Howard Bank Chairman, CEO and President Mary Ann Scully takes the opportunity to answer questions you may have regarding the bank’s 2009 earnings release.
Question: How did the bank have a loss for the year?
Answer: The loss is directly attributable to the economic recession and its impact on some small borrowers. Howard Bank, along with many of our small and medium sized business customers, is operating in the deepest and longest economic downturn in at least 20 years. Since we operate as a commercially focused bank, our loan portfolio was affected by the later stages of this economic downturn just as the earlier stages impacted banks with sizable mortgage backed securities portfolios or with large pools of underperforming residential mortgages. Accordingly, we anticipated the impact of the continued downturn in the economic cycle on small and mid-sized businesses early in 2009 and we determined that prudent and realistic provisioning would be necessary as the cycle progressed. That provisioning has proceeded throughout the year.
Net charge-offs for the fourth quarter of 2009 were primarily in the commercial and industrial loan and commercial real estate segments of the loan portfolio. It's important to understand that these provisions were the result of a small number of problem credits - with 80% of our losses attributable to six relationships – and as a result there is no indication of systemic problems in our loan portfolio.
In addition to the increased provision for loan losses, 2009 was also negatively impacted by a substantial deterioration in the value of the bank's one OREO Property (property classified as “other real estate owned”) and based upon a recent appraisal sought by the bank, the bank recorded a $1.3 million diminution in value.
Question: Does the bank expect the losses to continue?
Answer: Asset quality for Howard Bank has been a major focus of attention for management and the board of directors throughout our history. We will continue to monitor trends in delinquencies, attempt early identification of borrowers that are experiencing difficulties, review risk ratings to ensure credits are appropriately categorized, and closely monitor watch credits in order to maintain an acceptable level of asset quality. 2009 represented a year of fairly constant asset problem identification, assessment, categorization, and resolution (both positive and negative). Given the depth and length of this recession, 2010 will undoubtedly present some similar challenges and opportunities. However, we are later in the cycle and therefore closer to the end of the tunnel; we are starting the year with a lower level of OREO assets, with healthier provisions, and with generally better collateralized watch credits. The bank's primary measure of asset quality is the relationship between non-accrual loans and OREO as a percentage of total assets. This ratio showed improvement for 2009 with a ratio of 2.01% as of December 31, 2009 versus 2.48% at the end of 2008.
The bank, as it has matured, has also continuously strengthened its core operating performance as we have grown into the infrastructure that we put into place to ensure execution of our long term strategy and those core earnings cushion credit provisions.
Question: Does this affect the long term viability of the bank?
Answer: No. Both Howard Bancorp and Howard Bank are considered well capitalized according to regulatory definitions and our strong capital ratios, one of the primary pillars of a bank's safety and soundness, allow us to not only maintain our current position but to grow. Total capital was increased by $6.3 million in early 2009 as a result of the issuance of preferred shares under the US Treasury Capital Purchase Plan. The original purpose of issuing these shares was to allow for continued growth as we serve our local communities but also to add cushion for exactly this type of credit provisioning in a deep downturn like the one we are experiencing. This capital has allowed us to increase shareholders' equity after the $2.2MM loss at 12/31/09 by 15 % from 2008 levels. As of 12/31/09, Howard Bancorp had a total risk based capital ratio of 12.58%, a tier one capital ratio of 11.33% and a leverage ratio of 10.01%. Howard Bank also exceeds all capital ratio requirements to be considered well capitalized.
Question: Is the bank still lending and growing?
Answer: Of course. Our capital levels clearly support ongoing prudent and targeted lending. The $6.3 million in capital received under the US Treasury Capital Purchase Plan allows us, as the Treasury program intended, to continue to meet the needs of our targeted small and medium sized business marketplace in both Howard and Anne Arundel Counties. Our marketplace remains one of the healthiest in the nation. Many competitors either cannot lend or choose not to lend. We still view this time as one of opportunity for prudent lenders.
Question: Is the bank’s focus on growth in any way responsible for this loss?
Answer: The bank's underwriting as well as its credit administration has served the bank well in this downturn. In addition to a strong Tier 1 capital position, a cushion has been provided by our general allowance which has grown as the bank has grown. Only six credits in our portfolio (out of a total of over 600 relationships) are responsible for 80% of the credit provisions and losses; our specific credit provisions represent a mix of land loans, commercial real estate loans, SBA loans, tenant improvement loans, and commercial lines of credit to for-profit and not-for-profit businesses. The bank's growth over the last five years is attributable to many factors - the relative growth rate of the segments (small and medium sized businesses) and markets (Howard and Anne Arundel Counties) which we target and serve; the value proposition that we have offered; and the small base from which we started. For these reasons, we intend to continue to prudently lend as we believe that growth in prudent bank lending will hasten our economy's recovery and enhance our shareholder value.
Question: Does the bank intend to cut back or layoff employees?
Answer: No. We closely monitor all expenses - salaries, occupancy costs, processing costs and marketing expenses and focus all expenses on the achievement of our long term strategic goals. However, the bank is focused on continued targeted growth in deposits and loans, profitability, asset quality control and capitalizing on opportunities and, in order to successfully accomplish those goals, we continue to need and employ dedicated, talented employees. In fact, we have added or replaced employees in sales, relationship management, credit administration, operations and general administration. Our number of FTE's has increased this year through the fourth quarter and will grow modestly next year as well.
Question: Are the Bank's executives receiving bonuses?
Answer: No. The bank's executives will not receive any incentives, bonuses or merit increases in 2010.
Question: Is my money safe?
Answer: Yes. We're considered well capitalized according to regulatory definitions and our strong capital ratios, one of the primary pillars of a bank's safety and soundness, allow us to not only maintain our current position but to grow by continuing to serve our customer's financial needs. In addition to our own intrinsic capital strength, deposits at the bank are insured by the FDIC up to $250,000 per depositor. You can have more than $250,000 and still be fully insured provided the accounts meet certain requirements. All Non-Interest-Bearing checking accounts are fully guaranteed by the FDIC for the entire amount in the account. Business repo accounts are fully collateralized.
Question: What is the anticipated impact on Community Support?
Answer: There will be no reduction in the overall levels of financial support allocated to the communities we serve. The bank continues to maintain its high levels of community support both financially and through employee volunteerism. That's not to say that we don't vary our level of support for various organizations. Every year, the bank evaluates its support levels for the numerous organizations in our community and matches the needs of the general and business community with the bank's objectives. Often, the bank will spread its resources differently depending on that analysis. We will continue that approach in 2010. We have not planned any cut back in the total level of community support expenditures in our 2010 operating plan.
Since opening in 2004, the bank has had an exemplary history of supporting the community. In fact, our employees are involved in over 20 not-for-profit organizations, many in leadership positions, and we have been honored repeatedly for our philanthropic and financial education efforts. The bank has given over $400,000 in direct support of the community over the past 5 plus years and our dedicated employees have given thousands of personal dollars and hours to not-for-profit organizations. Community involvement, support and leadership have been and will continue to be a hallmark of the bank.
Question: What does this mean for my shares – the return on my investment?
Answer: From day one, Howard Bank has been positioned as a growth company and, as such, a long term investment. We do not pay dividends and have not had an intention to do so from the bank's formation for the foreseeable future. Our focus has been on growing the bank from a balance sheet, revenue and net income perspective in order to, in the long-term, increase the bank's book value and ultimately share /market value.
Howard Bancorp's share price has recently been negatively impacted by the investment community's portfolio allocation models which have downplayed the importance of financial services stock in portfolios. However, our share price has not fallen as far as some other banks operating in weaker markets or without the core operating strength that Howard Bank enjoys. While some shareholders or their advisors may view this news as an opportunity to sell shares, others will view it as an opportunity to buy. Given our consistent focus on the future, the long term story is not materially impacted by this loss.
This document contains statements that are forward-looking, as that term is defined by the Private Securities Litigation Reform Act of 1995 or the Securities and Exchange Commission in its rules, regulations, and releases. The Company intends that such forward-looking statements be subject to the safe harbors created thereby. All forward-looking statements are based on current expectations regarding important risk factors, including but not limited to real estate values, local and national economic conditions, and the impact of interest rates on financing. Accordingly, actual results may differ from those expressed in the forward-looking statements, and the making of such statements should not be regarded as a representation by the Company or any other person that results expressed therein will be achieved. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.