UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
Commission File Number: 000-50755
OPTIMUMBANK HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Florida
(State or other jurisdiction of incorporation or organization)
55-0865043
(I.R.S. Employer Identification No.)
2477 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
Common Stock, par value $0.01 per share
Name of each exchange on which registered
NASDAQ Capital Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1993. Yes ☐ No ☒
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
☒
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 ☒ 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 ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be
contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Non-accelerated filer ☐
(Do not check if a smaller reporting company)
Accelerated filer ☐
Smaller reporting company ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes ☐ No ☒
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant (1,005,823 shares) on December 31, 2016, was approximately
$4,778,000, computed by reference to the closing market price at $4.75 per share as of June 30, 2016. 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 20, 2017 was 1,103,447 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on April 25, 2017, to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A within 120 days of the issuer’s fiscal year end are incorporated by reference into Part III, Items 10 through 14, of this Annual Report on Form
10-K.
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosure
PART II
Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 8. Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
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Item 1. Business
Forward-Looking Statements
PART I
We have made forward-looking statements in this Annual Report about the financial condition, results of operations, and business of our company. These
statements are not historical facts and include expressions concerning the future that are subject to risks and uncertainties. Factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements include, among other things, the following possibilities:
☐
☐
☐
☐
☐
general economic conditions, either nationally or regionally, that are less favorable than expected resulting in, among other things, a deterioration in credit
quality and an increase in credit risk-related losses and expenses;
changes in the interest rate environment that reduce margins;
competitive pressure in the banking industry that increases significantly;
changes that occur in the regulatory environment; and
changes that occur in business conditions and the rate of inflation.
When used in this Annual Report, the words “believes,” “estimates,” “plans,” “expects,” “should,” “may,” “might,” “outlook,” and “anticipates,” as well as similar
expressions, as they relate to OptimumBank Holdings, Inc., or its management, are intended to identify forward-looking statements.
General
OptimumBank Holdings, Inc. is a Florida corporation (the “Company”) formed in 2004 as a bank holding company for OptimumBank (the “Bank”). The
Company’s only business is the ownership and operation of the Bank and the Bank’s subsidiaries. The Bank is a Florida state chartered bank established in 2000, with
deposits insured by the Federal Deposit Insurance Corporation (“FDIC”). The Bank offers a variety of community banking services to individual and corporate customers
through its three banking offices located in Broward County, Florida. The Bank has four wholly-owned subsidiaries primarily engaged in holding and disposing of
foreclosed real estate and one subsidiary primarily engaged in managing foreclosed real estate.
The Company is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). OptimumBank is
subject to the supervision and regulation of the State of Florida Office of Financial Regulation (“OFR”) and the FDIC. OptimumBank is a member of the Federal Home
Loan Bank of Atlanta.
At December 31, 2016, the Company had total assets of $119.7 million, net loans of $77.0 million, total deposits of $86.0 million and stockholders’ equity of $3.1
million. During 2016, the Company had a net loss of $396,000.
Recent Developments
Consent Order and Written Agreement.
On November 7, 2016, the Bank agreed to the issuance of a Consent Order by the FDIC and the OFR (the “Consent Order”), which requires the Bank to take
certain measures to improve its safety and soundness. The Consent Order supersedes the prior consent order that became effective in 2010. Pursuant to the Consent Order,
the Bank is required to take certain measures to improve its management, condition and operations, including actions to improve management practices and board
supervision and independence, assure that its allowance for loan losses is maintained at an appropriate level and improve liquidity. The Consent Order requires the Bank to
adopt and implement a compliance plan to address the Bank’s obligations under the Bank Secrecy Act (the “BSA”) and related obligations related to anti-money laundering.
The Consent Order continues the requirement for the Bank to maintain a Tier 1 leverage ratio of at least 8% and a total risk-based capital ratio of 12% beginning 90 days
from the issuance of the Consent Order. The Consent Order prohibits the payment of dividends by the Bank. The Company estimates that the cost of complying with the
BSA components of the Consent Order will increase expenses in 2017 by approximately $190,000.
In addition to the Consent Order, the Company is party to a Written Agreement dated June 22, 2010, with the Federal Reserve Bank of Atlanta, which requires the
Company to take certain measures to ensure the Bank complied with the prior consent order. Under the Written Agreement, the Company is subject to restrictions on paying
interest on debt, or paying dividends or distributions of stock, including dividends on its common stock, as well as incurring additional debt or redeeming stock. Additional
details on the Consent Order and the Written Agreement are contained in “Business-Supervision and Regulation- Consent Order- and -Written Agreement.”
At December 31, 2016, the Bank had a Tier 1 leverage ratio of 8.06%, and a total risk-based capital ratio of 12.79%. At December 31, 2016, the Bank in
compliance with the Tier 1 leverage ratio and total risk-based capital ratio requirement of the Consent Order. Additional information on the Bank’s capital adequacy is
contained in “Item 7- Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
1
Going Concern Status
The Company is in default with respect to its $5,155,000 Junior Subordinated Debenture (“Debenture”) due to its failure to make certain required interest payments
under the Debenture. The Trustee of the Debenture (the “Trustee”) or the holders of the Debenture are entitled to accelerate the payment of the $5,155,000 principal balance
plus accrued and unpaid interest totaling $1,147,636 at December 31, 2016. To date the Trustee has not accelerated the outstanding balance of the Debenture. No
adjustments to the accompanying consolidated financial statements have been made as a result of this uncertainty.
Management’s plans with regard to this matter are as follows: A Director of the Company has offered to purchase the Debenture and this offer has been approved
by certain equity owners of the Trust that holds the Debenture. The Director has also agreed to enter into a forbearance agreement with the Company with respect to
payments due under the Debenture upon consummation of the Director’s purchase of the Debenture.
In March 2016, the Trustee received a direction from certain debt holders of the Trust that holds the Debenture to sell the Debenture to a Director of the Company.
Based upon the receipt of conflicting directions from other equity owners of the Trust, in August 2016, the Trustee commenced an action in a Minnesota State Court seeking
directions from the Court. The case was subsequently transferred to United States District Court for the Southern District of New York, where the case is currently pending.
The Company continues to pursue mechanisms for paying the accrued interest, such as raising additional capital.
Brokered Deposits
Under the terms of the Consent Order, the Bank is not permitted to solicit brokered deposits. In March 2017, the FDIC notified the Bank that it considers a
significant portion of the Bank’s certificates of deposit to be brokered deposits due to the rates paid on such deposits, even though such deposits were not obtained through
any deposit brokers. The Bank has requested a waiver of the prohibition on brokered deposits from the FDIC. If this waiver is not granted, then the Bank would not be able
to accept, renew or rollover the existing certificates of deposit that are viewed as brokered deposits, which would likely have an adverse effect on the Bank’s liquidity.
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, drive-in tellers, and banking by mail. The Bank makes residential and commercial
real estate loans and consumer loans. The Bank offers business lending lines for working capital needs. Growing businesses can use the loans to expand inventory, take
discounts, offset receivables, or establish new structured financing and repayment plans that are consistent with the cash flow of the business. The Bank provides ATM
cards and Visa debit cards, as a part of the Star, Presto and Cirrus networks, thereby permitting customers to utilize the convenience of ATMs worldwide. The Bank does
not have trust powers and provides no trust services.
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;
County;
● Maintaining a presence in Broward County through a branch network. Currently, the Bank has three branch banking offices in Broward
● 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, high service levels and to maintain strong customer
relationships. The Bank seeks customers who prefer to conduct business with a locally managed institution.
The Bank’s management is focusing its efforts on a long-term strategy with the following objectives:
● Stabilize the Loan Portfolio- Management devotes significant resources to the identification and workout of problem loans and has been
successful in reducing same.
2
●
Increase and Diversify Loan Originations- Management is focused on increasing its loan production to add more interest bearing assets and
interest income to its asset base and has increased same. 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.
● 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 has occurred.
●
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 plan and to improve profitability.
Lending Activities
The Bank offers real estate, commercial and consumer loans, to individuals and small businesses and other organizations that are located in or conduct a substantial
portion of their business in its market area. The Bank’s market area consists of the tri-county area of Broward, Miami-Dade and Palm Beach counties. The Bank’s net loans
at December 31, 2016 were $77.0 million, or 64.3% of total assets. The interest rates charged on loans varied with the degree of risk, maturity, and amount of the loan, and
are further subject to competitive pressures, money market rates, availability of funds, and government regulations. The Bank has no foreign loans.
The Bank’s loan portfolio is concentrated in two major areas: residential and commercial real estate loans. As of December 31, 2016, 84.66% of the loan portfolio
consisted of loans secured by mortgages on real estate, of which approximately 33.97% of the total loan portfolio was secured by one-to-four family residential properties.
The real estate loans are located primarily in the tri-county market area.
The Bank’s real estate loans are secured by mortgages and consist primarily of loans to individuals and businesses for the purchase or improvement of, or
investment in, real estate. These real estate loans were made at fixed or variable interest rates and are normally 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 repayment as well as the value of the underlying collateral. The Bank also generally limits its loans to up to 80% of the value of the
underlying real estate collateral. The Bank generally charges a prepayment penalty if a loan is repaid within the first two to three years of origination to recover any costs it
paid for the origination of the loan.
Deposit Activities
Deposits are the major source of the Bank’s funds for lending and other investment activities. The Bank considers the majority of its regular savings, demand,
NOW, money market deposit accounts and CD’s under $100,000 to be core deposits. These accounts comprised approximately 68.03% of the Bank’s total deposits at
December 31, 2016. Approximately 65.95% of the deposits at December 31, 2016 were certificates of deposit. Generally, the Bank attempts to maintain the rates paid on its
deposits at a competitive level. Time deposits of $100,000 and over made up approximately 40.52% of the Bank’s total deposits at December 31, 2016. 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.
Under the terms of the Consent Order, the Bank is not permitted to solicit brokered deposits. In March 2017, the FDIC notified the Bank that it considers a
significant portion of the Bank’s certificates of deposit to be brokered deposits because the rates paid on such deposits, even though such deposits were not obtained through
any deposit brokers. See “Business-Recent Developments – Brokered Deposits.”
Investments
The Bank’s investment securities portfolio was approximately $20.2 million and $25.7 million at December 31, 2016 and 2015, respectively, representing 16.9%
and 20.2% of its total assets. At December 31, 2016, 100% 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.
3
OptimumBank has established a correspondent relationship with 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.
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 at www.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 bill payment. The Bank now offers its retail customers mobile access to their account
information, with the option to setup alerts, 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
OptimumBank 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, OptimumBank 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 OptimumBank 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, OptimumBank 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, 2016, the Bank had 16 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, 2016, the Bank’s capital
conservation buffer exceeds the minimum requirements of 0.625% for 2016. The required buffer is to be phased in over three years. Under the new regulations in the first
quarter of 2015, the Bank elected an irreversible one-time opt-out to exclude accumulated other comprehensive loss from regulatory capital.
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.
4
The following table shows the Bank’s capital amounts and ratios and regulatory thresholds at December 31, 2016 and December 31, 2015 (dollars in thousands):
Actual
Amount
%
For Capital
Adequacy Purposes
Amount
%
Minimum To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
%
Amount
Requirements of
Consent Order
%
Amount
As of December 31, 2016:
Total Capital to Risk-Weighted Assets
Tier I Capital to Risk-Weighted Assets
Common Equity Tier I Capital to Risk-
Weighted Assets
Tier 1 Capital to Total Assets
As of December 31, 2015:
Total Capital to Risk-Weighted Assets
Tier I Capital to Risk-Weighted Assets
Common Equity Tier I Capital to Risk-
Weighted Assets
Tier I Capital to Total Assets
$
$
10,566
9,498
9,498
9,498
10,319
9,173
9,173
9,173
12.79% $
11.50
11.50
8.06
11.40
10.14
10.14
7.59
$
6,609
4,957
3,718
4,714
7,240
5,430
4,073
4,836
8.00% $
6.00
$
4.50
4.00
8.0
6.0
4.5
4.0
8,261
6,609
5,370
5,893
9,050
7,240
5,883
6,045
Written Agreement with the Federal Reserve Bank of Atlanta
10.00% $
9,913
N/A
N/A
9,428
$
10,860
N/A
N/A
9,672
8.00
6.50
5.00
10.0
8.0
6.50
5.0
12.00%
N/A
N/A
8.00
12.0
N/A
N/A
8.0
The Company is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). On June 22, 2010, the
Company entered into a written agreement with the Federal Reserve Bank of Atlanta (“Reserve Bank”) with respect to certain aspects of the operation and management of
the Company (the “Written Agreement”).
The Written Agreement contains the following principal requirements:
●
The Board of the Company must take appropriate steps to fully utilize the Company’s financial and managerial resources to serve as a source of strength to
the Bank, including, but not limited to, taking steps to ensure that the Bank complies with the Consent Order entered into with the Florida Office of Financial Regulation
(“OFR”) and the FDIC and any other supervisory action taken by the Bank’s state or federal regulator.
●
●
The Company may not declare or pay any dividends without prior Reserve Bank and Federal Reserve approval.
The Company may not, directly or indirectly, take dividends or any other form of payment representing a reduction in capital from the Bank without prior
Reserve Bank approval.
●
The Company and its nonconsolidated subsidiary, OptimumBank Holdings Capital Trust I, may not make any distributions of interest, principal, or other
sums on subordinated debentures or trust preferred securities without the prior written approval of the Reserve Bank and the Federal Reserve.
●
The Company and its nonconsolidated subsidiary, OptimumBank Holdings Capital Trust I, may not, directly or indirectly, incur, increase, or guarantee any
debt or purchase or redeem any shares of its stock without the prior written approval of the Reserve Bank.
●
The Company must obtain prior written consent from the Reserve Bank before appointing any new director or senior executive officer, or changing the
responsibilities of any senior executive officer so that the officer would assume a different senior executive officer position, and must comply with the regulations applicable
to indemnification and severance payments.
●
The Company must provide quarterly progress reports to the Reserve Bank, along with parent company only financial statements.
5
Consent Order by the FDIC and the OFR
On November 7, 2016, the Bank agreed to the issuance of a Consent Order by the FDIC and the OFR (the “Consent Order”), which requires the Bank to take
certain measures to improve its safety and soundness. The Consent Order supersedes the prior consent order that became effective in 2010. The Consent Order represents a
commitment by the Bank to the FDIC and the OFR to take certain actions to improve the management, condition and operations of the Bank. The Consent Order imposes no
fines or penalties on the Bank. The Consent Order will remain in effect and enforceable until it is modified, terminated, suspended, or set aside by the FDIC and the OFR.
The Consent Order contains the following principal requirements:
●
The Board of the Bank is required to increase its participation in the affairs of the Bank, assuming full responsibility for the approval of sound policies and
objectives and for the supervision of all of the Bank’s activities, consistent with the role and expertise commonly expected for directors of banks of comparable size.
●
The Bank is required to have and retain qualified and appropriately experienced senior management, including a chief executive officer, a chief lending
officer and a chief operating officer, who are given the authority to implement the provisions of the Consent Order.
●
●
Any proposed changes in the Bank’s Board of Directors or senior executive officers are subject to the prior consent of the FDIC and the OFR.
The Bank is required to maintain both a fully funded allowance for loan and lease losses satisfactory to the FDIC and the OFR and a minimum Tier 1
leverage capital ratio of 8% and a total risk-based capital ratio of 12% for as long as the Consent Order remains in effect.
●
The Bank is required to eliminate from its books, by charge-off or collection, all assets or portions of assets classified “Loss” and 50 percent of those assets
or portions of assets classified “Doubtful” in the most recent examination report that have not been previously collected or charged-off.
●
examination report.
The Bank is required to submit a revised plan to reduce the remaining assets classified “Doubtful” and “Substandard” in the current or any future regulatory
●
The Bank may not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit from
the Bank that has been charged-off or classified, in whole or in part, “Loss” or “Doubtful” and is uncollected.
●
The Bank may not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit from
the Bank that has been classified, in whole or part, “Substandard.”
●
The Board is required to review, revise, and implement its written lending and collection policy to provide effective guidance and control over the Bank’s
lending and credit administration functions.
Bank.
●
●
The Bank is required to prepare and submit to the Supervisory Authorities an acceptable written business/strategic plan covering the overall operation of the
The Bank is required to develop and submit to the Supervisory Authorities a written plan and a comprehensive budget for all categories of income and
expense for calendar year 2017 and subsequent years.
●
●
The Bank is required to implement a written plan to improve liquidity, contingency funding, interest rate risk and asset liability management.
The Bank is required to revise and implement a written policy for managing interest rate risk in a manner that is appropriate to the size of the Bank and the
complexity of its assets.
●
The Bank is required to revise and implement its policy for the operation of the Bank in such a manner as to provide adequate internal routines and controls
within the Bank consistent with safe and sound banking practices.
6
●
●
The Bank may not accept, renew, or rollover any brokered deposit.
The Bank may not declare or pay dividends, pay bonuses, or make any other form of payment outside the ordinary course of business resulting in a
reduction of capital, without the prior written approval of the Supervisory Authorities.
●
The Bank is required to notify the Supervisory Authorities at least sixty days prior to undertaking asset growth that exceeds 10% or more per annum or
initiating material changes in asset or liability composition.
●
The Bank is required to develop, adopt, and implement a plan (“Compliance Plan”) for administration of a program reasonably designed to ensure and
maintain compliance with the law and regulations related to the Bank Secrecy Act and related anti-money laundering regulations. The Compliance Plan must be consistent
with the guidance for BSA/AML Risk Assessment set forth in the Federal Financial Institutions Examination Council’s Bank Secrecy Act/Anti-Money Laundering
Examination Manual.
●
The Bank is required to furnish written progress reports to the Supervisory Authorities within forty-five days from the end of each quarter, detailing the
form and manner of any actions taken to secure compliance with this Consent Order.
●
The Bank is required to develop a revised system of internal controls designed to ensure full compliance with the BSA rules and regulations (“BSA Internal
Controls”) taking into account its size and risk profile and addressing the deficiencies and recommendations contained in the most recent examination report.
●
The Bank is required to assess its BSA staffing needs to ensure adequate qualified personnel are in place at all times.
●
The Bank is required to contract with an external independent testing firm that specializes in the BSA, AML, and OFAC rules and regulations for a review.
The Bank is required to also engage an independent qualified firm, acceptable to the Supervisory Authorities, to conduct a review of all high-risk accounts and all high-risk
transaction activity for the period beginning February 3, 2014, through the date of the Consent Order.
●
The Bank is in process of implementing comprehensive policies and plans to address all of the requirements of the Consent Order and has incorporated
recommendations from the FDIC and OFR into these policies and plans.
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. However, the regulations have increased and are expected to continue to increase our operating and compliance costs.
7
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, or 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 now have the opportunity to seek broadened authority, subject to limitations
on investment, to engage in activities that are “financial in nature” if all of their subsidiary depository institutions are well capitalized, well managed, and have at least a
satisfactory rating under the Community Reinvestment Act, which is also discussed below.
In this regard, the BHCA prohibits a bank holding company, with certain limited exceptions, from (i) acquiring or retaining direct or indirect ownership or control
of more than 5% of the outstanding voting stock of any company which is not a bank or bank holding company, or (ii) engaging directly or indirectly in activities other than
those of banking, managing or controlling banks, or performing services for its subsidiaries, unless such non-banking business is determined by the FRB to be so closely
related to banking or managing or controlling banks as to be properly incident thereto. In making such determinations, the FRB is required to weigh the expected benefit to
the public, such as greater convenience, increased competition or gains in efficiency, against the possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interest, or unsound banking practices. Generally, bank holding companies, such as the Company, are required to obtain prior
approval of the Federal Reserve to engage in any new activity not previously approved by the Federal Reserve.
8
Change of Control. The BHCA also requires that every bank holding company obtain the prior approval of the Federal Reserve before it may acquire all or
substantially all of the assets of any bank, or ownership or control of any voting shares of any bank, if after such acquisition it would own or control, directly or indirectly,
more than 5% of the voting shares of such bank. In approving bank acquisitions by bank holding companies, the Federal Reserve is required to consider the financial and
managerial resources and future prospects of the bank holding company and the banks concerned, the convenience and needs of the communities to be served, including the
parties’ performance under the Community Reinvestment Act (discussed below) and various competitive factors. As described in greater detail below, pursuant to the
Riegle-Neal Interstate Banking and Branch Efficiency Act of 1994 (the “Interstate Banking and Branching Act”), a bank holding company is permitted to acquire banks in
states other than its home state.
The BHCA further prohibits a person or group of persons from acquiring “control” of a bank holding company unless the Federal Reserve Bank has been notified
and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve, the acquisition of 10% or more of a class of voting stock of a
bank holding company with a class of securities registered under Section 12 of the Exchange Act would, under the circumstances set forth in the presumption, constitute
acquisition of control of the bank holding company. In addition, any person or group of persons must obtain the approval of the Federal Reserve under the BHCA before
acquiring 25% (5% in the case of an acquirer that is already a bank holding company) or more of the outstanding common stock of a bank holding company, or otherwise
obtaining control or a “controlling influence” over the bank holding company.
Interstate Banking and Branching. The Interstate Banking and Branching Act provides for nationwide interstate banking and branching. Under the law, interstate
acquisitions of banks or bank holding companies in any state by bank holding companies in any other state are permissible subject to certain limitations. Florida also has a
law that allows out-of-state bank holding companies (located in states that allow Florida bank holding companies to acquire banks and bank holding companies in that state)
to acquire Florida banks and Florida bank holding companies. The law essentially provides for out-of-state entry by acquisition only (and not by interstate branching) and
requires the acquired Florida bank to have been in existence for at least three years. Interstate branching and consolidation of existing bank subsidiaries in different states is
permissible. A Florida bank also may establish, maintain, and operate one or more branches in a state other than Florida pursuant to an interstate merger transaction in which
the Florida bank is the resulting bank.
Financial Modernization. The Gramm-Leach-Bliley Act of 1999 (the “GLB Act”) sought to achieve significant modernization of the federal bank regulatory
framework by allowing the consolidation of banking institutions with other types of financial services firms, subject to various restrictions and requirements. In general, the
GLB Act repealed most of the federal statutory barriers which separated commercial banking firms from insurance and securities firms and authorized the consolidation of
such firms in a “financial services holding company.” We 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.
9
Consent Order. On November 7, 2016, the Bank agreed to the issuance of a Consent Order by the FDIC and the OFR (the “Consent Order”), which requires the
Bank to take certain measures to improve its safety and soundness. The Consent Order supersedes the prior consent order that became effective in 2010. Pursuant to the
Consent Order, the Bank is required to take certain measures to improve its management, condition and operations, including actions to improve management practices and
board supervision and independence, assure that its allowance for loan losses is maintained at an appropriate level and improve liquidity. The Consent Order requires the
Bank to adopt and implement a compliance plan to address the Bank’s obligations under the Bank Secrecy Act and related obligations related to anti-money laundering. The
Consent Order continues the requirement for the Bank to maintain a Tier 1 leverage ratio of at least 8% and a total risk-based capital ratio of 12% beginning 90 days from
the issuance of the Consent Order. The Consent Order prohibits the payment of dividends by the Bank. The principal requirements of the Consent Order are described in
“Business- Supervision and Regulation- Consent Order.”
Capital Adequacy Requirements. Banks are required to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures,
adjusted for risk weights ranging from 0% to 100%. Under the risk-based standard, capital is classified into two tiers. Tier 1 capital consists of common shareholders’ equity
(excluding the unrealized gain (loss) on available-for-sale securities), trust preferred securities subject to certain limitations, and minus certain intangible assets. Tier 2
capital consists of the general allowance for credit losses except for certain limitations. An institution’s qualifying capital base for purposes of its risk-based capital ratio
consists of the sum of its Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital. At December 31, 2016, the
Bank’s Tier 1 and total risk-based capital ratios were 11.50% and 12.79%, 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, 2016, the Bank’s
leverage ratio was 8.06%.
The Consent Order imposes higher capital requirements on OptimumBank. Under the Consent Order, OptimumBank must maintain a Tier 1 Leverage Ratio of
8.0%, and a total risk based capital ratio of 12.0%. With a Tier 1 Leverage ratio of 8.06% and a Total Risk Based Capital Ratio of 12.79% at December 31, 2016, the Bank
met the total risk-based capital ratio as required by the Consent Order.
The FDIC Improvement Act of 1993 (“FDICIA”) contains “prompt corrective action” provisions pursuant to which banks are to be classified into one of five
categories based upon capital adequacy, ranging from “well capitalized” to “critically undercapitalized” and which require (subject to certain exceptions) the appropriate
federal banking agency to take prompt corrective action with respect to an institution which becomes “significantly undercapitalized” or “critically undercapitalized.”
The FDIC has issued regulations to implement the “prompt corrective action” provisions of FDICIA. In general, the regulations define the five capital categories as
follows:
●
an institution is “well capitalized” if it has a total risk-based capital ratio of 10% or greater, has a Tier 1 risk-based capital ratio of 6% or greater,
has a leverage ratio of 5% or greater and is not subject to any written capital order or directive to meet and maintain a specific capital level for any capital
measures;
●
an institution is “adequately capitalized” if it has a total risk-based capital ratio of 8% or greater, has a Tier 1 risk-based capital ratio of 4% or
greater, and has a leverage ratio of 4% or greater;
●
an institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8%, has a Tier 1 risk-based capital ratio that is less than 4%
or has a leverage ratio that is less than 4%;
●
an institution is “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is
less than 3% or a leverage ratio that is less than 3%; and
●
an institution is “critically undercapitalized” if its “tangible equity” is equal to or less than 2% of its total assets.
The FDIC, after an opportunity for a hearing, has authority to downgrade an institution from “well capitalized” to “adequately capitalized” or to subject an
“adequately capitalized” or “undercapitalized” institution to the supervisory actions applicable to the next lower category, for supervisory concerns.
Generally, FDICIA requires that an “undercapitalized” institution must submit an acceptable capital restoration plan to the appropriate federal banking agency
within 45 days after the institution becomes “undercapitalized” and the agency must take action on the plan within 60 days. The appropriate federal banking agency may not
accept a capital restoration plan unless, among other requirements, each company having control of the institution has guaranteed that the institution will comply with the
plan until the institution has been adequately capitalized on average during each of the three consecutive calendar quarters and has provided adequate assurances of
performance. The aggregate liability under this provision of all companies having control of an institution is limited to the lesser of:
●
●
5% of the institution’s total assets at the time the institution becomes “undercapitalized”; or
the amount which is necessary, or would have been necessary, to bring the institution into compliance with all capital standards applicable to the
institution as of the time the institution fails to comply with the plan filed pursuant to FDICIA.
10
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, 2016, OptimumBank met the FDIC definition of an “adequately capitalized” institution.
For additional information regarding OptimumBank’s capital ratios and requirements, see “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Regulatory Capital Adequacy.”
Dividends. The Company’s ability to pay dividends is substantially dependent on the ability of 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 Consent Order and the Company’s ability to pay dividends is also restricted under its Written
Agreement with the Federal Reserve. At December 31, 2016, 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 is approximately $2.4 million, provided the unsecured portion does not exceed
approximately $1.4 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.
11
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 Gramm-Leach-Bliley Act of 1999 privacy provisions, which require the Bank maintain privacy policies intended to safeguard consumer
financial information, to disclose these policies to its customers, and allow customers to “opt-out” of having their financial service providers disclose their
confidential financial information to non-affiliated third parties, subject to certain exceptions;
●
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for
complying with administrative subpoenas of financial records; and
●
Electronic Funds Transfer Act and Regulation E, which govern automatic deposits to, and withdrawals from, deposit accounts and customers’
rights and liabilities arising from the use of automated teller machines and other electronic banking services.
12
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.
13
Item 2. Properties
The following table sets forth information with respect to the Bank’s main office and branch offices as of December 31, 2016.
Location
Executive Office and Ft. Lauderdale Branch:
2477 East Commercial Boulevard
Fort Lauderdale, Florida 33308
Plantation Branch Office:
10197 Cleary Boulevard
Plantation, Florida 33324
Deerfield Beach Branch Office:
2215 West Hillsboro Boulevard
Deerfield Beach, Florida 33442
(1) At December 31, 2016, the future minimum lease payments are approximately as follows (in thousands):
Year Ending December 31,
2017
Total
Item 3. Legal Proceedings
Year Facility
Opened
Facility Status
2004
Owned
2000
Owned
2004
Leased (1)
Amount
$
59
59
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.
14
Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters
PART II
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
2016
2015
Quarter
High (1)
Low(1)
First
Second
Third
Fourth
First
Second
Third
Fourth
$
$
$
$
$
$
$
$
7.30
4.99
6.35
4.89
11.00
19.00
23.10
10.60
$
$
$
$
$
$
$
$
3.56
3.75
3.64
3.51
8.90
9.00
8.50
3.70
(1) Reflects the 10 for 1 reverse common stock split effective January 11, 2016
The Company had approximately 751 holders registered or in street names as of December 31, 2016.
During 2016, the Company sold 92,980 shares of the Company’s common stock at a price of $4.04 per share to accredited investors and issued 36,118 share of the
Company’s common stock as compensation for legal services at a price of $3.53 per share, at 85% of the 30-day weighted average market price of the shares on the date of
issuance. Pursuant to Company’s stockholder approved 2011 Equity Incentive Plan (“2011 Plan”), during 2016, the Company also issued 57,476 shares of the Company’s
common stock to five directors. The shares had a value ranging from $3.75 to $4.75 per share. Subsequently $200,000 (46,296 shares) were reclassified to other liabilities
(see Note 15 to the Consolidated Financial Statements).
At December 31, 2016, the Bank and Company could not pay cash dividends and the Company does not anticipate that it will pay dividends on 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 Consent Order issued by the FDIC and Florida Office of Financial
Regulation and banking laws. The Company’s ability to pay dividends is also restricted under its Written Agreement with the Federal Reserve.
15
Item 6. Selected Financial Data
At Year End:
Cash and cash equivalents
Security available for sale
Loans, net
All other assets
Total assets
Deposit accounts
Federal Home Loan Bank advances
Junior subordinated debenture
All other liabilities
Stockholders’ equity (deficit)
At December 31, or for the Year Then Ended
(Dollars in thousands, except per share figures)
2016
2015
2014
2013
2012
$
$
17,640
20,222
76,999
4,842
10,365
25,749
82,573
8,791
12,074
26,748
75,829
9,879
13,881
22,990
79,249
12,663
23,611
18,648
85,209
16,275
$
119,703
$
127,478
124,530
128,783
143,743
86,009
23,500
5,155
1,958
3,081
97,571
20,000
5,155
1,785
2,967
91,603
22,740
5,155
2,053
2,979
98,692
22,740
5,155
2,412
(216)
101,611
27,700
5,155
2,367
6,910
Total liabilities and stockholders’ equity (deficit)
$
119,703
$
127,478
124,530
128,783
143,743
For the Year:
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest (expense) income
Noninterest expenses
(Loss) earnings before income taxes (benefit)
Income taxes (benefit)
Net (loss) earnings
Net (loss) earnings per share, basic (1)
Net (loss) earnings per share, diluted (1)
2016
2015
2014
2013
2012
4,764
1,079
3,685
—
3,685
(144)
3,937
(396)
—
(396)
(0.38)
(0.38)
$
$
$
4,534
884
3,650
—
3,650
412
4,545
(483)
(320)
(163)
(.17)
(.17)
5,392
911
4,481
—
4,481
572
3,448
1,605
0
1,605
1.85
1.85
5,280
1,919
3,361
2,194
1,167
144
8,066
(6,755)
320
(7,075)
(8.94)
(8.94)
5,162
2,581
2,581
1,653
928
258
5,883
(4,697)
0
(4,697)
(6.87)
(6.87)
Weighted-average number of shares outstanding, basic (1)
1,041,213
953,855
867,789
791,358
684,067
Weighted-average number of shares outstanding, diluted (1)
1,041,213
953,855
867,789
791,358
684,067
Ratios and Other Data:
Return on average assets
Return on average equity
Average equity to average assets
Dividend payout ratio
Net interest margin during the year
Interest-rate differential during the year
Net yield on average interest-earning assets
Noninterest expenses to average assets
Ratio of average interest-earning assets to average interest-bearing liabilities
Nonperforming loans and foreclosed assets as a percentage of total assets at end of
year
Allowance for loan losses as a percentage of total loans at end of year
Total number of banking offices
Total shares outstanding at end of year (1)
Book value per share at end of year (1)
January 11, 2016.
16
2016
2015
2014
2013
2012
(0.3)%
(12.5)%
2.6%
—%
3.1%
3.0%
4.0%
3.3%
1.09
(0.1)%
(5.3)%
2.5%
—%
3.4%
3.3%
4.2%
3.6%
1.07
1.3%
86.2%
1.5%
—%
3.9%
4.0%
4.7%
2.7%
0.97
(5.3)%
(216.8)%
2.4%
—%
2.9%
3.0%
4.5%
5.8%
.95
(3.1)%
(60.3)%
5.2%
—%
1.9%
2.5%
3.9%
3.6%
1.1
0.3%
4.9%
3
1,103,447
2.79
7.5%
2.7%
3
962,886
3.08
12.1%
2.9%
3
930,524
3.20
12.7%
2.7%
3
801,108
(0.27)
19.5%
2.8%
3
787,780
8.77
$
(1) All share and per share amounts have been adjusted to reflect the 1-for-4 reverse stock split declared in 2013 and 1 for 10 reverse common stock split effective
$
$
$
$
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, 2016 and 2015, 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, 2016, the Bank’s impaired loans were approximately $1.4 million,
or 1.7% of the gross loan portfolio. All of these loans are on our books for at least 90 percent of appraised value.
17
The following table sets forth the composition of the Bank’s loan portfolio:
Residential real estate
Multi-family real estate
Commercial real estate
Land and construction
Commercial
Consumer
Total loans
Add (deduct):
Net deferred loan costs and premiums
Allowance for loan losses
2016
% of
Total
Amount
At December 31,
2015
% of
Amount
Total
(dollars in thousands)
2014
% of
Total
Amount
$
27,334
5,829
29,264
5,681
10,514
1,829
80,451
463
(3,915)
33.98% $
7.25
36.37
7.06
13.07
2.27
100%
16,203
3,697
34,771
5,258
21,770
3,015
84,714
154
(2,295)
$
19.13
4.36
41.05
6.21
25.70
3.55
100.00
21,426
1,979
37,215
6,177
11,070
20
77,887
186
(2,244)
27.51%
2.54
47.78
7.93
14.21
.03
100.00%
Loans, net
$
76,999
$
82,573
$
75,829
Residential real estate
Multi-family real estate
Commercial real estate
Land and construction
Commercial
Consumer
Total loans
Add (deduct):
Net deferred loan costs and premiums
Allowance for loan losses
Loans, net
2013
Amount
At December 31,
% of
Total
(dollars in thousands)
Amount
2012
% of
Total
$
26,618
3,605
34,020
6,459
10,297
81
81,080
380
(2,211)
32.83% $
4.45
41.96
7.97
12.70
.10
100.00%
30,064
3,916
45,532
7,276
752
70
87,610
58
(2,459)
$
79,249
$
85,209
34.32%
4.47
51.97
8.30
.86
.08
100.00%
The following table sets forth the activity in the allowance for loan losses (in thousands):
Beginning balance
Provision (credit) for loan losses
Loans charged off
Recoveries
Ending balance
2016
Year Ended December 31,
2014
2013
2015
2012
$
$
$
2,295
—
(469)
2,089
$
2,244
—
(289)
340
$
2,211
—
—
33
$
2,459
2,194
(2,959)
517
2,349
1,653
(1,848)
305
3,915
$
2,295
$
2,244
$
2,211
$
2,459
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 by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries. The allowance for loan losses represented 4.87% and
2.71% of the total loans outstanding at December 31, 2016 and 2015, 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.
18
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):
Residential real estate
Multi-family real estate
Commercial real estate
Land and construction
Commercial
Consumer
Unallocated
2016
% of
Total
Loans
Amount
At December 31,
2015
Amount
% of
Total
Loans
2014
% of
Total
Loans
Amount
$
310
58
787
120
188
165
2,287
33.98% $
7.25
36.37
7.06
13.07
2.27
—
116
26
1,085
77
120
151
720
19.13% $
4.36
41.05
6.21
25.70
3.55
—
66
2
2,058
99
10
—
9
27.51%
2.54
47.78
7.93
14.21
.03
—
Total allowance for loan losses
$
3,915
100.00% $
2,295
100.00% $
2,244
100.00%
Allowance for loan losses as a percentage of total loans
outstanding
4.87%
2.71%
2.88%
Residential real estate
Multi-family real estate
Commercial real estate
Land and construction
Commercial
Consumer
Unallocated
Total allowance for loan losses
Allowance for loan losses as a percentage of total loans outstanding
The following summarizes impaired loans (in thousands):
At December 31,
2013
2012
Amount
% of
Total
Loans
Amount
% of
Total
Loans
$
$
49
4
1,139
458
31
—
530
2,211
32.82% $
4.45
41.96
7.97
12.70
.10
—
100.00% $
2.73%
434
267
1,552
166
36
4
—
2,459
34.32%
4.47
51.97
8.30
.86
.08
—
100.00%
2.81%
December 31, 2016
Unpaid
Principal
Balance
Related
Allowance
Recorded
Investment
At December 31, 2015
Unpaid
Principal
Balance
Related
Allowance
Recorded
Investment
With no related allowance recorded:
Residential real estate
Commercial real estate
With an allowance recorded:
Commercial real estate
Total:
Residential real estate
Commercial real estate
Total
$
$
$
$
375
—
1,004
375
1,004
1,379
$
$
$
$
19
501
—
1,004
501
1,004
1,505
$
$
$
$
— $
—
104
— $
$
104
1,319
3,232
1,041
1,319
4,273
104
$
5,592
$
$
$
$
1,521
5,287
1,041
1,521
6,328
7,849
$
$
$
$
—
—
13
—
13
13
During 2016, 2015 and 2014, the average net investment in impaired loans and interest income recognized and received on impaired loans is as follows (in
thousands):
Average investment in impaired loans
Interest income recognized on impaired loans
Interest income received on a cash basis on impaired loans
Liquidity and Capital Resources
2016
Year Ended December 31,
2015
2014
$
$
$
2,957
124
182
$
$
$
9,579
250
492
$
$
$
11,531
674
587
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, 2016, were from principal repayments of securities available for sale of $4.3 million and
proceeds from sale of securities available for sale of $28.4 million. Cash was used primarily to increase $7.3 million of cash and due from banks, purchase $27.7 million in
securities and fund an $11.6 million reduction in deposits. 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 $30.4 million. As of December 31, 2016, the Bank had $23.5 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 $2.5 million with SunTrust, $2.5 million with Alostar Bank, $.75 million with Servis First Bank, and $.78 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):
At December 31, 2016:
Securities available for sale:
Collateralized mortgage obligations
SBA Pool Securities
At December 31, 2015:
Securities available for sale:
Mortgage-backed securities
Collateralized mortgage obligations
SBA Pool Security
20
Amortized
Cost
Fair
Value
$
$
$
$
10,157
10,470
20,627
$
$
10,107
15,223
644
25,974
$
$
9,752
10,470
20,222
10,086
15,017
646
25,749
The following table sets forth, by maturity distribution, certain information pertaining to the securities portfolio (dollars in thousands):
At December 31, 2016:
Collateralized mortgage obligation
SBA Pool Securities
At December 31, 2015:
Mortgage-backed securities
Collateralized debt obligations
SBA Pool Security
After
Five
Years
Through
Ten
Years
After Ten
Years
Total
Yield
$
$
$
$
$
2,557
—
7,600
10,470
$
2,557
$
18,070
$
— $
—
$
10,107
15,223
644
— $
25,974
$
10,157
10,470
20,627
10,107
15,223
644
25,974
1.83
1.90
2.50
2.17
3.00
Regulatory Capital Adequacy
Failure to meet minimum capital requirements can result in certain mandatory and, possibly, additional discretionary actions by federal and state regulators that, if
undertaken, could have a direct material effect on the Bank’s and Company’s financial condition and results of operations. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-
balance-sheet items as calculated under regulatory accounting practices. In addition, the Consent Order imposes increased minimum capital requirements on the Bank.
Quantitative measures established by regulation and by the Consent Order to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth
in the following table) of Total and Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets. As of December 31, 2016, the Bank did meet the minimum
applicable capital adequacy requirements.
The Bank’s actual and required minimum capital ratios were as follows (dollars in thousands):
Regulatory Capital Requirements
Actual
For Capital
Adequacy
Purposes
Minimum
To Be Well
Capitalized Under
Prompt
Corrective
Action
Provisions
Requirements of
Consent
Order
As of December 31, 2016:
Total Capital to Risk-Weighted Assets
Tier I Capital to Risk-Weighted Assets
Common Equity Tier 1 Capital to Risk-Weighted
Assets
Tier I Capital to Total Assets
As of December 31, 2015:
Total Capital to Risk-Weighted Assets
Tier I Capital to Risk-Weighted Assets
Common Equity Tier 1 Capital to Risk Weighted
Assets
Tier I Capital to Total Assets
Amount
%
Amount
%
Amount
%
Amount
%
$ 10,566
9,498
12.79% $
11.50
6,609
4,957
8.00% $
6.00
8,261
6,609
9,498
9,498
11.50
8.06
3,718
4,714
4.50
4.00
5,370
5,893
10.00% $
8.00
6.50
5.00
9,913
N/A
N/A
9,428
$ 10,319
9,173
11.40% $
10.14
7,240
5,430
8.0% $
6.0
9,050
7,240
10.0% $ 10,860
N/A
8.0
9,173
9,173
10.14
7.59
4,073
4,836
4.5
4.0
5,883
6,045
6.50
5.0
N/A
9,672
12.00%
N/A
N/A
8.00
12.0%
N/A
N/A
8.0
21
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. The Bank’s market risk arises primarily from interest-rate risk inherent in its lending
and deposit-taking activities. The Bank does not engage in securities trading or hedging activities and does not invest in interest-rate derivatives or enter into interest rate
swaps.
The Bank may utilize financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. The
measurement of market risk associated with financial instruments is meaningful only when all related and offsetting on- and off-balance-sheet transactions are aggregated,
and the resulting net positions are identified. Disclosures about the fair value of financial instruments, which reflect changes in market prices and rates, can be found in Note
8 of 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.
22
The following table sets forth certain information related to the Bank’s interest-earning assets and interest-bearing liabilities at December 31, 2016, that are
estimated to mature or are scheduled to reprice within the period shown (dollars in thousands):
Loans (1):
Residential real estate loans
Multi-family real estate loans
Commercial real estate loans
Land and construction
Commercial
Consumer
Total loans
Securities (2)
Federal Home Loan Bank stock
Total rate-sensitive assets
Deposit accounts (3):
Money-market deposits
Interest-bearing checking deposits
Savings deposits
Time deposits
Total deposits
Federal Home Loan Bank advances
Junior subordinated debenture
Total rate-sensitive liabilities
GAP (repricing differences)
Cumulative GAP
Gap Maturity / Repricing Schedule
More than
One Year
and Less
than Five
Years
More than
Five Years
and Less
than Fifteen
Years
One Year or
Less
Over
Fifteen
Years
Total
$
$
9,473
909
10,224
4,076
9,773
1,829
36,284
10,470
1,113
47,867
17,743
3,604
806
43,194
65,347
18,500
—
83,847
$
$
(35,980)
(35,980)
$
$
8,100
4,847
19,040
1,605
741
—
34,333
—
—
34,333
—
—
—
13,531
13,531
—
—
13,531
20,802
(15,178)
$
$
$
7,908
73
—
—
—
—
7,981
—
—
7,981
—
—
—
—
—
5,000
—
5,000
2,981
(12,197)
$
$
$
$
1,853
—
—
—
—
—
1,853
9,752
—
27,334
5,829
29,264
5,681
10,514
1,829
80,451
20,222
1,113
11,605
101,786
—
—
—
—
—
—
5,155
5,155
6,450
(5,747)
$
$
17,743
3,604
806
56,725
78,878
23,500
5,155
107,533
(5,747)
(5,747)
Cumulative GAP/total assets
(35.35%)
(14.91%)
(11.98%)
(5.65%)
(1)
In preparing the table above, adjustable-rate loans are included in the period in which the interest rates are next scheduled to adjust rather than in the period in which
the loans mature. Fixed-rate loans are scheduled, including repayment, according to their maturities.
(2) Securities are scheduled through the repricing date.
(3) Money-market, interest-bearing checking and savings deposits are regarded as readily accessible withdrawable accounts. All other time deposits are scheduled through
the maturity dates.
The following table sets forth loan maturities by type of loan at December 31, 2016 (in thousands):
Residential real estate
Multi-family real estate
Commercial real estate
Land and construction
Commercial
Consumer
Total
One Year
or Less
After One
But Within
Five Years
After
Five Years
Total
$
14
505
3,797
—
1,746
1,829
$
2,258
536
13,346
2,774
7,228
—
$
25,062
4,788
12,121
2,907
1,540
—
7,891
$
26,142
$
46,419
$
27,334
5,829
29,264
5,681
10,514
1,829
80,451
$
$
23
The following table sets forth the maturity or repricing of loans by interest type at December 31, 2016 (in thousands):
Fixed interest rate
Variable interest rate
Total
One Year
or Less
After One
But Within
Five Years
After
Five Years
$
$
3,077
33,207
36,284
$
$
15,040
19,294
34,334
$
$
2,558
7,275
9,833
$
$
Total
20,675
59,776
80,451
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 Bank 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. 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 Bank’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 Bank 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 Bank 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.
As of December 31, 2016, commitments to extend credit totaled $7.1 million.
The following is a summary of the Bank’s contractual obligations, including certain on-balance sheet obligations, at December 31, 2016 (in thousands):
Contractual Obligations
Federal Home Loan Bank advances
Junior subordinated debenture
Operating leases
Total
Deposits
Payments Due by Period
Total
$
23,500
5,155
59
Less
Than 1
Year
$
18,500
—
59
28,714
$
18,559
$
$
$
1-3
Years
3-5
Years
— $
—
—
— $
$
5,000
—
—
5,000
$
More
Than 5
Years
—
5,155
—
5,155
Deposits traditionally are the primary source of funds for the Bank’s use in lending, making investments and meeting liquidity demands. The Bank 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 Bank offers a variety of
deposit products, which are promoted within its market area. Net deposits decreased $11.6 million in 2016.
24
The following table displays the distribution of the Bank’s deposits at December 31, 2016, 2015 and 2014 (dollars in thousands):
Noninterest-bearing demand deposits
Interest-bearing demand deposits
Money-market deposits
Savings
Subtotal
Time deposits:
0.00% – 0.99%
1.00% – 1.99%
2.00% – 2.99%
3.00% – 3.99%
Total time deposits (1)
Total deposits
2016
% of
Deposits
Amount
2015
% of
Deposits
Amount
2014
% of
Deposits
Amount
$
$
7,131
3,604
17,743
806
29,284
14,891
41,695
139
—
56,725
$
$
$
8.29
4.19
20.63
.94
34.05
17.31
48.48
.16
—
65.95
9,478
2,615
20,776
643
33,512
48,196
15,727
136
—
64,059
$
$
9.71
2.68
21.29
0.66
34.34%
49.40
16.12
0.14
—
65.66
9,195
1,768
21,971
605
33,539
49,950
6,021
2,093
—
58,064
10.04
1.93
23.99
0.66
36.62%
54.53
6.57
2.28
—
63.38
$
86,009
$
100.00% $
97,571
100.00% $
91,603
100.00%
(1) Included are Individual Retirement Accounts (IRA’s) totaling $2,818,000 and $3,069,000 at December 31, 2016 and 2015, respectively, all of which are in the
form of time deposits.
Time Deposits of $100,000 or more, or Jumbo Time Deposits, are generally considered a more unpredictable source of funds. The following table sets forth the
Bank’s maturity distribution of time deposits of $100,000 or more at December 31, 2016 and 2015 (in thousands):
Due three months or less
Due more than three months to six months
More than six months to one year
One to five years
Total
Analysis of Results of Operations
At December 31,
2016
2015
$
$
$
4,838
3,433
16,968
9,608
34,847
$
2,475
2,977
18,014
8,780
32,246
The Bank’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 Bank’s interest-rate spread is affected by regulatory, economic, and competitive factors that influence interest rates, loan demand, and deposit flows. The
Bank’ 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.
25
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):
2016
Interest
And
Dividends
Average
Yield/
Rate
Years Ended December 31,
2015
Interest
and
Dividends
Average
Yield/
Rate
Average
Balance
Average
Balance
2014
Interest
and
Dividends
Average
Yield/
Rate
Interest-earning assets:
Loans
Securities
Other interest-earning assets (1)
Total interest-earning
assets/interest income
Cash and due from banks
Premises and equipment
Other assets
Average
Balance
$
83,574
22,686
11,996
118,256
953
2,687
(747)
Total assets
$
121,149
4,200
459
105
4,764
5.03%
2.02
0.88
80,691
26,490
1,273
4.03%
108,454
3,865
597
72
4,534
124
524
236
884
9,483
3,744
3,278
124,959
19,314
59,158
23,158
Interest-bearing liabilities:
Savings, NOW and money-market
deposits
Time deposits
Borrowings (4)
Total interest-bearing
liabilities/interest expense
23,360
60,813
24,416
117
611
351
0.50
1.00
1.44
108,589
1,079
.99
101,630
Noninterest-bearing demand deposits
Other liabilities
Stockholders’ equity
5,870
3,526
3,164
Total liabilities and stockholders’
equity
$
121,149
Net interest income
Interest rate spread (2)
Net interest margin (3)
Ratio of average interest-earning assets
to average interest- bearing liabilities
8,497
11,771
3,061
124,959
3,685
3,650
3.03
3.12
1.09
4,366
959
67
5,392
146
516
249
911
4,481
4.79% $
2.25
5.66
77,703
30,082
6,165
4.18%
113,950
5,996
2,859
5,028
$
127,833
28,680
60,991
28,004
117,675
5,543
2,340
2,275
$
127,833
0.64
0.89
1.02
0.87
3.31
3.37
1.07
5.62%
3.11
1.23
4.73
0.51
0.85
0.89
0.77
3.96
3.93
0.97
(1) Includes interest-earning deposits with banks, Federal funds sold and Federal Home Loan Bank stock dividends.
(2) Interest rate spread represents the difference between average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(3) Net interest margin is net interest income divided by average interest-earning assets.
(4) Includes Federal Home Loan Bank advances, junior subordinated debenture and securities sold under an agreement to repurchase.
26
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):
Rate/Volume Analysis
Interest-earning assets:
Loans
Securities
Other interest-earning assets
Total interest-earning assets
Interest-bearing liabilities:
Savings, NOW and money-market
Time deposits
Other
Total interest-bearing liabilities
Net interest income
Interest-earning assets:
Loans
Securities
Other interest-earning assets
Total interest-earning assets
Interest-bearing liabilities:
Savings, NOW and money-market
Time deposits
Borrowings
Total interest-bearing liabilities
Net interest income
Year Ended December 31,
2016 versus 2015
Increases (Decreases) Due to Change In:
Rate
Volume
Rate/
Volume
Total
$
190
(61)
(61)
68
(27)
70
97
140
$
138
(86)
607
659
26
15
13
54
$
7
9
(513)
(497)
(6)
2
5
1
(72)
$
605
$
(498)
$
Year Ended December 31,
2015 versus 2014
Increases (Decreases) Due to Change In:
Total
$
Rate
Volume
$
(644)
(264)
241
(667)
38
24
36
98
168
(134)
(52)
(18)
(48)
(16)
(43)
(107)
Rate/
Volume
$
(25)
36
(184)
(173)
(12)
—
(6)
(18)
335
(138)
33
230
(7)
87
115
195
35
(501)
(362)
5
(858)
(22)
8
(13)
(27)
(765)
$
89
$
(155)
$
(831)
$
$
$
$
27
Financial Condition as of December 31, 2016 Compared to December 31, 2015
The Company’s total assets decreased by $7.8 million, to $119.7 million at December 31, 2016, from $127.5 million at December 31, 2015.
At December 31, 2016, the Bank had a Tier 1 leverage ratio of 8.06%, and a total risk-based capital ratio of 12.79%, both of which were in excess of the 8% and
12% requirements of the Consent Order. The Company’s capital was enhanced during 2016 through the sale of $375,000 in common stock.
The Company may need to sell additional shares of common stock to comply with the capital requirements through the end of 2017 and in subsequent years. At the
present time, the Company has not received any commitments from any third parties to purchase any additional shares. Accordingly, it is uncertain whether the Company
will be able to obtain the capital that is required or the price and terms of any capital that is obtained.
The Company is in default with respect to its $5,155,000 Junior Subordinated Debenture (“Debenture”) due to its failure to make certain required interest payments
under the Debenture. The Trustee of the Debenture (the “Trustee”) or the holders of the Debenture are entitled to accelerate the payment of the $5,155,000 principal balance
plus accrued and unpaid interest totaling $1,147,636 at December 31, 2016. To date the Trustee has not accelerated the outstanding balance of the Debenture. No
adjustments to the accompanying consolidated financial statements have been made as a result of this uncertainty.
Management’s plans with regard to this matter are as follows: A Director of the Company has offered to purchase the Debenture and this offer has been approved
by certain equity owners of the Trust that holds the Debenture. The Director has also agreed to enter into a forbearance agreement with the Company with respect to
payments due under the Debenture upon consummation of the Director’s purchase of the Debenture.
In March 2016, the Trustee received a direction from certain equity owners of the Trust that holds the Debenture to sell the Debenture to a Director of the
Company. Based upon the receipt of conflicting directions from other debt holders of the Trust, in August 2016, the Trustee commenced an action in a Minnesota State
Court seeking directions from the Court. The case was subsequently transferred to United States District Court for the Southern District of New York, where the case is
currently pending. The Company continues to pursue mechanisms for paying the accrued interest, such as raising additional capital.
Results of Operations for Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
General. Net loss of $0.4 million or $(0.38) loss per basic and diluted share for the year ended December 31, 2016 compared to net loss for the year ended
December 31, 2015 of $0.2 million or $(.17) per basic and diluted share. This $.2 million increase in net (loss) was primarily the result of the $.5 million decrease in
noninterest income and no income tax benefit in 2016.
Interest income. Interest income increased to $4.8 million for the year ended December 31, 2016 compared to $4.5 million for the year ended December 31, 2015.
Interest on loans increased by $335,000 due to an increase in average yield in 2016 compared to 2015. Interest on securities decreased by $138,000 due to a decrease in
average balance of securities in 2016 compared to 2015, and by a decrease in average yield earned in 2016 compared to 2015.
Interest expense. Interest expense on deposits was $728,000 in the year ended December 31, 2016 compared to $$648,000 in the year ended December 31, 2015.
Interest expense on borrowings was $351,000 in the year ended December 31, 2016 compared to $236,000 in the year ended December 31, 2015.
Provision for Loan Losses. There was no provision for loan losses recorded for the years ended December 31, 2016 and 2015. The provision for loan losses is
charged to operations as losses are estimated to have occurred in order to bring the total allowance for loan losses to a level deemed appropriate by management to absorb
losses inherent in the loan portfolio at December 31, 2016. Management’s periodic evaluation of the adequacy of the allowance is based upon historical experience, the
volume and type of lending conducted by it, adverse situations that may affect the borrower’s ability to repay, estimated value of the underlying collateral, loans identified
as impaired, general economic conditions, particularly as they relate to its market areas, and other qualitative factors related to the estimated collectability of its loan
portfolio. The allowance for loan losses totaled $3.9 million or 4.87% of loans outstanding at December 31, 2016, compared to $2.3 million or 2.71% of loans outstanding at
December 31, 2015. Management believes the balance in the allowance for loan losses at December 31, 2016 is adequate and has requested a permission to reduce the
allowance for loan lease losses from the regulating authorities.
On January 6, 2016, the Bank completed a sale of a judgement on a defaulted credit that resulted in a $1.8 million recovery of previously charged-off amounts to
the Allowance for Loan and Lease Losses (“ALLL”). This increased the balance of the ALLL to approximately $3.9 million at December 31, 2016. The Bank has submitted
a written request to the FDIC for a partial reversal of the ALLL. Management does not expect a response until the next safety and soundness examination which is expected
to be performed in first and second quarters of 2017.
28
Noninterest Income. Total noninterest income decreased to $(144,000) for the year ended December 31, 2016, from $412,000 for the year ended December 31,
2015 primarily due to loss on sale of securities.
Noninterest Expenses. Total noninterest expenses decreased by $ 0.6 million, to $3.9 million for the year ended December 31, 2016 from $4.5 million for the year
ended December 31, 2015, partially due to a non-recurring gain on sale of foreclosed real estate of $147,000 in 2016.
Income Taxes. Income taxes (benefit) for the years ended December 31, 2016 and 2015 were $0 and ($320,000), respectively. Income tax benefit for 2015 results
from the closure with no adjustment with respect to the Internal Revenue Service examination of the Bank’s 2010 and 2009 income tax returns.
Results of Operations for Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
General. Net loss for the year ended December 31, 2015, was $163,000 or $(.17) per basic and diluted share compared to net income of $1.6 million or $1.85
earnings per basic and diluted share for the year ended December 31, 2014. This $1.8 million decrease in net earnings was primarily the result of the decrease in net interest
income of $831,000 and increase in noninterest expenses of $1.1 million.
Interest income. Interest income decreased to $4.5 million for the year ended December 31, 2015 compared to $5.4 million for the year ended December 31, 2014.
Interest on loans decreased by $501,000 due to a decrease in average yield in 2015 compared to 2014. Interest on securities decreased by $362,000 due to a decrease in
average balance of securities in 2015 compared to 2014, and by a decrease in average yield earned in 2015 compared to 2014.
Interest expense. Interest expense on deposits was $648,000 in the year ended December 31, 2015 compared to $662,000 in the year ended December 31, 2014.
Interest expense on borrowings was $236,000 in the year ended December 31, 2015 compared to $249,000 in the year ended December 31, 2014.
Provision for Loan Losses. There was no provision for loan losses recorded for the years ended December 31, 2015 and 2014. The provision for loan losses is
charged to operations as losses are estimated to have occurred in order to bring the total allowance for loan losses to a level deemed appropriate by management to absorb
losses inherent in the loan portfolio at December 31, 2015. Management’s periodic evaluation of the adequacy of the allowance is based upon historical experience, the
volume and type of lending conducted by it, adverse situations that may affect the borrower’s ability to repay, estimated value of the underlying collateral, loans identified
as impaired, general economic conditions, particularly as they relate to its market areas, and other qualitative factors related to the estimated collectability of its loan
portfolio. The allowance for loan losses totaled $2.3 million or 2.71% of loans outstanding at December 31, 2015, compared to $2.9 million or 2.88% of loans outstanding at
December 31, 2014. Management believes the balance in the allowance for loan losses at December 31, 2015 is adequate.
Noninterest Income. Total noninterest income decreased to $412,000 for the year ended December 31, 2015, from $572,000 for the year ended December 31,
2014.
Noninterest Expenses. Total noninterest expenses increased by $1.1 million, to $4.5 million for the year ended December 31, 2015 from $3.4 million for the year
ended December 31, 2014, primarily due to a non-recurring gain on sale of foreclosed real estate of $0.8 million in 2014.
Income Taxes. Income taxes (benefit) for the years ended December 31, 2015 and 2014 were ($320,000) and $0, respectively. Income tax benefit for 2015 results
from the closure with no adjustment with respect to the Internal Revenue Service examination of the Bank’s 2010 and 2009 income tax returns.
Impact of Inflation and Changing Prices
The 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.
29
Item 8. Financial Statements
The Board of Directors and Stockholders
OptimumBank Holdings, Inc.
Fort Lauderdale, Florida:
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of OptimumBank Holdings, Inc. and Subsidiary (the “Company”) as of December 31, 2016 and
2015, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the years then ended. These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31,
2016 and 2015, and the 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.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in notes 1, 7
and 13 to the consolidated financial statements, the Company is in technical default with respect to its Junior Subordinated Debenture (“Debt Securities”). The holders of the
Debt Securities could demand immediate payment of the outstanding debt of $5,155,000 and accrued and unpaid interest, which raises substantial doubt about the
Company’s ability to continue as a going concern. Management’s plans in regard to this matter are also described in Note 1. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
HACKER, JOHNSON & SMITH PA
Fort Lauderdale, Florida
March 20, 2017
30
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
Assets:
Cash and due from banks
Interest-bearing deposits with banks
Total cash and cash equivalents
Securities available for sale
Loans, net of allowance for loan losses of $3,915 and $2,295
Federal Home Loan Bank stock
Premises and equipment, net
Foreclosed real estate, net
Accrued interest receivable
Other assets
Total assets
Liabilities and Stockholders’ Equity:
Liabilities:
Noninterest-bearing demand deposits
Savings, NOW and money-market deposits
Time deposits
Total deposits
Federal Home Loan Bank advances
Junior subordinated debenture
Advanced payment by borrowers for taxes and insurance
Official checks
Other liabilities
Total liabilities
Commitments and contingencies (Notes 1, 4, 7, 8, 13, 17 and 21)
Stockholders’ equity:
Preferred stock, no par value; 6,000,000 shares authorized, 7 shares issued and outstanding in 2016 and 4 shares issued and
outstanding in 2015
Common stock, $.01 par value; 5,000,000 shares authorized, 1,103,447 shares issued and outstanding in 2016 and
50,000,000 shares authorized, 9,628,863 shares issued and outstanding in 2015
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to Consolidated Financial Statements
31
December 31,
2016
December 31,
2015
$
$
17,563
77
17,640
20,222
76,999
1,113
2,648
—
380
701
10,162
203
10,365
25,749
82,573
966
2,703
4,029
462
631
$
119,703
$
127,478
7,131
22,153
56,725
86,009
23,500
5,155
221
114
1,623
9,478
24,034
64,059
97,571
20,000
5,155
251
130
1,404
116,622
124,511
—
11
34,039
(30,717)
(252)
$
3,081
119,703
$
—
96
33,330
(30,321)
(138)
2,967
127,478
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(In thousands, except share amounts)
Year Ended December 31,
2016
2015
Interest income:
Loans
Securities
Other
Total interest income
Interest expense:
Deposits
Borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest (loss) income:
Service charges and fees
Other
(Loss) gain on sale of securities available for sale
Total noninterest (loss) income
Noninterest expenses:
Salaries and employee benefits
Occupancy and equipment
Data processing
Professional fees
Insurance
Foreclosed real estate (income) expenses
Regulatory assessments
Other
Total noninterest expenses
Loss before income tax benefit
Income tax benefit
Net loss
Net loss per share:
Basic
Diluted
See Accompanying Notes to Consolidated Financial Statements.
32
$
$
$
$
$
4,200
459
105
4,764
728
351
1,079
3,685
—
3,685
24
18
(186)
(144)
1,774
446
333
659
103
(123)
253
492
3,937
(396)
—
(396)
$
(0.38)
(0.38)
$
$
3,865
597
72
4,534
648
236
884
3,650
—
3,650
141
211
60
412
1,902
476
298
594
115
412
298
450
4,545
(483)
(320)
(163)
(0.17)
(0.17)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Loss
(In thousands)
Net loss
Other comprehensive loss:
Unrealized loss on securities available for sale:
Unrealized loss arising during the year
Reclassification adjustment for realized loss (gain) on sale of securities available for sale
Net change in unrealized holding loss
Deferred income tax benefit on above change
Total other comprehensive loss
Comprehensive loss
See Accompanying Notes to Consolidated Financial Statements.
33
Year Ended
December 31,
2016
2015
$
(396)
$
(163)
(366)
186
(180)
(66)
(114)
$
(510)
$
(297)
(60)
(357)
(136)
(221)
(384)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2016 and 2015
(Dollars in thousands)
Preferred Stock
Common Stock
Shares
Amount
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other
Compre-
hensive
Loss
Total
Stockholders’
Equity
Balance at December 31, 2014
Proceeds from sale of preferred stock
Proceeds from sale of common stock
Common stock issued as
compensation to directors
Net change in unrealized gain on
securities available
for sale, net of income
tax benefit
Net loss
Balance at December 31, 2015
Reverse common stock split
(1-for 10)
Proceeds from sale of preferred stock
Proceeds from sale of common stock
Common stock issued as
compensation to directors
Common stock issued for services
Reversal of common stock issued as
compensation to directors (See
Note 15)
Net change in unrealized loss on
securities available
for sale, net of income
tax benefit
Net loss
Balance at December 31, 2016
— $
4
—
—
—
—
4 $
—
3
—
—
—
—
—
—
7 $
—
—
—
—
—
—
—
9,305,236
—
37,500
286,127
—
—
9,628,863
— (8,665,694)
—
—
92,980
—
$
$
$
57,476
36,118
(46,296)
—
—
—
—
—
—
93 $
—
—
3
—
—
96 $
(87) $
—
1
1
—
—
32,961 $
100
30
(30,158) $
—
—
239
—
83 $
—
—
—
—
—
33,330 $
—
(163)
(30,321) $
(221)
—
(138) $
87
75
374
245
128
(200)
—
—
—
—
—
—
—
—
—
—
—
—
2,979
100
30
242
(221)
(163)
2,967
—
75
375
246
128
(200)
(114)
(396)
3,081
—
—
1,103,447
$
—
—
11 $
—
—
34,039 $
—
(396)
(30,717) $
(114)
—
(252) $
See Accompanying Notes to Consolidated Financial Statements.
34
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
2016
2015
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
$
(396)
$
Depreciation and amortization
Common stock issued as compensation to directors
Common stock issued as compensation for services
Net amortization of fees, premiums and discounts
(Loss) gain from sale of securities available for sale
Decrease (increase) in accrued interest receivable
(Increase) decrease in other assets
Gain on sale of foreclosed real estate
Provision for losses on foreclosed real estate
Increase (decrease) in official checks and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of securities available for sale
Principal repayments and calls of securities available for sale
Proceeds from sale of securities available for sale
Net decrease (increase) in loans
Purchase of premises and equipment, net
Proceeds from sale of foreclosed real estate, net
Capital improvements on foreclosed real estate
(Purchase) redemption of Federal Home Loan Bank stock
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Net (decrease) increase in deposits
Purchase (repayments) of Federal Home Loan Bank advances, net
Net (decrease) increase in advanced payment by borrowers for taxes and insurance
Proceeds from sale of common stock
Proceeds from sale of preferred stock
Net cash (used in) provided by financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
156
46
128
324
186
82
(4)
(174)
—
203
551
(27,738)
4,326
28,409
5,414
(101)
4,203
—
(147)
14,366
(11,562)
3,500
(30)
375
75
(7,642)
7,275
10,365
17,640
$
$
35
(163)
157
242
—
540
(60)
(36)
13
(48)
260
(278)
627
(12,314)
4,017
8,530
(7,816)
(24)
1,679
(39)
263
(5,704)
5,968
(2,740)
10
30
100
3,368
(1,709)
12,074
10,365
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
(In thousands)
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest
Income taxes
Noncash transactions:
Change in accumulated other comprehensive loss, net change in unrealized loss on securities available for sale
Loans transferred to foreclosed real estate
See Accompanying Notes to Consolidated Financial Statements.
36
Year Ended December 31,
2016
2015
$
$
$
$
874
$
— $
(114)
$
— $
723
—
(221)
1,001
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2016 and 2015 and the Years Then Ended
(1) Summary of Significant Accounting Policies
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 Bank’s wholly-owned subsidiaries are OB Real Estate Management, LLC and OB Real Estate Holdings, LLC, both of which were
formed in 2009; OB Real Estate Holdings 1692 and OB Real Estate Holdings 1704 formed in 2012, collectively, (the “Real Estate Holding Subsidiaries”). The
Holding Company’s only business is the operation of the Bank and its subsidiaries (collectively, the “Company”). 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. OB Real Estate Management, LLC is primarily engaged in managing foreclosed real estate.
This subsidiary had no activity in 2016 and 2015. All other subsidiaries are primarily engaged in holding and disposing of foreclosed real estate.
Basis of Presentation. The accompanying consolidated financial statements include the accounts of the Holding Company, the Bank and the Real Estate Holding
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.
Going Concern Status. The Company is in default with respect to its $5,155,000 Junior Subordinated Debenture (“Debenture”) due to its failure to make certain
required interest payments under the Debenture. The Trustee of the Debenture (the “Trustee”) or the holders of the Debenture are entitled to accelerate the payment
of the $5,155,000 principal balance plus accrued and unpaid interest totaling $1,147,636 at December 31, 2016. To date the Trustee has not accelerated the
outstanding balance of the Debenture. No adjustments to the accompanying consolidated financial statements have been made as a result of this uncertainty.
Management’s plans with regard to this matter are as follows: A Director of the Company has offered to purchase the Debenture and this offer has been approved
by certain equity owners of the Trust that holds the Debenture. The Director has also agreed to enter into a forbearance agreement with the Company with respect
to payments due under the Debenture upon consummation of the Director’s purchase of the Debenture.
In March 2016, the Trustee received a direction from certain equity owners of the Trust that holds the Debenture to sell the Debenture to a Director of the
Company. Based upon the receipt of conflicting directions from other debt holders of the Trust, in August 2016, the Trustee commenced an action in a Minnesota
State Court seeking directions from the Court. The case was subsequently transferred to United States District Court for the Southern District of New York, where
the case is currently pending. The Company continues to pursue mechanisms for paying the accrued interest, such as raising additional capital.
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 as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses, the valuation of foreclosed real estate, and 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, 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 in accounts with other banks. At December 31, 2016 and
2015, balances maintained as reserves were $70,000 and $127,000, respectively.
(continued)
37
(1) Summary of Significant Accounting Policies, 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 loss. 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, 2016 and
2015.
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.
38
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
Allowance for Loan Losses, Continued
The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. For such loans, an allowance is
established when the discounted cash flows (or collateral value or observable market price) of the impaired loans are lower than the carrying value of those loans.
The general component covers all other loans and is based on historical loss experience adjusted for qualitative factors.
The historical loss component of the allowance is determined by losses recognized by portfolio segment over the preceding three years. The historical loss
experience is adjusted for the risks by each portfolio segment. Risk factors impacting loans in each of the portfolio segments include: 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.
Foreclosed Real Estate. Real estate acquired through, or in lieu of, loan foreclosure is to be sold and is initially recorded at fair value less estimated selling costs at the
date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower
of the new cost basis or fair value less cost to sell. Revenue and expenses from operations are included in the consolidated statements of operations.
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” on the consolidated balance sheets (See Note 7).
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.
39
(1) Summary of Significant Accounting Policies, continued
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 is recorded as a component of income tax expense.
See Note 10 for additional details.
The Company recognizes interest and penalties on income taxes as a component of income tax expense.
The Holding Company and the Bank file a consolidated income tax return. Income taxes are allocated proportionately to the Holding Company and the Bank as
though separate income tax returns were filed.
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 $9,400 and $6,100 during the years ended December 31, 2016 and 2015, 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.
Reverse Common Stock Split. Effective January 11, 2016 each ten shares of the Company’s common stock were converted into one share of common stock. Earnings
per share for 2016 and 2015 has been adjusted to reflect the 1-for-10 reverse common stock split.
Loss Per Share. Basic loss per share is computed on the basis of the weighted-average number of common shares outstanding. In 2016 and 2015, basic and diluted loss
per share is the same due to the net loss incurred by the Company. Loss per common share has been computed based on the following (weighted-average number of
common shares outstanding have been adjusted for the reverse stock split discussed above):
Weighted-average number of common shares outstanding used to calculate basic and diluted loss per common share
1,041,213
953,855
Year Ended December 31,
2015
2016
40
(1) Summary of Significant Accounting Policies, continued
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. 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.
Foreclosed Real Estate. Estimates of fair values 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, the fair values estimates for foreclosed real estate are classified as Level 3.
41
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
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.
Securities. Fair values for securities are based on the framework for measuring fair value established by GAAP.
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.
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.
Accrued Interest Receivable. The carrying amount of accrued interest approximates its fair value.
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.
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.
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.
Comprehensive Loss. GAAP generally requires that recognized revenue, expenses, gains and losses be included in net loss. Although certain changes in 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 loss, are components of comprehensive loss. The only component of other comprehensive loss is the net change in the unrealized
loss on the securities available for sale.
Recent Pronouncements. In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-01, Financial
Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which is intended to enhance the reporting
model for financial instruments to provide users of financial statements with more decision-useful information. The ASU requires equity investments to be
measured at fair value with changes in fair values recognized in net earnings, simplifies the impairment assessment of equity investments without readily
determinable fair values by requiring a qualitative assessment to identity impairment and eliminates the requirement to disclose fair values, the methods and
significant assumptions used to estimate the fair value of financial instruments measured at amortized cost. The ASU also clarifies that the Company should
evaluate the need for a valuation allowance on a deferred tax asset related to available for-sale debt securities in combination with the Company’s other deferred
tax assets. The ASU is effective for the Company beginning January 1, 2018. Early adoption is permitted. The adoption of this guidance is not expected to have a
material impact on the Company’s consolidated financial statements.
42
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
Recent Pronouncements, Continued
In February 2016, the FASB issued ASU 2016-2, Leases (Topic 842) which will require lessees to recognize on the balance sheet the assets and liabilities for the
rights and obligations created by those leases with term of more than twelve months. Consistent with current GAAP, the recognition, measurement, and
presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. The new ASU
will require both types of leases to be recognized on the balance sheet. The ASU also will require disclosures to help investors and other financial statement users
better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements,
providing additional information about the amounts recorded in the financial statements. The ASU is effective for fiscal years and interim periods within those
fiscal years beginning after December 15, 2018. The Company is in the process of determining the effect of the ASU on its consolidated financial statements. Early
application will be permitted.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718) intended to improve the accounting for employee share-based
payments. The ASU affects all organizations that issue share-based payment awards to their employees. The ASU simplifies several aspects of the accounting for
share-based payment award transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the
consolidated statement of cash flows. The ASU will take effect for annual periods beginning after December 15, 2016, and interim periods within those annual
periods. The Company has evaluated the effect of ASU and determined it has no material effect on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13 Financial 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 financial statements. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt
securities and purchased financial assets with credit deterioration. The ASU will take effect for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2019. Early adoption is permitted. The Company is in the process of determining the effect of the ASU on its consolidated financial statements.
Reclassification. Certain amounts have been reclassified to conform to the 2016 consolidated financial statement presentation.
(continued)
43
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Securities. Securities have been classified according to management’s intent. The carrying amount of securities and approximate fair values are as follows (in
(2)
thousands):
At December 31, 2016:
Securities Available for Sale:
Collateralized mortgage obligations
SBA Pool Securities
Total
At December 31, 2015:
Securities Available for Sale:
Mortgage-backed securities
Collateralized mortgage obligations
SBA Pool Security
Total
The following summarizes sales of securities (in thousands):
Proceeds from sales of securities
Gross gains from sale of securities
Gross losses from sale of securities
Net (loss) gain from sales of securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
$
$
$
$
$
$
10,157
10,470
20,627
10,107
15,223
644
25,974
$
— $
—
— $
31
21
2
54
$
$
$
(405)
—
(405)
$
$
(52)
(227)
—
(279)
$
9,752
10,470
20,222
10,086
15,017
646
25,749
Year Ended December 31,
2015
2016
$
$
28,409
$
8,530
48
(234)
(186)
$
87
(27)
60
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):
Securities Available for Sale:
Collateralized mortgage obligations
Securities Available for Sale:
Mortgage-backed securities
Collateralized mortgage obligations
At December 31, 2016
Over Twelve Months
Gross
Unrealized
Losses
Fair
Value
Less Than Twelve Months
Gross
Unrealized
Losses
Fair
Value
(46)
$
864
$
(359)
$
8,888
At December 31, 2015
Over Twelve Months
Gross
Unrealized
Losses
Fair
Value
Less Than Twelve Months
Gross
Unrealized
Losses
Fair
Value
— $
—
— $
— $
—
— $
(52)
(227)
(279)
$
$
5,526
11,783
17,309
(continued)
$
$
$
44
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, 2016 and 2015, the unrealized losses on six and eighteen 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
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair
Value
At December 31, 2016:
Collateralized mortgage obligations
SBA Pool Securities
At December 31, 2015:
Mortgage-backed securities
Collateralized mortgage obligations
SBA Pool Security
$
$
$
$
$
$
$
9,752
10,470
20,222
10,086
15,017
646
25,749
$
— $
—
— $
— $
—
—
— $
$
$
$
9,752
10,470
20,222
10,086
15,017
646
25,749
$
During the years ended December 31, 2016 and 2015, no securities were transferred in or out of Level 1, Level 2 or Level 3.
45
—
—
—
—
—
—
—
(continued)
(3)
Loans. The components of loans are as follows (in thousands):
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Residential real estate
Multi-family real estate
Commercial real estate
Land and construction
Commercial
Consumer
Total loans
Add (deduct):
Net deferred loan fees, costs and premiums
Allowance for loan losses
Loans, net
At December 31,
2016
At December 31,
2015
$
$
27,334
5,829
29,264
5,681
10,514
1,829
80,451
463
(3,915)
$
76,999
$
16,203
3,697
34,771
5,258
21,770
3,015
84,714
154
(2,295)
82,573
(continued)
46
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, 2016 and 2015 follows (in thousands):
Residential
Real Estate
Multi-Family
Real Estate
Commercial
Real Estate
Land and
Construction
Commercial
Consumer
Unallocated
Total
Year Ended December 31,
2016:
Beginning balance
Provision (credit) for
loan losses
Charge-offs
Recoveries
Ending balance
Year Ended December 31,
2015:
Beginning balance
Provision (credit) for
loan losses
Charge-offs
Recoveries
Ending balance
$
$
$
$
116
$
26
$
1,085
$
77
$
120
$
151
$
720
$
2,295
194
—
—
32
—
—
(2,069)
(264)
2,035
19
—
24
68
—
—
189
(205)
30
1,567
—
—
—
(469)
2,089
310
$
58
$
787
$
120
$
188
$
165
$
2,287
$
3,915
66
$
2
$
2,058
$
99
$
10
$
— $
9
$
2,244
34
(289)
305
24
—
—
(973)
—
—
(44)
—
22
110
—
—
138
—
13
711
—
—
—
(289)
340
116
$
26
$
1,085
$
77
$
120
$
151
$
720
$
2,295
(continued)
47
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3) Loans, continued.
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, 2016 and
2015 follows (in thousands):
Residential
Real Estate
Multi-Family
Real Estate
Commercial
Real Estate
Land and
Construction
Commercial
Consumer
Unallocated
Total
At December 31, 2016:
Individually
evaluated for
impairment:
Recorded
investment
Balance in
allowance for
loan losses
Collectively
evaluated for
impairment:
Recorded
investment
Balance in
allowance for
loan losses
At December 31, 2015:
Individually
evaluated for
impairment:
Recorded
investment
Balance in
allowance for
loan losses
Collectively
evaluated for
impairment:
Recorded
investment
Balance in
allowance for
loan losses
$
$
$
$
$
$
$
$
375
$
— $
1,004
— $
— $
104
26,959
310
$
$
5,829
58
$
$
28,260
683
1,319
$
— $
4,273
— $
— $
13
14,884
116
$
$
3,697
26
$
$
30,498
1,072
$
$
$
$
$
$
$
$
48
— $
— $
— $
— $
1,379
— $
— $
— $
— $
104
5,681
120
$
$
10,514
188
$
$
1,829
165
$
$
— $
79,072
2,287
$
3,811
— $
— $
— $
— $
5,592
— $
— $
— $
— $
13
5,258
77
$
$
21,770
120
$
$
3,015
151
$
$
— $
79,122
720
$
2,282
(continued)
(3) Loans, 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.
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)
49
(3) Loans, Continued. The following summarizes the loan credit quality (in thousands):
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
OLEM
(Other
Loans
Especially
Mentioned)
Pass
$
$
$
25,326
5,829
25,979
5,636
8,768
1,823
73,361
15,132
3,697
29,925
5,212
19,916
3,015
$
1,633
—
1,174
45
—
—
2,852
$
— $
—
573
46
—
—
Sub-
standard
Doubtful
Loss
Total
$
$
$
375
—
2,111
—
1,746
6
4,238
1,071
—
4,273
—
1,854
—
— $
—
—
—
—
—
— $
— $
—
—
—
—
—
— $
— $
—
—
—
—
—
— $
— $
—
—
—
—
—
— $
27,334
5,829
29,264
5,681
10,514
1,829
80,451
16,203
3,697
34,771
5,258
21,770
3,015
84,714
76,897
$
619
$
7,198
$
At December 31, 2016:
Residential real estate
Multi-family real estate
Commercial real estate
Land and construction
Commercial
Consumer
Total
At December 31, 2015:
Residential real estate
Multi-family real estate
Commercial real estate
Land and construction
Commercial
Consumer
Total
$
$
$
$
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 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)
50
(3)
Loans, Continued. Age analysis of past-due loans is as follows (in thousands):
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
30-59
Days
Past Due
60-89
Days
Past Due
Accruing Loans
Greater
Than 90
Days
Past Due
Total
Past
Due
$
$
$
$
— $
—
—
—
—
—
— $
— $
—
—
—
—
—
— $
— $
—
—
—
—
6
6
$
— $
—
—
—
—
—
— $
— $
—
—
—
—
—
— $
— $
—
—
—
—
—
— $
Current
Nonaccrual
Loans
Total
Loans
$
$
$
— $
—
—
—
—
6
26,959
5,829
29,264
5,681
10,514
1,823
6
$
80,070
— $
—
—
—
—
—
15,132
3,697
31,539
5,258
21,770
3,015
$
$
$
375
—
—
—
—
—
375
1,071
—
3,232
—
—
—
27,334
5,829
29,264
5,681
10,514
1,829
80,451
16,203
3,697
34,771
5,258
21,770
3,015
— $
80,411
$
4,303
$
84,714
At December 31, 2016:
Residential real estate
Multi-family real estate
Commercial real estate
Land and construction
Commercial
Consumer
Total
At December 31, 2015:
Residential real estate
Multi-family real estate
Commercial real estate
Land and construction
Commercial
Consumer
Total
The following summarizes the amount of impaired loans (in thousands):
At December 31, 2016
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
Recorded
Investment
At December 31, 2015
Unpaid
Principal
Balance
Related
Allowance
With no related allowance recorded:
Residential real estate
Commercial real estate
With related allowance recorded -
Commercial real estate
Total
Residential real estate
Commercial real estate
Total
$
$
$
$
$
375
—
1,004
375
1,004
1,379
$
$
$
$
— $
—
104
— $
$
104
104
$
1,319
3,232
1,041
1,319
4,273
5,592
$
$
$
$
1,521
5,287
1,041
1,521
6,328
7,849
$
$
$
$
—
—
13
—
13
13
(continued)
$
$
$
$
501
—
1,004
501
1,004
1,505
51
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3)
Loans, Continued. The average net investment in impaired loans and interest income recognized and received on impaired loans are as follows (in thousands):
Average
Recorded
Investment
2016
Interest
Income
Recognized
For the Year Ended December 31,
Interest
Income
Received
Average
Recorded
Investment
2015
Interest
Income
Recognized
Interest
Income
Received
Residential real estate
Commercial real estate
Total
$
$
$
886
2,071
2,957
$
$
$
48
76
124
$
$
$
76
106
182
$
$
$
4,619
4,960
9,579
$
$
$
175
75
250
$
$
$
236
256
492
There were no loans determined to be troubled debt restructurings during the years ended December 31, 2016 and 2015.
(4) Premises and Equipment
A summary of premises and equipment follows (in thousands):
Land
Buildings and improvements
Furniture, fixtures and equipment
Leasehold improvements
Total, at cost
Less accumulated depreciation and amortization
Premises and equipment, net
$
At December 31,
2016
2015
$
1,171
2,065
1,268
119
4,623
1,171
2,053
1,190
119
4,533
(1,975)
(1,830)
$
2,648
$
2,703
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, 2016 and 2015 was $68,000 and
$64,000, respectively. At December 31, 2016, the future minimum lease payments are approximately as follows (in thousands):
Year Ending December 31,
2017
Total
(5) Foreclosed Real Estate
(Income) expenses applicable to foreclosed real estate are as follows (in thousands):
Provision for losses on foreclosed real estate
Gain on sale of foreclosed real estate
Operating expenses
Amount
$
$
59
59
Year Ended December 31,
2015
2016
$
$
— $
(174)
51
(123) $
260
(48)
200
412
At December 31, 2015 the valuation allowance with respect to foreclosed real estate was $260,000. This amount was reversed with the sale of the property in 2016.
(continued)
52
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(6) Deposits
The aggregate amount of time deposits with a minimum denomination of $100,000 was approximately $34.8 million and $32.2 million at December 31, 2016 and 2015,
respectively.
A schedule of maturities of time deposits at December 31, 2016 follows (in thousands):
Year Ending
December 31,
2017
2018
2019
2020
2021
Amount
$
(7) Federal Home Loan Bank Advances and Junior Subordinated Debenture
The maturities and interest rates on the Federal Home Loan Bank (“FHLB”) advances were as follows (dollars in thousands)
Maturity
Year Ending
December 31,
2016
2016
2017
2017
2017
2021
Interest
Rate
0.53%
0.59
0.80
0.49
0.49
1.68
At December 31,
2016
2015
$
$
— $
—
3,000
5,000
10,500
5,000
23,500
$
43,194
12,214
929
230
158
56,725
13,500
6,500
—
—
—
—
20,000
At December 31, 2016, all FHLB advances had fixed interest rates, with the exception of the FHLB advance with a balance of $3.0 million, which is adjusted daily.
At December 31, 2016 and 2015, the FHLB advances were collateralized by $22.0 million and $8.6 million, respectively, of securities and by a lien on qualifying
residential one-to-four family mortgage loans, commercial and multi-family real estate loans and second mortgage loans.
Junior Subordinated Debenture. On September 30, 2004, the Company issued a $5,155,000 junior subordinated debenture to an unconsolidated subsidiary (the
“Debenture”). The Debenture has a term of thirty years. The interest rate was fixed at 6.4% for the first five years, and thereafter, the coupon rate floats quarterly at
the three-month LIBOR rate plus 2.45% (3.33% at December 31, 2016). 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, 2016 totaled $1,147,636. The Company has deferred interest payments with respect to the Debenture for the maximum allowable twenty consecutive
quarterly payments. The holder of the Debenture can accelerate the $5,155,000 principal balance as a result of this default. Under the Written Agreement, the
Company is not able to make these interest payments without the prior approval of the Federal Reserve Bank of Atlanta. Regulatory approval to pay accrued and
unpaid interest has been denied.
A Director of the Company has offered to purchase the Debenture and this offer has been approved by certain equity owners of the Trust that holds the Debenture.
The Director has also agreed to enter into a forbearance agreement with the Company with respect to payments due under the Debenture upon consummation of the
Director’s purchase of the Debenture. In March 2016, the Trustee received a direction from certain debt holders of the Trust that holds the Debenture to sell the
Debenture to a Director of the Company. Based upon the receipt of conflicting directions from other equity owners of the Trust, in August 2016, the Trustee
commenced an action in a Minnesota State Court seeking directions from the Court. The case was subsequently transferred to United States District Court for the
Southern District of New York, where the case is currently pending. The Company continues to pursue mechanisms for paying the accrued interest, such as raising
additional capital.
(continued)
53
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(8) Financial Instruments
The estimated fair values of the Company’s financial instruments were as follows (in thousands):
Financial assets:
Cash and cash equivalents
Securities available for sale
Loans
Federal Home Loan Bank stock
Accrued interest receivable
Financial liabilities:
Deposit liabilities
Federal Home Loan Bank advances
Junior subordinated debenture
Off-balance sheet financial instruments
Carrying
Amount
At December 31, 2016
Fair
Value
Level
Carrying
Amount
At December 31, 2015
Fair
Value
Level
$
$
17,640
20,222
76,999
1,113
380
86,009
23,500
5,155
—
17,640
20,222
76,829
1,113
380
86,364
23,500
N/A (1)
—
$
1
2
3
3
3
3
3
3
—
$
10,365
25,749
82,573
966
462
97,571
20,000
5,155
—
10,365
25,749
82,429
966
462
97,837
20,000
N/A(1)
—
1
2
3
3
3
3
3
3
3
(1) The Company is unable to determine value based on significant unobservable inputs required in the calculation. Refer to Note 7 for further information.
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 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.
As of December 31, 2016, commitments to extend credit totaled $7.1 million.
(9) Credit Risk
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)
54
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(10) Income Taxes
Income tax benefit consisted of the following (in thousands):
Current:
Federal
State
Total Current
Deferred:
Federal
State
Change in Valuation Allowance
Total Deferred
Total
Year Ended December 31,
2016
2015
$
— $
—
—
(134)
(19)
153
—
$
— $
(320)
—
(320)
(153)
(26)
179
—
(320)
The reasons for the differences between the statutory Federal income tax rate and the effective tax rate are summarized as follows (dollars in thousands):
Income tax benefit at statutory rate
Increase (decrease) resulting from:
State taxes, net of Federal tax benefit
Other permanent differences
Change in valuation allowance
Uncertain tax position
Year Ended December 31,
2016
2015
Amount
% of
Pretax
Loss
Amount
%
of Pretax
Loss
$
$
(135)
(13)
(5)
153
—
—
34.0% $
3.3%
1.3%
(38.6%)
0.0%
0.0% $
(164)
(17)
2
179
(320)
(320)
34.0%
3.5%
(0.4%)
(37.1%)
66.3%
66.3%
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).
Deferred tax assets:
Net operating loss carryforwards
Premises and equipment
Foreclosed property expenses
Nonaccrual loan interest
Unrealized loss on available for sale securities
Other
Gross deferred tax assets
Less: Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Allowance for loan losses
Loan costs
Total deferred tax liabilities
Net deferred tax asset
At December 31,
2016
2015
$
5,125
78
—
287
153
56
5,699
5,393
306
(114)
(39)
(153)
153
$
4,005
52
849
399
87
82
5,474
5,240
234
(114)
(33)
(147)
87
$
$
During the years ended December 31, 2016 and 2015, 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, 2016, the Company had net operating loss carryforwards of approximately $13.6 million for Federal tax purposes and $13.5 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)
55
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(10) Income Taxes, Continued
The Company files U.S. and Florida income tax returns. The Company is no longer subject to U.S. Federal or state income tax examinations by taxing authorities for years
before 2013. The Company’s 2010 and 2009 Federal income tax returns were examined by the Internal Revenue Service (“IRS”). In 2015 the IRS closed the
examination with no adjustments for taxes due. In 2015, the Company reversed its reserve for unrecognized tax benefits related to this exam by recording an income tax
benefit of $320,000.
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 to a change in unrecognized tax benefits in the next year.
(continued)
56
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(10) Income Taxes, continued
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Balance, beginning of year
Additions for tax positions related to current year
Additions for tax positions of prior years
Settlement due to exam closure
Balance, end of year
(11) Related Party Transactions
Year Ended
December 31, 2015
$
$
320
—
—
(320)
—
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, 2016. At December 31, 2015, loans to related parties totaled $240,000. At December 31, 2016 and 2015, related parties had approximately
$635,000 and $8,560,000, respectively, on deposit with the Company.
(12) Stock-Based Compensation
On December 27, 2011, the Company’s stockholders approved the 2011 Equity Incentive Plan (“2011 Plan”). In May 2016, the Company increased the total
number of shares available to be awarded from 105,000 shares (adjusted for the one-for-ten reverse stock split) to 210,000 shares. Options, restricted stock,
performance share awards and bonus share awards in lieu of obligations may be issued under the 2011 Plan. Both incentive stock options and nonqualified stock
options can be granted under the 2011 Plan. The exercise price of the stock options cannot be less than the fair market value of the common stock on the date of
grant. Options must be exercised within ten years of the date of grant.
As of December 31, 2016, only common stock has been issued as compensation to directors for services rendered under this plan. 57,476 and 28,613 shares of
common stock (adjusted for one-for-ten reverse stock split) were issued for the years ended December 31, 2016 and 2015, respectively. Subsequently, $200,000
(46,296 shares) was reclassified to other liabilities (see Note 15). A total of $246,000 and $242,000 of compensation was recorded during the 2016 and 2015
periods. At December 31, 2016 a total of 145,861 (adjusted for one-for-ten reverse stock split) shares remain available for grant.
(13) 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, 2016, the
Bank’s capital conservation buffer exceeds the minimum requirements of 0.625% for 2016. The required buffer is to be phased in over three years. Under the new
regulations in the first quarter of 2015, the Bank elected an irreversible one-time opt-out to exclude accumulated other comprehensive loss from regulatory capital.
(continued)
57
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(13) Regulatory Matters, Continued. As of December 31, 2016 and December 31, 2015, the Bank was subject to Consent Orders issued by the Federal Deposit Insurance
Corporation and the State of Florida Office of Financial Regulation (“OFR”), and accordingly is deemed to be “adequately capitalized” even if its capital ratios
were to exceed those generally required to be a “well capitalized” bank. An institution must maintain minimum total risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the following tables. The Bank’s actual capital amounts and percentages are also presented in the table (dollars in thousands):
The following table shows the Bank’s capital amounts and ratios and regulatory thresholds at December 31, 2016 and December 31, 2015 (dollars in thousands):
Actual
Amount
%
For Capital
Adequacy Purposes
Amount
%
Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
%
Amount
Requirements of
Consent Order
%
Amount
As of December 31, 2016:
Total Capital to Risk-Weighted Assets
Tier I Capital to Risk-Weighted Assets
Common equity Tier I capital to Risk-
Weighted Assets
Tier I Capital to Total Assets
As of December 31, 2015:
Total Capital to Risk-Weighted Assets
Tier I Capital to Risk-Weighted Assets
Common equity Tier I capital to Risk-
Weighted Assets
Tier I Capital to Total Assets
$
$
10,662
9,498
9,498
9,498
10,319
9,173
9,173
9,173
12.79% $
11.50
11.50
8.06
11.40% $
10.14
10.14
7.59
6,609
4,957
3,718
4,714
7,240
5,430
4,073
4,836
58
8.00% $
6.00
4.50
4.0
8.0% $
6.0
4.5
4.0
8,261
6,609
5,370
5,893
9,050
7,240
5,883
6,045
10.00% $
8.00
6.50
5.0
10.0% $
8.0
6.5
5.0
9,913
N/A
N/A
9,428
10,860
N/A
N/A
9,672
12.0%
N/A
N/A
8.0
12.0%
N/A
N/A
8.0
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(13) Regulatory Matters, Continued
Regulatory Enforcement Actions
Bank Consent Order. On November 7, 2016, the Bank agreed to the issuance of a Consent Order by the FDIC and the OFR (the “Consent Order”), which requires
the Bank to take certain measures to improve its safety and soundness. The Consent Order supersedes the prior consent order that became effective in 2010.
Pursuant to the Consent Order, the Bank is required to take certain measures to improve its management, condition and operations, including actions to improve
management practices and board supervision and independence, assure that its allowance for loan losses is maintained at an appropriate level and improve liquidity.
The Consent Order requires the Bank to adopt and implement a compliance plan to address the Bank’s obligations under the Bank Secrecy Act and related
obligations related to anti-money laundering. The Consent Order prohibits the payment of dividends by the Bank.
The Consent Order continues the requirement for the Bank to maintain a Tier 1 leverage ratio of at least 8% and a total risk-based capital ratio of 12% beginning 90
days from the issuance of the Consent Order. At December 31, 2016, the Bank had a Tier 1 leverage ratio of 8.06%, and a total risk-based capital ratio of 12.79%.
The Consent Order contains the following principal requirements:
●
The Board of the Bank is required to increase its participation in the affairs of the Bank, assuming full responsibility for the approval of sound
policies and objectives and for the supervision of all of the Bank’s activities, consistent with the role and expertise commonly expected for directors of banks of
comparable size.
●
The Bank is required to have and retain qualified and appropriately experienced senior management, including a chief executive officer, a chief
lending officer and a chief operating officer, who are given the authority to implement the provisions of the Consent Order.
●
●
Any proposed changes in the Bank’s Board of Directors or senior executive officers are subject to the prior consent of the FDIC and the OFR.
The Bank is required to maintain both a fully funded allowance for loan and lease losses satisfactory to the FDIC and the OFR and a minimum
Tier 1 leverage capital ratio of 8% and a total risk-based capital ratio of 12% for as long as the Consent Order remains in effect.
●
The Bank is required to eliminate from its books, by charge-off or collection, all assets or portions of assets classified “Loss” and 50 percent of
those assets or portions of assets classified “Doubtful” in the most recent examination report that have not been previously collected or charged-off.
●
The Bank is required to submit a revised plan to reduce the remaining assets classified “Doubtful” and “Substandard” in the current or any future
regulatory examination report.
●
The Bank may not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of
credit from the Bank that has been charged-off or classified, in whole or in part, “Loss” or “Doubtful” and is uncollected.
●
The Bank may not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of
credit from the Bank that has been classified, in whole or part, “Substandard.”
●
The Board is required to review, revise, and implement its written lending and collection policy to provide effective guidance and control over the
Bank’s lending and credit administration functions.
●
The Bank is required to prepare and submit to the Supervisory Authorities an acceptable written business/strategic plan covering the overall
operation of the Bank.
●
The Bank is required to develop and submit to the Supervisory Authorities a written plan and a comprehensive budget for all categories of income
and expense for calendar year 2017 and subsequent years.
●
The Bank is required to implement a written plan to improve liquidity, contingency funding, interest rate risk and asset liability management.
59
(continued)
(13) Regulatory Matters, Continued
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
●
The Bank is required to revise and implement a written policy for managing interest rate risk in a manner that is appropriate to the size of the Bank
and the complexity of its assets.
●
The Bank is required to revise and implement its policy for the operation of the Bank in such a manner as to provide adequate internal routines and
controls within the Bank consistent with safe and sound banking practices.
●
●
The Bank may not accept, renew, or rollover any brokered deposit.
The Bank may not declare or pay dividends, pay bonuses, or make any other form of payment outside the ordinary course of business resulting in a
reduction of capital, without the prior written approval of the Supervisory Authorities.
●
The Bank is required to notify the Supervisory Authorities at least sixty days prior to undertaking asset growth that exceeds 10% or more per
annum or initiating material changes in asset or liability composition.
●
The Bank is required to develop, adopt, and implement a plan (“Compliance Plan”) for administration of a program reasonably designed to ensure
and maintain compliance with the law and regulations related to the Bank Secrecy Act and related anti-money laundering regulations. The Compliance Plan must
be consistent with the guidance for BSA/AML Risk Assessment set forth in the Federal Financial Institutions Examination Council’s Bank Secrecy Act/Anti-
Money Laundering Examination Manual.
●
The Bank is required to furnish written progress reports to the Supervisory Authorities within forty-five days from the end of each quarter,
detailing the form and manner of any actions taken to secure compliance with this Consent Order.
●
The Bank is required to develop a revised system of internal controls designed to ensure full compliance with the BSA rules and regulations
(“BSA Internal Controls”) taking into account its size and risk profile and addressing the deficiencies and recommendations contained in the most recent
examination report.
●
The Bank is required to assess its BSA staffing needs to ensure adequate qualified personnel are in place at all times.
●
The Bank is required to contract with an external independent testing firm that specializes in the BSA, AML, and OFAC rules and regulations for a
review. The Bank is required to also engage an independent qualified firm, acceptable to the Supervisory Authorities, to conduct a review of all high-risk accounts
and all high-risk transaction activity for the period beginning February 3, 2014, through the date of the Consent Order.
●
The Bank is in process of implementing comprehensive policies and plans to address all of the requirements of the Consent Order and has
incorporated recommendations from the FDIC and OFR into these policies and plans.
60
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(13) Regulatory Matters, Continued
Management believes that the Bank has made substantial progress in improving its financial condition through a significant reduction in non-performing assets and
the receipt of capital increases from investors since the 2010 consent order. The Bank is also seeking to eliminate the other issues raised by the FDIC and the OFR,
although the Bank has been hampered by difficulties in raising capital due to the default under the Debenture and the limits placed on the Company and the Bank
under the prior consent order and the Written Agreement. Management intends to continue its efforts to meet the conditions of the Consent Order and the Written
Agreement.
Company Written Agreement with Reserve Bank. On June 22, 2010, the Company and the Reserve Bank entered into a Written Agreement with respect to certain
aspects of the operation and management of the Company. The Written Agreement prohibits, without the prior approval of the Reserve Bank, the payment of
dividends, taking dividends or payments from the Bank, making any interest, principal or other distributions on trust preferred securities (including the Debenture),
incurring, increasing or guaranteeing any debt, purchasing or redeeming any shares of stock, or appointing any new director or senior executive officer.
Management believes that the Company is in substantial compliance with the requirements of the Written Agreement.
(14) Loan Loss Recovery. On January 6, 2016, the Bank completed a sale of a judgement on a defaulted credit that resulted in a $1.8 million recovery of previously
charged-off amounts to the Allowance for Loan and Lease Losses (“ALLL”). This increases the balance of the ALLL to approximately $3.9 million at December
31, 2016. On February 12, 2016, and amended May 6, 2016, pursuant to the terms and requirements of the Consent Order, Management submitted a written request
to the FDIC for a partial reversal of the ALLL. As of this date, no response from the FDIC has been received and management does not expect a response until the
next safety and soundness examination which is expected to be performed in first and second quarters of 2017.
(15) Reclassification. During the quarter ended March 31, 2016, the Company agreed to issue 46,296 shares to the Bank’s Chairman as compensation. The Company
recorded compensation expense of $200,000 based on the fair market value of the shares at that time, and reflected the issuance of the shares as an increase in
stockholders’ equity. The Bank’s Chairman has not yet taken delivery of the shares. As a result, during the quarter ended September 30, 2016, the Company
determined to reclassify the transaction as a liability of the Company (rather than an increase in stockholders’ equity) until the issuance of the shares. The
reclassification had no effect on the Company’s net loss for the year ended December 31, 2016.
(16) Dividends. The Company is limited in the amount of cash dividends that may be paid. Banking regulations place certain restrictions on dividends and loans or advances
made by the Bank to the Holding Company. The amount of cash dividends that may be paid by the Bank to the Holding Company is based on the Bank’s net
earnings of the current year combined with the Bank’s retained earnings of the preceding two years, as defined by state banking regulations. However, for any
dividend declaration, the Company must consider additional factors such as the amount of current period net earnings, liquidity, asset quality, capital adequacy and
economic conditions. It is likely that these factors would further limit the amount of dividends which the Company could declare. In addition, bank regulators have
the authority to prohibit banks from paying dividends if they deem such payment to be an unsafe or unsound practice. At December 31, 2016, the Bank and
Holding Company could not pay cash dividends (See Note 13).
(17) 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.
(18) 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, 2016 or 2015.
61
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(19) Fair Value Measurement
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 or a nonrecurring basis are as follows (in thousands):
At December 31, 2016
Residential real estate
Fair Value
375
$
$
Residential real estate
Commercial real estate
Fair Value
671
$
2,094
2,765
$
$
$
Level 1
Level 2
Level 3
Total
Losses
Losses
Recorded in
Operations
For the
Year Ended
December
31, 2016
— $
— $
375
$
126
$
—
At December 31, 2015
Level 1
Level 2
Level 3
Total
Losses
Losses
Recorded in
Operations
For the
Year Ended
December
31, 2015
— $
—
— $
— $
—
— $
671
2,094
2,765
$
$
202
2,055
2,257
$
$
—
—
—
Foreclosed real estate is recorded at fair value less estimated costs to sell. Foreclosed real estate which is measured at fair value on a nonrecurring basis is as follows (in
thousands):
At December 31, 2015
At Year End
Level 1
Level 2
Level 3
Losses
Recorded
During the
Year
Total
Losses
— $
— $
4,029
$
1,403
$
260
(continued)
Fair Value
4,029
$
$
62
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(20) Holding Company Financial Information
The Holding Company’s unconsolidated financial information as of December 31, 2016 and 2015 and for the years then ended follows (in thousands):
Condensed Balance Sheets
Assets
Cash
Investment in subsidiary
Other assets
Total assets
Liabilities and Stockholders’ Equity
Other liabilities
Junior subordinated debenture
Stockholders’ equity
Total liabilities and stockholders’ equity
Earnings of subsidiary
Interest expense
Other expense
Net loss
Condensed Statements of Operations
At December 31,
2016
2015
$
164
9,245
180
9,589
$
$
1,353
5,155
3,081
9,589
$
13
9,036
180
9,229
1,107
5,155
2,967
9,229
Year Ended December 31,
2016
2015
$
302
(193)
(505)
(396) $
532
(162)
(533)
(163)
$
$
$
$
$
$
Condensed Statements of Cash Flows
Year Ended December 31,
2016
2015
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Stock compensation to directors
Stock compensation for services
Equity in undistributed earnings of subsidiary
Increase in other liabilities
Net cash used in operating activities
Cash flow from investing activities-
Investment in subsidiary
Cash flow from financing activities:
Proceeds from sale of common stock, net
Proceeds from sale of preferred stock
Net cash provided by financing activities
Net increase (decrease) in cash
Cash at beginning of the year
Cash at end of year
Noncash transaction-
Change in accumulated other comprehensive loss of subsidiary, net change in unrealized loss on securities available for
sale
63
$
$
$
(396) $
46
128
(302)
246
(278)
(21)
375
75
450
151
13
164
$
(163)
242
—
(532)
307
(146)
(42)
30
100
130
(58)
71
13
(114) $
(221)
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(21) Subsequent Event.
Under the terms of the Consent Order, the Bank is not permitted to solicit brokered deposits. In March 2017, the FDIC notified the Bank that it considers a
significant portion of the Bank’s certificates of deposit to be brokered deposits due to the rates paid on such deposits, even though such deposits were not obtained through
any deposit brokers. The Bank has requested a waiver of the prohibition on brokered deposits from the FDIC. If this waiver is not granted, then the Bank would not be able
to accept, renew or rollover the existing certificates of deposit that are viewed as brokered deposits, which would likely have an adverse effect on the Bank’s liquidity.
64
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under
the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and
Exchange Commission. Based upon management’s evaluation of those controls and procedures performed within the 90 days preceding the filing of this Report, its
Principal Executive Officer and 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, 2016. In making this
assessment, the Company used the criteria set forth in Internal Control-Integrated Framework 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, 2016.
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 quarter ended December 31, 2016 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 Chief 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.
Item 9B. Other Information
None.
65
Item 10. Directors, Executive Officers, and Corporate Governance
PART III
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 at www.optimumbank.com/corpgovernance.html.
A list of the Company’s executive officers and biographical information about them and its directors will be included in the definitive Proxy Statement for its 2017
Annual Meeting of Stockholders to be held on April 25, 2017, which will be filed within 120 days of the end of its fiscal year ended December 31, 2016 (the “2016 Proxy
Statement”) and is incorporated herein by reference. Information about its Audit Committee may be found in the Proxy Statement. That information is incorporated herein
by reference.
Item 11. Executive Compensation
Information relating to the Company’s executive officer and director compensation and the compensation committee of its board of directors will be included in the
2016 Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
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 2016 Proxy Statement and is incorporated herein by reference.
The Bank had one compensation plan under which shares of its common stock were issuable at December 31, 2016. This plan is the 2011 Equity Compensation
Plan, previously approved by its stockholders. The following table sets forth information as of December 31, 2016 with respect to the number of shares of the Company’s
common stock issuable pursuant to this plan.
Equity Compensation Plan Information
The following table provides information generally as of December 31, 2016, 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 2016.
Plan Category
Equity compensation plans approved by stockholders
Equity compensation plans not approved by stockholders
Total
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 equity
compensation
plan
— $
—
— $
—
—
—
145,861
—
145,861
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information regarding certain relationships and related transactions and director independence will be included in the 2016 Proxy Statement and is incorporated
herein by reference.
Item 14. Principal Accounting Fees and Services
Information regarding principal accountant fees and services will be included in the 2016 Proxy Statement and is incorporated herein by reference.
66
Item 15. Exhibits and Financial Statement Schedules
PART IV
3.1
3.2
3.3
3.4
4.3
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
Articles of Incorporation (incorporated by reference from Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on May
11, 2004)
Articles of Amendment to the Articles of Incorporation, effective as of January 7, 2009 (incorporated by reference to Exhibit 3.2 to Annual Report on Form
10-K for the year ended December 31, 2008, filed with the SEC on March 31, 2009)
Articles of Amendment to the Articles of Incorporation, effective as of November 5, 2010 (incorporated by reference to Exhibit 3.3 to the Current Report on
Form 8-K, filed with the SEC on November 5, 2010)
Articles of Amendment to the Articles of Incorporation, effective as of September 29, 2011 (incorporated by reference from Current Report on Form 8-K, filed
with the SEC on October 4, 2011)
Bylaws (incorporated by reference from Current Report on Form 8-K filed with the SEC on May 11, 2004)
Form of stock certificate (incorporated by reference from Quarterly Report on Form 10-QSB filed with the SEC on August 12, 2004)
Amended and Restated Stock Option Plan (incorporated by reference from Annual Report on Form 10-KSB filed with the SEC on March 31, 2006)
OptimumBank Holdings, Inc. 2011 Equity Incentive Plan (incorporated by reference from Current Report on Form 8-K filed with the SEC on January 3, 2012)
OptimumBank Holdings, Inc. Director Compensation Plan (incorporated by reference from Current Report on Form 10-K filed with the SEC on March 30,
2012)
Consent Order between OptimumBank, Federal Deposit Insurance Corporation and State of Florida Office of Financial Regulation dated November 7, 2016
Written Agreement by and between OptimumBank Holdings, Inc. and Federal Reserve Bank of Atlanta dated June 22, 2010 (incorporated by reference from
Quarterly Report on Form 10-Q filed with the SEC on November 15, 2010)
Amended and Restated Stock Purchase Agreement, dated as of December 5, 2011, between OptimumBank Holdings, Inc. and Moishe Gubin (incorporated by
reference from Current Report on Form 8-K filed with the SEC on December 9, 2011)
Amended and Restated Stock Purchase Agreement, dated as of March 22, 2013, between OptimumBank Holdings, Inc. and Moishe Gubin (incorporated by
reference from Current Report on Form 8-K filed with the SEC on March 28, 2013)
10.98
Form of Registration Rights Agreement between OptimumBank Holdings, Inc. and Moishe Gubin (incorporated by reference from Current Report on Form 8-
K filed with the SEC on October 31, 2011)
10.9
14.1
31.1
31.2
32.1
32.1
Form of Registration Rights Agreement between OptimumBank Holdings, Inc. and Investors (incorporated by reference from Current Report on Form 8-K
filed with the SEC on October 31, 2011)
Code of Ethics for Chief Executive Officer and Senior Financial Officers (incorporated by reference from Annual Report on Form 10-K filed with the SEC on
March 31, 2010)
Certification of Principal Executive Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act
Certification of Principal Financial Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act
Certification of Principal Executive Officer under 18 U.S.C. Section 1350
Certification of Principal Financial Officer under 18 U.S.C. Section 1350
67
EXHIBIT INDEX
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
68
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this 10-K report to be duly signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Fort Lauderdale, State of Florida, on the 20 day of March, 2017.
SIGNATURES
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on
OPTIMUMBANK HOLDINGS, INC.
/s/ Timothy Terry
Timothy Terry
Principal Executive Officer
March 20, 2017.
Signature
/s/ Timothy Terry
Timothy Terry
/s/James R. Odza
James R. Odza
/s/Moishe Gubin
Moishe Gubin
/s/Martin Schmidt
Martin Schmidt
/s/ Joel Klein
Joel Klein
/s/ John Clifford
John Clifford
Title
Principal Executive Officer
Principal Financial Officer
Director
Director
Director
Director
69
OptimumBank Holdings, Inc. 10-K
I, certify that:
CERTIFICATION OF THE PRINCIPAL EXECUTIVE
REQUIRED BY RULE 13A-14(A)/15D-14(A)
UNDER THE SECURITIES EXCHANGE ACT OF 1934
EXHIBIT 31.1
1.
2.
3.
4.
I have reviewed this report on Form 10-K of OptimumBank Holdings, Inc. (the “Company”);
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15e and 15d-15e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15f and 15d-15f) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiary, is made known to us by others within that entity, particularly during the period in which
this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s
auditors and the Audit Committee of the Company’s Board of Directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
/s/ Timothy Terry
Timothy Terry
Principal Executive Officer
Date: March 20, 2017
70
OptimumBank Holdings, Inc. 10-K
I, certify that:
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
REQUIRED BY RULE 13A-14(A)/15D-14(A)
UNDER THE SECURITIES EXCHANGE ACT OF 1934
EXHIBIT 31.2
1.
2.
3.
4.
I have reviewed this report on Form 10-K of OptimumBank Holdings, Inc. (the “Company”);
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15e and 15d-15e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15f and 15d-15f) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiary, is made known to us by others within that entity, particularly during the period in which
this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s
auditors and the Audit Committee of the Company’s Board of Directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
/s/ James R. Odza
James R. Odza
Principal Financial Officer
Date: March 20, 2017
71
OptimumBank Holdings, Inc. 10-K
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO18 U.S.C. SECTION 1350,
AS ADDED BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report of OptimumBank Holdings, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2016 as filed with the
Securities and Exchange Commission (the “Report”), I, as the Principal Executive of the Company, certify, pursuant to 19 U.S.C. § 1350, as added by § 906 of the
Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. To my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as
of and for the period covered by the Report.
/s/ Timothy Terry
Timothy Terry
Principal Executive Officer
Date: March 20, 2017
72
OptimumBank Holdings, Inc. 10-K
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO18 U.S.C. SECTION 1350,
AS ADDED BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
In connection with the Annual Report of OptimumBank Holdings, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2016 as filed with the
Securities and Exchange Commission (the “Report”), I, as the Principal Financial Officer of the Company, certify, pursuant to 19 U.S.C. § 1350, as added by § 906 of the
Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. To my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as
of and for the period covered by the Report.
/s/ James R. Odza
James R. Odza
Principal Financial Officer
Date: March 20, 2017
73