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, 2017
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
Preferred Stock, no par value
Name of each exchange on which registered
NASDAQ Capital Market
None
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 [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934. Yes
[ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. 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 [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes [ ] No [X]
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant (992,803 shares) on December 31, 2017, was
approximately $2,968,481, computed by reference to the closing market price at $2.99 per share as of June 30, 2017. 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 28, 2018 was 1,286,503 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 29, 2018, to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days of the issuer’s fiscal year end are incorporated by reference into Part III, Items 10 through 14, of this
Annual Report on Form 10-K.
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”). The Bank is
subject to the supervision and regulation of the State of Florida Office of Financial Regulation (“OFR”) and the FDIC. The Bank is a member of the Federal Home
Loan Bank of Atlanta.
At December 31, 2017, the Company had total assets of $95.9 million, net loans of $68.2 million, total deposits of $65.3 million and stockholders’ equity
of $2.5 million. During 2017, the Company had a net loss of $589,000.
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 to comply with the BSA components of the Consent Order will be between $250,000 and $420,000. The Bank accrued
approximately $305,000 and $60,000 toward these expenses in 2017 and 2016, respectively.
In addition to the Consent Order, the Company is party to a Written Agreement dated June 22, 2010, with the Federal Reserve Bank of Atlanta, which
requires the Company to take certain measures to ensure the Bank complied with the prior consent order. Under the Written Agreement, the Company is subject to
restrictions on paying interest on debt, or paying dividends or distributions of stock, including dividends on its common stock, as well as incurring additional debt
or redeeming stock. Additional details on the Consent Order and the Written Agreement are contained in “Business-Supervision and Regulation- Consent Order-
and -Written Agreement.”
At December 31, 2017, the Bank had a Tier 1 leverage ratio of 8.89%, and a total risk-based capital ratio of 15.08%. At December 31, 2017, the Bank is
in compliance with the Tier 1 leverage ratio and total risk-based capital ratio requirement of the Consent Order. Additional information on the Bank’s capital
adequacy is contained in “Item 7- Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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 $1,375,011 at December 31, 2017. To date the Trustee has not accelerated the outstanding
balance of the Debenture. No adjustments to the accompanying consolidated financial statements have been made 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 offered to enter into a forbearance agreement with the Company with
respect to payments due under the Debenture upon consummation of the Director’s purchase of the Debenture.
In March 2016, the Trustee received a direction from certain debt holders of the Trust that holds the Debenture to sell the Debenture to a Director of the
Company. Based upon the receipt of conflicting directions from other equity owners of the Trust, in August 2016, the Trustee commenced an action in a Minnesota
State Court seeking directions from the Court. The case was subsequently transferred to United States District Court for the Southern District of New York, where
the case is currently pending. The Company continues to pursue mechanisms for paying the accrued interest, such as raising additional capital.
In the event the amounts due under the Debenture were accelerated, then the Trustee could undertake legal proceedings to obtain a judgment against the
Company with respect to such amounts due under the Debenture. If this action were successful, then the Trustee could seek to affect a sale of the Bank to pay the
amounts due under the Debenture.
Brokered Deposits
Under the terms of the Consent Order, the Bank is not permitted to solicit brokered deposits. In March 2017, the FDIC notified the Bank that it considers
a significant portion of the Bank’s certificates of deposit to be brokered deposits due to the rates paid on such deposits, even though such deposits were not
obtained through any deposit brokers. The remaining brokered deposits are expected to mature on or before April 5, 2018.
Banking Products
The Bank’s revenues are primarily derived from interest on, and fees received in connection with, real estate and other loans, and from interest from
securities and short-term investments. The principal sources of funds for the Bank’s lending activities are deposits, borrowings, repayment of loans, and the
repayment, or maturity of investment securities. The Bank’s principal expenses are the interest paid on deposits, and operating and general administrative
expenses.
As is the case with banking institutions generally, the Bank’s operations are materially and significantly influenced by general economic conditions and
by related monetary and fiscal policies of financial institution regulatory agencies, including the Federal Reserve and the FDIC. Deposit flows and costs of funds
are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing of real
estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered and other factors affecting local demand and
availability of funds. The Bank faces strong competition attracting deposits (its primary source of lendable funds) and originating loans.
The Bank provides a range of consumer and commercial banking services to individuals and businesses. The basic services offered include: demand
interest-bearing and noninterest-bearing accounts, money market deposit accounts, NOW accounts, time deposits, Visa debit and ATM cards, cash management,
direct deposits, notary services, money orders, night depository, cashier’s checks, domestic collections, and banking by mail. The Bank makes commercial real
estate loans and consumer loans. The Bank offers business lending lines for working capital needs. Growing businesses can use the loans to expand inventory, take
discounts, offset receivables, or establish new structured financing and repayment plans that are consistent with the cash flow of the business. The Bank provides
ATM cards and Visa debit cards, as a part of the Star, Presto and Cirrus networks, thereby permitting customers to utilize the convenience of ATMs worldwide.
The Bank does not have trust powers and provides no trust services.
Strategy
The Bank’s continuing goal is to become one of the leading community banking organizations in Broward County, Florida through steady, reasonable and
controlled growth and a prudent operating strategy.
The operating and business strategies emphasize the following:
● Local management and local decision making resulting in rapid, personalized customer service, rapid credit decisions and expedited
closings;
● Maintaining a presence in Broward County through a branch network. Currently, the Bank has three branch banking offices in
Broward County;
● Real estate, commercial and consumer lending activities by originating fixed and adjustable rate commercial mortgage loans,
commercial loans, and consumer loans for Bank customers;
● Maintaining high credit quality through strict underwriting criteria through the Bank’s knowledge of the real estate values and
borrowers in its market area;
● Personalized products and service by striving to provide innovative financial products, 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:
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● 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, 2017 were $68,220,000, or 71.2% 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, 2017, 91.2% of the loan
portfolio consisted of loans secured by mortgages on real estate, of which approximately 36.2% 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 $250,000 to be core deposits. These accounts comprised approximately 98.04% of the Bank’s
total deposits at December 31, 2017. Approximately 46.9% of the deposits at December 31, 2017 were certificates of deposit. Generally, the Bank attempts to
maintain the rates paid on its deposits at a competitive level. Time deposits of $250,000 and over made up approximately 2.0% of the Bank’s total deposits at
December 31, 2017. Although these large deposits are not traditionally considered core deposits, the majority of these deposits have served as a stable source of
funds for the Bank.
Investments
The Bank’s investment securities portfolio was approximately $11.4 and $20.2 million at December 31, 2017 and 2016, respectively, representing 11.9%
and 16.9% of its total assets. At December 31, 2017, 74.0% 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 the Federal Reserve Bank. The Bank pays for such services in cash as opposed to
keeping compensating balances. The Bank also sells loan participations to other banks with respect to loans which exceed its lending limit. The Bank may purchase
loan participations to supplement loan demand.
Data Processing
The Bank outsources most of its data processing services, including an automated general ledger and deposit accounting; however, it services all its loans
in-house.
Internet Banking
The Bank maintains a website 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 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
The Bank encounters strong competition both making loans and attracting deposits. The deregulation of the banking industry and the widespread
enactment of state laws which permit multi-bank holding companies as well as an increasing level of interstate banking have created a highly competitive
environment for commercial banking. In one or more aspects of its business, the Bank competes with other commercial banks, savings and loan associations, credit
unions, finance companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries. Most of these
competitors, some of which are affiliated with bank holding companies, have substantially greater resources and lending limits, and may offer certain services that
the Bank does not currently provide. In addition, many of its non-bank competitors are not subject to the same extensive federal regulations that govern federally
insured banks. Recent federal and state legislation has heightened the competitive environment in which financial institutions must conduct their business, and the
potential for competition among financial institutions of all types has increased significantly.
The Bank focuses its efforts on smaller loans, which is generally neglected by its competitors. To compete, the Bank relies upon specialized services,
responsive handling of customer needs, and personal contacts by its officers, directors, and staff. Large multi-branch banking competitors tend to compete
primarily by rate and the number and location of branches while smaller, independent financial institutions tend to compete primarily by rate and personal service.
Employees
As of December 31, 2017, 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,
2017 and 2016, the Bank’s capital conservation buffer exceeds the minimum requirements of 1.250% and 0.625%, respectively. The required conservation buffer
of 2.50% is to be phased in at 0.625% on each January 1 st over the next two years.
Under the new capital regulation for the Bank, the minimum capital ratios consist of a common equity tier 1 ratio of 4.5% of risk-weighted assets, a tier 1
capital of 6.0% of risk-weighted assets, a total capital ratio of 8.0% of risk-weighted assets, 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.
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The following table shows the Bank’s capital amounts and ratios and regulatory thresholds at December 31, 2017 and 2016 (dollars in thousands):
Actual
Amount
%
For Capital
Adequacy Purposes
%
Amount
Minimum To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Requirements of
Consent Order
Amount
%
Amount
%
As of December 31, 2017:
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, 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
10,484
15.08%
5,561
8.00%
6,951
10.00%
8,341
12.00%
9,577
9,577
9,577
13.78
13.78
8.89
4,170
3,128
4,307
6.00
4.50
4.00
5,561
4,518
5,383
8.00
6.50
5.00
N/A
N/A
8,614
N/A
N/A
8.00
$
10,566
12.79% $
6,609
8.00% $
8,261
10.00% $
9,913
12.00%
9,498
9,498
9,498
11.50
11.50
8.06
4,957
3,718
4,714
6.00
4.50
4.00
6,609
5,370
5,893
8.00
6.50
5.00
N/A
N/A
9,428
N/A
N/A
8.00
Written Agreement with the Federal Reserve Bank of Atlanta
The Company is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). On June 22,
2010, the Company entered into a written agreement with the Federal Reserve Bank of Atlanta (“Reserve Bank”) with respect to certain aspects of the operation
and management of the Company (the “Written Agreement”).
The Written Agreement contains the following principal requirements:
● The Board of the Company must take appropriate steps to fully utilize the Company’s financial and managerial resources to serve as a source of
strength to the Bank, including, but not limited to, taking steps to ensure that the Bank complies with the Consent Order entered into with the Florida Office of
Financial Regulation (“OFR”) and the FDIC and any other supervisory action taken by the Bank’s state or federal regulator.
● The Company may not declare or pay any dividends without prior Reserve Bank and Federal Reserve approval.
● The Company may not, directly or indirectly, take dividends or any other form of payment representing a reduction in capital from the Bank without
prior Reserve Bank approval.
● The Company and its nonconsolidated subsidiary, OptimumBank Holdings Capital Trust I, may not make any distributions of interest, principal, or
other sums on subordinated debentures or trust preferred securities without the prior written approval of the Reserve Bank and the Federal Reserve.
● The Company and its nonconsolidated subsidiary, OptimumBank Holdings Capital Trust I, may not, directly or indirectly, incur, increase, or guarantee
any debt or purchase or redeem any shares of its stock without the prior written approval of the Reserve Bank.
● The Company must obtain prior written consent from the Reserve Bank before appointing any new director or senior executive officer, or changing the
responsibilities of any senior executive officer so that the officer would assume a different senior executive officer position, and must comply with the regulations
applicable to indemnification and severance payments.
● The Company must provide quarterly progress reports to the Reserve Bank, along with parent company only financial statements.
Management believes that the Company is in substantial compliance with the requirements of the Written Agreement.
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Consent Order by the FDIC and the OFR
On November 7, 2016, the Bank agreed to the issuance of a Consent Order by the FDIC and the OFR (the “Consent Order”), which requires the Bank to
take certain measures to improve its safety and soundness. The Consent Order supersedes the prior consent order that became effective in 2010. The Consent Order
represents a commitment by the Bank to the FDIC and the OFR to take certain actions to improve the management, condition and operations of the Bank. The
Consent Order imposes no fines or penalties on the Bank. The Consent Order will remain in effect and enforceable until it is modified, terminated, suspended, or
set aside by the FDIC and the OFR.
The Consent Order contains the following principal requirements:
● The Board of the Bank is required to increase its participation in the affairs of the Bank, assuming full responsibility for the approval of sound policies
and objectives and for the supervision of all of the Bank’s activities, consistent with the role and expertise commonly expected for directors of banks of comparable
size.
● The Bank is required to have and retain qualified and appropriately experienced senior management, including a chief executive officer, a chief lending
officer and a chief operating officer, who are given the authority to implement the provisions of the Consent Order.
● Any proposed changes in the Bank’s Board of Directors or senior executive officers are subject to the prior consent of the FDIC and the OFR.
● The Bank is required to maintain both a fully funded allowance for loan and lease losses satisfactory to the FDIC and the OFR and a minimum Tier 1
leverage capital ratio of 8% and a total risk-based capital ratio of 12% for as long as the Consent Order remains in effect.
● The Bank is required to eliminate from its books, by charge-off or collection, all assets or portions of assets classified “Loss” and 50 percent of those
assets or portions of assets classified “Doubtful” in the most recent examination report that have not been previously collected or charged-off.
● The Bank is required to submit a revised plan to reduce the remaining assets classified “Doubtful” and “Substandard” in the current or any future
regulatory examination report.
● The Bank may not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit
from the Bank that has been charged-off or classified, in whole or in part, “Loss” or “Doubtful” and is uncollected.
● The Bank may not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit
from the Bank that has been classified, in whole or part, “Substandard.”
● The Board is required to review, revise, and implement its written lending and collection policy to provide effective guidance and control over the
Bank’s lending and credit administration functions.
● The Bank is required to prepare and submit to the Supervisory Authorities an acceptable written business/strategic plan covering the overall operation
of the Bank.
● The Bank is required to develop and submit to the Supervisory Authorities a written plan and a comprehensive budget for all categories of income and
expense for calendar year 2017 and subsequent years.
● The Bank is required to implement a written plan to improve liquidity, contingency funding, interest rate risk and asset liability management.
● The Bank is required to revise and implement a written policy for managing interest rate risk in a manner that is appropriate to the size of the Bank and
the complexity of its assets.
● The Bank is required to revise and implement its policy for the operation of the Bank in such a manner as to provide adequate internal routines and
controls within the Bank consistent with safe and sound banking practices.
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● The Bank may not accept, renew, or rollover any brokered deposit.
● The Bank may not declare or pay dividends, pay bonuses, or make any other form of payment outside the ordinary course of business resulting in a
reduction of capital, without the prior written approval of the Supervisory Authorities.
● The Bank is required to notify the Supervisory Authorities at least sixty days prior to undertaking asset growth that exceeds 10% or more per annum or
initiating material changes in asset or liability composition.
● The Bank is required to develop, adopt, and implement a plan (“Compliance Plan”) for administration of a program reasonably designed to ensure and
maintain compliance with the law and regulations related to the Bank Secrecy Act and related anti-money laundering regulations. The Compliance Plan must be
consistent with the guidance for BSA/AML Risk Assessment set forth in the Federal Financial Institutions Examination Council’s Bank Secrecy Act/Anti-Money
Laundering Examination Manual.
● The Bank is required to furnish written progress reports to the Supervisory Authorities within forty-five days from the end of each quarter, detailing the
form and manner of any actions taken to secure compliance with this Consent Order.
● The Bank is required to develop a revised system of internal controls designed to ensure full compliance with the BSA rules and regulations (“BSA
Internal Controls”) taking into account its size and risk profile and addressing the deficiencies and recommendations contained in the most recent examination
report.
● The Bank is required to assess its BSA staffing needs to ensure adequate qualified personnel are in place at all times.
● The Bank is required to contract with an external independent testing firm that specializes in the BSA, AML, and OFAC rules and regulations for a
review. The Bank is required to also engage an independent qualified firm, acceptable to the Supervisory Authorities, to conduct a review of all high-risk accounts
and all high-risk transaction activity for the period beginning February 3, 2014, through the date of the Consent Order.
● The Bank is in process of implementing comprehensive policies and plans to address all of the requirements of the Consent Order and has incorporated
recommendations from the FDIC and OFR into these policies and plans.
Management believes that the Bank has made substantial progress in improving its financial condition through a significant reduction in non-performing
assets and the receipt of capital increases from investors since the 2010 Consent Order. The Bank is also making significant progress in resolving the other issues
raised by the FDIC and the OFR including strengthening the management team. Although the Bank has been hampered by difficulties in raising capital due to the
default under the Junior Subordinated Debenture and the limits placed on the Company and the Bank under the prior Consent Order and the Written Agreement.
Management intends to continue its efforts to meet the conditions of the New Consent Order and the Written Agreement.
Dodd-Frank Act
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, into law. 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.
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, 2017, the Bank’s Tier 1 and total risk-based capital ratios were 13.19% and 15.08%, respectively.
Banks are also required to maintain capital at a minimum level based on total assets, which is known as the leverage ratio. The minimum requirement for
the leverage ratio is 4%, but all but the highest rated institutions are required to maintain ratios 100 to 200 basis points above the minimum. At December 31, 2017,
the Bank’s leverage ratio was 8.89%.
The Consent Order imposes higher capital requirements on OptimumBank. Under the Consent Order, OptimumBank must maintain a Tier 1 Leverage
Ratio of 8.0%, and a total risk based capital ratio of 12.0%. With a Tier 1 Leverage ratio of 8.89% and a Total Risk Based Capital Ratio of 15.08% at December
31, 2017, the Bank met the total risk-based capital ratio as required by the Consent Order.
The FDIC Improvement Act of 1993 (“FDICIA”) contains “prompt corrective action” provisions pursuant to which banks are to be classified into one of
five categories based upon capital adequacy, ranging from “well capitalized” to “critically undercapitalized” and which require (subject to certain exceptions) the
appropriate federal banking agency to take prompt corrective action with respect to an institution which becomes “significantly undercapitalized” or “critically
undercapitalized.”
The FDIC has issued regulations to implement the “prompt corrective action” provisions of FDICIA. In general, the regulations define the five capital
categories as follows:
● an institution is “well capitalized” if it has a total risk-based capital ratio of 10% or greater, has a Tier 1 risk-based capital ratio of 6% or
greater, has a leverage ratio of 5% or greater and is not subject to any written capital order or directive to meet and maintain a specific capital level for
any capital measures;
● an institution is “adequately capitalized” if it has a total risk-based capital ratio of 8% or greater, has a Tier 1 risk-based capital ratio of 4% or
greater, and has a leverage ratio of 4% or greater;
● an institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8%, has a Tier 1 risk-based capital ratio that is less than
4% or has a leverage ratio that is less than 4%;
● an institution is “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that
is less than 3% or a leverage ratio that is less than 3%; and
● an institution is “critically undercapitalized” if its “tangible equity” is equal to or less than 2% of its total assets.
The FDIC, after an opportunity for a hearing, has authority to downgrade an institution from “well capitalized” to “adequately capitalized” or to subject
an “adequately capitalized” or “undercapitalized” institution to the supervisory actions applicable to the next lower category, for supervisory concerns.
Generally, FDICIA requires that an “undercapitalized” institution must submit an acceptable capital restoration plan to the appropriate federal banking
agency within 45 days after the institution becomes “undercapitalized” and the agency must take action on the plan within 60 days. The appropriate federal
banking agency may not accept a capital restoration plan unless, among other requirements, each company having control of the institution has guaranteed that the
institution will comply with the plan until the institution has been adequately capitalized on average during each of the three consecutive calendar quarters and has
provided adequate assurances of performance. The aggregate liability under this provision of all companies having control of an institution is limited to the lesser
of:
● 5% of the institution’s total assets at the time the institution becomes “undercapitalized”; or
● the amount which is necessary, or would have been necessary, to bring the institution into compliance with all capital standards applicable to
the institution as of the time the institution fails to comply with the plan filed pursuant to FDICIA.
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, 2017, OptimumBank met the FDIC definition of an “adequately capitalized” institution.
For additional information regarding OptimumBank’s capital ratios and requirements, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Regulatory Capital Adequacy.”
Dividends . The Company’s ability to pay dividends is substantially dependent on the ability of 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, 2017, 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, 2017.
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, 2017, the future minimum lease payments are approximately as follows (in thousands):
Year Ending December 31,
2018
2019
2020
2021
2022
Total
Item 3. Legal Proceedings
Year Facility
Opened
Facility Status
2004
2000
2004
Owned
Owned
Leased (1)
Amount
$
$
90
92
95
98
93
468
From time-to-time, the Bank is involved in litigation arising in the ordinary course of its business. As of the date of the filing of this Form 10-K,
management is of the opinion that the ultimate aggregate liability represented thereby, 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
2017
2016
Quarter
High (1)
Low (1)
First
Second
Third
Fourth
First
Second
Third
Fourth
$
$
$
$
$
$
$
$
4.04 $
3.10 $
3.09 $
6.26 $
7.30 $
4.99 $
6.35 $
4.89 $
3.14
2.45
2.03
1.88
3.56
3.75
3.64
3.51
(1) Reflects the 10 for 1 reverse common stock split effective January 11, 2016
The Company had approximately 1,135 holders registered or in street names as of December 31, 2017.
During 2017, the Company sold 10,000 shares of the Company’s common stock at a price of $3.00 per share to accredited investors and issued 7,500
shares of the Company’s common stock as compensation for consulting services at a price of $3.00 per share. Pursuant to Company’s stockholder approved 2011
Equity Incentive Plan (“2011 Plan”), during 2017, the Company accrued stock compensation cost related to first quarter director’s fees to five directors. A total of
2,821 shares related to these first quarter 2017 director fees were issued during the first quarter of 2018 at a value of $3.14 per share. As of April 1, 2017, the
Company discontinued the issuance of common stock as a method of payment of director’s fees.
Additionally, as of December 31, 2017, 105,819 shares were due to be issued as compensation to a director. The Company accrued $200,000 during the
years ended December 31, 2017 and 2016, for these shares. Subsequently during 2018, $200,000 was accrued for 36,102 shares in additional compensation to the
director. All shares due to this director, totaling 141,921, were issued during the first quarter of 2018.
At December 31, 2017, 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 Years Then Ended
(Dollars in thousands, except per share figures)
2017
2016
2015
2014
2013
$
$
$
11,665 $
11,437
68,220
4,544
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
95,866 $
119,703 $
127,478
124,530
128,783
65,251
20,500
5,155
2,415
2,545
86,087
23,500
5,155
1,880
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)
Total liabilities and stockholders’ equity (deficit)
$
95,866 $
119,703 $
127,478
124,530
128,783
For the Years:
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income (expense)
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)
$
$
$
2017
2016
2015
2014
2013
4,716
1,196
3,520
—
3,520
52
4,161
(589 )
—
)
$
(589
4,764
1,079
3,685
—
3,685
(144)
3,937
(396)
—
4,534
884
3,650
—
3,650
412
4,545
(483)
(320)
5,392
911
4,481
—
4,481
572
3,448
1,605
—
5,280
1,919
3,361
2,194
1,167
144
8,066
(6,755)
320
(396)
(163)
1,605
(7,075)
(.53) $
(0.38)
(.17)
1.85
(8.94)
)
$
(.53
(0.38)
(.17)
1.85
(8.94)
Weighted-average number of shares outstanding, basic (1)
1,104,995
1,041,213
953,855
867,789
791,358
Weighted-average number of shares outstanding, diluted (1)
1,104,995
1,041,213
953,855
867,789
791,358
Ratios and Other Data:
2017
2016
2015
2014
2013
Return on average assets
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
(.5)%
(21.3)%
2.5%
—%
3.2%
3.0%
4.3%
3.8%
(0.3)%
(12.5)%
2.6%
—%
3.1%
3.0%
4.0%
3.3%
(0.1)%
(5.3)%
2.5%
—%
3.4%
3.3%
4.2%
3.6%
1.3%
86.2%
1.5%
—%
3.9%
4.0%
4.7%
2.7%
(5.3)%
(216.8)%
2.4%
—%
2.9%
3.0%
4.5%
5.8%
1.13
1.09
1.07
0.97
.95
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)
—
0.3%
7.5%
12.1%
12.7%
5.5%
4.9%
2.7%
2.9%
3
1,120,947
2.27
$
3
1,103,447
2.79
$
$
3
962,886
3.08
$
3
930,524
3.20
$
2.7%
3
801,108
(0.27)
(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 January 11, 2016.
16
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
Critical Accounting Policies
The Company’s financial condition and results of operations are sensitive to accounting measurements and estimates of matters that are inherently
uncertain. When applying accounting policies in areas that are subjective in nature, the Company must use its best judgment to arrive at the carrying value of
certain assets. One of the most critical accounting policies applied by the Company is related to the valuation of its loan portfolio.
A variety of estimates impact the carrying value of the Company’s loan portfolio including the calculation of the allowance for loan losses, valuation of
underlying collateral, the timing of loan charge-offs and the amount and amortization of loan fees and deferred origination costs.
The calculation of the allowance for loan losses is a complex process containing estimates which are inherently subjective and susceptible to significant
revision as current information becomes available. The allowance is established and maintained at a level management believes is adequate to cover losses
resulting from the inability of borrowers to make required payments on loans. Estimates for loan losses are determined by analyzing risks associated with specific
loans and the loan portfolio, current trends in delinquencies and charge-offs, the views of the Company’s regulators, changes in the size and composition of the
loan portfolio and peer comparisons. The analysis also requires consideration of the economic climate and direction, changes in the economic and interest rate
environment which may impact a borrower’s ability to pay, legislation impacting the banking industry and economic conditions specific to the tri-county region the
Bank serves in Southeast Florida. Because the calculation of the allowance for loan losses relies on the Company’s estimates and judgments relating to inherently
uncertain events, results may differ from management’s estimates.
During the years ended December 31, 2017 and 2016, the Company assessed its earnings history and trend over the past year and its estimate of future
earnings, and determined that it was more likely than not that the deferred tax assets would not be realized in the near term. Accordingly, a valuation allowance
was recorded and maintained against the net deferred tax asset for the amount not expected to be realized in the future
The allowance for loan losses is also discussed as part of “Loan Portfolio, Asset Quality and Allowance for Loan Losses” and in Note 3 of Notes to the
Consolidated Financial Statements. 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, 2017, the
Bank’s impaired loans were approximately $2.2 million, or 3.09% of the gross loan portfolio.
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
2017
Amount
% of
Total
Amount
At December 31,
2016
% of
Amount
Total
(dollars in thousands)
2015
% of
Total
$
26,054
7,356
32,152
1,051
4,522
794
$
36.22
10.23
44.70
1.46
6.29
1.10
27,334
5,829
29,264
5,681
10,514
1,829
33.98% $
7.25
36.37
7.06
13.07
2.27
16,203
3,697
34,771
5,258
21,770
3,015
19.13
4.36
41.05
6.21
25.70
3.55
71,929
100%
80,451
100%
84,714
100.00
Add (deduct):
Net deferred loan costs and premiums
Allowance for loan losses
282
(3,991)
463
(3,915)
154
(2,295)
Loans, net
$
68,220
$
76,999
$
82,573
At December 31,
2014
%
of Total
Amount
2013
%
of Total
Amount
(dollars in thousands)
$
21,426
1,979
37,215
6,177
11,070
20
27.51% $
2.54
47.78
7.93
14.21
.03
26,618
3,605
34,020
6,459
10,297
81
32.83%
4.45
41.96
7.97
12.70
.10
77,887
100.00%
81,080
100.00%
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
186
(2,244)
380
(2,211)
Loans, net
$
75,829
$
79,249
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
2017
$
Year Ended December 31,
2015
2014
2016
2013
3,915 $
—
(67)
143
2,295 $
—
(469)
2,089
2,244 $
—
(289)
340
2,211 $
—
—
33
2,459
2,194
(2,959)
517
Ending balance
$
3,991 $
3,915 $
2,295 $
2,244 $
2,211
The allowance for loan losses represents management’s estimate of probable incurred losses inherent in the existing loan portfolio. The allowance for loan
losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries. The allowance for loan losses
represented 5.55% and 4.87% of the total loans outstanding at December 31, 2017 and 2016, 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
2017
At December 31,
2016
2015
Amount
% of Total
Loans
Amount
% of Total
Loans
Amount
% of Total
Loans
$
641
59
759
22
55
86
2,369
$
%
36.22
10.23
44.70
1.46
6.29
1.10
—
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
—
Total allowance for loan losses
$
3,991
100.00% $
3,915
100.00% $
2,295
100.00%
Allowance for loan losses as a percentage of total loans
outstanding
5.55%
4.87%
2.71%
At December 31,
2014
2013
Amount
% of
Total Loans
Amount
% of
Total Loans
Residential real estate
Multi-family real estate
Commercial real estate
Land and construction
Commercial
Consumer
Unallocated
Total allowance for loan losses
$
$
66
2
2,058
99
10
—
9
2,244
Allowance for loan losses as a percentage of total loans
outstanding
The following summarizes impaired loans (in thousands):
27.51% $
2.54
47.78
7.93
14.21
.03
—
100.00% $
2.88%
49
4
1,139
458
31
—
530
2,211
32.82%
4.45
41.96
7.97
12.70
.10
—
100.00%
2.73%
Recorded
Investment
December 31, 2017
Unpaid
Principal
Balance
Related
Allowance
Recorded
Investment
December 31, 2016
Unpaid
Principal
Balance
Related
Allowance
With no related allowance recorded:
Residential real estate
Commercial real estate
With an allowance recorded -
Residential real estate
Commercial real estate
Total:
Residential real estate
Commercial real estate
$
$
$
194
231
$
217
231
$
—
—
$
375
—
$
501
—
$
978
744
978
744
330
83
—
1,004
—
1,004
1,172
975
$
$
1,195
975
$
$
330
83
$
$
375
1,004
$
$
501
1,004
$
$
—
—
—
104
—
104
Total
$
2,147
$
2,170
$
413
$
1,379
$
1,505
$
104
19
During 2017, 2016, and 2015, the average net investment in impaired loans and interest income recognized and received on impaired loans is as follows
(in thousands):
2017
Year Ended December 31,
2016
2015
Average investment in impaired loans
Interest income recognized on impaired loans
Interest income received on a cash basis on impaired loans
$
$
$
2,454 $
278 $
173 $
2,957 $
124 $
182 $
9,579
250
492
Liquidity and Capital Resources
Liquidity represents an institution’s ability to meet current and future obligations through liquidation or maturity of existing assets or the acquisition of
additional liabilities. The Bank’s ability to respond to the needs of depositors and borrowers and to benefit from investment opportunities is facilitated through
liquidity management.
The Bank’s primary sources of cash during the year ended December 31, 2017, were from principal repayments of securities available for sale of $2.2
million, proceeds from sale of securities available for sale of $6.5 million and payoffs or paydowns of loans of $8.6 million. Cash was used primarily to repay $3
million in FHLB advances and fund a $20.8 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 $32.5 million. As of December 31, 2017, the Bank had
$20.5 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 $.56 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, 2017:
Securities available for sale:
Collateralized mortgage obligations
SBA Pool Securities
At December 31, 2016:
Securities available for sale:
Collateralized mortgage obligations
SBA Pool Securities
Amortized
Cost
Fair
Value
$
$
$
$
8,806
2,965
11,771
10,157
10,470
20,627
$
$
$
$
8,466
2,971
11,437
9,752
10,470
20,222
20
The following table sets forth, by maturity distribution, certain information pertaining to the securities portfolio (dollars in thousands):
At December 31, 2017:
Collateralized mortgage obligation
SBA Pool Securities
At December 31, 2016:
Collateralized mortgage obligation
SBA Pool Securities
After
One
Year
Through
Five
Years
After Ten
Years
Total
Yield
$
$
$
$
8,806 $
—
$
8,806
2,557 $
—
— $
2,965
$
2,965
7,600 $
10,470
8,806
2,965
11,771
10,157
10,470
2,557 $
18,070 $
20,627
1.93
2.50
1.83
1.90
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, 2017, the Bank did
meet the minimum applicable capital adequacy requirements.
The Bank’s actual and required minimum capital ratios were as follows (dollars in thousands):
Regulatory Capital Requirements
As of December 31, 2017:
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, 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
Actual
For Capital
Adequacy
Purposes
Minimum
To Be Well
Capitalized Under
Prompt
Corrective Action
Provisions
Amount
%
Amount
%
Amount
%
Requirements of Consent
Order
Amount
%
$
10,484
15.08% $
5,561
8.00% $
6,951
10.00% $
8,341
12.00%
9,577
9,577
9,577
13.78
13.78
8.89
4,170
3,128
4,307
6.00
4.50
4.00
5,561
4,518
5,383
8.00
6.50
5.00
N/A
N/A
8,614
N/A
N/A
8.00
$
10,622
12.79% $
6,609
8.00% $
8,261
10.00% $
9,913
12.00%
9,498
9,498
9,498
11.50
11.50
8.06
4,957
3,718
4,714
21
6.00
4.50
4.00
6,609
5,370
5,893
8.00
6.50
5.00
N/A
N/A
9,428
N/A
N/A
8.00
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. The Bank’s market risk arises primarily from interest-rate risk inherent in
its lending and deposit-taking activities. The Bank does not engage in securities trading or hedging activities and does not invest in interest-rate derivatives or enter
into interest rate swaps.
The Bank may utilize financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. The
measurement of market risk associated with financial instruments is meaningful only when all related and offsetting on- and off-balance-sheet transactions are
aggregated, and the resulting net positions are identified. Disclosures about the fair value of financial instruments, which reflect changes in market prices and rates,
can be found in Note 8 of 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, 2017, that
are estimated to mature or are scheduled to reprice within the period shown (dollars in thousands):
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
$
$
8,957
396
11,477
1,051
2,936
794
25,611
2,971
979
29,561
16,498
4,783
765
24,507
46,553
5,000
—
51,553
$
$
(21,992)
(21,992)
$
$
9,370
6,888
20,675
—
1,586
—
38,519
—
—
38,519
—
—
—
6,067
6,067
15,500
—
21,567
16,952
(5,040)
$
$
6,572
72
—
—
—
—
6,644
—
—
6,644
—
—
—
—
—
—
—
—
$
$
6,644
1,604
$
$
1,155
—
—
—
—
—
1,155
8,466
—
9,621
—
—
—
—
—
—
5,155
5,155
4,466
6,070
$
$
$
26,054
7,356
32,152
1,051
4,522
794
71,929
11,437
979
84,345
16,498
4,783
765
30,574
52,620
20,500
5,155
78,275
6,070
6,070
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
Cumulative GAP/total assets
(22.94%)
(5.26%)
1.67%
6.33%
(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, 2017 (in thousands):
Residential real estate
Multi-family real estate
Commercial real estate
Land and construction
Commercial
Consumer
One Year
or Less
After One
But Within
Five Years
After
Five Years
Total
$
— $
6,022
—
60
192
1,640 $
528
6,844
592
3,244
602
24,414 $
6,828
19,286
459
1,218
—
26,054
7,356
32,152
1,051
4,522
794
Total
6,274 $
13,450 $
52,205 $
71,929
$
23
The following table sets forth the maturity or repricing of loans by interest type at December 31, 2017 (in thousands):
Fixed interest rate
Variable interest rate
Total
One Year
or Less
After One
But Within
Five Years
After
Five Years
Total
2,386 $
23,313
9,510 $
29,129
1,155 $
6,436
25,699 $
38,639 $
7,591 $
13,051
58,878
71,929
$
$
Scheduled contractual principal repayments of loans do not reflect the actual life of such assets. The average life of loans is substantially less than their
average contractual terms due to prepayments. In addition, due-on-sale clauses on loans generally give us the right to declare a conventional loan immediately due
and payable in the event, among other things, that the borrower sells real property subject to a mortgage and the loan is not repaid. The average life of mortgage
loans tends to increase, however, when current mortgage loan rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when
rates on existing mortgages are substantially higher than current mortgage rates.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, unused lines of credit, and standby letters of credit. These instruments involve, to varying
degrees, elements of credit and interest-rate risk in excess of the amounts recognized in the consolidated balance sheet. The contractual amounts of those
instruments reflect the extent of the Company’s involvement in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet
instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.
Commitments generally have fixed-expiration dates or other termination clauses and may require payment of a fee. Since certain commitments expire without
being drawn upon, the total committed amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness
on a case-by-case basis. The amount of collateral obtained, if deemed necessary in order to extend credit, is based on management’s credit evaluation of the
counterparty.
A summary of the contractual amounts of the Company’s-balance sheet risk at December 31, 2017 follows (in thousands):
Commitments to extend credit
Unused lines of credit
Standby letters of credit
$
$
$
791
2,031
-
The following is a summary of the Company’s contractual obligations, including certain on-balance sheet obligations, at December 31, 2017 (in
thousands):
Contractual Obligations
Federal Home Loan Bank advances
Junior subordinated debenture
Operating leases
$
Total
20,500 $
5,155
468
Payments Due by Period
Less
Than 1
Year
1-3
Years
3-5
Years
5,000 $
—
90
10,500 $
—
187
5,000 $
—
191
Total
Deposits
$
26,123 $
5,090 $
10,687 $
5,191 $
More
Than 5
Years
—
5,155
—
5,155
Deposits traditionally are the primary source of funds for the Company’s use in lending, making investments and meeting liquidity demands. The
Company has focused on raising time deposits primarily within its market area, which is the tri-county area of Broward, Miami-Dade and Palm Beach counties.
However, the Company offers a variety of deposit products, which are promoted within its market area. Net deposits decreased $20.8 millions in 2017.
24
The following table displays the distribution of the Company’s deposits at December 31, 2017, 2016 and 2015 (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
12,632
4,782
16,498
765
$
%
19.36
7.33
25.28
1.17
$
$
$
$
2017
2016
Amount
% of
Deposits
Amount
% of
Deposits
2015
% of
Deposits
Amount
%
7,209
3,604
17,743
806
$
8.29
4.19
20.63
0.94
9,478
2,615
20,776
643
9.71%
2.68
21.29
0.66
34,677
53.14%
29,362
34.05% $
33,512
34.34%
6,849
23,582
143
—
$
10.50
36.14
.22
—
14,891 $
41,695
139
—
$
17.31
48.48
.16
—
48,196
15,727
136
—
49.40
16.12
0.14
—
30,574
46.86
56,725
65.95
64,059
65.66
$
65,251
100.00% $
86,087 $
100.00% $
97,571
100.00%
(1) Included are Individual Retirement Accounts (IRA’s) totaling $2,451,000 and $2,818,000 at December 31, 2017 and 2016, 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 Company’s maturity distribution of time deposits of $100,000 or more at December 31, 2017 and 2016 (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,
2017
2016
$
4,847 $
4,618
5,628
4,189
4,838
3,433
16,968
9,608
$
19,282 $
34,847
The Company’s profitability depends to a large extent on net interest income, which is the difference between the interest received on earning assets, such
as loans and securities, and the interest paid on interest-bearing liabilities, principally deposits and borrowings. Net interest income is determined by the difference
between yields earned on interest-earning assets and rates paid on interest-bearing liabilities (“interest-rate spread”) and the relative amounts of interest-earning
assets and interest-bearing liabilities. The Company’s interest-rate spread is affected by regulatory, economic, and competitive factors that influence interest rates,
loan demand, and deposit flows. The Company’s results of operations are also affected by the provision for loan losses, operating expenses such as salaries and
employee benefits, occupancy and other operating expenses including income taxes, and noninterest income such as loan prepayment fees.
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):
2017
Interest
And
Average
Average
Yield/
Balance Dividends Rate
Average
Balance
Interest-earning assets:
Loans
Securities
Other interest-earning assets (1)
$ 75,894
18,054
16,536
4,126
366
224
5.44% $
2.03
1.35
83,574
22,686
11,996
Total interest-earning assets/interest income
110,484
4,716
4.27%
118,256
Cash and due from banks
Premises and equipment
Other assets
1,121
2,618
(3,480)
953
2,687
(747)
Total assets
$ 110,793
$ 121,149
Interest-bearing liabilities:
Savings, NOW and money-market deposits
Time deposits
Borrowings (4)
22,062
50,367
25,672
112
562
522
.51
1.11
2.03
23,360
60,813
24,416
117
611
351
Total interest-bearing liabilities/interest expense
98,101
1,196
1.22
108,589
1,079
0.50
1.00
1.44
.99
Noninterest-bearing demand deposits
Other liabilities
Stockholders’ equity
6,551
3,380
2,761
5,870
3,526
3,164
Total liabilities and stockholders’ equity
$ 110,793
$ 121,149
Years Ended December 31,
2016
Interest
And
Dividends
Average
Yield/
Rate
Average
Balance
2015
Interest
and
Dividends
Average
Yield/
Rate
Average
Balance
2014
Interest
and
Dividends
Average
Yield/
Rate
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
4.79% $
2.25
5.66
77,703
30,082
6,165
4.18%
113,950
4,366
959
67
5,392
5.62%
3.11
1.23
4.73
9,483
3,744
3,278
124,959
19,314
59,158
23,158
101,630
8,497
11,771
3,061
124,959
124
524
236
884
0.64
0.89
1.02
0.87
5,996
2,859
5,028
$
127,833
28,680
60,991
28,004
117,675
5,543
2,340
2,275
$
127,833
146
516
249
911
0.51
0.85
0.89
0.77
3.96
3.93
0.97
Net interest income
Interest rate spread (2)
Net interest margin (3)
Ratio of average interest-earning assets to average
interest- bearing liabilities
$
3,520
3,685
3,650
4,481
3.05
3.19
1.13
3.04
3.12
1.09
3.31
3.37
1.07
(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
Other
Total interest-bearing liabilities
Net interest income
Year Ended December 31,
2017 versus 2016
Increases (Decreases) Due to Change In:
Rate
Volume
Rate/
Volume
Total
$
299 $
1
58
358
2
68
145
215
(386) $
(94
)
40
)
(440
(7)
(105)
18
(94)
(27) $
—
21
(114)
(93)
119
(6)
( 88)
—
(12)
7
( 5)
(5)
(49)
170
116
$
143 $
(346) $
(1) $
(204)
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) $
335
(138)
33
230
(7)
87
115
195
35
$
$
27
Financial Condition as of December 31, 2017 Compared to December 31, 2016
The Company’s total assets decreased by $23.8 million at December 31, 2017, from $119.7 million, to $95.9 million at December 31, 2017.
At December 31, 2017, the Bank had a Tier 1 leverage ratio of 8.89%, and a total risk-based capital ratio of 15.08%, both of which were in excess of the
8% and 12% requirements of the Consent Order. The Company’s capital was enhanced during 2017 through the sale of $30,000 in common stock.
The Company may need to sell additional shares of common stock to comply with the capital requirements through the end of 2018 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 $1,375,011 at December 31, 2017. To date the Trustee has not accelerated the outstanding
balance of the Debenture. No adjustments to the accompanying consolidated financial statements have been made 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 offered to enter into a forbearance agreement with the Company with
respect to payments due under the Debenture upon consummation of the Director’s purchase of the Debenture.
In March 2016, the Trustee received a direction from certain 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.
In the event the amounts due under the Debenture were accelerated, then the Trustee could undertake legal proceedings to obtain a judgment against the
Company with respect to such amounts due under the Debenture. If this action were successful, then the Trustee could seek to affect a sale of the Bank to pay the
amounts due under the Debenture.
Results of Operations for Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
General . Net loss of $0.6 million or $(.53) loss per basic and diluted share for the year ended December 31, 2017 compared to net loss for the year ended
December 31, 2016 of $0.4 million or $(.38) per basic and diluted share.
Interest income . Interest income decreased to $4.7 million for the year ended December 31, 2017 compared to $4.8 million for the year ended December
31, 2016. Interest on loans decreased by $74,000 due to an overall decrease in the loan portfolio during 2017. Interest on securities decreased by $93,000 due to a
decrease in average balance of securities in 2017 compared to 2016. Interest income or overnight funds increased by $119,000 to offset the reduction in interest
income from loans and investments.
Interest expense. Interest expense on deposits was $674,000 in the year ended December 31, 2017 compared to $728,000 in the year ended December 31,
2016. Interest expense on borrowings was $522,000 in the year ended December 31, 2017 compared to $351,000 in the year ended December 31, 2016.
Provision for Loan Losses. There was no provision for loan losses recorded for the years ended December 31, 2017 and 2016. The provision for loan
losses is charged to operations as losses are estimated to have occurred in order to bring the total allowance for loan losses to a level deemed appropriate by
management to absorb losses inherent in the loan portfolio at December 31, 2017. 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 $4.0 million or 5.55% of loans outstanding at December 31, 2017,
compared to $ 3.9 million or 4.87% of loans outstanding at December 31, 2016. Management believes the balance in the allowance for loan losses at December 31,
2017 is significantly over funded and has requested a permission to reduce the allowance for loan lease losses from the regulating authorities.
On January 6, 2016, the Bank completed a sale of a judgement on a defaulted credit that resulted in a $1.8 million recovery of previously charged-off
amounts to the Allowance for Loan and Lease Losses (“ALLL”). This increased the balance of the ALLL to approximately $4.0 million at December 31, 2017. The
Bank has submitted a second written request to the FDIC for a partial reversal of the ALLL. Management does not expect a response until the next safety and
soundness examination which is expected to be performed in first and second quarters of 2018.
28
Noninterest Income. Total noninterest income increased to $52,000 for the year ended December 31, 2017, from ($144,000) for the year ended December
31, 2016 primarily due to loss on sale of securities during 2016.
Noninterest Expenses . Total noninterest expenses increased by $224,000 for the year ended December 31, 2017, from $3.9 million for the year ended
December 31, 2016 to $4.2 million for the year ended December 31, 2017, primarily due to an accrual related to a BSA look back project.
Income Taxes. Income taxes for the years ended December 31, 2017 and 2016 were $0 and $0, respectively. Income tax benefit for 2016 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, 2016 Compared to Year Ended December 31, 2015
General . Net loss for the year ended December 31, 2016, was $400,000 or $(.38) per basic and diluted share compared to net loss of $200,000 or $(.17)
earnings per basic and diluted share for the year ended December 31, 2015. This $200,000 increase in net loss was primarily the result of the decrease in non-
interest income of $500,000 and increase in noninterest expenses of $1.1 million.
Interest income . Interest income decreased to $4.8 million for the year ended December 31, 2016 compared to $4.5 million for the year ended December
31, 2015. Interest on loans increased by $335,000 due to a increase in average yield in 2016 compared to 2015. Interest on securities decreased by $138,000 due to
a decrease in average balance of securities in 2016 compared to 2015, and by a decrease in average yield earned in 2016 compared to 2015.
Interest expense. Interest expense on deposits was $728,000 in the year ended December 31, 2016 compared to $648,000 in the year ended December 31,
2015. Interest expense on borrowings was $351,000 in the year ended December 31, 2016 compared to $236,000 in the year ended December 31, 2015.
Provision for Loan Losses. There was no provision for loan losses recorded for the years ended December 31, 2016 and 2015. The provision for loan
losses is charged to operations as losses are estimated to have occurred in order to bring the total allowance for loan losses to a level deemed appropriate by
management to absorb losses inherent in the loan portfolio at December 31, 2016. Management’s periodic evaluation of the adequacy of the allowance is based
upon historical experience, the volume and type of lending conducted by it, adverse situations that may affect the borrower’s ability to repay, estimated value of the
underlying collateral, loans identified as impaired, general economic conditions, particularly as they relate to its market areas, and other qualitative factors related
to the estimated collectability of its loan portfolio. The allowance for loan losses totaled $3.9 million or 4.87% of loans outstanding at December 31, 2016,
compared to $2.3 million or 2.71% of loans outstanding at December 31, 2015. Management believes the balance in the allowance for loan losses at December 31,
2016 is adequate.
On January 6, 2016, the Bank completed a sale of a judgement on a defaulted credit that resulted in a $1.8 million recovery of previously charged-off
amounts to the Allowance for Loan and Lease Losses (“ALLL”). This increased the balance of the ALLL to approximately $3.9 million at December 31, 2016. The
Bank has submitted a written request to the FDIC for a partial reversal of the ALLL. Management does not expect a response until the next safety and soundness
examination which is expected to be performed in first and second quarters of 2017.
Noninterest Income. Total noninterest income decreased to $(144,000) for the year ended December 31, 2016, from $412,000 for the year ended
December 31, 2015, primarily due to loss on sale of securities.
Noninterest Expenses . Total noninterest expenses decreased by $0.6 million, to $3.9 million for the year ended December 31, 2016 from $4.5 million for
the year ended December 31, 2015, partially due to a non-recurring gain on sale of foreclosed real estate of $147,000 in 2016.
Income Taxes. Income taxes (benefit) for the years ended December 31, 2016 and 2015 were $0 and $(320,000), respectively. Income tax benefit for
2015 results from the closure with no adjustment with respect to the Internal Revenue Service examination of the Bank’s 2010 and 2009 income tax returns.
Impact of Inflation and Changing Prices
The 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
To the Shareholders and the Board of Directors
OptimumBank Holdings, Inc.
Fort Lauderdale, Florida:
Opinion on the Financial Statements
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, 2017 and
2016 and the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for the years then ended and the related notes
(collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the consolidated financial position of the Company as of December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for the
years then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in notes 1, 7
and 13 to the consolidated financial statements, the Company is in technical default with respect to its Junior Subordinated Debenture (“Debt Securities”). The
holders of the Debt Securities could demand immediate payment of the outstanding debt of $5,155,000 and accrued and unpaid interest, which raises substantial
doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to this matter are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements
based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, the Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over
financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly,
we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ HACKER, JOHNSON & SMITH PA
We have served as the Company’s auditor since 2000.
Fort Lauderdale, Florida
March 28, 2018
30
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
December 31,
2017
December 31,
2016
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 $3,991 and $3,915
Federal Home Loan Bank stock
Premises and equipment, 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 and 17)
Stockholders’ equity:
Preferred stock, no par value; 6,000,000 shares authorized: Designated Series A, no par value,
$25,000 liquidation value per share,7 shares issued and outstanding in 2017 and 2016
Common stock, $.01 par value; 5,000,000 shares authorized, 1,120,947 shares issued and outstanding
in 2017 and 1,103,447 shares issued and outstanding in 2016
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
11,233 $
432
11,665
11,437
68,220
979
2,593
316
656
95,866 $
12,632
22,045
30,574
65,251
20,500
5,155
7
39
2,369
93,321
—
11
34,090
(31,306)
(250)
2,545
95,866 $
17,563
77
17,640
20,222
76,999
1,113
2,648
380
701
119,703
7,209
22,153
56,725
86,087
23,500
5,155
221
36
1,623
116,622
—
11
34,039
(30,717)
(252)
3,081
119,703
See accompanying notes to Consolidated Financial Statements
31
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(In thousands, except share amounts)
Year Ended December 31,
2017
2016
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 income (loss):
Service charges and fees
Other
Gain (loss) on sale of securities available for sale
Total noninterest income (loss)
Noninterest expenses:
Salaries and employee benefits
Occupancy and equipment
Data processing
Professional fees
Insurance
Foreclosed real estate expenses
Regulatory assessments
Other
Total noninterest expenses
Loss before income tax benefit
Income tax benefit
Net loss
Net loss per share:
Basic
Diluted
$
$
$
$
4,126 $
366
224
4,716
674
522
1,196
3,520
—
3,520
26
15
11
52
1,770
415
342
784
95
—
202
553
4,161
(589)
—
(589)
$
(.53) $
(.53)
$
4,200
459
105
4,764
728
351
1,079
3,685
—
3,685
24
18
(186)
(144)
1,774
495
333
659
103
(123)
253
443
3,937
(396)
—
(396)
(0.38)
(0.38)
See Accompanying Notes to Consolidated Financial Statements.
32
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Loss
(In thousands)
Net loss
Other comprehensive income (loss):
Unrealized loss on securities available for sale:
Unrealized gain (loss) arising during the year
Reclassification adjustment for realized (gain) loss on sale of securities available for sale
Net change in unrealized holding loss
Deferred income taxes (benefit) on above change
Total other comprehensive income (loss )
Comprehensive loss
$
See Accompanying Notes to Consolidated Financial Statements.
33
Year Ended
December 31,
2017
2016
$
(589) $
(396)
82
( 11)
71
69
2
(587)
$
(366)
186
(180)
(66)
(114)
(510)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2017 and 2016
(Dollars in thousands)
Preferred
Stock
Series A
Shares Amount
Common Stock
Additional
Paid-In
Accumulated
Shares
Amount
Capital
Deficit
Accumulated
Other
Compre-
hensive
Loss
Total
Stockholders’
Equity
4 $
—
9,628,863 $
96 $
33,330 $
(30,321) $
(138) $
2,967
—
3
—
—
—
—
—
—
7 $
—
—
—
—
7 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(8,665,694) $
—
92,980
57,476
36,118
(87) $
—
1
1
—
87
75
374
245
128
(46,296)
—
(200)
—
—
1,103,447 $
10,000
7,500
—
—
1,120,947 $
—
—
11 $
—
—
—
—
11 $
—
—
34,039 $
30
21
—
—
34,090 $
—
—
—
—
—
—
—
(396)
(30,717) $
—
—
—
(589)
(31,306) $
See Accompanying Notes to Consolidated Financial Statements.
34
—
—
—
—
—
—
(114)
—
(252) $
—
—
2
—
(250) $
—
75
375
246
128
(200)
(114)
(396)
3,081
30
21
2
(589)
2,545
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
Proceeds from sale of common stock
Common stock issued for services
Net change in unrealized loss on securities available for
sale, net of income taxes
Net loss
Balance at December 31, 2017
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization
Common stock issued as compensation to directors
Common stock issued as compensation for services
Net amortization of fees, premiums and discounts
(Gain) loss from sale of securities available for sale
Decrease in accrued interest receivable
Increase in other assets
Gain on sale of foreclosed real estate
Increase 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 in loans
Purchase of premises and equipment, net
Proceeds from sale of foreclosed real estate, net
Redemption (purchase) of Federal Home Loan Bank stock
Net cash provided by investing activities
Cash flows from financing activities:
Net decrease in deposits
(Repayments) p urchase of Federal Home Loan Bank advances, net
Net decrease 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 financing activities
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
Year Ended December 31,
2016
2017
$
(589) $
(396)
149
—
21
211
(11)
64
(24)
—
749
570
—
2,189
6,448
8,798
(94)
—
134
17,475
(20,836)
(3,000)
(214)
3 0
—
(24,020)
(5,975)
17,640
11,665 $
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
(continued)
$
35
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, net of income taxes
See Accompanying Notes to Consolidated Financial Statements.
36
Year Ended December 31,
2016
2017
$
$
$
980 $
— $
874
—
2 $
(114)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
At December 31, 2017 and 2016 and for 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 2017 and 2016. 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 $1,375,011 at December 31, 2017. To date the
Trustee has not accelerated the outstanding balance of the Debenture. No adjustments to the accompanying consolidated financial statements have been
made 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 offered to enter into a forbearance agreement with the
Company with respect to payments due under the Debenture upon consummation of the Director’s purchase of the Debenture.
In March 2016, the Trustee received a direction from certain 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 and the valuation of the deferred tax asset.
Cash and Cash Equivalents. For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks
and interest-bearing deposits with banks, all of which have original maturities of ninety days or less.
The Company may be required by law or regulation to maintain cash reserves in the form of vault cash or in accounts with other banks. At December 31,
2017 , there were no required cash reserves. Total required cash reserves at December 31, 2016 were $70,000.
37
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
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, 2017 and 2016.
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.
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
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
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.
On December 22, 2017, the “Tax Cuts and Jobs Act of 2017,” or the Tax Act, was signed into law. The Tax Act, among other things, reduced the
maximum statutory federal corporate income tax rate from 35% to 21% effective January 1, 2018. As a result of enactment of the Tax Act, the Bank
revalued its net deferred tax asset. This revaluation of the deferred tax asset had no effect on income tax provision due to valuation allowance on the
deferred tax asset.
Advertising. The Company expenses all media advertising as incurred. Media advertising expense included in other noninterest expenses in the accompanying
consolidated statements of operations was approximately $69,179 and $9,400 during the years ended December 31, 2017 and 2016, 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 2017 and 2016 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 2017 and 2016, 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
40
Year Ended December 31,
2017
2016
1,104,995
1,041,213
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
Off-Balance-Sheet Financial Instruments. In the ordinary course of business the Company may enter into off-balance-sheet financial instruments consisting
of commitments to extend credit, unused lines of credit, and standby letters of credit. Such financial instruments are recorded in the consolidated financial
statements when they are funded.
Fair Value Measurements. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value
hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The
hierarchy describes three levels of inputs that may be used to measure fair value:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar
assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and model-driven valuations whose
inputs are observable or whose significant value drivers are observable. Valuations may be obtained from, or corroborated by, third-party pricing services.
Level 3: Unobservable inputs to measure fair value of assets and liabilities for which there is little, if any market activity at the measurement date, using
reasonable inputs and assumptions based upon the best information at the time, to the extent that inputs are available without undue cost and effort.
The following describes valuation methodologies used for assets measured at fair value:
Securities Available for Sale. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy.
Level 1 securities include highly liquid government bonds, certain mortgage products and exchange-traded equities. If quoted market prices are not
available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.
Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include certain mortgage-backed securities
and U.S. Government and agency securities.
Impaired Loans . The Company’s impaired loans are normally collateral dependent and, as such, are carried at the lower of the Company’s net recorded
investment in the loan or fair market value of the collateral less estimated selling costs. Estimates of fair value are determined based on a variety of
information, including the use of available appraisals, estimates of market value by licensed appraisers or local real estate brokers and the knowledge and
experience of the Company’s management related to values of properties in the Company’s market areas. Management takes into consideration the type,
location and occupancy of the property as well as current economic conditions in the area the property is located in assessing estimates of fair value.
Accordingly, fair value estimates for impaired loans are classified as Level 3.
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 (Level 1).
Securities. Fair values for securities are based on the framework for measuring fair value established by GAAP (Level 2).
Loans. For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for
fixed-rate loans, including fixed-rate residential and commercial real estate and commercial loans, are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality (Level 3).
Federal Home Loan Bank Stock. Fair value of the Company’s investment in Federal Home Loan Bank stock is based on its redemption value, which is
its cost of $100 per share (Level 3).
Accrued Interest Receivable. The carrying amount of accrued interest approximates its fair value (Level 3).
Deposit Liabilities. The fair values disclosed for demand, NOW, money-market and savings deposits are, by definition, equal to the amount payable on
demand at the reporting date (that is, their carrying amounts). Fair values for fixed-rate time deposits are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated expected monthly maturities of time deposits
(Level 3).
Federal Home Loan Bank Advances. Fair values of Federal Home Loan Bank advances are estimated using discounted cash flow analysis based on the
Company’s current incremental borrowing rates for similar types of borrowings (Level 3).
Off-Balance-Sheet Financial Instruments. Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing (Level 3).
Comprehensive Loss. 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 income
(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 operations, simplifies the impairment assessment of equity
investments without readily determinable fair values by requiring a qualitative assessment to identity impairment and eliminates the requirement to
disclose fair values, the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost. The ASU
also clarifies that the Company should evaluate the need for a valuation allowance on a deferred tax asset related to available for-sale debt securities in
combination with the Company’s other deferred tax assets. The ASU is effective for the Company beginning January 1, 2018. Early adoption is permitted.
The adoption of this guidance did not to have a material impact on the Company’s consolidated financial statements.
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 was effective for annual periods beginning after December 15, 2016,
and interim periods within those annual periods. The Company has evaluated the effect of ASU and determined it has no material effect on its
consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13 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.
In March 2017, FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20) which amends the accounting for the
amortization of premiums for certain purchased callable debt securities by shortening the amortization period to the earliest call date. The ASU is
effective for interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the impact of the ASU, if any, on its
consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting . The ASU was
issued to provide clarity as to when to apply modification accounting when there is a change in the terms or conditions of a share-based payment award.
The ASU requires an entity to account for the effects of a modification unless the fair value, vesting conditions, and balance sheet classification of the
award is the same after the modification as compared to the original award prior to the modification. The ASU is effective for reporting periods beginning
after December 15, 2017. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedge Activities .
The ASU better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation
and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the ASU expands and
refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging
instrument and the hedged item in the financial statements. The ASU is effective for fiscal years beginning after December 15, 2018. Early adoption is
permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02), Income Statement Reporting Comprehensive Income (Topic 220) . The ASU provides an option
for reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal
corporate income tax rate. The amount of the reclassification would be the difference between the historical corporate income tax rate and the newly
enacted 21 percent corporate income tax rate. The ASU is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. The
adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
Reclassification. Certain amounts in the 2017 consolidated financial statements have been reclassified to conform to the 2016 consolidated financial statement
presentation.
43
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(2) Securities. Securities have been classified according to management’s intent. The carrying amount of securities and approximate fair values are as follows (in
thousands):
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
At December 31, 2017:
Securities Available for Sale:
Collateralized mortgage obligations
$
8,806 $
SBA Pool Securities
2,965
— $
10
Total
$
11,771 $
10 $
(340) $
)
(4
)
$
(344
8,466
2,971
11,437
At December 31, 2016:
Securities Available for Sale:
Collateralized mortgage obligations
SBA Pool Securities
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
$
$
10,157 $
10,470
20,627 $
— $
—
— $
(405) $
—
9,752
10,470
(405) $
20,222
Year Ended December 31,
2017
2016
$
6,448 $
28,409
11
—
48
(234)
(186)
Net gain (loss) from sales of securities
$
11 $
Securities with gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous loss position, is
as follows (in thousands):
Securities Available for Sale:
Collateralized mortgage obligations
SBA Pools
At December 31, 2017
Over Twelve Months
Gross
Unrealized
Losses
Fair
Value
Less Than Twelve Months
Gross
Unrealized
Losses
Fair
Value
$
340
3 $
343
8,466
539 $
9,005 $
—
1 $
1 $
—
540
540
At December 31, 2016
Over Twelve Months
Gross
Unrealized
Losses
Fair
Value
Less Than Twelve Months
Gross
Unrealized
Losses
Fair
Value
Securities Available for Sale:
Collateralized mortgage obligations
$
(46) $
864 $
(359) $
8,888
(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, 2017 and 2016, the unrealized losses on eight and six 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):
At December 31, 2017:
Collateralized mortgage obligations
SBA Pool Securities
At December 31, 2016:
Collateralized mortgage obligations
SBA Pool Securities
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)
— $
—
— $
8,466 $
2,971
11,437 $
Fair
Value
$
8,466 $
2,971
$
11,437 $
$
9,752 $
10,470
— $
—
9,752 $
10,470
$
20,222 $
— $
20,222 $
—
—
—
—
—
—
During the years ended December 31, 2017 and 2016, no securities were transferred in or out of Level 1, Level 2 or Level 3.
As of December 31, 2017, the Company had pledged Securities with market value of $590,000 as collateral for the Federal Reserve Bank Discount Window.
45
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3) Loans. The components of loans are as follows (in thousands):
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,
2017
At December 31,
2016
$
$
26,054
7,356
32,152
1,051
4,522
794
71,929
282
(3,991)
$
68,220
$
27,334
5,829
29,264
5,681
10,514
1,829
80,451
463
(3,915)
76,999
(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, 2017 and 2016 follows (in thousands):
Residential
Real Estate
Multi-Family
Real Estate
Commercial
Real Estate
Land and
Construction Commercial
Consumer
Unallocated
Total
Year Ended December 31, 2017:
Beginning balance
Provision (credit) for loan losses
Charge-offs
Recoveries
Ending balance
Year Ended December 31, 2016:
Beginning balance
Provision (credit) for loan losses
Charge-offs
Recoveries
Ending balance
$
$
$
$
310 $
229
—
102
641 $
116 $
194
—
—
310 $
58 $
1
—
—
59 $
26 $
32
—
—
58 $
787 $
(28)
—
—
759 $
1,085 $
(2,069)
(264)
2,035
120 $
(122)
—
24
22 $
77 $
19
—
24
787 $
120 $
188 $
(133)
—
—
55 $
120 $
68
—
—
188 $
165 $
(29)
( 67)
17
2,287 $
82
—
3,915
—
( 67)
143
86 $
2,369 $
3,991
151 $
189
(205)
30
720 $
1,567
—
—
2,295
—
(469)
2,089
165 $
2,287 $
3,915
(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,
2017 and 2016 follows (in thousands):
Residential
Real Estate
Multi-
Family Real
Estate
Commercial
Real Estate
Land and
Construction Commercial Consumer Unallocated
Total
At December 31, 2017:
Individually evaluated for impairment:
Recorded investment
Balance in allowance for loan losses
Collectively evaluated for impairment:
Recorded investment
Balance in allowance for loan losses
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
$
$
$
$
$
$
$
$
1,172
330
$
$
— $
— $
975 $
83 $
— $
— $
— $
— $
— $
— $
— $
— $
2,147
413
24,882
311
$
$
7,356 $
59 $
31,177 $
676 $
1,051 $
22 $
4,522 $
55 $
794 $
86 $
— $
2,369 $
69,782
3,578
375
—
$
$
— $
— $
1,004 $
104 $
— $
— $
— $
— $
— $
— $
— $
— $
1,379
104
26,959
310
$
$
5,829 $
58 $
28,260 $
683 $
5,681 $
120 $
10,514 $
188 $
1,829 $
165 $
— $
2,287 $
79,072
3,811
48
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3) Loans, Continued.
Residential Real Estate, Multi-Family Real Estate, Commercial Real Estate, Land and Construction . All loans are underwritten in accordance with
policies set forth and approved by the Board of Directors (the “Board”), including repayment capacity and source, value of the underlying property, credit
history and stability. 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.
49
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3) Loans, Continued. The following summarizes the loan credit quality (in thousands):
OLEM
(Other
Loans
Especially
Mentioned)
Sub-
standard
Doubtful
Loss
Total
At December 31, 2017:
Residential real estate
Multi-family real estate
Commercial real estate
Land and construction
Commercial
Consumer
$
Pass
22,315 $
7,356
24,704
1,051
2,304
794
2,494 $
—
6,473
—
2,218
—
1,245 $
—
975
—
—
—
Total
$
58,524 $
11,185 $
2,220 $
At December 31, 2016:
Residential real estate
Multi-family real estate
Commercial real estate
Land and construction
Commercial
Consumer
$
25,326 $
5,829
25,979
5,636
8,768
1,823
1,633 $
—
1,174
45
—
—
375 $
—
2,111
—
1,746
6
Total
$
73,361 $
2,852 $
4,238 $
Internally assigned loan grades are defined as follows:
— $
—
—
—
—
—
— $
— $
—
—
—
—
—
— $
— $
—
—
—
—
—
26,054
7,356
32,152
1,051
4,522
794
— $
71,929
— $
—
—
—
—
—
27,334
5,829
29,264
5,681
10,514
1,829
— $
80,451
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.
50
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3) Loans, Continued. At December 31, 2017, no loans were past due, more than thirty days and no loans were on nonaccrual. Age analysis of past-due loans at
December 31, 2016 is as follows (in thousands):
30-59
Days
Past Due
60-89
Days
Past Due
Accruing Loans
Greater
Than 90
Days
Past Due
Total
Past
Due
Current
Nonaccrual
Loans
Total
Loans
At December 31, 2016:
Residential real estate
Multi-family real estate
Commercial real estate
Land and construction
Commercial
Consumer
$
— $
—
—
—
—
—
— $
—
—
—
—
6
Total
$
— $
6 $
The following summarizes the amount of impaired loans (in thousands):
— $
—
—
—
—
—
— $
— $
—
—
—
—
6
26,959 $
5,829
29,264
5,681
10,514
1,823
375 $
—
—
—
—
—
27,334
5,829
29,264
5,681
10,514
1,829
6 $
80,070 $
375 $
80,451
With no related allowance recorded:
Residential real estate
Commercial real estate
With related allowance recorded:
Residential real estate
Commercial real estate
Total
Residential real estate
Commercial real estate
Total
At December 31, 2017
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
At December 31, 2016
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
$
$
$
$
194
231
$
217
231
$
—
—
$
375
—
$
501
—
$
978
744
978
744
1,172
975
2,147
$
$
$
1,195
975
2,170
$
$
$
330
83
330
83
413
—
1,004
—
1,004
$
$
$
375
1,004
1,379
$
$
$
501
1,004
1,505
$
$
$
—
—
—
104
—
104
104
(continued)
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):
Residential real estate
Commercial real estate
Total
Average
Recorded
Investment
2017
Interest
Income
Recognized
For the Year Ended December 31,
Interest
Income
Received
Average
Recorded
Investment
2016
Interest
Income
Recognized
Interest
Income
Received
$
$
$
650
900
1,550
$
$
$
226
52
278
$
$
$
121
52
173
$
$
$
886
2,071
2,957
$
$
$
48
76
124
$
$
$
76
106
182
There were no loans determined to be troubled debt restructurings during the years ended December 31, 2017 and 2016.
(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
At December 31,
2017
2016
$
1,171 $
2,105
1,308
131
4,715
(2,122)
Premises and equipment, net
$
2,593 $
1,171
2,065
1,268
119
4,623
(1,975)
2,648
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, 2017 and 2016 was
$73,000 and $68,000, respectively. At December 31, 2017, the future minimum lease payments are approximately as follows (in thousands):
Year Ending December 31,
Amount
2018
2019
2020
2021
2022
Total
(5) Foreclosed Real Estate
$
$
90
92
95
98
93
468
Th ere was no foreclosed real estate outstanding throughout the year ended December 31, 2017 or as of December 31, 2017.
(Income) expenses applicable to foreclosed real estate during the year ended December 31, 2016 are as follows (in thousands):
Provision for losses on foreclosed real estate
Gain on sale of foreclosed real estate
Operating expenses
$
$
—
(174)
51
(123)
52
(continued)
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 $19.3 and $34.8 million at December 31, 2017 and
2016, respectively.
A schedule of maturities of time deposits at December 31, 2017 follows (in thousands):
Year Ending
December 31,
2018
2019
2020
2021
2022
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,
2017
2017
2018
2018
2021
Interest
Rate
At December 31,
2017
2016
0.80%
0.49
1.53%
1.60
1.68
$
$
$
—
—
5,000
10,500
5,000
20,500
$
24,507
4,524
378
99
1,066
30,574
3,000
15,500
—
—
5,000
23,500
At December 31, 2017, all FHLB advances had fixed interest rates.
At December 31, 2017 and 2016, the FHLB advances were collateralized by a blanket lien on loans totaling $40.1 and $22.0 million, respectively. The blanket
lien was on certain qualifying residential one-to-four family mortgage loans, commercial and multi-family real estate loans and second mortgage loans.
Junior Subordinated Debenture . On September 30, 2004, the Company issued a $5,155,000 junior subordinated debenture to an unconsolidated subsidiary
(the “Debenture”). The Debenture has a term of thirty years. The interest rate was fixed at 6.4% for the first five years, and thereafter, the coupon rate
floats quarterly at the three-month LIBOR rate plus 2.45% (3.78% at December 31, 2017). The Debenture is redeemable in certain circumstances. The
terms of the Debenture 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, 2017 totaled $1,375,011. 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 offered to enter into a forbearance agreement with the Company with respect to payments due under the Debenture upon
consummation of the Director’s purchase of the Debenture. In March 2016, the Trustee received a direction from certain debt holders of the Trust that
holds the Debenture to sell the Debenture to a Director of the Company. Based upon the receipt of conflicting directions from other equity owners of the
Trust, in August 2016, the Trustee commenced an action in a Minnesota State Court seeking directions from the Court. The case was subsequently
transferred to United States District Court for the Southern District of New York, where the case is currently pending.
53
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(8) Financial Instruments
The estimated fair values of the Company’s financial instruments were as follows (in thousands):
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
At December 31, 2017
Carrying
Amount
Fair
Value
Level
Carrying
Amount
At December 31, 2016
Fair
Value
Level
$
11,665 $
11,437
68,220
979
316
65,251
20,500
5,155
__
11,665
11,437
68,079
979
316
65,475
20,394
(1)
N/A
__
1 $
2
3
3
3
3
3
3
3
17,640 $
20,222
76,999
1,113
380
86,087
23,500
5,155
—
17,640
20,222
76,829
1,113
380
86,442
23,500
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, unused lines of credit, and standby letters of credit and may involve, to varying degrees, elements
of credit and interest-rate risk in excess of the amount recognized in the consolidated balance sheet. The contract amounts of these instruments reflect the
extent of involvement the Company has in these financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance-
sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each
customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit,
is based on management’s credit evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved
in issuing letters of credit to customers is essentially the same as that involved in extending loan facilities to customers. The Bank generally holds
collateral supporting those commitments. Standby letters of credit generally have expiration dates within one year.
Commitments to extend credit, unused lines of credit, and standby letters of credit typically result in loans with a market interest rate when funded. A
summary of the contractual amounts of the Company’s financial instruments with off-balance-sheet risk at December 31, 2017 follows (in thousands):
Commitments to extend credit
Unused lines of credit
Standby letters of credit
(9) Credit Risk
$
$
$
791
2,031
-
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.
54
(continued)
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,
2017
2016
$
$
$
—
—
—
1,633
)
(32
(1,601)
—
—
$
—
—
—
(134)
(19)
153
—
—
The reasons for the differences between the statutory Federal income tax rate and the effective tax rate are summarized as follows (dollars in thousands):
Year Ended December 31,
2017
2016
Amount
% of
Pretax
Loss
Amount
% of
Pretax
Loss
Income tax benefit at statutory rate
Increase (decrease) resulting from:
State taxes, net of Federal tax benefit
Other permanent differences
Reduction in Federal income-tax rate
Change in valuation allowance
$
(200)
34.0% $
(135)
(21)
—
1822
(1,601)
—
3.6%
—
(309.3%)
271.7%
$
—
$
(13)
(5)
—
153
—
34.0%
3.3%
1.3%
—
(38.6%)
—
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
Accrued 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
$
At December 31,
2017
2016
$
3,547
66
104
122
85
56
3,980
3,792
188
(77)
(26)
(103)
5,125
78
—
287
153
56
5,699
5,393
306
(114)
(39)
(153)
Net deferred tax asset
$
85
$
153
During the years ended December 31, 2017 and 2016, the Company assessed its earnings history and trend over the past year and its estimate of future
earnings, and determined that it was more likely than not that the deferred tax assets would not be realized in the near term. Accordingly, a valuation
allowance was recorded and maintained against the net deferred tax asset for the amount not expected to be realized in the future.
At December 31, 2017, the Company had net operating loss carryforwards of approximately $14.0 million for Federal tax purposes and $13.9 million for
Florida tax purposes available to offset future taxable income. These carryforwards will begin to expire in 2029. A portion of the Federal and Florida net
operating losses are subject to Internal Revenue Code Section 382 limitations.
55
(continued)
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 2014.
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.
56
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(11) Related Party Transactions
The Company has entered into transactions with its executive officers, directors and their affiliates in the ordinary course of business. There were no loans to
related parties at December 31, 2017 or 2016. During 2017, the Company incurred approximately $54,000 in legal fees related to a law firm owned by a
director. At December 31, 2017 and 2016, related parties had approximately $229,000 and $635,000, 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. Stock options,
restricted stock, performance share awards and bonus share awards in lieu of obligations may be issued under the 2011 Plan. Both incentive stock options
and nonqualified stock options can be granted under the 2011 Plan. The exercise price of the stock options cannot be less than the fair market value of the
common stock on the date of grant. Stock options must be exercised within ten years of the date of grant.
As of December 31, 2017, only common stock has been issued as compensation to directors for services rendered under this plan. No shares were issued
during year ended December 31, 2017. During the year ended December 31, 2016, 57,476 shares of common stock were issued. Pursuant to 2011 Plan
(amended), during 2017, the Company accrued stock compensation cost of 2,821 shares at $3.14 per share related to first quarter director’s fees. These
2,821 shares were issued during the first quarter of 2018. As of April 1, 2017, the Company discontinued the issuance of common stock as a method of
payment of director’s fees.
Additionally, as of December 31, 2017, 105,819 shares were due to be issued as compensation to a director. The Company accrued $200,000 during each
of the years ended December 31, 2017 and 2016, for these shares. A total of $214,000 and $246,000 of compensation was recorded during the 2017 and
2016 periods. Subsequently in 2018, $200,000 was accrued for 36,102 shares in additional compensation to the director. All shares due to this director,
totaling 141,921, were issued during the first quarter of 2018. At December 31, 2017, a total of 37,220 (adjusted for one-for-ten reverse stock split) shares
remain available for grant.
(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, 2017 and 2016, the Bank’s capital conservation buffer exceeds the minimum requirements of 1.250% and 0.625%,
respectively. The required conservation buffer of 2.50% is to be phased in at 0.625% on each January 1st over the next two years.
(continued)
57
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(13) Regulatory Matters, Continued . As of December 31, 2017 and 2016, 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, 2017 and 2016 (dollars in thousands):
Actual
For Capital Adequacy
Purposes
Amount
%
Amount
%
Minimum To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
%
Amount
Requirements of
Consent Order
%
Amount
As of December 31, 2017:
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, 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
$
10,484
9,577
15.08% $
13.78
5,561
4,170
8.00% $
6.00
6,951
5,561
9,577
9,577
13.78
8.89
3,128
4,307
4.50
4.00
4,518
5,383
8.00
6.50
5.00
10.00% $
8,341
N/A
12.00%
N/A
N/A
8,614
N/A
8.00
$
10,662
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
4.0
5,370
5,893
10.00% $
8.00
6.50
5.0
9,913
N/A
N/A
9,428
12.0%
N/A
N/A
8.0
58
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 Company estimates that the cost to comply with the BSA components of the Consent Order will be between $250,000 and $420,000.
The Bank accrued approximately $305,000 and $60,000 toward these expenses in 2017 and 2016, respectively.
The Consent Order continues the requirement for the Bank to maintain a Tier 1 leverage ratio of at least 8% and a total risk-based capital ratio of 12%
beginning 90 days from the issuance of the Consent Order. At December 31, 2017, the Bank had a Tier 1 leverage ratio of 8.89%, and a total risk-based
capital ratio of 15.08%.
The Consent Order contains the following principal requirements:
● The Board of the Bank is required to increase its participation in the affairs of the Bank, assuming full responsibility for the approval of
sound policies and objectives and for the supervision of all of the Bank’s activities, consistent with the role and expertise commonly expected for
directors of banks of comparable size.
● The Bank is required to have and retain qualified and appropriately experienced senior management, including a chief executive officer, a
chief lending officer and a chief operating officer, who are given the authority to implement the provisions of the Consent Order.
● Any proposed changes in the Bank’s Board of Directors or senior executive officers are subject to the prior consent of the FDIC and the
OFR.
● The Bank is required to maintain both a fully funded allowance for loan and lease losses satisfactory to the FDIC and the OFR and a
minimum Tier 1 leverage capital ratio of 8% and a total risk-based capital ratio of 12% for as long as the Consent Order remains in effect.
● The Bank is required to eliminate from its books, by charge-off or collection, all assets or portions of assets classified “Loss” and 50 percent
of those assets or portions of assets classified “Doubtful” in the most recent examination report that have not been previously collected or charged-off.
● The Bank is required to submit a revised plan to reduce the remaining assets classified “Doubtful” and “Substandard” in the current or any
future regulatory examination report.
● The Bank may not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other
extension of credit from the Bank that has been charged-off or classified, in whole or in part, “Loss” or “Doubtful” and is uncollected.
● The Bank may not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other
extension of credit from the Bank that has been classified, in whole or part, “Substandard.”
● The Board is required to review, revise, and implement its written lending and collection policy to provide effective guidance and control
over the Bank’s lending and credit administration functions.
● The Bank is required to prepare and submit to the Supervisory Authorities an acceptable written business/strategic plan covering the overall
operation of the Bank.
● The Bank is required to develop and submit to the Supervisory Authorities a written plan and a comprehensive budget for all categories of
income and expense for calendar year 2017 and subsequent years.
● The Bank is required to implement a written plan to improve liquidity, contingency funding, interest rate risk and asset liability
management.
59
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(13) Regulatory Matters, Continued
● The Bank is required to revise and implement a written policy for managing interest rate risk in a manner that is appropriate to the size of
the Bank and the complexity of its assets.
● The Bank is required to revise and implement its policy for the operation of the Bank in such a manner as to provide adequate internal
routines and controls within the Bank consistent with safe and sound banking practices.
● The Bank may not accept, renew, or rollover any brokered deposit.
● The Bank may not declare or pay dividends, pay bonuses, or make any other form of payment outside the ordinary course of business
resulting in a reduction of capital, without the prior written approval of the Supervisory Authorities.
● The Bank is required to notify the Supervisory Authorities at least sixty days prior to undertaking asset growth that exceeds 10% or more
per annum or initiating material changes in asset or liability composition.
● The Bank is required to develop, adopt, and implement a plan (“Compliance Plan”) for administration of a program reasonably designed to
ensure and maintain compliance with the law and regulations related to the Bank Secrecy Act and related anti-money laundering regulations. The
Compliance Plan must be consistent with the guidance for BSA/AML Risk Assessment set forth in the Federal Financial Institutions Examination
Council’s Bank Secrecy Act/Anti-Money Laundering Examination Manual.
● The Bank is required to furnish written progress reports to the Supervisory Authorities within forty-five days from the end of each quarter,
detailing the form and manner of any actions taken to secure compliance with this Consent Order.
● The Bank is required to develop a revised system of internal controls designed to ensure full compliance with the BSA rules and regulations
(“BSA Internal Controls”) taking into account its size and risk profile and addressing the deficiencies and recommendations contained in the most recent
examination report.
● The Bank is required to assess its BSA staffing needs to ensure adequate qualified personnel are in place at all times.
● The Bank is required to contract with an external independent testing firm that specializes in the BSA, AML, and OFAC rules and
regulations for a review. The Bank is required to also engage an independent qualified firm, acceptable to the Supervisory Authorities, to conduct a
review of all high-risk accounts and all high-risk transaction activity for the period beginning February 3, 2014, through the date of the Consent Order.
● The Bank is in process of implementing comprehensive policies and plans to address all of the requirements of the Consent Order and has
incorporated recommendations from the FDIC and OFR into these policies and plans.
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,
2017. On February 12, 2016, and amended May 6, 2016, pursuant to the terms and requirements of the Consent Order, Management submitted a Second
written request to the FDIC for a partial reversal of the ALLL. As of this date, no response from the FDIC has been received and management does not
expect a response until the next safety and soundness examination which is expected to be performed in first and second quarters of 2018.
(15) Reclassification .
During the quarter ended March 31, 2016, the Company agreed to issue 46,296 shares to the Bank’s Chairman as compensation. The Company recorded
compensation expense of $200,000 based on the fair market value of the shares at that time, and reflected the issuance of the shares as an increase in
stockholders’ equity. The Bank’s Chairman has not yet taken delivery of the shares. As a result, during the quarter ended September 30, 2016, the
Company determined to reclassify the transaction as a liability of the Company (rather than an increase in stockholders’ equity) until the issuance of the
shares. The reclassification had no effect on the Company’s net loss for the year ended December 31, 2016.
(16) Dividends.
The Company is limited in the amount of cash dividends that may be paid. Banking regulations place certain restrictions on dividends and loans or
advances made by the Bank to the Holding Company. The amount of cash dividends that may be paid by the Bank to the Holding Company is based on
the Bank’s net earnings of the current year combined with the Bank’s retained earnings of the preceding two years, as defined by state banking
regulations. However, for any dividend declaration, the Company must consider additional factors such as the amount of current period net earnings,
liquidity, asset quality, capital adequacy and economic conditions. It is likely that these factors would further limit the amount of dividends which the
Company could declare. In addition, bank regulators have the authority to prohibit banks from paying dividends if they deem such payment to be an
unsafe or unsound practice. At December 31, 2017, the Bank and Holding Company could not pay cash dividends (See Note 13).
(17) 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, 2017 or 2016.
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):
Residential real estate
Residential real estate
At December 31, 2017
Level 2
Level 3
Total
Losses
Losses
Recorded in
Operations
For the Year
Ended
December 31,
2017
— $
648 $
330 $
—
Fair Value Level 1
648 $
$
— $
At December 31, 2016
Level 2
Level 3
Total
Losses
Losses
Recorded in
Operations
For the Year
Ended
December 31,
2016
— $
— $
375 $
126 $
—
Fair Value Level 1
375 $
$
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, 2017 and 2016 and for the years then ended follows (in thousands):
Condensed Balance Sheets
At December 31,
2017
2016
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
Condensed Statements of Cash Flows
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
Increase in other assets
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 (decrease) increase in cash
Cash at beginning of the year
$
51 $
9,328
199
$
9,578 $
$
1,878 $
5,155
2,545
$
9,578 $
Year Ended December 31,
2016
2017
$
79 $
(227)
(441)
$
(589) $
164
9,245
180
9,589
1,353
5,155
3,081
9,589
302
(193)
(505)
(396)
Year Ended December 31,
2017
2016
$
(589)
$
—
21
(79)
525
(19)
(141)
(2)
30
—
30
(113)
164
(396)
46
128
(302)
246
—
(278)
(21)
375
75
450
151
13
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, net of taxes
$
$
51
$
164
2
$
(114)
(continued)
(21) Preferred Stock
The company issued 7 shares of Series A Preferred Stock at $25,000 per share. Each share of the Series A Preferred Stock has no par value and is non-
convertible to common stock. The Preferred Stock has a rate of 10% per annum. These dividends will be paid annually in arrears on December 31 of each
year. Notwithstanding the foregoing, dividends will not be declared, paid or set aside for payment to the extent such act would cause the Company to fail
to comply with laws and regulations. These dividends will be cumulative. A liquidation value of $25,000 is assigned to each share.
63
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, 2017. In making
this assessment, the Company used the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (“COSO”). Based upon its evaluation under the framework in Internal Control-Integrated Framework, the Company’s management
concluded that its internal control over financial reporting was effective as of December 31, 2017.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange
Commission that permit the Company to provide only management’s report in this annual report.
(c) Changes in Internal Controls
The Company has made no significant changes in its internal controls over financial reporting during the year ended December 31, 2017 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.
64
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 2018 Annual Meeting of Stockholders to be held on May 29, 2018, which will be filed within 120 days of the end of its fiscal year ended December 31, 2017
(the “2017 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 2018 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 2018 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, 2017. This plan is the 2011 Equity
Compensation Plan, previously approved by its stockholders. The following table sets forth information as of December 31, 2017 with respect to the number of
shares of the Company’s common stock issuable pursuant to this plan.
Equity Compensation Plan Information
The following table provides information generally as of December 31, 2017, 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 2017.
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
—
—
—
$
$
—
—
—
37,220
—
37,220
Plan Category
Equity compensation plans approved by stockholders
Equity compensation plans not approved by stockholders
Total
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 2017 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 2017 Proxy Statement and is incorporated herein by reference.
65
Item 15. Exhibits and Financial Statement Schedules
PART IV
3.1
3.2
3.3
3.4
4.3
4.1
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)
10.1
Amended and Restated Stock Option Plan (incorporated by reference from Annual Report on Form 10-KSB filed with the SEC on March 31, 2006)
10.2
10.3
10.4
10.5
10.6
10.7
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
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)
31.1
Certification of Principal Executive Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act
31.2
Certification of Principal Financial Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act
32.1
Certification of Principal Executive Officer under 18 U.S.C. Section 1350
32.2
Certification of Principal Financial Officer under 18 U.S.C. Section 1350
66
EXHIBIT INDEX
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
67
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 28 day of March, 2018.
SIGNATURES
OPTIMUMBANK HOLDINGS, INC.
/s/ Timothy Terry
Timothy Terry
Principal Executive Officer
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 March 28, 2018.
Signature
/s/ Timothy Terry
Timothy Terry
/s/ David L. Edgar
David L. Edgar
/s/Moishe Gubin
Moishe Gubin
/s/Martin Schmidt
Martin Schmidt
/s/ Joel Klein
Joel Klein
/s/ Avi M. Zwelling
Avi M. Zwelling
Title
Principal Executive Officer
Principal Financial Officer
Director
Director
Director
Director
68
EXHIBIT 31.1
CERTIFICATION OF THE PRINCIPAL EXECUTIVE
REQUIRED BY RULE 13A-14(A)/15D-14(A)
UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, certify that:
1.
I have reviewed this report on Form 10-K of OptimumBank Holdings, Inc. (the “Company”);
2. 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;
3. 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;
4. 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 28, 2018
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
REQUIRED BY RULE 13A-14(A)/15D-14(A)
UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, certify that:
1.
I have reviewed this report on Form 10-K of OptimumBank Holdings, Inc. (the “Company”);
2. 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;
3. 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;
4. 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/ David L. Edgar
David L. Edgar
Principal Financial Officer
Date: March 28, 2018
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, 2017 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 28, 2018
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, 2017 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/ David L. Edgar
David L. Edgar
Principal Financial Officer
Date: March 28, 2018