Notes to Consolidated Financial Statements
December 31, 2016 and 2015 and the Years Then
Ended
|
(1)
|
Summary of Significant Accounting Policies
|
Organization.
OptimumBank Holdings, Inc. (the “Holding Company”) is a one-bank holding company and owns 100% of OptimumBank
(the “Bank”), a Florida-chartered commercial bank. The Bank’s wholly-owned subsidiaries are OB Real Estate Management,
LLC and OB Real Estate Holdings, LLC, both of which were formed in 2009; OB Real Estate Holdings 1692 and OB Real Estate Holdings
1704 formed in 2012, collectively, (the “Real Estate Holding Subsidiaries”). The Holding Company’s only business
is the operation of the Bank and its subsidiaries (collectively, the “Company”). The Bank’s deposits are insured
up to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). The Bank offers a variety of community
banking services to individual and corporate customers through its three banking offices located in Broward County, Florida. OB
Real Estate Management, LLC is primarily engaged in managing foreclosed real estate. This subsidiary had no activity in 2016 and
2015. All other subsidiaries are primarily engaged in holding and disposing of foreclosed real estate.
Basis of
Presentation.
The accompanying consolidated financial statements include the accounts of the Holding Company, the Bank
and the Real Estate Holding Subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
The accounting and reporting practices of the Company conform to accounting principles generally accepted in the United States
of America (“GAAP”) and to general practices within the banking industry. The following summarizes the more significant
of these policies and practices.
Going Concern
Status
.
The Company is in default with respect to its $5,155,000 Junior Subordinated Debenture (“Debenture”)
due to its failure to make certain required interest payments under the Debenture. The Trustee of the Debenture (the “Trustee”)
or the holders of the Debenture are entitled to accelerate the payment of the $5,155,000 principal balance plus accrued and unpaid
interest totaling $1,147,636 at December 31, 2016. To date the Trustee has not accelerated the outstanding balance of the Debenture.
No adjustments to the accompanying consolidated financial statements have been made as a result of this uncertainty.
Management’s plans with regard
to this matter are as follows: A Director of the Company has offered to purchase the Debenture and this offer has been approved
by certain equity owners of the Trust that holds the Debenture. The Director has also agreed to enter into a forbearance agreement
with the Company with respect to payments due under the Debenture upon consummation of the Director’s purchase of the Debenture.
In March 2016, the Trustee received
a direction from certain equity owners of the Trust that holds the Debenture to sell the Debenture to a Director of the
Company. Based upon the receipt of conflicting directions from other debt holders of the Trust, in August 2016, the Trustee
commenced an action in a Minnesota State Court seeking directions from the Court. The case was subsequently transferred to
United States District Court for the Southern District of New York, where the case is currently pending. The Company
continues to pursue mechanisms for paying the accrued interest, such as raising additional capital.
Use of Estimates.
In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that
are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses,
the valuation of foreclosed real estate, and the deferred tax asset.
Cash and
Cash Equivalents.
For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and
balances due from banks and interest-bearing deposits, all of which have original maturities of ninety days or less.
The Company may be required by law or
regulation to maintain cash reserves in the form of vault cash or in accounts with other banks. At December 31, 2016 and 2015,
balances maintained as reserves were $70,000 and $127,000, respectively.
(continued)
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, 2016 and 2015.
The allowance for loan losses is evaluated
on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light
of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s
ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently
subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
|
(1)
|
Summary of Significant Accounting Policies, continued
|
Allowance for Loan Losses, Continued
The allowance consists of specific and
general components. The specific component relates to loans that are classified as impaired. For such loans, an allowance is established
when the discounted cash flows (or collateral value or observable market price) of the impaired loans are lower than the carrying
value of those loans. The general component covers all other loans and is based on historical loss experience adjusted for qualitative
factors.
The historical loss component of the
allowance is determined by losses recognized by portfolio segment over the preceding three years. The historical loss experience
is adjusted for the risks by each portfolio segment. Risk factors impacting loans in each of the portfolio segments include: economic
trends and conditions; experience, ability and depth of lending management; national and local political environment; industry
conditions and trends in charge-offs; and other trends or uncertainties that could affect management’s estimate of probable
losses.
A loan is considered impaired when, based
on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal
or interest when due. Factors considered by management in determining impairment include payment status, collateral value, and
the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays
and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including
the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall
in relation to the principal and interest owed. Impairment is measured on a loan by loan basis, by either the present value of
expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or
the fair value of the collateral if the loan is collateral-dependent.
Foreclosed
Real Estate.
Real estate acquired through, or in lieu of, loan foreclosure is to be sold and is initially recorded at fair
value less estimated selling costs at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the lower of the new cost basis or fair value less cost
to sell. Revenue and expenses from operations are included in the consolidated statements of operations.
Premises
and Equipment.
Land is stated at cost. Buildings and improvements, furniture, fixtures, equipment, and leasehold improvements
are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization expense are computed using the
straight-line method over the estimated useful life of each type of asset or lease term, if shorter.
Preferred
Securities of Unconsolidated Subsidiary Trust.
The Company owns all of the common stock of OptimumBank Holdings Capital
Trust I (“Issuer Trust”), an unconsolidated subsidiary trust. The Issuer Trust used the proceeds from the issuance
of $5,000,000 of its preferred securities to third-party investors and common stock to acquire a $5,155,000 debenture issued by
the Company. This debenture and certain capitalized costs associated with the issuance of the securities comprise the Issuer Trust’s
only assets and the interest payments from the debentures finance the distributions paid on the preferred securities. The Company
recorded the debenture in “Junior Subordinated Debenture” and its equity interest in the business trust in “Other
Assets” on the consolidated balance sheets (See Note 7).
The Company has entered into agreements
which, taken collectively, fully and unconditionally guarantee the preferred securities of the Issuer Trust subject to the terms
of the guarantee.
Transfer
of Financial Assets.
Transfers of financial assets or a participating interest in an entire financial asset are accounted
for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when
(1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it
from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective
control over the transferred assets through an agreement to repurchase them before their maturity. A participating interest is
a portion of an entire financial asset that (1) conveys proportionate ownership rights with equal priority to each participating
interest holder (2) involves no recourse (other than standard representations and warranties) to, or subordination by, any participating
interest holder, and (3) does not entitle any participating interest holder to receive cash before any other participating interest
holder.
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.
Advertising.
The Company expenses all media advertising as incurred. Media advertising expense included in other noninterest expenses
in the accompanying consolidated statements of operations was approximately $9,400 and $6,100 during the years ended December 31,
2016 and 2015, respectively.
Stock Compensation
Plan.
The Company has adopted the fair value recognition method and expenses the fair value of any stock options as they
vest. Under the fair value recognition method, the Company recognizes stock-based compensation in the accompanying consolidated
statements of operations.
Reverse Common
Stock Split.
Effective January 11, 2016 each ten shares of the Company’s common stock were converted into one share
of common stock. Earnings per share for 2016 and 2015 has been adjusted to reflect the 1-for-10 reverse common stock split.
Loss Per
Share.
Basic loss per share is computed on the basis of the weighted-average number of common shares outstanding. In 2016
and 2015, basic and diluted loss per share is the same due to the net loss incurred by the Company. Loss per common share has been
computed based on the following (weighted-average number of common shares outstanding have been adjusted for the reverse stock
split discussed above):
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Weighted-average number of common shares outstanding used to calculate basic and diluted loss per common share
|
|
|
1,041,213
|
|
|
|
953,855
|
|
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. Such financial instruments are recorded in the consolidated financial statements when
they are funded.
Fair Value
Measurements.
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. The fair value hierarchy requires the Company to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. The hierarchy describes three levels of inputs that may be used to measure
fair value:
Level 1: Observable inputs such as quoted
prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices
that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or
liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and model-driven
valuations whose inputs are observable or whose significant value drivers are observable. Valuations may be obtained from, or corroborated
by, third-party pricing services.
Level 3: Unobservable inputs to measure
fair value of assets and liabilities for which there is little, if any market activity at the measurement date, using reasonable
inputs and assumptions based upon the best information at the time, to the extent that inputs are available without undue cost
and effort.
The following describes valuation methodologies
used for assets measured at fair value:
Securities Available for Sale.
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level
1 securities include highly liquid government bonds, certain mortgage products and exchange-traded equities. If quoted market prices
are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics,
or discounted cash flows. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy,
include certain mortgage-backed securities and U.S. Government and agency securities.
Impaired Loans
. The Company’s
impaired loans are normally collateral dependent and, as such, are carried at the lower of the Company’s net recorded investment
in the loan or fair market value of the collateral less estimated selling costs. Estimates of fair value are determined based on
a variety of information, including the use of available appraisals, estimates of market value by licensed appraisers or local
real estate brokers and the knowledge and experience of the Company’s management related to values of properties in the Company’s
market areas. Management takes into consideration the type, location and occupancy of the property as well as current economic
conditions in the area the property is located in assessing estimates of fair value. Accordingly, fair value estimates for impaired
loans are classified as Level 3.
Foreclosed Real Estate.
Estimates
of fair values are determined based on a variety of information, including the use of available appraisals, estimates of market
value by licensed appraisers or local real estate brokers and the knowledge and experience of the Company’s management related
to values of properties in the Company’s market areas. Management takes into consideration the type, location and occupancy
of the property as well as current economic conditions in the area the property is located in assessing estimates of fair value.
Accordingly, the fair values estimates for foreclosed real estate are classified as Level 3.
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
|
(1)
|
Summary of Significant Accounting Policies, continued
|
Fair Values
of Financial Instruments.
The following methods and assumptions were used by the Company in estimating fair values of financial
instruments disclosed herein:
Cash and Cash Equivalents.
The carrying amounts of cash and cash equivalents approximate their fair value.
Securities.
Fair values
for securities are based on the framework for measuring fair value established by GAAP.
Loans.
For variable-rate
loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values
for fixed-rate loans, including fixed-rate residential and commercial real estate and commercial loans, are estimated using discounted
cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
Federal Home Loan Bank Stock.
Fair
value of the Company’s investment in Federal Home Loan Bank stock is based on its redemption value, which is its cost of
$100 per share.
Accrued Interest Receivable.
The
carrying amount of accrued interest approximates its fair value.
Deposit Liabilities.
The
fair values disclosed for demand, NOW, money-market and savings deposits are, by definition, equal to the amount payable on demand
at the reporting date (that is, their carrying amounts). Fair values for fixed-rate time deposits are estimated using a discounted
cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated expected
monthly maturities of time deposits.
Federal Home Loan Bank Advances.
Fair values of Federal Home Loan Bank advances are estimated using discounted cash flow analysis based on the Company’s
current incremental borrowing rates for similar types of borrowings.
Off-Balance-Sheet Financial Instruments.
Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the counterparties’ credit standing.
Comprehensive
Loss.
GAAP generally requires that recognized revenue, expenses, gains and losses be included in net loss. Although certain
changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate
component of the equity section of the consolidated balance sheets, such items along with net loss, are components of comprehensive
loss. The only component of other comprehensive loss is the net change in the unrealized loss on the securities available for sale.
Recent Pronouncements.
In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,
which is intended to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful
information. The ASU requires equity investments to be measured at fair value with changes in fair values recognized in net earnings,
simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative
assessment to identity impairment and eliminates the requirement to disclose fair values, the methods and significant assumptions
used to estimate the fair value of financial instruments measured at amortized cost. The ASU also clarifies that the Company should
evaluate the need for a valuation allowance on a deferred tax asset related to available for-sale debt securities in combination
with the Company’s other deferred tax assets. The ASU is effective for the Company beginning January 1, 2018. Early adoption
is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial
statements.
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
|
(1)
|
Summary of Significant Accounting Policies, continued
|
Recent Pronouncements, Continued
In February 2016, the FASB issued ASU
2016-2, Leases (Topic 842) which will require lessees to recognize on the balance sheet the assets and liabilities for the rights
and obligations created by those leases with term of more than twelve months. Consistent with current GAAP, the recognition, measurement,
and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance
or operating lease. The new ASU will require both types of leases to be recognized on the balance sheet. The ASU also will require
disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash
flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information
about the amounts recorded in the financial statements. The ASU is effective for fiscal years and interim periods within those
fiscal years beginning after December 15, 2018. The Company is in the process of determining the effect of the ASU on its consolidated
financial statements. Early application will be permitted.
In March 2016, the FASB issued ASU
No. 2016-09,
Compensation-Stock Compensation (Topic 718)
intended to improve the accounting for employee share-based
payments. The ASU affects all organizations that issue share-based payment awards to their employees. The ASU simplifies
several aspects of the accounting for share-based payment award transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and classification on the consolidated statement of cash flows. The
ASU will take effect for annual periods beginning after December 15, 2016, and interim periods within those annual periods.
The Company has evaluated the effect of ASU and determined it has no material effect on its consolidated financial
statements.
In June 2016, the FASB issued ASU No.
2016-13 Financial Instruments-Credit Losses (Topic 326). The ASU improves financial reporting by requiring timelier recording of
credit losses on loans and other financial instruments held by the Company. The ASU requires the Company to measure all expected
credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable
and supportable forecasts. Many of the loss estimation techniques applied today will still be permitted, although the inputs to
those techniques will change to reflect the full amount of expected credit losses. The Company will continue to use judgment to
determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors
and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as
well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative
and quantitative requirements that provide additional information about the amounts recorded in the financial statements. Additionally,
the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit
deterioration. The ASU will take effect for fiscal years, and interim periods within those fiscal years, beginning after December
15, 2019. Early adoption is permitted. The Company is in the process of determining the effect of the ASU on its consolidated financial
statements.
Reclassification.
Certain amounts have been reclassified to conform to the 2016 consolidated financial statement presentation.
(continued)
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, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
$
|
10,157
|
|
|
$
|
—
|
|
|
$
|
(405
|
)
|
|
$
|
9,752
|
|
SBA Pool Securities
|
|
|
10,470
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,627
|
|
|
$
|
—
|
|
|
$
|
(405
|
)
|
|
$
|
20,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
10,107
|
|
|
$
|
31
|
|
|
$
|
(52
|
)
|
|
$
|
10,086
|
|
Collateralized mortgage obligations
|
|
|
15,223
|
|
|
|
21
|
|
|
|
(227
|
)
|
|
|
15,017
|
|
SBA Pool Security
|
|
|
644
|
|
|
|
2
|
|
|
|
—
|
|
|
|
646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,974
|
|
|
$
|
54
|
|
|
$
|
(279
|
)
|
|
$
|
25,749
|
|
The following summarizes
sales of securities (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Proceeds from sales of securities
|
|
$
|
28,409
|
|
|
$
|
8,530
|
|
|
|
|
|
|
|
|
|
|
Gross gains from sale of securities
|
|
|
48
|
|
|
|
87
|
|
Gross losses from sale of securities
|
|
|
(234
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) gain from sales of securities
|
|
$
|
(186
|
)
|
|
$
|
60
|
|
Securities with gross
unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous loss
position, is as follows (in thousands):
|
|
At December 31, 2016
|
|
|
|
Over Twelve Months
|
|
|
Less Than Twelve Months
|
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
$
|
(46
|
)
|
|
$
|
864
|
|
|
$
|
(359
|
)
|
|
$
|
8,888
|
|
|
|
At December 31, 2015
|
|
|
|
Over Twelve Months
|
|
|
Less Than Twelve Months
|
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Securities Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(52
|
)
|
|
$
|
5,526
|
|
Collateralized mortgage obligations
|
|
|
—
|
|
|
|
—
|
|
|
|
(227
|
)
|
|
|
11,783
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(279
|
)
|
|
$
|
17,309
|
|
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(2)
Securities,
Continued
.
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more
frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the
intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated
recovery in fair value.
At December 31, 2016 and 2015, the unrealized
losses on six and eighteen investment securities, respectively were caused by market conditions. It is expected that the securities
would not be settled at a price less than the book value of the investments. Because the decline in fair value is attributable
to market conditions and not credit quality, and because the Company has the ability and intent to hold these investments until
a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.
Available-for-sale securities
measured at fair value on a recurring basis are summarized below (in thousands):
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
|
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
At December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
$
|
9,752
|
|
|
$
|
—
|
|
|
$
|
9,752
|
|
|
$
|
—
|
|
SBA Pool Securities
|
|
|
10,470
|
|
|
|
—
|
|
|
|
10,470
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,222
|
|
|
$
|
—
|
|
|
$
|
20,222
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
10,086
|
|
|
$
|
—
|
|
|
$
|
10,086
|
|
|
$
|
—
|
|
Collateralized mortgage obligations
|
|
|
15,017
|
|
|
|
—
|
|
|
|
15,017
|
|
|
|
—
|
|
SBA Pool Security
|
|
|
646
|
|
|
|
—
|
|
|
|
646
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,749
|
|
|
$
|
—
|
|
|
$
|
25,749
|
|
|
$
|
—
|
|
During the years ended December 31, 2016 and 2015, no securities were transferred
in or out of Level 1, Level 2 or Level 3.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3)
Loans.
The
components of loans are as follows (in thousands):
|
|
At December 31,
|
|
|
At December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
27,334
|
|
|
$
|
16,203
|
|
Multi-family real estate
|
|
|
5,829
|
|
|
|
3,697
|
|
Commercial real estate
|
|
|
29,264
|
|
|
|
34,771
|
|
Land and construction
|
|
|
5,681
|
|
|
|
5,258
|
|
Commercial
|
|
|
10,514
|
|
|
|
21,770
|
|
Consumer
|
|
|
1,829
|
|
|
|
3,015
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
80,451
|
|
|
|
84,714
|
|
|
|
|
|
|
|
|
|
|
Add (deduct):
|
|
|
|
|
|
|
|
|
Net deferred loan fees, costs and premiums
|
|
|
463
|
|
|
|
154
|
|
Allowance for loan losses
|
|
|
(3,915
|
)
|
|
|
(2,295
|
)
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
76,999
|
|
|
$
|
82,573
|
|
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3)
Loans, Continued.
An
analysis of the change in the allowance for loan losses for the years ended December 31, 2016 and 2015 follows (in thousands):
|
|
Residential Real Estate
|
|
|
Multi-Family Real Estate
|
|
|
Commercial Real Estate
|
|
|
Land and Construction
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Year Ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
116
|
|
|
$
|
26
|
|
|
$
|
1,085
|
|
|
$
|
77
|
|
|
$
|
120
|
|
|
$
|
151
|
|
|
$
|
720
|
|
|
$
|
2,295
|
|
Provision (credit) for loan losses
|
|
|
194
|
|
|
|
32
|
|
|
|
(2,069
|
)
|
|
|
19
|
|
|
|
68
|
|
|
|
189
|
|
|
|
1,567
|
|
|
|
—
|
|
Charge-offs
|
|
|
—
|
|
|
|
—
|
|
|
|
(264
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(205
|
)
|
|
|
—
|
|
|
|
(469
|
)
|
Recoveries
|
|
|
—
|
|
|
|
—
|
|
|
|
2,035
|
|
|
|
24
|
|
|
|
—
|
|
|
|
30
|
|
|
|
—
|
|
|
|
2,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
310
|
|
|
$
|
58
|
|
|
$
|
787
|
|
|
$
|
120
|
|
|
$
|
188
|
|
|
$
|
165
|
|
|
$
|
2,287
|
|
|
$
|
3,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
66
|
|
|
$
|
2
|
|
|
$
|
2,058
|
|
|
$
|
99
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
2,244
|
|
Provision (credit) for loan losses
|
|
|
34
|
|
|
|
24
|
|
|
|
(973
|
)
|
|
|
(44
|
)
|
|
|
110
|
|
|
|
138
|
|
|
|
711
|
|
|
|
—
|
|
Charge-offs
|
|
|
(289
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(289
|
)
|
Recoveries
|
|
|
305
|
|
|
|
—
|
|
|
|
—
|
|
|
|
22
|
|
|
|
—
|
|
|
|
13
|
|
|
|
—
|
|
|
|
340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
116
|
|
|
$
|
26
|
|
|
$
|
1,085
|
|
|
$
|
77
|
|
|
$
|
120
|
|
|
$
|
151
|
|
|
$
|
720
|
|
|
$
|
2,295
|
|
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3)
Loans, continued.
The balance in the allowance
for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2016
and 2015 follows (in thousands):
|
|
Residential Real Estate
|
|
|
Multi-Family Real Estate
|
|
|
Commercial Real Estate
|
|
|
Land and Construction
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
At December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment
|
|
$
|
375
|
|
|
$
|
—
|
|
|
$
|
1,004
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,379
|
|
Balance in allowance for loan losses
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
104
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment
|
|
$
|
26,959
|
|
|
$
|
5,829
|
|
|
$
|
28,260
|
|
|
$
|
5,681
|
|
|
$
|
10,514
|
|
|
$
|
1,829
|
|
|
$
|
—
|
|
|
$
|
79,072
|
|
Balance in allowance for loan losses
|
|
$
|
310
|
|
|
$
|
58
|
|
|
$
|
683
|
|
|
$
|
120
|
|
|
$
|
188
|
|
|
$
|
165
|
|
|
$
|
2,287
|
|
|
$
|
3,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment
|
|
$
|
1,319
|
|
|
$
|
—
|
|
|
$
|
4,273
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,592
|
|
Balance in allowance for loan losses
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment
|
|
$
|
14,884
|
|
|
$
|
3,697
|
|
|
$
|
30,498
|
|
|
$
|
5,258
|
|
|
$
|
21,770
|
|
|
$
|
3,015
|
|
|
$
|
—
|
|
|
$
|
79,122
|
|
Balance in allowance for loan losses
|
|
$
|
116
|
|
|
$
|
26
|
|
|
$
|
1,072
|
|
|
$
|
77
|
|
|
$
|
120
|
|
|
$
|
151
|
|
|
$
|
720
|
|
|
$
|
2,282
|
|
(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.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
|
(3)
|
Loans, Continued.
The following summarizes
the loan credit quality (in thousands):
|
|
|
Pass
|
|
|
OLEM
(Other
Loans
Especially Mentioned)
|
|
|
Sub-
standard
|
|
|
Doubtful
|
|
|
Loss
|
|
|
Total
|
|
At December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
25,326
|
|
|
$
|
1,633
|
|
|
$
|
375
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
27,334
|
|
Multi-family real estate
|
|
|
5,829
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,829
|
|
Commercial real estate
|
|
|
25,979
|
|
|
|
1,174
|
|
|
|
2,111
|
|
|
|
—
|
|
|
|
—
|
|
|
|
29,264
|
|
Land and construction
|
|
|
5,636
|
|
|
|
45
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,681
|
|
Commercial
|
|
|
8,768
|
|
|
|
—
|
|
|
|
1,746
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,514
|
|
Consumer
|
|
|
1,823
|
|
|
|
—
|
|
|
|
6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
73,361
|
|
|
$
|
2,852
|
|
|
$
|
4,238
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
80,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
15,132
|
|
|
$
|
—
|
|
|
$
|
1,071
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,203
|
|
Multi-family real estate
|
|
|
3,697
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,697
|
|
Commercial real estate
|
|
|
29,925
|
|
|
|
573
|
|
|
|
4,273
|
|
|
|
—
|
|
|
|
—
|
|
|
|
34,771
|
|
Land and construction
|
|
|
5,212
|
|
|
|
46
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,258
|
|
Commercial
|
|
|
19,916
|
|
|
|
—
|
|
|
|
1,854
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21,770
|
|
Consumer
|
|
|
3,015
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
76,897
|
|
|
$
|
619
|
|
|
$
|
7,198
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
84,714
|
|
Internally assigned loan grades are defined as follows:
Pass – a Pass
loan’s primary source of loan repayment is satisfactory, with secondary sources very likely to be realized if necessary.
These are loans that conform in all aspects to bank policy and regulatory requirements, and no repayment risk has been identified.
OLEM (Other Loans
Especially Mentioned) – an Other Loan Especially Mentioned has potential weaknesses that deserve management’s close
attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset
or the Company’s credit position at some future date.
Substandard –
a Substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral
pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.
Included in this category are loans that are current on their payments, but the Bank is unable to document the source of repayment.
They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful – a
loan classified as Doubtful has all the weaknesses inherent in one classified as Substandard, with the added characteristics that
the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly
questionable and improbable. This classification does not mean that the asset has absolutely no recovery or salvage value, but
rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be
affected in the future. The Company charges off any loan classified as Doubtful.
Loss – a loan
classified Loss is considered uncollectible and of such little value that continuance as a bankable asset is not warranted. This
classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable
to defer writing off this basically worthless asset even though partial recovery may be affected in the future. The Company fully
charges off any loan classified as Loss.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3)
|
Loans, Continued.
Age analysis of past-due loans is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing Loans
|
|
|
|
|
|
|
|
|
|
|
|
30-59
Days
Past Due
|
|
|
60-89
Days
Past Due
|
|
|
Greater
Than 90
Days
Past Due
|
|
|
Total
Past
Due
|
|
|
Current
|
|
|
Nonaccrual
Loans
|
|
|
Total
Loans
|
|
At December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
26,959
|
|
|
$
|
375
|
|
|
$
|
27,334
|
|
Multi-family real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,829
|
|
|
|
—
|
|
|
|
5,829
|
|
Commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
29,264
|
|
|
|
—
|
|
|
|
29,264
|
|
Land and construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,681
|
|
|
|
—
|
|
|
|
5,681
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,514
|
|
|
|
—
|
|
|
|
10,514
|
|
Consumer
|
|
|
—
|
|
|
|
6
|
|
|
|
—
|
|
|
|
6
|
|
|
|
1,823
|
|
|
|
—
|
|
|
|
1,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
80,070
|
|
|
$
|
375
|
|
|
$
|
80,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,132
|
|
|
$
|
1,071
|
|
|
$
|
16,203
|
|
Multi-family real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,697
|
|
|
|
—
|
|
|
|
3,697
|
|
Commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31,539
|
|
|
|
3,232
|
|
|
|
34,771
|
|
Land and construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,258
|
|
|
|
—
|
|
|
|
5,258
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21,770
|
|
|
|
—
|
|
|
|
21,770
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,015
|
|
|
|
—
|
|
|
|
3,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
80,411
|
|
|
$
|
4,303
|
|
|
$
|
84,714
|
|
The following summarizes the amount of impaired loans (in thousands):
|
|
At December 31, 2016
|
|
|
At December 31, 2015
|
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
375
|
|
|
$
|
501
|
|
|
$
|
—
|
|
|
$
|
1,319
|
|
|
$
|
1,521
|
|
|
$
|
—
|
|
Commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,232
|
|
|
|
5,287
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With related allowance recorded - Commercial real
estate
|
|
$
|
1,004
|
|
|
|
1,004
|
|
|
|
104
|
|
|
|
1,041
|
|
|
|
1,041
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
375
|
|
|
$
|
501
|
|
|
$
|
—
|
|
|
$
|
1,319
|
|
|
$
|
1,521
|
|
|
$
|
—
|
|
Commercial real estate
|
|
$
|
1,004
|
|
|
$
|
1,004
|
|
|
$
|
104
|
|
|
$
|
4,273
|
|
|
$
|
6,328
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,379
|
|
|
$
|
1,505
|
|
|
$
|
104
|
|
|
$
|
5,592
|
|
|
$
|
7,849
|
|
|
$
|
13
|
|
(continued)
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):
|
|
|
For the Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
Interest
Income
Received
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
Interest
Income
Received
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
886
|
|
|
$
|
48
|
|
|
$
|
76
|
|
|
$
|
4,619
|
|
|
$
|
175
|
|
|
$
|
236
|
|
Commercial real estate
|
|
$
|
2,071
|
|
|
$
|
76
|
|
|
$
|
106
|
|
|
$
|
4,960
|
|
|
$
|
75
|
|
|
$
|
256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,957
|
|
|
$
|
124
|
|
|
$
|
182
|
|
|
$
|
9,579
|
|
|
$
|
250
|
|
|
$
|
492
|
|
There were no loans determined to be troubled debt restructurings during
the years ended December 31, 2016 and 2015.
|
(4)
|
Premises and Equipment
|
A summary of
premises and equipment follows (in thousands):
|
|
At December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Land
|
|
$
|
1,171
|
|
|
$
|
1,171
|
|
Buildings and improvements
|
|
|
2,065
|
|
|
|
2,053
|
|
Furniture, fixtures and equipment
|
|
|
1,268
|
|
|
|
1,190
|
|
Leasehold improvements
|
|
|
119
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
Total, at cost
|
|
|
4,623
|
|
|
|
4,533
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
(1,975
|
)
|
|
|
(1,830
|
)
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
$
|
2,648
|
|
|
$
|
2,703
|
|
The Company currently
leases one branch facility under an operating lease. The lease contains renewal options and requires the Company to pay an allowable
share of common area maintenance and real estate taxes. Rent expense under the operating lease during the years ended December
31, 2016 and 2015 was $68,000 and $64,000, respectively. At December 31, 2016, the future minimum lease payments are approximately
as follows (in thousands):
Year Ending December 31,
|
|
|
Amount
|
|
|
|
|
|
|
2017
|
|
|
$
|
59
|
|
Total
|
|
|
$
|
59
|
|
|
(5)
|
Foreclosed Real Estate
|
(Income) expenses
applicable to foreclosed real estate are as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Provision for losses on foreclosed real estate
|
|
$
|
—
|
|
|
$
|
260
|
|
Gain on sale of foreclosed real estate
|
|
|
(174
|
)
|
|
|
(48
|
)
|
Operating expenses
|
|
|
51
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(123
|
)
|
|
$
|
412
|
|
At December 31,
2015 the valuation allowance with respect to foreclosed real estate was $260,000. This amount was reversed with the sale of the
property in 2016.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The aggregate
amount of time deposits with a minimum denomination of $100,000 was approximately $34.8 million and $32.2 million at December
31, 2016 and 2015, respectively.
A schedule of maturities of time deposits
at December 31, 2016 follows (in thousands):
Year Ending
December 31,
|
|
|
Amount
|
|
2017
|
|
|
$
|
43,194
|
|
2018
|
|
|
|
12,214
|
|
2019
|
|
|
|
929
|
|
2020
|
|
|
|
230
|
|
2021
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
56,725
|
|
|
(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
|
|
Interest
|
|
At December 31,
|
|
December 31,
|
|
Rate
|
|
2016
|
|
2015
|
|
2016
|
|
|
0.53%
|
|
$
|
—
|
|
$
|
13,500
|
|
2016
|
|
|
0.59
|
|
|
—
|
|
|
6,500
|
|
2017
|
|
|
0.80
|
|
|
3,000
|
|
|
—
|
|
2017
|
|
|
0.49
|
|
|
5,000
|
|
|
—
|
|
2017
|
|
|
0.49
|
|
|
10,500
|
|
|
—
|
|
2021
|
|
|
1.68
|
|
|
5,000
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,500
|
|
$
|
20,000
|
|
At
December 31, 2016, all FHLB advances had fixed interest rates, with the exception of the FHLB advance with a balance of $3.0
million, which is adjusted daily.
At December 31, 2016 and 2015, the FHLB advances were collateralized by $22.0 million and $8.6
million, respectively, of securities and by a lien on qualifying residential one-to-four family mortgage loans, commercial and
multi-family real estate loans and second mortgage loans.
Junior Subordinated
Debenture
. On September 30, 2004, the Company issued a $5,155,000 junior subordinated debenture to an unconsolidated subsidiary
(the “Debenture”). The Debenture has a term of thirty years. The interest rate was fixed at 6.4% for the first five
years, and thereafter, the coupon rate floats quarterly at the three-month LIBOR rate plus 2.45% (3.33% at December 31, 2016).
The Debenture is redeemable in certain circumstances. The terms of the Debenture allow the Company to defer payments of interest
on the Debenture by extending the interest payment period at any time during the term of the Debenture for up to twenty consecutive
quarterly periods. Beginning in 2010, the Company exercised its right to defer payment of interest on the Debenture. Interest payments
deferred as of December 31, 2016 totaled $1,147,636. The Company has deferred interest payments with respect to the Debenture for
the maximum allowable twenty consecutive quarterly payments. The holder of the Debenture can accelerate the $5,155,000 principal
balance as a result of this default. Under the Written Agreement, the Company is not able to make these interest payments without
the prior approval of the Federal Reserve Bank of Atlanta. Regulatory approval to pay accrued and unpaid interest has been denied.
A Director of the Company has
offered to purchase the Debenture and this offer has been approved by certain equity owners of the Trust that holds the
Debenture. The Director has also agreed to enter into a forbearance agreement with the Company with respect to payments due
under the Debenture upon consummation of the Director’s purchase of the Debenture. In March 2016, the Trustee received
a direction from certain debt holders of the Trust that holds the Debenture to sell the Debenture to a Director of
the Company. Based upon the receipt of conflicting directions from other equity owners of the Trust, in August 2016, the
Trustee commenced an action in a Minnesota State Court seeking directions from the Court. The case was subsequently
transferred to United States District Court for the Southern District of New York, where the case is currently pending. The
Company continues to pursue mechanisms for paying the accrued interest, such as raising additional capital.
(continued)
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016
|
|
|
At December 31, 2015
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Level
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Level
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,640
|
|
|
$
|
17,640
|
|
|
|
1
|
|
|
$
|
10,365
|
|
|
$
|
10,365
|
|
|
|
1
|
|
Securities available for sale
|
|
|
20,222
|
|
|
|
20,222
|
|
|
|
2
|
|
|
|
25,749
|
|
|
|
25,749
|
|
|
|
2
|
|
Loans
|
|
|
76,999
|
|
|
|
76,829
|
|
|
|
3
|
|
|
|
82,573
|
|
|
|
82,429
|
|
|
|
3
|
|
Federal Home Loan Bank stock
|
|
|
1,113
|
|
|
|
1,113
|
|
|
|
3
|
|
|
|
966
|
|
|
|
966
|
|
|
|
3
|
|
Accrued interest receivable
|
|
|
380
|
|
|
|
380
|
|
|
|
3
|
|
|
|
462
|
|
|
|
462
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit liabilities
|
|
|
86,009
|
|
|
|
86,364
|
|
|
|
3
|
|
|
|
97,571
|
|
|
|
97,837
|
|
|
|
3
|
|
Federal Home Loan Bank advances
|
|
|
23,500
|
|
|
|
23,500
|
|
|
|
3
|
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
3
|
|
Junior subordinated debenture
|
|
|
5,155
|
|
|
|
N/A (1)
|
|
|
|
3
|
|
|
|
5,155
|
|
|
|
N/A
|
(1)
|
|
|
3
|
|
Off-balance sheet financial instruments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
(1)
|
The Company is unable to determine value based on significant unobservable inputs required in the calculation. Refer to Note 7 for further information.
|
The
Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs
of its customers. These financial instruments are commitments to extend credit and may involve, to varying degrees, elements of
credit and interest-rate risk in excess of the amount recognized in the consolidated balance sheet. The contract amounts of these
instruments reflect the extent of involvement the Company has in these financial instruments.
The
Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments
to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making
commitments as it does for on-balance-sheet instruments.
Commitments
to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because some
of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company, upon extension of credit, is based on management’s credit evaluation
of the counterparty.
As of December
31, 2016, commitments to extend credit totaled $7.1 million.
The Company grants
the majority of its loans to borrowers throughout Broward County, Florida and portions of Palm Beach and Miami-Dade Counties, Florida.
Although the Company has a diversified loan portfolio, a significant portion of its borrowers’ ability to repay their loans
and meet their contractual obligations to the Company is dependent upon the economy in Broward, Palm Beach and Miami-Dade Counties,
Florida.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Income tax benefit consisted of the
following (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
$
|
(320
|
)
|
State
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total Current
|
|
|
—
|
|
|
(320
|
)
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
Federal
|
|
|
(134
|
)
|
|
(153
|
)
|
State
|
|
|
(19
|
)
|
|
(26
|
)
|
Change in Valuation Allowance
|
|
|
153
|
|
|
179
|
|
|
|
|
|
|
|
|
|
Total Deferred
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
$
|
(320
|
)
|
The
reasons for the differences between the statutory Federal income tax rate and the effective tax rate are summarized as follows
(dollars in thousands):
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Amount
|
|
|
% of
Pretax
Loss
|
|
|
Amount
|
|
|
%
of Pretax
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit at statutory rate
|
|
$
|
(135
|
)
|
|
|
34.0
|
%
|
|
$
|
(164
|
)
|
|
|
34.0
|
%
|
Increase (decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes, net of Federal tax benefit
|
|
|
(13
|
)
|
|
|
3.3
|
%
|
|
|
(17
|
)
|
|
|
3.5
|
%
|
Other permanent differences
|
|
|
(5
|
)
|
|
|
1.3
|
%
|
|
|
2
|
|
|
|
(0.4
|
%)
|
Change in valuation allowance
|
|
|
153
|
|
|
|
(38.6
|
%)
|
|
|
179
|
|
|
|
(37.1
|
%)
|
Uncertain tax position
|
|
|
—
|
|
|
|
0.0
|
%
|
|
|
(320
|
)
|
|
|
66.3
|
%
|
|
|
$
|
—
|
|
|
|
0.0
|
%
|
|
$
|
(320
|
)
|
|
|
66.3
|
%
|
The tax effects
of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented
below (in thousands).
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
5,125
|
|
|
$
|
4,005
|
|
Premises and equipment
|
|
|
78
|
|
|
|
52
|
|
Foreclosed property expenses
|
|
|
—
|
|
|
|
849
|
|
Nonaccrual loan interest
|
|
|
287
|
|
|
|
399
|
|
Unrealized loss on available for sale securities
|
|
|
153
|
|
|
|
87
|
|
Other
|
|
|
56
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
5,699
|
|
|
|
5,474
|
|
Less: Valuation allowance
|
|
|
5,393
|
|
|
|
5,240
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
306
|
|
|
|
234
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(114
|
)
|
|
|
(114
|
)
|
Loan costs
|
|
|
(39
|
)
|
|
|
(33
|
)
|
Total deferred tax liabilities
|
|
|
(153
|
)
|
|
|
(147
|
)
|
Net deferred tax asset
|
|
$
|
153
|
|
|
$
|
87
|
|
During
the years ended December 31, 2016 and 2015, the Company assessed its earnings history and trend over the past year and its estimate
of future earnings, and determined that it was more likely than not that the deferred tax assets would not be realized in the
near term. Accordingly, a valuation allowance was recorded and maintained against the net deferred tax asset for the amount not
expected to be realized in the future.
At
December 31, 2016, the Company had net operating loss carryforwards of approximately $13.6 million for Federal tax purposes and
$13.5 million for Florida tax purposes available to offset future taxable income. These carryforwards will begin to expire in
2029. A portion of the Federal and Florida net operating losses are subject to Internal Revenue Code Section 382 limitations.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(10) Income Taxes, Continued
The
Company files U.S. and Florida income tax returns. The Company is no longer subject to U.S. Federal or state income tax examinations
by taxing authorities for years before 2013. The Company’s 2010 and 2009 Federal income tax returns were examined by the
Internal Revenue Service (“IRS”). In 2015 the IRS closed the examination with no adjustments for taxes due. In 2015,
the Company reversed its reserve for unrecognized tax benefits related to this exam by recording an income tax benefit of $320,000.
The
Company regularly reviews its tax positions in each significant taxing jurisdiction in the process of evaluating its unrecognized
tax benefits. The Company makes adjustments to its unrecognized tax benefits when: (i) facts and circumstances regarding a tax
position change, causing a change in management’s judgment regarding that tax position; (ii) a tax position is effectively
settled with a tax authority at a differing amount; and/or (iii) the statute of limitations expires regarding a tax position.
The Company does not expect to a change in unrecognized tax benefits in the next year.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(10) Income Taxes, continued
A reconciliation
of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
|
|
Year Ended
December 31, 2015
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
320
|
|
|
Additions for tax positions related to current year
|
|
|
—
|
|
|
Additions for tax positions of prior years
|
|
|
—
|
|
|
Settlement due to exam closure
|
|
|
(320
|
)
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
—
|
|
(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, 2016. At December 31, 2015, loans to related parties totaled $240,000. At December
31, 2016 and 2015, related parties had approximately $635,000 and $8,560,000, respectively, on deposit with the Company.
(12) Stock-Based Compensation
On December 27, 2011, the Company’s
stockholders approved the 2011 Equity Incentive Plan (“2011 Plan”). In May 2016, the Company increased the total number
of shares available to be awarded from 105,000 shares (adjusted for the one-for-ten reverse stock split) to 210,000 shares. Options,
restricted stock, performance share awards and bonus share awards in lieu of obligations may be issued under the 2011 Plan. Both
incentive stock options and nonqualified stock options can be granted under the 2011 Plan. The exercise price of the stock options
cannot be less than the fair market value of the common stock on the date of grant. Options must be exercised within ten years
of the date of grant.
As of December 31, 2016, only common
stock has been issued as compensation to directors for services rendered under this plan. 57,476 and 28,613 shares of common stock
(adjusted for one-for-ten reverse stock split) were issued for the years ended December 31, 2016 and 2015, respectively. Subsequently,
$200,000 (46,296 shares) was reclassified to other liabilities (see Note 15). A total of $246,000 and $242,000 of compensation
was recorded during the 2016 and 2015 periods. At December 31, 2016 a total of 145,861 (adjusted for one-for-ten reverse stock
split) shares remain available for grant.
(13)
Regulatory
Matters
.
The Bank is subject to various regulatory capital requirements administered by the bank regulatory agencies. Failure
to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company and Bank’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of its assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Effective January 1, 2015, the Bank,
became subject to the new Basel III capital level threshold requirements under the Prompt Corrective Action regulations with full
compliance with all of the final rule’s requirements phased in over a multi-year schedule. These new regulations were designed
to ensure that banks maintain strong capital positions even in the event of severe economic downturns or unforeseen losses.
Changes that could affect the Bank going
forward include additional constraints on the inclusion of deferred tax assets in capital and increased risk weightings for nonperforming
loans and acquisition/development loans in regulatory capital. Beginning on January 1, 2016, the Bank became subject to the capital
conservation buffer rules which places limitations on distributions, including dividend payments, and certain discretionary bonus
payments to executive officers. In order to avoid these limitations, an institution must hold a capital conservation buffer above
its minimum risk-based capital requirements. As of December 31, 2016, the Bank’s capital conservation buffer exceeds the
minimum requirements of 0.625% for 2016. The required buffer is to be phased in over three years. Under the new regulations in
the first quarter of 2015, the Bank elected an irreversible one-time opt-out to exclude accumulated other comprehensive loss from
regulatory capital.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(13)
Regulatory
Matters, Continued
.
As of December 31, 2016 and December 31, 2015, the Bank was subject to Consent Orders issued by the
Federal Deposit Insurance Corporation and the State of Florida Office of Financial Regulation (“OFR”), and accordingly
is deemed to be “adequately capitalized” even if its capital ratios were to exceed those generally required to be a
“well capitalized” bank. An institution must maintain minimum total risk-based, Tier I risk-based and Tier I leverage
ratios as set forth in the following tables. The Bank’s actual capital amounts and percentages are also presented in the
table (dollars in thousands):
The following table shows the Bank’s
capital amounts and ratios and regulatory thresholds at December 31, 2016 and December 31, 2015 (dollars in thousands):
|
|
Actual
|
|
|
For Capital
Adequacy Purposes
|
|
|
Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
|
|
|
Requirements of
Consent Order
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
As of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital to Risk-Weighted Assets
|
|
$
|
10,662
|
|
|
|
12.79
|
%
|
|
$
|
6,609
|
|
|
|
8.00
|
%
|
|
$
|
8,261
|
|
|
|
10.00
|
%
|
|
$
|
9,913
|
|
|
|
12.0
|
%
|
Tier I Capital to Risk-Weighted Assets
|
|
|
9,498
|
|
|
|
11.50
|
|
|
|
4,957
|
|
|
|
6.00
|
|
|
|
6,609
|
|
|
|
8.00
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Common equity Tier I capital to Risk-Weighted Assets
|
|
|
9,498
|
|
|
|
11.50
|
|
|
|
3,718
|
|
|
|
4.50
|
|
|
|
5,370
|
|
|
|
6.50
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier I Capital to Total Assets
|
|
|
9,498
|
|
|
|
8.06
|
|
|
|
4,714
|
|
|
|
4.0
|
|
|
|
5,893
|
|
|
|
5.0
|
|
|
|
9,428
|
|
|
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital to Risk-Weighted Assets
|
|
$
|
10,319
|
|
|
|
11.40
|
%
|
|
$
|
7,240
|
|
|
|
8.0
|
%
|
|
$
|
9,050
|
|
|
|
10.0
|
%
|
|
$
|
10,860
|
|
|
|
12.0
|
%
|
Tier I Capital to Risk-Weighted Assets
|
|
|
9,173
|
|
|
|
10.14
|
|
|
|
5,430
|
|
|
|
6.0
|
|
|
|
7,240
|
|
|
|
8.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Common equity Tier I capital to Risk-Weighted Assets
|
|
|
9,173
|
|
|
|
10.14
|
|
|
|
4,073
|
|
|
|
4.5
|
|
|
|
5,883
|
|
|
|
6.5
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier I Capital to Total Assets
|
|
|
9,173
|
|
|
|
7.59
|
|
|
|
4,836
|
|
|
|
4.0
|
|
|
|
6,045
|
|
|
|
5.0
|
|
|
|
9,672
|
|
|
|
8.0
|
|
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(13)
Regulatory
Matters, Continued
Regulatory Enforcement
Actions
Bank Consent Order
. On November
7, 2016, the Bank agreed to the issuance of a Consent Order by the FDIC and the OFR (the “Consent Order”), which requires
the Bank to take certain measures to improve its safety and soundness. The Consent Order supersedes the prior consent order that
became effective in 2010. Pursuant to the Consent Order, the Bank is required to take certain measures to improve its management,
condition and operations, including actions to improve management practices and board supervision and independence, assure that
its allowance for loan losses is maintained at an appropriate level and improve liquidity. The Consent Order requires the Bank
to adopt and implement a compliance plan to address the Bank’s obligations under the Bank Secrecy Act and related obligations
related to anti-money laundering. The Consent Order prohibits the payment of dividends by the Bank.
The Consent Order continues the requirement
for the Bank to maintain a Tier 1 leverage ratio of at least 8% and a total risk-based capital ratio of 12% beginning 90 days from
the issuance of the Consent Order. At December 31, 2016, the Bank had a Tier 1 leverage ratio of 8.06%, and a total risk-based
capital ratio of 12.79%.
The Consent Order contains the following
principal requirements:
● The Board
of the Bank is required to increase its participation in the affairs of the Bank, assuming full responsibility for the approval
of sound policies and objectives and for the supervision of all of the Bank’s activities, consistent with the role and expertise
commonly expected for directors of banks of comparable size.
● The Bank
is required to have and retain qualified and appropriately experienced senior management, including a chief executive officer,
a chief lending officer and a chief operating officer, who are given the authority to implement the provisions of the Consent Order.
● Any proposed
changes in the Bank’s Board of Directors or senior executive officers are subject to the prior consent of the FDIC and the
OFR.
● The Bank
is required to maintain both a fully funded allowance for loan and lease losses satisfactory to the FDIC and the OFR and a minimum
Tier 1 leverage capital ratio of 8% and a total risk-based capital ratio of 12% for as long as the Consent Order remains in effect.
● The Bank
is required to eliminate from its books, by charge-off or collection, all assets or portions of assets classified “Loss”
and 50 percent of those assets or portions of assets classified “Doubtful” in the most recent examination report that
have not been previously collected or charged-off.
● The Bank
is required to submit a revised plan to reduce the remaining assets classified “Doubtful” and “Substandard”
in the current or any future regulatory examination report.
● The Bank
may not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension
of credit from the Bank that has been charged-off or classified, in whole or in part, “Loss” or “Doubtful”
and is uncollected.
● The Bank
may not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension
of credit from the Bank that has been classified, in whole or part, “Substandard.”
● The Board
is required to review, revise, and implement its written lending and collection policy to provide effective guidance and control
over the Bank’s lending and credit administration functions.
● The Bank
is required to prepare and submit to the Supervisory Authorities an acceptable written business/strategic plan covering the overall
operation of the Bank.
● The Bank
is required to develop and submit to the Supervisory Authorities a written plan and a comprehensive budget for all categories of
income and expense for calendar year 2017 and subsequent years.
● The Bank
is required to implement a written plan to improve liquidity, contingency funding, interest rate risk and asset liability management.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(13)
Regulatory
Matters, Continued
● The Bank
is required to revise and implement a written policy for managing interest rate risk in a manner that is appropriate to the size
of the Bank and the complexity of its assets.
● The Bank
is required to revise and implement its policy for the operation of the Bank in such a manner as to provide adequate internal routines
and controls within the Bank consistent with safe and sound banking practices.
● The Bank
may not accept, renew, or rollover any brokered deposit.
● The Bank
may not declare or pay dividends, pay bonuses, or make any other form of payment outside the ordinary course of business resulting
in a reduction of capital, without the prior written approval of the Supervisory Authorities.
● The Bank
is required to notify the Supervisory Authorities at least sixty days prior to undertaking asset growth that exceeds 10% or more
per annum or initiating material changes in asset or liability composition.
● The Bank
is required to develop, adopt, and implement a plan (“Compliance Plan”) for administration of a program reasonably
designed to ensure and maintain compliance with the law and regulations related to the Bank Secrecy Act and related anti-money
laundering regulations. The Compliance Plan must be consistent with the guidance for BSA/AML Risk Assessment set forth in the Federal
Financial Institutions Examination Council’s Bank Secrecy Act/Anti-Money Laundering Examination Manual.
● The Bank
is required to furnish written progress reports to the Supervisory Authorities within forty-five days from the end of each quarter,
detailing the form and manner of any actions taken to secure compliance with this Consent Order.
● The
Bank is required to develop a revised system of internal controls designed to ensure full compliance with the BSA rules and
regulations (“BSA Internal Controls”) taking into account its size and risk profile and addressing the
deficiencies and recommendations contained in the most recent examination report.
● The Bank
is required to assess its BSA staffing needs to ensure adequate qualified personnel are in place at all times.
● The Bank
is required to contract with an external independent testing firm that specializes in the BSA, AML, and OFAC rules and regulations
for a review. The Bank is required to also engage an independent qualified firm, acceptable to the Supervisory Authorities, to
conduct a review of all high-risk accounts and all high-risk transaction activity for the period beginning February 3, 2014, through
the date of the Consent Order.
● The Bank
is in process of implementing comprehensive policies and plans to address all of the requirements of the Consent Order and has
incorporated recommendations from the FDIC and OFR into these policies and plans.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(13)
Regulatory Matters,
Continued
Management believes that
the Bank has made substantial progress in improving its financial condition through a significant reduction in non-performing
assets and the receipt of capital increases from investors since the 2010 consent order. The Bank is also seeking to
eliminate the other issues raised by the FDIC and the OFR, although the Bank has been hampered by difficulties in raising
capital due to the default under the Debenture and the limits placed on the Company and the Bank under the prior consent
order and the Written Agreement. Management intends to continue its efforts to meet the conditions of the Consent Order and
the Written Agreement.
Company Written Agreement with Reserve
Bank
. On June 22, 2010, the Company and the Reserve Bank entered into a Written Agreement with respect to certain aspects of
the operation and management of the Company. The Written Agreement prohibits, without the prior approval of the Reserve Bank, the
payment of dividends, taking dividends or payments from the Bank, making any interest, principal or other distributions on trust
preferred securities (including the Debenture), incurring, increasing or guaranteeing any debt, purchasing or redeeming any shares
of stock, or appointing any new director or senior executive officer. Management believes that the Company is in substantial compliance
with the requirements of the Written Agreement.
(14)
Loan
Loss Recovery
.
On January 6, 2016, the Bank completed a sale of a judgement on a defaulted credit that resulted in a $1.8
million recovery of previously charged-off amounts to the Allowance for Loan and Lease Losses (“ALLL”). This increases
the balance of the ALLL to approximately $3.9 million at December 31, 2016. On February 12, 2016, and amended May 6, 2016, pursuant
to the terms and requirements of the Consent Order, Management submitted a written request to the FDIC for a partial reversal of
the ALLL. As of this date, no response from the FDIC has been received and management does not expect a response until the next
safety and soundness examination which is expected to be performed in first and second quarters of 2017.
(15)
Reclassification
.
During the quarter ended March 31, 2016, the Company agreed to issue 46,296 shares to the Bank’s Chairman as compensation.
The Company recorded compensation expense of $200,000 based on the fair market value of the shares at that time, and reflected
the issuance of the shares as an increase in stockholders’ equity. The Bank’s Chairman has not yet taken delivery of
the shares. As a result, during the quarter ended September 30, 2016, the Company determined to reclassify the transaction as a
liability of the Company (rather than an increase in stockholders’ equity) until the issuance of the shares. The reclassification
had no effect on the Company’s net loss for the year ended December 31, 2016.
(16)
Dividends.
The Company
is limited in the amount of cash dividends that may be paid. Banking regulations place certain restrictions on dividends and loans
or advances made by the Bank to the Holding Company. The amount of cash dividends that may be paid by the Bank to the Holding Company
is based on the Bank’s net earnings of the current year combined with the Bank’s retained earnings of the preceding
two years, as defined by state banking regulations. However, for any dividend declaration, the Company must consider additional
factors such as the amount of current period net earnings, liquidity, asset quality, capital adequacy and economic conditions.
It is likely that these factors would further limit the amount of dividends which the Company could declare. In addition, bank
regulators have the authority to prohibit banks from paying dividends if they deem such payment to be an unsafe or unsound practice.
At December 31, 2016, the Bank and Holding Company could not pay cash dividends (See Note 13).
(17)
Contingencies
.
Various
claims also arise from time to time in the normal course of business. In the opinion of management, none have occurred that will
have a material effect on the Company’s consolidated financial statements.
(18)
Retirement Plans
.
The
Company has a 401(k) Profit Sharing plan covering all eligible employees who are over the age of twenty one and have completed
one year of service. The Company may make a matching contribution each year. The Company did not make any matching
contributions in connection with this plan during the years ended December 31, 2016 or 2015.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(19)
Fair Value Measurement
Impaired collateral-dependent
loans are carried at fair value when the current collateral value is lower than the carrying value of the loan. Those impaired
collateral-dependent loans which are measured at fair value or a nonrecurring basis are as follows (in thousands):
|
|
At December 31, 2016
|
|
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Losses
|
|
|
Losses Recorded in Operations For the Year Ended December 31, 2016
|
|
Residential real estate
|
|
$
|
375
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
375
|
|
|
$
|
126
|
|
|
$
|
—
|
|
|
|
At December 31, 2015
|
|
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Losses
|
|
|
Losses Recorded in Operations For the Year Ended December 31, 2015
|
|
Residential real estate
|
|
$
|
671
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
671
|
|
|
$
|
202
|
|
|
$
|
—
|
|
Commercial real estate
|
|
|
2,094
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,094
|
|
|
|
2,055
|
|
|
|
—
|
|
|
|
$
|
2,765
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,765
|
|
|
$
|
2,257
|
|
|
$
|
—
|
|
Foreclosed real
estate is recorded at fair value less estimated costs to sell. Foreclosed real estate which is measured at fair value on a nonrecurring
basis is as follows (in thousands):
|
|
At Year End
|
|
|
|
|
|
|
Fair
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
Losses
|
|
|
Losses
Recorded During the Year
|
|
At December 31, 2015
|
|
$
|
4,029
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,029
|
|
|
$
|
1,403
|
|
|
$
|
260
|
|
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(20) Holding Company Financial Information
The Holding Company’s
unconsolidated financial information as of December 31, 2016 and 2015 and for the years then ended follows (in thousands):
Condensed Balance
Sheets
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
164
|
|
|
$
|
13
|
|
Investment in subsidiary
|
|
|
9,245
|
|
|
|
9,036
|
|
Other assets
|
|
|
180
|
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,589
|
|
|
$
|
9,229
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
1,353
|
|
|
$
|
1,107
|
|
Junior subordinated debenture
|
|
|
5,155
|
|
|
|
5,155
|
|
Stockholders’ equity
|
|
|
3,081
|
|
|
|
2,967
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
9,589
|
|
|
$
|
9,229
|
|
Condensed Statements of Operations
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Earnings of subsidiary
|
|
$
|
302
|
|
|
$
|
532
|
|
Interest expense
|
|
|
(193
|
)
|
|
|
(162
|
)
|
Other expense
|
|
|
(505
|
)
|
|
|
(533
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(396
|
)
|
|
$
|
(163
|
)
|
Condensed Statements of Cash Flows
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(396
|
)
|
|
$
|
(163
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Stock compensation to directors
|
|
|
46
|
|
|
|
242
|
|
Stock compensation for services
|
|
|
128
|
|
|
|
—
|
|
Equity in undistributed earnings of subsidiary
|
|
|
(302
|
)
|
|
|
(532
|
)
|
Increase in other liabilities
|
|
|
246
|
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(278
|
)
|
|
|
(146
|
)
|
|
|
|
|
|
|
|
|
|
Cash flow from investing activities-
|
|
|
|
|
|
|
|
|
Investment in subsidiary
|
|
|
(21
|
)
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock, net
|
|
|
375
|
|
|
|
30
|
|
Proceeds from sale of preferred stock
|
|
|
75
|
|
|
|
100
|
|
Net cash provided by financing activities
|
|
|
450
|
|
|
|
130
|
|
Net increase (decrease) in cash
|
|
|
151
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
Cash at beginning of the year
|
|
|
13
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year
|
|
$
|
164
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
Noncash transaction-
|
|
|
|
|
|
|
|
|
Change in accumulated other comprehensive loss of subsidiary, net change in unrealized loss on securities available for sale
|
|
$
|
(114
|
)
|
|
$
|
(221
|
)
|
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(21)
Subsequent Event.
Under the terms
of the Consent Order, the Bank is not permitted to solicit brokered deposits. In March 2017, the FDIC notified the Bank
that it considers a significant portion of the Bank’s certificates of deposit to be brokered deposits due to the rates
paid on such deposits, even though such deposits were not obtained through any deposit brokers. The Bank has requested a
waiver of the prohibition on brokered deposits from the FDIC. If this waiver is not granted, then the Bank would not be able
to accept, renew or rollover the existing certificates of deposit that are viewed as brokered deposits, which would likely
have an adverse effect on the Bank’s liquidity.