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Edited Transcript of HBMD earnings conference call or presentation 24-Apr-19 7:00pm GMT

Q1 2019 Howard Bancorp Inc Earnings Call

ELLICOTT CITY Apr 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Howard Bancorp Inc earnings conference call or presentation Wednesday, April 24, 2019 at 7:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* George C. Coffman

Howard Bancorp, Inc. - Executive VP, Treasurer & CFO

* Mary Ann Scully

Howard Bancorp, Inc. - Chairman & CEO

* Robert Dietrich Kunisch

Howard Bancorp, Inc. - President & Director

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Conference Call Participants

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* Austin Lincoln Nicholas

Stephens Inc., Research Division - VP and Research Analyst

* Catherine Fitzhugh Summerson Mealor

Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP

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Presentation

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Operator [1]

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Greetings and welcome to the Howard Bancorp, Inc. First Quarter 2019 Financial Results Conference Call. My name is Devon, and I will be your operator for today. Please note, this conference is being recorded. (Operator Instructions)

I will now turn it over to George Coffman, Executive Vice President and Chief Financial Officer of Howard Bancorp, Inc. Mr. Coffman, you may begin.

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George C. Coffman, Howard Bancorp, Inc. - Executive VP, Treasurer & CFO [2]

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Thank you for joining the call, and good afternoon. Before we begin the presentation, I would like to remind everyone that some of the comments made during this call may be considered forward-looking statements. Our form 10-K for the 2018 fiscal year and our current reports on Form 8-K identify certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made this afternoon.

The company does not undertake the process to update any forward-looking statements as a result of new information or future events or recent developments. Our periodic reports are available from the company, online at the company's website or at the SEC's website. I would like to remind you that while we think our prospects for continued growth and performance are good, it is our policy not to establish with the markets any earnings, margin or balance sheet guidance.

Now I would like to introduce Mary Ann Scully, the CEO and Chairman of Howard Bancorp.

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Mary Ann Scully, Howard Bancorp, Inc. - Chairman & CEO [3]

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Good afternoon, everybody. And I'll add my thanks to George's for everybody being on the line and providing us with this opportunity to give you the most recent update on the financial stability of your company and provide you hopefully with the collective opportunity to ask us questions.

I'll try to make my remarks as brief as possible to allow for as much time as possible for those questions. The highlights as you noted in the presentation that was distributed earlier is that our net income was $4.3 million. This is a noiseless quarter in a sense compared to some of the prior 4 quarters post the acquisition of First Mariner.

We're seeing earnings per share of $0.22, up 1 -- up from $0.01 in the fourth quarter of 2018. Our total noninterest expenses have continued to come down, $3.6 million from the number reported in the fourth quarter but just as substantively, $600,000 from the normalized expenses reported after extracting onetime items from the fourth quarter. So a very consistent movement down in our expense base.

Our net interest margin was 3.64% or after excluding fair market value adjustments, was 3.54%. This is mostly down from the prior quarter's numbers that as anticipated, reflect the first full quarter impact of the subordinated debt that was issued in November of last year and substantively invested initially in lower-yielding securities rather than immediately in loans.

Our asset base was relatively flat on both a point-to-point and an average basis during the quarter. But I know, and we'll talk about this a little bit later as well, that our originations in the first quarter were $74 million. So we had another quarter where we experienced some unusual onetime paydowns largely in the commercial real estate sector. Our book value per share increased to $15.77, tangible book value to $11.75 per share. This is a higher jump than you would expect to see purely from the accretion of the net income, and that's because of a $0.22 increase resulting from the change in tax laws that allowed us finally after a number of quarters of negotiation in our legislature to allow us to recognize the full benefits of the acquired BOLI, so this $5 million addition to tangible book value is certainly very welcome news.

We're seeing that our profitability ratios as a result of all those various movements in the balance sheet and in the income statement continue to improve. Most notably, the return on average assets, which is the metric that we use most frequently to measure our progress is 78 basis points. Our return on average tangible assets is 81 basis points, and we always try to point out the cost of the CDI expense, the core deposit intangible that we acquired with the First Mariner acquisition, which everyone will remember was a much larger number than had been anticipated at the time of the acquisition due to a movement in interest rate.

And while that's a rapidly-amortizing asset, it does on both a core net income perspective and a tangible book value perspective distort the numbers. And so we're asking everybody to look at the 88 basis point return on average assets net of CDI.

We also know that the acquisition allowed us to achieve certain efficiencies from an operating perspective in the addition of a large headquarters building. That combined with our goodwill has made our nonearning assets slightly larger than peers. And so purely for informational purposes, we'll also share that the return on average earning assets again net of that CDI intangible expense is a little over 1%, and we're following all of those numbers on an ongoing basis.

Our organic loan growth continues to be focused primarily on commercial and it's based on building longer-term profitable client relationships. We continue to be very cautious in how we view our portfolio in this market because we see an economy moving closer to the latter stages of expansion.

Different underwriting standards, much tighter interest rate spread, longer fixed rate terms and some basic shifts in the cap values of our companies with out-of-market borrowers paying premium prices for properties and businesses reflecting the liquidity that still is in the market. But we are emphasizing the loan originations that we are able to achieve even with these tighter underwriting standards, and they are only being offset by the runoff that's exacerbated by those lending activities.

And we remind everybody, and if we look at this chart on Page 6, that our long-term loan organic CAGR for Howard since 2013 is 19.9%. That excludes all of the results of acquired loans in our serial acquisition, and it also includes the $400 million in organically-originated loans at First Mariner after their recapitalization. So we're confident that even with this lending environment, that we will continue to return to those types of growth and are still on target for a mid- to high-single-digit growth by the end of the fourth quarter. We continue to maintain strong capital ratios, but in -- which in this kind of an economic environment is also critically important.

Risk-based capital, which is the measure that we use most frequently because of our mix of earning assets being oriented more towards loans than to securities, increased to 12.62%, again in part because of the clean net income quarter that we had but also due to the onetime change in the BOLI moving out of goodwill. And our Tier 1 leverage ratio, which is a ratio that's followed by a growing number of our community banking peers increased to over the 9% level this quarter.

Margin, as I noted before, has been remarkably stable. And while it showed an anticipated modest drop because of the subordinated debt, if you look at the chart on Page 8, you will see both that the margin on our core basis has been very stable and also that despite the acquisitions over a long period of time, we're relatively unimpacted by fair market value noise in those numbers.

And finally, we look at the asset quality focus. As a reminder, when we bought our bank that was 3 years past a recapitalization, we saw an initial jump in our NPAs and our net charge-offs. We very aggressively worked down those NPA numbers, and you see them going from a 1.67% to a 1.13%.

We did incur in the fourth quarter a provision of $2.4 million, and that provision was converted to a charge-off in the first quarter. As we converted that specific provision to a charge-off, it impacted the company's historical loss ratios.

And so for this 1 additional quarter, there was an overhang from that same loan. The amount of the charge-off was not in excess. In fact it was relatively below the provision number, but because of what it does to our historical loss numbers, it meant that our general reserves were increased because of that charge-off. We've also been more conservative in applying certain provisions and general reserves to our pass-rated credits, and that is reflected in that larger provision as well, but no large new charge-offs or specific provisions and a very consistent trending down in NPAs to total assets.

So in summary, this is a good quarter. We're beginning to see the results of the increased scale, in that it actually is providing us with clean, transparent growth in return. It's reflected in the net income that we show, it's reflected in the lower noninterest expenses, and we would remind everybody that we believe there's a continued focus on other opportunities, especially as we focus on customer behaviors and how that impacts our branch network.

We are extraordinarily focused on both asset quality and capital buffers because of where we believe we may be in the economic cycle, and we're maintaining disciplined underwriting and loan structuring, but we are able because of our lower cost of funding versus peers to continue to offer competitive loan pricing to the highest quality credits in our market. And finally, the rationale for all of the activities in the last year is that we have very differentiated positioning as the largest locally headquartered bank in an SME-dominated market.

Greater Baltimore is a good market, one that tends to be overlooked by most of our local and national competitors, and the fact that we are seeing a much stronger loan origination pipeline and a modest increase in our average balances last quarter makes us believe that, that differentiating positioning, which was the rationale for the acquisition, will continue to play out in our numbers going forward.

We provided a lot of information in the Appendix on our loan mix, our noninterest income mix, our funding mix and the components of our noninterest expense.

We're happy to address any questions on the regular presentation or on that appendix. But as I promised, I'd really like to turn it over to all of you, so that you might be able to ask your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Catherine Mealor with KBW.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [2]

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I'd like to start with just the margin and wanted to see if you could give us some updated thoughts on your outlook for the margin now that we've got the sub debt fully in, and how you're thinking about the margin in a flat rate environment?

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George C. Coffman, Howard Bancorp, Inc. - Executive VP, Treasurer & CFO [3]

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Okay. I guess the positive news is that the margin for the first quarter came in about where we expected. When we did the sub debt, we projected that the impact of that would be between 10 and 12 basis points, and that carried through for the first quarter. We are seeing continued pressure, even though somewhat lessened at the pace on the deposit funding side. It's not nearly as competitive as it was probably 3 months ago but the pressure is still there. So that's continuing. We are, at least through the first quarter, seeing a slight uptick in some of the loan yields. Based on pricing, we're hopeful that, that continues, but that's the piece that could cause the margin to compress slightly. But overall, there's really nothing that we would expect that would have a material impact on the overall margin. We do have the pricing pressures but so far we've been able to mitigate that through loan yields, and we believe we can continue to do that, at a more modest level, but continue to do that going forward.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [4]

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Great. And then -- and have about on the growth side. What's your outlook for growth? And is part of your ability to maintain a flatter margin dependent on growth kind of staying in the single-digit range? Or I guess we can start just from your outlook for growth this year?

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Robert Dietrich Kunisch, Howard Bancorp, Inc. - President & Director [5]

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Yes, Catherine, it's Rob Kunisch. What I would tell you is we have a strong pipeline right now. Over the last 4 months or 5 months, we had some turnover initially within the lending group at the senior level position. We have that settled down, and our loan officers have been out working aggressively. So we have a very strong pipeline right now, stronger than -- the strongest that I've seen it since the merger. As George mentioned, there is pressure on rate there, which is just the environment that we're living in. So although I don't want to give you any specific numbers in terms of where I think that's going to come in because, based on the timing of a lot of the commercial loans, it's just hard. We project a lot of them to come in, in the second quarter, but things get pushed out because of appraisals or delays, because of equipment delivery dates and things of that nature. So not sure that answers your question, but I would tell you the pipeline's strong.

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Mary Ann Scully, Howard Bancorp, Inc. - Chairman & CEO [6]

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And Catharine, I'm reluctant to give you any specific numbers, but I would say that if you looked at our balance sheet today, you would also see growth in the loan portfolio and more market growth than we've seen for some period of time. So it is beginning to stick as well and convert from the pipeline stage to the outstanding stage.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [7]

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And you mentioned that there were some larger paydowns this quarter. Can you give any dollars around maybe what paydowns were this quarter? And how that's compared to some recent quarters.

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George C. Coffman, Howard Bancorp, Inc. - Executive VP, Treasurer & CFO [8]

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Yes. Paydowns were 50 -- and actually payoffs, these were loans that just completely paid off in the quarter, were about $56 million. I think Mary Ann mentioned earlier that we had about $75 million in new originations. Of that $56 million, there was 1 sizable loan, a little over $16 million that paid off. The good news is that was the loan that generated a prepayment penalty but that 1 loan was a big loss in the quarter. Exclusive of that we would have been closer to a $40 million payoff range, which would have been about the same as what we saw in the fourth quarter.

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Operator [9]

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Our next question comes from the line of Austin Nicholas with Stephens.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [10]

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Maybe on the -- just getting back on the expenses. Obviously, you had a very nice quarter of controlled cost there. Maybe as you look out through the next -- the remainder of the year, I guess how should we be thinking about the kind of growth rate in the overall expense base. And then I guess more broadly, any initiatives or team hires that you're looking at that could maybe drive that number up higher than kind of what it has traditionally grown at.

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George C. Coffman, Howard Bancorp, Inc. - Executive VP, Treasurer & CFO [11]

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Yes, Austin, this is George. I'll take the first half of that question. We had kind of planned that we would be in about the $15 million to $15.2 million combined expense range for the quarter. We came in at $14.9 million. So obviously, we're pleased with that. There were certain categories of expenses where we would expect them to go up, specifically in the marketing, the advertising. We did very little in the first quarter. We typically do very little in the first quarter, so we would expect to see an increase there. Kind of countering that is we had a increased level in medical insurance cost. We have a self-funded medical plan. The costs of that in the first quarter were about $400,000 higher than what we saw in the fourth quarter. We would expect that, that would go down. Another thing that would work in our favor is the FDIC assessments that the rates have gone down. So our FDIC assessments are running about $100,000 less than what we originally projected per quarter. So we expect to see -- at least we hope to see reductions in the medical insurance, we expect to continue to see the reductions on the FDIC. We expect that the costs will go up on the advertising/marketing, and we typically expect to see increased mortgage origination volumes in the second quarter versus the first quarter. So those origination-related expenses due to mortgage we would expect to go up. So overall, we're still thinking that the $15 million to $15.2 million is a good baseline, but the composition of those are likely to change going forward from what we saw in the first quarter.

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Mary Ann Scully, Howard Bancorp, Inc. - Chairman & CEO [12]

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Yes. And, Austin, in terms of team liftouts, we continue to talk to people in the marketplace as always. We're obviously as our -- most of our competitors in this market, focused not exclusively but as part of that strategy on any fallout that might come about because of the SunTrust and BB&T merger. Interestingly, we're already beginning to see some shifts, positive shifts in the loan portfolio without somebody needing to bring a loan officer over, as some customers are concerned about the impact of that particular transaction. We don't have any of that budgeted in the numbers right now. But I would also say that we're not close to closing on any of those transactions right now. Clearly, that would be something that could impact the expenses going forward. But nothing where anything has even enough certainty around it to begin to provide guidance. But I will go back and mention again that we've been talking about this constant examination of the delivery system that we're looking at and do believe that we could have on an annualized basis, another $1 million to $1.3 million coming out of efficiencies in the delivery system. Those might have an upfront cost of an almost equal amount. The locations that we're considering right now have a slightly less than 1-year payback. But that $1 million to $1.3 million is significant enough that we are strongly considering those and you would see those most likely in the third and fourth quarter of the year.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [13]

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Understood. That's really helpful. And I guess would that be just within the occupancy expense that you're referring to on the kind of delivery platform?

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Mary Ann Scully, Howard Bancorp, Inc. - Chairman & CEO [14]

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It's primarily the -- it's -- yes, it's primarily the occupancy expense because again, it's related to how customers are behaving, not with whom they're interacting. And so we are tending to move people around and into different business development positions, so those savings are mostly related to occupancy.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [15]

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Understood. Okay, great. And maybe just one more on the mortgage platform that was a little bit higher than maybe I was expecting. And then I guess, is there any fair value marks or any moving pieces in that line item that we should know about as we kind of think about projecting out into the second quarter?

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George C. Coffman, Howard Bancorp, Inc. - Executive VP, Treasurer & CFO [16]

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Yes. We saw -- it's seasonal. In the month of March, we saw an uptick in the origination volume. Most of the fair value items are related to volumes so because of that March increase, we saw that. Overall, fair values added about $240,000 of additional revenue in the quarter. So of that uptick on the mortgage revenues, a good piece of it was fair value-related, but again just to caution everybody, as those volumes decline after we've gotten past this kind of spring peak season, you see the declines in those. So those are seasonal in nature. You see the uptick in the revenues between now and maybe even in the second quarter. But then you see those decline in the last 2 quarters.

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Operator [17]

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(Operator Instructions) As there are no further questions left in the queue, I will like to turn the call back over to management for closing remarks.

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Mary Ann Scully, Howard Bancorp, Inc. - Chairman & CEO [18]

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We just want to thank everybody again for being on the call. It's very helpful to us to be able to have this opportunity to share with you on a little bit more local color what's happening behind the numbers. Appreciate the support of all of you. And we'd obviously remind all of you that we're always available for any specific questions that you might have. But thank you again.

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Operator [19]

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This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.