30, 2017
	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		210		1		291		501
Commercial - non-owner occupied		2		2,667		-		-		2,667
Commercial loans and leases		1		514		1		156		670
		4	$	3,391		3	$	572	$	3,963

	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 are as follows:

	June 30, 2017
			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		6		210		291		501
Commercial RE - non-owner occupied
Rate modification		-		2,667		-		2,667
Commercial loans
Forbearance		-		514		156		670
Total troubled debt restructure loans	$	6	$	3,391	$	572	$	3,963

	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

There were no new loans restructured during the six months ended June 30, 2017, however, there were four loans totaling $1.4 million restructured in 2016 consisting of the following:

One commercial loan in the amount of $183 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.

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 have been only interest rate concessions and payment term extensions, not principal reductions that resulted in the recordation of a loss. Thus, the pre-modification and post-modification recorded investment amounts are the same for these TDRs.

Performing TDRs were in compliance with their modified terms and there are no further commitments associated with these loans. During the six months ended June 30, 2017 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 six months ended June 30, 2017 and 2016 there were additional allowances recorded of $96 thousand and $83 thousand, respectively, as the current appraised value, less estimated cost to sell, was not sufficient to cover the recorded OREO amount. For the six months ended June 30, 2017 and 2016 there were no new loans transferred from loans to OREO. The Company sold two properties held as OREO during the second quarter of 2017 for a net gain totaling $19 thousand. There were no such properties sold during the same period of 2016. The Company held no residential first lien loans in OREO at either June 30, 2017 or December 31, 2016. At June 30, 2017 there were two residential first lien loans totaling $458 thousand in the process of foreclosure, and no residential first lien loans in the process of foreclosure at December 31, 2016.

Note 5: 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 the extent that the carrying amount exceeds the asset’s fair value.

The Bank has one unit, which is the core banking operation. The table below shows goodwill balances at June 30, 2017 and December 31, 2016.

(in thousands)
Goodwill
Banking	$	603

The gross carrying amount and accumulated amortization of other intangible assets are as follows:

June 30, 2017

Weighted

Gross

Net

Average

Carrying

Accumulated

Carrying

Remaining Life

(in thousands)

Amount

Amortization

Amount

(Years)

Amortizing intangible assets:

Core deposit intangible

3,540

1,563

1,977

6.11

December 31, 2016

Weighted

Gross

Net

Average

Carrying

Accumulated

Carrying

Remaining Life

(in thousands)

Amount

Amortization

Amount

(Years)

Amortizing intangible assets:

Core deposit intangible

3,540

1,292

2,248

6.61

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

(in thousands)
2017	$	234
2018		396
2019		314
2020		269
2021		258
Thereafter		506
Total amortizing intangible assets	$	1,977

Note 6: Deposits

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

(dollars in thousands)	June 30, 2017					December 31, 2016
			% of					% of
	Amount		Total			Amount		Total
Noninterest-bearing demand	$	215,124		25	%	$	182,880		23	%
Interest-bearing checking		69,031		8			62,538		8
Money market accounts		272,917		32			247,858		31
Savings		54,262		6			50,495		6
Certificates of deposit		243,375		29			264,963		32
Total deposits	$	854,709		100	%	$	808,734		100	%

Note 7: 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. 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. 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 of Directors as compensation for attendance and participation at meetings of the Board of Directors and meetings of the various committees of the Board. For the six months ended June 30, 2017 and 2016, Bancorp issued 6,604 and 4,004 shares of common stock, respectively, to directors as compensation for their service.

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 no stock options granted during the first six months of 2017 or the year ended December 31, 2016. The valuation 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.

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

	June 30, 2017					December 31, 2016
				Weighted					Weighted
				Average					Average
				Exercise					Exercise
	Shares			Price		Shares			Price
Balance at January 1,		123,593		$	12.36		137,463		$	12.30
Granted		-			-		-			-
Exercised		(19,759	)		11.86		(3,020	)		11.64
Forfeited		(65,039	)		13.95		(10,850	)		11.77
Balance at period end		38,795		$	10.03		123,593		$	12.36
Exercisable at period end		38,795		$	10.03		123,593		$	12.36
Weighted average fair value of options
granted during the year				$	-				$	-

The cash received from the exercise of stock options during the six months ended June 30, 2017 was $234 thousand, compared to $19 thousand for the first half of 2016. 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 $19.25 at June 30, 2017, the options outstanding had an aggregate intrinsic value of $381 thousand. At December 31, 2016, based upon fair market value of $15.10, the outstanding options outstanding had an aggregate intrinsic value of $338 thousand.

Restricted Stock

In the second quarter of 2013, 50,000 shares of restricted stock were granted, with 30,000 of 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 June 30, 2017, there were no restricted stock awards granted or outstanding, and all of the pre-tax compensation expense related to restricted stock awards has been recognized.

Restricted Stock Units

Restricted stock units (“RSUs”) are similar to restricted stock, except 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 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.

For the first half of 2017, 5,000 RSUs were granted subject to a three year vesting schedule. The Company granted 27,000 RSUs during 2016, all of which are subject to a three-year vesting schedule.

The following table presents a summary of the activity in the Company’s RSUs for the periods ended:

	June 30, 2017					December 31, 2016
				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
Granted		5,000			10.81		27,000			12.91
Vested		(18,668	)		12.43		(17,838	)		12.95
Forfeited		-			-		(18,499	)		12.96
Balance at period end		51,823		$	13.28		65,491		$	13.23

At June 30, 2017, based on RSU awards outstanding at that time, the total unrecognized pre-tax compensation expense related to unvested RSU awards was $468 thousand. This expense is expected to be recognized through 2019.

Stock-Based Compensation Expense: Stock-based compensation 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. The amount that the Company recognized in stock-based compensation expense related to the issuance of restricted stock and RSUs and for director compensation paid in stock is presented in the following table:

	Six months ended				Three months ended
	June 30,				June 30,
(in thousands)	2017		2016		2017		2016
Stock-based compensation expense
Related to the issuance of restricted stock and RSUs	$	236	$	168	$	149	$	90
Director compensation paid in stock	$	110	$	50	$	66	$	17

Note 8: 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 $381 thousand and $312 thousand, respectively, for the six months ended June 30, 2017 and 2016. The Company’s matching contributions vest immediately.

Supplemental Executive Retirement Plan (SERP)

In 2014, the Bank created a SERP for the Chief Executive Officer. This plan was amended in 2015. Under the defined benefit SERP, Ms. Scully 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 vesting on a graduated schedule in which she will become fully vested on August 25, 2019, which has been established for purposes of the SERP as her retirement date. Expense related to this plan totaled $141 thousand and $121 thousand, respectively, for the six month periods and $67 thousand and $61 thousand, respectively, for the three month periods ending June 30, 2017 and 2016.

Note 9: Income per Common Share

The table below shows the presentation of basic and diluted income per common share for the periods indicated:

	Six months ended					Three months ended
	June 30,					June 30,
(dollars in thousands, except per share data)	2017		2016			2017		2016
Net income	$	3,604	$	2,601		$	2,038	$	1,641
Preferred stock dividends		-		(166	)		-		(109	)
Net income available to common stockholders (numerator)	$	3,604	$	2,435		$	2,038	$	1,532
BASIC
Basic average common shares outstanding (denominator)		9,295,777		6,963,199			9,779,772		6,970,876
Basic income per common share	$	0.39	$	0.35		$	0.21	$	0.22
DILUTED
Average common shares outstanding		9,295,777		6,963,199			9,779,772		6,970,876
Dilutive effect of common stock equivalents		39,373		93,083			42,393		90,991
Diluted average common shares outstanding (denominator)		9,335,150		7,056,282			9,822,165		7,061,867
Diluted income per common share	$	0.39	$	0.35		$	0.21	$	0.22

Common stock equivalents outstanding that are anti-dilutive and thus excluded from calculation of diluted number of shares presented above		-		75,711			-		79,911

Note 10: Risk-Based 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. Bancorp’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by 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 provisions 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.

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). Under the guidelines, capital is compared to the relative risk related to 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 guaranteed by the U.S. government or one of 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% 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.

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

											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 June 30, 2017:
Total capital
(to risk-weighted assets)
Howard Bank	$	120,413		12.89	%	$	74,726		8.00	%	$	93,408		10.00	%
Howard Bancorp	$	134,600		14.34	%	$	75,112		8.00	%		N/A
Common equity tier 1 capital
(to risk-weighted assets)
Howard Bank	$	115,064		12.32	%	$	42,034		4.50	%	$	60,715		6.50	%
Howard Bancorp	$	125,721		13.39	%	$	42,251		4.50	%		N/A
Tier 1 capital (to risk-weighted assets)
Howard Bank	$	115,064		12.32	%	$	56,045		6.00	%	$	74,726		8.00	%
Howard Bancorp	$	125,721		13.39	%	$	56,334		6.00	%		N/A
Tier 1 capital (to average assets)
(Leverage ratio)
Howard Bank	$	115,064		10.79	%	$	42,669		4.00	%	$	53,336		5.00	%
Howard Bancorp	$	125,721		11.78	%	$	42,686		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

Note 11: Preferred Stock

On September 22, 2011, Bancorp entered into a Securities Purchase Agreement with the Secretary of the Treasury, pursuant to which Bancorp issued and sold to the Treasury 12,562 shares of 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 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, 2016 with respect to 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 junior to the Series AA Preferred Stock) if it had declared and paid dividends for the current dividend period on the Series AA Preferred Stock, and was subject to other restrictions on its ability to repurchase 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 redemption of the Series AA Preferred Stock. This debt was repaid on February 1, 2017.

Note 12: 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.

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 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 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.

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

June 30, 2017			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)
Available for sale securities:
U.S. Government agencies	$	47,296	$	-	$	47,296	$	-
U.S. Government treasuries		1,499		-		1,499		-
Mortgage-backed securities		1,311		-		1,311		-
Other investments		2,045		-		1,977		68
Loans held for sale		53,872		-		53,872		-
Loans held for investment		1,753		-		1,753		-
Rate lock commitments		586		-		-		586

December 31, 2016			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)
Available for sale securities:
U.S. Government agencies	$	34,463	$	-	$	34,463	$	-
U.S. Government treasuries		1,504		-		1,504		-
Mortgage-backed securities		1,298		-		1,298		-
Other investments		1,463		-		1,463		-
Loans held for sale		51,054		-		51,054		-
Loans held for investment		6,580		-		6,580		-
Rate lock commitments		528		-		-		528

Assets under fair value option:

June 30, 2017	Carrying		Aggregate
	Fair Value		Unpaid
(in thousands)	Amount		Principal		Difference
Loans held for sale	$	53,872	$	52,260	$	1,612
Loans held for investment		1,753		1,695		58

December 31, 2016	Carrying		Aggregate
	Fair Value		Unpaid
(in thousands)	Amount		Principal		Difference
Loans held for sale	$	51,054	$	49,709	$	1,345
Loans held for investment		6,580		6,794		(214	)

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:

	June 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		58		20
Balance, end of period	$	654	$	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 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 subsequent to foreclosure. Values are derived from appraisals of underlying collateral and discounted cash flow analysis. There were valuation losses of $96 thousand recognized during the three months ended June 30, 2017 and $83 thousand recognized for the year ended December 31, 2016. These 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 $212 thousand that was originally classified as held for sale that was downgraded to non-accrual status in 2016. Net gain from the changes included in earnings in fair value of loans held for sale was $267 thousand at June 30, 2017. Net gain from the changes included in earnings in fair value of loans held for investment was $93 thousand at June 30, 2017.

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 June 30, 2017 and December 31, 2016.

June 30, 2017			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)
Other real estate owned	$	2,135	$	-	$	-	$	2,135
Impaired loans:
Construction and land		125		-		-		125
Residential - first lien		1,789		-		-		1,789
Residential - junior lien		196		-		-		196
Commercial - owner occupied		508		-		-		508
Commercial - non-owner occupied		3,660		-		-		3,660
Commercial loans and leases		2,580		-		-		2,580
Consumer		-		-		-		-

December 31, 2016			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)
Other real estate owned	$	2,350	$	-	$	-	$	2,350
Impaired loans:
Construction and land		125		-		-		125
Residential - first lien		778		-		-		778
Residential - junior lien		37		-		-		37
Commercial - owner occupied		509		-		-		509
Commercial - non-owner occupied		3,148		-		-		3,148
Commercial loans and leases		3,066		-		-		3,066
Consumer		95		-		-		95

OREO consisted of the outstanding balance of $4.7 million, less valuation allowance of $2.6 million, at June 30, 2017, and $5.0 million, less valuation allowance of $2.7 million, at December 31, 2016. Related allowance on impaired loans was $544 thousand and $2.2 million at June 30, 2017 and December 31, 2016, respectively.

Various techniques are used to valuate 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 of financial instruments where it is practical to estimate fair value:

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 December 31, 2016, 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. At June 30, 2017 the carrying amounts approximate the fair values.

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:

	June 30, 2017
					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	$	52,151	$	52,151	$	-	$	52,083	$	68
Held to maturity securities		9,250		9,332		-		-		9,332
Nonmarketable equity securities		5,196		5,196		-		5,196		-
Loans held for sale		53,872		53,872		-		53,872		-
Loans held for investment		1,753		1,753		-		1,753		-
Rate lock commitments		586		586		-		-		586
Loans and leases		872,999		870,923		-		-		870,923
Financial Liabilities
Deposits		854,709		855,872		-		855,872		-
Short-term borrowings		109,770		109,770		-		109,770		-
Long-term borrowings		6,541		6,541		-		6,541		-

	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		-

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section 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 June 30, 2017 and December 31, 2016 and our consolidated results of operations for the six and three month periods ended June 30, 2017 and June 30, 2016. This section should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements.

Overview

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 consider our primary market area to be 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 to small to 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.

Our core business strategy is to deliver superior customer service that is supported by an extremely high level of banking sophistication. Our specialized community banking focus on both local markets and small business related market segments is combined with 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 on our net interest income, which is the difference between the interest income we earn on our loan and investment portfolios and the interest expense we pay on deposits and borrowings. Results of operations are also affected 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 respect to changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially affect our financial condition and results of operations.

On February 1, 2017, Howard 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 the Company 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 May 6, 2016, we redeemed all of the 12,562 shares of the Series AA Preferred Stock that we had previously issued to the Treasury under its 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. This debt was repaid on February 1, 2017.

Financial highlights during the six months ended June 30, 2017 are as follows:

Primarily as a result of the capital offering our total stockholders’ equity increased $42.6 million or 49.7%. As anticipated, all of our regulatory capital ratios increased dramatically as a result of the offering. We used $12.7 million of the approximately $38.4 million in net proceeds of the offering to repay the loan to Raymond James Bank, N.A, and retained the remainder to provide funding for future growth.

Total assets increased $77.4 million or 7.5%, to $1.1 billion at June 30, 2017.

Loans and leases held in our portfolio grew $58.6 million or 7.1%, to $880.1 million at June 30, 2017.

Deposits increased $46.0 million or 5.7% to $854.7 million at June 30, 2017, including noninterest-bearing deposit growth of $32.2 million or 17.6%.

Net income available to common stockholders increased $1.2 million or 48.0% compared to the same period in 2016.

Tangible book value increased to $12.84 per share at June 30, 2017 compared to $11.45 per share at June 30, 2016.

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, business combinations, income taxes and share based compensation. 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. There have been no changes to the significant accounting policies as described in the Annual Report. Disclosures regarding the effects of new accounting pronouncements are also included in Note 1.

Balance Sheet Analysis and Comparison of Financial Condition

A comparison between June 30, 2017 and December 31, 2016 balance sheets is presented below.

General

Total assets increased $77.4 million, or 7.5%, to $1.104 billion at June 30, 2017 compared to $1.027 billion December 31, 2016. This asset growth consisted primarily of increases in our loan portfolio of $58.6 million, investment securities of $16.4 million and bank owned life insurance of $6.9 million, partially offset by declines in interest bearing deposits in banks of $9.9 million. The asset growth was funded primarily from increases in customer deposits of $46.0 million or 5.7%. This deposit growth consisted of increases in noninterest-bearing deposits of $32.2 million or 17.6% and in interest-bearing deposits of $13.7 million or 2.2%.

Securities

Available for sale

Available for sale securities are reported at fair value. We currently hold U.S. agency and treasury securities, mortgage backed securities, and mutual fund investments in our securities 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 to provide the required collateral for funding via commercial customer overnight securities sold under agreement to repurchase (“repurchase agreements”) as well as to provide sufficient liquidity to fund our loans and provide funds for withdrawals of deposits.

Held to maturity

Held to maturity securities are reported at amortized cost. The only investments that we have classified as held to maturity are corporate debentures. These investments are intended to be held until maturity.

The following tables set forth the composition of our investment securities portfolio at the dates indicated.

(in thousands)	June 30, 2017				December 31, 2016
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
Available for sale
U.S. Government
Agencies	$	47,414	$	47,296	$	34,584	$	34,463
Treasuries		1,508		1,499		1,512		1,504
Mortgage-backed		1,346		1,311		1,366		1,298
Other investments		2,068		2,045		1,500		1,463
	$	52,336	$	52,151	$	38,962	$	38,728
Held to maturity
Corporate debentures	$	9,250	$	9,332	$	6,250	$	6,584

We had securities available for sale of $52.2 million and $38.7 million at June 30, 2017 and December 31, 2016, respectively, which were recorded at fair value. This represents an increase of $13.4 million, or 34.7%, from year-end 2016. Nearly $15.6 million of 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 six months ended June 30, 2017.

We had securities held to maturity of $9.3 million and $6.3 million at June 30, 2017 and December 31, 2016, respectively, which were recorded at amortized cost. This represents an increase of $3.0 million during the first half of 2017, consisting of additional investments in corporate debentures.

With respect to our portfolio of securities available for sale, the portfolio contained 29 securities with unrealized losses of $193 thousand and 12 securities with unrealized losses of $240 thousand at June 30, 2017 and December 31, 2016, respectively. Changes in the fair value of these securities resulted primarily from fluctuations in market interest rates. 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 to maturity securities were all in a gain position at June 30, 2017 and December 31, 2016.

At June 30, 2017 and December 31, 2016 we held an investment in stock of the Federal Home Loan Bank (“FHLB”) of $5.2 million and $5.1 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.

Loan and Lease Portfolio

Total loans and leases (which excludes loans held for sale) increased $58.6 million, or 7.1%, to $880.1 million at June 30, 2017 from $821.5 million at December 31, 2016. At June 30, 2017, total loans and leases represented 79.7% of total assets, down slightly compared to 80.0% of total assets at December 31, 2016. Of all our loan categories, real estate loans reflected the largest growth during the first half of 2017, increasing $38.1 million or 5.8% from December 31, 2016 levels. This growth consists of increases of $22.9 million in commercial mortgages, $10.0 million in construction and land loans and $5.2 million in residential real estate loans. Commercial loans and leases increased $20.8 million during the first six months of 2017 as we continue to focus on the needs of small to mid-size businesses in our market area.

The following table sets forth the composition of our loan portfolio at the dates indicated.

(dollars in thousands)	June 30, 2017					December 31, 2016
	Amount		Percent			Amount		Percent
Real Estate
Construction and land	$	82,966		9.4	%	$	72,973		8.9	%
Residential - first lien		196,392		22.3			195,032		23.7
Residential - junior lien		38,873		4.4			35,009		4.3
Total residential real estate		235,265		26.7			230,041		28.0
Commercial - owner occupied		154,584		17.6			134,213		16.3
Commercial - non-owner occupied		219,263		24.9			216,781		26.4
Total commercial real estate		373,847		42.5			350,994		42.7
Total real estate loans		692,078		78.6			654,008		79.6
Commercial loans and leases		183,537		20.9			162,715		19.8
Consumer loans		4,522		0.5			4,801		0.6
Total loans and leases	$	880,137		100.0	%	$	821,524		100.0	%

Loan Held for Sale

We sell the majority of residential mortgage loans originated by the Bank. Loans held for sale increased $2.8 million to $53.9 million at June 30, 2017 from $51.1 million at December 31, 2016. Mortgage loan origination volumes continue to be strong, with $326.9 million in loans originated in the first half of 2017 compared to $251.7 million for the same period of 2016.

Deposits

Deposits increased from $808.7 million at December 31, 2016 to $854.7 million at June 30, 2017, an increase of $46.0 million or 5.7%. Deposit increases during the first half of 2017 were as follows: noninterest-bearing demand deposits $32.2 million; interest-bearing demand deposits $6.5 million; money market accounts $25.1 million; and savings accounts $3.8 million. These increases were partially offset by a $21.6 million decrease in certificates of deposit.

The following tables set forth the distribution of total deposits, by account type, at the dates indicated:

(dollars in thousands)	June 30, 2017					December 31, 2016
			% of					% of
	Amount		Total			Amount		Total
Noninterest-bearing demand	$	215,124		25	%	$	182,880		23	%
Interest-bearing checking		69,031		8			62,538		8
Money market accounts		272,917		32			247,858		31
Savings		54,262		6			50,495		6
Certificates of deposit		243,375		29			264,963		32
Total deposits	$	854,709		100	%	$	808,734		100	%

As a result of the significant demand deposit growth, coupled with more modest growth in other deposit categories and the proceeds of the capital raise, we intentionally allowed certificates of deposit levels to decline during the first half 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, as collateral for 100% of the principal and accrued interest of its repurchase agreements.

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 $116.3 million at June 30, 2017 versus $127.6 million at December 31, 2016, reflecting a decrease of $11.3 million or 8.8%. Short-term borrowings at June 30, 2017 consisted of repurchase agreements of $11.3 million, master notes totaling $1.0 million, and 13 short-term FHLB advances totaling $97.5 million. Long-term borrowing totaled $6.5 million at June 30, 2017, consisting of one long-term FHLB advance totaling $3.0 million and junior subordinated debt totaling $3.5 million.

Stockholders’ Equity

Total stockholders’ equity increased $42.6 million, or approximately 49.7%, from $85.8 million at December 31, 2016 to $128.4 million at June 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 June 30, 2017 represents a capital to asset ratio of 11.6%, compared to 8.4% at December 31, 2016. Book value per share was $13.11 at June 30, 2017 and $12.27 at December 31, 2016. Leverage ratio, Tier1 risk-based capital ratio and total risk-based capital ratio were 11.78%, 13.39% and 14.34%, respectively at June 30, 2017.

Average Balance and Yields

The following tables set forth average balance sheets, average yields and costs, 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.

	Six months ended June 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	$	169,406		$	3,662		4.36	%	$	161,345		$	4,078		5.08	%
Commercial real estate		361,313			8,511		4.75			312,839			7,512		4.83
Construction and land		78,888			1,863		4.76			71,532			1,681		4.73
Residential real estate		230,711			5,023		4.39			218,238			4,662		4.30
Consumer		4,528			125		5.57			4,020			110		5.53
Total loans and leases		844,846			19,184		4.58			767,974			18,043		4.72
Loans held for sale		29,640			558		3.79			43,791			757		3.48
Other earning assets ²		51,204			208		0.82			32,210			64		0.40
Securities: ³
U.S. Treasury		1,502			6		0.83			183			1		0.84
U.S Gov agencies		44,157			243		1.11			50,617			93		0.37
Mortgage-backed		1,302			17		2.66			45			1		4.43
Corporate debentures		8,242			254		6.23			3,023			108		7.18
Other investments		5,666			106		3.77			5,100			98		3.85
Total securities		60,869			626		2.08			58,968			301		1.03
Total earning assets		986,559			20,576		4.21			902,943			19,165		4.27
Cash and due from banks		8,974								7,133
Bank premises and equipment, net		19,889								20,793
Other assets		33,926								30,645
Less: allowance for credit losses		(5,852	)							(5,192	)
Total assets	$	1,043,496							$	956,322
Interest-bearing liabilities
Deposits:
Interest-bearing demand accounts	$	65,884			77		0.24	%	$	56,848		$	65		0.23	%
Money market		258,308			550		0.43			245,623			570		0.47
Savings		52,526			37		0.14			53,579			37		0.14
Time deposits		244,441			1,161		0.96			238,390			995		0.84
Total interest-bearing deposits		621,159			1,825		0.59			594,440			1,667		0.56
Short-term borrowings		76,516			336		0.88			53,955			210		0.78
Long-term borrowings		12,483			167		2.70			36,894			270		1.47
Total interest-bearing funds		710,158			2,328		0.66			685,289			2,147		0.63
Noninterest-bearing deposits		210,496								175,668
Other liabilities and accrued expenses		4,209								6,300
Total liabilities		924,863								867,257
Shareholders' equity		118,633								89,065
Total liabilities & shareholders' equity	$	1,043,496							$	956,322
Net interest rate spread⁴				$	18,248		3.55	%				$	17,018		3.64	%
Effect of noninterest-bearing funds							0.18								0.15
Net interest margin on earning assets⁵							3.73	%							3.79	%

(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.

	Three months ended June 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	$	174,343		$	2,033		4.68	%	$	161,196		$	1,934		4.83	%
Commercial real estate		368,247			4,340		4.73			314,663			3,759		4.80
Construction and land		82,332			983		4.79			73,157			854		4.69
Residential real estate		232,626			2,513		4.33			224,054			2,393		4.30
Consumer		4,417			56		5.11			3,889			41		4.28
Total loans and leases		861,965			9,925		4.62			776,959			8,981		4.65
Loans held for sale		36,632			356		3.89			42,271			365		3.47
Other earning assets ²		42,067			87		0.83			33,958			31		0.36
Securities: ³
U.S. Treasury		1,501			3		0.83			366			1		1.10
U.S Gov agencies		50,390			142		1.13			58,843			66		0.45
Mortgage-backed		1,304			9		2.62			39			-		-
Corporate debentures		8,843			137		6.21			3,047			55		7.26
Other investments		6,421			49		3.06			5,351			54		4.05
Total securities		68,459			340		1.99			67,646			176		1.05
Total earning assets		1,009,123			10,708		4.26			920,834			9,553		4.17
Cash and due from banks		9,373								7,427
Bank premises and equipment, net		19,769								20,708
Other assets		36,895								30,762
Less: allowance for credit losses		(5,330	)							(5,376	)
Total assets	$	1,069,830							$	974,355
Interest-bearing liabilities
Deposits:
Interest-bearing demand accounts	$	68,346			41		0.24	%	$	59,083		$	34		0.23	%
Money market		267,921			294		0.44			256,043			318		0.50
Savings		54,093			19		0.14			53,739			19		0.14
Time deposits		237,188			587		0.99			242,156			521		0.87
Total interest-bearing deposits		627,548			941		0.60			611,021			892		0.59
Short-term borrowings		90,406			195		0.86			51,957			145		1.12
Long-term borrowings		9,533			75		3.15			39,507			141		1.44
Total interest-bearing funds		727,487			1,211		0.67			702,485			1,178		0.67
Noninterest-bearing deposits		212,213								180,123
Other liabilities and accrued expenses		3,443								5,825
Total liabilities		943,143								888,433
Shareholders' equity		126,687								85,922
Total liabilities & shareholders' equity	$	1,069,830							$	974,355
Net interest rate spread⁴				$	9,497		3.59	%				$	8,375		3.50	%
Effect of noninterest-bearing funds							0.18								0.16
Net interest margin on earning assets⁵							3.77	%							3.66	%

(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.

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). The total of the changes set forth in the rate and volume columns are presented in the total column.

	Six months ended June 30,									Three months ended June 30,
	2017 vs. 2016									2017 vs. 2016
	Due to variances in									Due to variances in
(in thousands)	Total			Rates			Volumes¹			Total			Rates			Volumes¹
Interest earned on:
Loans and leases:
Commercial loans and leases	$	(416	)	$	(579	)	$	163		$	99		$	(60	)	$	159
Commercial real estate		999			(122	)		1,121			581			(61	)		642
Construction and land		182			13			169			129			18			111
Residential real estate		361			102			259			120			21			99
Consumer		15			1			14			15			8			7
Loans held for sale		(199	)		69			(268	)		(9	)		45			(54	)
Taxable securities		325			307			18			164			159			5
Other earning assets		144			67			77			56			40			16
Total interest income		1,411			(142	)		1,553			1,155			170			985

Interest paid on:
Savings deposits		(0	)		0			(0	)		0			0			0
Interest bearing checking		12			2			10			7			1			6
Money market accounts		(20	)		(45	)		25			(24	)		(38	)		14
Time deposits		166			140			26			66			77			(11	)
Short-term borrowings		126			28			98			50			(33	)		83
Long-term borrowings		(103	)		224			(327	)		(66	)		169			(235	)
Total interest expense		181			349			(168	)		33			177			(143	)
Net interest earned	$	1,230		$	(491	)	$	1,721		$	1,122		$	(6	)	$	1,128

(1)

Change attributed to mix (rate and volume) are included in volume variance

Comparison of Results of Operations

A comparison between the six months ended June 30, 2017 and June 30, 2016 is presented below.

General

Net income available to common stockholders increased $1.2 million, or 48.0%, to $3.6 million for the six months ended June 30, 2017 compared to $2.4 million for the same period in 2016. The increase in net income available to common stockholders resulted from a $3.6 million increase in revenues (net interest income plus non-interest income) partially offset by a $2.2 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, and the increase in 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 common share for the first six months of 2017 were $0.39 compared to $0.35 for the same period of 2016, representing a per share increase of 11%. The percentage increase in earnings per share was less than the percentage growth in net income because our average shares outstanding increased by over 2.3 million when comparing the first half of 2017 to the same period in 2016 primarily as a result of our common stock offering during the first quarter of this year.

Interest Income

Interest income increased $1.4 million, or 7.4%, to $20.6 million for the six months ended June 30, 2017 compared to $19.2 million for the same period in 2016. This increase consisted of increases of $942 thousand in interest and fees on loans (including loans held for sale) and leases, $325 thousand in securities income and $144 thousand in other interest income. Growth in the average balances was the primary contributing factor as the average balance of loans (excluding loans held for sale) and leases increased $76.8 million, partially offset by a decrease of $14.2 million in loans held for sale, the average balance of our securities portfolio grew $1.9 million and the average balance of other earning assets grew $19.0 million. These increases were slightly offset by an overall decrease in the average yield of our interest-earning assets. While the average yield on our loans held for sale increased 31 basis points and the average yield on our other earnings assets increased 42 basis points, the average yield on our portfolio loans and leases (excluding loans held for sale) decreased by 14 basis points as a result of decreases in the average rates on our commercial loans and leases and commercial real estate loans due to the loans we have recently originated being made at lower rates than existing loans as a result of market competition, which offset the gains from the increase in yields in the other categories of our interest-earning assets.

Interest Expense

Interest expense increased $181 thousand, or 8.4%, to $2.3 million for the six months ended June 30, 2017, compared to $2.1 million for the same period in 2016. Interest expense on deposits increased by $158 thousand or 9.5% as a result of an increase in the average rate paid on interest-bearing deposits, primarily our time deposits due to market competition, and, to a lesser extent, an increase in the average balance of our interest-bearing deposits for the first half of 2017 compared to the same period in 2016. In addition, our interest expense on borrowings increased $23 thousand for the first half of 2017 compared to the first half of 2016 because of higher average interest rates on our borrowings, reflecting market changes in interest rates, partially offset by a decrease in the average balance of our long-term borrowings.

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 to interest income and interest expense described above, net interest income increased $1.2 million, or 7.2%, during the six months ended June 30, 2017 compared to the six months ended June 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 $540 thousand for the six months ended June 30, 2017 compared to $900 thousand for the same period in 2016, a decrease of $360 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. During 2017, the Company 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 in a provision for the first half of 2017 that was less than the same period of the prior year.

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.

Noninterest Income

Noninterest income was $9.8 million for the six months ended June 30, 2017 compared to $7.4 million for the six months ended June 30, 2016, a $2.3 million or 31.4% 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 approximately $6.0 million in noninterest revenues for the first half of 2017 compared to $4.1 million for the same period of 2016. Similarly, loan fee income, the majority of which is mortgage related, increased $1.0 million period over period. Further, included in noninterest income for the first half of 2016 was the sale of an acquired impaired loan, which resulted in a gain of approximately $675 thousand. In addition, service charges on deposit accounts, which consist of account activity fees such as overdraft fees and other traditional banking fees, increased $131 thousand period over period, primarily as a result of increased overdraft fees resulting from the deposit growth we continue to experience.

Noninterest Expenses

Noninterest expenses increased $2.2 million, or 11.2%, to $21.7 million for the six months ended June 30, 2017 from $19.5 million for the same period of 2016. Compensation and benefit expenses, which account for almost all of this increase, increased $2.2 million or 22.9% when comparing the six months ended June 30, 2017 to the six months ended June 30, 2016, and continue to represent the largest percentage of noninterest expense. The primary driver of the increase in compensation and benefits was the expanded size and talent 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 expand, many of our noninterest expenses have increased to support expanding infrastructure, growth initiatives and delivery strategies. Cost increases related to this expansion when comparing the six months ended June 30, 2017 to the same period last year include $515 thousand in marketing and business development and $207 thousand in data processing. 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 $302 thousand as a result of the greater number of loans originated during the six months ended June 30, 2017 compared to the same period in 2016. Offsetting these increases were various reductions in cost. Occupancy and equipment expense for the 2017 period decreased $467 thousand compared to the six months ended June 30, 2016. Included in the first quarter of 2016 were $430 thousand in occupancy costs relating to our decision to close three of our less active branch locations, for which there was no comparable expense in the 2017 period. FDIC insurance expenses decreased $112 thousand partially due to the additional capital raised and its impact on assessment rates. Other operating expenses, which consists of variety of general expenses such as telephone and data lines, supplies and postage and courier services, decreased $162 thousand as we continue to focus on expense control.

A comparison between the three months ended June 30, 2017 and June 30, 2016 is presented below.

General

Net income available to common stockholders increased $506 thousand, or 33.0%, to $2.0 million for the three months ended June 30, 2017 compared to $1.5 million for the three months ended June 30, 2016. Basic earnings per common share were $0.21 for the second quarter of 2017 compared to $0.22 in the same period of 2016. This slight 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.

Interest Income

Interest income increased $1.2 million, or 12.1%, to $10.7 million for the three months ended June 30, 2017 compared to $9.6 million for the same period of 2016. The increase was almost entirely due to average balance sheet growth quarter over quarter, although an increase in the average yield on our interest-earning assets also contributed to the increase. The average balance of loans (excluding loans held for sale) and leases increased $85.0 million quarter over quarter, partially offset by a $5.7 million decrease in loans held for sale, while average yield on loans (excluding loans held for sale) and leases decreased three basis points and the average yield on loans held for sale increased 42 basis points. In addition, the average balance of our investment securities increased $813 thousand and the average balance of our other interest earning assets increased $8.1 million, while the average yields on these assets increased 94 basis points and 47 basis points, respectively.

Interest Expense

Interest expense increased $33 thousand, or 2.8%, to $1.21 million for the three months ended June 30, 2017, compared to $1.18 million for the same period of 2016, primarily as a result of an increase in the average balances of our total interest bearing funds. While the average rate paid on our deposits remained basically unchanged quarter over quarter, the average cost of our long-term borrowings increased 171 basis points, which was offset by a 75.9% decrease in the average balance of such borrowings. The overall cost of funds was 67 basis points for each of the three month periods ended June 30, 2017 and 2016.

Net Interest Income

As a result of the changes in our interest income and interest expense as discussed above, our net interest income increased $1.1 million, or 13.4%, during the three months ended June 30, 2017 compared to the three months ended June 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 $340 thousand for the three months ended June 30, 2017 compared to $515 thousand for the same period in 2016, a decrease of $175 thousand. Even with the continuing organic growth in loans, our asset quality measures are improving, and a lower level of specific provisions was required for 2017 compared to 2016.

Noninterest Income

Noninterest income was $5.3 million for the three months ended June 30, 2017 compared to $4.6 million for the three months ended June 30, 2016, a $722 thousand or 15.8% increase. This increase was primarily due to the $1.1 million increase in income generated from our mortgage banking activities during the 2017 period. In addition, during the 2016 period we recorded a gain on the sale of an acquired loan of $652 thousand, while during the 2017 period, we had a gain of five thousand. Most other categories of noninterest income reflected small increases for the second quarter of 2017 compared to the same period for 2016.

Noninterest Expenses

Noninterest expenses increased $1.4 million, or 13.7%, during the three months ended June 30, 2017 compared to the three months ended June 30, 2016. The primary reason for this increase was a $1.2 million increase in compensation and employee benefits, which increased for the same reasons as discussed above with respect to the six month period. In addition, our marketing and business development expense increased $297 thousand and data processing cost increased $99 thousand quarter over quarter, again for the reasons discussed with respect to the six-month period. Partially offsetting these increases were decreases of $248 thousand in professional fees and $122 thousand in our FDIC assessment quarter over quarter, for reasons consistent with those discussed above.

Nonperforming and Problem Assets

Management performs 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 serious doubt about further collectability of principal or interest on the loan, even though the loan is currently performing. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income 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.

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)	2017			2016
Non-accrual loans:
Real estate loans:
Residential - first lien	$	1,504		$	491
Residential - junior lien		196			37
Commercial		4,168			1,584
Commercial and leases		2,867			4,624
Consumer		-			167
Total non-accrual loans		8,735			6,903
Accruing troubled debt restructured loans:
Real estate loans:
Construction and land		125			125
Residential - first lien		291			294
Commercial		-			2,073
Commercial and leases		156			183
Total accruing troubled debt restructured loans		572			2,675
Total non-performing loans		9,307			9,578
Other real estate owned:
Land		1,123			1,220
Commercial		1,012			1,130
Total other real estate owned		2,135			2,350
Total non-performing assets	$	11,442		$	11,928
Ratios:
Non-performing loans to total gross loans		1.06	%		1.17	%
Non-performing assets to total assets		1.04	%		1.16	%

Included in non-accrual loans at June 30, 2017 are four troubled debt restructured loans (“TDRs”) totaling $3.4 million that were not performing in accordance with their modified terms, and the accrual of interest has ceased. Further, there were three TDRs totaling $572 thousand performing subject to their modified terms at June 30, 2017. There were no additional loans restructured during the first half of 2017, although one commercial real estate credit for $2.1 million was downgraded from performing to non-performing in the second quarter of 2017. At June 30, 2017, loans and leases 90 days or more past due and still accruing interest consisted of one residential first lien loan in the amount of $77 thousand.

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 related to the borrower’s financial difficulties, grants a concession, such as a reduction in the effective interest rate, to the borrower that we would not otherwise consider. A debt restructuring or loan modification for a borrower, however, does not necessarily constitute a troubled debt restructuring.

Nonperforming assets amounted to $11.4 million, or 1.04% of total assets, at June 30, 2017 compared to $11.9 million, or 1.16% of total assets, at December 31, 2016. Total nonperforming assets decreased $486 thousand during the first half of 2017.

The composition of our nonperforming assets at June 30, 2017 is further described below:

Non-Accrual Loans:

Seven residential first lien loans totaling $1.5 million, one with a specific reserve of $6 thousand.

Three residential junior lien loans totaling $196 thousand.

Two commercial owner occupied loans totaling $508 thousand.

Seven commercial non-owner occupied loans totaling $3.7 million, three of which represent one relationship.

28 commercial loans totaling $2.9 million, seven with a Small Business Administration (“SBA”) guarantee and eight that include specific aggregate reserves of $538 thousand.

Accruing Troubled Debt Restructured Loans:

One construction and land loan in the amount of $125 thousand.

One residential real estate loan in the amount of $291 thousand.

One commercial loan in the amount of $156 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.

We had OREO of $2.1 million at June 30, 2017 and $2.4 million at December 31, 2016. Cost relating to OREO recorded in noninterest expenses was $40 thousand for both six months periods ended June 30, 2017 and 2016, and $16 thousand and $24 thousand for the three months ended June 30, 2017 and 2016, respectively. There was a $96 thousand and $83 thousand valuation allowance recorded in the first half of 2017 and 2016, respectively, as the current appraised value, less estimated cost to sell, was insufficient to cover the recorded OREO amount.

Allowance for Credit Losses

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 which, 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 allowance for credit losses consists primarily of two components:

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

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.

The allowance for credit losses is maintained at a level to provide for losses that are probable and can be reasonably estimated. Management’s 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.

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 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 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 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.

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 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 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;

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 national, state and local economic trends and business conditions;

changes and trends in levels of loan payment delinquencies; and

any other factors that managements 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.

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 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 June 30, 2017 and December 31, 2016, impaired loans were $9.4 million and $9.9 million, respectively. The amount of impaired loans requiring specific reserves totaled $1.8 million at June 30, 2017 and $3.8 million at December 31, 2016, with the reduction during the first half of 2017 primarily driven by the charge-off of two commercial loans, each of which had specific reserves held against them at December 31, 2016. As noted in the table below, the amount charged off on these commercial loans totaled $1.4 million. The amount of impaired loans without a specific valuation allowance totaled $7.6 million and $6.1 million, respectively, at such dates.

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 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.

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.

The following table sets forth activity in our allowance for credit losses for the periods indicated:

	Six months ended			Twelve months ended
(in thousands)	June 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		(1,366	)		(234	)
Consumer loans		(108	)		(20	)
		(1,637	)		(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		3			5
Commercial loans and leases		28			101
Consumer loans		22			37
		54			183
Net charge-offs		(1,583	)		(478	)
Provision for credit losses		540			2,037
Balance at end of year	$	5,385		$	6,428
Net charge-offs to average loans and leases		0.19	%		0.06	%

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.

	June 30, 2017					December 31, 2016
(dollars in thousands)	Amount		Percent¹			Amount		Percent¹
Real estate
Construction and land loans	$	562		9.4	%	$	511		8.9	%
Residential first lien loans		543		22.3			454		23.7
Residential junior lien loans		111		4.4			89		4.3
Commercial owner occupied loans		401		17.6			327		16.3
Commercial non-owner occupied loans		1,176		24.9			1,120		26.4
Commercial loans and leases		2,490		20.9			3,800		19.8
Consumer loans		102		0.5			127		0.6
Total	$	5,385		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.

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 Liability Committee 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 June 30, 2017 and December 31, 2016. We regularly monitor and adjust our investments in liquid assets based upon our assessment of:

Expected loan demand;

Expected deposit flows and borrowing maturities;

Yields available on interest-earning deposits and securities; and

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 June 30, 2017 and December 31, 2016, cash and cash equivalents totaled $41.8 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.

At June 30, 2017 and December 31, 2016, we had $168.5 million and $127.1 million, respectively, in loan commitments outstanding, including commitments issued to originate loans of $69.7 million and $46.2 million at June 30, 2017 and December 31, 2016, respectively, and $98.8 million and $80.9 million in unused lines of credit to borrowers at June 30, 2017 and December 31, 2016, respectively. In addition to commitments to originate loans and unused lines of credit, we had $8.6 million and $9.7 million in letters of credit at June 30, 2017 and December 31, 2016, respectively. Certificates of deposit due within one year of June 30, 2017 totaled $164.9 million, or 19.3% of total deposits. 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. 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 with maturities of one year or less.

Our primary investing activity is originating loans. During the first half of 2017 and 2016 cash used to fund net loan growth was $63.8 million and $38.0 million, respectively. During the first half of 2017 we utilized cash to purchase additional securities totaling $30.9 million while receiving $14.5 million as a result of securities maturing. For the same period in 2016 we purchase additional securities totaling $54.3 million and we received $46.0 million from security maturities. Additionally, in 2017 we received $9.9 million in cash from the maturities of interest bearing deposits with banks, while there were no such maturities during the same period of 2016.

Financing activities consist primarily of activity in deposit accounts and FHLB advances. We experienced a net increase in deposits of $46.0 million during the six months ended June 30, 2017. 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 provide an additional source of funds. FHLB advances were $100.5 million at June 30, 2017 compared to $100.0 million at December 31, 2016. At June 30, 2017, we had the ability to borrow up to a total of $230.1 million based upon our credit availability at the FHLB, subject to collateral requirements.

The Company and the Bank are 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 June 30, 2017 and December 31, 2016, we exceeded all regulatory capital requirements. We are considered “well capitalized” under regulatory guidelines.

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 commitments and lines of credit at June 30, 2017 and December 31, 2016 are as follows:

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

Unfunded loan commitments	$	69,744	$	46,194
Unused lines of credit		98,798		80,876
Letters of credit		8,600		9,660

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 consolidated balance sheets at June 30, 2017 or December 31, 2016 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.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Not applicable

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 June 30, 2017. 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.

There were no 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 June 30, 2017, that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II - Other Information

Item 1.

Legal Proceedings

From time to time, we may be 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.

Item 1A.

Risk Factors

There have been no material changes in the risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC on March 16, 2017.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.

Defaults Upon Senior Securities

None

Item 4.

Mine Safety Disclosures

Not applicable

Item 5.

Other Information

None

Item 6.

Exhibits

	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(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	Certifications pursuant to 18 U.S.C. Section 1350, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith
	101	Extensible Business Reporting Language (“XBRL”) – filed herewith

	101.INS	XBRL Instance File
	101.SCH	XBRL Schema File
	101.CAL	XBRL Calculation File
	101.DEF	XBRL Definition File
	101.LAB	XBRL Label File
	101.PRE	XBRL Presentation File

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)

August 9, 2017		/s/ Mary Ann Scully

Date		MARY ANN SCULLY
		PRESIDENT AND CEO

August 9, 2017		/s/ George C. Coffman

Date		GEORGE C. COFFMAN
		EVP AND CFO

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