Old Line Bancshares
January 8, 2009
Amit Pande
Accounting Branch Chief
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549
Dear Amit Pande:
We have reviewed the comments outlined in your letter dated December 18, 2008 in regards to our Form 10-Q for the Quarterly Period Ended September 30, 2008 and our Form 8-K filed December 5, 2008. Our response follows.
Form 10-Q for the Quarterly Period Ended September 30, 2008:
Asset Quality, page 30
1. | With a view toward enhanced disclosure in your next Form 10-K, please provide us with an update and your analysis in determining that the $935 thousand non-accrual loan was not impaired as of September 30, 2008, including your specific consideration of the guidance in paragraph 8 of SFAS 114. |
Response
At the end of every quarter, we review all classified and non-accrual loans to determine if we should disclose impairment and have continued do so during the periods that we will include in our next Form 10-K. Paragraph 8 of SFAS 114 states “A loan is not impaired during a period of delay in payment if the creditor expects to collect all amounts due including interest accrued at the contractual interest rate for the period of delay.” As outlined in our Form 10-Q for the period ended September 30, 2008, the borrower on the loan in question began remitting payments in the first quarter of 2008 and has committed to making all past due interest and principal current prior to March 31, 2009. At September 30, 2008, the borrower had, by the due date, made several months of scheduled payments of principal and interest plus a percentage of the past due principal and interest and we expected to receive all amounts due including interest accrued at the contractual interest rate by March 31, 2009. As of the date of this letter, we have continued to receive payments from the borrower. We have and will continue to monitor the borrower’s performance, the loan to value of the collateral, and our expectations regarding full repayment of all amounts past due and provide updates and disclosure on this loan in our next Form 10-K.
2. | Form 8-K Filed December 5, 2008 |
Please tell us how you considered whether a sale of securities to the Treasury Department would have a material impact on your financial statements and evaluate whether pro-forma financial statements are appropriate. |
Where you expect the proceeds of the sale of securities to the Treasury Department to have a material impact on your balance sheet or income statement, our rules require you to provide pro-forma statements that comply with Article 11 of Regulation S-X. |
1525 Pointer Ridge Place, Bowie, MD 20716
301-430-2544•FAX: 301-430-2545
In evaluating the impact of the potential sale of securities to the Treasury Department, you must consider the material effect of the transaction, including: |
· | how the application of the proceeds of the transaction may potentially effect your net interest margin; |
· | how the accretion and dividends on the preferred stock will impact the net income available to common shareholders; and |
· | how the transaction will impact your basic earnings per share, diluted earnings per share, and diluted shares outstanding. |
Response
In determining whether a sale of securities to the Treasury Department would have a material impact on our financial statements, we completed a pro-forma analysis based on the information available at the time of the transaction. A Pro-Forma Balance Sheet, Income Statement, Average Balance Sheet, Average Shares Worksheet, and Capital Ratios are attached for your review.
In order to compile this analysis we relied on certain assumptions regarding the use of the $7 million approved by the Treasury Department. The injection of these proceeds would increase our legal lending limit by approximately $1 million. We reviewed the number of loans that we participated out to other financial institutions during 2008 because they exceeded our legal lending limit, our 20% historical loan growth rate, our credit quality and the current economy. We assumed that we would continue to originate a similar number and dollar amount of loan transactions during the next 9-12 months as we had in the prior 12 months. Considering these items, we expect to deploy the $7 million to increased loan growth. Until such time that we can deploy these funds, we expect to invest them in mortgage backed or federal agency securities. Based on market quoted yields of 4.2% on mortgage backed securities, we assumed that in the short term, we would earn 4.2% on these funds. In our Pro Forma analyses, we considered only those plans for the proceeds that met factually supportable criteria. However, during the next twelve months, we plan to leverage this additional capital by originating an increased number of higher dollar loans that will most likely earn a higher rate of return.
Our analysis also included the impact of the accretion of the warrants and the dividend payment on the preferred stock. We allocated the $7 million in proceeds based on the estimated fair value of the preferred stock and warrants. To determine the fair value of the preferred stock, we assessed the current market rate for similar transactions. Although there were few transactions of similar nature in the current market, we identified recent transactions with an 8% yield. Using this as our basis, we increased the risk premium by 1% and determined the appropriate discount rate was 9%. We expect to repurchase the preferred stock by the end of the 5th year and assumed a 5 year term in our present value analysis.
To determine the fair value of the warrants, we used the Black-Scholes method with the following factors:
-24.66% Volatility (Derived from our historical stock price)
- 3.35% Interest Rate
- 1.60% Continuous Yield (Yield at time of calculation)
As outlined in the Pro-Forma statements, in the short term we expect the preferred stock transaction to increase net income approximately $44,000 and reduce earnings per common share approximately $0.03-$0.05 annually and have minimal impact on our net interest margin. As we accomplish our objective of leveraging the proceeds into loan growth, we anticipate that the preferred stock transaction will be immaterial to our long term financial performance. In light of the current uncertainties in the economy and the turmoil in the financial markets, it is difficult, if not impossible to predict our actual performance and actual results may differ materially.
1525 Pointer Ridge Place, Bowie, MD 20716
301-430-2544•FAX: 301-430-2545
The Company acknowledges that it is responsible for the adequacy and accuracy of the disclosure in the filing and that staff comments or changes to our disclosures in response to staff comments do not foreclose the Commission from taking any action with respect to the filing. We further acknowledge the Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
After you have had an opportunity to review our analysis, please advise me if you have any additional questions.
Sincerely,
/s/ Christine M. Rush
Christine M. Rush
Executive Vice President &
Chief Financial Officer
1525 Pointer Ridge Place, Bowie, MD 20716
301-430-2544•FAX: 301-430-2545
Old Line Bancshares, Inc. & Subsidiary | ||||||||
Consolidated Balance Sheets | ||||||||
PRO-FORMA AFTER TARP BASED ON 9/30/08 | September 30, 2008 Prior to TARP | |||||||
(ProForma) | (Unaudited) | |||||||
Assets | ||||||||
Cash and due from banks | $ | 3,949,847 | $ | 3,949,847 | ||||
Federal funds sold | 21,904,173 | 21,904,173 | ||||||
Total cash and cash equivalents | 25,854,020 | 25,854,020 | ||||||
Time deposits in other banks | - | - | ||||||
Investment securities available for sale | 15,751,056 | 8,751,056 | ||||||
Investment securities held to maturity | 9,847,243 | 9,847,243 | ||||||
Loans, less allowance for loan losses | 223,531,239 | 223,531,239 | ||||||
Restricted equity securities at cost | 2,126,550 | 2,126,550 | ||||||
Investment in real estate LLC | 811,925 | 811,925 | ||||||
Bank premises and equipment | 4,801,831 | 4,801,831 | ||||||
Accrued interest receivable | 992,284 | 992,284 | ||||||
Deferred income taxes | 186,948 | 186,948 | ||||||
Bank owned life insurance | 8,013,389 | 8,013,389 | ||||||
Other assets | 1,042,618 | 1,042,618 | ||||||
$ | 292,959,103 | $ | 285,959,103 | |||||
Liabilities and Stockholders' Equity | ||||||||
Deposits | ||||||||
Noninterest-bearing | $ | 35,483,127 | $ | 35,483,127 | ||||
Interest-bearing | 176,913,764 | 176,913,764 | ||||||
Total deposits | 212,396,891 | 212,396,891 | ||||||
Short-term borrowings | 23,310,048 | 23,310,048 | ||||||
Long-term borrowings | 15,000,000 | 15,000,000 | ||||||
Accrued interest payable | 653,738 | 653,738 | ||||||
Income tax payable | 48,609 | 48,609 | ||||||
Other liabilities | 559,142 | 559,142 | ||||||
251,968,428 | 251,968,428 | |||||||
Stockholders' Equity | ||||||||
Preferred Stock, $0.01 par value; authorized 1,000,000 shares; issued and outstanding 7,000 Series A, with a redemption and liquidation value of $1,000 per share. | 70 | - | ||||||
Additional paid-in capital preferred stock | 6,698,497 | - | ||||||
Common stock, par value $.01 per share; authorized 15,000,000 shares; | ||||||||
issued and outstanding 3,859,117 in 2008, and 4,075,849 in 2007 | 38,591 | 38,591 | ||||||
Additional paid-in capital common stock | 28,802,634 | 28,802,634 | ||||||
Warrants to purchase 143,247 of common stock | 301,433 | - | ||||||
Retained earnings | 5,175,823 | 5,175,823 | ||||||
41,017,048 | 34,017,048 | |||||||
Accumulated other comprehensive income | (26,373 | ) | (26,373 | ) | ||||
40,990,675 | 33,990,675 | |||||||
$ | 292,959,103 | $ | 285,959,103 | |||||
1525 Pointer Ridge Place, Bowie, MD 20716
301-430-2544•FAX: 301-430-2545
Old Line Bancshares, Inc. & Subsidiary | ||||||||
Consolidated Statements of Income | ||||||||
(Pro-Forma after $7 Million TARP) | ||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
2008 | 2008 | |||||||
Interest revenue | ||||||||
Loans, including fees | $ | 3,642,695 | $ | 10,620,360 | ||||
U.S. Treasury securities | 17,052 | 58,237 | ||||||
U.S. government agency securities | 40,319 | 90,026 | ||||||
Mortgage backed securities | 170,307 | 429,754 | ||||||
Municipal securities | 23,883 | 72,694 | ||||||
Federal funds sold | 85,110 | 257,079 | ||||||
Other | 31,262 | 125,213 | ||||||
Total interest revenue | 4,010,628 | 11,653,363 | ||||||
Interest expense | ||||||||
Deposits | 1,256,945 | 3,773,591 | ||||||
Borrowed funds | 202,894 | 593,015 | ||||||
Total interest expense | 1,459,839 | 4,366,606 | ||||||
Net interest income | 2,550,789 | 7,286,757 | ||||||
Provision for loan losses | 180,000 | 345,000 | ||||||
Net interest income after provision for loan losses | 2,370,789 | 6,941,757 | ||||||
Non-interest revenue | ||||||||
Service charges on deposit accounts | 78,533 | 230,737 | ||||||
Earnings on bank owned life insurance | 90,895 | 273,609 | ||||||
Income (loss) on investment in real estate LLC | (7,737 | ) | 5,904 | |||||
Other fees and commissions | 47,419 | 191,958 | ||||||
Total non-interest revenue | 209,110 | 702,208 | ||||||
Non-interest expense | ||||||||
Salaries | 822,131 | 2,308,762 | ||||||
Employee benefits | 222,607 | 723,965 | ||||||
Occupancy | 286,729 | 837,438 | ||||||
Equipment | 81,771 | 228,437 | ||||||
Data processing | 67,163 | 193,042 | ||||||
Other operating | 348,886 | 1,014,822 | ||||||
Total non-interest expense | 1,829,287 | 5,306,466 | ||||||
Income before income taxes | 750,612 | 2,337,499 | ||||||
Income taxes | 272,345 | 828,804 | ||||||
Net income | 478,267 | 1,508,696 | ||||||
Dividends and Accretion on Series A Preferred Stock | 102,571 | 307,716 | ||||||
Net income available for common stockholders | $ | 375,696 | $ | 1,200,980 | ||||
Basic earnings per common share | $ | 0.10 | $ | 0.30 | ||||
Diluted earnings per common share | $ | 0.10 | $ | 0.30 |
1525 Pointer Ridge Place, Bowie, MD 20716
301-430-2544•FAX: 301-430-2545
The following table illustrates Pro-Forma average balances of total interest earning assets and total interest-bearing liabilities after receipt of $7 million in TARP funds. It assumes that we transfer $7 million of existing federal funds into mortgage backed securities at 4.2%.
Average Balances, Interest and Yields | ||||||||||||
Pro-Forma based on nine months ended on September 30, 2008 | ||||||||||||
Average | ||||||||||||
balance | Interest | Yield | ||||||||||
Assets: | ||||||||||||
Federal funds sold(1) | $ | 14,324,829 | $ | 262,020 | 2.44 | % | ||||||
Time deposits in other banks | 1,850,149 | 47,198 | 3.40 | |||||||||
Investment securities(1)(2) | ||||||||||||
U.S. Treasury | 2,345,107 | 61,594 | 3.50 | |||||||||
U.S. government agency | 3,373,028 | 95,215 | 3.76 | |||||||||
Mortgage backed securities | 13,206,584 | 429,754 | 4.33 | |||||||||
Municipal securities | 2,917,024 | 107,488 | 4.91 | |||||||||
Other | 2,100,469 | 80,317 | 5.09 | |||||||||
Total investment securities | 23,942,212 | 774,368 | 4.31 | |||||||||
Loans: | ||||||||||||
Commercial | 61,197,893 | 3,171,251 | 6.90 | |||||||||
Mortgage | 135,422,739 | 6,772,121 | 6.66 | |||||||||
Installment | 17,134,442 | 676,988 | 5.26 | |||||||||
Total loans | 213,755,074 | 10,620,360 | 6.62 | |||||||||
Allowance for loan losses | 1,686,510 | - | ||||||||||
Total loans, net of allowance | 212,068,564 | 10,620,360 | 6.67 | |||||||||
Total interest earning assets(1) | 252,185,754 | 11,703,946 | 6.18 | |||||||||
Non-interest bearing cash | 3,955,090 | |||||||||||
Premises and equipment | 4,414,384 | |||||||||||
Other assets | 11,095,402 | |||||||||||
Total assets | $ | 271,650,630 | ||||||||||
Liabilities and Stockholders' Equity: | ||||||||||||
Interest bearing deposits | ||||||||||||
Savings | $ | 6,647,613 | 31,901 | 0.64 | ||||||||
Money market and NOW | 34,244,291 | 259,736 | 1.01 | |||||||||
Other time deposits | 117,417,843 | 3,481,954 | 3.95 | |||||||||
Total interest-bearing deposits | 158,309,747 | 3,773,591 | 3.18 | |||||||||
Borrowed funds | 34,915,382 | 593,015 | 2.26 | |||||||||
Total interest-bearing liabilities | 193,225,129 | 4,366,606 | 3.01 | |||||||||
Noninterest-bearing deposits | 35,729,533 | |||||||||||
228,954,662 | ||||||||||||
Other liabilities | 1,385,765 | |||||||||||
Stockholders' equity | 41,310,203 | |||||||||||
Total liabilities and stockholders' equity | $ | 271,650,630 | ||||||||||
Net interest spread(1) | 3.17 | |||||||||||
Net interest income and Net interest margin(1) | $ | 7,337,340 | 3.88 | % | ||||||||
The FTE basis adjusts for the tax favored status of these investments.
2) Available for sale investment securities are presented at amortized cost.
1525 Pointer Ridge Place, Bowie, MD 20716
301-430-2544•FAX: 301-430-2545
Old Line Bank Pro-Forma
Average Number of Common Shares
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
2008 | 2008 | |||||||
Weighted average number of shares | 3,880,460 | 3,940,228 | ||||||
Dilutive average number of shares | 1,324 | 2,742 | ||||||
Additional Dilution with TARP | 2,307 | 2,307 | ||||||
Strike price of warrants-$7.33 | ||||||||
Stock price-$7.45 |
1525 Pointer Ridge Place, Bowie, MD 20716
301-430-2544•FAX: 301-430-2545
Old Line Bank Pro-Forma
Capital Ratios after $7 million TARP
Old Line Bank Actual 9/30/2008 | TARP | Old Line Bank ProForma w/Tarp 9/30/2008 | ||||||||||
Tier 1 Capital | ||||||||||||
Total Equity Capital | $ | 31,938 | $ | 7,000 | $ | 38,938 | ||||||
Minus Unrealized Loss on AFS | (26 | ) | - | (26 | ) | |||||||
Total Tier 1 Capital | 31,964 | 7,000 | 38,964 | |||||||||
Tier 2 Capital | ||||||||||||
Allowance for Loan Losses | 1,916 | - | 1,916 | |||||||||
Total Tier 2 Capital | 33,880 | 7,000 | 40,880 | |||||||||
QUARTERLY Average Total Assets | 280,916 | 7,000 | 287,916 | |||||||||
Risk Weighted Assets(1 | 236,315 | - | 236,315 | |||||||||
Ratios | ||||||||||||
Total Capital to Risk Weighted Assets | ||||||||||||
Consolidated Total Risk Based | 14.34 | % | 17.30 | % | ||||||||
Tier 1 Capital to Risk Weighted Assets | ||||||||||||
Consolidated Risk Based Capital | 13.53 | % | 16.49 | % | ||||||||
Tier 1 Capital to Average Assets | ||||||||||||
Consolidated Leverage Ratio | 11.38 | % | 13.53 | % | ||||||||
Legal Lending limit | $ | 5,082 | $ | 6,132 | ||||||||
Note: If funds invested in FF 0% RW-ratios will decrease slightly after movement to investments and/or loans | ||||||||||||
1525 Pointer Ridge Place, Bowie, MD 20716
301-430-2544•FAX: 301-430-2545