Edgar Filing: Howard Bancorp Inc

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 September 30, 2012

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 to 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, or a small reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Small reporting company x

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

The number of outstanding shares of common stock outstanding as of October 31, 2012.

Common Stock, $0.01 par value – 4,036,628 shares

HOWARD BANCORP, INC.

TABLE OF CONTENTS

		Page
PART I	Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets (Unaudited)	4
	Consolidated Statements of Operations (Unaudited)	5
	Consolidated Statements of Comprehensive Income (Unaudited)	6
	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)	6
	Consolidated Statements of Cash Flows (Unaudited)	7
	Notes to Financial Statements (Unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosure about Market Risk	39

Item 4.	Controls and Procedures	39

PART II	Other Information
Item 1.	Legal Proceeding	39

Item 1A.	Risk Factors	39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3.	Defaults upon Senior Securities	39

Item 4.	Mine Safety Disclosures	39

Item 5.	Other Information	39

Item 6.	Exhibits	39

Signature

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 increasing originations of residential mortgage loans, our portfolio of mortgage loans and our selling of loans into the secondary market;

the expected impact of our recently-completed initial public offering and concurrent private placement;

statements regarding our intentions to not sell securities in our investment portfolio and the status of unrealized losses in such portfolios;

our statement regarding anticipated changes in expenses;

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

future cash requirements relating to commitments to extend credit, and that we do not anticipate any material losses in connection therewith;

our statement with respect to expected retention of maturing certificates of deposits; and

our statement with respect to adequate liquidity and future liquidity intensions.

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 prospectus.

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:

general economic conditions, either nationally or in our market area, that are worse than expected;

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;

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;

changes in our organization, compensation and benefit plans

loss of key personnel; and

other risk discussed in this report, in our final prospectus dated May 21, 2012 as filed with the SEC on May 23, 2012 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
	September 30,			December 31,
(in thousands)	2012			2011
ASSETS
Cash and due from banks	$	11,858		$	17,926
Federal funds sold		6,478			279
Total cash and cash equivalents		18,336			18,205
Securities available-for-sale		35,952			13,376
Nonmarketable equity securities		1,205			1,313
Loans held for sale		573			646
Loans and leases, net of unearned income		298,814			276,531
Allowance for credit losses		(2,733	)		(3,433	)
Net loans Net loans and leases		296,081			273,098
Bank premises and equipment, net		9,659			9,484
Other real estate owned		2,903			1,885
Deferred income taxes		1,208			1,679
Interest receivable and other assets		2,564			3,396
Total assets	$	368,481		$	323,082
LIABILITIES
Noninterest-bearing deposits	$	79,934		$	62,044
Interest-bearing deposits		207,492			200,598
Total deposits		287,426			262,642
Short-term borrowings		27,619			12,984
Long-term borrowings		6,000			10,000
Accrued expenses and other liabilities		1,114			826
Total liabilities		322,159			286,452
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock—par value $0.01 (liquidation preference of $1,000 per share) authorized 5,000,000;shares issued and outstanding 12,562 series AA at September 30, 2012 and December 31, 2011, net of issuance cost		12,562			12,562
Common stock - par value of $0.01 authorized 5,000,000 shares; issued and outstanding 4,036,628 shares at September 30, 2012 and 2,640,264 shares at December 31, 2011		40			26
Capital surplus		37,379			28,413
Accumulated deficit		(3,681	)		(4,391	)
Accumulated other comprehensive income		22			20
Total shareholders’ equity		46,322			36,630
Total liabilities and shareholders’equity	$	368,481		$	323,082

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

Consolidated Statements of Operations

	Unaudited
	Nine months ended					Three months ended
	September 30,					September 30,
(in thousands)	2012			2011		2012		2011
INTEREST INCOME
Interest and fees on loans and leases	$	11,386		$	10,728	$	3,854	$	3,666
Interest and dividends on securities		74			82		29		30
Other interest income		46			17		15		6
Total interest income		11,506			10,827		3,898		3,702
INTEREST EXPENSE
Deposits		1,371			1,300		432		441
Short-term borrowings		125			137		40		50
Long-term borrowings		53			72		14		18
Total interest expense		1,549			1,509		486		509

NET INTEREST INCOME		9,957			9,318		3,412		3,193
Provision for credit losses		650			740		308		558
Net interest income after provision for credit losses		9,307			8,578		3,104		2,635
NONINTEREST INCOME
Service charges on deposit accounts		235			229		87		75
Gains on the sale of loans		111			18		31		4
Loss on the sale of other real estate owned		(131	)		-		-		-
Other operating income		334			256		98		60
Total noninterest income		549			503		216		139
NONINTEREST EXPENSE
Compensation and benefits		4,291			3,752		1,491		1,256
Occupancy and equipment		1,124			1,061		381		341
Marketing and business development		435			368		145		109
Professional fees		445			250		134		79
Data processing fees		331			257		116		92
FDIC Assessment		228			258		83		42
Provision for OREO		48			393		-		-
Other operating expense		940			1,018		309		293
Total noninterest expense		7,843			7,357		2,659		2,212

INCOME BEFORE INCOME TAXES		2,013			1,724		661		561
Income tax expense		831			693		274		224
NET INCOME	$	1,182		$	1,031	$	387	$	337
Preferred stock dividends		471			278		157		115
Net income available to common shareholders	$	711		$	753	$	230	$	222
NET INCOME PER COMMON SHARE AVAILABLE
Basic	$	0.24		$	0.29	$	0.06	$	0.08
Diluted	$	0.24		$	0.29	$	0.06	$	0.08

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

Consolidated Statements of Comprehensive Income

	Unaudited
	Nine months ended						Three months ended
	September 30,						September 30,
(in thousands)	2012			2011			2012			2011
Net Income	$	1,182		$	1,031		$	387		$	337
Other comprehensive income
Investments available-for-sale:
Unrealized holding (losses) gains		3			(1	)		15			(37	)
Related income tax benefit (expense)		(1	)		-			(5	)		15
Comprehensive income	$	1,184		$	1,030		$	397		$	315

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

Consolidated Statements of Changes in Shareholders’ Equity

													Accumulated
													other
	Preferred			Number of		Common		Capital		Accumulated			comprehensive
(dollars in thousands, except per share data)	stock			shares		stock		Surplus		deficit			gain/(loss)		Total
(Unaudited)
Balances at January 1, 2011	$	6,272			2,636,837	$	26	$	28,285	$	(5,325	)	$	30	$	29,288
Net income		-			-		-		-		1,031			-		1,031
Net unrealized gain/(loss) on securities		-			-		-		-		-			-		-
Issuance of series AA preferred stock		12,562														12,562
Dividends paid on preferred stock		-			-		-		-		(278	)		-		(278	)
Repurchase of series A and B perferred stock		(6,272	)		-		-		-		-			-		(6,272	)
Issuance of common stock:
Stock awards		-			3,427		-		21		-			-		21
Stock-based compensation		-			-		-		80		-			-		80
Balances at September 30, 2011	$	12,562			2,640,264	$	26	$	28,386	$	(4,572	)	$	30	$	36,432

Balances at January 1, 2012	$	12,562			2,640,264	$	26	$	28,413	$	(4,391	)	$	20	$	36,630
Net income		-			-		-		-		1,182			-		1,182
Net unrealized gain/(loss) on securities		-			-		-		-		-			2		2
Issuance of series AA preferred stock		-														-
Dividends paid on preferred stock		-			-		-		-		(471	)		-		(471	)
Issuance of common stock:
Stock offering		-			1,396,364		14		8,966		-			-		8,980
Balances at September 30, 2012	$	12,562			4,036,628	$	40	$	37,379	$	(3,681	)	$	22	$	46,322

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

Consolidated Statements of Cash Flows

	Unaudited
	Nine months ended
	September 30,
(in thousands)	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,182		$	1,031
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		650			740
Deferred income taxes		470			605
Provision for other real estate owned		48			393
Depreciation		381			343
Stock-based compensation		-			101
Net accretion of investment securities		32			172
Loans originated for sale		(8,658	)		(1,655	)
Proceeds from loans originated for sale		8,841			2,745
Gains on sales of loans		(111	)		(18	)
Loss on sales of other real estate owned, net		131			-
Decrease in interest receivable		(62	)		(161	)
Increase (decrease) in interest payable		10			(19	)
Decrease in other assets		1,003			358
Increase in other liabilities		278			191
Net cash provided by operating activities		4,195			4,826

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available-for-sale		(44,018	)		(39,185	)
Proceeds from maturities of investment securities available-for-sale		21,413			36,545
Net increase in loans and leases outstanding		(25,358	)		(16,963	)
Proceeds from the sale of other real estate owned		527			-
Purchase of premises and equipment		(555	)		(415	)
Net cash used in investing activities		(47,991	)		(20,018	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing deposits		17,890			8,985
Net increase in interest-bearing deposits		6,893			2,673
Net increase (decrease) in short-term borrowings		14,635			(1,843	)
Proceeds from issuance of long-term debt		-			4,000
Repayment of long-term debt		(4,000	)		-
Net proceeds from issuance of common stock, net of cost		8,980			-
Net proceeds from issuance of preferred stock, net of cost		-			6,290
Cash dividends on preferred stock		(471	)		(278	)
Net cash provided by financing activities		43,927			19,827

Net increase in cash and cash equivalents		131			4,635

Cash and cash equivalents at beginning of period		18,205			11,754

Cash and cash equivalents at end of period	$	18,336		$	16,389

SUPPLEMENTAL INFORMATION
Cash payments for interest	$	1,539		$	1,319
Cash payments for income taxes	$	475		$	50

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

Notes to Consolidated Financial Statements

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 shareholders of the Bank and by federal and state regulatory agencies. Each share of Bank common stock was converted into two shares of Bancorp common stock effected by the filing of Articles of Exchange on that date, and the shareholders of the Bank became the shareholders of Bancorp. The Bank has three subsidiaries, two of which hold foreclosed real estate 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. These consolidated financial statements included herein are unaudited, however they reflect all adjustments consisting only of normal recurring accruals that, in the opinion of management, are necessary to present fairly the Company’s financial condition, results of operations, and cash flows for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Company believes that the disclosures are adequate to make the information presented not misleading. The balances as of December 31, 2011 have been derived from audited financial statements. There have been no significant changes to the Company’s accounting policies as disclosed in the 2011 Annual Report. The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results of operations to be expected for the remainder of the year or any other period.

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”).

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 Howard County Maryland, Anne Arundel County Maryland and their contiguous counties.

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.

Certain reclassifications may have been made to the prior year’s consolidated financial statements to conform to current period presentation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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, deferred income taxes and share-based compensation.

Segment Information

The Company has one reportable segment, “Community Banking.” All of the Company’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, lending is dependent upon the ability of the Bank to fund itself with deposits and other borrowings and manage interest rate and credit risk. Accordingly, all significant operating decisions are based upon analysis of the Company as one segment or unit.

New Accounting Pronouncements

ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities.” ASU No. 2011-11 requires an entity to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods and is not expected to have a significant impact on the financial statements.

ASU No. 2011-12, “Deferral of Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” ASU No. 2011-12 defer the effective date pertaining to reclassification adjustments out of accumulated other comprehensive income in Accounting Standards Update 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, until the Board is able to reconsider those paragraphs. While the Board is considering the concerns entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before Update 2011-05. ASU No. 2011-12 became effective January 1, 2012 and did not have a significant impact on the financial statements.

Note 2: Investments Securities

The amortized cost and estimated fair values of investments available for sale are as follows:

	September 30, - Unaudited								December 31,
(in thousands)	2012								2011
			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated		Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value
U.S. Federal agencies	$	35,536	$	10	$	2	$	35,544	$	12,774	$	1	$	2	$	12,773
Mortgage-backed		380		28		-		408		568		35		-		603
	$	35,916	$	38	$	2	$	35,952	$	13,342	$	36	$	2	$	13,376

There have not been any individual securities with an unrealized loss position for a period greater than one year as of either September 30, 2012 or December 31, 2011. 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 September 30, 2012 and December 31, 2011 are presented below:

September 30, 2012 -Unaudited
(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
U.S. Federal
agencies	$	12,999	$	2	$	-	$	-	$	12,999	$	2
Mortgage-backed		-		-		-		-		-		-
	$	12,999	$	2	$	-	$	-	$	12,999	$	2

December 31, 2011
(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
U.S. Federal agencies	$	9,722	$	2	$	-	$	-	$	9,722	$	2
Mortgage-backed		-		-		-		-		-		-
	$	9,722	$	2	$	-	$	-	$	9,722	$	2

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 (1) duration and magnitude of the decline in value, (2) the financial condition of the issuer or issuers and (3) structure of the security.

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 shareholders’ equity as a component of other comprehensive income, net of deferred tax.

The amortized cost and estimated fair values of investments available for sale by contractual maturity are shown below:

	September 30, - Unaudited				December 31,
(in thousands)	2012				2011
	Amortized		Estimated Fair		Amortized		Estimated Fair
	Cost		Value		Cost		Value
Amounts maturing:
One year or less	$	30,566	$	30,567	$	6,000	$	6,000
After one through five years		5,144		5,163		7,021		7,036
After five through ten years		109		117		168		177
After ten years		97		105		153		163
	$	35,916	$	35,952	$	13,342	$	13,376

There were no sales of investment securities during the nine months ended September 30, 2012 or in 2011. At September 30, 2012 and December 31, 2011, $16.2 million and $5.8 million fair value of securities was pledged as collateral for repurchase agreements, respectively. The outstanding balance of no single issuer, except for U. S. Government and U. S. Government agency securities, exceeded ten percent of shareholders’ equity at either period.

Note 3: Loans and Leases

The Company makes loans 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 September 30, 2012 and December 31, 2011 are presented in the following table:

	Unaudited
	September 30,					December 31,
(in thousands)	2012		% of Total			2011		% of Total
Real estate
Construction and land	$	35,889		12.0	%	$	39,268		14.2	%
Residential - first lien		23,074		7.7			22,087		8.0
Residential - junior lien		8,162		2.7			9,242		3.3
Total residential real estate		31,236		10.5			31,329		11.3
Commercial - owner occupied		58,793		19.7			46,588		16.8
Commercial - non-owner occupied		86,116		28.8			76,880		27.8
Total commercial real estate		144,909		48.5			123,468		44.6
Total real estate loans		212,034		71.0			194,065		70.2
Commercial loans and leases		85,409		28.6			81,243		29.4
Consumer		1,371		0.5			1,223		0.4
Total loans and leases	$	298,814		100.0	%	$	276,531		100.0	%

There were $573 thousand in loans held for sale at September 30, 2012 and $646 thousand at December 31, 2011.

Note 4: Credit Quality Assessment

Allowance for Credit Losses

Summary information on the allowance for credit loss activity for the nine months ended September 30, 2012 and September 30, 2011 is provided in the following table:

	Unaudited
	Nine months ended
	September 30,
(in thousands)	2012			2011
Balance at beginning of year	$	3,433		$	3,523
Provision for credit losses		650			740
Loan and lease charge-offs		(1,480	)		(553	)
Loan and lease recoveries		130			306
Balance at period end	$	2,733		$	4,016

The following tables provides information on the activity in the allowance for credit losses by the respective loan portfolio segment for the three months and nine months ended September 30, 2012 and September 30, 2011, and for the year ended December 31, 2011:

	September 30, 2012 - Unaudited
									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:

Nine months ended September 30, 2012
Beginning balance	$	174	$	111		$	64		$	611	$	197		$	2,233		$	43		$	3,433
Charge-offs		-		(23	)		(44	)		-		(268	)		(1,130	)		(15	)		(1,480	)
Recoveries		-		-			-			-		63			65			2			130
Provision for credit losses		18		17			2			40		357			215			1			650
Ending balance	$	192	$	105		$	22		$	651	$	349		$	1,383		$	31		$	2,733

Three months ended September 30, 2012
Beginning balance	$	99	$	65		$	42		$	553	$	532		$	1,744		$	41		$	3,076
Charge-offs		-		-			-			-		(268	)		(463	)		-			(731	)
Recoveries		-		-			-			-		63			16			1			80
Provision for credit losses		93		40			(20	)		98		22			86			(11	)		308
Ending balance	$	192	$	105		$	22		$	651	$	349		$	1,383		$	31		$	2,733

Ending balance:
individually evaluated for impairment		103		73			-			-		-			257			-			433
collectively evaluated for impairment		89		32			22			651		349			1,126			31			2,300

Loans:
Ending balance		35,889		23,074			8,162			58,793		86,116			85,409			1,371			298,814
Ending balance:
individually evaluated for impairment		432		471			-			-		3,146			1,978			-			6,027
collectively evaluated for impairment		35,457		22,603			8,162			58,793		82,970			83,431			1,371			292,787

	September 30, 2011 - Unaudited
							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:

Nine months ended September 30, 2011
Beginning balance	$	143	$	16	$	20	$	892		$	124	$	2,294		$	34		$	3,523
Charge-offs		-		-		-		-			-		(531	)		(21	)		(552	)
Recoveries		-		-		-		-			-		304			1			305
Provision for credit losses		26		1		-		229			12		443			29			740
Ending balance	$	169	$	17	$	20	$	1,121		$	136	$	2,510		$	43		$	4,016

Three months ended September 30, 2011
Beginning balance	$	160	$	17	$	20	$	1,146		$	123	$	2,366		$	36		$	3,868
Charge-offs		-		-		-		-			-		(394	)		(16	)		(410	)
Recoveries		-		-		-		-			-		-			-			-
Provision for credit losses		9		-		-		(25	)		13		538			23			558
Ending balance	$	169	$	17	$	20	$	1,121		$	136	$	2,510		$	43		$	4,016

Ending balance:
individually evaluated for impairment		-		-		-		1,033			-		112			-			1,145
collectively evaluated for impairment		169		17		20		88			136		2,398			43			2,871

Loans:
Ending balance		36,809		23,365		10,089		46,513			70,816		82,405			1,212			271,209
Ending balance:
individually evaluated for impairment		-		475		-		2,122			-		1,243			-			3,840
collectively evaluated for impairment		36,809		22,890		10,089		44,391			70,816		81,162			1,212			267,369

	December 31, 2011
							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:
Beginning balance	$	143	$	16	$	20	$	892		$	124	$	2,294		$	34		$	3,523
Charge-offs		-		-		-		(1,033	)		-		(562	)		(21	)		(1,616	)
Recoveries		-		-		-		-			-		361			1			362
Provision for credit losses		31		95		44		752			73		140			29			1,164
Ending balance	$	174	$	111	$	64	$	611		$	197	$	2,233		$	43		$	3,433

Ending balance:
individually evaluated for impairment		-		68		44		-			-		1,161			-			1,273
collectively evaluated for impairment		174		43		20		611			197		1,072			43			2,160

Loans:
Ending balance		39,268		22,087		9,242		46,588			76,880		81,243			1,223			276,531
Ending balance:
individually evaluated for impairment		-		611		44		1,988			2,783		3,498			9			8,933
collectively evaluated for impairment		39,268		21,476		9,198		44,600			74,097		77,745			1,214			267,598

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 Company’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:

	September 30, 2012 - Unaudited
							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	$	35,457	$	22,841	$	8,162	$	58,793	$	85,726	$	83,867	$	1,371	$	296,217
Special mention		-		-		-		-		-		-		-		-
Substandard		432		233		-		-		390		1,542		-		2,597
Doubtful		-		-		-		-		-		-		-		-
Total	$	35,889	$	23,074	$	8,162	$	58,793	$	86,116	$	85,409	$	1,371	$	298,814

	December 31, 2011
							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	$	39,268	$	21,476	$	9,198	$	44,600	$	76,880	$	78,014	$	1,214	$	270,650
Special mention		-		-		-		-		-		-		-		-
Substandard		-		611		44		1,988		-		3,229		9		5,881
Doubtful		-		-		-		-		-		-		-		-
Total	$	39,268	$	22,087	$	9,242	$	46,588	$	76,880	$	81,243	$	1,223	$	276,531

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 a possible credit deterioration.

An aged analysis of past due loans are as follows:

	September 30, 2012 - Unaudited
							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	$	35,457	$	22,395	$	8,121	$	58,793	$	85,726	$	83,757	$	1,371	$	295,620
Accruing loans past due:
31-59 days past due		-		238		41		-		-		110		-		389
60-89 days past due		-		208				-		-		-		-		208
Greater than 90 days past due		-		-		-		-		-		-		-		-
Total past due	$	-	$	446	$	41	$	-	$	-	$	110	$	-	$	597

Non-accrual loans		432		233		-		-		390		1,542		-		2,597

Total loans	$	35,889	$	23,074	$	8,162	$	58,793	$	86,116	$	85,409	$	1,371	$	298,814

	December 31, 2011
							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	$	39,268	$	21,719	$	9,198	$	44,600	$	75,790	$	77,951	$	1,214	$	269,740
Accruing loans past due:
31-59 days past due		-		-		-		-		-		-		-		-
60-89 days past due		-		-		-		-		1,000		63		-		1,063
Greater than 90 days past due		-		-		-		-		90		-		-		90
Total past due	$	-	$	-	$	-	$	-	$	1,090	$	63	$	-	$	1,153

Non-accrual loans		-		368		44		1,988		-		3,229		9		5,638

Total loans	$	39,268	$	22,087	$	9,242	$	46,588	$	76,880	$	81,243	$	1,223	$	276,531

Total loans either in non-accrual status or in excess of ninety days delinquent totaled $2.6 million or .87% of total loans outstanding as of September 30, 2012 compared to $5.7 million or 2.07% of total loans outstanding as of December 31, 2011.

The impaired loans for the nine months ended September 30, 2012 and the year ended December 31, 2011 are as follows:

	September 30, 2012 - Unaudited
							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	$	432	$	471	$	-	$	-	$	3,146	$	1,978	$	-	$	6,027
With an allowance recorded		432		233		-		-		-		584		-		1,249
With no related allowance recorded		-		238		-		-		3,146		1,394		-		4,778

Related allowance		103		73		-		-		-		257		-		433

Un-paid principal		432		471		-		-		3,081		2,134		-		6,118
Nine months ended September 30, 2012
Average balance of impaired loans		441		472		-		-		3,517		2,418		-		6,848
Interest income recognized		18		7		-		-		155		88		-		268
Three months ended September 30, 2012
Average balance of impaired loans		432		472		-		-		3,510		2,265		-		6,679
Interest income recognized	$	18	$	-	$	-	$	-	$	48	$	69	$	-	$	135

	December 31, 2011
							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	$	-	$	611	$	44	$	1,988	$	2,783	$	3,498	$	9	$	8,933
With an allowance recorded		-		368		44		-		-		1,884		-		2,296
With no related allowance recorded		-		243		-		1,988		2,783		1,614		9		6,637

Related allowance		-		68		44		-		-		1,161		-		1,273

Un-paid principal		-		611		44		3,021		2,783		3,533		9		10,001

Average balance of impaired loans		-		609		44		3,044		2,778		3,593		9		10,078
Interest income recognized	$	-	$	23	$	2	$	52	$	114	$	157	$	-	$	348

Nonaccrual loans included in impaired loans totaled $2.6 million and $5.6 million at September 30, 2012 and December 31, 2011, respectively. Interest income that would have been recorded if nonaccrual loans had been current and in accordance with their original terms was $68 thousand for the first nine months of 2012.

Management routinely evaluates other real estate owned (“OREO”) based upon periodic appraisals. For the nine months ended September 30, 2012 the Bank transferred two properties into OREO totaling $1.7 million, one of which was a residential property for $112 thousand that was also sold in 2012. During 2011, the Bank transferred two loans totaling $1.8 million, net of reserves, to OREO. For the nine months ended September 30, 2012 the Bank recorded an additional valuation allowance of $48 thousand in non-interest expense for two properties whose current appraised value was less than the recorded OREO amount. For 2011 the Bank recorded a valuation allowance of $393 thousand during the same nine month period.

The trouble debt restructured loans (“TDRs”) for September 30, 2012 and December 31, 2011 are as follows:

	September 30, 2012 - Unaudited
	Number		Non-Accrual		Number		Accrual		Total
(dollars in thousands)	of Loans		Status		of Loans		Status		TDR's
Residential real estate - first lien		-	$	-		-	$	-	$	-
Commercial real estate non-owner occupied		-		-		-		-		-
Commercial loans		3		637		-		-		637
		3	$	637		-	$	-	$	637

	December 31, 2011
	Number		Non-Accrual		Number		Accrual		Total
(dollars in thousands)	of Loans		Status		of Loans		Status		TDR's
Residential real estate - first lien		-	$	-		1	$	240	$	240
Commercial real estate non-owner occupied		-		-		-		-		-
Commercial loans		5		751		-		-		751
		5	$	751		1	$	240	$	991

There have not been any defaults on loans classified as a TDR for the periods presented. One loan for $387 thousand was restructured during the three months ended September 30, 2012.

A summary of TDRs modifications outstanding and performance under modified terms are as follows:

	September 30, 2012 - Unaudited
	Not Performing		Performing
	to Modified		to Modified		Total
(in thousands)	Terms		Terms		TDR's
Residential real estate - first lien
Interest only payments	$	-	$	-	$	-
Rate modification		-		-		-
Forberance		-		-		-
Extension or other modification		-		-		-
Total residential real estate		-		-		-
Commercial loans
Interest only payments	$	-	$	-	$	-
Rate modification		-		-		-
Forberance		-		-		-
Extension or other modification		637		-		637
Total commercial		637		-		637
Total TDR's	$	637	$	-	$	637

	December 31, 2011
	Not Performing		Performing
	to Modified		to Modified		Total
(in thousands)	Terms		Terms		TDR's
Residential real estate - first lien
Interest only payments	$	-	$	-	$	-
Rate modification		-		-		-
Forberance		-		-		-
Extension or other modification		-		240		240
Total residential real estate		-		240		240
Commercial loans
Interest only payments	$	-	$	-	$	-
Rate modification		-		-		-
Forberance		353		-		353
Extension or other modification		398		-		398
Total commercial		751		-		751
Total TDR's	$	751	$	240	$	991

Note 5: Deposits

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

	Unaudited
	September 30,					December 31,
(dollars in thousands)	2012		% of Total			2011		% of Total
Noninterest-bearing demand	$	79,934		28	%	$	62,044		24	%
Interest-bearing checking		18,946		7			17,687		7
Money market accounts		66,707		23			61,267		23
Savings		12,262		4			10,644		4
Certificates of deposit $100,000 and over		74,844		26			79,718		30
Certificates of deposit under $100,000		34,733		12			31,282		12
Total deposits	$	287,426		100	%	$	262,642		100	%

Note 6: Stock Options, Awards and Warrants

The Company initially raised $4,775,000 of capital by selling to its founders investment units consisting of one share of common stock and a fully detachable warrant equal to .25 shares of common stock per unit. The warrants were issued in recognition of the financial and organizational risk undertaken by the purchasers in the organizational offering. The warrants are immediately exercisable and will expire ten (10) years from the date of issuance on August 8, 2014. As of September 30, 2012 there have not been any exercises of these warrants and the Company has outstanding warrants to purchase 119,376 shares at the price of $10.00 per share.

The Company’s stock incentive plans provide 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 options and 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. The Company previously maintained an Advisory Board, for which non-employee members were compensated via stock options for meeting attendance. These nonqualified stock options can be granted with terms up to ten years, vest immediately, and are fully exercisable at time of grant. Stock awards granted to directors are based on the fair value of the awards, which is generally the market price of the common stock on the measurement date, and vest immediately. For the nine months ended September 30, 2012 the Company’s granted 6,211 shares of stock to directors as compensation for their service.

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

	Unaudited
	September 30, 2012
			Weighted
			Average
			Exercise
	Shares		Price
Balance at January 1, 2012		395,351	$	11.16
Granted		-		-
Exercised		-		-
Forfeited
Balance at September 30, 2012		395,351	$	11.16
Exercisable at September 30, 2012		394,751	$	11.17
Weighted average fair value of options granted during the year			$	-

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 $7.15 at September 30, 2012 the options outstanding had no aggregate intrinsic value. There have not been any exercises of options during the first nine months of 2012.

Note 7: 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 $79.7 thousand for the nine months ended September 30, 2012 and $72.8 thousand for the same period in 2011. The Company’s matching contributions vest immediately.

Note 8: Income per Common Share

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

	Unaudited
	Nine months ended						Three months ended
	September 30,						September 30,
(dollars in thousands, except per share data)	2012			2011			2012			2011
Net income	$	1,182		$	1,031		$	387		$	337
Preferred dividends		(471	)		(278	)		(157	)		(115	)
Net income available to common shareholders (numerator)	$	711		$	753		$	230		$	222

BASIC
Average common shares outstanding (denominator)		3,012,288			2,637,829			3,748,248			2,639,780
Basic income per common share	$	0.24		$	0.29		$	0.06		$	0.08

DILUTED
Average common shares outstanding		3,012,288			2,637,829			3,748,248			2,639,780
Diluted effect of stock options and warrants		-			-			-			-
Diluted average common shares outstanding (denominator)		3,012,288			2,637,829			3,748,248			2,639,780
Diluted income per common share	$	0.24		$	0.29		$	0.06		$	0.08

Stock options and warrants outstanding that are anti-dilutive and thus excluded from calculation of diluted number of shares presented above		514,127			491,576			514,127			491,576

Note 9: Risk-Based Capital

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) required that the federal regulatory agencies adopt regulations defining five capital tiers for banks: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. 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 the Company’s financial statements. Quantitative measures, established by the regulators to ensure capital adequacy, require that the Bank and Bancorp maintain minimum ratios (set forth below) of capital to risk-weighted assets. Under the guidelines, capital is compared to the relative risk related to the balance sheet. 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 September 30, 2012 and December 31, 2011 the Bank met all capital adequacy requirements to which it is 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 September 30, 2012: (unaudited)
Total capital (to risk-weighted assets)
Howard Bank	$	39,196		12.79	%	$	24,525		8.00	%	$	30,656		10.00	%
Howard Bancorp	$	48,974		15.83	%	$	24,742		8.00	%		N/A
Tier 1 capital (to risk-weighted assets)
Howard Bank	$	36,466		11.90	%	$	12,262		4.00	%	$	18,394		6.00	%
Howard Bancorp	$	46,241		14.95	%	$	12,371		4.00	%		N/A
Tier 1 capital (to average assets)
(Leverage ratio)
Howard Bank	$	36,466		10.10	%	$	14,448		4.00	%	$	18,060		5.00	%
Howard Bancorp	$	46,241		12.79	%	$	14,457		4.00	%		N/A
As of December 31, 2011:
Total capital (to risk-weighted assets)
Howard Bank	$	38,172		13.75	%	$	22,214		8.00	%	$	27,768		10.00	%
Howard Bancorp	$	40,127		14.36	%	$	22,349		8.00	%		N/A
Tier 1 capital (to risk-weighted assets)
Howard Bank	$	34,739		12.51	%	$	11,107		4.00	%	$	16,661		6.00	%
Howard Bancorp	$	36,694		13.14	%	$	11,174		4.00	%		N/A
Tier 1 capital (to average assets)
(Leverage ratio)
Howard Bank	$	34,739		10.92	%	$	12,725		4.00	%	$	15,907		5.00	%
Howard Bancorp	$	36,694		11.52	%	$	12,737		4.00	%		N/A

The Bank is currently prohibited from paying dividends without the prior approval of the Commissioner.

Note 10: Common Stock Offering

On July 20, 2012, Bancorp closed its previously announced common stock offering, pursuant to an effective registration statement, and concurrent private placement of its common stock. Bancorp raised $10.2 million of additional capital and issued 1,396,364 shares of its common stock as of the closing date of the offerings. The following table represents the additional capital raised and the number of shares issued under each segment of the offerings:

	Gross Proceeds $		Shares Issued #
Rights Offering		1,778,039		243,567
Public Offer		4,264,616		584,194
Private Placement		4,150,802		568,603
Total		10,193,457		1,396,364

Note 11: Preferred Stock

On September 22, 2011, we entered into a Securities Purchase Agreement with the Secretary of the U. S. Treasury, pursuant to which we issued and sold to the Treasury 12,562 shares of our 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 Treasury’s Small Business Lending Fund (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 are 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, which is calculated on the aggregate Liquidation Amount, has been initially set at 5% per annum based upon the current level of “Qualified Small Business Lending” (“QSBL”) by the Bank. The dividend rate for future dividend periods will be set based upon the percentage change in qualified lending between each dividend period and the baseline QSBL level established at the time the Agreement was entered into. Such dividend rate may 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 nineteenth dividend periods. If the Series AA Preferred Stock remains outstanding for more than four-and-one-half years, the dividend rate will be fixed at 9%. Prior to that time, in general, the dividend rate decreases as the level of the Bank’s QSBL increases. Such dividends are not cumulative, but the Company may only declare and pay dividends on its common stock (or any other equity securities junior to the Series AA Preferred Stock) if it has declared and paid dividends for the current dividend period on the Series AA Preferred Stock, and will be subject to other restrictions on its ability to repurchase or redeem other securities. In addition, if (i) we have 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) may designate a representative to attend all meetings of Bancorp’s Board of Directors in a nonvoting observer capacity and Bancorp must give such representative copies of all notices, minutes, consents and other materials that Bancorp provide to its directors in connection with such meetings.

We may redeem the shares of Series AA Preferred Stock, in whole or in part, at any time at a redemption price equal to the sum of the Liquidation Amount per share and the per-share amount of any unpaid dividends for the then-current period, subject to any required prior approval by our primary federal banking regulator.

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.

The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities, liquid mortgage products, active listed equities and most money market securities. Such instruments are generally classified within Level 1 or Level 2 of the fair value hierarchy. As required by FASB ASC Topic 820, the Company does not adjust the quoted price for such instruments.

The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include most investment-grade and high-yield corporate bonds, less liquid mortgage products, less liquid equities, state, municipal and provincial obligations, and certain physical commodities. Such instruments are generally classified within Level 2 of the fair value hierarchy.

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.

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 as of September 30, 2012 and December 31, 2011.

September 30, 2012 (unaudited)			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)
Investment securities:
U.S. Federal agencies	$	35,544	$	-	$	35,544	$	-
Mortgage-backed securities		408		-		408		-
Loans held for sale		573		-		573		-

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 as of September 30, 2012 and December 31, 2011.

September 30, 2012 - (unaudited)			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	$	2,903	$	-	$	-	$	2,903
Impaired loans:
Construction and land		432		-		-		432
Residential - first lien		471		-		-		471
Residential - junior lien		-		-		-		-
Commercial - owner occupied		-		-		-		-
Commercial - non-owner occupied		3,144		-		-		3,144
Commercial loans and leases		1,980		-		-		1,980
Consumer		-		-		-		-

December 31, 2011			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	$	1,885	$	-	$	-	$	1,885
Impaired loans:
Construction and land		-		-		-		-
Residential - first lien		611		-		-		611
Residential - junior lien		44		-		-		44
Commercial - owner occupied		1,988		-		-		1,988
Commercial - non-owner occupied		2,783		-		-		2,783
Commercial loans and leases		3,498		-		-		3,498
Consumer		9		-		-		9

The following table provides a reconciliation of all assets measured at fair value on a nonrecurring basis using significant unobservable inputs for the nine months ended September 30, 2012 and the twelve months ended December 31, 2011.

	Foreclosed			Impaired
(in thousands)	Properties			Loans
Balance at December 31, 2011	$	1,885		$	8,933
Total net gain (losses) for the year included in:
Gain (loss) on sale of foreclosed properties		(131	)		-
Other comprehensive gain (loss)		-			-
Purchase and sales, net		(422	)		-
Net transfers in (out)		1,598			(2,906	)
Valuation allowance		(27	)		-
Balance at September 30, 2012 - Unaudited	$	2,903		$	6,027

	Foreclosed			Impaired
(in thousands)	Properties			Loans
Balance at December 31, 2010	$	3,024		$	9,433
Total net gain (losses) for the year included in:
Gain on sale of foreclosed properties		459			-
Other comprehensive gain (loss)		-			-
Purchase and sales, net		(2,625	)		-
Net transfers in (out)		1,804			218
Valuation allowance		(777	)		(718	)
Balance at December 31, 2011	$	1,885		$	8,933

The following table presents required information in accordance with ASC Topic 825 “Financial Instruments” at September 30, 2012 and December 31, 2011. 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. These financial assets and liabilities have not been recorded at fair value,

The following methods and assumptions were used to estimate the fair value of financial instruments where it is practical to estimate fair value:

Cash and cash equivalents: The fair value of cash and cash equivalents is estimated to approximate the carrying amounts.

Securities available-for-sale: Based on quoted market prices. If quoted market price is not available fair value is estimated using quoted market prices for similar securities. See Note 2 for additional information.

Nonmarketable equity securities: Because these securities are not marketable, the carrying amount approximates the fair value.

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: Variable rate repurchase agreements carrying amounts approximate the fair values at the reporting date.

Long-term borrowing: Because the borrowing is a variable rate instrument, the carrying amount approximates the fair value.

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.

					September 30, 2012 - Unaudited
					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
Cash and cash equivalents	$	18,336	$	18,336	$	-	$	18,336		0
Nonmarketable equity securities		1,205		1,205		-		1,205		0
Loans		299,387		304,950		-		-		304,950

Financial Liabilities
Deposits		287,426		286,789		-		286,789		0
Short-term borrowings		27,619		27,619		-		27,619		0
Long-term borrowings		6,000		6,028		-		6,028		0

					December 31, 2011
					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
Cash and cash equivalents	$	18,205	$	18,205	$	-	$	18,205		0
Nonmarketable equity securities		1,313		1,313		-		1,313		0
Loans		277,177		280,653		-		-		280,653

Financial Liabilities
Deposits		262,642		262,412		-		262,412		0
Short-term borrowings		12,984		12,984		-		12,984		0
Long-term borrowings		10,000		10,052		-		10,052		0

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section is intended to help potential investors understand our financial performance through a discussion of the factors affecting our consolidated financial condition. This section should be read in conjunction with the Consolidated Financial Statements and notes to the consolidated financial statements.

Overview

Bancorp is the holding company for the Bank. The Bank is a trust company chartered under Subtitle 2 of Title 3 of the Financial Institutions Article of the Annotated Code of Maryland. The Bank was formed in March 2004 and commenced banking operations on August 9, 2004. The Bank does not exercise trust powers, and our regulatory structure is the same as a Maryland-chartered commercial bank. As such, our 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. Although we plan to continue to focus on commercial customers, we intend to increase our originations of one- to four-family residential mortgage loans going forward, increasing 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 Howard County, Maryland and Anne Arundel County, Maryland. Our secondary market area, primarily for commercial lending, includes the Maryland counties of Baltimore, Carroll, Frederick, Montgomery and Prince George’s as well as Baltimore City. 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. We call it Hands-On Service.

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, 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 law, regulations or government policies may materially affect our financial condition and results of operations.

Bancorp’s total assets increased by over $45 million or 14.1% when comparing September 30, 2012 assets of $368.5 million to the $323.1 million at December 31, 2011. Total loans outstanding of $298.8 million at the end of September 2012, showed an increase of 8.1% compared to total loans of $276.5 million on December 31, 2011. Demand deposits, which not only represent the lowest cost source of funding available to a bank, but also are most reflective of the core customer relationships targeted by the Bank, grew from $62.0 million at December 31, 2011 to $79.9 million at the end of the third quarter of 2012, representing growth in this highly coveted deposit category of $17.9 million or 28.8%. Total deposits grew by $24.8 million or 9.4% when comparing September 30, 2012 to December 31, 2011. Because of the significant increases in deposits, even after funding the 8.1% loan growth, the Bank was able to utilize the additional deposits to increase our balance sheet liquidity measures.

Through the end of the third quarter of 2012 net income was $1.2 million, which represents an increase of 14.6% over net income for the nine months ended September 30, 2011. Net interest income for the first nine months of 2012 was $10.0 million versus $9.3 million for the first nine months of 2011, an increase of approximately $639 thousand or 6.9%. Noninterest income for the first nine months of 2012 compared to the first nine months of 2011 increased $46 thousand or 9.2% while noninterest expense increased $486 thousand or 6.6%. Total noninterest income was $549 thousand for the nine months ended September 30, 2012, compared to a total of $503 thousand for the same period in 2011. For 2012, noninterest income would have reflected a $177 thousand or 35.2% increase over the prior year, but 2012 was impacted by a loss on the sale of one property classified as other real estate owned (“OREO”) of $131 thousand in the first quarter of 2012. Total noninterest expenses for the nine months ended September 30, 2012 was $7.8 million compared to $7.4 million for the same period in 2011. This represent a $486 thousand or a 6.6% increase.

We closed our initial public offering and a concurrent private placement, pursuant to which we issued a total of 1,396,364 shares of our common stock, for total gross proceeds of $10.2 million on July 20, 2012. The net proceeds of the offering increased our capital levels, which will permit additional growth in our loan levels and asset size. This growth may be either organic growth, which could take a longer time to occur, or growth that could come more quickly via merger or acquisition of other financial institutions. As such growth is realized, our operating results will reflect the additional income generated from the higher levels of earning assets.

Critical Accounting Policies

Our accounting and financial reporting policies conform to the accounting principles generally accepted in the United States of America (“GAAP”) and general practice within the banking industry. Accordingly, the financial statements require management to exercise significant judgment or discretion or make significant assumptions 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. We consider the allowance for credit losses to be our most significant accounting policy, which is further described in the Notes to the financial statements.

The allowance for credit losses is established through a provision for credit losses charged against income. Loans are charged against the allowance for credit losses when management believes that the collectability of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that represents the amount of probable and reasonably estimable known and inherent losses in the loan portfolio, based on evaluations of the collectability of loans. The evaluations take into consideration such factors as changes in the types and amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, estimated losses relating to specifically identified loans, and current economic conditions. This evaluation is inherently subjective as it requires material estimates including, among others, exposure at default, the amount and timing of expected future cash flows on impacted loans, value of collateral, estimated losses on our loan portfolios as well as consideration of general loss experience. Based on our estimate of the level of allowance for credit losses required, we record a provision for credit losses to maintain the allowance for credit losses at an appropriate level.

We cannot predict with certainty the amount of loan charge-offs that we will incur. We do not currently determine a range of loss with respect to the allowance for credit losses. In addition, our regulatory agencies, as an integral part of their examination processes, periodically review our allowance for credit losses. Such agencies may require that we recognize additions to the allowance for credit losses based on their judgments about information available to them at the time of their examination. To the extent that actual outcomes differ from management’s estimates, additional provisions to the allowance for credit losses may be required that would adversely impact earnings in future periods.

We account for income taxes under the asset/liability method. We recognize deferred tax assets for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, as well as operating loss and tax credit carry-forwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize the effect on deferred tax assets and liabilities of a change in tax rates in income in the period indicated by the enactment date. We establish a valuation allowance for deferred tax assets when, in the judgment of management, it is more likely than not that such deferred tax assets will not become realizable. The judgment about the level of future taxable income is dependent to a great extent on matters that may, at least in part, be beyond our control. It is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred tax assets could change in the near term.

We follow the provisions of ASC Topic 718 "Compensation," which requires the expense recognition over a service period for the fair value of share based compensation awards, such as stock options, restricted stock, and performance based shares. This standard allows management to establish modeling assumptions as to expected stock price volatility, option terms, forfeiture rates and dividend rates which directly impact estimated fair value. The accounting standard also allows for the use of alternative option pricing models which may impact fair value as determined. Our practice is to utilize reasonable and supportable assumptions which are reviewed with the appropriate Board Committee.

Balance Sheet Analysis and Comparison of Financial Condition

A comparison between September 30, 2012 and December 31, 2011 balance sheets are presented below.

Assets

Total assets increased $45.4 million, or 14.1%, to $368.5 million at September 30, 2012 compared to $323.1 million at December 31, 2011. This asset growth was primarily due to a $22.6 million increase in investment securities and growth of $22.3 million in total loans. The asset growth was funded primarily from increases in customer deposits and commercial customers overnight sweep agreements. Deposits increased from $262.6 million at December 31, 2011 to $287.4 million at September 30, 2012, an increase of $24.8 million or 9.4%. From a funding perspective, most important was the growth in noninterest-bearing deposits of $17.9 million or 28.8% from $62.0 million at December 31, 2011 to $79.9 million at September 30, 2012. Additional funding for asset growth came from securities sold under agreement to repurchase and other short term borrowings which increased $14.6 million to $27.6 million at September 30, 2012 from $13.0 million at December 31, 2011.

Securities Available for Sale

We currently hold both U.S. agency securities and mortgage backed securities in our securities portfolio, all of which are classified as available for sale. Our securities portfolio is used to provide the required collateral for funding via commercial customer repurchase agreements as well as to provide sufficient liquidity to fund our loans and provide funds for withdrawals of deposited funds. At September 30, 2012 we held an investment in stock of the Federal Home Loan Bank of Atlanta (“FHLB”) of $1.2 million compared to $1.3 million held at December 31, 2011. This investment, which is required for continued membership, is based partially upon the dollar amount of borrowings outstanding from the FHLB. These investments are carried at cost. We have never held stock in Fannie Mae or Freddie Mac.

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

(in thousands)	September 30, 2012				December 31, 2011
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
U.S. Federal agencies	$	35,536	$	35,544	$	12,774	$	12,773
Mortgage-backed		380		408		568		603
Total	$	35,916	$	35,952	$	13,342	$	13,376

We had securities available for sale of $36.0 million and $13.4 million at September 30, 2012 and December 31, 2011, respectively, which were recorded at fair value. This represents an increase of $22.6 million, or 168.8%, from the prior year end. We did not record any gains or losses on the sales or calls of securities or mortgage backed securities in either period presented. At September 30, 2012 and December 31, 2011, $16.2 million and $5.8 million fair value of securities, respectively, was pledged as collateral for repurchase agreements.

With respect to our total portfolio of securities available for sale, we held certain securities that had unrealized losses of $2 thousand at both September 30, 2012 and December 31, 2011. The minimal changes in the fair value of these securities resulted primarily from interest rate fluctuations. 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 consider all of the unrealized losses to be temporary impairment losses.

Loan and Lease Portfolio

Total loans and leases increased by $22.3 million or 8.1%, to $298.8 million at September 30, 2012 from $276.5 million at December 31, 2011. At September 30, 2012, total loans and leases were 81.1% of total assets, down slightly compared to 85.6% of total assets at December 31, 2011. Loan and leases growth throughout the banking industry has been impacted by decreased loan demand resulting from uncertain economic conditions.

The following table sets forth the composition of our loan and lease portfolio at the dates indicated. We had loans held for sale of $573 thousand at September 30, 2012, and $646 thousand at December 31, 2011.

	Unaudited
	September 30,					December 31,
(in thousands)	2012		% of Total			2011		% of Total
Real estate
Construction and land	$	35,889		12.0	%	$	39,268		14.2	%
Residential - first lien		23,074		7.7			22,087		8.0
Residential - junior lien		8,162		2.7			9,242		3.3
Total residential real estate		31,236		10.5			31,329		11.3
Commercial - owner occupied		58,793		19.7			46,588		16.8
Commercial - non-owner occupied		86,116		28.8			76,880		27.8
Total commercial real estate		144,909		48.5			123,468		44.6
Total real estate loans		212,034		71.0			194,065		70.2
Commercial loans and leases		85,409		28.6			81,243		29.4
Consumer		1,371		0.5			1,223		0.4
Total loans and leases	$	298,814		100.0	%	$	276,531		100.0	%

Deposits

Our deposits increased from $262.6 million at December 31, 2011 to $287.4 million at September 30, 2012, an increase of $24.8 million or 9.4%. The increase resulted primarily from a $17.9 million or 28.8% increase in noninterest-bearing checking accounts, which increased from $62.0 million at December 31, 2011 to $79.9 million at September 30, 2012. In addition, with the exception of certificates of deposit all other interest bearing accounts increased $8.3 million or 9.3% from December 31, 2011 to September 30, 2012. Certificates of deposits declined $1.4 million or 1.3% to $109.6 million at September 30, 2012 from $111.0 million at December 31, 2011. The growth in the non-maturity deposits and other sources was more than sufficient to fund the growth in loans and assets during the nine month period.

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

	September 30,					December 31,
(dollars in thousands)	2012		% of Total			2011		% of Total
Noninterest-bearing demand	$	79,934		28	%	$	62,044		24	%
Interest-bearing checking		18,946		7			17,687		7
Money market accounts		66,707		23			61,267		23
Savings		12,262		4			10,644		4
Certificates of deposit $100,000 and over		74,844		26			79,718		30
Certificates of deposit under $100,000		34,733		12			31,282		12
Total deposits	$	287,426		100	%	$	262,642		100	%

Borrowings

Customer deposits remain the primary source utilized to meet funding needs. Borrowings consist of overnight unsecured master notes, overnight securities sold under agreement to repurchase (“repurchase agreements”) and FHLB advances. Our borrowings totaled $33.6 million at September 30, 2012 and $23.0 million at December 31, 2011, respectively. Short-term borrowings totaled $27.6 million at September 30, 2012 and $13.0 million at December 31, 2011. Short term borrowing at September 30, 2012 consisted of master notes, repurchase agreements and FLHB advances totaling $1.5 million, $16.1 million and $10.0 million, respectively compared to these borrowings at December 31, 2011 totaling $1.2 million, $5.8 million and $6.0 million, respectively. We had three long-term FHLB advances outstanding totaling $6.0 million at September 30, 2012 compared to five FHLB advances outstanding totaling $10 million at December 31, 2011.

Shareholders’ Equity

Total shareholders’ equity increased by $9.7 million or 26.5% from $36.6 million at December 31, 2011 to $46.3 million at September 30, 2012. The increase in shareholders’ equity is primarily the result of the common stock offering and retention of the earnings for the first nine months of 2012, net of preferred dividends paid. On July 20, 2012, Bancorp closed its previously announced common stock offering, pursuant to an effective registration statement, and concurrent private placement of its common stock. Bancorp raised $10.2 million in gross proceeds and issued 1,396,364 shares of its common stock as of the closing date of the offerings.

Total shareholders’ equity at September 30, 2012 represents a capital to asset ratio of 12.57%, while the total shareholders’ equity at December 31, 2011 represents a capital to asset ratio of 11.34%. Even though capital levels increased, the overall growth in asset levels resulted in a decline in the capital to asset ratio.

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.

	Nine months ended September 30,
	2012								2011
	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	$	79,080		$	3,226		5.45	%	$	85,156		$	3,595		5.64	%
Commercial real estate		131,227			5,412		5.51			104,857			4,604		5.87
Construction and land		38,107			1,544		5.41			33,164			1,240		5.00
Residential real estate		31,138			1,147		4.92			33,101			1,242		5.02
Consumer		1,679			58		4.62			1,266			47		4.96
Total loans and leases		281,231			11,386		5.41			257,544			10,728		5.57
Federal funds sold		27,827			46		0.22			11,484			17		0.20
Securities: ²
U.S Gov agencies		21,835			39		0.24			13,399			36		0.36
Mortgage-backed		504			18		4.69			865			32		4.95
Other investments		1,190			18		1.98			1,489			14		1.26
Total securities		23,529			74		0.42			15,753			82		0.70
Total earning assets		332,586			11,506		4.62			284,781			10,827		5.08
Cash and due from banks		3,690								3,040
Bank premises and equipment, net		9,664								9,201
Other assets		6,445								9,369
Less: allowance for credit losses		(3,269	)							(3,840	)
Total assets	$	349,116							$	302,551
Interest-bearing liabilities
Deposits:
Interest-bearing demand accounts	$	17,678			47		0.36		$	16,024			52		0.43
Money market		64,321			280		0.58			62,725			329		0.70
Savings		11,576			47		0.54			12,340			61		0.66
Time deposits $100,000 and over		61,815			554		1.20			57,911			530		1.22
Other time deposits		51,747			442		1.14			40,548			328		1.08
Total interest-bearing deposits		207,137			1,371		0.88			189,548			1,300		0.92
Short-term borrowings		23,303			125		0.72			24,219			137		0.76
Long-term borrowings		7,248			53		0.97			6,872			72		1.40
Total interest-bearing funds		237,689			1,549		0.87			220,639			1,509		0.91
Noninterest-bearing deposits		71,017								51,050
Other liabilities and accrued expenses		842								807
Total liabilities		309,547								272,496
Shareholders' equity		39,569								30,055
Total liabilities & shareholders' equity	$	349,116							$	302,551
Net interest rate spread ³				$	9,957		3.75	%				$	9,318		4.17	%
Effect of noninterest-bearing funds							0.25								0.21
Net interest margin on earning assets⁴							4.00	%							4.37	%

(1)

Loan fee income is included in the interest income calculation, and nonaccrual loans are included in the average loan base upon which the interest rate earned on loans is calculated.

(2)

Available for sale securities are presented at amortized cost

(3)

Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(4)

Net interest margin represents net interest income divided by average total interest-earning assets.

	Three months ended September 30,
	2012								2011
	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	$	81,412		$	1,084		5.30	%	$	85,734		$	1,172		5.42	%
Commercial real estate		136,046			1,861		5.44			106,898			1,605		5.96
Construction and land		37,577			510		5.40			34,839			453		5.16
Residential real estate		31,296			381		4.84			33,476			421		4.99
Consumer		1,615			18		4.43			1,196			15		4.98
Total loans and leases		287,946			3,854		5.32			262,143			3,666		5.55
Federal funds sold		25,944			15		0.22			11,482			6		0.21
Securities: ²
U.S. Gov agencies		29,198			18		0.24			13,879			13		0.37
Mortgage-backed		434			5		4.64			779			9		4.58
Other investments		1,051			6		2.18			1,451			8		2.19
Total securities		30,683			29		0.37			16,109			30		0.74
Total earning assets		344,573			3,897		4.50			289,734			3,702		5.07
Cash and due from banks		3,762								3,469
Bank premises and equipment, net		9,740								9,192
Other assets		6,244								9,569
Less: allowance for credit losses		(2,831	)							(3,966	)
Total assets	$	361,488							$	307,998
Interest-bearing liabilities
Deposits:
Interest-bearing demand accounts	$	17,887			13		0.29		$	15,171			17		0.44
Money market		65,418			77		0.47			60,177			107		0.71
Savings		12,164			13		0.43			11,328			18		0.63
Time deposits $100,000 and over		60,557			181		1.19			62,286			187		1.19
Other time deposits		50,737			147		1.16			42,507			112		1.05
Total interest-bearing deposits		206,763			432		0.83			191,469			441		0.91
Short-term borrowings		26,341			40		0.60			23,638			50		0.84
Long-term borrowing		6,000			14		0.96			6,587			18		1.09
Total interest-bearing funds		239,104			486		0.81			221,694			509		0.91
Noninterest-bearing deposits		77,121								54,685
Other liabilities and accrued expenses		708								888
Total liabilities		316,934								277,267
Shareholders' equity		44,554								30,731
Total liabilities & shareholders' equity	$	361,488							$	307,998
Net interest rate spread ³				$	3,411		3.69	%				$	3,193		4.16	%
Effect of noninterest-bearing funds							0.25								0.21
Net interest margin on earning assets⁴							3.94	%							4.37	%

(1)

Loan fee income is included in the interest income calculation, and nonaccrual loans are included in the average loan base upon which the interest rate earned on loans is calculated.

(2)

Available for sale securities are presented at amortized cost

(3)

Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(4)

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 column is further broken down to show the impact of changes in either rates or volumes. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

	Nine months ended September 30,									Three months ended September 30,
	2012 vs. 2011									2012 vs. 2011
	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	$	(369	)	$	(167	)	$	(202	)	$	(88	)	$	(108	)	$	20
Commercial real estate		808			(381	)		1,189			256			(549	)		806
Construction and land		304			137			167			57			84			(27	)
Residential real estate		(95	)		(32	)		(63	)		(40	)		(50	)		10
Consumer		11			(5	)		15			3			(6	)		9
Taxable securities		(8	)		(43	)		36			(1	)		(59	)		58
Federal funds sold		29			2			26			9			2			7
Interest-bearing deposits in other banks		-			-			-			-			-			-
Total interest income		679			(489	)		1,168			195			(688	)		883

Interest paid on:
Savings deposits		(14	)		(15	)		1			(5	)		(22	)		17
Checking plus interest deposits		(5	)		(12	)		8			(4	)		(24	)		20
Money market accounts		(49	)		(75	)		26			(30	)		(142	)		112
Time deposit $100,000 and over		24			(15	)		39			(6	)		(0	)		(6	)
Other time deposits		114			24			90			35			47			(11	)
Short-term borrowings		(12	)		(9	)		(2	)		(10	)		(57	)		47
Long-term borrowing		(19	)		(30	)		10			(4	)		(9	)		5
Total interest expense		40			(132	)		172			(23	)		(207	)		184
Net interest earned	$	639		$	(357	)	$	996		$	218		$	(481	)	$	699

(1)

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

Comparison of Results of Operations

A comparison between the nine months ended September 30, 2012 and September 30, 2011 is presented below.

General

Net income available to common shareholders decreased $42 thousand, or 5.6%, to $711 thousand for the nine months ended September 30, 2012 compared to $753 thousand for the nine months ended September 30, 2011. The decrease was primarily due to a $193 thousand, or 69.4%, increase in dividends paid on preferred stock due to the outstanding amount of preferred stock increasing from $6.0 million to $12.6 million at the end of the third quarter of 2011. This increase was a result of our redeeming the preferred stock issued as part of the U.S. Department of Treasury’s Troubled Asset Relief Program Capital Purchase Program and issuing new preferred stock to the U.S. Treasury as part of its Small Business Lending Fund (SBLF) program in September 2011. Partially offsetting the increased dividends was a $639 thousand or 6.9% increase in net interest income, which consisted of an increase of $679 thousand, or 6.3%, in interest income with an increase of only $40 thousand, or 2.7%, in interest expense. Non-interest income during the first nine months of 2012 increased $46 thousand compared to the first nine months of, 2011, primarily as a result of the $171 thousand in additional revenues from loan related fees and increased mortgage banking revenues partially offset by a $131 thousand loss on the sale of other real estate owned (for which there was no comparable gain or loss in the first nine months of 2011). Non-interest expenses increased $486 thousand or 6.6% period over period, mostly from increases in staff with the opening of a new branch, and other required staffing additions to support a growing organization.

Interest Income

Interest income increased $679 thousand, or 6.3%, to $11.5 million for the nine months ended September 30, 2012 compared to $10.8 million for the same period 2011. The increase was primarily due to a $658 thousand, or 6.1%, increase in interest income on loans. The increase in interest income on loans was due to a 9.2% increase in the average balance of the loan portfolio compared to the nine months ended September 30, 2011, partially offset by a decrease in the average yield on such loans. In addition to loans, other sources of interest income increased by $21 thousand over the same period in 2011, primarily as a result of a $24.1 million increase in the average balances of these other forms of interest earning assets. These other interest earning assets, consisting of federal funds sold and investment securities increased 88.6% on average, from their averages during the first nine months of 2011.

Interest Expense

Interest expense remained relatively unchanged, increasing $40 thousand, or 2.7%, totaling $1.5 million for both the nine months ended September 30, 2012 and the same period 2011. This small increase was primarily attributable to an increase based upon our growth in average interest-bearing deposits and borrowings, offset by reductions in the average rates paid on these sources of funds. For the first nine months of 2012 versus 2011, average interest bearing funds increased by $17 million or 8%, while the average rates paid on these funds decreased by 4 basis points from 91 basis points in 2011 to 87 basis points for 2012.

Net Interest Income

Net interest income is the Bank’s largest component of revenue. Net interest income increased $639 thousand, or 6.9%, during the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. As noted above, the increase in net interest income was due to an increase of $679 thousand, or 6.3%, in interest income with only a $40 thousand or 2.7%, increase in interest expense during the nine month period.

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 $650 thousand for the nine months ended September 30, 2012 compared to $740 thousand for the same period in 2011, a decrease of $90 thousand, or 12.2%. A large portion of the decrease in the provision for credit losses was attributable to the reduction in non-performing loans. The reduction in loss provisions due to improvements in asset quality, was more than sufficient to cover the provisioning required by the growth in loans. Nonperforming loans totaled $2.6 million at September 30, 2012, which represented .89% of total loans, while at September 30, 2011, nonperforming loans were $3.8 million or 1.42 % of total loans.

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 Federal Deposit Insurance Corporation (“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 $549 thousand for the nine months ended September 30, 2012 compared to $503 thousand for the nine months ended September 30, 2011, representing a $46 thousand increase. Service charges on deposit accounts, which consist of account activity fees such as overdraft fees and other traditional banking fees, increased slightly by 2.6% for the first nine months of 2012 compared to the same period in 2011. The Bank began selling mortgage loans into the secondary market during 2010. The income derived from this activity increased $92 thousand for the nine months ended September 30, 2012 compared to the same period in 2011 as the Company hired a dedicated mortgage loan originator to increase the volume of loans closed and sold. Other operating income consists mainly of certain loan fees and non-depository account transaction based fees. Various fees such as wire and ATM increased $31 thousand due to increased customer activity over the same period. Additionally other operating income for 2012 benefited from a $49.9 thousand onetime pre-payment penalty collected on a commercial credit relationship. Partially offsetting these increases was a net loss of $131 thousand on the sale of one property held in OREO which was recorded in the first nine months of 2012, while no such loss was incurred in the first nine months of 2011.

Noninterest Expenses

Noninterest expenses increased by $486 thousand or 6.6%, and were $7.8 million for the nine months ended September 30, 2012 compared to $7.4 million for the nine months ended September 30, 2011. This increase was due primarily to increases in salaries and employee benefits expenses, which is the largest component of noninterest expense, which increased $539 thousand or 14.8% in the first nine months of 2012 compared to the same period in 2011, due to our continued growth. We also recorded increases in occupancy costs resulting from our branch expansion, and increases in professional fees which increased $195 thousand primarily from legal and investment banking fees for ongoing strategic growth initiatives; higher data processing costs as we increased our number of customers, and business development expenses related to our continued organic growth initiatives. Partially offsetting these expense increases were reductions in the level of FDIC assessments which decreased $30 thousand or 11.5% in the 2012 period compared to the 2011 period primarily due to changes in the assessment base and rate calculation as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; and lower levels of other expenses and OREO valuation costs due to lower operating costs of foreclosed properties and a stabilization of valuations on the properties held as OREO.

A comparison between the three months ended September 30, 2012 and September 30, 2011 is presented below.

General

Net income available to common shareholders increased by $8 thousand, or 3.6%, to $230 thousand for the three months ended September 30, 2012 compared to $222 thousand for the three months ended September 30, 2011. The increase was primarily due to a $50 thousand increase in net income resulting from higher levels of net interest income and non-interest income, and a reduction of the provision for credit losses for the three month period, partially offset by a higher level of noninterest expenses. Net interest income grew 6.9% to $3.4 million and noninterest income increased 55.4% to $216 thousand, while the provision expense decreased by 45% to $308 thousand for the third quarter. Noninterest expenses increased 20.2% to $2.7 million during the three month period compared to the same period in 2011. The resulting increase in net income of $50 thousand was partially offset by an increase of $42 thousand, or 36.5%, in dividends paid on preferred stock due to an increase in the average balance of the preferred stock.

Interest Income

Interest income increased $196 thousand, or 5.3%, to $3.9 million for the three months ended September 30, 2012 compared to $3.7 million for the same period 2011. The increase was primarily due to a $188 thousand, or 5.1%, increase in interest income on loans. The increase in interest income on loans was due to a 9.8% increase in the average balance of the loan portfolio compared to the three months ended September 30, 2011, partially offset by a decrease in the average yield. In addition, other interest income which consists of federal funds sold, increased by $9 thousand over the same period in 2011, primarily as a result of a $14.5 million increase in the average balance of federal funds sold.

Interest Expense

Interest expense decreased $23 thousand, or 4.5%, to $486 thousand for the three months ended September 30, 2012, compared to $509 thousand for the same period in 2011. This decrease was primarily attributable to an 8 basis point overall decrease in the average rate paid on deposits while growth in average interest-bearing deposits increased 8.0%. For the third quarter of 2012 versus 2011, given the growth in noninterest bearing deposit balances, and with a reduction in interest rates paid on interest-bearing demand, money market and saving accounts, we were able to decrease deposit related interest expense by $9 thousand during the period despite the $15.3 million growth in the levels of interest-bearing deposits on average.

Net Interest Income

Net interest income increased $219 thousand, or 6.9%, during the three months ended September 30, 2012 compared to the three months ended September 30, 2011. As noted above, the increase in net interest income was due to an increase of $196 thousand, or 5.3%, in interest income with a decrease of $23 thousand or 4.5%, in interest expense during the three month period.

Provision for Credit Losses

Based on management’s evaluation, we had a provision for credit losses of $308 thousand for the three months ended September 30, 2012 compared to $558 thousand for the same period in 2011, a decrease of $250 thousand. The provision for 2012 reflects the additional general provisions that are required given the continued growth in the size of our loan portfolio, and smaller provisions due to a lower number and amount of troubled loans that are individually evaluated for impairment.

Noninterest Income

Noninterest income was $216 thousand for the three months ended September 30, 2012 compared to $139 thousand for the three months ended September 30, 2011, a $77 thousand or 55.4% increase. Service charges on deposit accounts increased moderately by $12 thousand or 16% in the 2012 period compared to the third quarter of 2011, while other operating income increased $38 thousand or 64% due to higher transaction fees and an increase in rent collected on OREO properties. In addition, our mortgage banking revenues increased from $4 thousand for the third quarter of 2011, to $31 thousand for the same three months in 2012, an increase of $27 thousand or over 600%, due to a higher level of origination volume.

Noninterest Expenses

Noninterest expenses increased $447 thousand or 20.2% to $2.7 million for the three months ended September 30, 2012 from $2.2 million for the three months ended September 30, 2011. Salaries and employee benefits increased $235 thousand or 18.7% period over period primarily as a result of a an increase in staffing levels from our continued branch expansion as well as increasing the infrastructure to support a larger organization. The $40 thousand or 11.8% increase in occupancy and equipment expense is a result of opening a new branch location in May 2012. Data processing fees increased $41 thousand or 97.6% as a result of customer growth while professional fee increased $55 thousand or 69.6% primary due to various legal and investment banking costs associated with our growth initiatives. FDIC expenses increased by $41 thousand given our growth in assets, while other operating expenses increased slightly primarily as a result of additional operating expenses resulting from OREO properties.

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 restructure 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 a 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 nonaccrual loans, troubled debt restructurings and OREO (which includes real estate acquired through, or in lieu of, foreclosure), at the dates indicated.

(in thousands)	September 30, 2012		December 31, 2011
Non-accrual loans:
Real estate loans:
Commercial	$	390	$	1,988
Residential - first lien		233		368
Residential - junior lien		-		44
Construction & land		432		-
Commercial		1,542		3,229
Consumer		-		9
Total non-accrual loans		2,597		5,638
Trouble debt restructure loans:
Real estate loans:
Commercial		-		-
Residential - first lien		-		240
Construction & land		-		-
Commercial		-		-
Total trouble debt restructure loans		-		240
Total non-performing loans		2,597		5,878
Other real estate owned:
Land		595		595
Commercial		2,130		1,084
Residential		178		206
Total other real estate owned		2,903		1,885
Total non-performing assets	$	5,500	$	7,763
Ratios:
Non-performing loans to total gross loans		0.87		2.12
Non-performing assets to total assets		1.49		2.40

Included in total non-accrual loans above are two trouble debt restructured loans totaling $250 thousand that were not performing in accordance with the modified terms, and the accrual of interest has ceased. There was one residential first lien loan totaling $208 thousand that was 90 days or more past due and still accruing interest at September 30, 2012.

Under GAAP, we are required to account for certain loan modifications or restructurings as “troubled debt restructurings” (“TDR”). In general, the modification or restructuring of a debt constitutes a troubled debt restructuring if Howard 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. However, all debt restructurings or loan modifications for a borrower do not necessarily always constitute troubled debt restructurings.

Nonperforming assets amounted to $5.5 million or 1.51% of total assets, at September 30, 2012 compared to $7.8 million or 2.40% of total assets at December 31, 2011. Total nonperforming assets decreased by $2.2 million during 2012 due primarily as a result of a reduction in non-accrual loans of $3.0 or 53.9%. OREO fluctuations are due to an additional commercial property of $1.6 million off set by the sales of one commercial and one residential property.

At September 30, 2012, our nonperforming loans of $2.6 million consisted mainly of one non-owner occupied commercial real estate loan, one commercial land credit, several commercial relationships partially guaranteed by the Small Business Administration (“SBA”) and one residential mortgage. The composition of our nonperforming loans is further described below:

One owner occupied commercial real estate loan totaling $387 thousand to a local borrower who also owns a property housing one of his business ventures in Sussex County Delaware.

One commercial land loan for $432 thousand in Prince Georges County, Maryland which in addition to the collateral has personal guarantees associated with the loan.

One commercial loan relationship totaling $938 thousand for a medical care facility

One commercial relationship totaling $348 thousand, for which the full amount is guaranteed by the SBA, and claims have been submitted

One residential first lien mortgage for approximately $233 thousand.

Nine small commercial loans totaling $259 thousand.

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 substandard or doubtful. 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 our 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 nonaccrual 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.

As of September 30, 2012 and December 31, 2011, nonperforming loans amounted to $2.6 million and $5.9 million, respectively. The amount of nonperforming loans requiring specific reserves totaled $1.2 million and $2.3 million, respectively. The amount of nonperforming loans with no specific valuation allowance totaled $1.4 million and $3.6 million, respectively.

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 represents the activity in the allowance for credit losses for the nine months ended September 30, 2012 and September 30, 2011:

	Unaudited
	Nine months ended
	September 30,
(in thousands)	2012			2011
Balance at beginning of year	$	3,433		$	3,523
Provision for credit losses		650			740
Loan and lease charge-offs		(1,480	)		(553	)
Loan and lease recoveries		130			306
Balance at period end	$	2,733		$	4,016

Although total charge-offs increase for the first nine months of 2012 compared to the same period in 2011, of the $1.5 million in charge-offs for 2012, nearly $1.2 million of the charge-offs had been independently evaluated for loss as of the end of 2011, and specific reserves had been established on these loans. Thus, because the potential loss had already been identified, and specific reserves established, there was no need to replenish these reserves during 2012.

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

	Nine months ended September 30,						Three months ended September 30,
(in thousands)	2012			2011			2012			2011
Balance at beginning of period	$	3,433		$	3,523		$	3,076		$	3,868
Charge-offs:
Real estate
Construction and land loans		-			-			-			-
Residential first lien loans		(23	)		-			-			-
Residential junior lien loans		(44	)		-			-			-
Commercial owner occupied laons		-			-			-			-
Commercial non-owner occupied loans		(268	)		-			(268	)		-
Commercial loans and leases		(1,130	)		(532	)		(463	)		(394	)
Consumer loans		(15	)		(21	)		-			(16	)
		(1,480	)		(553	)		(731	)		(410	)
Recoveries:
Real estate
Construction and land loans		-			-			-			-
Residential first lien loans		-			-			-			-
Residential junior lien loans		-			-			-			-
Commercial owner occupied laons		-			-			-			-
Commercial non-owner occupied loans		63			-			63			-
Commercial loans and leases		65			305			16			-
Consumer loans		2			1			1			-
		130			306			80			-

Net recoveries (charge-offs)		(1,350	)		(247	)		(651	)		(410	)

Provision for credit losses		650			740			308			558

Balance at end of period	$	2,733		$	4,016		$	2,733		$	4,016

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.

	September 30, 2012					December 31, 2011
(dollars in thousands)	Amount		Percent¹			Amount		Percent¹
Real estate
Construction and land loans	$	192		12.0	%	$	174		14.2	%
Residential first lien loans		105		7.7			111		8.0
Residential junior lien loans		22		2.7			64		3.3
Commercial owner occupied laons		651		19.7			611		16.8
Commercial non-owner occupied loans		349		28.8			197		27.8
Commercial loans and leases		1,383		28.6			2,233		29.4
Consumer laons		31		0.5			43		0.5
Total	$	2,733		100.0	%	$	3,433		100.0	%

(1)

Represents the percent of loans in each category to total loans

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 September 30, 2012 and December 31, 2011, and expect to maintain our focus on retaining appropriate liquidity levels now that we have completed our initial public offering.

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 September 30, 2012 and December 31, 2011, cash and cash equivalents totaled $18.3 million and $18.2 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 September 30, 2012 and December 31, 2011, we had $79.1 million and $59.5 million, respectively, in loan commitments outstanding, including commitments issued to originate loans of $31.4 million and $31.2 million at September 30, 2012 and December 31, 2011, respectively, and $41.3 million and $23.4 million in unused lines of credit to borrowers on these same dates, respectively. In addition to commitments to originate loans and unused lines of credit we had $6.4 million and $4.9 in letters of credit at September 30, 2012 and December 31, 2011, respectively. Certificates of deposit due within one year of September 30, 2012 totaled $60.7 million, or 16.5% of total deposits. Should these deposits not remain with us, 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 nine months of 2012 cash was utilized by net loan growth of $25.4 million, while for the nine month ended September 30, 2011 cash was used to fund net loan growth totaled $17.0 million. During these periods, we purchased $44.0 million and $39.2 million of securities, respectively.

Financing activities consist primarily of activity in deposit accounts and FHLB advances. We experienced a net increase in deposits of $24.7 million during the first nine months of 2012. 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, we have borrowing agreements in place with the FHLB, which provide an additional source of funds. Total FHLB advances were unchanged at $16 million at September 30, 2012 and December 31, 2011. At September 30, 2012, we had the ability to borrow up to a total of $71.2 million based upon our credit availability at the FHLB, subject to collateral requirements.

The Bank is 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 September 30, 2012 and December 31, 2011, the Bank exceeded all regulatory capital requirements. The Bank is 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 which would have a material effect on us.

Outstanding loan commitments and lines of credit at September 30, 2012 and December 31, 2011 are as follows:

	September 30,		December 31,
(in thousands)	2012		2011

Unfunded loan commitments	$	31,370	$	31,203
Unused lines of credit		41,337		23,424
Letters of credit		6,398		4,902

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 the statement of financial condition at September 30, 2012 or December 31, 2011 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 of the end of the period covered by this quarterly report on Form 10-Q Bancorp’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of Bancorp’s disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, Bancorp’s Chief Executive Officer and Chief Financial Officer concluded that Bancorp’s disclosure controls and procedures are effective as of September 30, 2012. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by Bancorp 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.

In addition, there were no changes in Bancorp’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2012, that have materially affected, or are reasonably likely to materially affect Bancorp’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 or similar proceedings being contemplated by any governmental authorities.

Item 1A. Risk Factors

There have been no material changes in the risk factors from those disclosed in our final prospectus dated May 21, 2012, as filed with the SEC on May 23, 2012.

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

Our registration statement on Form S-1, File Number 333-178204, with respect to our initial public offering of our common stock, was declared effective by the SEC on May 14, 2012. We sold a total of 827,761 shares of common stock in our initial public offering for aggregate gross proceeds of $6,042,655, plus an additional 4,193,457 shares in a concurrent private placement which raised additional proceeds of $4,150,802.

After expenses, we raised net proceeds of approximately $9.0 million, and Bancorp has not yet used any of the net proceeds of the initial public offering, which have been placed in in deposit accounts at Howard Bank until they can be utilized.

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)

November 9, 2012		/s/ Mary Ann Scully
Date		MARY ANN SCULLY
		PRESIDENT AND CEO

November 9, 2012		/s/ George C. Coffman
Date		GEORGE C. COFFMAN
		EVP AND CFO