UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31 2017, 2021
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 000-50755
OPTIMUMBANK HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Florida | 55-0865043 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
24772929 East Commercial Blvd. Suite 303, Fort Lauderdale, FL33308
(Address of principal executive offices)
Registrant’s telephone number, including area code:(954)900-2800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Common Stock, par value $0.01 per share | OPHC | NASDAQ Capital Market | ||
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1993.1933. Yes [ ] ☐ No [X] ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934. Yes [ ] ☐ No [X] ☒
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 Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] ☒ No [ ]☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See definitiondefinitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer |
Non-accelerated filer | Smaller reporting company |
Emerging Growth Company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes [ ] ☐ No [X] ☒
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant (992,803(3,208,236 shares) on December 31, 2017,June 30, 2021, was approximately $2,968,481,$15,463,698, computed by reference to the closing market price at $2.99$4.82 per share as of June 30, 2017.2021. For purposes of this information, the outstanding shares of common stock beneficially owned by directors and executive officers of the registrant were deemed to be shares of common stock held by affiliates.
The number of shares of common stock, par value $0.01 per share, of the registrant outstanding as of March 28, 20188, 2022 was 1,286,503 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2022 Annual Meeting of Shareholders to be held on May 29, 2018, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the issuer’s fiscal year end are incorporated by reference into Part III, Items 10 through 14, of this Annual Report on Form 10-K.10-K.
Table of Contents
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Forward-Looking Statements
We have made forward-looking statements in this Annual Report about the financial condition, results of operations, and business of our company. These statements are not historical facts and include expressions concerning the future that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among other things, the following possibilities:
● | general economic conditions, either nationally or regionally, that are less favorable than expected resulting in, among other things, a deterioration in credit quality and an increase in credit risk-related losses and expenses; | |
● | changes in the interest rate environment that reduce margins; | |
● | competitive pressure in the banking industry that increases significantly; | |
● | changes that occur in the regulatory environment; and | |
● | changes that occur in business conditions and the rate of inflation. |
When used in this Annual Report, the words “believes,” “estimates,” “plans,” “expects,” “should,” “may,” “might,” “outlook,” and “anticipates,” as well as similar expressions, as they relate to OptimumBank Holdings, Inc.,us or itsour management, are intended to identify forward-looking statements.
General
OptimumBank Holdings, Inc. is a Florida corporation (the “Company”) formed in 2004 as a bank holding company for OptimumBank (the “Bank”). The Company’s only business is the ownership and operation of the Bank and the Bank’s subsidiaries.Bank. The Bank is a Florida state charteredstate-chartered bank established in 2000, with deposits insured by the Federal Deposit Insurance Corporation (“FDIC”). The Bank offers a variety of community banking services to individual and corporate customers through its threetwo banking offices located in Broward County, Florida. The Bank has four wholly-owned subsidiaries primarily engaged in holding and disposing of foreclosed real estate and one subsidiary primarily engaged in managing foreclosed real estate.
The Company is subject to the supervision and regulation of theThe Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Bank is subject to the supervision and regulation of the State of Florida Office of Financial Regulation (“OFR”) and the FDIC. The Bank is a member of the Federal Home Loan Bank of Atlanta.
At December 31, 2017,2021, the Company had total assets of $95.9$351.8 million, net loans of $68.2$247.9 million, total deposits of $65.3$292.4 million and stockholders’ equity of $2.5$38.5 million. During 2017,2021, the Company had a net lossincome of $589,000.$6.3 million.
Recent Developments
Consent Order and Written Agreement.
On November 7, 2016, the Bank agreed to the issuance of a Consent Order by the FDIC and the OFR (the “Consent Order”), which requires the Bank to take certain measures to improve its safety and soundness. The Consent Order supersedes the prior consent order that became effective in 2010. Pursuant to the Consent Order, the Bank is required to take certain measures to improve its management, condition and operations, including actions to improve management practices and board supervision and independence, assure that its allowance for loan losses is maintained at an appropriate level and improve liquidity. The Consent Order requires the Bank to adopt and implement a compliance plan to address the Bank’s obligations under the Bank Secrecy Act (the “BSA”) and related obligations related to anti-money laundering. The Consent Order continues the requirement for the Bank to maintain a Tier 1 leverage ratio of at least 8% and a total risk-based capital ratio of 12% beginning 90 days from the issuance of the Consent Order. The Consent Order prohibits the payment of dividends by the Bank. The Company estimates that the cost to comply with the BSA components of the Consent Order will be between $250,000 and $420,000. The Bank accrued approximately $305,000 and $60,000 toward these expenses in 2017 and 2016, respectively.
In addition to the Consent Order, the Company is party to a Written Agreement dated June 22, 2010, with the Federal Reserve Bank of Atlanta, which requires the Company to take certain measures to ensure the Bank complied with the prior consent order. Under the Written Agreement, the Company is subject to restrictions on paying interest on debt, or paying dividends or distributions of stock, including dividends on its common stock, as well as incurring additional debt or redeeming stock. Additional details on the Consent Order and the Written Agreement are contained in “Business-Supervision and Regulation- Consent Order- and -Written Agreement.”
At December 31, 2017, the Bank had a Tier 1 leverage ratio of 8.89%, and a total risk-based capital ratio of 15.08%. At December 31, 2017, the Bank is in compliance with the Tier 1 leverage ratio and total risk-based capital ratio requirement of the Consent Order. Additional information on the Bank’s capital adequacy is contained in “Item 7- Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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Going Concern StatusJunior Subordinated Debenture
Junior Subordinated Debenture.
In 2004, the Company formed OptimumBank Capital Trust I (the “Trust”) for the purpose of raising capital through the sale of trust preferred securities. At that time, the Trust raised $5,155,000 through the sale of 5,000 trust preferred securities (the “Trust Preferred Securities”) to third-party investors and the issuance of 155 common trust securities to the Company. The Trust utilized the proceeds of $5,155,000 to purchase a junior subordinated debenture from the Company is(the “Junior Subordinated Debenture”).
The outstanding principal amount of the Junior Subordinated Debenture at December 31, 2020, was $2,068,000, During the first nine months of 2021, the Company acquired all of the outstanding Trust Preferred Securities and paid all accrued interest in defaultexchange for 700,614 shares of the Company’s common stock. As a result, the Company’s obligations with respect to its $5,155,000the Trust Preferred Securities and the Junior Subordinated Debenture (“Debenture”) due to its failure to make certain required interest payments under the Debenture. The Trustee of the Debenture (the “Trustee”) or the holders of the Debenture are entitled to accelerate the payment of the $5,155,000 principal balance plus accrued and unpaid interest totaling $1,375,011 at December 31, 2017. To date the Trustee has not accelerated the outstanding balance of the Debenture. No adjustments to the accompanying consolidated financial statements have been made asfully satisfied.
Branch Sale
During the fourth quarter of 2021, the Bank sold its Plantation branch location to a result of this uncertainty.
Management’s plansthird-party. The sale was completed in November 2021 for $1,081,000. In connection with regard to this matter are as follows: A Director ofthe sale, the Company has offered to purchaserecorded a gain in the Debenture and this offer has been approved by certain equity ownersconsolidated statements of the Trust that holds the Debenture. The Director has offered to enter into a forbearance agreement with the Company with respect to payments due under the Debenture upon consummationoperations of the Director’s purchase of the Debenture.$340,000.
In March 2016, the Trustee received a direction from certain debt holders of the Trust that holds the Debenture to sell the Debenture to a Director of the Company. Based upon the receipt of conflicting directions from other equity owners of the Trust, in August 2016, the Trustee commenced an action in a Minnesota State Court seeking directions from the Court. The case was subsequently transferred to United States District Court for the Southern District of New York, where the case is currently pending. The Company continues to pursue mechanisms for paying the accrued interest, such as raising additional capital.
In the event the amounts due under the Debenture were accelerated, then the Trustee could undertake legal proceedings to obtain a judgment against the Company with respect to such amounts due under the Debenture. If this action were successful, then the Trustee could seek to affect a sale of the Bank to pay the amounts due under the Debenture.
Brokered Deposits
Under the terms of the Consent Order, the Bank is not permitted to solicit brokered deposits. In March 2017, the FDIC notified the Bank that it considers a significant portion of the Bank’s certificates of deposit to be brokered deposits due to the rates paid on such deposits, even though such deposits were not obtained through any deposit brokers. The remaining brokered deposits are expected to mature on or before April 5, 2018.
Banking Products
The Bank’s revenues are primarily derived from interest on, and fees received in connection with, real estate and other loans, and from interest from securities and short-term investments.investments, and service charges on payment transactions. The principal sources of funds for the Bank’s lending activities are deposits, borrowings, repayment of loans, and the repayment, or maturity of investment securities. The Bank’s principal expenses are the interest paid on deposits, and operating and general administrative expenses.
As is the case with banking institutions generally, the Bank’s operations are materially and significantly influenced by general economic conditions and by related monetary and fiscal policies of financial institution regulatory agencies, including the Federal Reserve and the FDIC. Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered and other factors affecting local demand and availability of funds. The Bank faces strong competition attracting deposits (its primary source of lendable funds) and originating loans.
The Bank provides a range of consumer and commercial banking services to individuals and businesses. The basic services offered include: demand interest-bearing and noninterest-bearing accounts, money market deposit accounts, NOW accounts, time deposits, Visa debit and ATM cards, cash management, direct deposits, notary services, money orders, night depository, cashier’s checks, domestic collections, and banking by mail. The Bank makes commercial real estate loans and consumer loans. The Bank offers business lending lines for working capital needs. Growing businesses can use the loans to expand inventory, take discounts, offset receivables, or establish new structured financing and repayment plans that are consistent with the cash flow of the business. The Bank provides ATM cards and Visa debit cards, as a part of the Star, Presto and Cirrus networks, thereby permitting customers to utilize the convenience of ATMs worldwide. The Bank does not have trust powers and provides no trust services.
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Operating and Business Strategy
Strategy
The Bank’sCompany’s continuing goal is for the Bank to become one of the leading community banking organizations in Broward County, Florida through steady reasonable and controlled growth and a prudent operating strategy.
The key elements of the Bank’s operating and business strategies emphasize the following:are as follows:
● LocalEmphasizing local management and local decision makingdecision-making, resulting in rapid, personalized customer service, rapid credit decisions and expedited closings;
● Maintaining a presence in Broward County through a branch network. Currently, the Bank has threetwo branch banking offices in Broward County;
● RealConcentrating on real estate, commercial and consumer lending activities by originating fixed and adjustablevariable rate commercial mortgage loans, commercial loans, and consumer loans for Bank customers;
● Maintaining high credit quality through strict underwriting criteria throughand the Bank’s knowledge of the real estate values and borrowers in its market area; and
● PersonalizedPersonalizing products and service by striving to provideproviding innovative financial products and high service levels andin order to maintain strong customer relationships. The Bank seeks customers who prefer to conduct business with a locally managed institution.
The Bank’sBank and its management isteam are focusing its efforts on a long-term strategy withachieving the following key business objectives:
●IncreaseIncreasing and DiversifyDiversifying Loan Originations-. Management is focused on increasing itsseeking to increase the Bank’s loan production to add more interest bearinginterest-bearing assets and interest income to its asset base and has increased same.base. In addition, management is diversifying itsendeavoring to diversify loan originations and the loan portfolio to include more commercial and consumer loans in additionorder to supplement the Bank’s existing portfolio of residential and commercial real estate loans.
●LowerLowering the Cost of Deposits-. Management is focused on changingseeking to change the Bank’s deposit mix by replacing higher cost interest bearing time deposits with non-interest bearingnon-interest-bearing demand deposits, which has occurred.deposits.
●IncreaseIncreasing Capital Ratios-. Management continuesis seeking to seekobtain additional sources of capital to increase the Bank’s capital ratios in order to allow the Bank to grow, implement its business plan and to improve profitability.
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Lending Activities
The Bank offers real estate, commercial and consumer loans to individuals and small businesses and other organizations that are located in or conduct a substantial portion of their business in its market area. The Bank’s primary market area consists of the tri-county area of Broward, Miami-Dade and Palm Beach counties.counties, and secondarily throughout the State of Florida. The Bank’s net loans at December 31, 20172021 were $68,220,000,$247.9 million, or 71.2%70% of total assets. During 2021 net loans increased by $95.4 million. Loan balances increased by $29.4 million in multi-family real estate loans, $55.1 million in commercial real estate loans and $17.1 million in consumer loans. The interest rates charged on loans varied with the degree of risk, maturity, and amount of the loan, and are further subject to competitive pressures, money market rates, availability of funds, and government regulations. The Bank has no foreign loans.
The Bank’s loan portfolio is concentrated in twothree major areas: residential, multi-family real estate, and commercial real estate loans. As of December 31, 2017, 91.2%2021, 85% of the loan portfolio consisted of loans secured by mortgages on real estate, of which approximately 36.2%51% of the total loan portfolio was secured by one-to-four family residentialcommercial real estate properties. The real estate loans are located primarily in the tri-county market area.
The Bank’s real estate loans are secured by mortgages and consist primarily of loans to individuals and businesses for the purchase or improvement of, or investment in, real estate. These real estate loans were made at fixed or variable interest rates and are normally adjustablevariable rate mortgages which adjust annually after the initial three to five year period.five-year period of the loan. The Bank’s fixed rate loans generally are for terms of five years or less, and are repayable in monthly installmentsinstalments based on a maximum 30-year amortization schedule.
Loan originations are derived primarily from director and employee referrals, existing customers, and direct marketing. Certain credit risks are inherent in making loans. These include prepayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting from changes in economic and industry conditions including interest rates, and risks inherent in dealing with individual borrowers. A significant portion of the Bank’s portfolio is collateralized by real estate in South Florida, which is susceptible to local economic downturns. The Bank attempts to minimize credit losses through various means. On largermost credits, it relies on the cash flow and assets of a debtor as the source of repayment as well as the value of the underlying collateral. The Bank also generally limits its loans to up to 80% of the value of the underlying real estate collateral. The Bank generally charges a prepayment penalty if a loan is repaid within the first two to three years of origination to recover any costs it paid for the origination of the loan.
Deposit Activities
Deposits are the major source of the Bank’s funds for lending and other investment activities. The Bank considers the majority of its regular savings, demand, NOW, money market deposit accounts and CD’scertificates of deposit under $250,000 to be core deposits. These accounts comprised approximately 98.04%99.4% of the Bank’s total deposits at December 31, 2017.2021. Approximately 46.9%4.5% of the deposits at December 31, 20172021 were certificates of deposit. Generally, the Bank attempts to maintain the rates paid on its deposits at a competitive level. Time deposits of $250,000 and over made up approximately 2.0%0.6% of the Bank’s total deposits at December 31, 2017.2021. Although these large deposits are not traditionally considered core deposits, the majority of these deposits have served as a stable source of funds for the Bank. During 2021 total deposits increased by $101.7 million. The increase in deposit balances primarily consisted of increases of $65.8 million in non-interest bearing demand deposits and $44.4 million in savings, NOW and money-market deposits. Time deposits decreased by $8.5 million during 2021.
Investments
The Bank’s investment securities portfolio was approximately $11.4$35.4 and $20.2$22.3 million at December 31, 20172021 and 2016,2020, respectively, representing 11.9%10% and 16.9%9.5% of its total assets. At December 31, 2017, 74.0%2021, 52% of this portfolio was invested in asset-backed securities. Mortgage backedMortgage-backed securities generally have a shorter life than the stated maturity. The Bank’s investments are managed in relation to loan demand and deposit growth, and are generally used to provide for the investment of excess funds at minimal risk levels while providing liquidity to fund increases in loan demand or to offset fluctuations in deposits.
The Excess Balance Accountexcess balance account is the excess cash the Bank has available over and above daily cash needs. This money is invested on an overnight basis with the Federal Reserve.
Correspondent Banking
Correspondent banking involves one bank providing services to another bank which cannot provide that service for itself from an economic or practical standpoint. OptimumBankThe Bank is required to purchase correspondent services offered by larger banks, including check collections, purchase of federal funds, security safekeeping, investment services, coin and currency supplies, and sales of loans to or participations with correspondent banks.
OptimumBankThe Bank has established a correspondent relationship with the Federal Reserve Bank. The Bank pays for such services in cash as opposed to keeping compensating balances. The Bank also sells loan participations to other banks with respect to loans which exceed its lending limit. The Bank may purchase loan participations to supplement loan demand.
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Data Processing
The Bank outsources most of its data processing services, including an automated general ledger and deposit accounting; however, it services all its loans in-house.
Internet Banking
The Bank maintains a website atwww.optimumbank.com where retail and business customers can access account balances, view current account activity and their previous statement,statements, view images of paid checks, transfer funds between accounts, and bill payment.pay bills. The Bank now offers its customers mobile access to their account information, with the option to setup alerts, and deposit checks across a broad range of phones and mobile devices. The Bank nowalso offers its business customers remote deposit capture and online cash management services that include ACH origination and wire transfers using soft token technology for security.
Competition
TheBank encounters strong competition bothin making loans and attracting deposits. The deregulation of the banking industry and the widespread enactment of state laws which permit multi-bank holding companies as well as an increasing level of interstate banking have created a highly competitive environment for commercial banking. In one or more aspects of its business, the Bank competes with other commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries. Most of these competitors, some of which are affiliated with bank holding companies, have substantially greater resources and lending limits, and may offer certain services that the Bank does not currently provide. In addition, many of its non-bank competitors are not subject to the same extensive federal regulations that govern federally insured banks. Recent federal and state legislation has heightened the competitive environment in which financial institutions must conduct their business, and the potential for competition among financial institutions of all types has increased significantly.
The Bank focuses its efforts on smaller loans, which isare generally neglected by its larger competitors. To compete, the Bank relies upon specialized services, responsive handling of customer needs, and personal contacts by its officers, directors and staff. Large multi-branch banking competitors tend to compete primarily by rate and the number and location of branches while smaller, independent financial institutions tend to compete primarily by rate and personal service.
EmployeesHuman Capital
The Bank is committed to establishing personal relationships with its customers and providing personalized banking services that meet their specific needs. The Bank’s employees are critical to achieving this goal. It is therefore crucial that the Bank continues to attract and retain experienced and skilled employees.
As part of these efforts, the Bank seeks to offer competitive compensation and benefits, maintain a community in which all employees are empowered to perform their duties to the best of their abilities, and give employees the opportunity to contribute to the local community.
As of December 31, 2017,2021, the Bank had 1638 full-time employees, including executive officers. These employees are not represented by a collective bargaining unit. The Bank considers its relations with its employees to be good.
Compensation and Benefits Program. The Bank’s compensation program is designed to attract and reward talented individuals who possess the skills necessary to support our business objectives, assist in the achievement of our strategic goals and create long-term value for our shareholders. The Bank provides its employees with compensation packages that include base salary and annual incentive bonuses. The Bank believes that its compensation program provides fair and competitive compensation and aligns associate and shareowner interests, including by incentivizing business and individual performance and integrating compensation with our business plans. In addition to cash compensation, the Bank also offers employees benefits such as life and health insurance, paid time off, paid parental leave and a 401(k) plan.
Diversity and Inclusion. The Bank believes that an equitable and inclusive environment produces more creative solutions, results in better services and is crucial to our efforts to attract and retain key talent. The Bank strives to promote inclusion through our corporate values of integrity, advocacy, partnership, relationships, community, and personalized service. The Bank is focused on building an inclusive culture through a variety of diversity and inclusion initiatives, including related to internal promotions and hiring practices.
Community Involvement. The Bank aims to give back to the local community, and believes that this commitment helps in our efforts to attract and retain employees. The Bank encourages its employees to volunteer with local service organizations and philanthropic groups.
Health and Safety. The success of the Bank’s business is fundamentally connected to the well-being of its employees. Accordingly, the Bank is committed to the health, safety and the wellness of its employees. The Bank provides employees and their families with access to a variety of flexible and convenient health and the welfare programs, including benefits that support their physical and mental health by providing tools and resources to help them improve or maintain their health status; and that offer choice where possible so they can customize their benefits to meet their needs and the needs of their families. In response to the COVID-19 pandemic, the Bank implemented significant operating environment changes that the Bank determined were in the best interest of its employees, as the well as the local community, and which comply with government regulations. This includes having most of our employees work from home, while implementing additional safety measures for employees continuing critical on-site work.
Supervision and Regulation
Banks and their holding companies are extensively regulated under both federal and state law. The following is a brief summary of certain statutes, rules, regulations and enforcement actions affecting OptimumBank Holdings, Inc.the Company and OptimumBank.the Bank. This summary is qualified in its entirety by reference to the particular statutory and regulatory provisions referred to below and is not intended to be an exhaustive description of the statutes or regulations applicable to the business of the Company or the Bank. Supervision, regulation, and examination of banks by regulatory agencies are intended primarily for the protection of depositors, rather than shareholders.
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Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by the bank regulatorybanking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of itsthe Bank’s assets, liabilities, and certain off-balance-sheetoff-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts, and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Effective January 1, 2015,In 2019, the Bank,federal banking agencies jointly issued a final rule that provides for an optional, simplified measure of capital adequacy, the community bank leverage ratio framework (CBLR framework), for qualifying community banking organizations. The final rule became subject to the new Basel III capital level threshold requirements under the Prompt Corrective Action regulations with full compliance with all of the final rule’s requirements phased in over a multi-year schedule. These new regulations were designed to ensure that banks maintain strong capital positions even in the event of severe economic downturns or unforeseen losses.
Changes that could affect the Bank going forward include additional constraints on the inclusion of deferred tax assets in capital and increased risk weightings for nonperforming loans and acquisition/development loans in regulatory capital. Beginningeffective on January 1, 2016,2020 and was elected by the Bank became subjectBank. In April 2020, the federal banking agencies issued an interim final rule that makes temporary changes to the capital conservation buffer rules which places limitations on distributions, including dividend payments,CBLR framework, pursuant to section 4012 of the Coronavirus Aid, Relief, and certain discretionary bonus paymentsEconomic Security (CARES) Act, and a second interim final rule that provides a graduated increase in the community bank leverage ratio requirement after the expiration of the temporary changes implemented pursuant to executive officers. In ordersection 4012 of the CARES Act.
The community bank leverage ratio removes the requirement for qualifying banking organizations to avoid these limitations, an institution must hold a capital conservation buffer above its minimumcalculate and report risk-based capital requirements. As of December 31, 2017but rather only requires a Tier 1 to average assets (leverage) ratio. Qualifying community banking organizations that elect to use the community bank leverage ratio framework and 2016, the Bank’s capital conservation buffer exceeds the minimum requirements of 1.250% and 0.625%, respectively. The required conservation buffer of 2.50% is to be phased in at 0.625% on each January 1st over the next two years.
Under the new capital regulation for the Bank, the minimum capital ratios consist of a common equity tier 1 ratio of 4.5% of risk-weighted assets, a tier 1 capital of 6.0% of risk-weighted assets, a total capital ratio of 8.0% of risk-weighted assets, andthat maintain a leverage ratio of 4.0%. Common equity tier 1 isgreater than required minimums will be considered to have satisfied the generally comprised of common stock, additional paid inapplicable risk-based and leverage capital and retained earnings.
These new requirements create a new capital ratio for common equity Tier 1 capital and increase the Tier 1 capital ratio requirements. There were changes in the risk weightagencies’ capital rules (generally applicable rule) and, if applicable, will be considered to have met the well capitalized ratio requirements for purposes of certain assetssection 38 of the Federal Deposit Insurance Act. Under the interim final rules, the community bank leverage ratio minimum requirement is 8.5% as of December 31, 2021 and 9% for calendar year 2022 and beyond. The interim rule allows for a two-quarter grace period to better reflectcorrect a ratio that falls below the risk associated with those assets, suchrequired amount, provided that the Bank maintains a leverage ratio of 7.5% as of December 31, 2021 and 8% for calendar year 2022 and beyond. Under the risk weighting for non-performing loansfinal rule, an eligible community banking organization can opt out of the CBLR framework and certain high volatility commercial real estate acquisitions, development and construction loans. The changes also include additional limitationsrevert back to the inclusionrisk-weighting framework without restriction.
Management believes, as of deferred tax assets in capital.
December 31, 2021, that the Bank met all capital adequacy requirements to which it was subject. The following table shows the Bank’s actual capital amounts and ratios and regulatory thresholds at December 31, 2017 and 2016 (dollarspercentages are presented in the table ($’s in thousands):
Actual | For Capital Adequacy Purposes | Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions | Requirements of Consent Order | |||||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||
As of December 31, 2017: | ||||||||||||||||||||||||||||||||
Total Capital to Risk-Weighted Assets | 10,484 | 15.08 | % | 5,561 | 8.00 | % | 6,951 | 10.00 | % | 8,341 | 12.00 | % | ||||||||||||||||||||
Tier I Capital to Risk-Weighted Assets | 9,577 | 13.78 | 4,170 | 6.00 | 5,561 | 8.00 | N/A | N/A | ||||||||||||||||||||||||
Common Equity Tier I Capital to Risk-Weighted Assets | 9,577 | 13.78 | 3,128 | 4.50 | 4,518 | 6.50 | N/A | N/A | ||||||||||||||||||||||||
Tier 1 Capital to Total Assets | 9,577 | 8.89 | 4,307 | 4.00 | 5,383 | 5.00 | 8,614 | 8.00 | ||||||||||||||||||||||||
As of December 31, 2016: | ||||||||||||||||||||||||||||||||
Total Capital to Risk-Weighted Assets | $ | 10,566 | 12.79 | % | $ | 6,609 | 8.00 | % | $ | 8,261 | 10.00 | % | $ | 9,913 | 12.00 | % | ||||||||||||||||
Tier I Capital to Risk-Weighted Assets | 9,498 | 11.50 | 4,957 | 6.00 | 6,609 | 8.00 | N/A | N/A | ||||||||||||||||||||||||
Common Equity Tier I Capital to Risk-Weighted Assets | 9,498 | 11.50 | 3,718 | 4.50 | 5,370 | 6.50 | N/A | N/A | ||||||||||||||||||||||||
Tier 1 Capital to Total Assets | 9,498 | 8.06 | 4,714 | 4.00 | 5,893 | 5.00 | 9,428 | 8.00 |
Actual | To Be Well Capitalized Under Prompt Corrective Action Regulations (CBLR Framework) | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
As of December 31, 2021: | ||||||||||||||||
Tier I Capital to Total Assets | $ | 35,338 | 10.64 | % | $ | 28,235 | 8.5 | % | ||||||||
As of December 31, 2020: | ||||||||||||||||
Tier I Capital to Total Assets | $ | 19,261 | 9 | % | $ | 17,116 | 8 | % |
Written Agreement with the Federal Reserve Bank of Atlanta
The Company is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). On June 22, 2010, the Company entered into a written agreement with the Federal Reserve Bank of Atlanta (“Reserve Bank”) with respect to certain aspects of the operation and management of the Company (the “Written Agreement”).
The Written Agreement contains the following principal requirements:
● The Board of the Company must take appropriate steps to fully utilize the Company’s financial and managerial resources to serve as a source of strength to the Bank, including, but not limited to, taking steps to ensure that the Bank complies with the Consent Order entered into with the Florida Office of Financial Regulation (“OFR”) and the FDIC and any other supervisory action taken by the Bank’s state or federal regulator.
● The Company may not declare or pay any dividends without prior Reserve Bank and Federal Reserve approval.
● The Company may not, directly or indirectly, take dividends or any other form of payment representing a reduction in capital from the Bank without prior Reserve Bank approval.
● The Company and its nonconsolidated subsidiary, OptimumBank Holdings Capital Trust I, may not make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without the prior written approval of the Reserve Bank and the Federal Reserve.
● The Company and its nonconsolidated subsidiary, OptimumBank Holdings Capital Trust I, may not, directly or indirectly, incur, increase, or guarantee any debt or purchase or redeem any shares of its stock without the prior written approval of the Reserve Bank.
● The Company must obtain prior written consent from the Reserve Bank before appointing any new director or senior executive officer, or changing the responsibilities of any senior executive officer so that the officer would assume a different senior executive officer position, and must comply with the regulations applicable to indemnification and severance payments.
● The Company must provide quarterly progress reports to the Reserve Bank, along with parent company only financial statements.
Management believes that the Company is in substantial compliance with the requirements of the Written Agreement.
Consent Order by the FDIC and the OFR
On November 7, 2016, the Bank agreed to the issuance of a Consent Order by the FDIC and the OFR (the “Consent Order”), which requires the Bank to take certain measures to improve its safety and soundness. The Consent Order supersedes the prior consent order that became effective in 2010. The Consent Order represents a commitment by the Bank to the FDIC and the OFR to take certain actions to improve the management, condition and operations of the Bank. The Consent Order imposes no fines or penalties on the Bank. The Consent Order will remain in effect and enforceable until it is modified, terminated, suspended, or set aside by the FDIC and the OFR.
The Consent Order contains the following principal requirements:
● The Board of the Bank is required to increase its participation in the affairs of the Bank, assuming full responsibility for the approval of sound policies and objectives and for the supervision of all of the Bank’s activities, consistent with the role and expertise commonly expected for directors of banks of comparable size.
● The Bank is required to have and retain qualified and appropriately experienced senior management, including a chief executive officer, a chief lending officer and a chief operating officer, who are given the authority to implement the provisions of the Consent Order.
● Any proposed changes in the Bank’s Board of Directors or senior executive officers are subject to the prior consent of the FDIC and the OFR.
● The Bank is required to maintain both a fully funded allowance for loan and lease losses satisfactory to the FDIC and the OFR and a minimum Tier 1 leverage capital ratio of 8% and a total risk-based capital ratio of 12% for as long as the Consent Order remains in effect.
● The Bank is required to eliminate from its books, by charge-off or collection, all assets or portions of assets classified “Loss” and 50 percent of those assets or portions of assets classified “Doubtful” in the most recent examination report that have not been previously collected or charged-off.
● The Bank is required to submit a revised plan to reduce the remaining assets classified “Doubtful” and “Substandard” in the current or any future regulatory examination report.
● The Bank may not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit from the Bank that has been charged-off or classified, in whole or in part, “Loss” or “Doubtful” and is uncollected.
● The Bank may not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit from the Bank that has been classified, in whole or part, “Substandard.”
● The Board is required to review, revise, and implement its written lending and collection policy to provide effective guidance and control over the Bank’s lending and credit administration functions.
● The Bank is required to prepare and submit to the Supervisory Authorities an acceptable written business/strategic plan covering the overall operation of the Bank.
● The Bank is required to develop and submit to the Supervisory Authorities a written plan and a comprehensive budget for all categories of income and expense for calendar year 2017 and subsequent years.
● The Bank is required to implement a written plan to improve liquidity, contingency funding, interest rate risk and asset liability management.
● The Bank is required to revise and implement a written policy for managing interest rate risk in a manner that is appropriate to the size of the Bank and the complexity of its assets.
● The Bank is required to revise and implement its policy for the operation of the Bank in such a manner as to provide adequate internal routines and controls within the Bank consistent with safe and sound banking practices.
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● The Bank may not accept, renew, or rollover any brokered deposit.Dodd-Frank Act
● The Bank may not declare or pay dividends, pay bonuses, or make any other form of payment outside the ordinary course of business resulting in a reduction of capital, without the prior written approval of the Supervisory Authorities.
● The Bank is required to notify the Supervisory Authorities at least sixty days prior to undertaking asset growth that exceeds 10% or more per annum or initiating material changes in asset or liability composition.
● The Bank is required to develop, adopt, and implement a plan (“Compliance Plan”) for administration of a program reasonably designed to ensure and maintain compliance with the law and regulations related to the Bank Secrecy Act and related anti-money laundering regulations. The Compliance Plan must be consistent with the guidance for BSA/AML Risk Assessment set forth in the Federal Financial Institutions Examination Council’s Bank Secrecy Act/Anti-Money Laundering Examination Manual.
● The Bank is required to furnish written progress reports to the Supervisory Authorities within forty-five days from the end of each quarter, detailing the form and manner of any actions taken to secure compliance with this Consent Order.
● The Bank is required to develop a revised system of internal controls designed to ensure full compliance with the BSA rules and regulations (“BSA Internal Controls”) taking into account its size and risk profile and addressing the deficiencies and recommendations contained in the most recent examination report.
● The Bank is required to assess its BSA staffing needs to ensure adequate qualified personnel are in place at all times.
● The Bank is required to contract with an external independent testing firm that specializes in the BSA, AML, and OFAC rules and regulations for a review. The Bank is required to also engage an independent qualified firm, acceptable to the Supervisory Authorities, to conduct a review of all high-risk accounts and all high-risk transaction activity for the period beginning February 3, 2014, through the date of the Consent Order.
● The Bank is in process of implementing comprehensive policies and plans to address all of the requirements of the Consent Order and has incorporated recommendations from the FDIC and OFR into these policies and plans.
Management believes that the Bank has made substantial progress in improving its financial condition through a significant reduction in non-performing assets and the receipt of capital increases from investors since the 2010 Consent Order. The Bank is also making significant progress in resolving the other issues raised by the FDIC and the OFR including strengthening the management team. Although the Bank has been hampered by difficulties in raising capital due to the default under the Junior Subordinated Debenture and the limits placed on the Company and the Bank underare subject to the prior Consent Order and the Written Agreement. Management intends to continue its efforts to meet the conditionsrequirements of the New Consent Order and the Written Agreement.
Dodd-Frank Act
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, into law.Act. The Dodd-Frank Act has had a broad impact on the financial services industry, including significant regulatory and compliance changes including, among other things, (1) enhanced resolution authority of troubled and failing banks and their holding companies; (2) changes to capital and liquidity requirements; (3) changes to regulatory examination fees; (4) changes to assessments to be paid to the FDIC for federal deposit insurance; and (5) numerous other provisions designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector. Additionally, the Dodd-Frank Act established a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Board of Governors of the Federal Reserve System, or the Federal Reserve, the Office of the Comptroller of the Currency, or the OCC, and the Federal Deposit Insurance Corporation, or the FDIC. Not all of the regulations under the Dodd-Frank Act have been finalized and thus we cannot predict the ultimate impact of these regulations on the Company or its business, financial condition or results of operations.
The following items provide a brief description of the impact of the Dodd-Frank Act on the Bank’s operations and activities, both currently and prospectively.
Increased Capital Standards and Enhanced Supervision. Effective January 1, 2015, revised capital rules became effective for community banks with assets less than $10 billion and their holding companies pursuant to the requirements of the Dodd-Frank Act and standards adopted by the Basel Committee on Banking Supervision (referred to as “Basel III”). The Dodd-Frank Act also increased regulatory oversight, supervision and examination of banks, bank holding companies and their respective subsidiaries by the appropriate regulatory agency. Compliance with new regulatory requirements and expanded examination processes could increase the Company’s cost of operations.
The Consumer Financial Protection Bureau. The Dodd-Frank Act created a new, independent Consumer Financial Protection Bureau, or the Bureau, within the Federal Reserve. The Bureau is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The Bureau has rulemaking authority over many of the statutes governing products and services offered to bank consumers. Generally, we will not be directly subject to the rules and regulations of the Bureau. However, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are stricter than those regulations promulgated by the Bureau and state attorneys general are permitted to enforce consumer protection rules adopted by the Bureau against certain state-chartered institutions. Any such new regulations could increase the cost of operations and, as a result, could limit the Bank’s ability to expand into these products and services.
Deposit Insurance. The Dodd-Frank Act made permanent the $250,000 deposit insurance limit for insured deposits. Amendments to the Federal Deposit Insurance Act also revised the assessment base against which an insured depository institution’s deposit insurance premiumspremium paid to the FDIC’s Deposit Insurance Fund or the DIF,(the “DIF”) is calculated. Under the amendments, the assessment base will be its average consolidated total assets less its average tangible equity. Additionally, the Dodd-Frank Act made changes to the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15 percent to 1.35 percent of the estimated amount of total insured deposits, and eliminated the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. The Dodd-Frank Act also provides that depository institutions may pay interest on demand deposits, which assists the Bank in obtaining more deposits.
Transactions with Affiliates. The Dodd-Frank Act enhanced the requirements for certain transactions with affiliates under Sections 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and increasing the amount of time for which collateral requirements regarding covered transactions must be maintained.
Transactions with Insiders. Insider transaction limitations arewere expanded through the strengthening on loan restrictions to insiders and the expansion of the types of transactions subject to the various limits.
Enhanced Lending Limits. The Dodd-Frank Act strengthensstrengthened the existing limits on a depository institution’s credit exposure to one borrower. The Dodd-Frank Act expandsexpanded the scope of these restrictions to include credit exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing transactions.
Company Regulation
General. As a bank holding company registered under the Bank Holding Company Act of 1956 (the “BHCA”), the Company is subject to the regulation and supervision of, and inspection by, the Federal Reserve Board (“Federal Reserve”). The Company is also required to file with the Federal Reserve annual reports and other information regarding its business operations, and those of its subsidiaries. In the past, the BHCA limited the activities of bank holding companies and their subsidiaries to activities which were limited to banking, managing or controlling banks, furnishing services to or performing services for their subsidiaries or engaging in any other activity which the Federal Reserve determined to be so closely related to banking or managing or controlling banks as to be properly incidental thereto. Under the Gramm-Leach-Bliley Financial Modernization Act of 1999 which is discussed below, bank holding companies now have the opportunity to seek broadened authority, subject to limitations on investment, to engage in activities that are “financial in nature” if all of their subsidiary depository institutions are well capitalized, well managed, and have at least a satisfactory rating under the Community Reinvestment Act, which is also discussed below.
In this regard, the BHCA prohibits a bank holding company, with certain limited exceptions, from (i) acquiring or retaining direct or indirect ownership or control of more than 5% of the outstanding voting stock of any company which is not a bank or bank holding company, or (ii) engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or performing services for its subsidiaries, unless such non-banking business is determined by the FRB to be so closely related to banking or managing or controlling banks as to be properly incident thereto. In making such determinations, the FRB is required to weigh the expected benefit to the public, such as greater convenience, increased competition or gains in efficiency, against the possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. Generally, bank holding companies, such as the Company, are required to obtain prior approval of the Federal Reserve to engage in any new activity not previously approved by the Federal Reserve.
Change of Control. The BHCA also requires that every bank holding company obtain the prior approval of the Federal Reserve before it may acquire all or substantially all of the assets of any bank, or ownership or control of any voting shares of any bank, if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. In approving bank acquisitions by bank holding companies, the Federal Reserve is required to consider the financial and managerial resources and future prospects of the bank holding company and the banks concerned, the convenience and needs of the communities to be served, including the parties’ performance under the Community Reinvestment Act (discussed below) and various competitive factors. As described in greater detail below, pursuant to the Riegle-Neal Interstate Banking and Branch Efficiency Act of 1994 (the “Interstate Banking and Branching Act”), a bank holding company is permitted to acquire banks in states other than its home state.
The BHCA further prohibits a person or group of persons from acquiring “control” of a bank holding company unless the Federal Reserve Bank has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act would, under the circumstances set forth in the presumption, constitute acquisition of control of the bank holding company. In addition, any person or group of persons must obtain the approval of the Federal Reserve under the BHCA before acquiring 25% (5% in the case of an acquirer that is already a bank holding company) or more of the outstanding common stock of a bank holding company, or otherwise obtaining control or a “controlling influence” over the bank holding company.
Interstate Banking and Branching. The Interstate Banking and Branching Act provides for nationwide interstate banking and branching. Under the law, interstate acquisitions of banks or bank holding companies in any state by bank holding companies in any other state are permissible subject to certain limitations. Florida also has a law that allows out-of-state bank holding companies (located in states that allow Florida bank holding companies to acquire banks and bank holding companies in that state) to acquire Florida banks and Florida bank holding companies. The law essentially provides for out-of-state entry by acquisition only (and not by interstate branching) and requires the acquired Florida bank to have been in existence for at least three years. Interstate branching and consolidation of existing bank subsidiaries in different states is permissible. A Florida bank also may establish, maintain, and operate one or more branches in a state other than Florida pursuant to an interstate merger transaction in which the Florida bank is the resulting bank.
Financial Modernization.The Gramm-Leach-Bliley Financial Modernization Act of 1999 (the “GLB Act”) sought to achieve significant modernization of the federal bank regulatory framework by allowing the consolidation of banking institutions with other types of financial services firms, subject to various restrictions and requirements. In general, the GLB Act repealed most of the federal statutory barriers which separated commercial banking firms from insurance and securities firms and authorized the consolidation of such firms in a “financial services holding company.” We haveThe Bank has no current plans to utilize the structural options created by the GLB Act.
Securities Regulation and Corporate Governance. The Company’s common stock is registered with the Securities and Exchange Commission (the “SEC”) under Section 12(g)12(b) of the Securities Exchange Act of 1934, and we are subject to restrictions, reporting requirements and review procedures under federal securities laws and regulations. The Company is also subject to the rules and reporting requirements of the NASDAQ GlobalCapital Market, on which its common stock is traded. Like other issuers of publicly traded securities, the Company must also comply with the corporate governance reforms enacted under the Sarbanes-Oxley Act of 2002 (“The Sarbanes-Oxley(the “Sarbanes-Oxley Act”) and the rules of the SEC and NASDAQ Stock Market adopted pursuant to the Sarbanes OxleySarbanes-Oxley Act. Among other things, these reforms, effective as of various dates, require certification of consolidated financial statements by the chief executive officer and chief financial officer, prohibit the provision of specified services by independent auditors, require pre-approval of independent auditor services, define director independence and require certain committees, and a majority of a subject company’s board of directors, to consist of independent directors, establish additional disclosure requirements in reports filed with the SEC, require expedited filing of reports, require management evaluation and auditor attestation of internal controls, prohibit loans by the issuer (but not by certain depository institutions) to directors and officers, set record-keeping requirements, mandate complaint procedures for the reporting of accounting and audit concerns by employees, and establish penalties for non-compliance.
Bank Regulation
General.OptimumBankThe Bank is chartered under the laws of the State of Florida, and its deposits are insured by the FDIC to the extent provided by law. OptimumBankThe Bank is subject to comprehensive regulation, examination and supervision by the FDIC and the Florida Office of Financial Regulation, or the Florida OFR, and to other laws and regulations applicable to banks. Such regulations include limitations on loans to a single borrower and to its directors, officers and employees; limitations on the types of activities a state bank can conduct; restrictions on the opening and closing of branch offices; the maintenance of required capital ratios; the granting of credit under equal and fair conditions; and the disclosure of the costs and terms of such credit. OptimumBankThe Bank is examined periodically by the FDIC and the Florida OFR, to whom it submits periodic reports regarding its financial condition and other matters. The FDIC and the Florida OFR have a broad range of powers to enforce regulations under their jurisdiction, and to take discretionary actions determined to be for the protection and safety and soundness of banks, including the institution of cease and desist orders and the removal of directors and officers. The FDIC and the Florida OFR also have the authority to approve or disapprove mergers, consolidations, and similar corporate actions.
Consent Order. On November 7, 2016, the Bank agreed to the issuance of a Consent Order by the FDIC and the OFR (the “Consent Order”), which requires the Bank to take certain measures to improve its safety and soundness. The Consent Order supersedes the prior consent order that became effective in 2010. Pursuant to the Consent Order, the Bank is required to take certain measures to improve its management, condition and operations, including actions to improve management practices and board supervision and independence, assure that its allowance for loan losses is maintained at an appropriate level and improve liquidity. The Consent Order requires the Bank to adopt and implement a compliance plan to address the Bank’s obligations under the Bank Secrecy Act and related obligations related to anti-money laundering. The Consent Order continues the requirement for the Bank to maintain a Tier 1 leverage ratio of at least 8% and a total risk-based capital ratio of 12% beginning 90 days from the issuance of the Consent Order. The Consent Order prohibits the payment of dividends by the Bank. The principal requirements of the Consent Order are described in “Business- Supervision and Regulation- Consent Order.”
Capital Adequacy Requirements. Banks are required to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. Under the risk-based standard, capital is classified into two tiers. Tier 1 capital consists of common shareholders’ equity (excluding the unrealized gain (loss) on available-for-sale securities), trust preferred securities subject to certain limitations, and minus certain intangible assets. Tier 2 capital consists of the general allowance for credit losses except for certain limitations. An institution’s qualifying capital base for purposes of its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital. At December 31, 2017, the Bank’s Tier 1 and total risk-based capital ratios were 13.19% and 15.08%, respectively.
Banks are also required to maintain capital at a minimum level based on total assets, which is known as the leverage ratio. The minimum requirement for the leverage ratio is 4%, but all but the highest rated institutions are required to maintain ratios 100 to 200 basis points above the minimum. At December 31, 2017, the Bank’s leverage ratio was 8.89%.
The Consent Order imposes higher capital requirements on OptimumBank. Under the Consent Order, OptimumBank must maintain a Tier 1 Leverage Ratio of 8.0%, and a total risk based capital ratio of 12.0%. With a Tier 1 Leverage ratio of 8.89% and a Total Risk Based Capital Ratio of 15.08% at December 31, 2017, the Bank met the total risk-based capital ratio as required by the Consent Order.
The FDIC Improvement Act of 1993 (“FDICIA”) contains “prompt corrective action” provisions pursuant to which banks are to be classified into one of five categories based upon capital adequacy, ranging from “well capitalized” to “critically undercapitalized” and which require (subject to certain exceptions) the appropriate federal banking agency to take prompt corrective action with respect to an institution which becomes “significantly undercapitalized” or “critically undercapitalized.”
The FDIC has issued regulations to implement the “prompt corrective action” provisions of FDICIA. In general, the regulations define the five capital categories as follows:
● an institution is “well capitalized” if it has a total risk-based capital ratio of 10% or greater, has a Tier 1 risk-based capital ratio of 6% or greater, has a leverage ratio of 5% or greater and is not subject to any written capital order or directive to meet and maintain a specific capital level for any capital measures;
● an institution is “adequately capitalized” if it has a total risk-based capital ratio of 8% or greater, has a Tier 1 risk-based capital ratio of 4% or greater, and has a leverage ratio of 4% or greater;
● an institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8%, has a Tier 1 risk-based capital ratio that is less than 4% or has a leverage ratio that is less than 4%;
● an institution is “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a leverage ratio that is less than 3%; and
● an institution is “critically undercapitalized” if its “tangible equity” is equal to or less than 2% of its total assets.
The FDIC, after an opportunity for a hearing, has authority to downgrade an institution from “well capitalized” to “adequately capitalized” or to subject an “adequately capitalized” or “undercapitalized” institution to the supervisory actions applicable to the next lower category, for supervisory concerns.
Generally, FDICIA requires that an “undercapitalized” institution must submit an acceptable capital restoration plan to the appropriate federal banking agency within 45 days after the institution becomes “undercapitalized” and the agency must take action on the plan within 60 days. The appropriate federal banking agency may not accept a capital restoration plan unless, among other requirements, each company having control of the institution has guaranteed that the institution will comply with the plan until the institution has been adequately capitalized on average during each of the three consecutive calendar quarters and has provided adequate assurances of performance. The aggregate liability under this provision of all companies having control of an institution is limited to the lesser of:
● 5% of the institution’s total assets at the time the institution becomes “undercapitalized”; or
● the amount which is necessary, or would have been necessary, to bring the institution into compliance with all capital standards applicable to the institution as of the time the institution fails to comply with the plan filed pursuant to FDICIA.
An “undercapitalized” institution may not acquire an interest in any company or any other insured depository institution, establish or acquire additional branch offices or engage in any new business unless the appropriate federal banking agency has accepted its capital restoration plan, the institution is implementing the plan, and the agency determines that the proposed action is consistent with and will further the achievement of the plan, or the appropriate Federal banking agency determines the proposed action will further the purpose of the “prompt corrective action” sections of FDICIA.
If an institution is “critically undercapitalized,” it must comply with the restrictions described above. In addition, the appropriate Federal banking agency is authorized to restrict the activities of any “critically undercapitalized” institution and to prohibit such an institution, without the appropriate Federal banking agency’s prior written approval, from:
● entering into any material transaction other than in the usual course of business;
● engaging in any covered transaction with affiliates (as defined in Section 23A(b) of the Federal Reserve Act);
● paying excessive compensation or bonuses; and
● paying interest on new or renewed liabilities at a rate that would increase the institution’s weighted average costs of funds to a level significantly exceeding the prevailing rates of interest on insured deposits in the institution’s normal market areas.
The “prompt corrective action” provisions of FDICIA also provide that in general no institution may make a capital distribution if it would cause the institution to become “undercapitalized.” Capital distributions include cash (but not stock) dividends, stock purchases, redemptions, and other distributions of capital to the owners of an institution.
Additionally, FDICIA requires, among other things, that:
●only a “well capitalized” depository institution may accept brokered deposits without prior regulatory approval, and
● the appropriate federal banking agency annually examines all insured depository institutions, with some exceptions for small, “well capitalized” institutions and state-chartered institutions examined by state regulators.
As of December 31, 2017, OptimumBank met the FDIC definition of an “adequately capitalized” institution.
For additional information regarding OptimumBank’s capital ratios and requirements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Regulatory Capital Adequacy.”
Dividends.The Company’s ability to pay dividends is substantially dependent on the ability of OptimumBankthe Bank to pay dividends to the Company. As a state charteredstate-chartered bank, OptimumBankthe Bank is subject to dividend restrictions set by Florida law and the FDIC. Except with the prior approval of the Florida OFR, all dividends of any Florida bank must be paid out of retained net profits from the current period and the previous two years, after deducting expenses, including losses and bad debts. Under the Federal Deposit Insurance Act, an FDIC-insured institution may not pay any dividend if payment would cause it to become undercapitalized or while it is undercapitalized. The FDIC and the Florida OFR also have the general authority to limit the dividend payment by banks if such payment may be deemed to constitute an unsafe and unsound practice. The Bank’s ability to pay dividends is further restricted under the Consent Order and the Company’s ability to pay dividends is also restricted under its Written Agreement with the Federal Reserve. At December 31, 2017, the Bank and Company could not pay cash dividends.
Loans to One Borrower. Florida law generally allows a state bank such as OptimumBankthe Bank to extend credit to any one borrower (and certain related entities of such borrower) in an amount up to 25% of its capital accounts, provided that the unsecured portion may not exceed 15% of the capital accounts of the bank. Based upon OptimumBank’sthe Bank’s capital, the maximum loan OptimumBankthe Bank is currently permitted to make to any one borrower (and certain related entities of such borrower) is approximately $2.4$9.6 million, provided the unsecured portion does not exceed approximately $1.4$5.7 million.
Transactions with Affiliates. Under federal law, federally insured banks are subject, with certain exceptions, to certain restrictions on any extension of credit to their parent holding companies or other affiliates, on investment in the stock or other securities of affiliates, and on the taking of such stock or securities as collateral from any borrower. In addition, banks are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or the providing of any property or service.
Change of Bank Control. Florida law restricts the amount of voting stock of a bank that a person may acquire without the prior approval of banking regulators. The overall effect of such laws is to make it more difficult to acquire a bank by tender offer or similar means than it might be to acquire control of another type of corporation. Consequently, shareholders of financial institutions are less likely to benefit from the rapid increases in stock prices that often result from tender offers or similar efforts to acquire control of other companies.
Under Florida law, no person or group of persons may, directly or indirectly or acting by or through one or more persons, purchase or acquire a controlling interest in any bank which would result in the change in control of that bank unless the Florida OFR first shall have approved such proposed acquisition. A person or group will be deemed to have acquired “control” of a bank (i) if the person or group, directly or indirectly or acting by or through one, or more other persons, owns, controls, or has power to vote 25% or more of any class of voting securities of the bank, or controls in any manner the election of a majority of the directors of the bank, or (ii) if the Florida OFR determines that such person exercises a controlling influence over the management or policies of the bank. In any case where a proposed purchase of voting securities would give rise to a presumption of control, the person or group who proposes to purchase the securities must first file written notice of the proposal to the Florida OFR for its review and approval. Subsections 658.27(2) and 658.28(3), Florida Statutes, refer to a potential change of control of a financial institution at a 10% or more threshold and rebuttable presumption of control. Accordingly, the name of any subscriber acquiring more than 10% of the voting securities of OptimumBankthe Bank must be submitted to the Florida OFR for prior approval.
USA Patriot Act.The Bank is subject to the requirements of the USA Patriot Act, which was enacted after September 11,in 2001 to provide the federal government with powers to prevent, detect, and prosecute terrorism and international money laundering, and has resulted in promulgation of several regulations that have a direct impact on banks. There are a number of programs that financial institutions must have in place such as: (i) Bank Secrecy Act/Anti-Money Laundering programs to manage risk; (ii) Customer Identification Programs to determine the true identity of customers, document and verify the information, and determine whether the customer appears on any federal government list of known or suspected terrorist or terrorist organizations; and (iii) monitoring for the timely detection and reporting of suspicious activity and reportable transactions. Over the past few years, enforcement, and compliance monitoring, of these anti-money laundering laws has dramatically increased. As a result, theThe Bank has increased thedevoted substantial attention and resources it dedicates to compliance with these laws.
Other Consumer Laws. Florida usury laws and federal laws concerning interest rates limit the amount of interest and various other charges collected or contracted by a bank. OptimumBank’sThe Bank’s loans are also subject to federal laws applicable to consumer credit transactions, such as the:
● Federal Truth-In-Lending Act governing disclosures of credit terms to consumer borrowers;
● Community Reinvestment Act requiring financial institutions to meet their obligations to provide for the total credit needs of the communities they serve, including investing their assets in loans to low and moderate-income borrowers;
● Home Mortgage Disclosure Act requiring financial institutions to provide information to enable public officials to determine whether a financial institution is fulfilling its obligations to meet the housing needs of the community it serves;
● Equal Credit Opportunity Act prohibiting discrimination on the basis of race, creed or other prohibitive factors in extending credit;
● Real Estate Settlement Procedures Act which requires lenders to disclose certain information regarding the nature and cost of real estate settlements, and prohibits certain lending practices, as well as limits escrow account amounts in real estate transactions;
● Fair Debt Collection Act governing the manner in which consumer debts may be collected by collection agencies;
● Fair and Accurate Credit Transactions Act which establishes additional rights for consumers to obtain and correct credit reports, addresses identity theft, and establishes additional requirements for consumer reporting agencies and financial institutions that provide adverse credit information to a consumer reporting agency; and
● The rules and regulations of various federal agencies charged with the responsibility of implementing such federal laws.
OptimumBank’sThe Bank’s deposit and loan operations are also subject to the:the following:
●The Gramm-Leach-BlileyGLB Act of 1999 privacy provisions, which require the Bank maintain privacy policies intended to safeguard consumer financial information, to disclose these policies to its customers, and allow customers to “opt-out” of having their financial service providers disclose their confidential financial information to non-affiliated third parties, subject to certain exceptions;
● Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and
● Electronic Funds Transfer Act and Regulation E, which govern automatic deposits to, and withdrawals from, deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.
Other Regulation
Enforcement Powers. Congress has provided the federal bank regulatory agencies with an array of powers to enforce laws, rules, regulations and orders. Among other things, the agencies may require that institutions cease and desist from certain activities, may preclude persons from participating in the affairs of insured depository institutions, may suspend or remove deposit insurance, and may impose civil money penalties against institution-affiliated parties for certain violations.
Community Reinvestment Act.Bank holding companies and their subsidiary banks are subject to the provisions of the Community Reinvestment Act of 1977 (“CRA”(the “CRA”) and the regulations promulgated thereunder by the appropriate bank regulatory agency. Under the terms of the CRA, the appropriate federal bank regulatory agency is required, in connection with its examination of a bank, to assess such bank’s record in meeting the credit needs of the community served by that bank, including low-and moderate-income neighborhoods. The regulatory agency’s assessment of the Bank’s record is made available to the public. Further, such assessment is required of any bank which has applied to charter a bank, obtain deposit insurance coverage for a newly chartered institution, establish a new branch office that will accept deposits, relocate an office, or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal Reserve will assess the record of each subsidiary bank of the applicant bank holding company, and such records may be the basis for denying the application.
Effect of Governmental Monetary Policies
The Company’s earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve monetary policies have had, and will likely continue to have, an important impact on the operating results of financial institutions through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve have major effects upon the levels of loans, investments and deposits through its open market operations in United States Government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirement against member bank deposits.banks. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies.
Statistical Profile and Other Financial Data
Reference is hereby made to the statistical and financial data contained in the sections captioned “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for statistical and financial data providing a review of the Bank’s business activities.
The Bank operates a main office and one branch office in Broward County, Florida. The following table sets forth information with respect to the Bank’s main office and branch officesoffice as of December 31, 2017.2021.
Location | Year Facility Opened | Facility Status | ||||||
Executive Office and Ft. Lauderdale | Leased | |||||||
Suite 101 and 303 Fort Lauderdale, Florida 33308 | ||||||||
Deerfield Beach Branch Office: | 2004 | Leased | ||||||
2215 West Hillsboro Boulevard Deerfield Beach, Florida 33442 |
(1) At December 31, 2017, the future minimum lease payments are approximately as follows (in thousands):
Year Ending December 31, | Amount | |||
2018 | $ | 90 | ||
2019 | 92 | |||
2020 | 95 | |||
2021 | 98 | |||
2022 | 93 | |||
Total | $ | 468 |
From time-to-time, the Bank is involved in litigation arising in the ordinary course of its business. As of the date of the filing of this Form 10-K, management is of the opinion that the ultimate aggregate liability represented thereby, ifin connection with any pending litigation will not have a material adverse effect on the Company’s consolidated financial condition or results of operations.
Item 4. Mine Safety Disclosure
Not applicable.
Item 5.Market for the Registrant’s Common Equity, and Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock currently trades on the NASDAQ Capital Market under the symbol “OPHC.” The table below presents the high and low sales prices for the periods indicated.
Year | Quarter | High(1) | Low(1) | |||||||
2017 | First | $ | 4.04 | $ | 3.14 | |||||
Second | $ | 3.10 | $ | 2.45 | ||||||
Third | $ | 3.09 | $ | 2.03 | ||||||
Fourth | $ | 6.26 | $ | 1.88 | ||||||
2016 | First | $ | 7.30 | $ | 3.56 | |||||
Second | $ | 4.99 | $ | 3.75 | ||||||
Third | $ | 6.35 | $ | 3.64 | ||||||
Fourth | $ | 4.89 | $ | 3.51 |
(1)Reflects the 10 for 1 reverse common stock split effective January 11, 2016
The Company had approximately 1,135888 record holders registered or in street namesof its common stock as of December 31, 2017.2021.
During 2017,the first and second quarter of 2021, the Company sold 10,000issued a total of 360 shares of preferred stock to third parties for an aggregate purchase price of $9,000,000. The issuance of the shares in these transactions were exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933 as a transaction by an issuer not involving a public offering. The Company used the proceeds to make capital contributions to the Bank in order to increase its regulatory capital and allow the Bank to remain in compliance with required regulatory capital ratios.
During the second and third quarters of 2021, the Company issued 809,100 shares of common stock to unrelated third parties, for an aggregate purchase price of $3.6 million. The Company used the proceeds for general working capital purposes, including capital contributions to the Bank to pay for operating expenses and making loans. The capital contributions to the Bank increased its regulatory capital and allows the Bank to remain in compliance with required regulatory capital ratios. These shares were issued in reliance upon the exemption from registration under Section 4(a)(2) of the Securities Act for a transaction by an issuer not involving a public offering.
During the second and third quarters of 2021, the Company issued 689,572 shares of common stock in exchange for 2,068 Trust Preferred Securities. See Note 1 of the Company’s consolidated financial statements for further details on the matter. These shares were issued in reliance upon the exemption from registration under Section 4(a)(2) of the Securities Act for a transaction by an issuer not involving a public offering.
During the fourth quarter of 2021, the Company issued 62,112 shares of common stock at a price of $3.00 per share to accredited investors and issued 7,500 sharesone of the Company’s common stockdirectors and an executive officer as compensation for consulting services at a price of $3.00 per share. Pursuant to Company’s stockholder approved 2011 Equity Incentive Plan (“2011 Plan”), during 2017, the Company accrued stock compensation cost related to first quarter director’s fees to five directors. A total of 2,821performed. These shares related to these first quarter 2017 director fees were issued during the first quarter of 2018 athad a value of $3.14 per share. As$199,000 based on the market price at the time of April 1, 2017, the Company discontinuedapproval of the issuance of common stock as a method of payment of director’s fees.
Additionally, as of December 31, 2017, 105,819the shares. These shares were due to be issued as compensation toin reliance upon the exemption from registration under Section 4(a)(2) of the Securities Act for a director. transaction by an issuer not involving a public offering.
The Company accrued $200,000 during the years ended December 31, 2017 and 2016, for these shares. Subsequently during 2018, $200,000 was accrued for 36,102 shares in additional compensationis currently permitted to the director. All shares due to this director, totaling 141,921, were issued during the first quarter of 2018.
At December 31, 2017, the Bank and Company could not pay cash dividends, and the Companybut does not anticipate that it willplan to pay any dividends on its common stock in the foreseeable future. Banking regulations place certainInstead, the Company intends to retain any income for the purpose of enhancing its financial position and supporting the growth of the Bank. The Bank is currently permitted to pay cash dividends subject to restrictions on dividends and loans or advances madeimposed by the Bank tofederal banking law and the Company. TheFlorida Financial Institutions Code. In general, the amount of cash dividends that may be paid by the Bank to the Company is based on the Bank’s net earnings of the current year combined with the Bank’s retained earnings of the preceding two years, as defined by state banking regulations. However, for any dividend declaration, the Company must consider additional factors such as the amount of current period net earnings, liquidity, asset quality, capital adequacy and economic conditions. It is likely that these factors would further limit the amount of dividends which the Company could declare. Furthermore, the Bank’s ability to pay dividends is restricted under the Consent Order issued by the FDIC and Florida Office of Financial Regulation and banking laws. The Company’s ability to pay dividends is also restricted under its Written Agreement with the Federal Reserve.years.
Item 6. [Reserved]Selected Financial Data
At December 31, or for the Years Then Ended
(Dollars in thousands, except per share figures)
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
At Year End: | ||||||||||||||||||||
Cash and cash equivalents | $ | 11,665 | $ | 17,640 | $ | 10,365 | 12,074 | 13,881 | ||||||||||||
Security available for sale | 11,437 | 20,222 | 25,749 | 26,748 | 22,990 | |||||||||||||||
Loans, net | 68,220 | 76,999 | 82,573 | 75,829 | 79,249 | |||||||||||||||
All other assets | 4,544 | 4,842 | 8,791 | 9,879 | 12,663 | |||||||||||||||
Total assets | $ | 95,866 | $ | 119,703 | $ | 127,478 | 124,530 | 128,783 | ||||||||||||
Deposit accounts | $ | 65,251 | 86,087 | 97,571 | 91,603 | 98,692 | ||||||||||||||
Federal Home Loan Bank advances | 20,500 | 23,500 | 20,000 | 22,740 | 22,740 | |||||||||||||||
Junior subordinated debenture | 5,155 | 5,155 | 5,155 | 5,155 | 5,155 | |||||||||||||||
All other liabilities | 2,415 | 1,880 | 1,785 | 2,053 | 2,412 | |||||||||||||||
Stockholders’ equity (deficit) | 2,545 | 3,081 | 2,967 | 2,979 | (216 | ) | ||||||||||||||
Total liabilities and stockholders’ equity (deficit) | $ | 95,866 | $ | 119,703 | $ | 127,478 | 124,530 | 128,783 |
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
For the Years: | ||||||||||||||||||||
Total interest income | 4,716 | 4,764 | 4,534 | 5,392 | 5,280 | |||||||||||||||
Total interest expense | 1,196 | 1,079 | 884 | 911 | 1,919 | |||||||||||||||
Net interest income | 3,520 | 3,685 | 3,650 | 4,481 | 3,361 | |||||||||||||||
Provision for loan losses | — | — | — | — | 2,194 | |||||||||||||||
Net interest income after provision for loan losses | 3,520 | 3,685 | 3,650 | 4,481 | 1,167 | |||||||||||||||
Noninterest income (expense) | 52 | (144 | ) | 412 | 572 | 144 | ||||||||||||||
Noninterest expenses | 4,161 | 3,937 | 4,545 | 3,448 | 8,066 | |||||||||||||||
(Loss) earnings before income taxes (benefit) | (589 | ) | (396 | ) | (483 | ) | 1,605 | (6,755 | ) | |||||||||||
Income taxes (benefit) | — | — | (320 | ) | — | 320 | ||||||||||||||
Net (loss) earnings | $ | (589 | ) | $ | (396 | ) | (163 | ) | 1,605 | (7,075 | ) | |||||||||
Net (loss) earnings per share, basic (1) | $ | (.53 | ) | $ | (0.38 | ) | (.17 | ) | 1.85 | (8.94 | ) | |||||||||
Net (loss) earnings per share, diluted (1) | $ | (.53 | ) | $ | (0.38 | ) | (.17 | ) | 1.85 | (8.94 | ) | |||||||||
Weighted-average number of shares outstanding, basic (1) | 1,104,995 | 1,041,213 | 953,855 | 867,789 | 791,358 | |||||||||||||||
Weighted-average number of shares outstanding, diluted (1) | 1,104,995 | 1,041,213 | 953,855 | 867,789 | 791,358 |
Ratios and Other Data:
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
Return on average assets | (.5 | )% | (0.3 | )% | (0.1 | )% | 1.3 | % | (5.3 | )% | ||||||||||
Return on average equity | (21.3 | )% | (12.5 | )% | (5.3 | )% | 86.2 | % | (216.8 | )% | ||||||||||
Average equity to average assets | 2.5 | % | 2.6 | % | 2.5 | % | 1.5 | % | 2.4 | % | ||||||||||
Dividend payout ratio | — | % | — | % | — | % | — | % | — | % | ||||||||||
Net interest margin during the year | 3.2 | % | 3.1 | % | 3.4 | % | 3.9 | % | 2.9 | % | ||||||||||
Interest-rate differential during the year | 3.0 | % | 3.0 | % | 3.3 | % | 4.0 | % | 3.0 | % | ||||||||||
Net yield on average interest-earning assets | 4.3 | % | 4.0 | % | 4.2 | % | 4.7 | % | 4.5 | % | ||||||||||
Noninterest expenses to average assets | 3.8 | % | 3.3 | % | 3.6 | % | 2.7 | % | 5.8 | % | ||||||||||
Ratio of average interest-earning assets to average interest-bearing liabilities | 1.13 | 1.09 | 1.07 | 0.97 | .95 | |||||||||||||||
Nonperforming loans and foreclosed assets as a percentage of total assets at end of year | — | 0.3 | % | 7.5 | % | 12.1 | % | 12.7 | % | |||||||||||
Allowance for loan losses as a percentage of total loans at end of year | 5.5 | % | 4.9 | % | 2.7 | % | 2.9 | % | 2.7 | % | ||||||||||
Total number of banking offices | 3 | 3 | 3 | 3 | 3 | |||||||||||||||
Total shares outstanding at end of year (1) | 1,120,947 | 1,103,447 | 962,886 | 930,524 | 801,108 | |||||||||||||||
Book value per share at end of year (1) | $ | 2.27 | $ | 2.79 | $ | 3.08 | $ | 3.20 | $ | (0.27 | ) |
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
Critical Accounting Policies
The Company’s financial condition and results of operations are sensitive to accounting measurements and estimates of matters that are inherently uncertain. When applying accounting policies in areas that are subjective in nature, the Company must use its best judgment to arrive at the carrying value of certain assets. One of the most critical accounting policies applied by the Company is related to the valuation of its loan portfolio.
A variety of estimates impact the carrying value of the Company’s loan portfolio including the calculation of the allowance for loan losses, valuation of underlying collateral, the timing of loan charge-offs and the amount and amortization of loan fees and deferred origination costs.
The calculation of the allowance for loan losses is a complex process containing estimates which are inherently subjective and susceptible to significant revision as current information becomes available. The allowance is established and maintained at a level management believes is adequate to cover losses resulting from the inability of borrowers to make required payments on loans. Estimates for loan losses are determined by analyzing risks associated with specific loans and the loan portfolio, current trends in delinquencies and charge-offs, the views of the Company’s regulators, changes in the size and composition of the loan portfolio and peer comparisons. The analysis also requires consideration of the economic climate and direction, changes in the economic and interest rate environment which may impact a borrower’s ability to pay, legislation impacting the banking industry and economic conditions specific to the tri-county region the Bank serves in Southeast Florida. Because the calculation of the allowance for loan losses relies on the Company’s estimates and judgments relating to inherently uncertain events, results may differ from management’s estimates.
During the years ended December 31, 2017 and 2016, the Company assessed its earnings history and trend over the past year and its estimate of future earnings, and determined that it was more likely than not that the deferred tax assets would not be realized in the near term. Accordingly, a valuation allowance was recorded and maintained against the net deferred tax asset for the amount not expected to be realized in the future
The allowance for loan losses is also discussed as part of “Loan Portfolio, Asset Quality and Allowance for Loan Losses” and in Note 3 of Notes to the Consolidated Financial Statements.consolidated financial statements. The Company’s significant accounting policies are discussed in Note 1 of Notes to the Consolidated Financial Statements.consolidated financial statements.
During the years ended December 31, 2021 and 2020, the Company assessed its earnings history and trend over the past year and its estimate of future earnings. In 2021, the Company determined that it was more likely than not that the deferred tax assets would be realized in the near term. Accordingly, in 2021, the valuation allowance in the amount of $4 million that has been previously recorded against the net deferred tax asset for the amount not expected to be realized in the future was fully reversed.
Regulation and Legislation
As a state-chartered commercial bank, the Bank is subject to extensive regulation by the Florida Office of Financial Regulation, or Florida OFR, and the FDIC. The Bank files reports with the Florida OFR and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other financial institutions. Periodic examinations are performed by the Florida OFR and the FDIC to monitor the Bank’s compliance with the various regulatory requirements. The Company is also subject to regulation and examination by the Federal Reserve Board of Governors.
Loan Portfolio, Asset Quality and Allowance for Loan Losses
The Bank’s primary business is making business loans. This activity may subject the Bank to potential loan losses, the magnitude of which depends on a variety of economic factors affecting borrowers which are beyond its control. The combination of stronger U.S. growth, the consumer boost from sharply lower crude oil prices and the aggressive monetary easing and weaker currencies outside of the United States should support improving conditions. With most of the Bank’s loans concentrated in south Florida, the decline in local economic conditions had previously adversely affected the values of the Bank’s real estate collateral, but these trends are reversing and are shown in the improvement in the Bank’s impaired loans and improved asset quality. As of December 31, 2017,2021, the Bank’sBank did not have any impaired loans were approximately $2.2 million, or 3.09% of the gross loan portfolio.loans.
The following table sets forth the composition of the Bank’s loan portfolio:portfolio (dollars in thousands):
At December 31, | ||||||||||||||||||||||||
2021 | 2020 | 2019 | ||||||||||||||||||||||
Amount | % of Total | Amount | % of Total | Amount | % of Total | |||||||||||||||||||
Residential real estate | $ | 32,583 | 13 | % | $ | 28,997 | 19 | % | $ | 28,266 | 27 | % | ||||||||||||
Multi-family real estate | 48,592 | 19 | 19,210 | 12 | 8,396 | 8 | ||||||||||||||||||
Commercial real estate | 129,468 | 51 | 74,398 | 48 | 55,652 | 54 | ||||||||||||||||||
Land and construction | 3,772 | 2 | 4,750 | 3 | 2,496 | 2 | ||||||||||||||||||
Commercial | 14,157 | 6 | 21,849 | 14 | 4,476 | 4 | ||||||||||||||||||
Consumer | 22,827 | 9 | 5,715 | 4 | 4,903 | 5 | ||||||||||||||||||
Total loans | $ | 251,399 | 100 | % | $ | 154,919 | 100 | % | $ | 104,189 | 100 | % | ||||||||||||
(Deduct) add: | ||||||||||||||||||||||||
Net deferred loan (fees) costs and premiums | (422 | ) | (544 | ) | 53 | |||||||||||||||||||
Allowance for loan losses | (3,075 | ) | (1,906 | ) | (2,009 | ) | ||||||||||||||||||
Loans, net | $ | 247,902 | $ | 152,469 | $ | 102,233 |
At December 31, | |||||||||||||||||||||||||
2017 | 2016 | 2015 | |||||||||||||||||||||||
Amount | % of Total | Amount | % of Total | Amount | % of Total | ||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||||
Residential real estate | $ | 26,054 | 36.22 | $ | 27,334 | 33.98 | % | $ | 16,203 | 19.13 | |||||||||||||||
Multi-family real estate | 7,356 | 10.23 | 5,829 | 7.25 | 3,697 | 4.36 | |||||||||||||||||||
Commercial real estate | 32,152 | 44.70 | 29,264 | 36.37 | 34,771 | 41.05 | |||||||||||||||||||
Land and construction | 1,051 | 1.46 | 5,681 | 7.06 | 5,258 | 6.21 | |||||||||||||||||||
Commercial | 4,522 | 6.29 | 10,514 | 13.07 | 21,770 | 25.70 | |||||||||||||||||||
Consumer | 794 | 1.10 | 1,829 | 2.27 | 3,015 | 3.55 | |||||||||||||||||||
Total loans | 71,929 | 100 | % | 80,451 | 100 | % | 84,714 | 100.00 | |||||||||||||||||
Add (deduct): | |||||||||||||||||||||||||
Net deferred loan costs and premiums | 282 | 463 | 154 | ||||||||||||||||||||||
Allowance for loan losses | (3,991 | ) | (3,915 | ) | (2,295 | ) | |||||||||||||||||||
Loans, net | $ | 68,220 | $ | 76,999 | $ | 82,573 |
At December 31, | ||||||||||||||||
2014 | 2013 | |||||||||||||||
Amount | % of Total | Amount | % of Total | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Residential real estate | $ | 21,426 | 27.51 | % | $ | 26,618 | 32.83 | % | ||||||||
Multi-family real estate | 1,979 | 2.54 | 3,605 | 4.45 | ||||||||||||
Commercial real estate | 37,215 | 47.78 | 34,020 | 41.96 | ||||||||||||
Land and construction | 6,177 | 7.93 | 6,459 | 7.97 | ||||||||||||
Commercial | 11,070 | 14.21 | 10,297 | 12.70 | ||||||||||||
Consumer | 20 | .03 | 81 | .10 | ||||||||||||
Total loans | 77,887 | 100.00 | % | 81,080 | 100.00 | % | ||||||||||
Add (deduct): | ||||||||||||||||
Net deferred loan costs and premiums | 186 | 380 | ||||||||||||||
Allowance for loan losses | (2,244 | ) | (2,211 | ) | ||||||||||||
Loans, net | $ | 75,829 | $ | 79,249 |
The following table sets forth the activity in the allowance for loan losses (in thousands):
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Beginning balance | $ | 1,906 | $ | 2,009 | $ | 2,243 | ||||||
Provision (credit) for loan losses | 1,173 | 1,020 | (79 | ) | ||||||||
Loans charged off | (277 | ) | (1,184 | ) | (202 | ) | ||||||
Recoveries | 273 | 61 | 47 | |||||||||
Ending balance | $ | 3,075 | $ | 1,906 | $ | 2,009 |
Year Ended December 31, | ||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
Beginning balance | $ | 3,915 | $ | 2,295 | $ | 2,244 | $ | 2,211 | $ | 2,459 | ||||||||||
Provision (credit) for loan losses | — | — | — | — | 2,194 | |||||||||||||||
Loans charged off | (67 | ) | (469 | ) | (289 | ) | — | (2,959 | ) | |||||||||||
Recoveries | 143 | 2,089 | 340 | 33 | 517 | |||||||||||||||
Ending balance | $ | 3,991 | $ | 3,915 | $ | 2,295 | $ | 2,244 | $ | 2,211 |
The allowance for loan losses represents management’s estimate of probable incurred losses inherent in the existing loan portfolio. The allowance for loan losses is increased (decreased) by the provision (credit) for loan losses charged to expenseoperations and reduced by loans charged off, net of recoveries. The allowance for loan losses represented 5.55%1.22% and 4.87%1.23% of the total loans outstanding at December 31, 20172021 and 2016,2020, respectively.
The Bank evaluates the allowance for loan losses on a regular basis. The allowance for loan losses is determined based on a periodic review of several factors: reviews and evaluation of individual loans, historical loan loss experiences, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and current economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of two components. The first component consists of amounts specifically reserved (“specific allowance”) for specific loans identified as impaired, as defined by FASB Accounting Standards Codification No. 310 (“ASC 310”). Impaired loans are those loans that management has estimated will not be repaid as agreed upon. The Bank measures impairment on a loan by loan basis for all of its loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent. A loan may be impaired (i.e. not expected to be repaid as agreed), but may be sufficiently collateralized such that the Bank expects to recover all principal and interest eventually, and therefore no specific reserve is warranted.
The second component is a general reserve (“general allowance”) on all of the Bank’s loans, other than those identified as impaired. The Bank groups these loans into categories with similar characteristics and then applies a loss factor to each group which is derived from the Bank’s historical loss experience for that category adjusted for qualitative factors such as economic conditions and other trends or uncertainties that could affect management’s estimate of probable loss. The aggregate of these two components results in the Bank’s total allowance for loan losses.
The following table sets forth the Bank’s allowance for loan losses by loan type (dollars in thousands):
At December 31, | ||||||||||||||||||||||||
2021 | 2020 | 2019 | ||||||||||||||||||||||
Amount | % of Total Loans | Amount | % of Total Loans | Amount | % of Total Loans | |||||||||||||||||||
Residential real estate | $ | 482 | 13 | % | $ | 463 | 19 | % | $ | 531 | 27 | % | ||||||||||||
Multi-family real estate | 535 | 19 | 253 | 12 | 82 | 8 | ||||||||||||||||||
Commercial real estate | 1535 | 51 | 884 | 48 | 624 | 54 | ||||||||||||||||||
Land and construction | 32 | 2 | 52 | 3 | 21 | 2 | ||||||||||||||||||
Commercial | 74 | 6 | 103 | 14 | 573 | 4 | ||||||||||||||||||
Consumer | 417 | 9 | 151 | 4 | 152 | 5 | ||||||||||||||||||
Unallocated | — | — | — | — | 26 | — | ||||||||||||||||||
Total allowance for loan losses | $ | 3,075 | 100 | % | $ | 1,906 | 100 | % | $ | 2,009 | 100 | % | ||||||||||||
Allowance for loan losses as a percentage of total loans outstanding | 1.22 | % | 1.23 | % | 1.93 | % |
At December 31, | |||||||||||||||||||||||||
2017 | 2016 | 2015 | |||||||||||||||||||||||
Amount | % of Total Loans | Amount | % of Total Loans | Amount | % of Total Loans | ||||||||||||||||||||
Residential real estate | $ | 641 | 36.22 | % | $ | 310 | 33.98 | % | $ | 116 | 19.13 | % | |||||||||||||
Multi-family real estate | 59 | 10.23 | 58 | 7.25 | 26 | 4.36 | |||||||||||||||||||
Commercial real estate | 759 | 44.70 | 787 | 36.37 | 1,085 | 41.05 | |||||||||||||||||||
Land and construction | 22 | 1.46 | 120 | 7.06 | 77 | 6.21 | |||||||||||||||||||
Commercial | 55 | 6.29 | 188 | 13.07 | 120 | 25.70 | |||||||||||||||||||
Consumer | 86 | 1.10 | 165 | 2.27 | 151 | 3.55 | |||||||||||||||||||
Unallocated | 2,369 | — | 2,287 | — | 720 | — | |||||||||||||||||||
Total allowance for loan losses | $ | 3,991 | 100.00 | % | $ | 3,915 | 100.00 | % | $ | 2,295 | 100.00 | % | |||||||||||||
Allowance for loan losses as a percentage of total loans outstanding | 5.55 | % | 4.87 | % | 2.71 | % |
At December 31, | ||||||||||||||||
2014 | 2013 | |||||||||||||||
Amount | % of Total Loans | Amount | % of Total Loans | |||||||||||||
Residential real estate | $ | 66 | 27.51 | % | $ | 49 | 32.82 | % | ||||||||
Multi-family real estate | 2 | 2.54 | 4 | 4.45 | ||||||||||||
Commercial real estate | 2,058 | 47.78 | 1,139 | 41.96 | ||||||||||||
Land and construction | 99 | 7.93 | 458 | 7.97 | ||||||||||||
Commercial | 10 | 14.21 | 31 | 12.70 | ||||||||||||
Consumer | — | .03 | — | .10 | ||||||||||||
Unallocated | 9 | — | 530 | — | ||||||||||||
Total allowance for loan losses | $ | 2,244 | 100.00 | % | $ | 2,211 | 100.00 | % | ||||||||
Allowance for loan losses as a percentage of total loans outstanding | 2.88 | % | 2.73 | % |
The following summarizes the amount of impaired loans (in thousands):
At December 31, | ||||||||||||||||||||||||||||||||||||
2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | Recorded Investment | Unpaid Principal Balance | Related Allowance | Recorded Investment | Unpaid Principal Balance | Related Allowance | ||||||||||||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||||||||||||||
Commercial real estate | $ | — | $ | — | $ | — | $ | 2,193 | $ | 2,193 | $ | — | $ | 2,206 | $ | 2,206 | $ | — | ||||||||||||||||||
Commercial | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||||||||||||||
Residential real estate | — | — | — | — | — | — | 944 | 944 | 258 | |||||||||||||||||||||||||||
Commercial real estate | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Commercial | — | — | — | — | — | — | 812 | 812 | 531 | |||||||||||||||||||||||||||
Total: | ||||||||||||||||||||||||||||||||||||
Residential real estate | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 944 | $ | 944 | $ | 258 | ||||||||||||||||||
Commercial real estate | $ | — | $ | — | $ | — | $ | 2,193 | $ | 2,193 | $ | — | $ | 2,206 | $ | 2,206 | $ | — | ||||||||||||||||||
Commercial | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 812 | $ | 812 | $ | 531 | ||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 2,193 | $ | 2,193 | $ | — | $ | 3,962 | $ | 3,962 | $ | 789 |
December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||
Residential real estate | $ | 194 | $ | 217 | $ | — | $ | 375 | $ | 501 | $ | — | ||||||||||||
Commercial real estate | 231 | 231 | — | — | — | — | ||||||||||||||||||
With an allowance recorded - | ||||||||||||||||||||||||
Residential real estate | 978 | 978 | 330 | — | — | — | ||||||||||||||||||
Commercial real estate | 744 | 744 | 83 | 1,004 | 1,004 | 104 | ||||||||||||||||||
Total: | ||||||||||||||||||||||||
Residential real estate | $ | 1,172 | $ | 1,195 | $ | 330 | $ | 375 | $ | 501 | $ | — | ||||||||||||
Commercial real estate | $ | 975 | $ | 975 | $ | 83 | $ | 1,004 | $ | 1,004 | $ | 104 | ||||||||||||
Total | $ | 2,147 | $ | 2,170 | $ | 413 | $ | 1,379 | $ | 1,505 | $ | 104 |
During 2017, 2016,2021, 2020, and 2015,2019, the average netrecorded investment in impaired loans and interest income recognized and received on impaired loans iswere as follows (in thousands):
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Average investment in impaired loans | $ | 658 | $ | 3,344 | $ | 4,829 | ||||||
Interest income recognized on impaired loans | $ | 7 | $ | 96 | $ | 233 | ||||||
Interest income received on a cash basis on impaired loans | $ | 7 | $ | 89 | $ | 230 |
Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Average investment in impaired loans | $ | 2,454 | $ | 2,957 | $ | 9,579 | ||||||
Interest income recognized on impaired loans | $ | 278 | $ | 124 | $ | 250 | ||||||
Interest income received on a cash basis on impaired loans | $ | 173 | $ | 182 | $ | 492 |
Liquidity and Capital Resources
Liquidity represents an institution’s ability to meet current and future obligations through liquidation or maturity of existing assets or the acquisition of additional liabilities. The Bank’s ability to respond to the needs of depositors and borrowers and to benefit from investment opportunities is facilitated through liquidity management.
The Bank’s primary sources of cash during the year ended December 31, 2017,2021, were frompayments of principal repaymentsand interest on loans made by the Bank to third parties, payments of principal and interest on debt securities available for sale of $2.2 million, proceeds from sale of securities available for sale of $6.5 millionheld by the Bank and payoffs or paydowns of loans of $8.6 million.deposits made by third parties at the Bank. Cash was used primarily to fund loans and repay $3 million in FHLB advances and fund a $20.8 million reduction in deposits.Federal Home Loan Bank of Atlanta (“FHLB”) advances. The Bank will adjustadjusts rates on its deposits to attract or retain deposits as needed. The Bank primarily obtains funds primarilydeposits from depositors in its market area.
In addition to obtaining funds from depositors, theThe Bank may borrow funds from other financial institutions. OptimumBankThe Bank is a member of the Federal Home Loan Bank of Atlanta,FHLB, which allows it to borrow funds under a pre-arranged line of credit equal to $32.5 million.credit. As of December 31, 2017,2021, the Bank had $20.5$18 million in borrowings outstanding from the Federal Home Loan BankFHLB of Atlanta to facilitate loan fundingslending and manage its asset and liability structure.structure, and remaining credit availability with the FHLB of $65.7 million. At December 31, 2021, the Bank also had lines of credit amounting to $19.5 million with five correspondent banks to purchase federal funds. The BankCompany also has established a line of credit for $2.5 million with SunTrust, $2.5 million with Alostar Bank, $.75 million with Servis First Bank, and $.56 million with the Federal Reserve.Reserve Bank under which the Company may draw up to $116,000. The line is secured by $118,000 in securities.
Debt Securities
The Bank’s securities portfolio is comprised primarily of SBA Pool Securitiespool securities, mortgage-backed securities, taxable municipal securities and Collateralizedcollateralized mortgage obligations. The securities portfolio is categorized as either “held to maturity”“held-to-maturity” or “available for sale.” Securities held to maturityDebt securities held-to-maturity represent those securities which the CompanyBank has the positive intent and ability to hold to maturity. These debt securities are carried at amortized cost. SecuritiesDebt securities available for sale represent those investments which may be sold for various reasons including changes in interest rates and liquidity considerations. These debt securities are reported at fair market value and unrealized gains and losses are excluded from earnings and reported in other comprehensive loss.
The following table sets forth the amortized cost and fair value of the Bank’s debt securities portfolio (in thousands):
Amortized Cost | Fair Value | |||||||
At December 31, 2021: | ||||||||
Held-to-maturity: | ||||||||
Collateralized mortgage obligations | $ | 854 | $ | 882 | ||||
Mortgage-backed Securities | 186 | 189 | ||||||
Total | $ | 1,040 | $ | 1,071 | ||||
Available for sale: | ||||||||
SBA Pool Securities | $ | 1,097 | $ | 1,072 | ||||
Collateralized mortgage obligations | 210 | 217 | ||||||
Taxable municipal securities | 16,766 | 16,426 | ||||||
Mortgage-backed Securities. | 17,137 | 16,679 | ||||||
Total | $ | 35,210 | $ | 34,394 | ||||
At December 31, 2020: | ||||||||
Held-to-maturity: | ||||||||
Collateralized mortgage obligations | $ | 2,420 | $ | 2,536 | ||||
Mortgage-backed Securities | 979 | 1,013 | ||||||
Total | $ | 3,399 | $ | 3,549 | ||||
Available for sale: | ||||||||
SBA Pool Securities | $ | 1,338 | $ | 1,297 | ||||
Collateralized mortgage obligations | 458 | 485 | ||||||
Taxable municipal securities | 5,063 | 5,085 | ||||||
Mortgage-backed Securities. | 11,984 | 12,026 | ||||||
Total | $ | 18,843 | $ | 18,893 | ||||
At December 31, 2019: | ||||||||
Held-to-maturity: | ||||||||
Collateralized mortgage obligations | $ | 4,218 | $ | 4,347 | ||||
Mortgage-backed securities | 1,588 | 1,639 | ||||||
Total | $ | 5,806 | $ | 5,986 | ||||
Available for sale- | ||||||||
SBA Pool Securities | $ | 1,734 | $ | 1,682 | ||||
Collateralized mortgage obligations | 998 | 1,016 | ||||||
Mortgage-backed Securities. | 2,666 | 2,711 | ||||||
Total | $ | 5,398 | $ | 5,409 |
Amortized Cost | Fair Value | |||||||
At December 31, 2017: | ||||||||
Securities available for sale: | ||||||||
Collateralized mortgage obligations | $ | 8,806 | $ | 8,466 | ||||
SBA Pool Securities | 2,965 | 2,971 | ||||||
$ | 11,771 | $ | 11,437 | |||||
At December 31, 2016: | ||||||||
Securities available for sale: | ||||||||
Collateralized mortgage obligations | $ | 10,157 | $ | 9,752 | ||||
SBA Pool Securities | 10,470 | 10,470 | ||||||
$ | 20,627 | $ | 20,222 |
The following table sets forth, by maturity distribution, certain information pertaining to the debt securities portfolio at amortized cost (dollars in thousands):
After One Year Through Five Years | After Ten Years | Total | Yield | |||||||||||||
At December 31, 2017: | ||||||||||||||||
Collateralized mortgage obligation | $ | 8,806 | $ | — | $ | 8,806 | 1.93 | |||||||||
SBA Pool Securities | — | 2,965 | 2,965 | 2.50 | ||||||||||||
$ | 8,806 | $ | 2,965 | $ | 11,771 | |||||||||||
At December 31, 2016: | ||||||||||||||||
Collateralized mortgage obligation | $ | 2,557 | $ | 7,600 | $ | 10,157 | 1.83 | |||||||||
SBA Pool Securities | — | 10,470 | 10,470 | 1.90 | ||||||||||||
$ | 2,557 | $ | 18,070 | $ | 20,627 |
After One Year Through Five Years | After Ten Years | Total | Yield | |||||||||||||
At December 31, 2021: | ||||||||||||||||
Collateralized mortgage obligation | $ | — | $ | 1,064 | $ | 1,064 | 0.52 | % | ||||||||
Mortgage-backed securities | — | 17,323 | 17,323 | 1.57 | % | |||||||||||
Taxable municipal securities | — | 16,766 | 16,766 | 2.16 | % | |||||||||||
SBA pool securities | — | 1,097 | 1,097 | 0.26 | % | |||||||||||
$ | — | $ | 36,250 | $ | 36,250 | |||||||||||
At December 31, 2020: | ||||||||||||||||
Collateralized mortgage obligation | — | $ | 2,878 | $ | 2,878 | 1.3 | % | |||||||||
Mortgage-backed securities | $ | — | 12,963 | 12,963 | 1.46 | % | ||||||||||
Taxable municipal securities | — | 5,063 | 5,063 | 2.08 | % | |||||||||||
SBA pool securities | — | 1,338 | 1,338 | 1.52 | % | |||||||||||
$ | — | $ | 22,242 | $ | 22,242 | |||||||||||
At December 31, 2019: | ||||||||||||||||
Collateralized mortgage obligation | $ | — | $ | 5,216 | $ | 5,216 | 2.72 | % | ||||||||
Mortgage - backed securities | — | 4,254 | 4,254 | 2.56 | % | |||||||||||
SBA pool securities | — | 1,734 | 1,734 | 1.46 | % | |||||||||||
$ | — | $ | 11,204 | $ | 11,204 |
Regulatory Capital AdequacyExpected maturities of these debt securities will differ from contractual maturities because borrowers have the right to call or repay obligations with or without call or prepayment penalties.
Failure to meet minimum capital requirements can result in certain mandatory and, possibly, additional discretionary actions by federal and state regulators that, if undertaken, could have a direct material effect on the Bank’s and Company’s financial condition and results of operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. In addition, the Consent Order imposes increased minimum capital requirements on the Bank.
Quantitative measures established by regulation and by the Consent Order to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets. As of December 31, 2017, the Bank did meet the minimum applicable capital adequacy requirements.
The Bank’s actual and required minimum capital ratios were as follows (dollars in thousands):
Regulatory Capital Requirements
Actual | For Capital Adequacy Purposes | Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions | Requirements of Consent Order | |||||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||
As of December 31, 2017: | ||||||||||||||||||||||||||||||||
Total Capital to Risk-Weighted Assets | $ | 10,484 | 15.08 | % | $ | 5,561 | 8.00 | % | $ | 6,951 | 10.00 | % | $ | 8,341 | 12.00 | % | ||||||||||||||||
Tier I Capital to Risk-Weighted Assets | 9,577 | 13.78 | 4,170 | 6.00 | 5,561 | 8.00 | N/A | N/A | ||||||||||||||||||||||||
Common Equity Tier 1 Capital to Risk-Weighted Assets | 9,577 | 13.78 | 3,128 | 4.50 | 4,518 | 6.50 | N/A | N/A | ||||||||||||||||||||||||
Tier I Capital to Total Assets | 9,577 | 8.89 | 4,307 | 4.00 | 5,383 | 5.00 | 8,614 | 8.00 | ||||||||||||||||||||||||
As of December 31, 2016: | ||||||||||||||||||||||||||||||||
Total Capital to Risk-Weighted Assets | $ | 10,622 | 12.79 | % | $ | 6,609 | 8.00 | % | $ | 8,261 | 10.00 | % | $ | 9,913 | 12.00 | % | ||||||||||||||||
Tier I Capital to Risk-Weighted Assets | 9,498 | 11.50 | 4,957 | 6.00 | 6,609 | 8.00 | N/A | N/A | ||||||||||||||||||||||||
Common Equity Tier 1 Capital to Risk-Weighted Assets | 9,498 | 11.50 | 3,718 | 4.50 | 5,370 | 6.50 | N/A | N/A | ||||||||||||||||||||||||
Tier I Capital to Total Assets | 9,498 | 8.06 | 4,714 | 4.00 | 5,893 | 5.00 | 9,428 | 8.00 |
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. The Bank’s market risk arises primarily from interest-rate risk inherent in its lending and deposit-taking activities. The Bank does not engage in securities trading or hedging activities and does not invest in interest-rate derivatives or enter into interest rate swaps.
The Bank may utilize financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. The measurement of market risk associated with financial instruments is meaningful only when all related and offsetting on- and off-balance-sheet transactions are aggregated, and the resulting net positions are identified. Disclosures about the fair value of financial instruments, which reflect changes in market prices and rates, can be found in Note 8 of Notesnotes to Consolidated Financial Statements.consolidated financial statements.
The Bank’s primary objective in managing interest-rate risk is to minimize the potential adverse impact of changes in interest rates on its net interest income and capital, while adjusting its asset-liability structure to obtain the maximum yield-cost spread on that structure. The Bank actively monitors and manages its interest-rate risk exposure by managing its asset and liability structure. However, a sudden and substantial increase in interest rates may adversely impact its earnings, to the extent that the interest-earning assets and interest-bearing liabilities do not change or reprice at the same speed, to the same extent, or on the same basis.
The Bank uses modeling techniques to simulate changes in net interest income under various rate scenarios. Important elements of these techniques include the mix of floating versus fixed-rate assets and liabilities, and the scheduled, as well as expected, repricing and maturing volumes and rates of the existing balance sheet.
Asset Liability Management
As part of its asset and liability management, the Bank has emphasized establishing and implementing internal asset-liability decision processes, as well as control procedures to aid in managing its earnings. Management believes that these processes and procedures provide us with better capital planning, asset mix and volume controls, loan-pricing guidelines, and deposit interest-rate guidelines, which should result in tighter controls and less exposure to interest-rate risk.
The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring an institution’s interest rate sensitivity “gap.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest-rate sensitivity gap is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. The gap ratio is computed as the amount of rate sensitive assets less the amount of rate sensitive liabilities divided by total assets. A gap is considered positive when the amount of interest-rate sensitive assets exceeds interest-rate sensitive liabilities. A gap is considered negative when the amount of interest-rate sensitive liabilities exceeds interest-rate sensitive assets. During a period of rising interest rates, a negative gap would adversely affect net interest income, while a positive gap would result in an increase in net interest income. During a period of falling interest rates, a negative gap would result in an increase in net interest income, while a positive gap would adversely affect net interest income.
In order to minimize the potential for adverse effects of material and prolonged increases in interest rates on the results of operations, the Bank’s management continues to monitor its assets and liabilities to better match the maturities and repricing terms of its interest-earning assets and interest-bearing liabilities. The Bank’s policies emphasize the origination of adjustable-rate loans, building a stable core deposit base and, to the extent possible, matching deposit maturities with loan repricing timeframes or maturities.
The following table sets forth certain information related to the Bank’s interest-earning assets and interest-bearing liabilities at December 31, 2017,2021, that are estimated to mature or are scheduled to reprice within the period shown (dollars in thousands):
Gap Maturity / Repricing Schedule
One Year or Less | More than One Year and Less than Five Years | More than Five Years and Less than Fifteen Years | Over Fifteen Years | Total | ||||||||||||||||
Loans (1): | ||||||||||||||||||||
Residential real estate loans | $ | 5,368 | $ | 22,014 | $ | 5,012 | $ | 189 | $ | 32,583 | ||||||||||
Multi-family real estate loans | 1,327 | 42,775 | 4,490 | - | 48,592 | |||||||||||||||
Commercial real estate loans | 3,762 | 98,488 | 27,218 | - | 129,468 | |||||||||||||||
Land and construction | 312 | 3,460 | - | - | 3,772 | |||||||||||||||
Commercial | 3,225 | 10,324 | 49 | 559 | 14,157 | |||||||||||||||
Consumer | 44 | 18,239 | - | 4,544 | 22,827 | |||||||||||||||
Total loans | 14,038 | 195,300 | 36,769 | 5,292 | 251,399 | |||||||||||||||
Securities (2) | 1,072 | - | 1,518 | 32,844 | 35,434 | |||||||||||||||
Interest-bearing deposits in banks | 45,289 | - | - | - | 45,289 | |||||||||||||||
Federal Home Loan Bank stock | 793 | - | - | - | 793 | |||||||||||||||
Total rate-sensitive assets | 61,192 | 195,300 | 38,287 | 38,136 | 332,915 | |||||||||||||||
Deposit accounts (3): | ||||||||||||||||||||
Money-market deposits | 121,083 | - | - | - | 121,083 | |||||||||||||||
Interest-bearing checking deposits | 33,083 | - | - | - | 33,083 | |||||||||||||||
Savings deposits | 936 | - | - | - | 936 | |||||||||||||||
Time deposits | 11,490 | 1,746 | - | - | 13,236 | |||||||||||||||
Total deposits | 166,592 | 1,746 | - | - | 168,338 | |||||||||||||||
Federal Home Loan Bank advances | - | 14,000 | 4,000 | - | 18,000 | |||||||||||||||
Junior subordinated debenture | - | - | - | - | - | |||||||||||||||
Total rate-sensitive liabilities | 166,592 | 15,746 | 4,000 | - | 186,338 | |||||||||||||||
GAP (repricing differences) | $ | (105,400 | ) | $ | 179,554 | $ | 34,287 | $ | 38,136 | $ | 146,577 | |||||||||
Cumulative GAP | $ | (105,400 | ) | $ | 74,154 | $ | 108,441 | $ | 146,577 | |||||||||||
Cumulative GAP/total assets | (30 | )% | 21 | % | 31 | % | 42 | % |
One Year or Less | More than One Year and Less than Five Years | More than Five Years and Less than Fifteen Years | Over Fifteen Years | Total | ||||||||||||||||
Loans (1): | ||||||||||||||||||||
Residential real estate loans | $ | 8,957 | $ | 9,370 | $ | 6,572 | $ | 1,155 | $ | 26,054 | ||||||||||
Multi-family real estate loans | 396 | 6,888 | 72 | — | 7,356 | |||||||||||||||
Commercial real estate loans | 11,477 | 20,675 | — | — | 32,152 | |||||||||||||||
Land and construction | 1,051 | — | — | — | 1,051 | |||||||||||||||
Commercial | 2,936 | 1,586 | — | — | 4,522 | |||||||||||||||
Consumer | 794 | — | — | — | 794 | |||||||||||||||
Total loans | 25,611 | 38,519 | 6,644 | 1,155 | 71,929 | |||||||||||||||
Securities (2) | 2,971 | — | — | 8,466 | 11,437 | |||||||||||||||
Federal Home Loan Bank stock | 979 | — | — | — | 979 | |||||||||||||||
Total rate-sensitive assets | 29,561 | 38,519 | 6,644 | 9,621 | 84,345 | |||||||||||||||
Deposit accounts (3): | ||||||||||||||||||||
Money-market deposits | 16,498 | — | — | — | 16,498 | |||||||||||||||
Interest-bearing checking deposits | 4,783 | — | — | — | 4,783 | |||||||||||||||
Savings deposits | 765 | — | — | — | 765 | |||||||||||||||
Time deposits | 24,507 | 6,067 | — | — | 30,574 | |||||||||||||||
Total deposits | 46,553 | 6,067 | — | — | 52,620 | |||||||||||||||
Federal Home Loan Bank advances | 5,000 | 15,500 | — | — | 20,500 | |||||||||||||||
Junior subordinated debenture | — | — | — | 5,155 | 5,155 | |||||||||||||||
Total rate-sensitive liabilities | 51,553 | 21,567 | — | 5,155 | 78,275 | |||||||||||||||
GAP (repricing differences) | $ | (21,992 | ) | $ | 16,952 | $ | 6,644 | $ | 4,466 | $ | 6,070 | |||||||||
Cumulative GAP | $ | (21,992 | ) | $ | (5,040 | ) | $ | 1,604 | $ | 6,070 | $ | 6,070 | ||||||||
Cumulative GAP/total assets | (22.94 | %) | (5.26 | %) | 1.67 | % | 6.33 | % |
In preparing the table above, adjustable-rate loans are included in the period in which the interest rates are next scheduled to adjust rather than in the period in which the loans mature. Fixed-rate loans are scheduled, including repayment, according to their maturities. | |
Securities are scheduled through the repricing date. | |
Money-market, interest-bearing checking and savings deposits are regarded as readily accessible withdrawable accounts. |
The following table sets forth loan maturities by type of loan at December 31, 20172021 (in thousands):
One Year or Less | After One But Within Five Years | After Five Years | Total | One Year or Less | After One But Within Five Years | After Five Years | Total | |||||||||||||||||||||||||
Residential real estate | $ | — | $ | 1,640 | $ | 24,414 | $ | 26,054 | $ | 1,401 | $ | 633 | $ | 30,549 | $ | 32,583 | ||||||||||||||||
Multi-family real estate | 528 | 6,828 | 7,356 | - | 1,411 | 47,181 | 48,592 | |||||||||||||||||||||||||
Commercial real estate | 6,022 | 6,844 | 19,286 | 32,152 | - | 20,346 | 109,122 | 129,468 | ||||||||||||||||||||||||
Land and construction | — | 592 | 459 | 1,051 | - | 1,569 | 2,203 | 3,772 | ||||||||||||||||||||||||
Commercial | 60 | 3,244 | 1,218 | 4,522 | 3,225 | 10,324 | 608 | 14,157 | ||||||||||||||||||||||||
Consumer | 192 | 602 | — | 794 | 18,283 | - | 4,544 | 22,827 | ||||||||||||||||||||||||
Total | $ | 6,274 | $ | 13,450 | $ | 52,205 | $ | 71,929 | $ | 22,909 | $ | 34,283 | $ | 194,207 | $ | 251,399 |
The following table sets forth the maturity or repricing of loans by interest type at December 31, 20172021 (in thousands):
One Year or Less | After One But Within Five Years | After Five Years | Total | |||||||||||||||||||||||||||||
One Year or Less | After One But Within Five Years | After Five Years | Total | |||||||||||||||||||||||||||||
Fixed interest rate | $ | 2,386 | $ | 9,510 | $ | 1,155 | $ | 13,051 | $ | 2,010 | $ | 31,381 | $ | 33,329 | $ | 66,720 | ||||||||||||||||
Variable interest rate | 23,313 | 29,129 | 6,436 | 58,878 | 12,028 | 163,919 | 8,732 | 184,679 | ||||||||||||||||||||||||
Total | $ | 25,699 | $ | 38,639 | $ | 7,591 | $ | 71,929 | $ | 14,038 | $ | 195,300 | $ | 42,061 | $ | 251,399 |
Scheduled contractual principal repayments of loans do not reflect the actual life of such assets. The average life of loans is substantially less than their average contractual terms due to prepayments. In addition, due-on-sale clauses on loans generally give us the right to declare a conventional loan immediately due and payable in the event, among other things, that the borrower sells real property subject to a mortgage and the loan is not repaid. The average life of mortgage loans tends to increase, however, when current mortgage loan rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when rates on existing mortgages are substantially higher than current mortgage rates.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unused lines of credit, and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amounts recognized in the consolidated balance sheet. The contractual amounts of those instruments reflect the extent of the Company’s involvement in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments.
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. Commitments generally have fixed-expiration dates or other termination clauses and may require payment of a fee. Since certain commitments expire without being drawn upon, the total committed amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary in order to extend credit, is based on management’s credit evaluation of the counterparty.
A summary of the contractual amounts of the Company’s-balanceCompany’s financial instruments with off-balance sheet risk at December 31, 20172021 follows (in thousands):
Commitments to extend credit | $ | 11,891 | ||
Unused lines of credit | $ | 11,793 | ||
Standby letters of credit | $ | 4,550 |
Commitments to extend credit | $ | 791 | ||
Unused lines of credit | $ | 2,031 | ||
Standby letters of credit | $ | - |
The following is a summary of the Company’s contractual obligations, including certain on-balance sheet contractual obligations at December 31, 20172021 (in thousands):
Payments Due by Period | Payments Due by Period | |||||||||||||||||||||||||||||||||||||||
Contractual Obligations | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | ||||||||||||||||||||||||||||||
Federal Home Loan Bank advances | $ | 20,500 | $ | 5,000 | $ | 10,500 | $ | 5,000 | $ | — | $ | 18,000 | $ | — | $ | 4,000 | $ | 10,000 | $ | 4,000 | ||||||||||||||||||||
Junior subordinated debenture | 5,155 | — | — | — | 5,155 | |||||||||||||||||||||||||||||||||||
Operating leases | 468 | 90 | 187 | 191 | — | |||||||||||||||||||||||||||||||||||
Operating lease liabilities | 1,840 | 254 | 374 | 394 | 818 | |||||||||||||||||||||||||||||||||||
Total | $ | 26,123 | $ | 5,090 | $ | 10,687 | $ | 5,191 | $ | 5,155 | $ | 19,840 | $ | 254 | $ | 4,374 | $ | 10,394 | $ | 4,818 |
Deposits
Deposits traditionally are the primary source of funds for the Company’s use in lending, making investments and meeting liquidity demands. The Company has focused on raising time deposits primarily within its market area, which is the tri-county area of Broward, Miami-Dade and Palm Beach counties. However, the Company offers a variety of deposit products, which are promoted within its market area. NetDeposits increased $101.6 million in 2021. The increase in deposit balances primarily consisted of increases of $65.8 million in noninterest-bearing demand deposits and $44.3 million in NOW and money-market deposits. Time deposits decreased $20.8 millions in 2017.by $8.5 million during 2021.
The following table displays the distribution of the Company’s deposits at December 31, 2017, 20162021, 2020 and 2015 (dollars in2019 (in thousands):
2017 | 2016 | 2015 | 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||
Amount | % of Deposits | Amount | % of Deposits | Amount | % of Deposits | Amount | % of Deposits | Amount | % of Deposits | Amount | % of Deposits | |||||||||||||||||||||||||||||||||||
Noninterest-bearing demand deposits | $ | 12,632 | 19.36 | % | $ | 7,209 | 8.29 | % | $ | 9,478 | 9.71 | % | $ | 124,119 | 42.4 | % | $ | 58,312 | 30.5 | $ | 10,545 | 10.4 | % | |||||||||||||||||||||||
Interest-bearing demand deposits | 4,782 | 7.33 | 3,604 | 4.19 | 2,615 | 2.68 | 33,083 | 11.3 | 27,803 | 14.6 | 6,928 | 6.83 | ||||||||||||||||||||||||||||||||||
Money-market deposits | 16,498 | 25.28 | 17,743 | 20.63 | 20,776 | 21.29 | 121,083 | 41.4 | 82,191 | 43.1 | 48,092 | 47.44 | ||||||||||||||||||||||||||||||||||
Savings | 765 | 1.17 | 806 | 0.94 | 643 | 0.66 | 936 | 0.3 | 710 | 0.4 | 455 | 0.45 | ||||||||||||||||||||||||||||||||||
Subtotal | $ | 34,677 | 53.14 | % | $ | 29,362 | 34.05 | % | $ | 33,512 | 34.34 | % | 279,221 | 95.4 | % | $ | 169,016 | 88.6 | $ | 66,020 | 65.12 | % | ||||||||||||||||||||||||
Time deposits: | ||||||||||||||||||||||||||||||||||||||||||||||
0.00% – 0.99% | $ | 6,849 | 10.50 | $ | 14,891 | $ | 17.31 | $ | 48,196 | 49.40 | 10,295 | 3.5 | % | $ | 12,895 | 6.7 | $ | 3,407 | 3.36 | % | ||||||||||||||||||||||||||
1.00% – 1.99% | 23,582 | 36.14 | 41,695 | 48.48 | 15,727 | 16.12 | 2,183 | 0.8 | 7,987 | 4.2 | 5,172 | 5.11 | ||||||||||||||||||||||||||||||||||
2.00% – 2.99% | 143 | .22 | 139 | .16 | 136 | 0.14 | 758 | 0.3 | 861 | 0.5 | 26,773 | 26.41 | ||||||||||||||||||||||||||||||||||
3.00% – 3.99% | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Total time deposits (1) | 30,574 | 46.86 | 56,725 | 65.95 | 64,059 | 65.66 | 13,236 | 4.6 | 21,743 | 11.4 | 35,352 | 34.88 | ||||||||||||||||||||||||||||||||||
Total deposits | $ | 65,251 | 100.00 | % | $ | 86,087 | $ | 100.00 | % | $ | 97,571 | 100.00 | % | $ | 292,457 | 100 | % | $ | 190,759 | 100 | % | $ | 101,372 | 100 | % |
(1) Included areIncludes Individual Retirement Accounts (IRA’s) totaling $2,451,000$1,207,000 and $2,818,000$2,000,000 at December 31, 20172021 and 2016,2020, respectively, all of which are in the form of time deposits.
Time Deposits of $100,000$250,000 or more, or Jumbo Time Deposits, are generally considered a more unpredictable source of funds. The following table sets forth the Company’s maturity distribution of time deposits of $100,000$250,000 or more at December 31, 20172021 and 20162020 (in thousands):
At December 31, | At December 31, | |||||||||||||||
2017 | 2016 | 2021 | 2020 | |||||||||||||
Due three months or less | $ | 4,847 | $ | 4,838 | $ | 583 | $ | 825 | ||||||||
Due more than three months to six months | 4,618 | 3,433 | 787 | — | ||||||||||||
More than six months to one year | 5,628 | 16,968 | 320 | 930 | ||||||||||||
One to five years | 4,189 | 9,608 | — | 787 | ||||||||||||
Total | $ | 19,282 | $ | 34,847 | $ | 1,690 | $ | 2,542 |
Analysis of Results of Operations
The Company’s profitability depends to a large extent on net interest income, which is the difference between the interest received on earning assets, such as loans and securities, and the interest paid on interest-bearing liabilities, principally deposits and borrowings. Net interest income is determined by the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities (“interest-rate spread”) and the relative amounts of interest-earning assets and interest-bearing liabilities. The Company’s interest-rate spread is affected by regulatory, economic, and competitive factors that influence interest rates, loan demand, and deposit flows. The Company’s results of operations are also affected by the provision for loan losses, operating expenses such as salaries and employee benefits, occupancy and other operating expenses including income taxes, and noninterest income such as loan prepayment fees.
The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yield; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest rate spread; and (v) net interest margin. Average balances are based on average daily balances (dollars in thousands):
Years Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | ||||||||||||||||||||||||||||||||||||||||||
Interest | Average | Interest | Average | Interest | Average | Interest | Average | ||||||||||||||||||||||||||||||||||||||
Average | And | Yield/ | Average | And | Yield/ | Average | and | Yield/ | Average | and | Yield/ | ||||||||||||||||||||||||||||||||||
Balance | Dividends | Rate | Balance | Dividends | Rate | Balance | Dividends | Rate | Balance | Dividends | Rate | ||||||||||||||||||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||||||||||||||||||||||||||
Loans | $ | 75,894 | 4,126 | 5.44 | % | $ | 83,574 | 4,200 | 5.03 | % | 80,691 | 3,865 | 4.79 | % | $ | 77,703 | 4,366 | 5.62 | % | ||||||||||||||||||||||||||
Securities | 18,054 | 366 | 2.03 | 22,686 | 459 | 2.02 | 26,490 | 597 | 2.25 | 30,082 | 959 | 3.11 | |||||||||||||||||||||||||||||||||
Other interest-earning assets (1) | 16,536 | 224 | 1.35 | 11,996 | 105 | 0.88 | 1,273 | 72 | 5.66 | 6,165 | 67 | 1.23 | |||||||||||||||||||||||||||||||||
Total interest-earning assets/interest income | 110,484 | 4,716 | 4.27 | % | 118,256 | 4,764 | 4.03 | % | 108,454 | 4,534 | 4.18 | % | 113,950 | 5,392 | 4.73 | ||||||||||||||||||||||||||||||
Cash and due from banks | 1,121 | 953 | 9,483 | 5,996 | |||||||||||||||||||||||||||||||||||||||||
Premises and equipment | 2,618 | 2,687 | 3,744 | 2,859 | |||||||||||||||||||||||||||||||||||||||||
Other assets | (3,480 | ) | (747 | ) | 3,278 | 5,028 | |||||||||||||||||||||||||||||||||||||||
Total assets | $ | 110,793 | $ | 121,149 | 124,959 | $ | 127,833 | ||||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||||||||||||
Savings, NOW and money-market deposits | 22,062 | 112 | .51 | 23,360 | 117 | 0.50 | 19,314 | 124 | 0.64 | 28,680 | 146 | 0.51 | |||||||||||||||||||||||||||||||||
Time deposits | 50,367 | 562 | 1.11 | 60,813 | 611 | 1.00 | 59,158 | 524 | 0.89 | 60,991 | 516 | 0.85 | |||||||||||||||||||||||||||||||||
Borrowings (4) | 25,672 | 522 | 2.03 | 24,416 | 351 | 1.44 | 23,158 | 236 | 1.02 | 28,004 | 249 | 0.89 | |||||||||||||||||||||||||||||||||
Total interest-bearing liabilities/interest expense | 98,101 | 1,196 | 1.22 | 108,589 | 1,079 | .99 | 101,630 | 884 | 0.87 | 117,675 | 911 | 0.77 | |||||||||||||||||||||||||||||||||
Noninterest-bearing demand deposits | 6,551 | 5,870 | 8,497 | 5,543 | |||||||||||||||||||||||||||||||||||||||||
Other liabilities | 3,380 | 3,526 | 11,771 | 2,340 | |||||||||||||||||||||||||||||||||||||||||
Stockholders’ equity | 2,761 | 3,164 | 3,061 | 2,275 | |||||||||||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 110,793 | $ | 121,149 | 124,959 | $ | 127,833 | ||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 3,520 | 3,685 | 3,650 | 4,481 | ||||||||||||||||||||||||||||||||||||||||
Interest rate spread (2) | 3.05 | 3.04 | 3.31 | 3.96 | |||||||||||||||||||||||||||||||||||||||||
Net interest margin (3) | 3.19 | 3.12 | 3.37 | 3.93 | |||||||||||||||||||||||||||||||||||||||||
Ratio of average interest-earning assets to average interest- bearing liabilities | 1.13 | 1.09 | 1.07 | 0.97 |
Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||
Interest | Average | Interest | Average | Interest | Average | |||||||||||||||||||||||||||||||
Average | And | Yield/ | Average | And | Yield/ | Average | And | Yield/ | ||||||||||||||||||||||||||||
Balance | Dividends | Rate | Balance | Dividends | Rate | Balance | Dividends | Rate | ||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||||||
Loans | $ | 191,561 | 9,756 | 5.09 | % | $ | 130,704 | 6,413 | 4.91 | % | $ | 86,867 | 4,693 | 5.4 | % | |||||||||||||||||||||
Securities | 30,075 | 488 | 1.62 | % | 11,722 | 192 | 1.64 | % | 11,465 | 245 | 2.14 | % | ||||||||||||||||||||||||
Other interest-earning assets (1) | 42,399 | 145 | 0.34 | % | 16,744 | 105 | 0.63 | % | 9,970 | 236 | 2.37 | % | ||||||||||||||||||||||||
Total interest-earning assets/interest income | 264,035 | 10,389 | 3.93 | % | 159,170 | 6,710 | 4.21 | % | 108,302 | 5,174 | 4.78 | % | ||||||||||||||||||||||||
Cash and due from banks | 19,169 | 11,383 | 2,130 | |||||||||||||||||||||||||||||||||
Premises and equipment | 3,045 | 1,660 | 2,915 | |||||||||||||||||||||||||||||||||
Other assets | 3,762 | 1,428 | (983 | ) | ||||||||||||||||||||||||||||||||
Total assets | 290,011 | $ | 173,641 | $ | 112,364 | |||||||||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||
Savings, NOW and money-market deposits | 129,792 | 533 | 0.41 | % | $ | 79,635 | 750 | 0.94 | % | $ | 44,494 | 805 | 1.81 | % | ||||||||||||||||||||||
Time deposits | 16,970 | 118 | 0.69 | % | 29,198 | 527 | 1.8 | % | 30,733 | 698 | 2.27 | % | ||||||||||||||||||||||||
Borrowings (4) | 20,271 | 334 | 1.74 | % | 25,079 | 443 | 1.76 | % | 18,142 | 543 | 2.99 | % | ||||||||||||||||||||||||
Total interest-bearing liabilities/interest expense | 167,033 | 985 | 0.59 | % | 133,912 | 1,720 | 1.28 | % | 93,369 | 2,046 | 2.19 | % | ||||||||||||||||||||||||
Noninterest-bearing demand deposits | 93,758 | 27,439 | 11,557 | |||||||||||||||||||||||||||||||||
Other liabilities | 1,690 | 2,208 | 2,279 | |||||||||||||||||||||||||||||||||
Stockholders’ equity | 27,530 | 10,082 | 5,159 | |||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 290,011 | $ | 173,641 | $ | 112,364 | ||||||||||||||||||||||||||||||
Net interest income | 9,404 | 4,990 | 3,128 | |||||||||||||||||||||||||||||||||
Interest rate spread (2) | 3.34 | % | 2.93 | % | 2.59 | % | ||||||||||||||||||||||||||||||
Net interest margin (3) | 3.56 | % | 3.14 | % | 2.89 | % | ||||||||||||||||||||||||||||||
Ratio of average interest-earning assets to average interest- bearing liabilities | 1.58 | 1.19 | 1.16 |
Includes interest-earning deposits with banks, Federal funds sold and Federal Home Loan Bank stock dividends. | |
Interest rate spread represents the difference between average yield on interest-earning assets and the average cost of interest-bearing liabilities. | |
Net interest margin is net interest income divided by average interest-earning assets. | |
Includes Federal Home Loan Bank advances and the junior subordinated |
Rate/Volume Analysis
The following tables set forth certain information regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate (change in rate multiplied by prior volume), (2) changes in volume (change in volume multiplied by prior rate) and (3) changes in rate-volume (change in rate multiplied by change in volume) (in thousands):
Year Ended December 31, | ||||||||||||||||||||||||||||||||
2021 versus 2020 | ||||||||||||||||||||||||||||||||
Year Ended December 31, 2017 versus 2016 Increases (Decreases) Due to Change In: | Increases (Decreases) Due to Change In: | |||||||||||||||||||||||||||||||
Rate | Volume | Rate/ Volume | Total | Rate | Volume | Rate/Volume | Total | |||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||
Loans | $ | 299 | $ | (386 | ) | $ | (27 | ) | $ | (114 | ) | $ | 244 | $ | 2,986 | $ | 113 | $ | 3,343 | |||||||||||||
Securities | 1 | (94 | ) | — | (93 | ) | (2 | ) | 301 | (3 | ) | 296 | ||||||||||||||||||||
Other interest-earning assets | 58 | 40 | 21 | 119 | (48 | ) | 161 | (73 | ) | 40 | ||||||||||||||||||||||
Total interest-earning assets | 358 | (440 | ) | (6 | ) | (88 | ) | 194 | 3,448 | 37 | 3,679 | |||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||
Savings, NOW and money-market | 2 | (7 | ) | — | (5 | ) | (423 | ) | 472 | (265 | ) | (216 | ) | |||||||||||||||||||
Time deposits | 68 | (105 | ) | (12 | ) | (49 | ) | (325 | ) | (221 | ) | 136 | (410 | ) | ||||||||||||||||||
Other | 145 | 18 | 7 | 170 | (4 | ) | (106 | ) | 1 | (109 | ) | |||||||||||||||||||||
Total interest-bearing liabilities | 215 | (94 | ) | (5 | ) | 116 | (752 | ) | 145 | (128 | ) | (735 | ) | |||||||||||||||||||
Net interest income | $ | 143 | $ | (346 | ) | $ | (1 | ) | $ | (204 | ) | $ | 946 | $ | 3,303 | $ | 165 | $ | 4,414 |
Year Ended December 31, | ||||||||||||||||||||||||||||||||
2020 versus 2019 | ||||||||||||||||||||||||||||||||
Year Ended December 31, 2016 versus 2015 Increases (Decreases) Due to Change In: | Increases (Decreases) Due to Change In: | |||||||||||||||||||||||||||||||
Rate | Volume | Rate/ Volume | Total | Rate | Volume | Rate/ Volume | Total | |||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||
Loans | $ | 190 | $ | 138 | $ | 7 | $ | 335 | $ | (431 | ) | $ | 2,369 | $ | (218 | ) | $ | 1,720 | ||||||||||||||
Securities | (61 | ) | (86 | ) | 9 | (138 | ) | (58 | ) | 5 | (2 | ) | (55 | ) | ||||||||||||||||||
Other interest-earning assets | (61 | ) | 607 | (513 | ) | 33 | (173 | ) | 159 | (118 | ) | (132 | ) | |||||||||||||||||||
Total interest-earning assets | 68 | 659 | (497 | ) | 230 | (662 | ) | 2,533 | (338 | ) | 1,533 | |||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||
Savings, NOW and money-market | (27 | ) | 26 | (6 | ) | (7 | ) | (386 | ) | 635 | (305 | ) | (56 | ) | ||||||||||||||||||
Time deposits | 70 | 15 | 2 | 87 | (144 | ) | (35 | ) | 7 | (172 | ) | |||||||||||||||||||||
Other | 97 | 13 | 5 | 115 | (224 | ) | 210 | (86 | ) | (100 | ) | |||||||||||||||||||||
Total interest-bearing liabilities | 140 | 54 | 1 | 195 | (754 | ) | 810 | (384 | ) | (328 | ) | |||||||||||||||||||||
Net interest income | $ | (72 | ) | $ | 605 | $ | (498 | ) | $ | 35 | $ | 92 | $ | 1,723 | $ | 46 | $ | 1,861 |
Financial Condition as of December 31, 20172021 Compared to December 31, 20162020
The Company’s total assets decreased by $23.8 million at December 31, 2017,2021, were $351.8 million, an increase of $116.7 million from $119.7December 31, 2020. The increase of $116.7 million in total assets primarily consisted of increases of $4.3 million in cash and cash equivalents, $13.1 million in debt securities and $95.4 million in net loans. The Company experienced growth across the various loan types due to $95.9new organic originations. The net increase in loans resulted from $29.4 million in multi-family real estate loans, $55.1 million in commercial real estate loans and $17.1 million in consumer loans.
The Company’s total liabilities at December 31, 2017.2021, were $313.4 million, an increase of $96 million from December 31, 2020. The increase of $96 million in total liabilities was mainly due to an increase of $101.7 million in total deposits and a decrease of $5 million in Federal Home Loan Bank advances.
The Company’s total stockholders’ equity at December 31, 2021, was $38.5 million, an increase of $20.6 million. The increase of $20.6 was principally due to the Company’s issuance of shares of Series B Participating Preferred Stock for an aggregate amount of $9 million, issuance of common stock for an aggregate amount of $5.9 million and net income of $6.3 million.
At December 31, 2017,2021, the Bank had a Tier 1 leverage ratio of 8.89%, and a total risk-based10.64%.
Junior Subordinated Debenture.
In 2004, the Company formed OptimumBank Capital Trust I (the “Trust”) for the purpose of raising capital ratio of 15.08%, both of which were in excess of the 8% and 12% requirements of the Consent Order. The Company’s capital was enhanced during 2017 through the sale of $30,000trust preferred securities. At that time, the Trust raised $5,155,000 through the sale of 5,000 trust preferred securities (the “Trust Preferred Securities”) to a third-party investor and the issuance of 155 common trust securities to the Company. The Trust utilized the proceeds of $5,155,000 to purchase a junior subordinated debenture from the Company (the “Junior Subordinated Debenture”). The outstanding principal amount of the Junior Subordinated Debenture at December 31, 2020, was $2,068,000.
During the year ended December 31, 2021, the Company acquired all of the outstanding Trust Preferred Securities and paid all accrued interest in exchange for 700,614 shares of the Company’s common stock. These shares were issued in the following transactions:
TheDuring the first quarter of 2021, the Company may need to sell additionalissued 11,042 shares of common stock to complypay approximately $41,000 of accrued interest associated with the capital requirements throughJunior Subordinated Debenture.
During the endsecond quarter of 2018 and in subsequent years. At the present time,2021, the Company has not received any commitments from any third parties to purchase any additional shares. Accordingly, it is uncertain whetherissued 282,377 shares of common stock in exchange for 840 Trust Preferred Securities. For accounting purposes, the Trust Preferred Securities acquired by the Company willwere deemed to be able to obtain the capital that is required or the price and terms of any capital that is obtained.
The Company is in default with respect to its $5,155,000 Junior Subordinated Debenture (“Debenture”) due to its failure to make certain required interest payments under the Debenture. The Trustee of the Debenture (the “Trustee”) or the holders of the Debenture are entitled to accelerate the payment of the $5,155,000 principal balance plus accrued and unpaid interest totaling $1,375,011 at December 31, 2017. To date the Trustee has not accelerated the outstanding balance of the Debenture. No adjustments to the accompanying consolidated financial statements have been made ascancelled. As a result, of this uncertainty.
Management’s plans with regard to this matter are as follows: A Director of the Company has offered to purchase the Debenture and this offer has been approved by certain equity ownerscancelled $840,000 in principal amount of the Trust that holdsPreferred Securities, together with accrued interest of $7,000, and increased its stockholders’ equity by the Debenture. The Director has offered to enter into a forbearance agreement withsame amount.
During the third quarter of 2021, the Company with respectissued 407,195 shares of common stock in exchange for the remaining 1,228 Trust Preferred Securities. For accounting purposes, the Trust Preferred Securities acquired by the Company were deemed to payments due underbe cancelled. As a result, the Debenture upon consummation of the Director’s purchase of the Debenture.
In March 2016, the Trustee received a direction from certain equity ownersCompany cancelled $1,221,000 in principal amount of the Trust that holdsPreferred Securities and increased its stockholders’ equity by the Debenture to sell the Debenture to a Director of the Company. Based upon the receipt of conflicting directions from other debt holders of the Trust, in August 2016, the Trustee commenced an action in a Minnesota State Court seeking directions from the Court. The case was subsequently transferred to United States District Court for the Southern District of New York, where the case is currently pending. The Company continues to pursue mechanisms for paying the accrued interest, such as raising additional capital.same amount.
In the event the amounts due under the Debenture were accelerated, then the Trustee could undertake legal proceedings to obtain a judgment against the Company with respect to such amounts due under the Debenture. If this action were successful, then the Trustee could seek to affect a sale of the Bank to pay the amounts due under the Debenture.
Results of Operations for Year Ended December 31, 20172021 Compared to Year Ended December 31, 20162020
Years Ended December 31, | Increase / (Decrease) | |||||||||||||||
(dollars in thousands) | 2021 | 2020 | Amount | Percentage | ||||||||||||
Total interest income | $ | 10,389 | $ | 6,710 | $ | 3,679 | 55 | % | ||||||||
Total interest expense | 985 | 1,720 | (735 | ) | (43 | )% | ||||||||||
Net interest income | 9,404 | 4,990 | 4,414 | 88 | % | |||||||||||
Provision for loan losses | 1,173 | 1,020 | 153 | 15 | % | |||||||||||
Net interest income after provision for loan losses | 8,231 | 3,970 | 4,261 | 107 | % | |||||||||||
Total noninterest income | 1,774 | 294 | 1,480 | 503 | % | |||||||||||
Total noninterest expenses | 6,936 | 5,046 | 1,890 | 37 | % | |||||||||||
Net income (loss) before income tax benefit | 3,069 | (782 | ) | 3,851 | 492 | % | ||||||||||
Income tax benefit | (3,227 | ) | - | (3,227 | ) | 100 | % | |||||||||
Net income (loss) | $ | 6,296 | $ | (782 | ) | $ | 7,078 | 905 | % | |||||||
Net income (loss) per share - Basic and diluted | $ | 1.61 | $ | (0.27 | ) |
General. Net lossIncome (Loss). The Company had net income of $0.6 million or $(.53) loss per basic and diluted share for the year ended December 31, 2017 compared to net loss for the year ended December 31, 2016 of $0.4 million or $(.38) per basic and diluted share.
Interest income. Interest income decreased to $4.7$6.3 million for the year ended December 31, 20172021 compared to $4.8a net loss of ($782,000) for the year ended December 31, 2020. The Company recorded a provision for loan losses amounting to $1,173,000 during year ended December 31, 2021, which was largely due to the growth in the loan portfolio of $95.6 million. The Company recorded a provision for loan losses amounting to $1,020,000 during the year ended December 31, 2020.
Interest Income. Interest income increased by $3.7 million to $10.4 million for the year ended December 31, 2016. Interest on loans decreased by $74,000 due to an overall decrease in the loan portfolio during 2017. Interest on securities decreased by $93,000 due to a decrease in average balance of securities in 2017 compared to 2016. Interest income or overnight funds increased by $119,000 to offset the reduction in interest income2021 from loans and investments.
Interest expense. Interest expense on deposits was $674,000 in$6.7 million for the year ended December 31, 2017 compared2020, primarily due to $728,000an increase in loan volume.
25 |
Interest Expense. Interest expense on deposits and borrowings decreased by $735,000 to $985,000 for the year ended December 31, 2016. Interest expense on borrowings was $522,000 in the year ended December 31, 20172021 compared to $351,000the prior year. The decrease in the year ended December 31, 2016.interest expense was caused by a reduction in interest rates paid on deposits and borrowings offset by volume increases in deposits and borrowings.
Provision for Loan Losses. There was noThe provision for loan losses recorded forduring the yearsyear ended December 31, 2017 and 2016.2021 amounted to $1,173,000. The provision for loan losses is charged to operations as losses are estimated to have occurred in order to bring the total allowance for loan losses to a level deemed appropriate by management to absorb losses inherent in the loan portfolio at December 31, 2017.portfolio. Management’s periodic evaluation of the adequacy of the allowance is based upon historical experience, the volume and type of lending conducted by it,us, adverse situations that may affect the borrower’s ability to repay, estimated value of the underlying collateral, loans identified as impaired, general economic conditions, particularly as they relate to itsour market areas, and other qualitative factors related to the estimated collectability of itsour loan portfolio. The allowance for loan losses totaled $4.0$3.1 million or 5.55%1.22% of loans outstanding at December 31, 2017,2021, compared to $ 3.9$1.9 million or 4.87%1.23% of loans outstanding at December 31, 2016. Management believes the balance in the allowance for loan losses at December 31, 2017 is significantly over funded and has requested a permission to reduce the allowance for loan lease losses from the regulating authorities.2020.
On January 6, 2016, the Bank completed a sale of a judgement on a defaulted credit that resulted in a $1.8 million recovery of previously charged-off amounts to the Allowance for Loan and Lease Losses (“ALLL”). This increased the balance of the ALLL to approximately $4.0 million at December 31, 2017. The Bank has submitted a second written request to the FDIC for a partial reversal of the ALLL. Management does not expect a response until the next safety and soundness examination which is expected to be performed in first and second quarters of 2018.
Noninterest Income. Total noninterest income increased to $52,000by $1,480,000 for the year ended December 31, 2017,2021, from ($144,000)$294,000 for the year ended December 31, 20162020. The increase is primarily duerelated to lossservice charges on sale of securities during 2016.deposit payment transactions.
Noninterest Expenses.. Total noninterest expenses increased by $224,000 for the year ended December 31, 2017, from $3.9$1,890,000 to $6.9 million for the year ended December 31, 20162021, compared to $4.2$5 million for the year ended December 31, 2017,2020 primarily due to an accrual related to a BSA look back project.increase in salaries and employee benefits and data processing.
Income Taxes.COVID-19 Related Loan Data Income taxes for the years ended
Paycheck Protection Program (“PPP”). As of December 31, 2017 and 2016 were $0 and $0, respectively. Income tax benefit2021, the Bank had originated 502 PPP loans for 2016 results froma total dollar amount of $37.4 million. These loans are 100% guaranteed by the closure with no adjustment with respect to the Internal Revenue Service examination of the Bank’s 2010 and 2009 income tax returns.
Results of Operations for Year EndedSmall Business Administration (the “SBA”). At December 31, 2016 Compared to Year Ended December 31, 20152021, outstanding amount of these PPP loans was approximately $10 million.
General. Net loss for the year ended December 31, 2016, was $400,000 or $(.38) per basic and diluted share compared to net loss of $200,000 or $(.17) earnings per basic and diluted share for the year ended December 31, 2015. This $200,000 increase in net loss was primarily the result of the decrease in non-interest income of $500,000 and increase in noninterest expenses of $1.1 million.
Interest income. Interest income decreased to $4.8 million for the year ended December 31, 2016 compared to $4.5 million for the year ended December 31, 2015. Interest on loans increased by $335,000 due to a increase in average yield in 2016 compared to 2015. Interest on securities decreased by $138,000 due to a decrease in average balance of securities in 2016 compared to 2015, and by a decrease in average yield earned in 2016 compared to 2015.
Interest expense. Interest expense on deposits was $728,000 in the year ended December 31, 2016 compared to $648,000 in the year ended December 31, 2015. Interest expense on borrowings was $351,000 in the year ended December 31, 2016 compared to $236,000 in the year ended December 31, 2015.
Provision for Loan Losses. There was no provision for loan losses recorded for the years ended December 31, 2016 and 2015. The provision for loan losses is charged to operations as losses are estimated to have occurred in order to bring the total allowance for loan losses to a level deemed appropriate by management to absorb losses inherent in the loan portfolio at December 31, 2016. Management’s periodic evaluation of the adequacy of the allowance is based upon historical experience, the volume and type of lending conducted by it, adverse situations that may affect the borrower’s ability to repay, estimated value of the underlying collateral, loans identified as impaired, general economic conditions, particularly as they relate to its market areas, and other qualitative factors related to the estimated collectability of its loan portfolio. The allowance for loan losses totaled $3.9 million or 4.87% of loans outstanding at December 31, 2016, compared to $2.3 million or 2.71% of loans outstanding at December 31, 2015. Management believes the balance in the allowance for loan losses at December 31, 2016 is adequate.
On January 6, 2016, the Bank completed a sale of a judgement on a defaulted credit that resulted in a $1.8 million recovery of previously charged-off amounts to the Allowance for Loan and Lease Losses (“ALLL”). This increased the balance of the ALLL to approximately $3.9 million at December 31, 2016. The Bank has submitted a written request to the FDIC for a partial reversal of the ALLL. Management does not expect a response until the next safety and soundness examination which is expected to be performed in first and second quarters of 2017.
Noninterest Income. Total noninterest income decreased to $(144,000) for the year ended December 31, 2016, from $412,000 for the year ended December 31, 2015, primarily due to loss on sale of securities.
Noninterest Expenses. Total noninterest expenses decreased by $0.6 million, to $3.9 million for the year ended December 31, 2016 from $4.5 million for the year ended December 31, 2015, partially due to a non-recurring gain on sale of foreclosed real estate of $147,000 in 2016.
Income Taxes. Income taxes (benefit) for the years ended December 31, 2016 and 2015 were $0 and $(320,000), respectively. Income tax benefit for 2015 results from the closure with no adjustment with respect to the Internal Revenue Service examination of the Bank’s 2010 and 2009 income tax returns.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, substantially all of the Bank’s assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on its performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, since such prices are affected by inflation to a larger extent than interest rates.
Item 8.Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors
OptimumBank Holdings, Inc.
Fort Lauderdale, Florida:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of OptimumBank Holdings, Inc. and Subsidiarysubsidiary (the “Company”), as of December 31, 20172021 and 20162020 and the related consolidated statements of operations, comprehensive loss,income (loss), stockholders’ equity and cash flows for the years then ended and the related notes (collectively referred to as the “financial“consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 20172021 and 2016,2020, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in notes 1, 7 and 13 to the consolidated financial statements, the Company is in technical default with respect to its Junior Subordinated Debenture (“Debt Securities”). The holders of the Debt Securities could demand immediate payment of the outstanding debt of $5,155,000 and accrued and unpaid interest, which raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to this matter are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, the Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of General Reserve Portion of the Allowance for Loan Losses - Evaluation of the Qualitative Adjustments
As described in Notes 1 and 3 to the consolidated financial statements, management determines the general reserve portion of the allowance for loan losses using actual historical loss experience for each individual loan category, as well as evaluating whether qualitative adjustments are necessary. As of December 31, 2021, the allowance for loan losses was $3.1 million which consists of two components: the allowance for loans individually evaluated for impairment (“special reserves”), and the allowance for loans collectively evaluated for impairment (“general reserve”), representing $3.1 million. The general reserve covers loans that are not individually classified as impaired. In evaluating whether qualitative adjustments are necessary, management considers (1) changes in national, regional and local economic conditions that affect the collectability of the loan portfolio (2) changes in collateral value of loans (3) changes in lending policies and procedures, risk selection and underwriting standards (4) changes in the volume and severity of past due loans, nonaccrual loans or loans classified special mention, substandard, doubtful or loss (5) the existence and effect of any concentrations of credit and changes in the level of such concentrations (6) changes in the nature and volume of the loan portfolio and terms of loans, (7) changes in the experience, ability and depth of lending management and other relevant staff, (8) quality of loan review, (9) the effect of other external factors, trends or uncertainties that could affect management’s estimate of probable losses, such as competition and industry conditions.
The principal considerations for our determination that performing procedures relating to the evaluation of qualitative adjustments used in the calculation of the general reserve portion of the allowance for loan losses is a critical audit matter are as follows: Significant judgment used by management when evaluating the qualitative adjustments, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing audit procedures and evaluating audit evidence relating to the qualitative adjustments.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included among others, testing management’s process for evaluating qualitative adjustments by (i) evaluating the appropriateness of the methodology management used in evaluating the qualitative adjustments, (ii) testing the inputs used in the estimate of qualitative adjustments, including the completeness and accuracy of underlying historical loss data, and (iii) evaluating the reasonableness of the qualitative adjustments given current microeconomic trends and portfolio characteristics.
(PCAOB ID: 400)
/s/HACKER, JOHNSON & SMITH PA | |
We have served as the Company’s auditor since 2000. | |
March |
27 |
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
2021 | 2020 | |||||||
December 31, | ||||||||
2021 | 2020 | |||||||
Assets: | ||||||||
Cash and due from banks | $ | 13,681 | $ | 25,523 | ||||
Interest-bearing deposits with banks | 45,289 | 29,106 | ||||||
Total cash and cash equivalents | 58,970 | 54,629 | ||||||
Debt securities available for sale | 34,394 | 18,893 | ||||||
Debt securities held-to-maturity (fair value of $1,071 and $3,549) | 1,040 | 3,399 | ||||||
Loans, net of allowance for loan losses of $3,075 and $1,906 | 247,902 | 152,469 | ||||||
Federal Home Loan Bank stock | 793 | 1,092 | ||||||
Premises and equipment, net | 843 | 1,413 | ||||||
Right-of-use operating lease assets | 1,737 | 904 | ||||||
Accrued interest receivable | 971 | 1,336 | ||||||
Deferred tax asset | 3,442 | — | ||||||
Other assets | 1,786 | 977 | ||||||
Total assets | $ | 351,878 | $ | 235,112 | ||||
Liabilities and Stockholders’ Equity: | ||||||||
Liabilities: | ||||||||
Noninterest-bearing demand deposits | $ | 124,119 | $ | 58,312 | ||||
Savings, NOW and money-market deposits | 155,102 | 110,704 | ||||||
Time deposits | 13,236 | 21,743 | ||||||
Total deposits | 292,457 | 190,759 | ||||||
Federal Home Loan Bank advances | 18,000 | 23,000 | ||||||
Junior subordinated debenture | - | 2,068 | ||||||
Official checks | 140 | 142 | ||||||
Operating lease liabilities | 1,775 | 923 | ||||||
Other liabilities | 996 | 386 | ||||||
Total liabilities | 313,368 | 217,278 | ||||||
Commitments and contingencies (Notes 8 and 14) | - | |||||||
Stockholders’ equity: | ||||||||
Preferred stock, 0 par value; shares authorized: | ||||||||
Series A Preferred, 0 par value, shares issued and outstanding | — | — | ||||||
Series B Preferred, 0 par value, shares authorized,and shares issued and outstanding in 2021 and 2020 | — | — | ||||||
Common stock, $ par value; shares authorized, and shares issued and outstanding in 2021 and 2020 | 48 | 32 | ||||||
Additional paid-in capital | 65,193 | 50,263 | ||||||
Accumulated deficit | (26,096 | ) | (32,392 | ) | ||||
Accumulated other comprehensive loss | (635 | ) | (69 | ) | ||||
Total stockholders’ equity | 38,510 | 17,834 | ||||||
Total liabilities and stockholders’ equity | $ | 351,878 | $ | 235,112 |
See accompanying notes to Consolidated Financial Statements
28 |
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(In thousands)
2021 | 2020 | |||||||
Year Ended December 31, | ||||||||
2021 | 2020 | |||||||
Interest income: | ||||||||
Loans | $ | 9,756 | $ | 6,413 | ||||
Debt securities | 488 | 192 | ||||||
Other | 145 | 105 | ||||||
Total interest income | 10,389 | 6,710 | ||||||
Interest expense: | ||||||||
Deposits | 651 | 1,277 | ||||||
Borrowings | 334 | 443 | ||||||
Total interest expense | 985 | 1,720 | ||||||
Net interest income | 9,404 | 4,990 | ||||||
Provision for loan losses | 1,173 | 1,020 | ||||||
Net interest income after provision for loan losses | 8,231 | 3,970 | ||||||
Noninterest income: | ||||||||
Service charges on deposits | 1,331 | 272 | ||||||
Gain on sale of premises and equipment, net | 340 | - | ||||||
Other | 103 | 22 | ||||||
Total noninterest income | 1,774 | 294 | ||||||
Noninterest expenses: | ||||||||
Salaries and employee benefits | 3,653 | 2,324 | ||||||
Professional fees | 563 | 558 | ||||||
Occupancy and equipment | 650 | 570 | ||||||
Data processing | 765 | 546 | ||||||
Insurance | 95 | 85 | ||||||
Regulatory assessment | 164 | 158 | ||||||
Other | 1,046 | 805 | ||||||
Total noninterest expenses | 6,936 | 5,046 | ||||||
Net income (loss) before income tax benefit | 3,069 | (782 | ) | |||||
Income tax benefit | (3,227) | - | ||||||
Net income (loss) | $ | 6,296 | $ | (782 | ) | |||
Net income (loss) per share - basic and diluted | $ | 1.61 | $ | (0.27 | ) |
See Accompanying Notes to Consolidated Financial Statements.
29 |
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
2021 | 2020 | |||||||
Year Ended | ||||||||
December 31, | ||||||||
2021 | 2020 | |||||||
Net income (loss) | 6,296 | $ | (782 | ) | ||||
Other comprehensive (loss) income: | ||||||||
Change in unrealized (loss) gain on debt securities- | ||||||||
Unrealized (loss) gain arising during the year | (891 | ) | 39 | |||||
Amortization of unrealized loss on debt securities transferred to held-to-maturity | 110 | 140 | ||||||
Other comprehensive (loss) income before income tax benefit (expense) | (781 | ) | 179 | |||||
Deferred income tax benefit (expense) on above change | 215 | (43 | ) | |||||
Total other comprehensive (loss) income | (566 | ) | 136 | |||||
Comprehensive income (loss) | 5,730 | $ | (646 | ) |
See Accompanying Notes to Consolidated Financial Statements.
30 |
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
Statements of Stockholders’ Equity
Years Ended December 31, 2021 and 2020
(Dollars in thousands except per share amounts)
December 31, | December 31, | |||||||
2017 | 2016 | |||||||
Assets: | ||||||||
Cash and due from banks | $ | 11,233 | $ | 17,563 | ||||
Interest-bearing deposits with banks | 432 | 77 | ||||||
Total cash and cash equivalents | 11,665 | 17,640 | ||||||
Securities available for sale | 11,437 | 20,222 | ||||||
Loans, net of allowance for loan losses of $3,991 and $3,915 | 68,220 | 76,999 | ||||||
Federal Home Loan Bank stock | 979 | 1,113 | ||||||
Premises and equipment, net | 2,593 | 2,648 | ||||||
Accrued interest receivable | 316 | 380 | ||||||
Other assets | 656 | 701 | ||||||
Total assets | $ | 95,866 | $ | 119,703 | ||||
Liabilities and Stockholders’ Equity: | ||||||||
Liabilities: | ||||||||
Noninterest-bearing demand deposits | 12,632 | 7,209 | ||||||
Savings, NOW and money-market deposits | 22,045 | 22,153 | ||||||
Time deposits | 30,574 | 56,725 | ||||||
Total deposits | 65,251 | 86,087 | ||||||
Federal Home Loan Bank advances | 20,500 | 23,500 | ||||||
Junior subordinated debenture | 5,155 | 5,155 | ||||||
Advanced payment by borrowers for taxes and insurance | 7 | 221 | ||||||
Official checks | 39 | 36 | ||||||
Other liabilities | 2,369 | 1,623 | ||||||
Total liabilities | 93,321 | 116,622 | ||||||
Commitments and contingencies (Notes 1, 4, 7, 8, 13 and 17) | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, no par value; 6,000,000 shares authorized: Designated Series A, no par value, $25,000 liquidation value per share,7 shares issued and outstanding in 2017 and 2016 | — | — | ||||||
Common stock, $.01 par value; 5,000,000 shares authorized, 1,120,947 shares issued and outstanding in 2017 and 1,103,447 shares issued and outstanding in 2016 | 11 | 11 | ||||||
Additional paid-in capital | 34,090 | 34,039 | ||||||
Accumulated deficit | (31,306 | ) | (30,717 | ) | ||||
Accumulated other comprehensive loss | (250 | ) | (252 | ) | ||||
Total stockholders’ equity | 2,545 | 3,081 | ||||||
Total liabilities and stockholders’ equity | $ | 95,866 | $ | 119,703 |
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||||||||||||||
Preferred | Preferred | Accumulated | ||||||||||||||||||||||||||||||||||||||
Stock | Stock | Additional | Other | Total | ||||||||||||||||||||||||||||||||||||
Series A | Series B | Common Stock | Paid-In | Accumulated | Comprehensive | Stockholders’ | ||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||||||||||||||
Balance at December 31, 2019 | — | $ | — | — | $ | — | 2,853,171 | $ | 28 | $ | 38,994 | $ | (31,610 | ) | $ | (205 | ) | $ | 7,207 | |||||||||||||||||||||
Proceeds from the sale of preferred stock | — | — | 400 | — | — | — | 10,000 | — | — | 10,000 | ||||||||||||||||||||||||||||||
Proceeds from the sale of common stock | — | — | — | — | 98,182 | 1 | 539 | — | — | 540 | ||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 80,602 | 1 | 218 | — | — | 219 | ||||||||||||||||||||||||||||||
Common stock issued for junior subordinated debenture interest payable | ||||||||||||||||||||||||||||||||||||||||
Common stock issued for junior subordinated debenture interest payable, shares | ||||||||||||||||||||||||||||||||||||||||
Common stock issued in exchange for Trust Preferred Securities | — | — | — | — | 171,500 | 2 | 512 | — | — | 514 | ||||||||||||||||||||||||||||||
Net change in unrealized gain on debt securities available for sale, net of income taxes | — | — | — | — | — | — | — | — | 30 | 30 | ||||||||||||||||||||||||||||||
Amortization of unrealized loss on debt securities transferred to held-to-maturity | — | — | — | — | — | — | — | — | 106 | 106 | ||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | (782 | ) | — | (782 | ) | ||||||||||||||||||||||||||||
Balance at December 31, 2020 | — | — | 400 | — | 3,203,455 | 32 | 50,263 | (32,392 | ) | (69 | ) | 17,834 | ||||||||||||||||||||||||||||
Proceeds from the sale of preferred stock | — | — | 360 | — | — | — | 9,000 | — | — | 9,000 | ||||||||||||||||||||||||||||||
Proceeds from the sale of common stock | — | — | 809,100 | 9 | 3,629 | — | — | 3,638 | ||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 62,112 | — | 199 | — | — | 199 | ||||||||||||||||||||||||||||||
Common stock issued for junior subordinated debenture interest payable | 11,042 | — | 41 | — | — | 41 | ||||||||||||||||||||||||||||||||||
Common stock issued in exchange for Trust Preferred Securities | — | — | — | — | 689,572 | 7 | 2,061 | — | — | 2,068 | ||||||||||||||||||||||||||||||
Net change in unrealized gain on debt securities available for sale, net of income taxes | — | — | — | — | — | — | — | — | (676 | ) | (676 | ) | ||||||||||||||||||||||||||||
Amortization of unrealized loss on debt securities transferred to held-to-maturity | — | — | — | — | — | — | — | — | 110 | 110 | ||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | 6,296 | — | 6,296 | ||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | — | — | — | 6,296 | — | 6,296 | ||||||||||||||||||||||||||||||
Balance at December 31, 2021 | — | — | 760 | — | 4,775,281 | 48 | 65,193 | (26,096 | ) | (635 | ) | 38,510 |
See accompanying notesAccompanying Notes to Consolidated Financial StatementsStatements.
31 |
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Cash Flows
(In thousands, except share amounts)thousands)
Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
Interest income: | ||||||||
Loans | $ | 4,126 | $ | 4,200 | ||||
Securities | 366 | 459 | ||||||
Other | 224 | 105 | ||||||
Total interest income | 4,716 | 4,764 | ||||||
Interest expense: | ||||||||
Deposits | 674 | 728 | ||||||
Borrowings | 522 | 351 | ||||||
Total interest expense | 1,196 | 1,079 | ||||||
Net interest income | 3,520 | 3,685 | ||||||
Provision for loan losses | — | — | ||||||
Net interest income after provision for loan losses | 3,520 | 3,685 | ||||||
Noninterest income (loss): | ||||||||
Service charges and fees | 26 | 24 | ||||||
Other | 15 | 18 | ||||||
Gain(loss) on sale of securities available for sale | 11 | (186 | ) | |||||
Total noninterest income (loss) | 52 | (144 | ) | |||||
Noninterest expenses: | ||||||||
Salaries and employee benefits | 1,770 | 1,774 | ||||||
Occupancy and equipment | 415 | 495 | ||||||
Data processing | 342 | 333 | ||||||
Professional fees | 784 | 659 | ||||||
Insurance | 95 | 103 | ||||||
Foreclosed real estate expenses | — | (123 | ) | |||||
Regulatory assessments | 202 | 253 | ||||||
Other | 553 | 443 | ||||||
Total noninterest expenses | 4,161 | 3,937 | ||||||
Loss before income tax benefit | (589 | ) | (396 | ) | ||||
Income tax benefit | — | — | ||||||
Net loss | $ | (589 | ) | $ | (396 | ) | ||
Net loss per share: | ||||||||
Basic | $ | (.53 | ) | $ | (0.38 | ) | ||
Diluted | $ | (.53 | ) | $ | (0.38 | ) |
2021 | 2020 | |||||||
Year Ended December 31, | ||||||||
2021 | 2020 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | 6,296 | $ | (782 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
Provision for loan losses | 1,173 | 1,020 | ||||||
Depreciation and amortization | 210 | 176 | ||||||
Deferred income tax benefit | (3,227 | ) | — | |||||
Stock-based compensation | 199 | 219 | ||||||
Net accretion of fees, premiums and discounts | (772 | ) | (37 | ) | ||||
Gain on sale of premises and equipment, net | (340 | ) | — | |||||
Loss on sale of foreclosed real estate, net | — | 7 | ||||||
Decrease (increase) in accrued interest receivable | 365 | (904 | ) | |||||
Amortization of right-of-use operating lease assets | 92 | 151 | ||||||
Net decrease in operating lease liabilities | (73 | ) | (138 | ) | ||||
Increase in other assets | (809 | ) | (172 | ) | ||||
Increase (decrease) in official checks and other liabilities | 649 | (998 | ) | |||||
Net cash provided by (used in) operating activities | 3,763 | (1,458 | ) | |||||
Cash flows from investing activities: | ||||||||
Purchase of debt securities available for sale | (19,513 | ) | (15,720 | ) | ||||
Principal repayments of debt securities available for sale | 2,915 | 2,220 | ||||||
Principal repayments of debt securities held-to-maturity | 2,409 | 2,473 | ||||||
Net increase in loans | (95,568 | ) | (51,771 | ) | ||||
Proceeds from sale of foreclosed real estate | — | 674 | ||||||
Purchases of premises and equipment | (381 | ) | (200 | ) | ||||
Proceeds from sale of premises and equipment | 1,081 | — | ||||||
Redemption (purchase) of FHLB stock | 299 | (450 | ) | |||||
Net cash used in investing activities | (108,758 | ) | (62,774 | ) | ||||
Cash flows from financing activities: | ||||||||
Net increase in deposits | 101,698 | 89,387 | ||||||
Net (decrease) increase in Federal Home Loan Bank advances | (5,000 | ) | 10,000 | |||||
Proceeds from sale of common stock | 3,638 | 540 | ||||||
Proceeds from sale of preferred stock | 9,000 | 10,000 | ||||||
Net cash provided by financing activities | 109,336 | 109,927 | ||||||
Net increase in cash and cash equivalents | 4,341 | 45,695 | ||||||
Cash and cash equivalents at beginning of the year | 54,629 | 8,934 | ||||||
Cash and cash equivalents at end of the year | $ | 58,970 | $ | 54,629 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the year for: | ||||||||
Interest | $ | 1,041 | $ | 2,681 | ||||
Income taxes | $ | — | $ | — | ||||
Noncash transactions: | ||||||||
Change in accumulated other comprehensive (loss) income, net change in unrealized (loss) gain on debt securities available for sale, net of income taxes | $ | (566 | ) | $ | 136 | |||
Amortization of unrealized loss on debt securities transferred to held-to-maturity | $ | 110 | $ | 140 | ||||
Right-of use lease assets obtained in exchange for operating lease liabilities | $ | 925 | $ | — | ||||
Issuance of common stock in exchange for Junior Subordinated Debenture | $ | 2,068 | $ | 514 | ||||
Transfer of loan to foreclosed real estate | $ | — | $ | 681 | ||||
Issuance of common stock for Junior Subordinated Debenture interest payable | $ | 41 | $ | — |
See Accompanying Notes to Consolidated Financial Statements.
32 |
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Loss(In thousands)
Year Ended | ||||||||
December 31, | ||||||||
2017 | 2016 | |||||||
Net loss | $ | (589 | ) | $ | (396 | ) | ||
Other comprehensive income (loss): | ||||||||
Unrealized loss on securities available for sale: | ||||||||
Unrealized gain (loss) arising during the year | 82 | (366 | ) | |||||
Reclassification adjustment for realized (gain) loss on sale of securities available for sale | (11 | ) | 186 | |||||
Net change in unrealized holding loss | 71 | (180 | ) | |||||
Deferred income taxes (benefit) on above change | 69 | (66 | ) | |||||
Total other comprehensive income (loss) | 2 | (114 | ) | |||||
Comprehensive loss | $ | (587 | ) | $ | (510 | ) |
See Accompanying Notes to Consolidated Financial Statements.
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2017 and 2016(Dollars in thousands)
Accumulated | ||||||||||||||||||||||||||
Preferred | Other | |||||||||||||||||||||||||
Stock | Additional | Compre- | Total | |||||||||||||||||||||||
Series A | Common Stock | Paid-In | Accumulated | hensive | Stockholders’ | |||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||
Balance at December 31, 2015 | 4 | $ | — | 9,628,863 | $ | 96 | $ | 33,330 | $ | (30,321 | ) | $ | (138 | ) | $ | 2,967 | ||||||||||
Reverse common stock split (1-for 10) | — | — | (8,665,694 | ) | $ | (87 | ) | $ | 87 | — | — | — | ||||||||||||||
Proceeds from sale of preferred stock | 3 | — | — | — | 75 | — | — | 75 | ||||||||||||||||||
Proceeds from sale of common stock | — | — | 92,980 | 1 | 374 | — | — | 375 | ||||||||||||||||||
Common stock issued as compensation to directors | — | — | 57,476 | 1 | 245 | — | — | 246 | ||||||||||||||||||
Common stock issued for services | — | — | 36,118 | — | 128 | — | — | 128 | ||||||||||||||||||
Reversal of common stock issued as compensation to directors (See Note 15) | — | — | (46,296 | ) | — | (200 | ) | — | — | (200 | ) | |||||||||||||||
Net change in unrealized loss on securities available for sale, net of income tax benefit | — | — | — | — | — | — | (114 | ) | (114 | ) | ||||||||||||||||
Net loss | — | — | — | — | — | (396 | ) | — | (396 | ) | ||||||||||||||||
Balance at December 31, 2016 | 7 | $ | — | 1,103,447 | $ | 11 | $ | 34,039 | $ | (30,717 | ) | $ | (252 | ) | $ | 3,081 | ||||||||||
Proceeds from sale of common stock | — | — | 10,000 | — | 30 | — | — | 30 | ||||||||||||||||||
Common stock issued for services | — | — | 7,500 | — | 21 | — | — | 21 | ||||||||||||||||||
Net change in unrealized loss on securities available for sale, net of income taxes | — | — | — | — | — | — | 2 | 2 | ||||||||||||||||||
Net loss | — | — | — | — | — | (589 | ) | — | (589 | ) | ||||||||||||||||
Balance at December 31, 2017 | 7 | $ | — | 1,120,947 | $ | 11 | $ | 34,090 | $ | (31,306 | ) | $ | (250 | ) | $ | 2,545 |
See Accompanying Notes to Consolidated Financial Statements.
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows(In thousands)
Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (589 | ) | $ | (396 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 149 | 156 | ||||||
Common stock issued as compensation to directors | — | 46 | ||||||
Common stock issued as compensation for services | 21 | 128 | ||||||
Net amortization of fees, premiums and discounts | 211 | 324 | ||||||
(Gain) loss from sale of securities available for sale | (11 | ) | 186 | |||||
Decrease in accrued interest receivable | 64 | 82 | ||||||
Increase in other assets | (24 | ) | (4 | ) | ||||
Gain on sale of foreclosed real estate | — | (174 | ) | |||||
Increase in official checks and other liabilities | 749 | 203 | ||||||
Net cash provided by operating activities | 570 | 551 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of securities available for sale | — | (27,738 | ) | |||||
Principal repayments and calls of securities available for sale | 2,189 | 4,326 | ||||||
Proceeds from sale of securities available for sale | 6,448 | 28,409 | ||||||
Net decrease in loans | 8,798 | 5,414 | ||||||
Purchase of premises and equipment, net | (94 | ) | (101 | ) | ||||
Proceeds from sale of foreclosed real estate, net | — | 4,203 | ||||||
Redemption(purchase) of Federal Home Loan Bank stock | 134 | (147 | ) | |||||
Net cash provided by investing activities | 17,475 | 14,366 | ||||||
Cash flows from financing activities: | ||||||||
Net decrease in deposits | (20,836 | ) | (11,562 | ) | ||||
(Repayments) purchase of Federal Home Loan Bank advances, net | (3,000 | ) | 3,500 | |||||
Net decrease in advanced payment by borrowers for taxes and insurance | (214 | ) | (30 | ) | ||||
Proceeds from sale of common stock | 30 | 375 | ||||||
Proceeds from sale of preferred stock | — | 75 | ||||||
Net cash used in financing activities | (24,020 | ) | (7,642 | ) | ||||
(Decrease)increase in cash and cash equivalents | (5,975 | ) | 7,275 | |||||
Cash and cash equivalents at beginning of the year | 17,640 | 10,365 | ||||||
Cash and cash equivalents at end of the year | $ | 11,665 | $ | 17,640 |
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued(In thousands)
Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the year for: | ||||||||
Interest | $ | 980 | $ | 874 | ||||
Income taxes | $ | — | $ | — | ||||
Noncash transactions: | ||||||||
Change in accumulated other comprehensive loss, net change in unrealized loss on securities available for sale, net of income taxes | $ | 2 | $ | (114 | ) |
See Accompanying Notes to Consolidated Financial Statements.
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
AtDecember 31, 20172021 and 20162020 and for the Years Then Ended
(1)Summary of Significant Accounting Policies
Organization.Organization. OptimumBank Holdings, Inc. (the “Holding Company”“Company”) is a one-bank holding company and owns 100%100% of OptimumBank (the “Bank”), a Florida-chartered commercial bank. The Bank’s wholly-owned subsidiaries are OB Real Estate Management, LLC and OB Real Estate Holdings, LLC, both of which were formed in 2009; OB Real Estate Holdings 1692 and OB Real Estate Holdings 1704 formed in 2012, collectively, (the “Real Estate Holding Subsidiaries”). The Holding Company’s only business is the operation of the Bank and its subsidiaries (collectively, the “Company”).Bank. The Bank’s deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). The Bank offers a variety of community banking services to individual and corporate customers through its threetwo banking offices located in Broward County, Florida. OB Real Estate Management, LLC is primarily engaged in managing foreclosed real estate. This subsidiary had no activity in 2017 and 2016. All other subsidiaries are primarily engaged in holding and disposing of foreclosed real estate.
Basis of Presentation.Presentation. The accompanying consolidated financial statements include the accounts of the Holding Company the Bank and the Real Estate Holding Subsidiaries.Bank. All significant intercompany accounts and transactions have been eliminated in consolidation. The accounting and reporting practices of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices within the banking industry. The following summarizes the more significant of these policies and practices.
Going Concern StatusSubsequent Events. The Company has evaluated subsequent events through March 8, 2022, which is the date the consolidated financial statements were issued, determining no additional events required disclosure.
Junior Subordinated Debenture.
In 2004, the Company formed OptimumBank Capital Trust I (the “Trust”) for the purpose of raising capital through the sale of trust preferred securities. At that time, the Trust raised $5,155,000 through the sale of 5,000 trust preferred securities (the “Trust Preferred Securities”) to third party investors and the issuance of 155 common trust securities to the Company. The Trust utilized the proceeds of $5,155,000 to purchase a junior subordinated debenture from the Company (the “Junior Subordinated Debenture”).
The outstanding principal amount of the Junior Subordinated Debenture (“Debenture”) due to its failure to make certain required interest payments under the Debenture. The Trustee of the Debenture (the “Trustee”) or the holders of the Debenture are entitled to accelerate the payment of the $5,155,000 principal balance plus accrued and unpaid interest totaling $1,375,011 at December 31, 2017. To date2020, was $2,068,000, During the Trustee has not acceleratedyear ended December 31, 2021, the Company acquired all of the outstanding balanceTrust Preferred Securities and paid all accrued interest in exchange for shares of the Debenture. No adjustmentsCompany’s common stock. These shares were issued in the following transactions:
During the first quarter of 2021, the Company issued 41,000 of accrued interest associated with the accompanying consolidated financial statements have been made asJunior Subordinated Debenture. shares of common stock to pay approximately $
During the second quarter of 2021, the Company issued of this uncertainty. shares of common stock in exchange for Trust Preferred Securities. For accounting purposes, the Trust Preferred Securities acquired by the Company were deemed to be cancelled. As a result,
Management’s plans with regard to this matter are as follows: A Director of the Company has offered to purchase the Debenture and this offer has been approved by certain equity ownerscancelled $840,000 in principal amount of the Trust that holdsPreferred Securities, together with accrued interest of $7,000, and increased its stockholders’ equity by the Debenture. The Director has offered to enter into a forbearance agreement withsame amount.
During the third quarter of 2021, the Company with respectissued shares of common stock in exchange for the remaining Trust Preferred Securities. For accounting purposes, the Trust Preferred Securities acquired by the Company were deemed to payments due underbe cancelled. As a result, the Debenture upon consummation of the Director’s purchase of the Debenture.
In March 2016, the Trustee received a direction from certain equity ownersCompany cancelled $1,221,000 in principal amount of the Trust that holdsPreferred Securities and increased its stockholders’ equity by the Debenture to sell the Debenture to a Director of the Company. Based upon the receipt of conflicting directions from other debt holders of the Trust, in August 2016, the Trustee commenced an action in a Minnesota State Court seeking directions from the Court. The case was subsequently transferred to United States District Court for the Southern District of New York, where the case is currently pending. The Company continues to pursue mechanisms for paying the accrued interest, such as raising additional capital.same amount.
Use of Estimates.Estimates. In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and 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 change in the near term relate to the determination of the allowance for loan losses and the valuation of the deferred tax asset.
Cash and Cash Equivalents.Equivalents. For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks and interest-bearing deposits with banks, all of which have original maturities of ninety days or less.
The Company may be required by law or regulation to maintain cash reserves in the form of vault cash or deposit with Federal Reserve Banks or in Pass-through accounts with other banks. AtThis requirement is based on the amount of the Bank’s transaction deposit accounts. As of December 31, 2017, there were no required cash reserves. Total required cash reserves at December 31, 2016 were $70,000.2021 and 2020, the Bank did not have a reserve requirement as the Federal Reserve Board lowered the requirements to zero for all depository institutions.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) | Summary of Significant Accounting Policies, continued |
Securities.Debt Securities. SecuritiesDebt securities may be classified as trading, held to maturity or available for sale. Trading debt securities are held principally for resale and recorded at their fair values. Unrealized gains and losses on trading debt securities are included immediately in operations. Held to maturityHeld-to-maturity debt securities are those which management has the positive intent and ability to hold to maturity and are reported at amortized cost. Available for saleAvailable-for-sale debt securities consist of debt securities not classified as trading debt securities nor as held to maturity debt securities. Unrealized holding gains and losses on available for sale debt securities are reported as a net amount in accumulated other comprehensive loss in stockholders’ equity until realized. Gains and losses on the sale of debt securities available for sale securities are determined using the specific-identification method. Premiums and discounts on debt securities are recognized in interest income using the interest method over the period to maturity.
Management evaluates debt securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. A debt security is impaired if the fair value is less than its carrying value at the financial statement date. When a debt security is impaired, the Company determines whether this impairment is temporary or other-than-temporary. In estimating other-than-temporary impairment (“OTTI”) losses, management assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a debt security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized in operations. For debt securities that do not meet the aforementioned criteria, the amount of impairment recognized in operations is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive loss.income. Management utilizes cash flow models to segregate impairments to distinguish between impairment related to credit losses and impairment related to other factors. To assess for OTTI, management considers, among other things, (i) the severity and duration of the impairment; (ii) the ratings of the debt security; (iii) the overall transaction structure (the Company’s position within the structure, the aggregate, near-term financial performance of the underlying collateral, delinquencies, defaults, loss severities, recoveries, prepayments, cumulative loss projections, and discounted cash flows); and (iv) the timing and magnitude of a break in modeled cash flows.
Loans.Loans. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal, adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs.
Commitment fees and loan origination fees are deferred and certain direct origination costs are capitalized. Both are recognized as an adjustment of the yield of the related loan.
The accrual of interest on loans is discontinued at the time the loan is ninety days delinquent unless the loan is well collateralized and in process of collection. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses.Losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to operations. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. There were no changes in the Company’s accounting policies or methodology during the years ended December 31, 2017 and 2016.2021 or 2020.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) | Summary of Significant Accounting Policies, continued |
Allowance for Loan Losses, Continued
The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. For such loans, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loans are lower than the carrying value of those loans. The general component covers all other loans and is based on historical loss experience adjusted for qualitative factors.
The historical loss component of the allowance is determined by losses recognized by portfolio segment over the preceding three years. The historical loss experience is adjusted for the risks by each portfolio segment. Risk factors impacting loans in each of the portfolio segments include: (1) changes in national, regional and local economic trendsconditions that affect the collectability of the loan portfolio (2) changes in collateral value of loans (3) changes in lending policies and conditions;procedures, risk selection and underwriting standards (4) changes in the volume and severity of past due loans, nonaccrual loans or loans classified special mention, substandard, doubtful or loss (5) the existence and effect of any concentrations of credit and changes in the level of such concentrations (6) changes in the nature and volume of the loan portfolio and terms of loans, (7) changes in the experience, ability and depth of lending management; nationalmanagement and local political environment; industry conditions and trends in charge-offs; and other relevant staff, (8) quality of loan review, (9) the effect of other external factors, trends or uncertainties that could affect management’s estimate of probable losses.losses, such as competition and industry conditions.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due. 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. Impairment is measured on a loan by loan basis, by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent.
Premises and Equipment.Equipment. Land is stated at cost. Buildings and improvements, furniture, fixtures, equipment, and leasehold improvements are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization expense are computed using the straight-line method over the estimated useful life of each type of asset or lease term, if shorter.
Preferred Securities of Unconsolidated Subsidiary Trust.Leases. The Company owns allWe determine if a contract contains a lease at inception and recognize operating lease right-of-use assets and operating lease liabilities based on the present value of the common stock of OptimumBank Holdings Capital Trust I (“Issuer Trust”), an unconsolidated subsidiary trust. The Issuer Trust usedfuture minimum lease payments at the proceeds from the issuance of $5,000,000 of its preferred securities to third-party investors and common stock to acquire a $5,155,000 debenture issued by the Company. This debenture and certain capitalized costs associatedlease commencement date. As our leases do not provide implicit rates, we use our incremental borrowing rate commensurate with the issuance ofunderlying lease terms. Lease agreements that have lease and non-lease components, are accounted for as a single lease component. Lease expense is recognized on a straight-line basis over the securities comprise the Issuer Trust’s only assets and the interest payments from the debentures finance the distributions paid on the preferred securities. The Company recorded the debenture in “Junior Subordinated Debenture” and its equity interest in the business trust in “Other Assets” on the consolidated balance sheets (See Note 7).lease term.
The Company has entered into agreements which, taken collectively, fully and unconditionally guarantee the preferred securities of the Issuer Trust subject to the terms of the guarantee.
Transfer of Financial Assets.Assets. Transfers of financial assets or a participating interest in an entire financial asset are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. A participating interest is a portion of an entire financial asset that (1) conveys proportionate ownership rights with equal priority to each participating interest holder, (2) involves no recourse (other than standard representations and warranties) to, or subordination by, any participating interest holder, and (3) does not entitle any participating interest holder to receive cash before any other participating interest holder.
Revenue Recognition. The Company has adopted Accounting Standards Updated (“ASU”) ASU 2014-09 Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, “ASC 606”). The majority of the Company’s revenues come from interest income and financial assets, including loans, and securities which are outside the scope of ASC 606. The Company’s services that fall within the scope of ASC 606 are presented within noninterest income and are recognized as revenue as the Company satisfies its obligation to the customer. Elements of noninterest income within the scope of ASC 606 are limited to service charges on deposit accounts and gain on sale of premises and equipment. The following summarizes the Company’s revenue recognition accounting policy for service charges on deposit accounts which is within the scope of ASC 606-
Service Charges on Deposit Accounts. Deposit related fees consist of fees earned on transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as wire fees, ATM use fees, debit card interchange fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that it the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.
Gain on sale of premises and equipment. Gain on sale of premises and equipment was recognized when control of the property was transferred and it is probable that substantially all consideration will be collected.
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) | Summary of Significant Accounting Policies, continued |
Income Taxes.Taxes. There are two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods.
Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The Company provides reserves for potential payments of tax related to uncertain tax positions. These reserves are based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is more likely than not to be realized following resolution of any potential contingencies present related to the tax benefit. Potential interest and penalties associated with such uncertain tax positions isare recorded as a component of income tax expense. See Note 10 for additional details.
The Company recognizes interest and penalties on income taxes as a component of income tax expense.
The Holding Company and the Bank file a consolidated income tax return. Income taxes are allocated proportionately to the Holding Company and the Bank as though separate income tax returns were filed.
OnDecember 22, 2017, the “Tax Cuts and Jobs Act of 2017,” or the Tax Act, was signed into law. The Tax Act, among other things, reduced the maximum statutory federal corporate income tax rate from 35% to 21% effective January 1, 2018. As a result of enactment of the Tax Act, the Bank revalued its net deferred tax asset. This revaluation of the deferred tax asset had no effect on income tax provision due to valuation allowance on the deferred tax asset.
Advertising.Advertising. The Company expenses all media advertising as incurred. Media advertising expense included in other noninterest expenses in the accompanying consolidated statements of operations was approximately $69,179$26,000 and $9,400$10,000 during the years ended December 31, 20172021 and 2016,2020, respectively.
Loss(Loss) Per Share.Basic lossnet income (loss) per share is computed on the basis of the weighted-average number of common shares outstanding. In 20172021 and 2016,2020, basic and diluted lossnet income (loss) per share iswere the same due to the net loss incurred by the Company. Lossbecause there are no outstanding potentially diluted securities. Earnings (Loss) per common share has been computed based on the following (weighted-average numberfollowing:
2021 | 2020 | |||||||
Year Ended December 31, | ||||||||
2021 | 2020 | |||||||
Weighted-average number of common shares outstanding used to calculate basic and diluted net income (loss) per common share | 3,899,118 | 2,934,293 |
Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
Weighted-average number of common shares outstanding used to calculate basic and diluted loss per common share | 1,104,995 | 1,041,213 |
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) | Summary of Significant Accounting Policies, continued |
Off-Balance-Sheet Financial Instruments.Instruments. In the ordinary course of business, the Company may enter into off-balance-sheet financial instruments consisting of commitments to extend credit, unused lines of credit, and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they are funded.
Fair Value Measurements.Measurements. Fair value is 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. The fair value hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy describes three levels of inputs that may be used to measure fair value:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and model-driven valuations whose inputs are observable or whose significant value drivers are observable. Valuations may be obtained from, or corroborated by, third-party pricing services.
Level 3: Unobservable inputs to measure fair value of assets and liabilities for which there is little, if any market activity at the measurement date, using reasonable inputs and assumptions based upon the best information at the time, to the extent that inputs are available without undue cost and effort.
The following describes valuation methodologies used for assets measured at fair value:
Securities Available for Sale.Debt Securities. Where quoted prices are available in an active market, debt securities are classified within Level 1 of the valuation hierarchy. Level 1 debt securities include highly liquid government bonds and certain mortgage products and exchange-traded equities.products. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include certain collateralized mortgage obligations, mortgage-backed securities, SBA pool securities and U.S. Government and agencytaxable municipal securities.
Impaired Loans. The Company’sfair value of impaired loans are normally collateral dependent and, as such, are carried at the lowerwith specific allocations of the Company’s net recorded investmentallowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the loan or fair market value ofappraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral less estimated selling costs. Estimates ofunderlying such loans. Such adjustments result in level 3 fair value are determined based on a variety of information, including the use of available appraisals, estimates of market value by licensed appraisers or local real estate brokers and the knowledge and experience of the Company’s management related to values of properties in the Company’s market areas. Management takes into consideration the type, location and occupancy of the property as well as current economic conditions in the area the property is located in assessing estimates of fair value. Accordingly, fair value estimatesclassification for impaired loans measured at fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are classified as Level 3.evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy.
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) | Summary of Significant Accounting Policies, continued |
Fair Values of Financial Instruments.Instruments. The following methods and assumptions were used by the Company in estimating fair values of financial instruments disclosed herein:
Cash and Cash Equivalents. The carrying amounts of cash and cash equivalents approximate their fair value (Level 1).
Debt Securities.Fair values for debt securities are based on the framework for measuring fair value established by GAAP (Level 2).
Loans.For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for fixed-rate loans, including fixed-rate residential and commercial real estate and commercial loans, are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality (Level 3).
Federal Home Loan Bank Stock.Fair value of the Company’s investment in Federal Home Loan Bank stock is based on its redemption value, which is its cost of $100$ per share (Level 3).
Accrued Interest Receivable.The carrying amount of accrued interest approximates its fair value (Level 3).
Deposit Liabilities. The fair values disclosed for demand, NOW, money-market and savings deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). Fair values for fixed-rate time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated expected monthly maturities of time deposits (Level 3).
Federal Home Loan Bank Advances.Fair values of Federal Home Loan Bank advances are estimated using discounted cash flow analysis based on the Company’s current incremental borrowing rates for similar types of borrowings (Level 3).
Off-Balance-Sheet Financial Instruments. Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing (Level 3).
Comprehensive Loss.income (loss). GAAP generally requires that recognized revenue, expenses, gains and losses be included in net loss.income (loss). Although certain changes in consolidated assets and liabilities, such as unrealized gains and losses on debt securities available for sale, securities, are reported as a separate component of the equity section of the consolidated balance sheets, such items along with net loss,income (loss), are components of comprehensive loss. The only component ofincome (loss).
Accumulated other comprehensive income (loss) isloss consists of the net changefollowing (in thousands):
Schedule of Accumulated and Other Comprehensive (Loss)
2021 | 2020 | |||||||
December 31, | ||||||||
2021 | 2020 | |||||||
Unrealized (loss) gain on debt securities available for sale | $ | (816 | ) | $ | 50 | |||
Unamortized portion of unrealized loss related to debt securities available for sale transferred to debt securities held-to-maturity | (34 | ) | (144 | ) | ||||
Income tax benefit | 215 | 25 | ||||||
Accumulated other comprehensive loss | $ | (635 | ) | $ | (69 | ) |
38 |
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) | Summary of Significant Accounting Policies, continued |
Reclassifications. Certain amounts in 2020 consolidated financial statements have been reclassified to conform to the unrealized loss on the securities available for sale.2021 consolidated financial statement presentation.
Recent Pronouncements.Pronouncements. In JanuaryJune 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-01,Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which is intended to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The ASU requires equity investments to be measured at fair value with changes in fair values recognized in operations, simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identity impairment and eliminates the requirement to disclose fair values, the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost. The ASU also clarifies that the Company should evaluate the need for a valuation allowance on a deferred tax asset related to available for-sale debt securities in combination with the Company’s other deferred tax assets. The ASU is effective for the Company beginning January 1, 2018. Early adoption is permitted. The adoption of this guidance did not to have a material impact on the Company’s consolidated financial statements.
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Recent Pronouncements, Continued
In February 2016, the FASB issued ASU 2016-2,Leases (Topic 842) which will require lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with term of more than twelve months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. The new ASU will require both types of leases to be recognized on the balance sheet. The ASU also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The ASU is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. The Company is in the process of determining the effect of the ASU on its consolidated financial statements. Early application will be permitted.
In March 2016, the FASB issued ASU No. 2016-09,Compensation-Stock Compensation (Topic 718) intended to improve the accounting for employee share-based payments. The ASU affects all organizations that issue share-based payment awards to their employees. The ASU simplifies several aspects of the accounting for share-based payment award transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the consolidated statement of cash flows. The ASU was effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company has evaluated the effect of ASU and determined it has no material effect on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13Financial Instruments-Credit Losses (Topic 326). The ASU improves financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by the Company. The ASU requires the Company to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. The Company will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the condensed consolidated financial statements. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The ASU will take effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted.2022. The Company is in the process of determining the effect of the ASU on its consolidated financial statements.
In March 2017, FASB issued ASU 2017-08,Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20) which amends the accounting for the amortization of premiums for certain purchased callable debt securities by shortening the amortization period to the earliest call date. The ASU is effective for interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the impact of the ASU, if any, on its consolidated financial statements.(continued)
In May 2017, the FASB issued ASU No. 2017-09,Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. The ASU was issued to provide clarity as to when to apply modification accounting when there is a change in the terms or conditions of a share-based payment award. The ASU requires an entity to account for the effects of a modification unless the fair value, vesting conditions, and balance sheet classification of the award is the same after the modification as compared to the original award prior to the modification. The ASU is effective for reporting periods beginning after December 15, 2017. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12,Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedge Activities. The ASU better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the ASU expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The ASU is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02),Income Statement Reporting Comprehensive Income (Topic 220). The ASU provides an option for reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate. The amount of the reclassification would be the difference between the historical corporate income tax rate and the newly enacted 21 percent corporate income tax rate. The ASU is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
Reclassification.Certain amounts in the 2017 consolidated financial statements have been reclassified to conform to the 2016 consolidated financial statement presentation.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(2)Debt SecuritiesSecurities.. SecuritiesDebt securities have been classified according to management’s intent. The carrying amount of debt securities and approximate fair values are as follows (in thousands):
Schedule of Amortized Cost and Approximate Fair Values of Debt Securities
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||||||
At December 31, 2017: | ||||||||||||||||||||||||||||||||
Securities Available for Sale: | ||||||||||||||||||||||||||||||||
At December 31, 2021: | ||||||||||||||||||||||||||||||||
Held-to-maturity: | ||||||||||||||||||||||||||||||||
Collateralized mortgage obligations | $ | 8,806 | $ | — | $ | (340 | ) | $ | 8,466 | $ | 854 | $ | 28 | $ | — | $ | 882 | |||||||||||||||
Mortgage-backed securities | 186 | 3 | — | 189 | ||||||||||||||||||||||||||||
Total | $ | 1,040 | $ | 31 | — | $ | 1,071 | |||||||||||||||||||||||||
Available for sale: | ||||||||||||||||||||||||||||||||
SBA Pool Securities | 2,965 | 10 | (4 | ) | 2,971 | $ | 1,097 | $ | 1 | $ | (26 | ) | $ | 1,072 | ||||||||||||||||||
Collateralized mortgage obligations | 210 | 7 | — | 217 | ||||||||||||||||||||||||||||
Taxable municipal securities | 16,766 | 19 | (359 | ) | 16,426 | |||||||||||||||||||||||||||
Mortgage-backed securities | 17,137 | 19 | (477 | ) | 16,679 | |||||||||||||||||||||||||||
Total | $ | 11,771 | $ | 10 | $ | (344 | ) | $ | 11,437 | $ | 35,210 | $ | 46 | $ | (862 | ) | $ | 34,394 | ||||||||||||||
At December 31, 2016: | ||||||||||||||||||||||||||||||||
Securities Available for Sale: | ||||||||||||||||||||||||||||||||
At December 31, 2020: | ||||||||||||||||||||||||||||||||
Held-to-maturity: | ||||||||||||||||||||||||||||||||
Collateralized mortgage obligations | $ | 10,157 | $ | — | $ | (405 | ) | $ | 9,752 | $ | 2,420 | $ | 116 | $ | — | $ | 2,536 | |||||||||||||||
Mortgage-backed securities | 979 | 34 | — | 1,013 | ||||||||||||||||||||||||||||
Total | $ | 3,399 | $ | 150 | — | $ | 3,549 | |||||||||||||||||||||||||
Available for sale: | ||||||||||||||||||||||||||||||||
SBA Pool Securities | 10,470 | — | — | 10,470 | $ | 1,338 | $ | — | $ | (41 | ) | $ | 1,297 | |||||||||||||||||||
Collateralized mortgage obligations | 458 | 27 | — | 485 | ||||||||||||||||||||||||||||
Taxable municipal securities | 5,063 | 29 | (7 | ) | 5,085 | |||||||||||||||||||||||||||
Mortgage-backed securities | 11,984 | 53 | (11 | ) | 12,026 | |||||||||||||||||||||||||||
Total | $ | 20,627 | $ | — | $ | (405 | ) | $ | 20,222 | $ | 18,843 | $ | 109 | $ | (59 | ) | $ | 18,893 |
The following summarizesThere were 0 sales of debt securities (in thousands):available for sale during the years ended December 31, 2021 and 2020.
Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
Proceeds from sales of securities | $ | 6,448 | $ | 28,409 | ||||
Gross gains from sale of securities | 11 | 48 | ||||||
Gross losses from sale of securities | — | (234 | ) | |||||
Net gain (loss) from sales of securities | $ | 11 | $ | (186 | ) |
SecuritiesDebt securities with gross unrealized losses, aggregated by investment category and length of time that individual debt securities have been in a continuous loss position, is as follows (in thousands):
At December 31, 2017 | ||||||||||||||||
Over Twelve Months | Less Than Twelve Months | |||||||||||||||
Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | |||||||||||||
Securities Available for Sale: | ||||||||||||||||
Collateralized mortgage obligations | 340 | 8,466 | — | — | ||||||||||||
SBA Pools | $ | 3 | $ | 539 | $ | 1 | $ | 540 | ||||||||
343 | 9,005 | $ | 1 | $ | 540 |
At December 31, 2016 | ||||||||||||||||
Over Twelve Months | Less Than Twelve Months | |||||||||||||||
Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | |||||||||||||
Securities Available for Sale: | ||||||||||||||||
Collateralized mortgage obligations | $ | (46 | ) | $ | 864 | $ | (359 | ) | $ | 8,888 |
Schedule of Debt Securities with Gross Unrealized Losses, by Investment Category
Over Twelve Months | Less Than Twelve Months | |||||||||||||||
Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | |||||||||||||
At December 31, 2021: | ||||||||||||||||
Available for Sale: | ||||||||||||||||
SBA Pool Securities | $ | 26 | $ | 895 | $ | - | $ | - | ||||||||
Taxable municipal securities | $ | 81 | $ | 1,853 | $ | 278 | $ | 12,828 | ||||||||
Mortgage-backed securities | $ | 242 | $ | 6,179 | $ | 235 | $ | 9,984 | ||||||||
Total | 349 | 8,927 | 513 | 22,812 | ||||||||||||
At December 31, 2020: | ||||||||||||||||
Available for Sale: | ||||||||||||||||
SBA Pool Securities | $ | 41 | $ | 1,297 | $ | - | $ | - | ||||||||
Taxable municipal securities | $ | - | $ | - | $ | 7 | $ | 1,413 | ||||||||
Mortgage-backed securities | $ | - | $ | - | $ | 11 | $ | 3,583 | ||||||||
Total | 41 | 1,297 | 18 | 4,996 |
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(2)Debt Securities, Continued. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
At December 31, 20172021 and 2016,2020, the unrealized losses on eight twenty-nine and six investmenteleven debt securities, respectively, were caused by market conditions. It is expected that the debt securities wouldwill not be settled at a price less than the book value of the investments. Because the decline in fair value is attributable to market conditions and not credit quality, and because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.
Available-for-sale securities measured at fair value on a recurring basis are summarized below (in thousands):
Fair Value Measurements Using | ||||||||||||||||
Fair Value | Quoted Prices In Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
At December 31, 2017: | ||||||||||||||||
Collateralized mortgage obligations | $ | 8,466 | $ | — | $ | 8,466 | $ | — | ||||||||
SBA Pool Securities | 2,971 | — | 2,971 | — | ||||||||||||
$ | 11,437 | $ | — | $ | 11,437 | $ | — | |||||||||
At December 31, 2016: | ||||||||||||||||
Collateralized mortgage obligations | $ | 9,752 | $ | — | $ | 9,752 | $ | — | ||||||||
SBA Pool Securities | 10,470 | — | 10,470 | — | ||||||||||||
$ | 20,222 | $ | — | $ | 20,222 | $ | — |
During the years ended December 31, 2017 and 2016, no securities were transferred in or out of Level 1, Level 2 or Level 3.
As of December 31, 2017,2021, the Company had pledged Securitiessecurities with a market value of $590,000$118,000 as collateral for the Federal Reserve Bank Discount Window.(the “FRB”) discount window.
(continued)The Company’s available-for-sale and held-to-maturity debt securities all have contractual maturity dates which are greater than ten years as of December 31, 2021. Expected maturities of these debt securities will differ from contractual maturities because borrowers have the right to call or repay obligations with or without call or prepayment penalties.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3)Loans.Loans. The components of loans are as follows (in thousands):
Schedule of Components of Loans
At December 31, | At December 31, | At December 31, | ||||||||||||||
2017 | 2016 | 2021 | 2020 | |||||||||||||
Residential real estate | $ | 26,054 | $ | 27,334 | $ | 32,583 | $ | 28,997 | ||||||||
Multi-family real estate | 7,356 | 5,829 | 48,592 | 19,210 | ||||||||||||
Commercial real estate | 32,152 | 29,264 | 129,468 | 74,398 | ||||||||||||
Land and construction | 1,051 | 5,681 | 3,772 | 4,750 | ||||||||||||
Commercial | 4,522 | 10,514 | 14,157 | 21,849 | ||||||||||||
Consumer | 794 | 1,829 | 22,827 | 5,715 | ||||||||||||
Total loans | 71,929 | 80,451 | 251,399 | 154,919 | ||||||||||||
Add (deduct): | ||||||||||||||||
Net deferred loan fees, costs and premiums | 282 | 463 | ||||||||||||||
Deduct: | ||||||||||||||||
Net deferred loan (fees), costs and premiums | (422 | ) | (544 | ) | ||||||||||||
Allowance for loan losses | (3,991 | ) | (3,915 | ) | (3,075 | ) | (1,906 | ) | ||||||||
Loans, net | $ | 68,220 | $ | 76,999 | $ | 247,902 | $ | 152,469 |
(continued)The Company makes the majority of its loans to borrowers in Broward County, Florida and portions of Palm Beach and Miami-Dade Counties, Florida. Although the Company has a diversified loan portfolio, a significant portion of its borrowers’ ability to repay their loans and meet their contractual obligations to the Company is dependent upon the economy in Broward, Palm Beach and Miami-Dade Counties, Florida.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3)Loans, Continued.An analysis of the change in the allowance for loan losses for the years ended December 31, 20172021 and 20162020 follows (in thousands):
Residential Real Estate | Multi-Family Real Estate | Commercial Real Estate | Land and Construction | Commercial | Consumer | Unallocated | Total | |||||||||||||||||||||||||
Year Ended December 31, 2017: | ||||||||||||||||||||||||||||||||
Beginning balance | $ | 310 | $ | 58 | $ | 787 | $ | 120 | $ | 188 | $ | 165 | $ | 2,287 | $ | 3,915 | ||||||||||||||||
Provision (credit) for loan losses | 229 | 1 | (28 | ) | (122 | ) | (133 | ) | (29 | ) | 82 | — | ||||||||||||||||||||
Charge-offs | — | — | — | — | — | (67 | ) | — | (67 | ) | ||||||||||||||||||||||
Recoveries | 102 | — | — | 24 | — | 17 | 143 | |||||||||||||||||||||||||
Ending balance | $ | 641 | $ | 59 | $ | 759 | $ | 22 | $ | 55 | $ | 86 | $ | 2,369 | $ | 3,991 | ||||||||||||||||
Year Ended December 31, 2016: | ||||||||||||||||||||||||||||||||
Beginning balance | $ | 116 | $ | 26 | $ | 1,085 | $ | 77 | $ | 120 | $ | 151 | $ | 720 | $ | 2,295 | ||||||||||||||||
Provision (credit) for loan losses | 194 | 32 | (2,069 | ) | 19 | 68 | 189 | 1,567 | — | |||||||||||||||||||||||
Charge-offs | — | — | (264 | ) | — | — | (205 | ) | — | (469 | ) | |||||||||||||||||||||
Recoveries | — | — | 2,035 | 24 | — | 30 | — | 2,089 | ||||||||||||||||||||||||
Ending balance | $ | 310 | $ | 58 | $ | 787 | $ | 120 | $ | 188 | $ | 165 | $ | 2,287 | $ | 3,915 |
Schedule of Changes in Allowance for Loan Losses
Residential Real Estate | Multi- Family Real Estate | Commercial Real Estate | Land and Construction | Commercial | Consumer | Unallocated | Total | |||||||||||||||||||||||||
Year Ended December 31, 2021: | ||||||||||||||||||||||||||||||||
Beginning balance | $ | 463 | $ | 253 | $ | 884 | $ | 52 | $ | 103 | $ | 151 | $ | — | $ | 1,906 | ||||||||||||||||
Provision (Credit) for loan losses | (11 | ) | 282 | 651 | (28 | ) | (231 | ) | 510 | — | 1,173 | |||||||||||||||||||||
Charge-offs | — | — | — | — | (23 | ) | (254 | ) | — | (277 | ) | |||||||||||||||||||||
Recoveries | 30 | — | — | 8 | 225 | 10 | — | 273 | ||||||||||||||||||||||||
Ending balance | $ | 482 | $ | 535 | $ | 1,535 | $ | 32 | $ | 74 | $ | 417 | $ | — | $ | 3,075 | ||||||||||||||||
Year Ended December 31, 2020: | ||||||||||||||||||||||||||||||||
Beginning balance | $ | 531 | $ | 82 | $ | 624 | $ | 21 | $ | 573 | $ | 152 | $ | 26 | $ | 2,009 | ||||||||||||||||
Provision (Credit) for loan losses | 175 | 171 | 260 | 7 | 284 | 149 | (26 | ) | (1,020 | ) | ||||||||||||||||||||||
Charge-offs | (259 | ) | — | — | — | (775 | ) | (150 | ) | — | (1,184 | ) | ||||||||||||||||||||
Recoveries | 16 | — | — | 24 | 21 | — | — | 61 | ||||||||||||||||||||||||
Ending balance | $ | 463 | $ | 253 | $ | 884 | $ | 52 | $ | 103 | $ | 151 | $ | — | $ | 1,906 |
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 20172021 and 20162020 follows (in thousands):
Residential Real Estate | Multi- Family Real Estate | Commercial Real Estate | Land and Construction | Commercial | Consumer | Unallocated | Total | |||||||||||||||||||||||||
At December 31, 2021: | ||||||||||||||||||||||||||||||||
Collectively evaluated for impairment: | ||||||||||||||||||||||||||||||||
Recorded investment | $ | 32,583 | $ | 48,592 | $ | 129,468 | $ | 3,772 | $ | 14,157 | $ | 22,827 | $ | — | $ | 251,399 | ||||||||||||||||
Balance in allowance for loan losses | $ | 481 | $ | 535 | $ | 1,535 | $ | 32 | $ | 72 | $ | 420 | $ | — | $ | 3,075 | ||||||||||||||||
At December 31, 2020: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment: | ||||||||||||||||||||||||||||||||
Recorded investment | $ | — | $ | — | $ | 2,193 | $ | — | $ | — | $ | — | $ | — | $ | 2,193 | ||||||||||||||||
Balance in allowance for loan losses | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Collectively evaluated for impairment: | ||||||||||||||||||||||||||||||||
Recorded investment | $ | 30,254 | $ | 20,637 | $ | 69,521 | $ | 4,750 | $ | 21,849 | $ | 5,715 | $ | — | $ | 152,726 | ||||||||||||||||
Balance in allowance for loan losses | $ | 463 | $ | 253 | $ | 884 | $ | 52 | $ | 103 | $ | 151 | $ | — | $ | 1,906 |
Residential Real Estate | Multi-Family Real Estate | Commercial Real Estate | Land and Construction | Commercial | Consumer | Unallocated | Total | |||||||||||||||||||||||||
At December 31, 2017: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment: | ||||||||||||||||||||||||||||||||
Recorded investment | $ | 1,172 | $ | — | $ | 975 | $ | — | $ | — | $ | — | $ | — | $ | 2,147 | ||||||||||||||||
Balance in allowance for loan losses | $ | 330 | $ | — | $ | 83 | $ | — | $ | — | $ | — | $ | — | $ | 413 | ||||||||||||||||
Collectively evaluated for impairment: | ||||||||||||||||||||||||||||||||
Recorded investment | $ | 24,882 | $ | 7,356 | $ | 31,177 | $ | 1,051 | $ | 4,522 | $ | 794 | $ | — | $ | 69,782 | ||||||||||||||||
Balance in allowance for loan losses | $ | 311 | $ | 59 | $ | 676 | $ | 22 | $ | 55 | $ | 86 | $ | 2,369 | $ | 3,578 | ||||||||||||||||
At December 31, 2016: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment: | ||||||||||||||||||||||||||||||||
Recorded investment | $ | 375 | $ | — | $ | 1,004 | $ | — | $ | — | $ | — | $ | — | $ | 1,379 | ||||||||||||||||
Balance in allowance for loan losses | $ | — | $ | — | $ | 104 | $ | — | $ | — | $ | — | $ | — | $ | 104 | ||||||||||||||||
Collectively evaluated for impairment: | ||||||||||||||||||||||||||||||||
Recorded investment | $ | 26,959 | $ | 5,829 | $ | 28,260 | $ | 5,681 | $ | 10,514 | $ | 1,829 | $ | — | $ | 79,072 | ||||||||||||||||
Balance in allowance for loan losses | $ | 310 | $ | 58 | $ | 683 | $ | 120 | $ | 188 | $ | 165 | $ | 2,287 | $ | 3,811 |
(continued)
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3)Loans, Continued.
Residential Real Estate, Multi-Family Real Estate, Commercial Real Estate, Land and Construction. All loans are underwritten in accordance with policies set forth and approved by the Board of Directors (the “Board”), including repayment capacity and source, value of the underlying property, credit history and stability. Residential real estate loans are underwritten based on repayment capacity and source, value of the underlying property, credit history and stability. Multi-family and commercial real estate loans are secured by the subject property and are underwritten based upon standards set forth in the policies approved by the Company’s Board. Such standards include, among other factors, loan to value limits, cash flow coverage and general creditworthiness of the obligors. Construction loans to borrowers finance the construction of owner occupied and leased properties. These loans are categorized as construction loans during the construction period, later converting to commercial or residential real estate loans after the construction is complete and amortization of the loan begins. Real estate development and construction loans are approved based on an analysis of the borrower and guarantor, the viability of the project and on an acceptable percentage of the appraised value of the property securing the loan. Real estate development and construction loan funds are disbursed periodically based on the percentage of construction completed. The Company carefully monitors these loans with on-site inspections and requires the receipt of lien waivers on funds advanced. Development and construction loans are typically secured by the properties under development or construction, and personal guarantees are typically obtained. Further, to assure that reliance is not placed solely on the value of the underlying property, the Company considers the market conditions and feasibility of proposed projects, the financial condition and reputation of the borrower and guarantors, the amount of the borrower’s equity in the project, independent appraisals, cost estimates and pre-construction sales information. The Company also makes loans on occasion for the purchase of land for future development by the borrower. Land loans are extended for future development for either commercial or residential use by the borrower. The Company carefully analyzes the intended use of the property and the viability thereof.
Commercial.Commercial business loans and lines of credit consist of loans to small- and medium-sized companies in the Company’s market area. Commercial loans are generally used for working capital purposes or for acquiring equipment, inventory or furniture. Primarily all of the Company’s commercial loans are secured loans, along with a small amount of unsecured loans. The Company’s underwriting analysis consists of a review of the financial statements of the borrower, the lending history of the borrower, the debt service capabilities of the borrower, the projected cash flows of the business, the value of the collateral, if any, and whether the loan is guaranteed by the principals of the borrower. These loans are generally secured by accounts receivable, inventory and equipment. Commercial loans are typically made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business, which makes them of higher risk than residential loans and the collateral securing loans may be difficult to appraise and may fluctuate in value based on the success of the business. The Company seeks to minimize these risks through its underwriting standards. The Company took action to support its clients and help its communities by participating in the Payroll Protection Plan (“PPP”). The Company originated 502 PPP loans for a total dollar amount of $37.4 million. These loans are 100% guaranteed by the Small Business Administration (the “SBA”). At December 31, 2021, the outstanding balance of these PPP loans totaled $10 million.
Consumer. Consumer loans are extended for various purposes, including purchases of automobiles, recreational vehicles, and boats. Also offered are home improvement loans, lines of credit, personal loans, and deposit account collateralized loans. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Loans to consumers are extended after a credit evaluation, including the creditworthiness of the borrower(s), the purpose of the credit, and the secondary source of repayment. Consumer loans are made at fixed and variable interest rates. Risk is mitigated by the fact that the loans are of smaller individual amounts.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Pass | OLEM (Other Loans Especially Mentioned) | Sub- standard | Doubtful | Loss | Total | |||||||||||||||||||
At December 31, 2017: | ||||||||||||||||||||||||
Residential real estate | $ | 22,315 | $ | 2,494 | $ | 1,245 | $ | — | $ | — | $ | 26,054 | ||||||||||||
Multi-family real estate | 7,356 | — | — | — | — | 7,356 | ||||||||||||||||||
Commercial real estate | 24,704 | 6,473 | 975 | — | — | 32,152 | ||||||||||||||||||
Land and construction | 1,051 | — | — | — | — | 1,051 | ||||||||||||||||||
Commercial | 2,304 | 2,218 | — | — | — | 4,522 | ||||||||||||||||||
Consumer | 794 | — | — | — | — | 794 | ||||||||||||||||||
Total | $ | 58,524 | $ | 11,185 | $ | 2,220 | $ | — | $ | — | $ | 71,929 | ||||||||||||
At December 31, 2016: | ||||||||||||||||||||||||
Residential real estate | $ | 25,326 | $ | 1,633 | $ | 375 | $ | — | $ | — | $ | 27,334 | ||||||||||||
Multi-family real estate | 5,829 | — | — | — | — | 5,829 | ||||||||||||||||||
Commercial real estate | 25,979 | 1,174 | 2,111 | — | — | 29,264 | ||||||||||||||||||
Land and construction | 5,636 | 45 | — | — | — | 5,681 | ||||||||||||||||||
Commercial | 8,768 | — | 1,746 | — | — | 10,514 | ||||||||||||||||||
Consumer | 1,823 | — | 6 | — | — | 1,829 | ||||||||||||||||||
Total | $ | 73,361 | $ | 2,852 | $ | 4,238 | $ | — | $ | — | $ | 80,451 |
(3)Loans, Continued. The following summarizes the loan credit quality (in thousands):
Schedule of Loans by Credit Quality
Pass | OLEM (Other Loans Especially Mentioned) | Sub- standard | Doubtful | Loss | Total | |||||||||||||||||||
At December 31, 2021: | ||||||||||||||||||||||||
Residential real estate | $ | 30,080 | $ | — | $ | 2,503 | $ | — | $ | — | $ | 32,583 | ||||||||||||
Multi-family real estate | 47,962 | 630 | — | — | — | 48,592 | ||||||||||||||||||
Commercial real estate | 125,620 | 3,848 | — | — | — | 129,468 | ||||||||||||||||||
Land and construction | 3,772 | — | — | — | — | 3,772 | ||||||||||||||||||
Commercial | 13,960 | 197 | — | — | — | 14,157 | ||||||||||||||||||
Consumer | 22,827 | — | — | — | — | 22,827 | ||||||||||||||||||
Total | $ | 244,221 | $ | 4,675 | $ | 2,503 | $ | — | $ | — | $ | 251,399 | ||||||||||||
At December 31, 2020: | ||||||||||||||||||||||||
Residential real estate | $ | 28,151 | $ | — | $ | 846 | $ | — | $ | — | $ | 28,997 | ||||||||||||
Multi-family real estate | 19,210 | — | — | — | — | 19,210 | ||||||||||||||||||
Commercial real estate | 66,089 | 4,449 | 3,860 | — | — | 74,398 | ||||||||||||||||||
Land and construction | 4,750 | — | — | — | — | 4,750 | ||||||||||||||||||
Commercial | 20,735 | 1,114 | — | — | — | 21,849 | ||||||||||||||||||
Consumer | 5,715 | — | — | — | — | 5,715 | ||||||||||||||||||
Total | $ | 144,650 | $ | 5,563 | $ | 4,706 | $ | — | $ | — | $ | 154,919 |
Internally assigned loan grades are defined as follows:
Pass – a Pass loan’s primary source of loan repayment is satisfactory, with secondary sources very likely to be realized if necessary. These are loans that conform in all aspects to bank policy and regulatory requirements, and no repayment risk has been identified.
OLEM (Other Loans Especially Mentioned) – an Other Loan Especially Mentioned has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company’s credit position at some future date.
Substandard – a Substandard loan is 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. Included in this category are loans that are current on their payments, but the Bank is unable to document the source of repayment. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful – a loan classified as Doubtful has all the weaknesses inherent in one classified as Substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. The Company charges off any loan classified as Doubtful.
Loss – a loan classified as Loss is considered uncollectible and of such little value that continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. The Company fully charges off any loan classified as Loss.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3)Loans, Continued. Age analysis of past due loans at December 31, 2021 and 2020 is as follows (in thousands):
Schedule of Age Analysis of Past-due Loans
Accruing Loans | Accruing Loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
30-59 Days Past Due | 60-89 Days Past Due | Greater Than 90 Days Past Due | Total Past Due | Current | Nonaccrual Loans | Total Loans | 30-59 Days Past Due | 60-89 Days Past Due | Greater Than 90 Days Past Due | Total Past Due | Current | Nonaccrual Loans | Total Loans | |||||||||||||||||||||||||||||||||||||||||||
At December 31, 2016: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2021: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential real estate | $ | — | $ | — | $ | — | $ | — | $ | 26,959 | $ | 375 | $ | 27,334 | $ | 198 | $ | — | $ | — | $ | 198 | $ | 32,385 | $ | — | $ | 32,583 | ||||||||||||||||||||||||||||
Multi-family real estate | — | — | — | — | 5,829 | — | 5,829 | — | — | — | — | 48,592 | — | 48,592 | ||||||||||||||||||||||||||||||||||||||||||
Commercial real estate | — | — | — | — | 29,264 | — | 29,264 | — | — | — | — | 129,468 | — | 129,468 | ||||||||||||||||||||||||||||||||||||||||||
Land and construction | — | — | — | — | 5,681 | — | 5,681 | — | — | — | — | 3,772 | — | 3,772 | ||||||||||||||||||||||||||||||||||||||||||
Commercial | — | — | — | — | 10,514 | — | 10,514 | — | — | — | — | 14,157 | — | 14,157 | ||||||||||||||||||||||||||||||||||||||||||
Consumer | — | 6 | — | 6 | 1,823 | — | 1,829 | 69 | — | — | 69 | 22,758 | — | 22,827 | ||||||||||||||||||||||||||||||||||||||||||
Total | $ | — | $ | 6 | $ | — | $ | 6 | $ | 80,070 | $ | 375 | $ | 80,451 | $ | 267 | $ | — | $ | — | $ | 267 | $ | 251,132 | $ | — | $ | 251,399 | ||||||||||||||||||||||||||||
At December 31, 2020: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential real estate | $ | 977 | $ | — | $ | — | $ | 977 | $ | 28,020 | $ | — | $ | 28,997 | ||||||||||||||||||||||||||||||||||||||||||
Multi-family real estate | — | — | — | — | 19,210 | — | 19,210 | |||||||||||||||||||||||||||||||||||||||||||||||||
Commercial real estate | — | — | — | — | 72,205 | 2,193 | 74,398 | |||||||||||||||||||||||||||||||||||||||||||||||||
Land and construction | — | — | — | — | 4,750 | — | 4,750 | |||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | — | — | — | — | 21,849 | — | 21,849 | |||||||||||||||||||||||||||||||||||||||||||||||||
Consumer | 6 | — | — | 6 | 5,709 | — | 5,715 | |||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 983 | $ | — | $ | — | $ | 983 | $ | 151,743 | $ | 2,193 | $ | 154,919 |
The following summarizes the amount of impaired loans (in thousands):
Schedule of Impaired Loans
At December 31, 2017 | At December 31, 2016 | |||||||||||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||
Residential real estate | $ | 194 | $ | 217 | $ | — | $ | 375 | $ | 501 | $ | — | ||||||||||||
Commercial real estate | 231 | 231 | — | — | — | — | ||||||||||||||||||
With related allowance recorded: | ||||||||||||||||||||||||
Residential real estate | 978 | 978 | 330 | — | — | — | ||||||||||||||||||
Commercial real estate | 744 | 744 | 83 | 1,004 | 1,004 | 104 | ||||||||||||||||||
Total | ||||||||||||||||||||||||
Residential real estate | $ | 1,172 | $ | 1,195 | $ | 330 | $ | 375 | $ | 501 | $ | — | ||||||||||||
Commercial real estate | $ | 975 | $ | 975 | $ | 83 | $ | 1,004 | $ | 1,004 | $ | 104 | ||||||||||||
Total | $ | 2,147 | $ | 2,170 | $ | 413 | $ | 1,379 | $ | 1,505 | $ | 104 |
At December 31, 2021 | At December 31, 2020 | |||||||||||||||||||||||
Unpaid | Unpaid | |||||||||||||||||||||||
Recorded | Principal | Related | Recorded | Principal | Related | |||||||||||||||||||
Investment | Balance | Allowance | Investment | Balance | Allowance | |||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||
Commercial real estate | $ | — | $ | — | $ | — | $ | 2,193 | $ | 2,193 | $ | — |
(continued)
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3)Loans, Continued. The average recorded investment in impaired loans and interest income recognized and received on impaired loans are as follows (in thousands):
Schedule of Interest Income Recognized and Received on Impaired Loans
For the Year Ended December 31, | For the Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||||
Average Recorded Investment | Interest Income Recognized | Interest Income Received | Average Recorded Investment | Interest Income Recognized | Interest Income Received | Average Recorded Investment | Interest Income Recognized | Interest Income Received | Average Recorded Investment | Interest Income Recognized | Interest Income Received | |||||||||||||||||||||||||||||||||||||
Residential real estate | $ | 650 | $ | 226 | $ | 121 | $ | 886 | $ | 48 | $ | 76 | $ | — | $ | — | $ | — | $ | 651 | $ | 18 | $ | 11 | ||||||||||||||||||||||||
Commercial real estate | $ | 900 | $ | 52 | $ | 52 | $ | 2,071 | $ | 76 | $ | 106 | $ | 658 | $ | 7 | $ | 7 | $ | 2,194 | $ | 78 | $ | 60 | ||||||||||||||||||||||||
Commercial | $ | — | $ | — | $ | — | $ | 499 | $ | — | $ | 18 | ||||||||||||||||||||||||||||||||||||
Total | $ | 1,550 | $ | 278 | $ | 173 | $ | 2,957 | $ | 124 | $ | 182 | $ | 658 | $ | 7 | $ | 7 | $ | 3,344 | $ | 96 | $ | 89 |
There were noNo loans have been determined to be troubled debt restructurings (TDR’s) during the year ended December 31, 2021 and 2020. At December 31, 2021 and 2020, there were no loans modified and entered into TDR’s within the past twelve months, that subsequently defaulted during the years ended December 31, 20172021 or 2020.
(4)Premises and 2016.
EquipmentA summary of premises and equipment follows (in thousands):
Schedule of Premises and equipment
2021 | 2020 | |||||||||||||||
At December 31, | At December 31, | |||||||||||||||
2017 | 2016 | 2021 | 2020 | |||||||||||||
Land | $ | 1,171 | $ | 1,171 | $ | — | $ | 426 | ||||||||
Buildings and improvements | 2,105 | 2,065 | — | 654 | ||||||||||||
Furniture, fixtures and equipment | 1,308 | 1,268 | 819 | 730 | ||||||||||||
Leasehold improvements | 131 | 119 | 654 | 505 | ||||||||||||
Total, at cost | 4,715 | 4,623 | 1,473 | 2,315 | ||||||||||||
Less accumulated depreciation and amortization | (2,122 | ) | (1,975 | ) | (630 | ) | (902 | ) | ||||||||
Premises and equipment, net | $ | 2,593 | $ | 2,648 | $ | 843 | $ | 1,413 |
The Company currently leases one branch facility under an operating lease. The lease contains renewal options and requiresDuring the fourth quarter, the Company sold one of its branch locations to pay an allowable sharea third-party. The sale was completed in November 2021 for $1,081,000. In connection with the sale, the Company recorded a gain in the consolidated statements of common area maintenance and real estate taxes. Rent expense under theoperations of $340,000 in November 2021.
(continued)
47 |
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(5) Leases. The Company’s operating lease duringobligation is for two of its branch locations. as well as a third location expected to open in 2022 in North Miami Beach, Florida. Our leases have a weighted-average remaining lease term of approximately 8.3 years and do not offer options to extend the years ended December 31, 2017leases. The components of lease expense and 2016 was $73,000 and $68,000, respectively. At December 31, 2017, the future minimumother lease payments are approximately as follows (in thousands):
Year Ending December 31, | Amount | |||
2018 | $ | 90 | ||
2019 | 92 | |||
2020 | 95 | |||
2021 | 98 | |||
2022 | 93 | |||
Total | $ | 468 |
There was no foreclosed real estate outstanding throughout the year ended December 31, 2017 or as of December 31, 2017.
(Income) expenses applicable to foreclosed real estate during the year ended December 31, 2016information are as follows (in thousands):
Schedule of Components of Lease Cost
Provision for losses on foreclosed real estate | $ | — | ||
Gain on sale of foreclosed real estate | (174 | ) | ||
Operating expenses | 51 | |||
$ | (123 | ) |
2021 | 2020 | |||||||
For the year ended December 31, | ||||||||
2021 | 2020 | |||||||
Operating lease cost | $ | 213 | $ | 171 | ||||
Cash paid for amounts included in measurement of lease liabilities | $ | 195 | $ | 158 |
(continued)Schedule of Operating Lease Liability
At December 31, 2021 | At December 31, 2020 | |||||||
Operating lease right-of-use assets | $ | 1,737 | 904 | |||||
Operating lease liabilities | $ | 1,775 | 923 | |||||
Weighted-average remaining lease term | 8.3 years | 7.4 years | ||||||
Weighted-average discount rate | 2.11 | % | 2.1 | % |
Future minimum lease payments under non-cancellable leases, reconciled to our discounted operating lease liabilities are as follows (in thousands):
Schedule of Future Minimum Lease Payments Under Non-cancelable Operating Leases
At December 31, 2021 | ||||
2022 | $ | 254 | ||
2023 | 185 | |||
2024 | 189 | |||
2025 | 192 | |||
2026 | 202 | |||
Thereafter | 818 | |||
Total future minimum lease payments | 1,840 | |||
Less imputed interest | (65 | ) | ||
Total operating lease liability | $ | 1,775 |
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(6)Deposits
The aggregate amount of time deposits with a minimum denomination of $100,000$250,000 was approximately $19.3$1.7 million and $34.8$2.5 million at December 31, 20172021 and 2016,2020, respectively.
A schedule of maturities of time deposits at December 31, 20172021 follows (in thousands):
Year Ending December 31, | Amount | |||
2018 | $ | 24,507 | ||
2019 | 4,524 | |||
2020 | 378 | |||
2021 | 99 | |||
2022 | 1,066 | |||
$ | 30,574 |
Schedule of Maturities of Time Deposits
Maturing Year Ending December 31, | Amount | |||
2022 | $ | 11,490 | ||
2023 | 965 | |||
2024 | 257 | |||
2025 | 496 | |||
2026 | 28 | |||
Total | $ | 13,236 |
(7)Federal Home Loan Bank Advances and Other Available Credit
The maturities and interest rates on the Federal Home Loan Bank (“FHLB”) advances were as follows (dollars in thousands)
Schedule of Maturities and Interest Rates on the Federal Home Loan Bank Advances
Maturity | ||||||||||||||
Year Ending | Interest | At December 31, | ||||||||||||
December 31, | Rate | 2017 | 2016 | |||||||||||
2017 | 0.80 | % | $ | — | $ | 3,000 | ||||||||
2017 | 0.49 | — | 15,500 | |||||||||||
2018 | 1.53 | % | 5,000 | — | ||||||||||
2018 | 1.60 | 10,500 | — | |||||||||||
2021 | 1.68 | 5,000 | 5,000 | |||||||||||
$ | 20,500 | $ | 23,500 |
Maturity Year Ending | Interest | At December 31, | ||||||||||
December 31, | Rate | 2021 | 2020 | |||||||||
2022 | 1.68% | $ | — | $ | 5,000 | |||||||
2024 | 1.96% | 4,000 | 4,000 | |||||||||
2025 | 1.01% | 10,000 | 10,000 | |||||||||
2029 | 1.69% | 4,000 | 4,000 | |||||||||
$ | 18,000 | $ | 23,000 |
At December 31, 2017, all 2021, three FHLB Advances were structured advances with potential calls on a quarterly basis.
FHLB advances had fixed interest rates.
At December 31, 2017 and 2016, the FHLB advances wereare collateralized by a blanket lien on loans totaling $40.1 and $22.0 million, respectively. The blanket lien was on certain qualifying residential one-to-four family mortgage loans, commercial and multi-family real estate loans and second mortgage loans.
Junior Subordinated Debenture. On September 30, 2004, the Company issued a $5,155,000 junior subordinated debenture to an unconsolidated subsidiary (the “Debenture”). The Debenture has a term of thirty years. The interest rate was fixed at 6.4% for the first five years, and thereafter, the coupon rate floats quarterly at the three-month LIBOR rate plus 2.45% (3.78% at December 31, 2017). The Debenture is redeemable in certain circumstances. The terms of the Debenture allowrequiring the Company to defer payments of interest on the Debenture by extending the interest payment period at any time during the term of the Debenture for up to twenty consecutive quarterly periods. Beginning in 2010,maintain certain first mortgage loans as pledged collateral. At December 31, 2021, the Company exercised its right to defer paymenthad remaining credit availability of interest on the Debenture. Interest payments deferred as of$65.7 million which can be used if additional collateral is pledged. At December 31, 2017 totaled $1,375,011.2021, the Company had loans pledged with a carrying value of $123.4 million as collateral for FHLB advances.
At December 31, 2021, the Company also had lines of credit amounting to $19.5 million with five correspondent banks to purchase federal funds. The Company also has deferred interest paymentsa line of credit with respect to the Debenture for the maximum allowable twenty consecutive quarterly payments. The holder of the Debenture can accelerate the $5,155,000 principal balance as a result of this default. Under the Written Agreement, the Company is not able to make these interest payments without the prior approval of the Federal Reserve Bank of Atlanta. Regulatory approval to pay accrued and unpaid interest has been denied.
A Director ofunder which the Company has offeredmay draw up to purchase the Debenture$116,000. The line is secured by $118,000 in securities. At December 31, 2021 and this offer has been approved by certain equity owners2020 there were no borrowings under these lines of the Trust that holds the Debenture. The Director has also offered to enter into a forbearance agreement with the Company with respect to payments due under the Debenture upon consummation of the Director’s purchase of the Debenture. In March 2016, the Trustee received a direction from certain debt holders of the Trust that holds the Debenture to sell the Debenture to a Director of the Company. Based upon the receipt of conflicting directions from other equity owners of the Trust, in August 2016, the Trustee commenced an action in a Minnesota State Court seeking directions from the Court. The case was subsequently transferred to United States District Court for the Southern District of New York, where the case is currently pending.credit.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(8)Financial Instruments
The estimated fair values of the Company’s financial instruments were as follows (in thousands):
Schedule of Estimated Fair Value of Financial Instruments
At December 31, 2017 | At December 31, 2016 | At December 31, 2021 | At December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||
Carrying Amount | Fair Value | Level | Carrying Amount | Fair Value | Level | Carrying Amount | Fair Value | Level | Carrying Amount | Fair Value | Level | |||||||||||||||||||||||||||||||||||
Financial assets: | ||||||||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 11,665 | $ | 11,665 | 1 | $ | 17,640 | $ | 17,640 | 1 | $ | 58,970 | $ | 58,970 | 1 | $ | 54,629 | $ | 54,629 | 1 | ||||||||||||||||||||||||||
Securities available for sale | 11,437 | 11,437 | 2 | 20,222 | 20,222 | 2 | ||||||||||||||||||||||||||||||||||||||||
Debt Securities available for sale | 34,394 | 34,394 | 2 | 18,893 | 18,893 | 2 | ||||||||||||||||||||||||||||||||||||||||
Debt Securities held-to-maturity | 1,040 | 1,071 | 2 | 3,399 | 3,549 | 2 | ||||||||||||||||||||||||||||||||||||||||
Loans | 68,220 | 68,079 | 3 | 76,999 | 76,829 | 3 | 247,902 | 247,788 | 3 | 152,469 | 153,276 | 3 | ||||||||||||||||||||||||||||||||||
Federal Home Loan Bank stock | 979 | 979 | 3 | 1,113 | 1,113 | 3 | 793 | 793 | 3 | 1,092 | 1,092 | 3 | ||||||||||||||||||||||||||||||||||
Accrued interest receivable | 316 | 316 | 3 | 380 | 380 | 3 | 971 | 971 | 3 | 1,336 | 1,336 | 3 | ||||||||||||||||||||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||
Deposit liabilities | 65,251 | 65,475 | 3 | 86,087 | 86,442 | 3 | 292,457 | 292,537 | 3 | 190,759 | 191,011 | 3 | ||||||||||||||||||||||||||||||||||
Federal Home Loan Bank advances | 20,500 | 20,394 | 3 | 23,500 | 23,500 | 3 | 18,000 | 18,021 | 3 | 23,000 | 23,254 | 3 | ||||||||||||||||||||||||||||||||||
Junior subordinated debenture | 5,155 | N/A | (1) | 3 | 5,155 | N/A | (1) | 3 | — | — | 3 | 2,068 | N/A | 1 | 3 | |||||||||||||||||||||||||||||||
Off-balance sheet financial instruments | __ | __ | 3 | — | — | 3 | — | — | 3 | — | — | 3 |
(1) | The Company is unable to determine value based on significant unobservable inputs required in the calculation. Refer to |
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are commitments to extend credit, unused lines of credit, and standby letters of credit and may involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated balance sheet. The contract amounts of these instruments reflect the extent of involvement the Company has in these financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments.
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. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit, is based on management’s credit evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by the BankCompany to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit to customers is essentially the same as that involved in extending loan facilities to customers. The BankCompany generally holds collateral supporting those commitments. Standby letters of credit generally have expiration dates within one year.
Commitments to extend credit, unused lines of credit, and standby letters of credit typically result in loans with a market interest rate when funded. A summary of the contractual amounts of the Company’s financial instruments with off-balance-sheet risk at December 31, 20172021 follows (in thousands):
Commitments to extend credit | $ | 791 | ||
Unused lines of credit | $ | 2,031 | ||
Standby letters of credit | $ | - |
Schedule of Off-Balance Sheet Risks of Financial Instruments
$ | 11,891 | |||
Unused lines of credit | $ | 11,793 | ||
Standby letters of credit | $ | 4,550 |
The Company grants the majority of its loans to borrowers throughout Broward County, Florida and portions of Palm Beach and Miami-Dade Counties, Florida. Although the Company has a diversified loan portfolio, a significant portion of its borrowers’ ability to repay their loans and meet their contractual obligations to the Company is dependent upon the economy in Broward, Palm Beach and Miami-Dade Counties, Florida.(continued)
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(9)Income Taxes
Income tax benefit consisted of the following (in thousands):
Schedule of Components of Income Tax Benefit
2021 | 2020 | |||||||||||||||
Year Ended December 31, | Year Ended December 31, | |||||||||||||||
2017 | 2016 | 2021 | 2020 | |||||||||||||
Current: | ||||||||||||||||
Federal | $ | — | $ | — | $ | — | $ | — | ||||||||
State | — | — | — | — | ||||||||||||
Total Current | — | — | — | — | ||||||||||||
Deferred: | ||||||||||||||||
Federal | 1,633 | (134 | ) | 609 | (161 | ) | ||||||||||
State | (32 | ) | (19 | ) | 169 | (34 | ) | |||||||||
Change in Valuation Allowance | (1,601 | ) | 153 | (4,005 | ) | 195 | ||||||||||
Total Deferred | — | — | (3,227 | ) | — | |||||||||||
Total | $ | — | $ | — | $ | (3,227 | ) | $ | — |
The reasons for the differences between the statutory Federal income tax rate and the effective tax rate are summarized as follows (dollars in thousands):
Schedule of Effective Income Tax Rate Reconciliation
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||
2017 | 2016 | 2021 | 2020 | |||||||||||||||||||||||||||||
Amount | % of Pretax Loss | Amount | % of Pretax Loss | Amount | % of Pretax Loss | Amount | % of Pretax Loss | |||||||||||||||||||||||||
Income tax benefit at statutory rate | $ | (200 | ) | 34.0 | % | $ | (135 | ) | 34.0 | % | $ | 644 | 21 | % | $ | (164 | ) | 21 | % | |||||||||||||
Increase (decrease) resulting from: | ||||||||||||||||||||||||||||||||
State taxes, net of Federal tax benefit | (21 | ) | 3.6 | % | (13 | ) | 3.3 | % | 134 | 4.3 | % | (34 | ) | 4.4 | % | |||||||||||||||||
Other permanent differences | — | — | (5 | ) | 1.3 | % | — | — | 3 | (0.4 | )% | |||||||||||||||||||||
Reduction in Federal income-tax rate | 1822 | (309.3 | %) | — | — | |||||||||||||||||||||||||||
Change in valuation allowance | (1,601 | ) | 271.7 | % | 153 | (38.6 | %) | (4,005 | ) | (130.5 | )% | 195 | (25 | )% | ||||||||||||||||||
$ | — | — | $ | — | — | $ | (3,227 | ) | (105.2 | )% | $ | — | 0 | % |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (in thousands).:
At December 31, | ||||||||
2017 | 2016 | |||||||
Deferred tax assets: | ||||||||
Net operating loss carryforwards | $ | 3,547 | $ | 5,125 | ||||
Premises and equipment | 66 | 78 | ||||||
Accrued expenses | 104 | — | ||||||
Nonaccrual loan interest | 122 | 287 | ||||||
Unrealized loss on available for sale securities | 85 | 153 | ||||||
Other | 56 | 56 | ||||||
Gross deferred tax assets | 3,980 | 5,699 | ||||||
Less: Valuation allowance | 3,792 | 5,393 | ||||||
Net deferred tax assets | 188 | 306 | ||||||
Deferred tax liabilities: | ||||||||
Allowance for loan losses | (77 | ) | (114 | ) | ||||
Loan costs | (26 | ) | (39 | ) | ||||
Total deferred tax liabilities | (103 | ) | (153 | ) | ||||
Net deferred tax asset | $ | 85 | $ | 153 |
Schedule of Deferred Tax Assets and Deferred Tax Liabilities
2021 | 2020 | |||||||
At December 31, | ||||||||
2021 | 2020 | |||||||
Deferred tax assets: | ||||||||
Net operating loss carryforwards | $ | 3,336 | $ | 4,284 | ||||
Allowance for loan losses | 15 | — | ||||||
Premises and equipment | 53 | 60 | ||||||
Nonaccrual loan interest | 30 | 40 | ||||||
Lease Liability | 450 | 234 | ||||||
Unrealized loss on debt securities | 215 | 25 | ||||||
Gross deferred tax assets | 4,099 | 4,643 | ||||||
Less: Valuation allowance | — | 4,005 | ||||||
Total deferred tax assets | 4,099 | 638 | ||||||
Deferred tax liabilities: | ||||||||
Allowance for loan losses | — | (283 | ) | |||||
Right of use lease assets | (440 | ) | (229 | ) | ||||
Loan costs | (217 | ) | (101 | ) | ||||
Total deferred tax liabilities | (657 | ) | (613 | ) | ||||
Net deferred tax asset | $ | 3,442 | $ | 25 |
During the years ended December 31, 20172021 and 2016,2020, the Company assessed its earnings history and trend over the past year and its estimate of future earnings, andearnings. In 2021, the Company determined that it was more likely than not that the deferred tax assets would not be realized in the near term. Accordingly, ain 2021, the valuation allowance wasin the amount of $4 million that had been previously recorded and maintained against the net deferred tax asset for the amount not expected to be realized in the future.
future was fully reversed. At December 31, 2017,2021, the net deferred tax asset of $3.4 million was presented under the caption “deferred taxes” on the accompanying consolidated balance sheets. At December 31, 2020, the net deferred tax asset of $25,000, was presented under the caption “other assets” on the accompanying consolidated balance sheets.
At December 31, 2021, the Company had net operating loss carryforwards of approximately $14.0 $13.2 million for Federal tax purposes and $13.9 million for Florida tax purposes available to offset future taxable income. These carryforwards will begin to expire in 2029. A portion of the Federal and Florida net operating losses are subject to Internal Revenue Code (“IRC”) Section 382 limitations.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Income Taxes, Continued |
The Company files U.S. and Florida income tax returns. The Company is no longer subject to U.S. Federal or state income tax examinations by taxing authorities for years before 2014.2018.
The Company regularly reviews its tax positions in each significant taxing jurisdiction in the process of evaluating its unrecognized tax benefits. The Company makes adjustments toadjusts its unrecognized tax benefits when: (i) facts and circumstances regarding a tax position change, causing a change in management’s judgment regarding that tax position; (ii) a tax position is effectively settled with a tax authority at a differing amount; and/or (iii) the statute of limitations expires regarding a tax position. The Company does not expect to a change in unrecognized tax benefits in the next year.
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(10)Related Party Transactions
The Company has entered into transactions with its executive officers, directors and their affiliates in the ordinary course of business. There were no loans to related parties at December 31, 2017 or 2016.
During 2017,2021, the Company incurred approximately $54,000$44,000 in legal fees relatedpayable to a law firm owned by a director.
At December 31, 20172021 and 2016,2020, related parties had approximately $229,000$46,600,000 and $635,000,$36,000,000, respectively, on deposit with the Company.
OnAt December 27, 2011, the Company’s stockholders approved the 201131, 2021 and 2020, related party loans totaled $1,000,000 and $1,100,000, respectively.
The Company is authorized to grant stock options, stock grants and other forms of equity-based compensation under its 2018 Equity Incentive Plan, (“2011 Plan”as amended (the “Plan”). In May 2016,The plan has been approved by the shareholders. The Company increased the total numberis authorized to issue up to shares of shares available to be awarded from 105,000 shares (adjusted for the one-for-ten reversecommon stock split) to 210,000 shares. Stock options, restricted stock, performance share awards and bonus share awards in lieu of obligations may be issued under the 2011 Plan. Both incentive stock options and nonqualified stock options can be granted under the 2011 Plan. The exercise price2018 Plan, of the stock options cannot be less than the fair market value of the common stock on the date of grant. Stock options must be exercised within ten years of the date of grant.
As of December 31, 2017, only common stock haswhich have been issued, as compensation to directorsand shares remain available for services rendered under this plan. No shares were issued during year ended December 31, 2017. grant.
During the year ended December 31, 2016, 57,476 shares of common stock were issued. Pursuant to 2011 Plan (amended), during 2017,2020, the Company accrued stockrecorded compensation costexpense of 2,821$ with respect to shares at $3.14 per share related to first quarter director’s fees. These 2,821 shares were issued during the first quarter of 2018. As of April 1, 2017, the Company discontinued the issuance of common stock as a method of payment of director’s fees.
Additionally, as of December 31, 2017, 105,819 shares were due to be issued as compensation to a director. The Company accrued $200,000 during each ofdirector for services performed.
During the yearsyear ended December 31, 20172021, the Company recorded compensation expense of $ with respect to shares issued to a director and 2016,an executive officer for these shares. A total of $214,000 and $246,000 of compensation was recorded during the 2017 and 2016 periods. Subsequently in 2018, $200,000 was accrued for 36,102 shares in additional compensation to the director. All shares due to this director, totaling 141,921, were issued during the first quarter of 2018. At December 31, 2017, a total of 37,220 (adjusted for one-for-ten reverse stock split) shares remain available for grant.services performed.
(13)(12)Regulatory Matters.
The Bank is subject to various regulatory capital requirements administered by the bank regulatorybanking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of itsthe Bank’s assets, liabilities, and certain off-balance-sheetoff-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts, and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Effective January 1, 2015, the Bank, became subject to the new Basel III capital level threshold requirements under the Prompt Corrective Action regulations with full compliance with all of the final rule’s requirements phased in over a multi-year schedule. These new regulations were designed to ensure that banks maintain strong capital positions even in the event of severe economic downturns or unforeseen losses.(continued)
Changes that could affect the Bank going forward include additional constraints on the inclusion of deferred tax assets in capital and increased risk weightings for nonperforming loans and acquisition/development loans in regulatory capital. Beginning on January 1, 2016, the Bank became subject to the capital conservation buffer rules which places limitations on distributions, including dividend payments, and certain discretionary bonus payments to executive officers. In order to avoid these limitations, an institution must hold a capital conservation buffer above its minimum risk-based capital requirements. As of December 31, 2017 and 2016, the Bank’s capital conservation buffer exceeds the minimum requirements of 1.250% and 0.625%, respectively. The required conservation buffer of 2.50% is to be phased in at 0.625% on each January 1st over the next two years.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(12) | Regulatory Matters, Continued |
(13)Regulatory Matters, Continued. AsIn 2019, the federal banking agencies jointly issued a final rule that provides for an optional, simplified measure of December 31, 2017capital adequacy, the community bank leverage ratio framework (CBLR framework), for qualifying community banking organizations. The final rule became effective on January 1, 2020 and 2016,was elected by the Bank was subjectBank. In April 2020, the federal banking agencies issued an interim final rule that makes temporary changes to Consent Orders issued bythe CBLR framework, pursuant to section 4012 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and a second interim final rule that provides a graduated increase in the community bank leverage ratio requirement after the expiration of the temporary changes implemented pursuant to section 4012 of the CARES Act.
The community bank leverage ratio removes the requirement for qualifying banking organizations to calculate and report risk-based capital but rather only requires a Tier 1 to average assets (leverage) ratio. Qualifying community banking organizations that elect to use the community bank leverage ratio framework and that maintain a leverage ratio of greater than required minimums will be considered to have satisfied the generally applicable risk based and leverage capital requirements in the agencies’ capital rules (generally applicable rule) and, if applicable, will be considered to have met the well capitalized ratio requirements for purposes of section 38 of the Federal Deposit Insurance CorporationAct. Under the interim final rules, the community bank leverage ratio minimum requirement is 8.5% as of December 31, 2021, 9% for calendar year 2022 and beyond. The interim rule allows for a two-quarter grace period to correct a ratio that falls below the Staterequired amount, provided that the Bank maintains a leverage ratio of Florida Office7.5% as of Financial Regulation (“OFR”),December 31, 2021, 8% for calendar year 2022and beyond. Under the final rule, an eligible community banking organization can opt out of the CBLR framework and accordinglyrevert back to the risk-weighting framework without restriction.
Management believes, as of December 31, 2021, that the Bank meets all capital adequacy requirements to which it is deemed to be “adequately capitalized” even if its capital ratios were to exceed those generally required to be a “well capitalized” bank. An institution must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following tables.subject. The Bank’s actual capital amounts and percentages are also presented in the table (dollars($ in thousands):
The following table shows the Bank’s capital amountsSchedule of Capital Amount and ratios and regulatory thresholds at December 31, 2017 and 2016 (dollars in thousands):Percentages
Actual | To Be Well Capitalized Under Prompt Corrective Action Regulations (CBLR Framework) | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
As of December 31, 2021: | ||||||||||||||||
Tier I Capital to Total Assets | $ | 35,338 | 10.64 | % | $ | 28,235 | 8.5 | % | ||||||||
As of December 31, 2020: | ||||||||||||||||
Tier I Capital to Total Assets | $ | 19,261 | 9 | % | $ | 17,116 | 8 | % |
Actual | For Capital Adequacy Purposes | Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions | Requirements of Consent Order | |||||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||
As of December 31, 2017: | ||||||||||||||||||||||||||||||||
Total Capital to Risk-Weighted Assets | $ | 10,484 | 15.08 | % | $ | 5,561 | 8.00 | % | $ | 6,951 | 10.00 | % | $ | 8,341 | 12.00 | % | ||||||||||||||||
Tier I Capital to Risk-Weighted Assets | 9,577 | 13.78 | 4,170 | 6.00 | 5,561 | 8.00 | N/A | N/A | ||||||||||||||||||||||||
Common equity Tier I capital to Risk-Weighted Assets | 9,577 | 13.78 | 3,128 | 4.50 | 4,518 | 6.50 | N/A | N/A | ||||||||||||||||||||||||
Tier I Capital to Total Assets | 9,577 | 8.89 | 4,307 | 4.00 | 5,383 | 5.00 | 8,614 | 8.00 | ||||||||||||||||||||||||
As of December 31, 2016: | ||||||||||||||||||||||||||||||||
Total Capital to Risk-Weighted Assets | $ | 10,662 | 12.79 | % | $ | 6,609 | 8.00 | % | $ | 8,261 | 10.00 | % | $ | 9,913 | 12.0 | % | ||||||||||||||||
Tier I Capital to Risk-Weighted Assets | 9,498 | 11.50 | 4,957 | 6.00 | 6,609 | 8.00 | N/A | N/A | ||||||||||||||||||||||||
Common equity Tier I capital to Risk-Weighted Assets | 9,498 | 11.50 | 3,718 | 4.50 | 5,370 | 6.50 | N/A | N/A | ||||||||||||||||||||||||
Tier I Capital to Total Assets | 9,498 | 8.06 | 4,714 | 4.0 | 5,893 | 5.0 | 9,428 | 8.0 |
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(13)Regulatory Matters, ContinuedDividends.
Regulatory Enforcement Actions
Bank Consent Order. On November 7, 2016, the Bank agreed to the issuance of a Consent Order by the FDIC and the OFR (the “Consent Order”), which requires the Bank to take certain measures to improve its safety and soundness. The Consent Order supersedes the prior consent order that became effective in 2010. Pursuant to the Consent Order, the Bank is required to take certain measures to improve its management, condition and operations, including actions to improve management practices and board supervision and independence, assure that its allowance for loan losses is maintained at an appropriate level and improve liquidity. The Consent Order requires the Bank to adopt and implement a compliance plan to address the Bank’s obligations under the Bank Secrecy Act and related obligations related to anti-money laundering. The Consent Order prohibits the payment of dividends by the Bank. The Company estimates that the cost to comply with the BSA components of the Consent Order will be between $250,000 and $420,000. The Bank accrued approximately $305,000 and $60,000 toward these expenses in 2017 and 2016, respectively.
The Consent Order continues the requirement for the Bank to maintain a Tier 1 leverage ratio of at least 8% and a total risk-based capital ratio of 12% beginning 90 days from the issuance of the Consent Order. At December 31, 2017, the Bank had a Tier 1 leverage ratio of 8.89%, and a total risk-based capital ratio of 15.08%.
The Consent Order contains the following principal requirements:
● The Board of the Bank is required to increase its participation in the affairs of the Bank, assuming full responsibility for the approval of sound policies and objectives and for the supervision of all of the Bank’s activities, consistent with the role and expertise commonly expected for directors of banks of comparable size.
● The Bank is required to have and retain qualified and appropriately experienced senior management, including a chief executive officer, a chief lending officer and a chief operating officer, who are given the authority to implement the provisions of the Consent Order.
● Any proposed changes in the Bank’s Board of Directors or senior executive officers are subject to the prior consent of the FDIC and the OFR.
● The Bank is required to maintain both a fully funded allowance for loan and lease losses satisfactory to the FDIC and the OFR and a minimum Tier 1 leverage capital ratio of 8% and a total risk-based capital ratio of 12% for as long as the Consent Order remains in effect.
● The Bank is required to eliminate from its books, by charge-off or collection, all assets or portions of assets classified “Loss” and 50 percent of those assets or portions of assets classified “Doubtful” in the most recent examination report that have not been previously collected or charged-off.
● The Bank is required to submit a revised plan to reduce the remaining assets classified “Doubtful” and “Substandard” in the current or any future regulatory examination report.
● The Bank may not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit from the Bank that has been charged-off or classified, in whole or in part, “Loss” or “Doubtful” and is uncollected.
● The Bank may not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit from the Bank that has been classified, in whole or part, “Substandard.”
● The Board is required to review, revise, and implement its written lending and collection policy to provide effective guidance and control over the Bank’s lending and credit administration functions.
● The Bank is required to prepare and submit to the Supervisory Authorities an acceptable written business/strategic plan covering the overall operation of the Bank.
● The Bank is required to develop and submit to the Supervisory Authorities a written plan and a comprehensive budget for all categories of income and expense for calendar year 2017 and subsequent years.
● The Bank is required to implement a written plan to improve liquidity, contingency funding, interest rate risk and asset liability management.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(13)Regulatory Matters, Continued
● The Bank is required to revise and implement a written policy for managing interest rate risk in a manner that is appropriate to the size of the Bank and the complexity of its assets.
● The Bank is required to revise and implement its policy for the operation of the Bank in such a manner as to provide adequate internal routines and controls within the Bank consistent with safe and sound banking practices.
● The Bank may not accept, renew, or rollover any brokered deposit.
● The Bank may not declare or pay dividends, pay bonuses, or make any other form of payment outside the ordinary course of business resulting in a reduction of capital, without the prior written approval of the Supervisory Authorities.
● The Bank is required to notify the Supervisory Authorities at least sixty days prior to undertaking asset growth that exceeds 10% or more per annum or initiating material changes in asset or liability composition.
● The Bank is required to develop, adopt, and implement a plan (“Compliance Plan”) for administration of a program reasonably designed to ensure and maintain compliance with the law and regulations related to the Bank Secrecy Act and related anti-money laundering regulations. The Compliance Plan must be consistent with the guidance for BSA/AML Risk Assessment set forth in the Federal Financial Institutions Examination Council’s Bank Secrecy Act/Anti-Money Laundering Examination Manual.
● The Bank is required to furnish written progress reports to the Supervisory Authorities within forty-five days from the end of each quarter, detailing the form and manner of any actions taken to secure compliance with this Consent Order.
● The Bank is required to develop a revised system of internal controls designed to ensure full compliance with the BSA rules and regulations (“BSA Internal Controls”) taking into account its size and risk profile and addressing the deficiencies and recommendations contained in the most recent examination report.
● The Bank is required to assess its BSA staffing needs to ensure adequate qualified personnel are in place at all times.
● The Bank is required to contract with an external independent testing firm that specializes in the BSA, AML, and OFAC rules and regulations for a review. The Bank is required to also engage an independent qualified firm, acceptable to the Supervisory Authorities, to conduct a review of all high-risk accounts and all high-risk transaction activity for the period beginning February 3, 2014, through the date of the Consent Order.
● The Bank is in process of implementing comprehensive policies and plans to address all of the requirements of the Consent Order and has incorporated recommendations from the FDIC and OFR into these policies and plans.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(13)Regulatory Matters, Continued
Management believes that the Bank has made substantial progress in improving its financial condition through a significant reduction in non-performing assets and the receipt of capital increases from investors since the 2010 consent order. The Bank is also seeking to eliminate the other issues raised by the FDIC and the OFR, although the Bank has been hampered by difficulties in raising capital due to the default under the Debenture and the limits placed on the Company and the Bank under the prior consent order and the Written Agreement. Management intends to continue its efforts to meet the conditions of the Consent Order and the Written Agreement.
Company Written Agreement with Reserve Bank. On June 22, 2010, the Company and the Reserve Bank entered into a Written Agreement with respect to certain aspects of the operation and management of the Company. The Written Agreement prohibits, without the prior approval of the Reserve Bank, the payment of dividends, taking dividends or payments from the Bank, making any interest, principal or other distributions on trust preferred securities (including the Debenture), incurring, increasing or guaranteeing any debt, purchasing or redeeming any shares of stock, or appointing any new director or senior executive officer. Management believes that the Company is in substantial compliance with the requirements of the Written Agreement.
(14)Loan Loss Recovery.
On January 6, 2016, the Bank completed a sale of a judgement on a defaulted credit that resulted in a $1.8 million recovery of previously charged-off amounts to the Allowance for Loan and Lease Losses (“ALLL”). This increases the balance of the ALLL to approximately $3.9 million at December 31, 2017. On February 12, 2016, and amended May 6, 2016, pursuant to the terms and requirements of the Consent Order, Management submitted a Second written request to the FDIC for a partial reversal of the ALLL. As of this date, no response from the FDIC has been received and management does not expect a response until the next safety and soundness examination which is expected to be performed in first and second quarters of 2018.
(15)Reclassification.
During the quarter ended March 31, 2016, the Company agreed to issue 46,296 shares to the Bank’s Chairman as compensation. The Company recorded compensation expense of $200,000 based on the fair market value of the shares at that time, and reflected the issuance of the shares as an increase in stockholders’ equity. The Bank’s Chairman has not yet taken delivery of the shares. As a result, during the quarter ended September 30, 2016, the Company determined to reclassify the transaction as a liability of the Company (rather than an increase in stockholders’ equity) until the issuance of the shares. The reclassification had no effect on the Company’s net loss for the year ended December 31, 2016.
(16)Dividends.
The Company is limited in the amount of cash dividends that may be paid. Banking regulations place certain restrictions on dividends and loans or advances made by the Bank to the Holding Company. The amount of cash dividends that may be paid by the Bank to the Holding Company is based on the Bank’s net earnings of the current year combined with the Bank’s retained earnings of the preceding two years, as defined by state banking regulations. However, for any dividend declaration, the Company must consider additional factors such as the amount of current period net earnings, liquidity, asset quality, capital adequacy and economic conditions. It is likely that these factors would further limit the amount of dividends which the Company could declare. In addition, bank regulators have the authority to prohibit banks from paying dividends if they deem such payment to be an unsafe or unsound practice. At December 31, 2017, the Bank and Holding Company could not pay cash dividends (See Note 13).
(17)(14)Contingencies.
Various claims also arise from time to time in the normal course of business. In the opinion of management, none have occurred that will have a material adverse effect on the Company’s consolidated financial statements.
(18)(15)Retirement Plans.
The Company has a 401(k) Profit Sharing plan covering all eligible employees who are over the age of twenty onetwenty-one and have completed one year of service. The Company may make a matching contribution each year. The Company did not make any matching contributions in connection with this plan during the years ended December 31, 20172021 or 2016.2020.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Impaired collateral-dependent loans are carried at fair value when the current collateral value is lower than the carrying value of the loan. Those(16)Fair Value Measurement
There were no impaired collateral-dependent loans which are measured at fair value oron a nonrecurring basis at December 31, 2021.
Debt securities available for sale measured at fair value on a recurring basis are as followssummarized below (in thousands):
Schedule of Debt Securities Available for Sale Measured at Fair Value on Recurring Basis
At December 31, 2017 | ||||||||||||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | Total Losses | Losses Recorded in Operations For the Year Ended December 31, 2017 | |||||||||||||||||||
Residential real estate | $ | 648 | $ | — | $ | — | $ | 648 | $ | 330 | $ | — |
Fair Value Measurements Using | ||||||||||||||||
Fair Value | Quoted Prices Assets | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
At December 31, 2021: | ||||||||||||||||
SBA Pool Securities | $ | 1,072 | $ | — | $ | 1,072 | $ | — | ||||||||
Collateralized mortgage obligations | 217 | — | 217 | — | ||||||||||||
Taxable municipal securities | 16,426 | — | 16,426 | — | ||||||||||||
Mortgage-backed securities | 16,679 | — | 16,679 | — | ||||||||||||
Total | $ | 34,394 | $ | — | $ | 34,394 | $ | — | ||||||||
At December 31, 2020: | ||||||||||||||||
SBA Pool Securities | $ | 1,297 | $ | — | $ | 1,297 | $ | — | ||||||||
Collateralized mortgage obligations | 485 | — | 485 | — | ||||||||||||
State and political subdivision | 5,085 | — | 5,085 | - | ||||||||||||
Mortgage-backed securities | 12,026 | — | 12,026 | — | ||||||||||||
Total | $ | 18,893 | $ | — | $ | 18,893 | $ | — |
During the years ended December 31, 2021 and 2020, no debt securities were transferred in or out of Level 3.
At December 31, 2016 | ||||||||||||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | Total Losses | Losses Recorded in Operations For the Year Ended December 31, 2016 | |||||||||||||||||||
Residential real estate | $ | 375 | $ | — | $ | — | $ | 375 | $ | 126 | $ | — |
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(17)Company Unconsolidated Financial Information
The Holding Company’s unconsolidated financial information as of December 31, 20172021 and 20162020 and for the years then ended follows (in thousands):
Condensed Balance Sheets
Schedule of Condensed Balance Sheet
At December 31, | ||||||||
2021 | 2020 | |||||||
Assets | ||||||||
Cash | $ | 508 | $ | 123 | ||||
Investment in subsidiary | 36,364 | 19,193 | ||||||
Deferred tax asset | 1,676 | — | ||||||
Other assets | 167 | 642 | ||||||
Total assets | $ | 38,715 | $ | 19,958 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Other liabilities | $ | 205 | $ | 56 | ||||
Junior subordinated debenture | — | 2,068 | ||||||
Stockholders’ equity | 38,510 | 17,834 | ||||||
Total liabilities and stockholders’ equity | $ | 38,715 | $ | 19,958 |
At December 31, | ||||||||
2017 | 2016 | |||||||
Assets | ||||||||
Cash | $ | 51 | $ | 164 | ||||
Investment in subsidiary | 9,328 | 9,245 | ||||||
Other assets | 199 | 180 | ||||||
Total assets | $ | 9,578 | $ | 9,589 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Other liabilities | $ | 1,878 | $ | 1,353 | ||||
Junior subordinated debenture | 5,155 | 5,155 | ||||||
Stockholders’ equity | 2,545 | 3,081 | ||||||
Total liabilities and stockholders’ equity | $ | 9,578 | $ | 9,589 |
Condensed Statements of Operations
Schedule of Condensed Statements of Operation
Year Ended December 31, | ||||||||
2021 | 2020 | |||||||
Income (loss) of subsidiary | $ | 5,412 | $ | (43 | ) | |||
Interest expense | (41 | ) | (122 | ) | ||||
Other expense | (751 | ) | (617 | ) | ||||
Income tax benefit | 1,676 | — | ||||||
Net income (loss) | $ | 6,296 | $ | (782 | ) |
Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
Earnings of subsidiary | $ | 79 | $ | 302 | ||||
Interest expense | (227 | ) | (193 | ) | ||||
Other expense | (441 | ) | (505 | ) | ||||
Net loss | $ | (589 | ) | $ | (396 | ) |
Condensed Statements of Cash Flows
Schedule of Condensed Statements of Cash Flows
Year Ended December 31, | ||||||||
2021 | 2020 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | 6,296 | $ | (782 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
Stock-based compensation | 199 | 219 | ||||||
Equity in undistributed (income) loss of subsidiary | (5,412 | ) | 43 | |||||
Deferred income tax benefit | (1,676 | ) | — | |||||
Increase (decrease) in other liabilities | 149 | (1,062 | ) | |||||
Decrease (increase) in other assets | 475 | (475 | ) | |||||
Net cash provided by (used in) operating activities | 31 | (2,057 | ) | |||||
Cash flow from investing activities – | ||||||||
Capital infusion to bank subsidiary | (12,324 | ) | (8,370 | ) | ||||
Cash flow from financing activities: | ||||||||
Proceeds from sale of preferred stock | 9,000 | 10,000 | ||||||
Proceeds from sale of common stock | 3,678 | 540 | ||||||
Cash provided by financing activities | 12,678 | 10,540 | ||||||
Net increase in cash | 385 | 113 | ||||||
Cash at beginning of the year | 123 | 10 | ||||||
Cash at end of year | $ | 508 | $ | 123 | ||||
Noncash transactions: | ||||||||
Change in accumulated other comprehensive loss of subsidiary, net change in unrealized loss on debt securities available for sale, net of income taxes | $ | (566 | ) | $ | 136 | |||
Issuance of common stock in exchange for Trust Preferred Securities | $ | 2,068 | $ | 514 |
57 |
Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (589 | ) | $ | (396 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Stock compensation to directors | — | 46 | ||||||
Stock compensation for services | 21 | 128 | ||||||
Equity in undistributed earnings of subsidiary | (79 | ) | (302 | ) | ||||
Increase in other liabilities | 525 | 246 | ||||||
Increase in other assets | (19 | ) | — | |||||
Net cash used in operating activities | (141 | ) | (278 | ) | ||||
Cash flow from investing activities- | ||||||||
Investment in subsidiary | (2 | ) | (21 | ) | ||||
Cash flow from financing activities: | ||||||||
Proceeds from sale of common stock, net | 30 | 375 | ||||||
Proceeds from sale of preferred stock | — | 75 | ||||||
Net cash provided by financing activities | 30 | 450 | ||||||
Net (decrease) increase in cash | (113 | ) | 151 | |||||
Cash at beginning of the year | 164 | 13 | ||||||
Cash at end of year | $ | 51 | $ | 164 | ||||
Noncash transaction- | ||||||||
Change in accumulated other comprehensive loss of subsidiary, net change in unrealized loss on securities available for sale, net of taxes | $ | 2 | $ | (114 | ) |
(continued)OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The company
(18)Preferred Stock
During 2021 and 2020, the Company issued 7 and shares, respectively, of the Company’s Series AB Participating Preferred Stock (the “Series B Preferred”) at $25,000 a price of $per share. Each share, or an aggregate of the Series A$19 million. The Preferred Stock has no par valuevalue. Except in the event of liquidation, if the Company declares or pays a dividend or distribution on the common stock, the Company shall simultaneously declare and pay a dividend on the Series B Preferred on a pro rata basis with the common stock determined on an as-converted basis assuming all shares of Series B Preferred Stock had been converted immediately prior to the record date of the applicable dividend. The Preferred Stock is non-convertibleconvertible into shares of common stock, at the option of the Company, subject to the prior fulfilment of the following conditions: (i) such conversion shall have been approved by the holders of a majority of the outstanding common stock of the Company; and (ii) such conversion shall not result in any holder of the Series B Preferred Stock and any persons with whom the holder may be acting in concert, becoming beneficial owners of more than % of the outstanding shares of the common stock. The number of shares issuable upon conversion is subject to adjustment based on the terms of the applicable Certificate of Designation for the Series B Preferred Stock(the “Certificate of Designation”) The Series B Preferred has a ratepreferential liquidation rights over common stockholders and holders of 10% junior securities. The liquidation price is the greater of $25,000 per annum. These dividends will be paid annually in arrears on December 31share of each year. NotwithstandingSeries B Preferred or such amount per share of Series A Preferred that would have been payable had all shares of the foregoing, dividends will not be declared, paid or set aside for paymentSeries B Preferred had been converted into common stock pursuant to the extent such act would causeterms of the CompanyCertificate of Designation immediately prior to fail to comply with laws and regulations. These dividends will be cumulative. A liquidation valuea liquidation. The Series B Preferred generally has no voting rights except as provided in the Certificate of $25,000 is assigned to each share.Designation.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon management’s evaluation of those controls and procedures performed within the 90 days preceding the filing of this Report, its Principal Executive Officer and ChiefPrincipal Financial Officer concluded that, subject to the limitations noted below, the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms.
(b) Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Such internal controls over financial reporting were designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017.2021. In making this assessment, the Company used the criteria set forth inInternal Control-Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based upon its evaluation under the framework in Internal Control-Integrated Framework, the Company’s management concluded that its internal control over financial reporting was effective as of December 31, 2017.2021.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
(c) Changes in Internal Controls
The Company has made no significant changes in its internal controls over financial reporting during the year ended December 31, 20172021 that have materially affected or are reasonably likely to materially affect its internal control over financial reporting.
(d) Limitations on the Effectiveness of Controls
The Company’s management, including its Principal Executive Officer and ChiefPrincipal Financial Officer, does not expect that its disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
None
None.
PART IIIItem 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections)
Not applicable.
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PART III
Item 10.Directors, Executive Officers, and Corporate Governance
The Company has a Code of Ethics that applies to its chief executive officer, chief operating officer, chief financial officer (who is also its chief accounting officer) and controller. This Code of Ethics is also posted on its website atwww.optimumbank.com/corpgovernance.html.
A list of the Company’s executive officers and biographical information about them and its directors will be included in the definitive Proxy Statement for its 20182022 Annual Meeting of Stockholders, to be held on May 29, 2018, which will be filed within 120 days of the end of its fiscal year ended December 31, 20172021 (the “2017“2022 Proxy Statement”) and is incorporated herein by reference. Information about its Audit Committee may be found in the Proxy Statement. That information is incorporated herein by reference.
Item 11.Executive Compensation
Information relating to the Company’s executive officer and director compensation and the compensation committee of its boardBoard of directorsDirectors will be included in the 20182022 Proxy Statement and is incorporated herein by reference.
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information relating to security ownership of certain beneficial owners of its common stock and information relating to the security ownership of its management will be included in the 20182022 Proxy Statement and is incorporated herein by reference.
The Bank hadCompany has one equity compensation plan under which shares of its common stock were issuableavailable to be issued at December 31, 2017. This2021. The plan is the 2011 Equity Compensation Plan,was previously approved by its stockholders.shareholders. The following table sets forth information as of December 31, 20172021 with respect to the number of shares of the Company’s common stock issuable pursuant to this plan.
Equity Compensation Plan Information
The following table provides information generally as of December 31, 2017,2021, regarding securities to be issued on exercise of stock options, and securities remaining available for issuance under the Company’s equity compensation plansplan that werewas in effect during fiscal 2017.year 2021.
Plan Category | Number of securities to be issued upon exercise of outstanding options | Weighted average exercise price of outstanding options | Number of securities remaining available for future issuance under the equity compensation plan | |||||||||
Equity compensation plans approved by stockholders | — | $ | — | |||||||||
Item 13.Certain Relationships and Related Transactions, and Director Independence
Information regarding certain relationships and related transactions and director independence will be included in the 20172022 Proxy Statement and is incorporated herein by reference.
Item 14.Principal Accounting Fees and Services
Information regarding principal accountantaccounting fees and services will be included in the 20172022 Proxy Statement and is incorporated herein by reference.
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PART IV
Item 15.Exhibits and Financial Statement Schedules
61 |
EXHIBIT INDEX
101.INS | Inline XBRL Instance Document |
101.SCH | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
SIGNATURES
Item 16. Form 10-K Summary
Not applicable.
62 |
In accordance with
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act, the Registrantregistrant has caused this 10-K report to be duly signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fort Lauderdale, State of Florida, on the 288th day of March, 2018.2022.
OPTIMUMBANK HOLDINGS, INC. | |
/s/ Timothy Terry | |
Timothy Terry | |
Principal Executive Officer |
In accordance withPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act, this report has been signed below by the following persons on behalf of the Registrantregistrant and in the capacities indicated on March 28, 2018.the dates indicated.
Signature | Title | Date | ||
/s/ | March 8, 2022 | |||
/s/ Joel Klein | March 8, 2022 | |||
Joel Klein | ||||
/s/ H Fai Chan | Director | March 8, 2022 | ||
H Fai Chan | ||||
/s/ Moishe Gubin | Director | March 8, 2022 | ||
Moishe Gubin | ||||
/s/ Martin Schmidt | Director | March 8, 2022 | ||
Martin Schmidt | ||||
/s/ Joel Klein | Director | March 8, 2022 | ||
Joel Klein | ||||
/s/ Avi M. Zwelling | Director | March 8, 2022 | ||
Avi M. Zwelling | ||||
/s/ Michael Blisko | Director | March 8, 2022 | ||
Michael Blisko |
63 |