UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K10-K/A
(Amendment No. 1)
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20182019
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., Fort Lauderdale, FL 33308
(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 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”,filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] | Accelerated filer [ ] |
Non-accelerated filer [X] | Smaller reporting company [X] |
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 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 (1,254,287(1,615,862 shares) on June 30, 2018,28, 2019, was approximately $5,644,292,$5,655,517, computed by reference to the closing market price at $4.50$3.50 per share as of June 30, 2018.28, 2019. For purposes of this information, the outstanding shares of common stock 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 25, 2019June 30, 2020 was 1,858,0202,951,353 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions ofNone.
EXPLANATORY NOTE
This Annual Report on Form 10-K/A is being filed by OptimumBank Holdings, Inc. (the “Company”) to amend the Proxy StatementAnnual Report on Form 10-K for the year ended December 31, 2019 Annual Meeting of Shareholders to be filed by the Company with the Securities and Exchange Commission pursuant(the “SEC”) on March 25, 2020 (the “Original Report”) to Regulation 14A within 120 days ofinclude the issuer’s fiscal year end are incorporatedinformation required to be disclosed by reference into Part III, Items 10 through- 14 of this Annual Report on Form 10-K.
Except for Items 10 - 14 of Part III and Item 15 of Part IV, no other information included in the Original Report is changed by this amendment.
As required pursuant to the Securities Exchange Act of 1934, as amended, this Amendment also includes updated certifications from the Company’s Principal Executive Officer and Principal Financial Officer as Exhibits 31.1, 31.2, 32.1 and 32.2.
Table of Contents
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Item 10. Directors, Executive Officers and Corporate Governance
Our Board of Directors currently consists of seven members. Directors hold office until the next annual meeting of shareholders and until their successors are elected and qualified.
The persons currently serving as Directors of the Company are:
Item 1.Moishe Gubin Business, age 43, has served as a Director of the Company and OptimumBank since March 2010. He also serves as the Chairman of the Board. Mr. Gubin is Chief Executive Officer of Strawberry Fields REIT, a real estate holding company, which owns properties in multiple states, and owns many other businesses. From 2004 to 2014, Mr. Gubin was the Principal Financial Officer of Infinity Healthcare Management, LLC, a company engaged in providing consulting services to facilities that service the elderly. Mr. Gubin graduated from Touro Liberal Arts and Science College, in New York, New York, with a BS in Accounting and Information Systems and a Minor in Jewish Studies. Mr. Gubin is the founder of the Midwest Torah Center Inc., a non-profit spiritual outreach center (www.midwesttorah.org). He also attended Yeshiva Bais Israel where he received a BA in Talmudic Literature. Mr. Gubin has been a licensed Certified Public Accountant in the State of New York since 2010.
Forward-Looking StatementsJoel Klein, age 73, became a Director of the Company and OptimumBank in February 2012. Since February 2020, Mr. Klein has also been serving as the Company’s interim Principal Financial Officer, until the Company designates his replacement. Mr. Klein worked in accounting and finance for more than 41 years, including six years as a CPA in public accounting. From 1989 to 1990, he was the Chief Financial Officer of Choice Drug Systems, Inc., a medical supply company primarily to skilled nursing facilities. From 1991 to 1994, he was a Vice-President of Equilease Corporation, an equipment leasing company. He then served as a Vice President of The Stamford Capital Group, Inc., an independent corporate advisory company, from 1994 to 2005, providing high quality advisory services to medium market clients, particularly mergers and acquisitions, divestitures, management buy outs and other strategic financial advisory services. From 2006 to 2010, he was the Chief Financial Officer of Taxi Affiliation Services, LLC, a taxi company located in Chicago, Illinois. Mr. Klein has been a private investor since 2010. Mr. Klein received a Bachelor of Science degree in Accounting from Brooklyn College in 1969. He has been licensed as a CPA in the State of New York since 1972.
We have made forward-looking statementsMartin Z. Schmidt, age 72, became a Director of the Company and OptimumBank in this Annual Report aboutAugust 2015. Mr. Schmidt has been in the financial condition, resultsand estate planning, securities and insurance industries since 1975. In 2013, he joined National Holdings Corp/Gilman Ciocia as a Vice President and retired in 2018. In 2007, he served in a marketing capacity and liaison to the national senior accounting firms for Twenty-First Securities, Inc., introducing market based solutions for tax and corporate based problems within their institutional client base. From 1993 to 2000, he served as a Vice President and Branch Manager for multiple branches of operations,Advest, Inc., a major regional securities and businessinvestment management firm. Mr. Schmidt served with the 423rd Military Police, U.S. Army Reserve, for five years, completed 3 years of our company. These statements are not historical factscoursework towards an MBA in Management Science and include expressions concerningStatistics at the future that are subject to risksLubin Graduate School of Business Administration in 1973, 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:
When usedgraduated Brooklyn College with a B.A. 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., or its management, are intended to identify forward-looking statements.Economics in 1969.
GeneralAvi M. Zwelling, age 47, became a Director of the Company and OptimumBank in December 2017. Mr. Zwelling is the managing partner of the Zwelling Law Firm, PA, which is located in Boca Raton, Florida. The firm handles commercial litigation, banking and real estate matters. Mr. Zwelling graduated from Columbia University in New York, New York, with a B.A. in Comparative Religion, and earned a law degree from the Benjamin N. Cardozo School of Law, also in New York, New York. Mr. Zwelling has been providing legal services to the Company since 2012.
Thomas Procelli, age 66, has served as a Director of the Company since 2017 and as a Director of OptimumBank Holdings, Inc.since 2012. He currently serves as a Chief Financial Officer of Better Living Solutions Recovery Center, a Tallahassee counseling and wellness outpatient mental health clinic specializing in eating disorder treatment. Mr. Procelli also offers financial institution and small business support services through his firm TAP Independent Consulting. Mr. Procelli served as an Executive Vice President of OptimumBank in October 2000 through September 2015. Mr. Procelli has been in banking for over 40 years having a diverse background in operations, information systems, compliance and audit. Outside of banking, he has worked in public accounting at the firm of Coopers and Lybrand and in mortgage origination software product development at Fiserv. He received his MBA in Finance in 1979 and his BBA degree in Accounting in 1976 from Hofstra University.
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Chan Heng Fai Ambrose, age 75, has served as a Director since June 2018. Mr. Chan is an expert in banking and finance, with years of experience in these industries. He has also restructured 35 companies in various industries and countries in the past 40 years. Mr. Chan serves as the CEO of Singapore eDevelopment Limited (“Singapore eDevelopment”), a limited company listed on the Catalist of the Singapore Exchange Securities Trading Limited. Singapore eDevelopment is a Florida corporation (the “Company”) formed in 2004diversified holding company. He was appointed as a bankdirector of Singapore eDevelopment in March 2014. He is also Non-Executive Director of ASX-listed bio-technology company Holista Colltech Limited, a position he has held since July of 2013. From September of 1992 until July of 2015, Mr. Chan also served as Managing Chairman of HKSE-listed Heng Fai Enterprises Limited, a holding company for OptimumBank (the “Bank”). The Company’s only business is the ownershipnow known as ZH International Holdings Limited. He also served as director of Global Medical REIT Inc. (NYSE: GMRE) from December of 2013 until July of 2015 and operationas director of American Housing REIT Inc. from October of 2013 to July of 2015.
Jeffry Wagner, age 66, became a Director of the Company and OptimumBank in November 2018. Mr. Wagner retired in 2015 after serving as Executive Vice President, CFO and Secretary of OptimumBank since 2013. Prior to his tenure at OptimumBank, Mr. Wagner was Executive Officer, CFO/Treasurer at Florida Business Bank in Melbourne, Florida from 2007 until 2012 and SVP of Planning & Analysis for Huntington Bancshares in Columbus, Ohio between 1993 and 2002. Mr. Wagner is also a Trustee for the Bank’s subsidiaries. The Bank isReeves Foundation, an Ohio-based private foundation. He graduated from Bowling Green University in 1978 with a Florida state chartered bank establishedB.A. in 2000, with deposits insured byEconomics and International Business.
Officers of the Federal Deposit Insurance Corporation (“FDIC”). The Bank offers a variety of community banking services to individual and corporate customers through its three banking offices located in Broward County, Florida.Company
The Board of Directors is seeking to appoint Moishe Gubin as the Company’s Chief Executive Officer. Mr. Gubin has submitted requests for the required regulatory approvals to serve as Chief Executive Officer of the Company. These requests are currently pending.
Since June 2016, Timothy Terry, President and Chief Executive Officer of the Bank, has been acting as the Principal Executive Officer for the Company, and since February 2020, Joel Klein, a director of the Company has been interim Principal Financial Officer for the Company. Mr. Klein assumed this position to replace the David Edgar, who resigned in January 2020.
The background of Mr. Terry is subjectset forth below. The background of Mr. Klein is set forth in the preceding section.
Timothy Terry, age 64, was appointed President and Chief Executive Officer of the Bank in February 2013 and was appointed Chief Operating Officer of the Bank in 2018. Mr. Terry has been in banking for 35 years and most recently served as President/CEO of Putnam State Bank in Palatka, Florida. Prior to joining OptimumBank, he served as President, CEO and Senior Loan Officer for Enterprise Bank of Florida in North Palm Beach, Florida, and held senior lending, branch administration & sales management positions at Palm Beach National Bank & Trust, Flagler National Bank of the supervisionPalm Beaches and regulationComerica Bank. Mr. Terry received his BBA degree in finance from Western Michigan University located in Kalamazoo, Michigan. He is also a graduate of the American Bankers Association Stonier Graduate School of Banking at the University of Delaware.
The Board of Directors Meetings and Committees
The Company’s Board of Directors met 11 times during 2019. The independent directors met once in executive session without management during 2019. Each of the current members of the Board of GovernorsDirectors attended at least 75% of the Federal Reserve System (the “Federal Reserve”). The Bank is subject to the supervision and regulationmeetings of the StateBoard and committees on which he served held while he has been a Director. The Company’s Board of Florida Office of Financial Regulation (“OFR”) andDirectors has established several standing committees, including the FDIC. The Bank is a member of the Federal Home Loan Bank of Atlanta.following:
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At December 31, 2018, the Company had total assets of $100.4 million, net loans of $77.2 million, total deposits of $62.4 million and stockholders’ equity of $5.3 million. During 2018, the Company had net earnings of $796,000.
Recent DevelopmentsCompensation Committee
The Compensation Committee currently consists of Moishe Gubin (Chairman), Thomas Procelli and Avi Zwelling. Mr. Gubin. Mr. Procelli and Mr. Zwelling are independent under the NASDAQ listing standards. The Compensation Committee reviews and recommends to the Board of Directors the compensation arrangements for executive management and non-employee directors. The Compensation Committee met once during 2019 and operates under a written charter. A copy of the current Compensation Committee Charter can be viewed on the Company’s website at Written Agreement.www.optimumbank.com/information-center/corporate-governance.
In 2019, no executive officer had a role in determining or recommending the amount or form of outside director compensation. The Compensation Committee does not delegate its authority to any other persons. The Compensation Committee does not use consultants to determine or recommend the amount or form of compensation arrangements.
Nominating Committee
The Nominating Committee currently consists of Mr. Gubin (Chairman), Mr. Procelli and Mr. Zwelling. The committee evaluates new candidates and current directors, and recommends candidates to the Board to fill vacancies occurring between annual shareholder meetings. A copy of the charter for the Nominating Committee can be viewed on the Company’s website at www.optimumbank.com/ information-center/corporate-governance.
All of the director nominees of the Company set forth in the Proposal entitled “Election of Directors” were recommended by a majority of the independent directors of the Company. The Nominating Committee held one meeting during 2019.
The Nominating Committee will initially consider nominating the Company’s existing directors for re-election to the Board as appropriate or other director nominees proposed, as appropriate, by the directors, and in doing so considers each director’s independence, if required, share ownership, skills, performance and attendance at a minimum of 75% of the Board and respective committee meetings. In evaluating any candidates for potential director nomination, the Nominating Committee will consider candidates that are independent, if required, who possess personal and professional integrity, have good business judgment, relevant experience and skills, including banking, financial, real estate and/or legal expertise, who would be effective as a director in conjunction with the full Board, who would commit to attend Board and committee meetings, and whose interests are aligned with the long-term interests of the Company’s shareholders.
The Nominating Committee will consider director candidates recommended by shareholders, provided the recommendation is in writing and delivered to the Corporate Secretary of the Company at the principal executive offices of the Company not later than the close of business on the 120th day prior to the first anniversary of the date on which the Company first mailed its proxy materials to shareholders for the preceding year’s annual meeting of shareholders. For the 2021 annual meeting, recommendations must be received by April 27, 2021. The nomination and notification must contain the nominee’s name, address, principal occupation, total number of shares owned, consent to serve as a director, and all information relating to the nominee and the nominating shareholder as would be required to be disclosed in solicitation of proxies for the election of such nominee as a director pursuant to the SEC’s proxy rules.
Audit Committee
The Audit Committee of the Board of Directors is responsible for the oversight of the Company’s financial and accounting reporting processes and the audits of the Company’s financial statements. The Audit Committee is currently composed of three non-employee directors consisting of Jeffry Wagner (Chairman), Thomas Procelli and Martin Schmidt. The Audit Committee operates under a written charter adopted and approved by the Board of Directors. A copy of the current Audit Committee Charter can be viewed on the Company’s website at www.optimumbank.com/information-center/corporate-governance.
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The Board determined that all members of the Audit Committee were financially literate and independent in accordance with the NASDAQ listing standards applicable to audit committee members. The Board has determined that Jeffry Wagner is an “audit committee financial expert” as defined by SEC rules. The Audit Committee met 4 times during 2019.
Attendance by Directors at Annual Shareholders’ Meetings
The Company is partyexpects its directors to a Written Agreement dated June 22, 2010, withattend 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 Written Agreement are contained in the “Supervision and Regulation” section.
Junior Subordinated Debenture. The Company is in default with respect to its $5,155,000 Junior Subordinated Debenture (the “Debenture”) due to its failure to make certain required interest payments under the Debenture. The Debenture was issued to Optimum Bank Holdings Capital Trust I, a Delaware statutory trust formed by the Company for the purpose of issuing and selling certain securities (the “Trust Preferred Securities”) representing undivided beneficial interests in the Debenture. The trust issued a total of 5,000 Trust Preferred Securities.
The Trustee, Wells Fargo Bank, for the Debenture (the “Trustee”) and the beneficial ownersannual meeting. All of the Debenture are entitled to acceleratecurrent directors attended the payment of the $5,155,000 principal balance plus accrued and unpaid interest totaling $1,686,350 at December 31, 2018. To date, neither the Trustee nor the holders have accelerated the outstanding balance of the Debenture. No adjustments to the accompanying consolidated financial statements have been made as a result of this uncertainty.
In May 2018, a company affiliated with a director of the Company (the “New Holder”) purchased all 5,000 Trust Preferred Securities from a third party. During the third quarter of 2018, the New Holder sold its rights2019 annual meeting (held in approximately 694 of the Trust Preferred Securities to several unaffiliated third parties, who subsequently exchanged these Trust Preferred Securities for 301,778 shares of the Company’s common stock. Due to regulatory agreement the exchange of Trust Preferred Securities for the Company’s common stock cannot reduce the principal amount of the Debenture collateralizing the Trust Preferred Securities. Accordingly it is recorded as an increase in the Company’s equity interest in the unconsolidated subsidiary trust, presented in “Other Assets” in the accompanying consolidated balance sheets.
Although the Company and the New Holder have not executed a formal, definitive bilateral agreement, the New Holder has provided the Company with written representations that the New Holder will not accelerate and demand payment of any of the remaining 4,306 Trust Preferred Securities principal or accrued interest within the next twelve months from the date this Annual Report, on Form 10-K as of and for the year ended December 31, 2018, is filed with the Securities and Exchange Commission.
August 2019).
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. 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 consistentShareholder Communications with the cash flowBoard 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.
Strategy
The Bank’s continuing goal is 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 operating and business strategies emphasize the following:
● Local management and local decision 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 three branch banking offices in Broward County;
● Real estate, commercial and consumer lending activities by originating fixed and adjustable rate commercial mortgage loans, commercial loans, and consumer loans for Bank customers;
● Maintaining high credit quality through strict underwriting criteria through the Bank’s knowledge of the real estate values and borrowers in its market area;
● Personalized products and service by striving to provide innovative financial products and high service levels and to maintain strong customer relationships. The Bank seeks customers who prefer to conduct business with a locally managed institution.Directors
The Bank’s management is focusing its efforts onBoard of Directors has adopted a long-term strategyformal process by which shareholders may communicate with the following objectives:
●IncreaseBoard. Shareholders who wish to communicate with the Board may do so by sending written communications addressed to: Board of Directors, OptimumBank Holdings, Inc. at 2929 East Commercial Boulevard, Fort Lauderdale, Florida 33308, Attention: Mary Franco. All communications will be compiled by the Corporate Secretary and Diversify Loan Originations- Managementsubmitted to the members of the Board. Concerns about accounting or auditing matters or possible violations of the Company’s Code of Ethics should be reported under the procedures outlined in the Company’s Whistleblower Policy. Our Whistleblower Policy is focusedavailable on increasing its loan production to add more interest bearing assets to its asset base. In addition, management is diversifying its loan originations and portfolio to include commercial and consumer loans, in addition to residential and commercial real estate loans.the Company’s website at www.optimumbank.com/information-center/corporate-governance.
●Lower the Cost of Deposits- Management is focused on changing the Bank’s deposit mix by replacing higher cost interest bearing time deposits with non-interest bearing demand deposits, which is occurring.
●Increase Capital Ratios- Management continues to seek additional sources of capital to increase the Bank’s capital ratios, allow the Bank to grow, implement its business planBoard Leadership Structure and improve profitability.
Lending ActivitiesRole in Risk Oversight
The Bank offers real estate, commercialCompany’s policy is to separate the roles of chairman 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 market area consistschief executive officer of the tri-county area of Broward, Miami-Dade and Palm Beach counties. The Bank’s net loans at December 31, 2018 were $77.2 million, or 76.9% of total assets. The interest rates charged on loans varied withCompany. At the degree of risk, maturity, and amountpresent time, Moishe Gubin serves as the Chairman 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.Board.
The Bank’s loan portfolioBoard believes that risk management is concentrated in two major areas: residential and commercial real estate loans. As of December 31, 2018, 93.4%an important component of the loan portfolio consisted of loans secured by mortgages on real estate, of which approximately 34.3%Company’s corporate strategy. While we assess specific risks at the Company’s committee levels, the Board, as a whole, oversees the Company’s risk management process, and discusses and reviews with management major policies with respect to risk assessment and risk management. The Board is regularly informed through committee reports about the Company’s risks. The Audit Committee reviews and assesses the Company’s processes to manage financial reporting risk. It also reviews the Company’s policies for risk assessment and assesses steps management has taken to control significant risks. The Compensation Committee oversees risks relating to compensation practices and policies.
Delinquent Section 16(a) Reports
Section 16(a) of the total loan portfolio was secured by one-to-four family residential properties. The real estate loans are located primarily inExchange Act requires the tri-county market area.
The Bank’s real estate loans are secured by mortgagesCompany’s executive officers 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 adjustable rate mortgages which adjust annually after the initial three to five year period. The Bank’s fixed rate loans generally are for terms of five years or less, and are repayable in monthly installments 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 larger credits, it relies on the cash flow and assets of a debtor as the source of repaymentdirectors, 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’s under $250,000 to be core deposits. These accounts comprised approximately 95.2% of the Bank’s total deposits at December 31, 2018. Approximately 41.8% of the deposits at December 31, 2018 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 10.3% of the Bank’s total deposits at December 31, 2018. 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.
Investments
The Bank’s investment securities portfolio was approximately $9.5 and $11.4 million at December 31, 2018 and 2017, respectively, representing 9.5% and 11.9% of its total assets. At December 31, 2018, 75.6% of this portfolio was invested in asset-backed securities. Mortgage 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 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. OptimumBank 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.
OptimumBank 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.
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, view images of paid checks, transfer funds between accounts, and 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 now offers its business customers remote deposit capture and online cash management services that include ACH origination and wire transfers using token technology for security.
Competition
The Bank encounters strong competition both 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 is generally neglected by its 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.
Employees
As of December 31, 2018, the Bank had 19 full-time employees, including executive officers. These employees are not represented by a collective bargaining unit. The Bank considers its relations with its employees good.
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. and OptimumBank. 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.
Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by the bank regulatory 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 its assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The 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.
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, 2018 and 2017, the Bank’s capital conservation buffer exceeds the minimum requirements of 1.875% and 1.250%, respectively. The required conservation buffer of 2.50% is effective January 1, 2019.
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, and a leverage ratio of 4.0%. Common equity tier 1 is generally comprised of common stock, additional paid in 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 weight of certain assets to better reflect the risk associated with those assets, such as the risk weighting for non-performing loans and certain high volatility commercial real estate acquisitions, development and construction loans. The changes also include additional limitations to the inclusion of deferred tax assets in capital.
The following table shows the Bank’s capital amounts and ratios and regulatory thresholds at December 31, 2018 and 2017 (dollars in thousands):
Actual | For Capital Adequacy Purposes | Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | |||||||||||||||||||
As of December 31, 2018: | ||||||||||||||||||||||||
Total Capital to Risk-Weighted Assets | $ | 12,155 | 15.86 | % | 6,132 | 8.00 | % | 7,665 | 10.00 | % | ||||||||||||||
Tier I Capital to Risk-Weighted Assets | 11,181 | 14.59 | 4,599 | 6.00 | 6,132 | 8.00 | ||||||||||||||||||
Common Equity Tier I Capital to Risk-Weighted Assets | 11,181 | 14.59 | 3,449 | 4.50 | 4,983 | 6.50 | ||||||||||||||||||
Tier 1 Capital to Total Assets | 11,181 | 11.68 | 3,828 | 4.00 | 4,785 | 5.00 | ||||||||||||||||||
As of December 31, 2017: | ||||||||||||||||||||||||
Total Capital to Risk-Weighted Assets | $ | 10,484 | 15.08 | % | 5,561 | 8.00 | % | 6,951 | 10.00 | % | ||||||||||||||
Tier I Capital to Risk-Weighted Assets | 9,577 | 13.78 | 4,170 | 6.00 | 5,561 | 8.00 | ||||||||||||||||||
Common Equity Tier I Capital to Risk-Weighted Assets | 9,577 | 13.78 | 3,128 | 4.50 | 4,518 | 6.50 | ||||||||||||||||||
Tier 1 Capital to Total Assets | 9,577 | 8.89 | 4,307 | 4.00 | 5,383 | 5.00 |
Regulatory Enforcement Actions
Memorandum of Understanding. On August 28, 2018, the Bank agreed to the issuance of a Memorandum of Understanding (the “MOU”), with the FDIC and OFR which requires the Bank to take certain measures to improve its safety and soundness. By agreeing to the MOU, the Bank was released from the Consent Order that became effective in 2016, including the restrictions on the interest rates paid on deposits.
Pursuant to the MOU, the Bank is required to take certain measures to maintain qualified management, improve its strategic planning and budgeting process, strengthen the interest rate management practices, limit its asset growth and provide for the ongoing organization, monitoring and operational administration of the Bank Secrecy Act Program. The MOU prohibits the payment of dividends by the Bank.
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 Regulatory Enforcement Actions 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.
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. 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 premiums paid to the FDIC’s Deposit Insurance Fund (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.
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 are 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 strengthens the existing limits on a depository institution’s credit exposure to one borrower. The Dodd-Frank Act expands 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 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 wouldpersons who 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 stockthe Company’s equity securities, to file reports of a bank holding company with a class of securities registered under Section 12their ownership of the Exchange Act would, underCompany’s securities, as well as statements of changes in such ownership, with the circumstances set forthSEC. The Company believes that all such filings required during 2019 were made on a timely basis, except for one Form 4 on behalf of Mr. Gubin for common shares issued as director compensation and one Form 4 on behalf of Mr. Gubin for common shares received in the presumption, constitute acquisition of control ofexchange offer for 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.Trust Preferred Securities.
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 toCERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1, 2019, except as described below, there 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 oneno transactions or more branches in a state other than Florida pursuant to an interstate merger transactionany proposed transactions in which the Florida bankCompany was or is a party, in which the resulting bank.amount involved exceeded $120,000, and in which a director, director nominee, executive officer, holder of more than 5% of the Company’s common stock or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest.
Financial Modernization.The Gramm-Leach-Bliley Financial Modernization ActExchange 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 have 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) 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 Global 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 Act”) and the rules of the SEC and NASDAQ Stock Market adopted pursuant to the Sarbanes-Oxley Act. Among other things, these reforms, effective as of various dates, require certification of 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.OptimumBank is chartered under the laws of the State of Florida, and its deposits are insured by the FDIC to the extent provided by law. OptimumBank is subject to comprehensive regulation, examination and supervision by the FDIC and the Florida Office of Financial Regulation, or 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. OptimumBank 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.
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, 2018, the Bank’s Tier 1 and total risk-based capital ratios were 14.6% and 15.9%, 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, 2018, the Bank’s leverage ratio was 11.68%.
The FDIC Improvement Act of 1993 (“FDICIA”) contains prompt corrective action (“PCA”) 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 “PCA” provisions of FDICIA. In general, the regulations define the five capital categories as follows:
Threshold Ratios | ||||||||||||||||
PCA CapitalCategory | Total Risk-Based Capital Ratio | Tier 1 Risk-Based Capital Ratio | CET1 Risk-Based Capital Ratio | Tier 1 Leverage Capital Ratio | ||||||||||||
Well capitalized | 10 | % | 8 | % | 6.5 | % | 5 | % | ||||||||
Adequately Capitalized | 8 | % | 6 | % | 4.5 | % | 4 | % | ||||||||
Undercapitalized | < 8 | % | < 6 | % | < 4.5 | % | < 4 | % | ||||||||
Significantly Undercapitalized | < 6 | % | < 4 | % | < 3 | % | < 3 | % | ||||||||
Critically Undercapitalized | Tangible Equity/Total Assets ≤ 2% |
Community banks are also subject to the following minimum capital requirements as of the dates indicated below.
Year (as of January 1) | 2016 | 2017 | 2018 | 2019 | ||||||||||||
Minimum CET1 ratio | 4.5 | % | 4.5 | % | 4.5 | % | 4.5 | % | ||||||||
Capital conversion buffer | 0.625 | % | 1.25 | % | 1.875 | % | 2.50 | % | ||||||||
Phase-in of deductions from CET1* | 60.0 | % | 80.0 | % | 100.0 | % | 100.0 | % | ||||||||
Minimum tier 1 capital | 6.0 | % | 6.0 | % | 6.0 | % | 6.0 | % | ||||||||
Minimum total capital | 8.0 | % | 8.0 | % | 8.0 | % | 8.0 | % |
*Including certain threshold deduction items that are over the limits.
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, 2018, OptimumBank met the FDIC definition of a “well-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 OptimumBank to pay dividends to the Company. As a state chartered bank, OptimumBank 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 Memorandum of Understanding with the FDIC and the Company’s ability to pay dividends is also restricted under its Written Agreement with the Federal Reserve. At December 31, 2018, the Bank and Company could not pay cash dividends.
Loans to One Borrower. Florida law generally allows a state bank such as OptimumBank 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’s capital, the maximum loan OptimumBank is currently permitted to make to any one borrower (and certain related entities of such borrower) is approximately $2.8 million, provided the unsecured portion does not exceed approximately $1.7 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 OptimumBank must be submitted to the Florida OFR for prior approval.
USA Patriot Act.The USA Patriot Act was enacted after September 11, 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, the Bank has increased the 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’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’s deposit and loan operations are also subject to the:
●The GLB Act 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”) 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. 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 following table sets forth information with respect to the Bank’s main office and branch offices as of December 31, 2018.
(1) At December 31, 2018, the future minimum lease payments are approximately as follows (in thousands):
Year Ending December 31, | Amount | |||
2019 | $ | 92 | ||
2020 | 95 | |||
2021 | 98 | |||
2022 | 93 | |||
Total | $ | 378 |
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, if any, 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, Related Stockholder Matters and Issuer Purchases of equityTrust Preferred 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 | Low | |||||||
2018 | First | $ | 6.12 | $ | 3.51 | |||||
Second | $ | 6.25 | $ | 4.18 | ||||||
Third | $ | 5.69 | $ | 4.72 | ||||||
Fourth | $ | 5.27 | $ | 2.70 | ||||||
2017 | First | $ | 4.25 | $ | 2.91 | |||||
Second | $ | 3.26 | $ | 2.25 | ||||||
Third | $ | 3.09 | $ | 1.97 | ||||||
Fourth | $ | 8.30 | $ | 1.85 |
The Company had approximately 689 holders registered or in street names as ofIn December 31, 2018.
On March 30, 2018,2019, the Company sold 20,814 sharescompleted a private offer to exchange (the “Exchange Offer”) for a portion of common stock to a director for an aggregate purchase price of $46,000. The Company used the proceeds to pay operating expenses of the Company. The issuance of these shares was exempt from registration pursuant to Section 4(a)(2) of the Securities Act as a transaction by an issuer not involving a public offering. These shares were deemed to have been issued under the Company’s 2018 Equity Incentive Plan. Please refer to the Company’s Forms 8-K filed with the Securities and Exchange Commission on November 16, 2018 and January 10, 2019 for further details.
On April 9, 2018, the Company issued 79,186 shares of common stock in exchange for the 7 shares of the Company’s Series A Preferred held by a director. At the request of the director, the shares were issued to an unaffiliated third party investor. The Series A Preferred had a liquidation value of $175,000. See Note 7 of the Company’s Financial Statements for further details. The issuance of these shares was exempt from registration pursuant to Section 4(a)(2) of the Securities Act as a transaction by an issuer not involving a public offering. These shares were deemed to have been issued under the Company’s 2018 Equity Incentive Plan. Please refer to the Company’s Forms 8-K filed with the Securities and Exchange Commission on November 16, 2018 and January 10, 2019 for further details.
During the year ended December 31, 2018, the Company sold 190,553 shares of common stock to individual investors at an aggregate price of $479,000. The issuances of these shares was exempt from registration pursuant to Section 4(a)(2) of the Securities Act as a transaction by an issuer not involving a public offering.
Additionally, the Company agreed to sell 12,447 shares of common stock to an individual investor at an aggregate price of $31,000. The investor has delivered the purchase price to the Company but has not yet taken delivery of the shares. The amount delivered by the investor was recorded as a liability. The issuance of the shares in this transaction will be exempt from registration pursuant to Section 4(a)(2) of the Securities Act as a transaction by an issuer not involving a public offering.
During the year ended December 31, 2018, Company issued 144,742 shares of common stock as compensation to certain directors for certain services rendered during 2016, 2017 and 2018. At the request of one of the directors, 141,921 of these shares were issued to third parties as either gifts by the director or purchases by such third parties. The issuance of all of these shares was exempt from registration pursuant to Section 4(a)(2) of the Securities Act as transactions by an issuer not involving a public offering. See Note 10 to the Company’s Consolidated Financial Statements for additional information concerning the issue of these shares.
During the third quarter of 2018, a company affiliated with a director of the Company sold its rights in approximately 694 of the Trust Preferred Securities to several unaffiliated third parties, who subsequently exchanged theseoutstanding Trust Preferred Securities for 301,778 shares of the Company’sits common stock. The issuance of all of these shares was exempt from registration pursuant to Section 4(a)(2) of the Securities Act as transactions by an issuer not involving a public offering. See Note 6Pursuant to the Company’s Consolidated Financial Statements for additional information concerning the issue of these shares.
At December 31, 2018, the Bank and Company could not pay cash dividends andExchange Offer, the Company does not anticipate that it will pay dividends onissued 924,395 shares of its common stock in the foreseeable future. Banking regulations place certain restrictions on dividends and loans or advances made by the Bank to the Company. 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 Memorandum of Understanding 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.
Item 6.Selected Financial Data
At December 31, or for the Years Then Ended
(Dollars in thousands, except per share figures)
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
At Year End: | ||||||||||||||||||||
Cash and cash equivalents | $ | 7,983 | $ | 11,665 | $ | 17,640 | $ | 10,365 | $ | 12,074 | ||||||||||
Securitiesavailable for sale | 2,359 | 11,437 | 20,222 | 25,749 | 26,748 | |||||||||||||||
Securities held to maturity | 7,139 | — | — | — | — | |||||||||||||||
Loans, net | 77,200 | 68,220 | 76,999 | 82,573 | 75,829 | |||||||||||||||
All other assets | 5,687 | 4,544 | 4,842 | 8,791 | 9,879 | |||||||||||||||
Total assets | $ | 100,368 | $ | 95,866 | $ | 119,703 | $ | 127,478 | 124,530 | |||||||||||
Deposit accounts | $ | 62,378 | 65,251 | 86,087 | 97,571 | 91,603 | ||||||||||||||
Federal Home Loan Bank advances | 24,600 | 20,500 | 23,500 | 20,000 | 22,740 | |||||||||||||||
Junior subordinated debenture | 5,155 | 5,155 | 5,155 | 5,155 | 5,155 | |||||||||||||||
All other liabilities | 2,929 | 2,415 | 1,880 | 1,785 | 2,053 | |||||||||||||||
Stockholders’ equity | 5,306 | 2,545 | 3,081 | 2,967 | 2,979 | |||||||||||||||
Total liabilities and stockholders’ equity | $ | 100,368 | $ | 95,866 | $ | 119,703 | $ | 127,478 | 124,530 |
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
For the Years: | ||||||||||||||||||||
Total interest income | $ | 4,292 | $ | 4,716 | $ | 4,764 | $ | 4,534 | $ | 5,392 | ||||||||||
Total interest expense | 1,246 | 1,196 | 1,079 | 884 | 911 | |||||||||||||||
Net interest income | 3,046 | 3,520 | 3,685 | 3,650 | 4,481 | |||||||||||||||
Creditfor loan losses | 1,754 | — | — | — | — | |||||||||||||||
Net interest income after provision for loan losses | 4,800 | 3,520 | 3,685 | 3,650 | 4,481 | |||||||||||||||
Noninterest income (expense) | 84 | 52 | (144 | ) | 412 | 572 | ||||||||||||||
Noninterest expenses | 4,088 | 4,161 | 3,937 | 4,545 | 3,448 | |||||||||||||||
Earnings(loss) before income tax benefit | 796 | (589 | ) | (396 | ) | (483 | ) | 1,605 | ||||||||||||
Income tax benefit | — | — | — | (320 | ) | — | ||||||||||||||
Net earnings (loss) | $ | 796 | $ | (589 | ) | $ | (396 | ) | (163 | ) | 1,605 | |||||||||
Net earnings (loss) per share, basic (1) | $ | 0.53 | $ | (0.53 | ) | $ | (0.38 | ) | (0.17 | ) | 1.85 | |||||||||
Net earnings (loss) per share, diluted (1) | $ | 0.53 | $ | (0.53 | ) | $ | (0.38 | ) | (0.17 | ) | 1.85 | |||||||||
Weighted-average number of shares outstanding, basic (1) | 1,493,303 | 1,104,995 | 1,041,213 | 953,855 | 867,789 | |||||||||||||||
Weighted-average number of shares outstanding, diluted (1) | 1,493,303 | 1,104,995 | 1,041,213 | 953,855 | 867,789 |
Ratios and Other Data:
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Return on average assets | 0.9 | % | (0.5 | )% | (0.3 | )% | (0.1 | )% | 1.3 | % | ||||||||||
Return on average equity | 19.8 | % | (21.3 | )% | (12.5 | )% | (5.3 | )% | 86.2 | % | ||||||||||
Average equity to average assets | 4.4 | % | 2.5 | % | 2.6 | % | 2.5 | % | 1.5 | % | ||||||||||
Dividend payout ratio | — | % | — | % | — | % | — | % | — | % | ||||||||||
Net interest margin during the year | 3.4 | % | 3.2 | % | 3.1 | % | 3.4 | % | 3.9 | % | ||||||||||
Interest-rate spread | 3.1 | % | 3.0 | % | 3.0 | % | 3.3 | % | 4.0 | % | ||||||||||
Net yield on average interest-earning assets | 4.8 | % | 4.3 | % | 4.0 | % | 4.2 | % | 4.7 | % | ||||||||||
Noninterest expenses to average assets | 4.4 | % | 3.8 | % | 3.3 | % | 3.6 | % | 2.7 | % | ||||||||||
Ratio of average interest-earning assets to average interest-bearing liabilities | 1.21 | 1.13 | 1.09 | 1.07 | 0.97 | |||||||||||||||
Nonperforming loans and foreclosed assets as a percentage of total assets at end of year | 1.37 | — | 0.3 | % | 7.5 | % | 12.1 | % | ||||||||||||
Allowance for loan losses as a percentage of total loans at end of year | 2.8 | % | 5.5 | % | 4.9 | % | 2.7 | % | 2.9 | % | ||||||||||
Total number of banking offices | 3 | 3 | 3 | 3 | 3 | |||||||||||||||
Total shares outstanding at end of year (1) | 1,858,020 | 1,120,947 | 1,103,447 | 962,886 | 930,524 | |||||||||||||||
Book value per share at end of year (1) | $ | 2.86 | $ | 2.27 | $ | 2.79 | $ | 3.08 | $ | 3.20 |
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, 2018 and 2017, 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. The Company’s significant accounting policies are discussed in Note 1 of Notes to the consolidated financial statements.
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, 2018, the Bank’s impaired loans were approximately $6.7 million, or 8.5% of the gross loan portfolio.
The following table sets forth the composition of the Bank’s loan portfolio:
At December 31, | |||||||||||||||||||||||||
2018 | 2017 | 2016 | |||||||||||||||||||||||
Amount | % of Total | Amount | % of Total | Amount | % of Total | ||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||||
Residential real estate | $ | 27,204 | 34.31 | % | $ | 26,054 | 36.22 | % | $ | 27,334 | 33.98 | % | |||||||||||||
Multi-family real estate | 8,195 | 10.34 | 7,356 | 10.23 | 5,829 | 7.25 | |||||||||||||||||||
Commercial real estate | 36,634 | 46.20 | 32,152 | 44.70 | 29,264 | 36.37 | |||||||||||||||||||
Land and construction | 1,998 | 2.52 | 1,051 | 1.46 | 5,681 | 7.06 | |||||||||||||||||||
Commercial | 4,997 | 6.30 | 4,522 | 6.29 | 10,514 | 13.07 | |||||||||||||||||||
Consumer | 260 | .33 | 794 | 1.10 | 1,829 | 2.27 | |||||||||||||||||||
Total loans | 79,288 | 100.00 | % | 71,929 | 100.00 | % | 80,451 | 100.00 | % | ||||||||||||||||
Add (deduct): | |||||||||||||||||||||||||
Net deferred loan costs and premiums | 155 | 282 | 463 | ||||||||||||||||||||||
Allowance for loan losses | (2,243 | ) | (3,991 | ) | (3,915 | ) | |||||||||||||||||||
Loans, net | $ | 77,200 | $ | 68,220 | $ | 76,999 |
At December 31, | ||||||||||||||||
2015 | 2014 | |||||||||||||||
Amount | % of Total | Amount | % of Total | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Residential real estate | $ | 16,203 | 19.13 | % | $ | 21,426 | 27.51 | % | ||||||||
Multi-family real estate | 3,697 | 4.36 | 1,979 | 2.54 | ||||||||||||
Commercial real estate | 34,771 | 41.05 | 37,215 | 47.78 | ||||||||||||
Land and construction | 5,258 | 6.21 | 6,177 | 7.93 | ||||||||||||
Commercial | 21,770 | 25.70 | 11,070 | 14.21 | ||||||||||||
Consumer | 3,015 | 3.55 | 20 | .03 | ||||||||||||
Total loans | 84,714 | 100.00 | % | 77,887 | 100.00 | % | ||||||||||
Add (deduct): | ||||||||||||||||
Net deferred loan costs and premiums | 154 | 186 | ||||||||||||||
Allowance for loan losses | (2,295 | ) | (2,244 | ) | ||||||||||||
Loans, net | $ | 82,573 | $ | 75,829 |
The following table sets forth the activity in the allowance for loan losses (in thousands):
Year Ended December 31, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Beginning balance | $ | 3,991 | $ | 3,915 | $ | 2,295 | $ | 2,244 | $ | 2,211 | ||||||||||
Provision (credit) for loan losses | (1,754 | ) | — | — | — | — | ||||||||||||||
Loans charged off | (25 | ) | (67 | ) | (469 | ) | (289 | ) | — | |||||||||||
Recoveries | 31 | 143 | 2,089 | 340 | 33 | |||||||||||||||
Ending balance | $ | 2,243 | $ | 3,991 | $ | 3,915 | $ | 2,295 | $ | 2,244 |
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 operations and reduced by loans charged off, net of recoveries. The allowance for loan losses represented 2.83% and 5.55% of the total loans outstanding at December 31, 2018 and 2017, 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, | |||||||||||||||||||||||||
2018 | 2017 | 2016 | |||||||||||||||||||||||
Amount | % of Total Loans | Amount | % of Total Loans | Amount | % of Total Loans | ||||||||||||||||||||
Residential real estate | $ | 544 | 34.31 | % | $ | 641 | 36.22 | % | �� | $ | 310 | 33.98 | % | ||||||||||||
Multi-family real estate | 88 | 10.34 | 59 | 10.23 | 58 | 7.25 | |||||||||||||||||||
Commercial real estate | 567 | 46.20 | 759 | 44.70 | 787 | 36.37 | |||||||||||||||||||
Land and construction | 19 | 2.52 | 22 | 1.46 | 120 | 7.06 | |||||||||||||||||||
Commercial | 850 | 6.30 | 55 | 6.29 | 188 | 13.07 | |||||||||||||||||||
Consumer | 25 | .33 | 86 | 1.10 | 165 | 2.27 | |||||||||||||||||||
Unallocated | 150 | — | 2,369 | — | 2,287 | — | |||||||||||||||||||
Total allowance for loan losses | $ | 2,243 | 100.00 | % | $ | 3,991 | 100.00 | % | $ | 3,915 | 100.00 | % | |||||||||||||
Allowance for loan losses as a percentage of total loans outstanding | 2.83 | % | 5.55 | % | 4.87 | % |
At December 31, | ||||||||||||||||
2015 | 2014 | |||||||||||||||
Amount | % of Total Loans | Amount | % of Total Loans | |||||||||||||
Residential real estate | $ | 116 | 19.13 | % | $ | 66 | 27.51 | % | ||||||||
Multi-family real estate | 26 | 4.36 | 2 | 2.54 | ||||||||||||
Commercial real estate | 1,085 | 41.05 | 2,058 | 47.78 | ||||||||||||
Land and construction | 77 | 6.21 | 99 | 7.93 | ||||||||||||
Commercial | 120 | 25.70 | 10 | 14.21 | ||||||||||||
Consumer | 151 | 3.55 | — | .03 | ||||||||||||
Unallocated | 720 | — | 9 | — | ||||||||||||
Total allowance for loan losses | $ | 2,295 | 100.00 | % | $ | 2,244 | 100.00 | % | ||||||||
Allowance for loan losses as a percentage of total loans outstanding | 2.71 | % | 2.88 | % |
The following summarizes the amount of impaired loans (in thousands):
December 31, 2018 | December 31, 2017 | |||||||||||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||
Residential real estate | $ | — | $ | — | $ | — | $ | 194 | $ | 217 | $ | — | ||||||||||||
Commercial real estate | 2,259 | 2,259 | — | 231 | 231 | — | ||||||||||||||||||
Commercial | 1,114 | 1,114 | — | — | — | — | ||||||||||||||||||
With an allowance recorded - | ||||||||||||||||||||||||
Residential real estate | 954 | 954 | 268 | 978 | 978 | 330 | ||||||||||||||||||
Commercial real estate | 1,602 | 1,602 | 162 | 744 | 744 | 83 | ||||||||||||||||||
Commercial | 814 | 814 | 814 | — | — | — | ||||||||||||||||||
Total: | ||||||||||||||||||||||||
Residential real estate | $ | 954 | $ | 954 | $ | 268 | $ | 1,172 | $ | 1,195 | $ | 330 | ||||||||||||
Commercial real estate | $ | 3,861 | $ | 3,861 | $ | 162 | $ | 975 | $ | 975 | $ | 83 | ||||||||||||
Commercial | $ | 1,928 | $ | 1,928 | $ | 814 | $ | — | $ | — | $ | — | ||||||||||||
Total | $ | 6,743 | $ | 6,743 | $ | 1,244 | $ | 2,147 | $ | 2,170 | $ | 413 |
During 2018, 2017, and 2016, the average net investment in impaired loans and interest income recognized and received on impaired loans is as follows (in thousands):
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Average investment in impaired loans | $ | 3,296 | $ | 1,801 | $ | 2,957 | ||||||
Interest income recognized on impaired loans | $ | 187 | $ | 278 | $ | 124 | ||||||
Interest income received on a cash basis on impaired loans | $ | 187 | $ | 173 | $ | 182 |
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, 2018, were from principal repayments of securities available for sale and held-to-maturity of $1.7 million, proceeds from Federal Home Loan Bank Advances of $4.1 million, proceeds from federal funds of $0.6 million, and proceeds from sale of common stock of $0.5 million. Cash was used primarily to fund loans. The Bank will adjust rates on its deposits to attract or retain deposits as needed. The Bank obtains funds primarily from depositors in its market area.
In addition to obtaining funds from depositors, the Bank may borrow funds from other financial institutions. OptimumBank is a member of the Federal Home Loan Bank of Atlanta, which allows it to borrow funds under a pre-arranged line of credit equal to $26.6 million. As of December 31, 2018, the Bank had $24.6 million in borrowings outstanding from the Federal Home Loan Bank of Atlanta to facilitate loan fundings and manage its asset and liability structure. The Bank has established a line of credit for $3.0 million with Center State Bank, $2.5 million with State Bank, $2.1 million with First National Bankers Bank, $0.8 million with Servis First Bank, and $0.4 million with the Federal Reserve.
Securities
The Bank’s securities portfolio is comprised primarily of SBA Pool Securities and Collateralized mortgage obligations. The securities portfolio is categorized as either “held-to-maturity” or “available for sale.” Securities held-to-maturity represent those securities which the Company has the positive intent and ability to hold to maturity. These securities are carried at amortized cost. Securities available for sale represent those investments which may be sold for various reasons including changes in interest rates and liquidity considerations. These 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 securities portfolio (in thousands):
Amortized Cost | Fair Value | |||||||
At December 31, 2018: | ||||||||
Held-to-maturity- | ||||||||
Collateralized mortgage obligations | $ | 7,139 | $ | 7,175 | ||||
Securities available for sale- | ||||||||
SBA Pool Securities | 2,423 | 2,359 | ||||||
$ | 9,562 | $ | 9,534 | |||||
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 |
The following table sets forth, by maturity distribution, certain information pertaining to the securities portfolio (dollars in thousands):
After One Year Through Five Years | After Ten Years | Total | Yield | |||||||||||||
At December 31, 2018: | ||||||||||||||||
Collateralized mortgage obligation | $ | 7,139 | $ | — | $ | 7,139 | 2.09 | % | ||||||||
SBA Pool Securities | — | 2,423 | 2,423 | 2.67 | % | |||||||||||
$ | 7,139 | $ | 2,423 | $ | 9,562 | |||||||||||
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 |
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 7 of Notes to 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, 2018, 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 | $ | 8,309 | $ | 14,712 | $ | 3,058 | $ | 1,125 | $ | 27,204 | ||||||||||
Multi-family real estate loans | 349 | 7,776 | 70 | — | 8,195 | |||||||||||||||
Commercial real estate loans | 11,198 | 24,620 | 816 | — | 36,634 | |||||||||||||||
Land and construction | 1,998 | — | — | — | 1,998 | |||||||||||||||
Commercial | 3,193 | 1,804 | — | — | 4,997 | |||||||||||||||
Consumer | 260 | — | — | — | 260 | |||||||||||||||
Total loans | 25,307 | 48,912 | 3,944 | 1,125 | 79,288 | |||||||||||||||
Securities (2) | 2,359 | — | — | 7,175 | 9,534 | |||||||||||||||
Interest-bearing deposits in banks | 6,049 | — | — | — | 6,049 | |||||||||||||||
Federal Home Loan Bank stock | 1,132 | — | — | — | 1,132 | |||||||||||||||
Total rate-sensitive assets | 34,847 | 48,912 | 3,944 | 8,300 | 96,003 | |||||||||||||||
Deposit accounts (3): | ||||||||||||||||||||
Money-market deposits | 20,450 | — | — | — | 20,450 | |||||||||||||||
Interest-bearing checking deposits | 5,675 | — | — | — | 5,675 | |||||||||||||||
Savings deposits | 557 | — | — | — | 557 | |||||||||||||||
Time deposits | 20,413 | 5,645 | — | — | 26,058 | |||||||||||||||
Total deposits | 47,095 | 5,645 | — | — | 52,740 | |||||||||||||||
Federal Home Loan Bank advances | 19,600 | 5,000 | — | — | 24,600 | |||||||||||||||
Junior subordinated debenture | — | — | — | 5,155 | 5,155 | |||||||||||||||
Federal funds purchased | 560 | — | — | — | 560 | |||||||||||||||
Total rate-sensitive liabilities | 67,255 | 10,645 | — | 5,155 | 83,055 | |||||||||||||||
GAP (repricing differences) | $ | (32,408 | ) | $ | 38,267 | $ | 3,944 | $ | 3,145 | $ | 12,948 | |||||||||
Cumulative GAP | $ | (32,408 | ) | $ | 5,859 | $ | 9,803 | $ | 12,948 | $ | 12,948 | |||||||||
Cumulative GAP/total assets | (32.29 | )% | 5.84 | % | 9.77 | % | 12.90 | % |
The following table sets forth loan maturities by type of loan at December 31, 2018 (in thousands):
One Year or Less | After One But Within Five Years | After Five Years | Total | |||||||||||||
Residential real estate | $ | — | $ | 1,593 | $ | 25,611 | $ | 27,204 | ||||||||
Multi-family real estate | — | 518 | 7,677 | 8,195 | ||||||||||||
Commercial real estate | 6,024 | 5,188 | 25,422 | 36,634 | ||||||||||||
Land and construction | 1,998 | — | — | 1,998 | ||||||||||||
Commercial | 94 | 4,181 | 722 | 4,997 | ||||||||||||
Consumer | 5 | 255 | — | 260 | ||||||||||||
Total | $ | 8,121 | $ | 11,735 | $ | 59,432 | $ | 79,288 |
The following table sets forth the maturity or repricing of loans by interest type at December 31, 2018 (in thousands):
One Year or Less | After One But Within Five Years | After Five Years | Total | |||||||||||||
Fixed interest rate | $ | 8,038 | $ | 7,442 | $ | 2,012 | $ | 17,492 | ||||||||
Variable interest rate | 17,269 | 41,470 | 3,057 | 61,796 | ||||||||||||
Total | $ | 25,307 | $ | 48,912 | $ | 5,069 | $ | 79,288 |
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 off-balance sheet risk at December 31, 2018 follows (in thousands):
Commitments to extend credit | $ | 1,820 | ||
Unused lines of credit | $ | 2,735 | ||
Standby letters of credit | $ | - |
The following is a summary of the Company’s contractual obligations, including certain on-balance sheet obligations, at December 31, 2018 (in thousands):
Payments Due by Period | ||||||||||||||||||||
Contractual Obligations | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | |||||||||||||||
Federal Home Loan Bank advances | $ | 24,600 | $ | 19,600 | $ | 5,000 | $ | — | $ | — | ||||||||||
Junior subordinated debenture | 5,155 | — | — | — | 5,155 | |||||||||||||||
Other borrowings | 560 | 560 | — | — | — | |||||||||||||||
Operating leases | 378 | 92 | 193 | 93 | — | |||||||||||||||
Total | $ | 30,693 | $ | 20,252 | $ | 5,193 | $ | 93 | $ | 5,155 |
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. Net deposits decreased $2.9 million in 2018.
The following table displays the distribution of the Company’s deposits at December 31, 2018, 2017 and 2016 (dollars in thousands):
2018 | 2017 | 2016 | |||||||||||||||||||||
Amount | % of Deposits | Amount | % of Deposits | Amount | % of Deposits | ||||||||||||||||||
Noninterest-bearing demand deposits | $ | 9,638 | 15.45 | % | $ | 12,632 | 19.36 | % | $ | 7,209 | 8.37 | % | |||||||||||
Interest-bearing demand deposits | 20,450 | 32.79 | 4,782 | 7.33 | 3,604 | 4.19 | |||||||||||||||||
Money-market deposits | 5,675 | 9.10 | 16,498 | 25.28 | 17,743 | 20.61 | |||||||||||||||||
Savings | 557 | 0.89 | 765 | 1.17 | 806 | 0.94 | |||||||||||||||||
Subtotal | $ | 36,320 | 58.23 | % | $ | 34,677 | 53.14 | % | $ | 29,362 | 34.11 | % | |||||||||||
Time deposits: | |||||||||||||||||||||||
0.00% – 0.99% | $ | 2,669 | 4.20 | % | $ | 6,849 | 10.50 | % | $ | 14,891 | 17.30 | % | |||||||||||
1.00% – 1.99% | 10,113 | 16.21 | 23,582 | 36.14 | 41,695 | 48.43 | |||||||||||||||||
2.00% – 2.99% | 13,276 | 21.28 | 143 | 0.22 | 139 | 0.16 | |||||||||||||||||
Total time deposits (1) | 26,058 | 41.77 | 30,574 | 46.86 | 56,725 | 65.89 | |||||||||||||||||
Total deposits | $ | 62,378 | 100.00 | % | $ | 65,251 | 100.00 | % | $ | 86,087 | 100.00 | % |
(1) Included are Individual Retirement Accounts (IRA’s) totaling $1,922,000 and $2,451,000 at December 31, 2018 and 2017, respectively, all of which are in the form of time deposits.
Time Deposits of $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 $250,000 or more at December 31, 2018 and 2017 (in thousands):
At December 31, | ||||||||
2018 | 2017 | |||||||
Due three months or less | $ | 666 | $ | 303 | ||||
Due more than three months to six months | 324 | — | ||||||
More than six months to one year | 909 | 302 | ||||||
One to five years | 760 | 673 | ||||||
Total | $ | 2,659 | $ | 1,278 |
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, | |||||||||||||||||||||||||||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||||||||||||||
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 | $ | 74,598 | $ | 3,912 | 5.24 | % | $ | 75,894 | $ | 4,126 | 5.44 | % | $ | 83,574 | $ | 4,200 | 5.03 | % | $ | 80,691 | 3,865 | 4.79 | % | ||||||||||||||||||||||
Securities | 10,494 | 232 | 2.21 | 18,054 | 366 | 2.03 | 22,686 | 459 | 2.02 | 26,490 | 597 | 2.25 | |||||||||||||||||||||||||||||||||
Other interest-earning assets (1) | 4,811 | 148 | 3.08 | 16,536 | 224 | 1.35 | 11,996 | 105 | 0.88 | 1,273 | 72 | 5.66 | |||||||||||||||||||||||||||||||||
Total interest-earning assets/interest income | 89,903 | 4,292 | 4.78 | % | 110,484 | 4,716 | 4.27 | % | 118,256 | 4,764 | 4.03 | % | 108,454 | 4,534 | 4.18 | % | |||||||||||||||||||||||||||||
Cash and due from banks | 1,676 | 1,171 | 953 | 9,483 | |||||||||||||||||||||||||||||||||||||||||
Premises and equipment | 2,676 | 2,618 | 2,687 | 3,744 | |||||||||||||||||||||||||||||||||||||||||
Other assets | (1,985 | ) | (3,480 | ) | (747 | ) | 3,278 | ||||||||||||||||||||||||||||||||||||||
Total assets | $ | 92,270 | $ | 110,793 | $ | 121,149 | $ | 124,959 | |||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||||||||||||
Savings, NOW and money-market deposits | $ | 22,000 | 175 | .80 | $ | 22,062 | 112 | .51 | $ | 23,360 | 117 | 0.50 | $ | 19,314 | 124 | 0.64 | |||||||||||||||||||||||||||||
Time deposits | 23,032 | 335 | 1.45 | 50,367 | 562 | 1.11 | 60,813 | 611 | 1.00 | 59,158 | 524 | 0.89 | |||||||||||||||||||||||||||||||||
Borrowings (4) | 29,213 | 736 | 2.52 | 25,672 | 522 | 2.03 | 24,416 | 351 | 1.44 | 23,158 | 236 | 1.02 | |||||||||||||||||||||||||||||||||
Total interest-bearing liabilities/interest expense | 74,245 | 1,246 | 1.68 | 98,101 | 1,196 | 1.22 | 108,589 | 1,079 | .99 | 101,630 | 884 | 0.87 | |||||||||||||||||||||||||||||||||
Noninterest-bearing demand deposits | 11,893 | 6,551 | 5,870 | 8,497 | |||||||||||||||||||||||||||||||||||||||||
Other liabilities | 2,105 | 3,380 | 3,526 | 11,771 | |||||||||||||||||||||||||||||||||||||||||
Stockholders’ equity | 4,027 | 2,761 | 3,164 | 3,061 | |||||||||||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 92,270 | $ | 110,793 | $ | 121,149 | $ | 124,959 | |||||||||||||||||||||||||||||||||||||
Net interest income | $ | 3,046 | $ | 3,520 | $ | 3,685 | $ | 3,650 | |||||||||||||||||||||||||||||||||||||
Interest rate spread (2) | 3.10 | 3.05 | 3.04 | 3.31 | |||||||||||||||||||||||||||||||||||||||||
Net interest margin (3) | 3.39 | 3.19 | 3.12 | 3.37 | |||||||||||||||||||||||||||||||||||||||||
Ratio of average interest-earning assets to average interest- bearing liabilities | 1.21 | 1.13 | 1.09 | 1.07 |
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, 2018 versus 2017 Increases (Decreases) Due to Change In: | ||||||||||||||||
Rate | �� | Volume | Rate/ Volume | Total | ||||||||||||
Interest-earning assets: | ||||||||||||||||
Loans | $ | (146 | ) | $ | (70 | ) | $ | 2 | $ | (214 | ) | |||||
Securities | 33 | (153 | ) | (14 | ) | (134 | ) | |||||||||
Other interest-earning assets | 285 | (159 | ) | (202 | ) | (76 | ) | |||||||||
Total interest-earning assets | 172 | (382 | ) | (214 | ) | (424 | ) | |||||||||
Interest-bearing liabilities: | ||||||||||||||||
Savings, NOW and money-market | 63 | 0 | 0 | 63 | ||||||||||||
Time deposits | 171 | (305 | ) | (93 | ) | (227 | ) | |||||||||
Other | 125 | 72 | 17 | 214 | ||||||||||||
Total interest-bearing liabilities | 359 | (233 | ) | (76 | ) | 50 | ||||||||||
Net interest income | $ | (187 | ) | $ | (149 | ) | $ | (138 | ) | $ | (474 | ) |
Year Ended December 31, 2017 versus 2016 Increases (Decreases) Due to Change In: | ||||||||||||||||
Rate | Volume | Rate/ Volume | Total | |||||||||||||
Interest-earning assets: | ||||||||||||||||
Loans | $ | 299 | $ | (386 | ) | $ | (27 | ) | $ | (114 | ) | |||||
Securities | 1 | (94 | ) | — | (93 | ) | ||||||||||
Other interest-earning assets | 58 | 40 | 21 | 119 | ||||||||||||
Total interest-earning assets | 358 | (440 | ) | (6 | ) | (88 | ) | |||||||||
Interest-bearing liabilities: | ||||||||||||||||
Savings, NOW and money-market | 2 | (7 | ) | — | (5 | ) | ||||||||||
Time deposits | 68 | (105 | ) | (12 | ) | (49 | ) | |||||||||
Other | 145 | 18 | 7 | 170 | ||||||||||||
Total interest-bearing liabilities | 215 | (94 | ) | (5 | ) | 116 | ||||||||||
Net interest income | $ | 143 | $ | (346 | ) | $ | (1 | ) | $ | (204 | ) |
Financial Condition as of December 31, 2018 Compared to December 31, 2017
The Company’s total assets increased by $4.5 million at December 31, 2018, to $100.4 million.
At December 31, 2018, the Bank had a Tier 1 leverage ratio of 11.68%, and a total risk-based capital ratio of 15.86%. The Company’s capital was enhanced during 2018 through the sale of $525,000 of common stock, the issuance of common stock for compensation of $615,000, and common stock issued in exchange for1,881 Trust Preferred Securities, with fair value of $694,000 plus accrued interest of $211,000, which resulted in $905,000 increase in Company’s capital.
Junior Subordinated Debenture. The Company is in default with respect to its $5,155,000 Junior Subordinated Debenture (the “Debenture”) due to its failure to make certain required interest payments under the Debenture. The Debenture was issued to Optimum Bank Holdings Capital Trust I, a Delaware statutory trust formed by the Company for the purpose of issuing and selling certain securities (the “Trust Preferred Securities”) representing undivided beneficial interests in the Debenture. The trust issued a total of 5,000 Trust Preferred Securities.
The Trustee, Wells Fargo Bank, for the Debenture (the “Trustee”) and the beneficial owners of the Debenture are entitled to accelerate the payment of the $5,155,000 principal balance plus accrued and unpaid interest totaling $1,686,350 at December 31, 2018. To date, neither the Trustee nor the holders have accelerated thehad an outstanding balance of the Debenture. No adjustments to the accompanying consolidated financial statements have been made as a result of this uncertainty.
In May 2018, a company affiliated with a director of the Company (the “New Holder”) purchased all 5,000 Trust Preferred Securities from a third party. During the third quarter of 2018, the New Holder sold its rights in approximately 694 of the Trust Preferred Securities to several unaffiliated third parties, who subsequently exchanged these Trust Preferred Securities for 301,778 shares of the Company’s common stock. Due to regulatory agreement the exchange of Trust Preferred Securities for the Company’s common stock cannot reduce the principal amount of the Debenture collateralizing the Trust Preferred Securities. Accordingly it is recorded as an increase in the Company’s equity interest in the unconsolidated subsidiary trust, presented in “Other Assets” in the accompanying consolidated balance sheets.
Although the Company and the New Holder have not executed a formal, definitive bilateral agreement, the New Holder has provided the Company with written representations that the New Holder will not accelerate and demand payment of any of the remaining 4,306 Trust Preferred Securities principal or accrued interest within the next twelve months from the date this Annual Report, Form 10-K as of and for the year ended December 31, 2018, is filed with the Securities and Exchange Commission.
Results of Operations for Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
General. Net earnings of $796,000 or $.53 earnings per basic and diluted share for the year ended December 31, 2018 compared to net loss for the year ended December 31, 2017 of $589,000 or $.53 loss per basic and diluted share.
Interest income. Interest income decreased to $4.3 million for the year ended December 31, 2018 compared to $4.7 million for the year ended December 31, 2017. Interest on loans decreased by $214,000 due to a decrease in average balance of loans in 2018 compared to 2017. Interest on securities decreased by $134,000 due to a decrease in average balance of securities in 2018 compared to 2017. Other interest income decreased by $76,000 as the bank’s average deposits decreased, resulting in a decrease in cash available for other interest-earning assets.
Interest expense. Interest expense on deposits was $510,000 during the year ended December 31, 2018 compared to $674,000 during the year ended December 31, 2017. Interest expense on borrowings was $736,000 in the year ended December 31, 2018 compared to $522,000 during the year ended December 31, 2017.
Provision for Loan Losses. In June 2018, the Bank reversed $2.1 million of the allowance for loan losses into income, which was later offset by a $0.3 million provision for loan losses during the fourth quarter of 2018. There was no provision or credit for losses during the year ended December 31, 2017. The provision or credit 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 portfolio at December 31, 2018. Management’s periodic evaluation of the adequacy of the allowance is based upon historical experience, the volume and type of lending conducted by 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 our market areas, and other factors related to the estimated collectability of our loan portfolio. The allowance for loan losses totaled $2.2 million or 2.8% of loans outstanding at December 31, 2018, as compared to $4.0 million or 5.5% of loans outstanding at December 31, 2017. Management believes the balance in the allowance for loan losses at December 31, 2018 is adequate. The Company determined that it was appropriate to decrease in the amount of the Company’s allowance for loan losses due to the continued improvement in the performance and credit quality of the loan portfolio.
Noninterest Income. Total noninterest income increased to $84,000 for the year ended December 31, 2018, from $52,000 for the year ended December 31, 2017 primarily due to loss on sale of securities during 2017 and an increase in service charges and fees in 2018.
Noninterest Expenses. Total noninterest expenses decreased by $73,000 for the year ended December 31, 2018, from $4,161,000 for the year ended December 31, 2017 to $4,088,000 for the year ended December 31, 2018, primarily due to an accrual related to a BSA look back project.
Income Taxes. There were no income taxes during the years ended December 31, 2018 and 2017.
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 Financial Statements
We have audited the accompanying consolidated balance sheets of OptimumBank Holdings, Inc. and Subsidiary (the “Company”), as of December 31, 2018 and 2017 and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for the years then ended and the related notes (collectively referred to as the “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, 2018 and 2017, 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.
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.
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Balance Sheets(Dollars in thousands, except per share amounts)
December 31, | December 31, | |||||||
2018 | 2017 | |||||||
Assets: | ||||||||
Cash and due from banks | $ | 1,934 | $ | 1,224 | ||||
Interest-bearing deposits with banks | 6,049 | 10,441 | ||||||
Total cash and cash equivalents | 7,983 | 11,665 | ||||||
Securities available for sale | 2,359 | 11,437 | ||||||
Securities held-to-maturity (fair value of $7,175) | 7,139 | — | ||||||
Loans, net of allowance for loan losses of $2,243 and $3,991 | 77,200 | 68,220 | ||||||
Federal Home Loan Bank stock | 1,132 | 979 | ||||||
Premises and equipment, net | 2,668 | 2,593 | ||||||
Accrued interest receivable | 314 | 316 | ||||||
Other assets | 1,573 | 656 | ||||||
Total assets | $ | 100,368 | $ | 95,866 | ||||
Liabilities and Stockholders’ Equity: | ||||||||
Liabilities: | ||||||||
Noninterest-bearing demand deposits | 9,638 | 12,632 | ||||||
Savings, NOW and money-market deposits | 26,682 | 22,045 | ||||||
Time deposits | 26,058 | 30,574 | ||||||
Total deposits | 62,378 | 65,251 | ||||||
Federal Home Loan Bank advances | 24,600 | 20,500 | ||||||
Junior subordinated debenture | 5,155 | 5,155 | ||||||
Federal funds purchased | 560 | — | ||||||
Official checks | 274 | 46 | ||||||
Other liabilities | 2,095 | 2,369 | ||||||
Total liabilities | 95,062 | 93,321 | ||||||
Commitments and contingencies (Notes 4, 7 and 13) | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, no par value; 6,000,000 shares authorized: Designated Series A, no par value, $25,000 liquidation value per share, none issued or outstanding in 2018 and 7 shares issued and outstanding in 2017 | — | — | ||||||
Common stock, $.01 par value; 5,000,000 shares authorized, 1,858,020 shares issued and outstanding in 2018 and 1,120,947 shares issued and outstanding in 2017 | 18 | 11 | ||||||
Additional paid-in capital | 36,128 | 34,090 | ||||||
Accumulated deficit | (30,510 | ) | (31,306 | ) | ||||
Accumulated other comprehensive loss | (330 | ) | (250 | ) | ||||
Total stockholders’ equity | 5,306 | 2,545 | ||||||
Total liabilities and stockholders’ equity | $ | 100,368 | $ | 95,866 |
See accompanying notes to Consolidated Financial Statements
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Operations(In thousands, except share amounts)
Year Ended December 31, | ||||||||
2018 | 2017 | |||||||
Interest income: | ||||||||
Loans | $ | 3,912 | $ | 4,126 | ||||
Securities | 232 | 366 | ||||||
Other | 148 | 224 | ||||||
Total interest income | 4,292 | 4,716 | ||||||
Interest expense: | ||||||||
Deposits | 510 | 674 | ||||||
Borrowings | 736 | 522 | ||||||
Total interest expense | 1,246 | 1,196 | ||||||
Net interest income | 3,046 | 3,520 | ||||||
Creditfor loan losses | 1,754 | — | ||||||
Net interest income after credit for loan losses | 4,800 | 3,520 | ||||||
Noninterest income: | ||||||||
Service charges and fees | 49 | 26 | ||||||
Other | 35 | 15 | ||||||
Gain on sale of securities available for sale | — | 11 | ||||||
Total noninterest income | 84 | 52 | ||||||
Noninterest expenses: | ||||||||
Salaries and employee benefits | 1,864 | 1,770 | ||||||
Occupancy and equipment | 437 | 415 | ||||||
Data processing | 407 | 342 | ||||||
Professional fees | 558 | 784 | ||||||
Insurance | 95 | 95 | ||||||
Regulatory assessments | 114 | 202 | ||||||
Other | 613 | 553 | ||||||
Total noninterest expenses | 4,088 | 4,161 | ||||||
Net earnings (loss) | $ | 796 | $ | (589 | ) | |||
Net earnings (loss) per share: | ||||||||
Basic and diluted | $ | .53 | $ | (.53 | ) |
See Accompanying Notes to Consolidated Financial Statements.
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income (Loss)(In thousands)
Year Ended | ||||||||
December 31, | ||||||||
2018 | 2017 | |||||||
Net earnings (loss) | $ | 796 | $ | (589 | ) | |||
Other comprehensive (loss) income: | ||||||||
Change in unrealized loss on securities: | ||||||||
Unrealized gain arising during the year | 270 | 82 | ||||||
Amortization of unrealized loss on securities transferred to held-to-maturity | 55 | — | ||||||
Reclassification adjustment for unrealized loss on securities transferred to held-to-maturity | (432 | ) | — | |||||
Reclassification adjustment for realized gain on sale of securities available for sale | — | (11 | ) | |||||
Other comprehensive (loss) income before income tax benefit (expense) | (107 | ) | 71 | |||||
Deferred income tax benefit (expense) on above change | 27 | (69 | ) | |||||
Total other comprehensive (loss) income | (80 | ) | 2 | |||||
Comprehensive income (loss) | $ | 716 | $ | (587 | ) |
See Accompanying Notes to Consolidated Financial Statements.
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2018 and 2017(Dollars in thousands)
Preferred | Accumulated | |||||||||||||||||||||||||
Stock | Additional | Other | Total | |||||||||||||||||||||||
Series A | Common Stock | Paid-In | Accumulated | Comprehensive | Stockholders’ | |||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||
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 | ||||||||||||
Proceeds from sale of common stock | — | — | 211,367 | 2 | 523 | — | — | 525 | ||||||||||||||||||
Common stock issued as compensation to directors | — | — | 144,742 | 2 | 613 | — | — | 615 | ||||||||||||||||||
Common stock issued in exchange for Preferred Stock | (7 | ) | — | 79,186 | — | — | — | — | — | |||||||||||||||||
Common stock issued in exchange for Trust Preferred Securities | — | — | 301,778 | 3 | 902 | — | — | 905 | ||||||||||||||||||
Net change in unrealized loss on securities available for sale, net of income taxes | — | — | — | — | — | — | 200 | 200 | ||||||||||||||||||
Amortization of unrealized loss on securities transferred to held-to-maturity | — | — | — | — | — | — | 44 | 44 | ||||||||||||||||||
Unrealized loss on securities transferred to held-to-maturity, net of income tax benefit | — | — | — | — | — | — | (324 | ) | (324 | ) | ||||||||||||||||
Net earnings | — | — | — | — | — | 796 | — | 796 | ||||||||||||||||||
Balance at December 31, 2018 | — | $ | — | 1,858,020 | $ | 18 | $ | 36,128 | $ | (30,510 | ) | $ | (330 | ) | $ | 5,306 |
See Accompanying Notes to Consolidated Financial Statements.
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows(In thousands)
Year Ended December 31, | ||||||||
2018 | 2017 | |||||||
Cash flows from operating activities: | ||||||||
Net earnings (loss) | $ | 796 | $ | (589 | ) | |||
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 159 | 149 | ||||||
Common stock issued as compensation for services | — | 21 | ||||||
Net amortization of fees, premiums and discounts | 237 | 211 | ||||||
Credit for loan losses | (1,754 | ) | — | |||||
Gain from sale of securities available for sale | — | (11 | ) | |||||
Decrease in accrued interest receivable | 2 | 64 | ||||||
Decrease (increase) in other assets | 15 | (24 | ) | |||||
Increase in official checks and other liabilities | 569 | 749 | ||||||
Net cash provided by operating activities | 24 | 570 | ||||||
Cash flows from investing activities: | ||||||||
Principal repayments of securities available for sale | 906 | 2,189 | ||||||
Proceeds from sale of securities available for sale | — | 6,448 | ||||||
Principal repayments of securities held-to-maturity | 814 | — | ||||||
Net (increase) decrease in loans | (7,351 | ) | 8,798 | |||||
Purchase of premises and equipment, net | (234 | ) | (94 | ) | ||||
(Purchase) redemption of Federal Home Loan Bank stock | (153 | ) | 134 | |||||
Net cash (used in) provided by investing activities | (6,018 | ) | 17,475 | |||||
Cash flows from financing activities: | ||||||||
Net decrease in deposits | (2,873 | ) | (20,836 | ) | ||||
Purchase (repayments) of Federal Home Loan Bank advances, net | 4,100 | (3,000 | ) | |||||
Net decrease in advanced payment by borrowers for taxes and insurance | — | (214 | ) | |||||
Proceeds from sale of common stock | 525 | 30 | ||||||
Increase in federal funds purchased | 560 | — | ||||||
Net cash provided by (used in) financing activities | 2,312 | (24,020 | ) | |||||
Decrease in cash and cash equivalents | (3,682 | ) | (5,975 | ) | ||||
Cash and cash equivalents at beginning of the year | 11,665 | 17,640 | ||||||
Cash and cash equivalents at end of the year | $ | 7,983 | $ | 11,665 |
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued(In thousands)
Year Ended December 31, | ||||||||
2018 | 2017 | |||||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the year for: | ||||||||
Interest | $ | 931 | $ | 980 | ||||
Income taxes | $ | — | $ | — | ||||
Noncash transactions: | ||||||||
Change in accumulated other comprehensive loss, net change in unrealized loss on securities available for sale, net of income taxes | $ | (80 | ) | $ | 2 | |||
Transfer of securities from available for sale to held-to-maturity | $ | 7,945 | $ | — | ||||
Reclassification of stock compensation from other liabilities to common stock | $ | 615 | $ | — | ||||
Issuance of common stock in exchange for Trust Preferred Securities | $ | 905 | $ | — | ||||
Amortization of unrealized loss on securities transferred to held-to-maturity | $ | 55 | $ | — |
See Accompanying Notes to Consolidated Financial Statements.
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
At December 31, 2018 and 2017 and for the Years Then Ended
Organization.OptimumBank Holdings, Inc. (the “Holding Company”) is a one-bank holding company and owns 100% of OptimumBank (the “Bank”), a Florida-chartered commercial bank. The Holding Company’s only business is the operation of the Bank and its subsidiaries (collectively, the “Company”). 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 three banking offices located in Broward County, Florida.
Basis of Presentation. The accompanying consolidated financial statements include the accounts of the Holding Company, the Bank and the Real Estate Subsidiaries. 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.
Junior Subordinated Debenture. The Company is in default with respect to its $5,155,000 Junior Subordinated Debenture (the “Debenture”) due to its failure to make certain required interest payments under the Debenture. The Debenture was issued to Optimum Bank Holdings Capital Trust I, a Delaware statutory trust formed by the Company for the purpose of issuing and selling certain securities (the “Trust Preferred Securities”) representing undivided beneficial interests in the Debenture. The trust issued a total of 5,000 Trust Preferred Securities.
The Trustee, Wells Fargo Bank, for the Debenture (the “Trustee”) and the beneficial owners of the Debenture are entitled to accelerate the payment of the $5,155,000 principal balance plus accrued and unpaid interest totaling $1,686,350 at December 31, 2018. To date, neither the Trustee nor the holders have accelerated the outstanding balance of the Debenture. No adjustments to the accompanying consolidated financial statements have been made as a result of this uncertainty.
In May 2018, a company affiliated with a director of the Company (the “New Holder”) purchased all 5,000 Trust Preferred Securities from a third party. During the third quarter of 2018, the New Holder sold its rights in approximately 694 of the Trust Preferred Securities to several unaffiliated third parties, who subsequently exchanged these Trust Preferred Securities for 301,778 shares of the Company’s common stock. Due to regulatory agreement the exchange of Trust Preferred Securities for the Company’s common stock cannot reduce the principal amount of the Debenture collateralizing the Trust Preferred Securities. Accordingly is recorded as an increase in the Company’s equity interest in the unconsolidated subsidiary trust, presented in “Other Assets” in the accompanying consolidated balance sheets.
Although the Company and the New Holder have not executed a formal, definitive bilateral agreement, the New Holder has provided the Company with written representations that the New Holder will not accelerate and demand payment of any of the remaining 4,306 Trust Preferred Securities principal or accrued interest within the next twelve months from the date this Annual Report, Form 10-K as of and for the year ended December 31, 2018, is filed with the Securities and Exchange Commission.
Use of 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$2,644,000 as of the completion 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. 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. At December 31, 2018 and 2017, there were no required cash reserves.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Securities.Securities may be classified as trading, held to maturity or available for sale. Trading securities are held principally for resale and recorded at their fair values. Unrealized gains and losses on trading securities are included immediately in operations. Held-to-maturity securities are those which management has the positive intent and ability to hold to maturity and are reported at amortized cost. Available for sale securities consist of securities not classified as trading securities nor as held to maturity securities. Unrealized holding gains and losses on available for sale securities are reported as a net amount in accumulated other comprehensive loss in stockholders’ equity until realized. Gains and losses on the sale of available for sale securities are determined using the specific-identification method. Premiums and discounts on securities are recognized in interest income using the interest method over the period to maturity.
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. A security is impaired if the fair value is less than its carrying value at the financial statement date. When a 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 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 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 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 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 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. 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, 2018 and 2017.
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
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: economic trends and conditions; experience, ability and depth of lending management; national and local political environment; industry conditions and trends in charge-offs; and other trends or uncertainties that could affect management’s estimate of probable losses.
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. 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.The Company owns all of the common stock of OptimumBank Holdings Capital Trust I (“Issuer Trust”), an unconsolidated subsidiary trust. The Issuer Trust used 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 associated with the issuance of 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” in the accompanying consolidated balance sheets (See Note 6).
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.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.
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Income 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 are recorded as a component of income tax expense. See Note 9 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.
On December 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 the income tax provision due to the valuation allowance on the deferred tax asset.
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 $40,000 and $69,000 during the years ended December 31, 2018 and 2017, respectively.
Stock Compensation Plan. The Company has adopted the fair value recognition method and expenses the fair value of any stock options as they vest. Under the fair value recognition method, the Company recognizes stock-based compensation in the accompanying consolidated statements of operations.
Earnings (loss) Per Share. Basic earnings (loss) per share is computed on the basis of the weighted-average number of common shares outstanding. In 2018, basic and diluted earnings per share is the same as there were no outstanding potentially dilutive securities. In 2017, basic and diluted loss per share is the same due to the net loss incurred by the Company. Earnings (loss) per common share has been computed based on the following:
Year Ended December 31, | ||||||||
2018 | 2017 | |||||||
Weighted-average number of common shares outstanding used to calculate basic and diluted earnings (loss) per common share | 1,493,303 | 1,104,995 |
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Off-Balance-Sheet Financial 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. 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. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government bonds, certain mortgage products and exchange-traded equities. 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 mortgage-backed securities and U.S. Government and agency securities.
Impaired Loans. The Company’s impaired loans are normally collateral dependent and, as such, are carried at the lower of the Company’s net recorded investment in the loan or fair market value of the collateral less estimated selling costs. Estimates of 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 estimates for impaired loans are classified as Level 3.
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Fair Values of Financial 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).
Securities.Fair values for 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).
Federal Funds Purchased. The carrying amount of federal funds purchased approximates its fair value (Level 1).
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 income (loss). GAAP generally requires that recognized revenue, expenses, gains and losses be included in net earnings (loss). Although certain changes in consolidated assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the consolidated balance sheets, such items along with net earnings (loss), are components of comprehensive income (loss).
Accumulated other comprehensive loss consists of the following (in thousands):
December 31, | December 31, | |||||||
2018 | 2017 | |||||||
Unrealized loss on securities available for sale | $ | (64 | ) | $ | (334 | ) | ||
Unamortized portion of unrealized loss related to securities available for sale transferred to securities held-to-maturity | (377 | ) | — | |||||
Income tax benefit | 111 | 84 | ||||||
$ | (330 | ) | $ | (250 | ) |
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Recent Pronouncements.In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-2, Leases (Topic 842) which will require lessees to recognize on the consolidated balance sheet the assets and liabilities for the rights and obligations created by those leases with a 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 consolidated 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 consolidated financial statements. The ASU is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. The Company estimates that the effect of the ASU will increase assets by $276,000, liabilities by $280,000 and accumulated deficit by $4,000.
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, 2020. Early adoption is permitted. The Company is in the process of determining the effect of the ASU on its 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. The adoption of guidance will not have a material impact on the Company’s consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Stock Compensation(Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The ASU is intended to reduce the cost and complexity and to improve financial reporting for nonemployee share-based payments. The ASU expands the scope of Topic 718. Compensation Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The ASU supersedes Subtopic 505-50,Equity-Equity-Based payments to Non-Employees. The ASU is effective for the Company for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The adoption of this guidance will not have a material impact on the company’s consolidated financial statements.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(2)Securities. Securities have been classified according to management’s intent. The carrying amount of securities and approximate fair values are as follows (in thousands):
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
At December 31, 2018: | ||||||||||||||||
Held-to-maturity – | ||||||||||||||||
Collateralized mortgage obligations | $ | 7,139 | $ | 40 | $ | (4 | ) | $ | 7,175 | |||||||
Available for sale – | ||||||||||||||||
SBA Pool Securities | $ | 2,423 | $ | — | $ | (64 | ) | $ | 2,359 | |||||||
At December 31, 2017 – | ||||||||||||||||
Securities Available for Sale: | ||||||||||||||||
Collateralized mortgage obligations | $ | 8,806 | $ | — | $ | (340 | ) | $ | 8,466 | |||||||
SBA Pool Securities | 2,965 | 10 | (4 | ) | 2,971 | |||||||||||
Total | $ | 11,771 | $ | 10 | $ | (344 | ) | $ | 11,437 |
In April 2018, the bank transferred securities of $7,945,000 from the available-for-sale category to the held-to-maturity category at their then fair values resulting in unrealized losses of $432,000. The unrealized loss which is recorded in the stockholders’ equity net of amortization and net of tax is being amortized over the remaining term of the securities. At December 31, 2018, $55,000 has been amortized.
There were no sales of securities available for sale during the year ended December 31, 2018.
The following summarizes the sale of securities available for sale during the year ended December 31, 2017 (in thousands):
Proceeds from sales | $ | 6,448 | ||
Gross gains from sales | 11 | |||
Gross loss from sales | - | |||
Net gain from sales | $ | 11 |
Securities with gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous loss position, is as follows (in thousands):
At December 31, 2018 | ||||||||||||||||
Over Twelve Months | Less Than Twelve Months | |||||||||||||||
Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | |||||||||||||
Held-to-maturity — | ||||||||||||||||
Collateralized mortgage obligations | $ | 4 | $ | 1,361 | $ | — | $ | — | ||||||||
Available for Sale — | ||||||||||||||||
SBA Pool Securities | $ | 24 | $ | 829 | $ | 40 | $ | 1,530 |
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 Securities | $ | 3 | $ | 539 | $ | 1 | $ | 540 | ||||||||
343 | 9,005 | $ | 1 | $ | 540 |
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(2)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, 2018 and 2017, the unrealized losses on seven and eight investment securities, respectively were caused by market conditions. It is expected that the securities would 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, 2018 – | ||||||||||||||||
SBA Pool Securities | $ | 2,359 | $ | — | $ | 2,359 | $ | — | ||||||||
At December 31, 2017: | ||||||||||||||||
Collateralized mortgage obligations | $ | 8,466 | $ | — | $ | 8,466 | $ | — | ||||||||
SBA Pool Securities | 2,971 | — | 2,971 | — | ||||||||||||
$ | 11,437 | $ | — | $ | 11,437 | $ | — |
During the years ended December 31, 2018 and 2017, no securities were transferred in or out of Level 1, 2 or 3.
As of December 31, 2018, the Company had pledged Securities with a market value of $453,000 as collateral for the Federal Reserve Bank Discount Window.
The Company’s available-for-sale and held-to-maturity securities all have contractual maturity dates which are greater than ten years after December 31, 2018. Expected maturities of these securities will differ from contractual maturities because borrowers have the right to call or repay obligations with or without call or prepayment penalties.
(continued)Exchange Offer.
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3)Loans.The components of loans are as follows (in thousands):
At December 31, | At December 31, | |||||||
2018 | 2017 | |||||||
Residential real estate | $ | 27,204 | $ | 26,054 | ||||
Multi-family real estate | 8,195 | 7,356 | ||||||
Commercial real estate | 36,634 | 32,152 | ||||||
Land and construction | 1,998 | 1,051 | ||||||
Commercial | 4,997 | 4,522 | ||||||
Consumer | 260 | 794 | ||||||
Total loans | 79,288 | 71,929 | ||||||
Add (deduct): | ||||||||
Net deferred loan fees, costs and premiums | 155 | 282 | ||||||
Allowance for loan losses | (2,243 | ) | (3,991 | ) | ||||
Loans, net | $ | 77,200 | $ | 68,220 |
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)
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, 2018 and 2017 follows (in thousands):
Residential Real Estate | Multi-Family Real Estate | Commercial Real Estate | Land and Construction | Commercial | Consumer | Unallocated | Total | |||||||||||||||||||||||||
Year Ended December 31, 2018: | ||||||||||||||||||||||||||||||||
Beginning balance | $ | 641 | $ | 59 | $ | 759 | $ | 22 | $ | 55 | $ | 86 | $ | 2,369 | $ | 3,991 | ||||||||||||||||
(Credit) provision for loan losses | (97 | ) | 29 | (192 | ) | (26 | ) | 795 | (44 | ) | (2,219 | ) | (1,754 | ) | ||||||||||||||||||
Charge-offs | — | — | — | — | — | (25 | ) | — | (25 | ) | ||||||||||||||||||||||
Recoveries | — | — | — | 23 | — | 8 | — | 31 | ||||||||||||||||||||||||
Ending balance | $ | 544 | $ | 88 | $ | 567 | $ | 19 | $ | 850 | $ | 25 | $ | 150 | $ | 2,243 | ||||||||||||||||
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 |
(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, 2018 and 2017 follows (in thousands):
Residential Real Estate | Multi-Family Real Estate | Commercial Real Estate | Land and Construction | Commercial | Consumer | Unallocated | Total | |||||||||||||||||||||||||
At December 31, 2018: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment: | ||||||||||||||||||||||||||||||||
Recorded investment | $ | 954 | $ | — | $ | 3,861 | $ | — | $ | 1,928 | $ | — | $ | — | $ | 6,743 | ||||||||||||||||
Balance in allowance for loan losses | $ | 268 | $ | — | $ | 162 | $ | — | $ | 814 | $ | — | $ | — | $ | 1,244 | ||||||||||||||||
Collectively evaluated for impairment: | ||||||||||||||||||||||||||||||||
Recorded investment | $ | 26,250 | $ | 8,195 | $ | 32,773 | $ | 1,998 | $ | 3,069 | $ | 260 | $ | — | $ | 72,545 | ||||||||||||||||
Balance in allowance for loan losses | $ | 276 | $ | 88 | $ | 405 | $ | 19 | $ | 36 | $ | 25 | $ | 150 | $ | 999 | ||||||||||||||||
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 |
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”). That increased the balance of the ALLL to approximately $4.2 million. 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. During the second quarter of 2018, the FDIC approved management’s request. In June 2018, the Bank reversed $2.1 million of the ALLL into income.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
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.
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, 2018: | ||||||||||||||||||||||||
Residential real estate | $ | 26,250 | $ | — | $ | 954 | $ | — | $ | — | $ | 27,204 | ||||||||||||
Multi-family real estate | 8,195 | — | — | — | — | 8,195 | ||||||||||||||||||
Commercial real estate | 31,050 | 1,723 | 3,861 | — | — | 36,634 | ||||||||||||||||||
Land and construction | 1,998 | — | — | — | — | 1,998 | ||||||||||||||||||
Commercial | 2,362 | 707 | 1,928 | — | — | 4,997 | ||||||||||||||||||
Consumer | 260 | — | — | — | — | 260 | ||||||||||||||||||
Total | $ | 70,115 | $ | 2,430 | $ | 6,743 | $ | — | $ | — | $ | 79,288 | ||||||||||||
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 |
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
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 | ||||||||||||||||||||||
At December 31, 2018: | ||||||||||||||||||||||||||||
Residential real estate | $ | — | $ | — | $ | — | $ | — | $ | 27,204 | $ | — | $ | 27,204 | ||||||||||||||
Multi-family real estate | — | — | — | — | 8,195 | — | 8,195 | |||||||||||||||||||||
Commercial real estate | — | — | — | — | 35,254 | 1,380 | 36,634 | |||||||||||||||||||||
Land and construction | — | — | — | — | 1,998 | — | 1,998 | |||||||||||||||||||||
Commercial | — | — | — | — | 4,997 | — | 4,997 | |||||||||||||||||||||
Consumer | — | — | — | — | 260 | — | 260 | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | 77,908 | $ | 1,380 | $ | 79,288 |
At December 31, 2017, no loans were past due, more than thirty days and no loans were on nonaccrual.
The following summarizes the amount of impaired loans (in thousands):
At December 31, 2018 | At December 31, 2017 | |||||||||||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||
Residential real estate | $ | — | $ | — | $ | — | $ | 194 | $ | 217 | $ | — | ||||||||||||
Commercial real estate | 2,259 | 2,259 | — | 231 | 231 | — | ||||||||||||||||||
Commercial | 1,114 | 1,114 | — | — | — | — | ||||||||||||||||||
With related allowance recorded: | ||||||||||||||||||||||||
Residential real estate | 954 | 954 | 268 | 978 | 978 | 330 | ||||||||||||||||||
Commercial real estate | 1,602 | 1,602 | 162 | 744 | 744 | 83 | ||||||||||||||||||
Commercial | 814 | 814 | 814 | — | — | — | ||||||||||||||||||
Total | ||||||||||||||||||||||||
Residential real estate | $ | 954 | $ | 954 | $ | 268 | $ | 1,172 | $ | 1,195 | $ | 330 | ||||||||||||
Commercial real estate | $ | 3,861 | $ | 3,861 | $ | 162 | $ | 975 | $ | 975 | $ | 83 | ||||||||||||
Commercial | $ | 1,928 | $ | 1,928 | $ | 814 | $ | — | $ | — | $ | — | ||||||||||||
Total | $ | 6,743 | $ | 6,743 | $ | 1,244 | $ | 2,147 | $ | 2,170 | $ | 413 |
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
For the Year Ended December 31, | ||||||||||||||||||||||||
2018 | 2017 | |||||||||||||||||||||||
Average Recorded Investment | Interest Income Recognized | Interest Income Received | Average Recorded Investment | Interest Income Recognized | Interest Income Received | |||||||||||||||||||
Residential real estate | $ | 981 | $ | 76 | $ | 76 | $ | 817 | $ | 226 | $ | 121 | ||||||||||||
Commercial real estate | $ | 677 | $ | 25 | $ | 25 | $ | 984 | $ | 52 | $ | 52 | ||||||||||||
Commercial | $ | 1,638 | $ | 86 | $ | 86 | $ | — | $ | — | $ | — | ||||||||||||
Total | $ | 3,296 | $ | 187 | $ | 187 | $ | 1,801 | $ | 278 | $ | 173 |
There were no loans modified and determined to be troubled debt restructurings during the years ended December 31, 2018 and 2017.
A summary of premises and equipment follows (in thousands):
At December 31, | ||||||||
2018 | 2017 | |||||||
Land | $ | 1,171 | $ | 1,171 | ||||
Buildings and improvements | 2,123 | 2,105 | ||||||
Furniture, fixtures and equipment | 684 | 1,308 | ||||||
Leasehold improvements | 127 | 131 | ||||||
Total, at cost | 4,105 | 4,715 | ||||||
Less accumulated depreciation and amortization | (1,437 | ) | (2,122 | ) | ||||
Premises and equipment, net | $ | 2,668 | $ | 2,593 |
The Company currently leases one branch facility under an operating lease. The lease contains renewal options and requires the Company to pay an allowable share of common area maintenance and real estate taxes. Rent expense under the operating lease during the years ended December 31, 2018 and 2017 was $90,000 and $73,000, respectively. At December 31, 2018, the future minimum lease payments are approximately as follows (in thousands):
Year Ending December 31, | Amount | |||
2019 | $ | 92 | ||
2020 | 95 | |||
2021 | 98 | |||
2022 | 93 | |||
Total | $ | 378 |
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The aggregate amount of time deposits with a minimum denomination of $250,000 was approximately $2.7 and $1.3 million at December 31, 2018 and 2017, respectively.
A schedule of maturities of time deposits at December 31, 2018 follows (in thousands):
Year Ending December 31, | Amount | |||
2019 | $ | 20,413 | ||
2020 | 3,914 | |||
2021 | 334 | |||
2022 | 1,095 | |||
2023 | 302 | |||
$ | 26,058 |
The maturities and interest rates on the Federal Home Loan Bank (“FHLB”) advances were as follows (dollars in thousands)
Maturity | ||||||||||||||
Year Ending | Interest | At December 31, | ||||||||||||
December 31, | Rate | 2018 | 2017 | |||||||||||
2018 | 1.53% | $ | — | $ | 5,000 | |||||||||
2019 | 1.60 - 2.65% | 19,600 | 10,500 | |||||||||||
2021 | 1.68% | 5,000 | 5,000 | |||||||||||
$ | 24,600 | $ | 20,500 |
At December 31, 2018, all FHLB advances had fixed interest rates, with the exception of one advance in the amount of $9.1 million which is a daily rate credit and matures in 2019.
At December 31, 2018, the FHLB advances were collateralized by a blanket lien requiring the Company to maintain certain first mortgage loans as pledged collateral. The Company has remaining credit availability of $2.0 million which can be used if additional collateral is pledged. At December 31, 2018, the Company had loans pledged with a carrying value of $39.5 million as collateral for FHLB advances.
At December 31, 2018, the Company also had lines of credit amounting to $8.4 million with four correspondent banks to purchase federal funds. The Company also has a line of credit with the Federal Reserve Bank under which the Company may draw up to $0.4 million. The line is secured by $0.5 million in securities. There were $560,000 of federal funds purchased outstanding with one of the correspondent banks at December 31, 2018. There were no federal funds purchased outstanding at December 31, 2017.
Junior Subordinated Debenture. On September 30, 2004, the Company issued a $5,155,000 Junior Subordinated Debenture (the “Debenture”) to Optimum Bank Holdings Capital Trust I, a Delaware statutory trust formed by the Company for the purpose of issuing and selling certain securities (the “Trust Preferred Securities”) representing undivided beneficial interests in the Debenture. The trust issued a total of 5,000 Trust Preferred Securities. The Debenture has a term of thirty years. The interest rate was fixed at 6.40% for the first five years, and thereafter, the coupon rate floats quarterly at the three-month LIBOR rate plus 2.45% (5.25% at December 31, 2018). The Debenture is redeemable in certain circumstances. The terms of the Debenture allow 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, the Company exercised its right to defer payment of interest on the Debenture. Interest payments deferred as of December 31, 2018 totaled $1,686,350. The Company has deferred interest payments with respect to the Debenture for the maximum allowable twenty consecutive quarterly payments. The Trustee for the Debenture and the beneficial owners of the Debenture can accelerate the $5,155,000 principal balance plus accrued and unpaid interest, as a result of this default. To date, neither the Trustee nor the holders have accelerated the outstanding balance of the Debenture. No adjustments to the accompanying consolidated financial statements have been made as a result of this uncertainty. Under the Written Agreement, the Company is not able to make any interest or principal payments without the prior approval of the Federal Reserve Bank of Atlanta.
In May 2018, a company affiliated with a director of the Company (the “New Holder”) purchased all 5,000 Trust Preferred Securities from a third party. During the third quarter of 2018, the New Holder sold its rights in approximately 694 of the Trust Preferred Securities to several unaffiliated third parties, who subsequently exchanged these Trust Preferred Securities for 301,778 shares of the Company’s common stock. Due to regulatory agreement the exchange of Trust Preferred Securities for the Company’s common stock cannot reduce the prinicipal amount of the Debenture collateralizing the Trust Preferred Securities. Accordingly is recorded as an increase in the Company’s equity interest in the unconsolidated subsidiary trust, presented in “Other Assets” in the accompanying consolidated balance sheets.
Although the Company and the New Holder have not executed a formal, definitive bilateral agreement, the New Holder has provided the Company with written representations that the New Holder will not accelerate and demand payment of any of the remaining 4,306 Trust Preferred Securities principal or accrued interest within the next twelve months from the date this Annual Report, Form 10-K as of and for the year ended December 31, 2018, is filed with the Securities and Exchange Commission.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The estimated fair values of the Company’s financial instruments were as follows (in thousands):
At December 31, 2018 | At December 31, 2017 | |||||||||||||||||||||
CarryingAmount | Fair Value | Level | Carrying Amount | Fair Value | Level | |||||||||||||||||
Financial assets: | ||||||||||||||||||||||
Cash and cash equivalents | $ | 7,983 | $ | 7,983 | 1 | $ | 11,665 | $ | 11,665 | 1 | ||||||||||||
Securities available for sale | 2,359 | 2,359 | 2 | 11,437 | 11,437 | 2 | ||||||||||||||||
Securities held-to-maturity | 7,139 | 7,175 | 2 | — | — | 2 | ||||||||||||||||
Loans | 77,200 | 77,062 | 3 | 68,220 | 68,079 | 3 | ||||||||||||||||
Federal Home Loan Bank stock | 1,132 | 1,132 | 3 | 979 | 979 | 3 | ||||||||||||||||
Accrued interest receivable | 314 | 314 | 3 | 316 | 316 | 3 | ||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||
Deposit liabilities | 62,378 | 62,243 | 3 | 65,251 | 65,475 | 3 | ||||||||||||||||
Federal Home Loan Bank advances | 24,600 | 24,437 | 3 | 20,500 | 20,394 | 3 | ||||||||||||||||
Junior subordinated debenture | 5,155 | N/A | (1) | 3 | 5,155 | N/A | (1) | 3 | ||||||||||||||
Federal funds purchased | 560 | 560 | 3 | — | — | 3 | ||||||||||||||||
Off-balance sheet financial instruments | — | — | 3 | — | — | 3 |
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 Company 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 Company 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, 2018 follows (in thousands):
Commitments to extend credit | $ | 1,820 | ||
Unused lines of credit | $ | 2,735 | ||
Standby letters of credit | $ | - |
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Income tax benefit consisted of the following (in thousands):
Year Ended December 31, | ||||||||
2018 | 2017 | |||||||
Current: | ||||||||
Federal | $ | — | $ | — | ||||
State | — | — | ||||||
Total Current | — | — | ||||||
Deferred: | ||||||||
Federal | 182 | 1,633 | ||||||
State | 38 | (32 | ) | |||||
Change in Valuation Allowance | (220 | ) | (1,601 | ) | ||||
Total Deferred | — | — | ||||||
Total | $ | — | $ | — |
The reasons for the differences between the statutory Federal income tax rate and the effective tax rate are summarized as follows (dollars in thousands):
Year Ended December 31, | ||||||||||||||||
2018 | 2017 | |||||||||||||||
Amount | % of Pretax Loss | Amount | % of Pretax Loss | |||||||||||||
Income tax benefit at statutory rate | $ | 167 | 21.00 | % | $ | (200 | ) | (34.0 | )% | |||||||
Increase (decrease) resulting from: | ||||||||||||||||
State taxes, net of Federal tax benefit | 38 | 4.77 | % | (21 | ) | (3.6 | )% | |||||||||
Other permanent differences | 15 | 1.88 | % | — | — | % | ||||||||||
Reduction in Federal income-tax rate | (220 | ) | (27.65 | )% | 1,822 | 309.3 | % | |||||||||
Change in valuation allowance | — | — | (1,601 | ) | (271.7 | )% | ||||||||||
$ | — | — | $ | — | — |
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, | ||||||||
2018 | 2017 | |||||||
Deferred tax assets: | ||||||||
Net operating loss carryforwards | $ | 3,926 | $ | 3,547 | ||||
Premises and equipment | 70 | 66 | ||||||
Accrued expenses | — | 104 | ||||||
Nonaccrual loan interest | 77 | 122 | ||||||
Unrealized loss on available for sale securities | 111 | 84 | ||||||
Other | 54 | 56 | ||||||
Gross deferred tax assets | 4,238 | 3,979 | ||||||
Less: Valuation allowance | 3,572 | 3,792 | ||||||
Net deferred tax assets | 666 | 187 | ||||||
Deferred tax liabilities: | ||||||||
Allowance for loan losses | (521 | ) | (77 | ) | ||||
Loan costs | (34 | ) | (26 | ) | ||||
Total deferred tax liabilities | (555 | ) | (103 | ) | ||||
Net deferred tax asset | $ | 111 | $ | 84 |
During the years ended December 31, 2018 and 2017, 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.
At December 31, 2018, the Company had net operating loss carryforwards of approximately $15.1 million for Federal tax purposes and $15.1 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 Section 382 limitations.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
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 2015.
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 to 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 a change in unrecognized tax benefits in the next year.
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
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, 2018 or 2017. During 2018, the Company incurred approximately $99,000 in legal fees related to a law firm owned by a director. At December 31, 2018 and 2017, related parties had approximately $1,147,000 and $229,000, respectively, on deposit with the Company. At December 31, 2018, all 4,306 Trust Preferred Securities are owned by a company affiliated with a director of the Company.
The Company is authorized to grant stock options, stock grants and other forms of equity-based compensation under its 2011 Equity Incentive Plan as amended (the “2011 Plan”) and its 2018 Equity Incentive Plan (the “2018 Plan”). Both plans have been approved by shareholders. The Company is authorized to issue up to 210,000 shares of common stock under the 2011 Plan as amended, of which 208,881 have been issued, and 1,119 shares remain available for grant, and up to 250,000 shares of common stock under the 2018 Plan, of which 100,000 have been issued, and 150,000 shares remain available for grant.
The Company’s only grants under the 2011 Plan as amended have been the issuance of shares of common stock to directors for director’s fees and compensation for services rendered. As of April 1, 2017, the Company discontinued the issuance of common stock as a method of payment of director’s fees.
During 2018, the sale of 20,814 shares of common stock to a director of the Company, and the issuance of 79,186 shares of common stock in exchange for 7 shares of the Company’s preferred stock held by a director in April 2018, were treated as grants under the 2018 Plan. Please refer to the Company’s Forms 8-K filed with the Securities and Exchange Commission on November 16, 2018 and January 10, 2019 for further details.
During year ended December 31, 2017, the Company accrued compensation expense of $8,858 with respect to 2,821 shares to be issued to directors at a value of $3.14 per share on account of director’s fees accrued during the first quarter of 2017. These shares were issued in 2018.
During the year ended December 31, 2018, the Company accrued compensation expense of $200,000 with respect to 36,101 shares issued to a director for services performed in 2018. The Company had previously agreed to issue 105,820 shares to this director for services performed in 2016 and 2017. These shares were issued in 2018.
(11) Regulatory Matters. The Bank is subject to various regulatory capital requirements administered by the bank regulatory 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 the 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 its assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(11) Regulatory Matters, Continued
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.
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, 2018 and 2017, the Bank’s capital conservation buffer exceeds the minimum requirements of 1.875% and 1.250%, respectively. The required conservation buffer of 2.50% is effective January 1, 2019.
The following table shows the Bank’s capital amounts and ratios and regulatory thresholds at December 31, 2018 and 2017 (dollars in thousands):
Actual | For Capital Adequacy Purposes | Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | |||||||||||||||||||
As of December 31, 2018: | ||||||||||||||||||||||||
Total Capital to Risk-Weighted Assets | $ | 12,155 | 15.86 | % | $ | 6,132 | 8.00 | % | $ | 7,665 | 10.00 | % | ||||||||||||
Tier I Capital to Risk-Weighted Assets | 11,181 | 14.59 | 4,599 | 6.00 | 6,132 | 8.00 | ||||||||||||||||||
Common equity Tier I capital to Risk-Weighted Assets | 11,181 | 14.59 | 3,449 | 4.50 | 4,983 | 6.50 | ||||||||||||||||||
Tier I Capital to Total Assets | 11,181 | 11.68 | 3,828 | 4.00 | 4,785 | 5.00 | ||||||||||||||||||
As of December 31, 2017: | ||||||||||||||||||||||||
Total Capital to Risk-Weighted Assets | $ | 10,484 | 15.08 | % | $ | 5,561 | 8.00 | % | $ | 6,951 | 10.00 | % | ||||||||||||
Tier I Capital to Risk-Weighted Assets | 9,577 | 13.78 | 4,170 | 6.00 | 5,561 | 8.00 | ||||||||||||||||||
Common equity Tier I capital to Risk-Weighted Assets | 9,577 | 13.78 | 3,128 | 4.50 | 4,518 | 6.50 | ||||||||||||||||||
Tier I Capital to Total Assets | 9,577 | 8.89 | 4,307 | 4.00 | 5,383 | 5.00 |
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(11) Regulatory Matters, Continued
| |
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 cash dividends, taking dividends or payments from the Bank, making any interest, principal or other distributions on account of 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.
(12)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, 2018, the Bank and Holding Company could not pay cash dividends (See Note 11).
(13)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 effect on the Company’s consolidated financial statements.
(14)Retirement Plans.
The Company has a 401(k) Profit Sharing plan covering all eligible employees who are over the age of twenty-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, 2018 or 2017.
(continued)
4 |
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARYThe number of shares of common stock that were exchanged for each Trust Preferred Security was determined by dividing (i) the outstanding balance of each Trust Preferred Security by (ii) the closing market price of the common stock on the completion date of the Exchange Offer, which was $2.86 per share.
The Trust Preferred Securities shares were issued to 13 accredited investors who held Trust Preferred Securities acquired from Preferred Shares LLC, an affiliate of Moishe Gubin, one of the Company’s directors. One of the accredited investors that received shares was Gubin Enterprises LP, an affiliate of Mr. Gubin. It received 142,575 shares in exchange for 290 Trust Preferred Shares, which had an outstanding balance of $408,000 as of the completion date of the Exchange Offer.
NotesLoans to Consolidated Financial StatementsOfficers, Directors and Affiliates
Impaired collateral-dependent loans are carried at fair value when the current collateral value is lower than the carrying value of the loan. Those impaired collateral-dependent loans which are measured at fair value on a nonrecurring basis are as follows (in thousands):
At December 31, 2018 | ||||||||||||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | Total Losses | Losses Recorded in Operations For the Year Ended December 31, 2018 | |||||||||||||||||||
Residential real estate | $ | 686 | $ | — | $ | — | $ | 686 | $ | 268 | $ | — | ||||||||||||
Commercial real estate | 1,312 | — | — | 1,312 | 71 | — | ||||||||||||||||||
1,998 | — | — | 1,998 | 339 | — |
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 | $ | — |
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Holding Company’s unconsolidated financial information as of December 31, 2018 and 2017 and for the years then ended follows (in thousands):
Condensed Balance Sheets
At December 31, | ||||||||
2018 | 2017 | |||||||
Assets | ||||||||
Cash | $ | 245 | $ | 51 | ||||
Investment in subsidiary | 10,851 | 9,327 | ||||||
Other assets | 1,103 | 200 | ||||||
Total assets | $ | 12,199 | $ | 9,578 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Other liabilities | $ | 1,738 | $ | 1,878 | ||||
Junior subordinated debenture | 5,155 | 5,155 | ||||||
Stockholders’ equity | 5,306 | 2,545 | ||||||
Total liabilities and stockholders’ equity | $ | 12,199 | $ | 9,578 |
Condensed Statements of Operations
Year Ended December 31, | ||||||||
2018 | 2017 | |||||||
Earnings of subsidiary | $ | 1,604 | $ | 79 | ||||
Interest expense | (298 | ) | (227 | ) | ||||
Other expense | (510 | ) | (441 | ) | ||||
Net earnings (loss) | $ | 796 | $ | (589 | ) |
Condensed Statements of Cash Flows
Year Ended December 31, | ||||||||
2018 | 2017 | |||||||
Cash flows from operating activities: | ||||||||
Net earnings (loss) | $ | 796 | $ | (589 | ) | |||
Adjustments to reconcile net earnings (loss) to net cash used in operating activities: | ||||||||
Stock compensation for services | — | 21 | ||||||
Equity in undistributed earnings of subsidiary | (1,604 | ) | (79 | ) | ||||
Increase in other liabilities | 475 | 525 | ||||||
Decrease (increase) in other assets | 2 | (19 | ) | |||||
Net cash used in operating activities | (331 | ) | (141 | ) | ||||
Cash flow from investing activities- | ||||||||
Investment in subsidiary | — | (2 | ) | |||||
Cash flow from financing activities – | ||||||||
Proceeds from sale of common stock | 525 | 30 | ||||||
Net increase (decrease) in cash | 194 | (113 | ) | |||||
Cash at beginning of the year | 51 | 164 | ||||||
Cash at end of year | $ | 245 | $ | 51 | ||||
Noncash transactions: | ||||||||
Change in accumulated other comprehensive loss of subsidiary, net change in unrealized loss on securities available for sale, net of income taxes | $ | (80 | ) | $ | 2 | |||
Reclassification of stock compensation from other liabilities to common stock | 615 | — | ||||||
Issuance of common stock in exchange for Trust Preferred Securities | 905 | — |
Prior to 2016, the Company issued 7 shares of Series A Preferred Stock (the “Series A Preferred”) at a price of $25,000 per share to a director. Each share of the Series A Preferred had an initial liquidation preference of $25,000 per share and was entitled to cumulative dividends at the rate of 10% per annum, provided that no dividends would be declared, paid or set aside for payment to the extent such act would cause the Company to fail to comply with any applicable regulatory requirements. In April 2018, the Company issued 79,186 shares of Common Stock in exchange for the 7 outstanding shares of the Series A Preferred.
The Bank is requiredoffers loans in the ordinary course of business to performits directors and employees, including executive officers, their related interests and immediate family members. Applicable law and Bank policy require that these loans be on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties, and must not involve more than the normal risk of repayment or present other unfavorable features. Loans to individual employees, directors and executive officers must also comply with the Bank’s lending policies and statutory lending limits, and directors with a BSA lookback review. The Bank expectspersonal interest in any loan application are excluded from the costconsideration of the BSA lookback review to be $235,000 based on an independent firm’s proposal for services. The proposal and ultimate agreement is subject to FDIC review and approval. Until the approval is received, these BSA services cannot be rendered. Once the BSA lookback review begins, the independent firm has 120 days to complete the work. At December 31, 2018, the Bank has accrued $235,000 for the proposed services.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.such loan application.
Item 9A. Controls and Procedures
(a) EvaluationCode 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 Chief 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 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, 2018. 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, 2018.
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, 2018 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 Principal 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.
Item 10.Directors, Executive Officers, and Corporate GovernanceEthics
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 listItem 11. Executive Compensation
The following table shows the compensation paid by the Company and the Bank for 2019 and 2018 to the persons acting as principal executive officer and principal financial officer.
The following table shows the compensation paid by the Company and the Bank for 2018 and 2019 to the persons acting as principal executive officer and principal financial officer during this period.
Summary Compensation Table
Name and Principal Position | Year | Salary ($) | Bonus ($) | All Other Compensation($) | Total Compensation($) | ||||||||||||||
Timothy Terry (1) | 2018 | $ | 225,000 | - | $ | 8,400 | $ | 233,400 | |||||||||||
President, Chief Executive Officer and | 2019 | $ | 225,000 | - | $ | 8,400 | $ | 233,400 | |||||||||||
Chief Operating Officer of the Bank | |||||||||||||||||||
David Edgar (2) | 2018 | $ | 165,000 | - | - | $ | 165,000 | ||||||||||||
Former Controller of the Bank | 2019 | 165,000 | - | - | $ | 165,000 |
(1) | All other compensation for Mr. Terry in each year represents an auto allowance. |
(2) | Mr. Edgar’s employment terminated in January 2020. |
Stock Options
No stock options were granted to any of the executive officers in 2019. None of the Company’s executive officers and biographical information about them and its directors will be included in the definitive Proxy Statement for its 2019 Annual Meeting of Stockholders, which will be filed within 120 days of the end of its fiscal year ended December 31, 2018 (the “2019 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.holds any stock options.
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Item 11.ExecutiveDirector Compensation
Information relating toEach Director receives compensation for serving on the Board of Directors and committees of the Board. Mr. Gubin receives $1,650 for each Board meeting attended, and all other directors receive $1,100 for each Board meeting attended. Mr. Gubin receives additional compensation for each Board meeting attended because he serves as the Chairman of the Board. For Audit Committee meetings, the Chairman receives compensation of $400 for each meeting attended, and the members receive $300. For Compensation Committee meetings, Mr. Gubin, as Chairman, receives compensation of $125 for each meeting attended and the other members receive $100.
Mr. Gubin also receives $200,000 per year for additional services as a director, payable in shares of the Company’s executive officer and director compensation andcommon stock (based on the compensation committeefair market value on the date of its board of directors will be includedissuance). These additional services include his generally spending one week per month in the 2019 Proxy StatementBank’s offices. He is also actively involved in the Bank’s marketing efforts for new loan business and is incorporated herein by reference.deposits and in the Company’s investor relations efforts.
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Director Compensation Table For 2019
Name | Cash Compensation($) | Stock Awards($) | All Other Compensation ($) | Total($) | ||||||||||||
Moishe Gubin | $ | 19,075 | $ | 201,000 | (1) | $ | 0 | $ | 201,000 | |||||||
Joel Klein | 14,200 | 0 | 0 | |||||||||||||
Martin Schmidt | 15,300 | 0 | 0 | |||||||||||||
Thomas Procelli | 14,500 | 0 | 0 | |||||||||||||
Avi M. Zwelling | 12,200 | 0 | 0 | |||||||||||||
Chan Heng Fai Ambrose | 12,100 | 0 | 0 | |||||||||||||
Jeffry Wagner | 13,300 | 0 | 0 | |||||||||||||
Total | $ | 100,675 | $ | 201,000 | $ | 0 | $ | 201,000 |
(1) | This amount represents the fair value of the stock grant made to Mr. Gubin in payment of a portion of his director’s fees in 2019. |
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Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersMatters.
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 2019 Proxy Statement and is incorporated herein by reference.
The Company had two compensation plans under which shares of its common stock were issuable at December 31, 2018. The plans are the 2011 Equity Compensation Plan, as amended, and the 2018 Equity Compensation Plan, previously approved by its stockholders. TheThis following table sets forth information regarding the beneficial ownership of the common stock as of December 31, 2018June 30, 2020, for:
● | each of the directors and executive officers of the Company and the Bank; | |
● | all of the directors and executive officers of the Company and the Bank as a group; and | |
● | each other person known by the Company to own beneficially more than 5% of the Company common stock. |
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting and investment power with respect to the number ofsecurities. The persons named in the table have sole voting and investment power or have shared voting and investment power with a spouse with respect to all shares of the Company’s common stock issuable pursuant toshown as beneficially owned by them, unless otherwise indicated in these plans.footnotes.
Name of Beneficial Owners | Number of Shares Beneficially Owned | Percent of Class1 | ||||||
Directors and Executive Officers | ||||||||
Moishe Gubin, Director | 283,393 | 9.6 | % | |||||
Joel Klein, Director and Interim Principal Financial Officer | 31,404 | 1.1 | % | |||||
Thomas Procelli, Director | 3,623 | 0.1 | % | |||||
Martin Schmidt, Director | 1,000 | 0.3 | % | |||||
Avi Zwelling, Director | 31,118 | 1.1 | % | |||||
Chan Heng Fai Ambrose, Director | 104,723 | 3.5 | % | |||||
Jeffry Wagner, Director | 0 | 0 | % | |||||
Timothy Terry, President, Chief Executive Officer | 0 | 0 | % | |||||
All directors and executive officers as a group | 449,079 | 15.4 | % | |||||
Principal Shareholders | ||||||||
David Gross 6633 N. Sacramento Ave. Chicago, Il. 60645 | 245,000 | 8.3 | % | |||||
Michael Blisko 9390 Bay Drive Surfside, Fl. 33154 | 238,330 | 8.1 | % | |||||
Barry Webster 1840 58th Street Brooklyn, New York 11204-2027 | 183,334 | 6.2 | % | |||||
The Elisha Rothman Irrevocable Trust 3570 N.E. 190th Street, Apt. 3900 Miami, Florida 33180-2466 | 192,000 | 6.5 | % |
1 | Based on 2,951,352 shares of common stock outstanding on June 30, 2020. |
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Equity Compensation Plan Information
The following table provides information generally as of December 31, 2018,2019, regarding securities to be issued on exercise of stock options, and securities remaining available for issuance under the Company’s equity compensation plans that were in effect during fiscal year 2018.2019.
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 | |||||||||
Equity compensation plans approved by stockholders | — | $ | — | |||||||||
Equity compensation plans not approved by stockholders | — | — | — | |||||||||
Total | — | $ | — |
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Item 13.Certain Relationships and Related Transactions, and Director Independence
Information regarding certain relationshipsSince January 1, 2019, except as described below, there have been no transactions or any proposed transactions in which the Company was or is a party, in which the amount involved exceeded $120,000, and related transactions andin which a director, independencedirector nominee, executive officer, holder of more than 5% of the Company’s common stock or any member of the immediate family of any of the foregoing persons had or will be included in the 2019 Proxy Statement and is incorporated herein by reference.have a direct or indirect material interest.
Item 14.Principal Accounting Fees and ServicesExchange of Trust Preferred Securities
Information regarding principal accounting feesIn December 2019, the Company completed a private offer to exchange (the “Exchange Offer”) for a portion of its outstanding Trust Preferred Securities for shares of its common stock. Pursuant to the Exchange Offer, the Company issued 924,395 shares of its common stock for 1,881 Trust Preferred Securities, which had an outstanding balance of $2,644,000 as of the completion date of the Exchange Offer.
The number of shares of common stock that were exchanged for each Trust Preferred Security was determined by dividing (i) the outstanding balance of each Trust Preferred Security by (ii) the closing market price of the common stock on the completion date of the Exchange Offer, which was $2.86 per share.
The Trust Preferred Securities shares were issued to 13 accredited investors who held Trust Preferred Securities acquired from Preferred Shares LLC, an affiliate of Moishe Gubin, one of the Company’s directors. One of the accredited investors that received shares was Gubin Enterprises LP, an affiliate of Mr. Gubin. It received 142,575 shares in exchange for 290 Trust Preferred Shares, which had an outstanding balance of $408,000 as of the completion date of the Exchange Offer.
Loans to Officers, Directors and services will be includedAffiliates
The Bank offers loans in the 2019 Proxy Statementordinary course of business to its directors and is incorporated herein by reference.employees, including executive officers, their related interests and immediate family members. Applicable law and Bank policy require that these loans be on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties, and must not involve more than the normal risk of repayment or present other unfavorable features. Loans to individual employees, directors and executive officers must also comply with the Bank’s lending policies and statutory lending limits, and directors with a personal interest in any loan application are excluded from the consideration of such loan application.
Director Independence
The Board of Directors analyzed the independence of each director and determined that Chan Heng Fai Ambrose, Moishe Gubin, Thomas Procelli, Martin Schmidt, Avi Zwelling and Jeffry Wagner each meet the standards of independence under the listing standards of The NASDAQ Stock Market (“NASDAQ”).
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Item 14. Principal Accounting Fees and Services
Hacker, Johnson & Smith, P.A., the Company’s independent registered public accounting firm, audited the Company’s consolidated financial statements for the fiscal year ended December 31, 2019.
PART IVAudit Fees
The following table is a summary of the fees billed to the Company by Hacker, Johnson & Smith, P.A. for professional services rendered for the years ended December 31, 2019 and 2018:
Fee Category | 2019 Fees | 2018 Fees | ||||||
Audit Fees | $ | 78,000 | $ | 73,000 |
Audit Fees. Consists of fees billed for professional services rendered for the audit of the Company’s financial statements and review of the interim financial statements included in quarterly reports and services that are normally provided by Hacker, Johnson & Smith, P.A. in connection with statutory and regulatory filings or engagements.
Pre-approved Services. Consistent with SEC rules regarding auditor independence, the Company’s Audit Committee Charter requires the Audit Committee to pre-approve all audit services and non-audit services permitted by law and Audit Committee policy (including the fees and terms of such services) to be performed for the Company by the independent auditors, subject to the “de minimis” exceptions for non-audit services described in SEC rules that are approved by the Audit Committee prior to the completion of the audit. The Audit Committee may delegate pre-approval authority to a member of the committee. The decisions of any committee member to whom pre-approval is delegated must be presented to the Audit Committee at its next scheduled meeting.
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Item 15.Exhibits and Financial Statement Schedules
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EXHIBIT INDEX
101.INS | XBRL Instance Document(1) |
101.SCH | XBRL Taxonomy Extension Schema Document(1) |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document(1) |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document(1) |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document(1) |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document(1) |
(1) Filed as an exhibit to the Company’s Annual Report on Form 10-K filed with the SEC on March 25, 2020 and incorporated herein by reference.
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SIGNATURES
In accordance withPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this 10-K10-K/A 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 2727th day of March, 2019.July, 2020.
OPTIMUMBANK HOLDINGS, INC. | |
/s/ Timothy Terry | |
Timothy Terry | |
Principal Executive Officer |
In accordance withPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on MarchJuly 27, 2019.2020.
Signature | Title | |
/s/ Timothy Terry | Principal Executive Officer | |
Timothy Terry | ||
/s/ | Principal Financial Officer | |
/s/ H Fai Chan | Director | |
H Fai Chan | ||
/s/ Moishe Gubin | Director | |
Moishe Gubin | ||
/s/ Martin Schmidt | Director | |
Martin Schmidt | ||
/s/ Joel Klein | Director | |
Joel Klein | ||
/s/ Avi M. Zwelling | Director | |
Avi M. Zwelling | ||
/s/ Thomas Procelli | Director | |
Thomas Procelli | ||
/s/ Jeffry Wagner | Director | |
Jeffry Wagner |
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