Notes
to Consolidated Financial Statements
At
December 31, 2022 and 2021 and for the Years Then Ended
(1)
Summary of Significant Accounting Policies
Organization. OptimumBank
Holdings, Inc. (the “Company”) is a one-bank holding company and owns 100%
of OptimumBank (the “Bank”), a Florida-chartered commercial bank. The Company’s only business is the operation of
the Bank. The Bank’s deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation
(“FDIC”). The Bank offers a variety of community banking services to individual and corporate customers through its two
banking offices located in Broward County, Florida. The Bank is planning to open an additional branch office in Miami-Dade County
in the third quarter of 2023.
Basis
of Presentation. The accompanying consolidated financial statements include the accounts of the Company and the Bank. All significant
intercompany accounts and transactions have been eliminated in consolidation. The accounting and reporting practices of the Company conform
to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices within the
banking industry. The following summarizes the more significant of these policies and practices.
Subsequent
Events. The Company has evaluated subsequent events through March 6, 2023, which is the date the consolidated financial statements
were issued, determining no additional events required disclosure.
Use
of Estimates. In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that
are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and
the valuation of the deferred tax asset.
Cash
and Cash Equivalents. For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances
due from banks and interest-bearing deposits with banks, all of which have original maturities of ninety days or less.
The
Company may be required by law or regulation to maintain cash reserves in the form of vault cash or deposit with Federal Reserve Banks
or in Pass-through accounts with other banks. This requirement is based on the amount of the Bank’s transaction deposit accounts.
As of December 31, 2022 and 2021, the Bank did not have a reserve requirement as the Federal Reserve Board lowered the requirements to
zero for all depository institutions.
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
Debt
Securities. Debt securities may be classified as trading, held to maturity or available for sale. Trading debt securities are
held principally for resale and recorded at their fair values. Unrealized gains and losses on trading debt securities are included immediately
in earnings. Held-to-maturity debt securities are those which management has the positive intent and ability to hold to maturity and
are reported at amortized cost. Available-for-sale debt securities consist of debt securities not classified as trading debt securities
nor as held to maturity debt securities. Unrealized holding gains and losses on available for sale debt securities are reported as a
net amount in accumulated other comprehensive loss in stockholders’ equity until realized. Gains and losses on the sale of debt
securities available for sale are determined using the specific-identification method. Premiums and discounts on debt securities are
recognized in interest income using the interest method over the period to maturity.
Management
evaluates debt securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market
concerns warrant such evaluation. A debt security is impaired if the fair value is less than its carrying value at the financial statement
date. When a debt security is impaired, the Company determines whether this impairment is temporary or other-than-temporary. In estimating
other-than-temporary impairment (“OTTI”) losses, management assesses whether it intends to sell, or it is more likely than
not that it will be required to sell, a debt security in an unrealized loss position before recovery of its amortized cost basis. If
either of these criteria is met, the entire difference between amortized cost and fair value is recognized in earnings. For debt securities
that do not meet the aforementioned criteria, the amount of impairment recognized in operations is limited to the amount related to credit
losses, while impairment related to other factors is recognized in other comprehensive income. Management utilizes cash flow models to
segregate impairments to distinguish between impairment related to credit losses and impairment related to other factors. To assess for
OTTI, management considers, among other things, (i) the severity and duration of the impairment; (ii) the ratings of the debt security;
(iii) the overall transaction structure (the Company’s position within the structure, the aggregate, near-term financial performance
of the underlying collateral, delinquencies, defaults, loss severities, recoveries, prepayments, cumulative loss projections, and discounted
cash flows); and (iv) the timing and magnitude of a break in modeled cash flows.
Loans.
Loans 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.
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
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 earnings. 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, 2022 or 2021.
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.
The
allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. For such
loans, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loans
are lower than the carrying value of those loans. The general component covers all other loans and is based on historical loss experience
adjusted for qualitative factors.
The
historical loss component of the allowance is determined by losses recognized by portfolio segment over the preceding three years. The
historical loss experience is adjusted for the risks by each portfolio segment. Risk factors impacting loans in each of the portfolio
segments include: (1) changes in national, regional and local economic conditions that affect the collectability of the loan portfolio
(2) changes in collateral value of loans (3) changes in lending policies and procedures, risk selection and underwriting standards (4)
changes in the volume and severity of past due loans, nonaccrual loans or loans classified special mention, substandard, doubtful or
loss (5) the existence and effect of any concentrations of credit and changes in the level of such concentrations (6) changes in the
nature and volume of the loan portfolio and terms of loans, (7) changes in the experience, ability and depth of lending management and
other relevant staff, (8) quality of loan review, (9) the effect of other external factors, trends or uncertainties that could affect
management’s estimate of probable losses, such as competition and industry conditions.
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.
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
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.
Leases.
We determine if a contract contains a lease at inception and recognize operating lease right-of-use assets and operating lease
liabilities based on the present value of the future minimum lease payments at the lease commencement date. As our leases do not provide
implicit rates, we use our incremental borrowing rate commensurate with the underlying lease terms. Lease agreements that have lease
and non-lease components, are accounted for as a single lease component. Lease expense is recognized on a straight-line basis over the
lease term.
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.
Revenue
Recognition. The majority of the Company’s revenues come from interest income and financial assets, including loans, and
securities which are outside the accounting guidance with respect to revenue from contracts with customers. The Company’s services
that fall within this guidance are presented within noninterest income and are recognized as revenue as the Company satisfies its obligation
to the customer. The following summarizes the Company’s revenue recognition accounting policy for service charges on deposit accounts
and gain on sale of premises and equipment.
Service
Charges on Deposit Accounts. Deposit related fees consist of fees earned on transaction-based, account maintenance, and overdraft
services. Transaction-based fees, which include services such as wire fees, ATM use fees, debit card interchange fees, stop payment charges,
statement rendering, and ACH fees, are recognized at the time the transaction is executed as that it the point in time the Company fulfills
the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of
a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point
in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.
Gain
on sale of premises and equipment. Gain on sale of premises and equipment is recognized when control of the property was transferred
and it is probable that substantially all consideration will be collected.
(continued)
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 are recorded as a component of income tax expense.
The
Company recognizes interest and penalties on income taxes as a component of income tax expense.
The
Company and the Bank file a consolidated income tax return. Income taxes are allocated proportionately to the 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 earnings was approximately $59,000 and $26,000 during the years ended December 31, 2022 and 2021,
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 earnings.
Net
Earnings Per Share. Basic net earnings per share is computed on the basis of the weighted-average number of common shares outstanding.
In 2022 and 2021, basic and diluted net earnings per share were the same because there are no outstanding potentially diluted securities.
Earnings per common share has been computed based on the following:
Schedule of Weighted Average Number of Common Shares Outstanding
| |
2022 | | |
2021 | |
| |
Year Ended December 31, | |
| |
2022 | | |
2021 | |
Weighted-average number of common shares outstanding used to calculate basic and diluted net earnings per common share | |
| 5,954,847 | | |
| 3,899,118 | |
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
Off-Balance-Sheet
Financial Instruments. In the ordinary course of business, the Company may enter into off-balance-sheet financial instruments
consisting of commitments to extend credit, unused lines of credit, and standby letters of credit. Such financial instruments are recorded
in the consolidated financial statements when they are funded.
Fair
Value Measurements. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. The fair value hierarchy requires the Company to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. The hierarchy describes three levels of inputs that may be used to measure fair value:
Level
1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level
2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted
prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not
active; and model-driven valuations whose inputs are observable or whose significant value drivers are observable. Valuations may be
obtained from, or corroborated by, third-party pricing services.
Level
3: Unobservable inputs to measure fair value of assets and liabilities for which there is little, if any market activity at the measurement
date, using reasonable inputs and assumptions based upon the best information at the time, to the extent that inputs are available without
undue cost and effort.
The
following describes valuation methodologies used for assets measured at fair value:
Debt
Securities. Where quoted prices are available in an active market, debt securities are classified within Level 1 of the valuation
hierarchy. Level 1 debt securities include highly liquid government bonds and certain mortgage products. If quoted market prices are
not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted
cash flows. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include certain
collateralized mortgage obligations, mortgage-backed securities, SBA pool securities and taxable municipal securities.
Impaired
Loans. The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real
estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales
and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences
between the comparable sales and income data available for similar loans and collateral underlying such loans. Such adjustments result
in level 3 fair value classification for impaired loans measured at fair value. Non-real estate collateral may be valued using an appraisal,
net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical
knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client
and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for
additional impairment and adjusted in accordance with the allowance policy.
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
Fair
Values of Financial Instruments. The following methods and assumptions were used by the Company in estimating fair values of
financial instruments disclosed herein:
Cash
and Cash Equivalents. The carrying amounts of cash and cash equivalents approximate their fair value (Level 1).
Debt
Securities. Fair values for debt securities are based on the framework for measuring fair value established by GAAP (Level 2).
Loans.
For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying
values. Fair values for fixed-rate loans, including fixed-rate residential and commercial real estate and commercial loans, are estimated
using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar
credit quality (Level 3).
Federal
Home Loan Bank Stock. Fair value of the Company’s investment in Federal Home Loan Bank stock is based on its redemption
value, which is its cost of $100 per share (Level 3).
Accrued
Interest Receivable. The carrying amount of accrued interest approximates its fair value (Level 3).
Deposit
Liabilities. The fair values disclosed for demand, NOW, money-market and savings deposits are, by definition, equal to the amount
payable on demand at the reporting date (that is, their carrying amounts). Fair values for fixed-rate time deposits are estimated using
a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated expected
monthly maturities of time deposits (Level 3).
Federal
Home Loan Bank Advances. Fair values of Federal Home Loan Bank advances are estimated using discounted cash flow analysis based
on the Company’s current incremental borrowing rates for similar types of borrowings (Level 3).
Off-Balance-Sheet
Financial Instruments. Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing (Level 3).
Comprehensive
Loss (Income). GAAP generally requires that recognized revenue, expenses, gains and losses be included in net earnings. Although
certain changes in consolidated assets and liabilities, such as unrealized gains and losses on debt securities available for sale, are
reported as a separate component of the equity section of the consolidated balance sheets, such items along with net earnings, are components
of comprehensive (loss) income.
Accumulated
other comprehensive loss consists of the following (in thousands):
Schedule of Accumulated and Other Comprehensive (Loss)
| |
2022 | | |
2021 | |
| |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Unrealized loss on debt securities available for sale | |
$ | (7,786 | ) | |
$ | (816 | ) |
Unamortized portion of unrealized loss related to debt securities available for sale transferred to debt securities held-to-maturity | |
| (18 | ) | |
| (34 | ) |
Income tax benefit | |
| 1,978 | | |
| 215 | |
| |
| | | |
| | |
Accumulated other comprehensive loss | |
$ | (5,826 | ) | |
$ | (635 | ) |
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
Reclassifications.
Certain amounts in 2021 consolidated financial statements have been reclassified to conform to the 2022 consolidated financial
statement presentation.
Adoption
on New Accounting Standards: On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected
loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses
under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity
debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters
of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with
Topic 842 on leases. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to
require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does
not intend to sell or believes that is more likely than not they will be required to sell.
The
Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost, and off-balance-sheet
(OBS) credit exposures. Results for reporting periods beginning after January 1, 2023, will be presented under ASC 326 while prior period
amounts will continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings
of $241,000 as of January 1, 2023, for the cumulative effect of adopting ASC 326.
(2)
Debt Securities. Debt securities have been classified according to management’s intent. The carrying amount of debt securities
and approximate fair values are as follows (in thousands):
Schedule of Amortized Cost and Approximate Fair Values of Debt Securities
| |
Amortized Cost | | |
Gross Unrealized Gains | | |
Gross
Unrealized Losses | | |
Fair Value | |
| |
| | |
| | |
| | |
| |
At December 31, 2022: | |
| | | |
| | | |
| | | |
| | |
Available for sale: | |
| | | |
| | | |
| | | |
| | |
SBA Pool Securities | |
$ | 834 | | |
$ | 1 | | |
$ | (18 | ) | |
$ | 817 | |
Collateralized mortgage obligations | |
| 145 | | |
| — | | |
| (15 | ) | |
| 130 | |
Taxable municipal securities | |
| 16,729 | | |
| — | | |
| (5,109 | ) | |
| 11,620 | |
Mortgage-backed securities | |
| 15,180 | | |
| — | | |
| (2,645 | ) | |
| 12,535 | |
Total | |
$ | 32,888 | | |
$ | 1 | | |
$ | (7,787 | ) | |
$ | 25,102 | |
| |
| | | |
| | | |
| | | |
| | |
Held-to-maturity: | |
| | | |
| | | |
| | | |
| | |
Collateralized mortgage obligations | |
$ | 475 | | |
$ | — | | |
$ | (35 | ) | |
$ | 440 | |
Mortgage-backed securities | |
| 65 | | |
| — | | |
| (1 | ) | |
| 64 | |
Total | |
$ | 540 | | |
$ | — | | |
$ | (36 | ) | |
$ | 504 | |
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(2)
Debt Securities, Continued.
| |
Amortized Cost | | |
Gross
Unrealized Gains | | |
Gross
Unrealized Losses | | |
Fair Value | |
| |
| | |
| | |
| | |
| |
At December 31, 2021: | |
| | | |
| | | |
| | | |
| | |
Available for sale: | |
| | | |
| | | |
| | | |
| | |
SBA Pool Securities | |
$ | 1,097 | | |
$ | 1 | | |
$ | (26 | ) | |
$ | 1,072 | |
Collateralized mortgage obligations | |
| 210 | | |
| 7 | | |
| — | | |
| 217 | |
Taxable municipal securities | |
| 16,766 | | |
| 19 | | |
| (359 | ) | |
| 16,426 | |
Mortgage-backed securities | |
| 17,137 | | |
| 19 | | |
| (477 | ) | |
| 16,679 | |
Total | |
$ | 35,210 | | |
$ | 46 | | |
$ | (862 | ) | |
$ | 34,394 | |
| |
| | | |
| | | |
| | | |
| | |
Held-to-maturity: | |
| | | |
| | | |
| | | |
| | |
Collateralized mortgage obligations | |
$ | 854 | | |
$ | 28 | | |
$ | — | | |
$ | 882 | |
Mortgage-backed securities | |
| 186 | | |
| 3 | | |
| — | | |
| 189 | |
Total | |
$ | 1,040 | | |
$ | 31 | | |
$ | — | | |
$ | 1,071 | |
There
were no sales of debt securities available for sale during the years ended December 31, 2022 and 2021.
Debt
securities with gross unrealized losses, aggregated by investment category and length of time that individual debt securities have been
in a continuous loss position, is as follows (in thousands):
Schedule
of Debt Securities with Gross Unrealized Losses, by Investment Category
| |
Over Twelve Months | | |
Less Than Twelve Months | |
| |
Gross
Unrealized Losses | | |
Fair Value | | |
Gross
Unrealized Losses | | |
Fair Value | |
At December 31, 2022: | |
| | | |
| | | |
| | | |
| | |
Available for Sale: | |
| | | |
| | | |
| | | |
| | |
SBA Pool Securities | |
$ | 18 | | |
$ | 657 | | |
$ | — | | |
$ | — | |
Collateralized mortgage obligations | |
$ | — | | |
$ | — | | |
$ | 15 | | |
$ | 130 | |
Taxable municipal securities | |
$ | 5,109 | | |
$ | 11,620 | | |
$ | — | | |
$ | — | |
Mortgage-backed securities | |
$ | 2,621 | | |
$ | 12,292 | | |
$ | 24 | | |
$ | 243 | |
Total | |
$ | 7,748 | | |
$ | 24,569 | | |
$ | 39 | | |
$ | 373 | |
At December 31, 2021: | |
| | | |
| | | |
| | | |
| | |
Available for Sale: | |
| | | |
| | | |
| | | |
| | |
SBA Pool Securities | |
$ | 26 | | |
$ | 895 | | |
$ | — | | |
$ | — | |
Taxable municipal securities | |
$ | 81 | | |
$ | 1,853 | | |
$ | 278 | | |
$ | 12,828 | |
Mortgage-backed securities | |
$ | 242 | | |
$ | 6,179 | | |
$ | 235 | | |
$ | 9,984 | |
Total | |
$ | 349 | | |
$ | 8,927 | | |
$ | 513 | | |
$ | 22,812 | |
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(2)
Debt Securities, Continued.
At
December 31, 2022 and 2021, the unrealized losses on forty and twenty-nine debt securities, respectively, were caused by market conditions.
It is expected that the debt securities will 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.
The
Company’s debt securities available-for-sale and held-to-maturity all have contractual maturity dates which are greater than ten
years as of December 31, 2022. Expected maturities of these debt securities will differ from contractual maturities because borrowers
have the right to call or repay obligations with or without call or prepayment penalties.
(3)
Loans. The components of loans are as follows (in thousands):
Schedule
of Components of Loans
| |
At December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Residential real estate | |
$ | 50,354 | | |
$ | 32,583 | |
Multi-family real estate | |
| 69,555 | | |
| 48,592 | |
Commercial real estate | |
| 310,695 | | |
| 129,468 | |
Land and construction | |
| 17,286 | | |
| 3,772 | |
Commercial | |
| 5,165 | | |
| 14,157 | |
Consumer | |
| 30,323 | | |
| 22,827 | |
| |
| | | |
| | |
Total loans | |
| 483,378 | | |
| 251,399 | |
| |
| | | |
| | |
Deduct: | |
| | | |
| | |
Net deferred loan fees | |
| (367 | ) | |
| (422 | ) |
Allowance for loan losses | |
| (5,793 | ) | |
| (3,075 | ) |
| |
| | | |
| | |
Loans, net | |
$ | 477,218 | | |
$ | 247,902 | |
The
Company makes the majority of its loans to borrowers in Broward County, Florida and portions of Palm Beach and Miami-Dade Counties, Florida.
Although the Company has a diversified loan portfolio, a significant portion of its borrowers’ ability to repay their loans and
meet their contractual obligations to the Company is dependent upon the economy in Broward, Palm Beach and Miami-Dade Counties, Florida.
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(3)
Loans, Continued. An analysis of the change in the allowance for loan losses for the years ended December 31, 2022 and 2021
follows (in thousands):
Schedule
of Changes in Allowance for Loan Losses
| |
Residential Real Estate | | |
Multi- Family Real Estate | | |
Commercial Real Estate | | |
Land and Construction | | |
Commercial | | |
Consumer | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Year Ended December 31, 2022: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Beginning balance | |
$ | 482 | | |
$ | 535 | | |
$ | 1,535 | | |
$ | 32 | | |
$ | 74 | | |
$ | 417 | | |
$ | 3,075 | |
Provision for loan losses | |
| 286 | | |
| 213 | | |
| 1,727 | | |
| 141 | | |
| 244 | | |
| 855 | | |
| 3,466 | |
Charge-offs | |
| — | | |
| — | | |
| — | | |
| — | | |
| (97 | ) | |
| (804 | ) | |
| (901 | ) |
Recoveries | |
| — | | |
| — | | |
| — | | |
| — | | |
| 56 | | |
| 97 | | |
| 153 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending balance | |
$ | 768 | | |
$ | 748 | | |
$ | 3,262 | | |
$ | 173 | | |
$ | 277 | | |
$ | 565 | | |
$ | 5,793 | |
Year Ended December 31, 2021: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Beginning balance | |
$ | 463 | | |
$ | 253 | | |
$ | 884 | | |
$ | 52 | | |
$ | 103 | | |
$ | 151 | | |
$ | 1,906 | |
Credit) provision for loan losses | |
| (11 | ) | |
| 282 | | |
| 651 | | |
| (28 | ) | |
| (231 | ) | |
| 510 | | |
| 1,173 | |
Charge-offs | |
| — | | |
| — | | |
| — | | |
| — | | |
| (23 | ) | |
| (254 | ) | |
| (277 | ) |
Recoveries | |
| 30 | | |
| — | | |
| — | | |
| 8 | | |
| 225 | | |
| 10 | | |
| 273 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending balance | |
$ | 482 | | |
$ | 535 | | |
$ | 1,535 | | |
$ | 32 | | |
$ | 74 | | |
$ | 417 | | |
$ | 3,075 | |
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, 2022 and 2021 follows (in thousands):
| |
Residential Real Estate | | |
Multi-Family Real Estate | | |
Commercial Real Estate | | |
Land and Construction | | |
Commercial | | |
Consumer | | |
Total | |
At December 31, 2022: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually evaluated for impairment: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Recorded investment | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
Balance in allowance for loan losses | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Collectively evaluated for impairment: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Recorded investment | |
$ | 50,354 | | |
$ | 69,555 | | |
$ | 310,695 | | |
$ | 17,286 | | |
$ | 5,165 | | |
$ | 30,323 | | |
$ | 483,378 | |
Balance in allowance for loan losses | |
$ | 768 | | |
$ | 748 | | |
$ | 3,262 | | |
$ | 173 | | |
$ | 277 | | |
$ | 565 | | |
$ | 5,793 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
At December 31, 2021: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually evaluated for impairment: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Recorded investment | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
Balance in allowance for loan losses | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Collectively evaluated for impairment: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Recorded investment | |
$ | 32,583 | | |
$ | 48,592 | | |
$ | 129,468 | | |
$ | 3,772 | | |
$ | 14,157 | | |
$ | 22,827 | | |
$ | 251,399 | |
Balance in allowance for loan losses | |
$ | 481 | | |
$ | 535 | | |
$ | 1,535 | | |
$ | 32 | | |
$ | 72 | | |
$ | 420 | | |
$ | 3,075 | |
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(3)
Loans, Continued.
Residential
Real Estate, Multi-Family Real Estate, Commercial Real Estate, Land and Construction. All loans are underwritten in accordance
with policies set forth and approved by the Board of Directors (the “Board”), including repayment capacity and source, value
of the underlying property, credit history and stability. Residential real estate loans are underwritten based on repayment capacity
and source, value of the underlying property, credit history and stability. Multi-family and commercial real estate loans are secured
by the subject property and are underwritten based upon standards set forth in the policies approved by the Company’s Board. Such
standards include, among other factors, loan to value limits, cash flow coverage and general creditworthiness of the obligors. Construction
loans to borrowers finance the construction of owner occupied and leased properties. These loans are categorized as construction loans
during the construction period, later converting to commercial or residential real estate loans after the construction is complete and
amortization of the loan begins. Real estate development and construction loans are approved based on an analysis of the borrower and
guarantor, the viability of the project and on an acceptable percentage of the appraised value of the property securing the loan. Real
estate development and construction loan funds are disbursed periodically based on the percentage of construction completed. The Company
carefully monitors these loans with on-site inspections and requires the receipt of lien waivers on funds advanced. Development and construction
loans are typically secured by the properties under development or construction, and personal guarantees are typically obtained. Further,
to assure that reliance is not placed solely on the value of the underlying property, the Company considers the market conditions and
feasibility of proposed projects, the financial condition and reputation of the borrower and guarantors, the amount of the borrower’s
equity in the project, independent appraisals, cost estimates and pre-construction sales information. The Company also makes loans on
occasion for the purchase of land for future development by the borrower. Land loans are extended for future development for either commercial
or residential use by the borrower. The Company carefully analyzes the intended use of the property and the viability thereof.
Commercial.
Commercial business loans and lines of credit consist of loans to small- and medium-sized companies in the Company’s market
area. Commercial loans are generally used for working capital purposes or for acquiring equipment, inventory or furniture. Primarily
all of the Company’s commercial loans are secured loans, along with a small amount of unsecured loans. The Company’s underwriting
analysis consists of a review of the financial statements of the borrower, the lending history of the borrower, the debt service capabilities
of the borrower, the projected cash flows of the business, the value of the collateral, if any, and whether the loan is guaranteed by
the principals of the borrower. These loans are generally secured by accounts receivable, inventory and equipment. Commercial loans are
typically made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business, which
makes them of higher risk than residential loans and the collateral securing loans may be difficult to appraise and may fluctuate in
value based on the success of the business. The Company seeks to minimize these risks through its underwriting standards.
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):
Schedule of Loans by Credit Quality
| |
Pass | | |
OLEM (Other Loans Especially Mentioned) | | |
Sub- standard | | |
Doubtful | | |
Loss | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| |
At December 31, 2022: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential real estate | |
$ | 50,354 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 50,354 | |
Multi-family real estate | |
| 69,555 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 69,555 | |
Commercial real estate | |
| 309,458 | | |
| — | | |
| 1,237 | | |
| — | | |
| — | | |
| 310,695 | |
Land and construction | |
| 17,286 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 17,286 | |
Commercial | |
| 5,165 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 5,165 | |
Consumer | |
| 30,323 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 30,323 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 482,141 | | |
$ | — | | |
$ | 1,237 | | |
$ | — | | |
$ | — | | |
$ | 483,378 | |
A December 31, 2021: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential real estate | |
$ | 30,080 | | |
$ | — | | |
$ | 2,503 | | |
$ | — | | |
$ | — | | |
$ | 32,583 | |
Multi-family real estate | |
| 47,962 | | |
| 630 | | |
| — | | |
| — | | |
| — | | |
| 48,592 | |
Commercial real estate | |
| 125,620 | | |
| 3,848 | | |
| — | | |
| — | | |
| — | | |
| 129,468 | |
Land and construction | |
| 3,772 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 3,772 | |
Commercial | |
| 13,960 | | |
| 197 | | |
| — | | |
| — | | |
| — | | |
| 14,157 | |
Consumer | |
| 22,827 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 22,827 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 244,221 | | |
$ | 4,675 | | |
$ | 2,503 | | |
$ | — | | |
$ | — | | |
$ | 251,399 | |
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 – |
an Other Loan Especially Mentioned has potential weaknesses
that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration
of the repayment prospects for the asset or the Company’s credit position at some future date. |
|
|
|
|
Substandard – |
a Substandard loan is inadequately protected by the
current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined
weakness or weaknesses that jeopardize the liquidation of the debt. Included in this category are loans that are current on their
payments, but the Bank is unable to document the source of repayment. They are characterized by the distinct possibility that the
Company will sustain some loss if the deficiencies are not corrected. |
|
|
|
|
Doubtful – |
a loan classified as Doubtful has all the weaknesses
inherent in one classified as Substandard, with the added characteristics that the weaknesses make collection or liquidation in full,
on the basis of currently existing facts, conditions, and values, highly questionable and improbable. This classification does not
mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off
this basically worthless asset even though partial recovery may be affected in the future. The Company charges off any loan classified
as Doubtful. |
|
|
|
|
Loss – |
a loan classified as Loss is considered uncollectible
and of such little value that continuance as a bankable asset is not warranted. This classification does not mean that the asset
has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless
asset even though partial recovery may be affected in the future. The Company fully charges off any loan classified as Loss. |
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(3)
Loans, Continued. Age analysis of past due loans at December 31, 2022 and 2021 is as follows (in thousands):
Schedule of Age Analysis of
Past-due Loans
| |
Accruing Loans | | |
| | |
| |
| |
30-59 Days Past Due | | |
60-89 Days Past Due | | |
Greater Than 90 Days Past Due | | |
Total Past Due | | |
Current | | |
Nonaccrual Loans | | |
Total Loans | |
At December 31, 2022: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential real estate | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 50,354 | | |
$ | — | | |
$ | 50,354 | |
Multi-family real estate | |
| — | | |
| — | | |
| — | | |
| — | | |
| 69,555 | | |
| — | | |
| 69,555 | |
Commercial real estate | |
| — | | |
| — | | |
| — | | |
| — | | |
| 310,695 | | |
| — | | |
| 310,695 | |
Land and construction | |
| — | | |
| — | | |
| — | | |
| — | | |
| 17,286 | | |
| — | | |
| 17,286 | |
Commercial | |
| — | | |
| — | | |
| — | | |
| — | | |
| 5,165 | | |
| — | | |
| 5,165 | |
Consumer | |
| 150 | | |
| 27 | | |
| — | | |
| 177 | | |
| 30,146 | | |
| — | | |
| 30,323 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 150 | | |
$ | 27 | | |
$ | — | | |
$ | 177 | | |
$ | 483,201 | | |
$ | — | | |
$ | 483,378 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
At December 31, 2021: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential real estate | |
$ | 198 | | |
$ | — | | |
$ | — | | |
$ | 198 | | |
$ | 32,385 | | |
$ | — | | |
$ | 32,583 | |
Multi-family real estate | |
| — | | |
| — | | |
| — | | |
| — | | |
| 48,592 | | |
| — | | |
| 48,592 | |
Commercial real estate | |
| — | | |
| — | | |
| — | | |
| — | | |
| 129,468 | | |
| — | | |
| 129,468 | |
Land and construction | |
| — | | |
| — | | |
| — | | |
| — | | |
| 3,772 | | |
| — | | |
| 3,772 | |
Commercial | |
| — | | |
| — | | |
| — | | |
| — | | |
| 14,157 | | |
| — | | |
| 14,157 | |
Consumer | |
| 69 | | |
| — | | |
| — | | |
| 69 | | |
| 22,758 | | |
| — | | |
| 22,827 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 267 | | |
$ | — | | |
$ | — | | |
$ | 267 | | |
$ | 251,132 | | |
$ | — | | |
$ | 251,399 | |
The
Company had no impaired loans at December 31, 2022 and 2021
The
average recorded investment in impaired loans and interest income recognized and received on impaired loans are as follows (in thousands):
Schedule
of Interest Income Recognized and Received on Impaired Loans
| |
For the Year Ended December 31, | |
| |
2022 | | |
2021 | |
| |
Average Recorded Investment | | |
Interest Income Recognized | | |
Interest Income Received | | |
Average Recorded Investment | | |
Interest Income Recognized | | |
Interest Income Received | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Residential real estate | |
$ | — | | |
$ | | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
Commercial real estate | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 658 | | |
$ | 7 | | |
$ | 7 | |
Commercial | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
Total | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 658 | | |
$ | 7 | | |
$ | 7 | |
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(3)
Loans, Continued. No loans have been determined to be troubled debt restructurings (TDR’s) during the year ended December
31, 2022 and 2021. At December 31, 2022 and 2021, there were no loans modified and entered into TDR’s within the past twelve months,
that subsequently defaulted during the years ended December 31, 2022 or 2021.
(4)
Premises and Equipment A summary of premises and equipment follows (in thousands):
Schedule of Premises and equipment
| |
2022 | | |
2021 | |
| |
At December 31, | |
| |
2022 | | |
2021 | |
Furniture, fixtures and equipment | |
$ | 1,138 | | |
$ | 819 | |
Leasehold improvements | |
| 657 | | |
| 654 | |
| |
| | | |
| | |
Total, at cost | |
| 1,795 | | |
| 1,473 | |
| |
| | | |
| | |
Less accumulated depreciation and amortization | |
| (861 | ) | |
| (630 | ) |
| |
| | | |
| | |
Premises and equipment, net | |
$ | 934 | | |
$ | 843 | |
During
the year ended December 31, 2021, the Company sold one of its branch locations to a third-party. The sale was completed in November 2021
for $1,081,000. In connection with the sale, the Company recorded a gain in the consolidated statements of earnings of $340,000 in 2021.
(5)
Leases. The Company’s operating lease obligation is for two of its branch locations. as well as a third location expected
to open in 2023 in North Miami Beach, Florida. Our leases have a weighted-average remaining lease term of approximately 8.3 years and
do not offer options to extend the leases. The components of lease expense and other lease information are as follows (in thousands):
Schedule of Components of Lease Cost
| |
2022 | | |
2021 | |
| |
For the year ended December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Operating lease cost | |
$ | 280 | | |
$ | 213 | |
Cash paid for amounts included in measurement of lease liabilities | |
$ | 261 | | |
$ | 195 | |
Schedule of Operating Lease Liability
| |
2022 | | |
2021 | |
| |
At December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Operating lease right-of-use assets | |
$ | 2,119 | | |
| 1,737 | |
Operating lease liabilities | |
$ | 2,172 | | |
| 1,775 | |
Weighted-average remaining lease term | |
| 8.4 years | | |
| 8.3 years | |
Weighted-average discount rate | |
| 2.3 | % | |
| 2.11 | % |
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(5)
Leases. Continued Future minimum lease payments under non-cancellable leases, reconciled to our discounted operating lease
liabilities are as follows (in thousands):
Schedule of Future Minimum Lease Payments Under Non-cancelable Operating Leases
| |
At December 31, 2022 | |
2023 | |
$ | 264 | |
2024 | |
| 270 | |
2025 | |
| 276 | |
2026 | |
| 288 | |
2027 | |
| 314 | |
Thereafter | |
| 1,068 | |
Total future minimum lease payments | |
| 2,480 | |
Less interest | |
| (308 | ) |
Total operating lease liability | |
$ | 2,172 | |
(6)
Deposits
The
aggregate amount of time deposits with a minimum denomination of $250,000 was approximately $47.3 million and $1.7 million at December
31, 2022 and 2021, respectively.
A
schedule of maturities of time deposits at December 31, 2022 follows (in thousands):
Schedule of Maturities of Time Deposits
Maturing Year Ending December 31, | |
Amount | |
2023 | |
$ | 223,840 | |
2024 | |
| 15,620 | |
2025 | |
| 519 | |
2026 | |
| 1 | |
Total | |
$ | 239,980 | |
(7)
Federal Home Loan Bank Advances and Other Available Credit
The
maturities and interest rates on the Federal Home Loan Bank (“FHLB”) advances were as follows (dollars in thousands)
Schedule
of Maturities and Interest Rates on the Federal Home Loan Bank Advances
Maturity Year Ending | |
Interest | | |
At December 31, | |
December 31, | |
Rate | | |
2022 | | |
2021 | |
2024 | |
| 1.96 | % | |
$ | — | | |
$ | 4,000 | |
2025 | |
| 1.01 | % | |
| 10,000 | | |
| 10,000 | |
2029 | |
| 1.69 | % | |
| — | | |
| 4,000 | |
| |
| | | |
$ | 10,000 | | |
$ | 18,000 | |
At
December 31, 2022, three FHLB Advances were structured advances with potential calls on a quarterly basis.
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(7)
Federal Home Loan Bank Advances and Other Available Credit Continued
FHLB
advances are collateralized by a blanket lien requiring the Company to maintain certain first mortgage loans as pledged collateral. At
December 31, 2022, the Company had remaining credit availability of $125.7 million. At December 31, 2022, the Company had loans pledged
with a carrying value of $211.5 million as collateral for FHLB advances.
At
December 31, 2022, the Company also had lines of credit amounting to $19.5 million with five correspondent banks to purchase federal
funds. At December 31, 2022 and 2021 there were no borrowings under these lines of credit.
(8)
Financial Instruments
The
estimated fair values of the Company’s financial instruments were as follows (in thousands):
Schedule
of Estimated Fair Value of Financial Instruments
| |
At December 31, 2022 | | |
At December 31, 2021 | |
| |
Carrying Amount | | |
Fair Value | | |
Level | | |
Carrying Amount | | |
Fair Value | | |
Level | |
Financial assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash and cash equivalents | |
$ | 71,836 | | |
$ | 71,836 | | |
| 1 | | |
$ | 58,970 | | |
$ | 58,970 | | |
| 1 | |
Debt Securities available for sale | |
| 25,102 | | |
| 25,102 | | |
| 2 | | |
| 34,394 | | |
| 34,394 | | |
| 2 | |
Debt Securities held-to-maturity | |
| 540 | | |
| 504 | | |
| 2 | | |
| 1,040 | | |
| 1,071 | | |
| 2 | |
Loans | |
| 477,218 | | |
| 476,566 | | |
| 3 | | |
| 247,902 | | |
| 247,788 | | |
| 3 | |
Federal Home Loan Bank stock | |
| 600 | | |
| 600 | | |
| 3 | | |
| 793 | | |
| 793 | | |
| 3 | |
Accrued interest receivable | |
| 1,444 | | |
| 1,444 | | |
| 3 | | |
| 971 | | |
| 971 | | |
| 3 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Financial liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Deposit liabilities | |
| 507,899 | | |
| 512,357 | | |
| 3 | | |
| 292,457 | | |
| 292,537 | | |
| 3 | |
Federal Home Loan Bank advances | |
| 10,000 | | |
| 9,450 | | |
| 3 | | |
| 18,000 | | |
| 18,021 | | |
| 3 | |
Off-balance sheet financial instruments | |
| — | | |
| — | | |
| 3 | | |
| — | | |
| — | | |
| 3 | |
The
Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of
its customers. These financial instruments are commitments to extend credit, unused lines of credit, and standby letters of credit and
may involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated balance
sheet. The contract amounts of these instruments reflect the extent of involvement the Company has in these financial instruments.
The
Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments
to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments
as it does for on-balance-sheet instruments.
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(8)
Financial Instruments Continued
Commitments
to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because some of the
commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Company, upon extension of credit, is based on management’s credit evaluation of the counterparty.
Standby
letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit to customers is essentially the same as that involved in extending loan facilities
to customers. The Company generally holds collateral supporting those commitments. Standby letters of credit generally have expiration
dates within one year.
Commitments
to extend credit, unused lines of credit, and standby letters of credit typically result in loans with a market interest rate when funded.
A summary of the contractual amounts of the Company’s financial instruments with off-balance-sheet risk at December 31, 2022 follows
(in thousands):
Schedule
of Off-Balance Sheet Risks of Financial Instruments
Commitments to extend credit | |
$ | 15,447 | |
| |
| | |
Unused lines of credit | |
$ | 17,400 | |
| |
| | |
Standby letters of credit | |
$ | 4,313 | |
(9)
Income Taxes
Income
tax benefit consisted of the following (in thousands):
Schedule
of Components of Income Tax Benefit
| |
2022 | | |
2021 | |
| |
Year Ended December 31, | |
| |
2022 | | |
2021 | |
Current: | |
| | | |
| | |
Federal | |
$ | — | | |
$ | — | |
State | |
| — | | |
| — | |
| |
| | | |
| | |
Total Current | |
| — | | |
| — | |
| |
| | | |
| | |
Deferred: | |
| | | |
| | |
Federal | |
| 1,071 | | |
| 609 | |
State | |
| 298 | | |
| 169 | |
Change in Valuation Allowance | |
| — | | |
| (4,005 | ) |
| |
| | | |
| | |
Total Deferred Income tax expense (benefit) | |
| 1,369 | | |
| (3,227 | ) |
| |
| | | |
| | |
Total Income tax expense (benefit) | |
$ | 1,369 | | |
$ | (3,227 | ) |
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(9)
Income Taxes Continued
The
reasons for the differences between the statutory Federal income tax rate and the effective tax rate are summarized as follows (dollars
in thousands):
Schedule
of Effective Income Tax Rate Reconciliation
| |
Year Ended December 31, | |
| |
2022 | | |
2021 | |
| |
Amount | | |
% of Pretax Loss | | |
Amount | | |
% of Pretax Loss | |
| |
| | |
| | |
| | |
| |
Income tax benefit at statutory rate | |
$ | 1,132 | | |
| 21.0 | % | |
$ | 644 | | |
| 21.0 | % |
Increase (decrease) resulting from: | |
| | | |
| | | |
| | | |
| | |
State taxes, net of Federal tax benefit | |
| 235 | | |
| 4.4 | % | |
| 134 | | |
| 4.3 | % |
Other permanent differences | |
| 2 | | |
| 0.0 | % | |
| — | | |
| — | |
Change in valuation allowance | |
| — | | |
| — | | |
| (4,005 | ) | |
| (130.5 | )% |
| |
$ | 1,369 | | |
| 25.4 | % | |
$ | (3,227 | ) | |
| (105.2 | )% |
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):
Schedule
of Deferred Tax Assets and Deferred Tax Liabilities
| |
2022 | | |
2021 | |
| |
At December 31, | |
| |
2022 | | |
2021 | |
Deferred tax assets: | |
| | | |
| | |
Net operating loss carryforwards | |
$ | 1,322 | | |
$ | 3,336 | |
Allowance for loan losses | |
| 893 | | |
| 15 | |
Premises and equipment | |
| 55 | | |
| 53 | |
Nonaccrual loan interest | |
| 26 | | |
| 30 | |
Accrued expense | |
| 72 | | |
| — | |
Operating lease liabilities | |
| 550 | | |
| 450 | |
Unrealized loss on debt securities | |
| 1,978 | | |
| 215 | |
| |
| | | |
| | |
Total deferred tax assets | |
| 4,896 | | |
| 4,099 | |
| |
| | | |
| | |
Deferred tax liabilities: | |
| | | |
| | |
Right of use lease assets | |
| (537 | ) | |
| (440 | ) |
Loan costs | |
| (523 | ) | |
| (217 | ) |
Total deferred tax liabilities | |
| (1,060 | ) | |
| (657 | ) |
Net deferred tax asset | |
$ | 3,836 | | |
$ | 3,442 | |
During
the year ended December 31, 2021, the Company assessed its earnings history and trend over the past year and its estimate of future earnings.
In 2021, the Company determined that it was more likely than not that the deferred tax assets would be realized in the near term. Accordingly,
the valuation allowance that was recorded and maintained against the net deferred tax asset for the amount not expected to be realized
in the future was fully reversed in 2021 in the amount of $4.0 million.
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(9) Income Taxes, Continued
At
December 31, 2022, the Company had net operating loss carryforwards of approximately $5.2 million for Federal and Florida tax purposes
available to offset future taxable income. These carryforwards will begin to expire in 2029. A portion of the Federal and Florida net
operating losses are subject to Internal Revenue Code (“IRC”) Section 382 limitations.
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 2019.
(10)
Related Party Transactions
The
Company has entered into transactions with its executive officers, directors and their affiliates in the ordinary course of business.
During
2022, the Company incurred approximately $65,000 in legal fees payable to a law firm owned by a director.
At
December 31, 2022 and 2021, related parties had approximately $32,750,000 and $46,600,000, respectively, on deposit with the Company.
At
December 31, 2022 and 2021, related party loans totaled $100,500 and $1,000,000, respectively.
(11)
Stock-Based Compensation
The
Company is authorized to grant stock options, stock grants and other forms of equity-based compensation under its 2018 Equity Incentive
Plan, as amended (the “Plan”). The plan has been approved by the shareholders. The Company is authorized to issue up to 550,000
shares of common stock under the 2018 Plan, of which 391,579 have been issued, and 158,421 shares remain available for grant.
During
the year ended December 31, 2021, the Company recorded compensation expense of $199,000 with respect to 62,112 shares issued to a director
and an executive officer for services performed.
During
the year ended December 31, 2022, the Company recorded compensation expense of $275,000 with respect to 67,183 shares issued to a director
and an executive officer for services performed.
During
the year ended December 31, 2022 the Company recorded compensation expense of $97,000
with respect to 24,493
shares issued to certain employees for services performed.
(12)
Regulatory Matters
The
Bank is subject to various regulatory capital requirements administered by the banking 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 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 the Bank’s assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts, and classification
are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(12) Regulatory Matters, Continued
In
2019, the federal banking agencies jointly issued a final rule that provides for an optional, simplified measure of capital adequacy,
the community bank leverage ratio framework (CBLR framework), for qualifying community banking organizations. The final rule became effective
on January 1, 2020 and was elected by the Bank.
The
CBLR Framework removes the requirement for qualifying banking organizations to calculate and report risk-based capital but rather only
requires a Tier 1 to average assets (leverage) ratio. Qualifying community banking organizations that elect to use the community bank
leverage ratio framework and that maintain a leverage ratio of greater than required minimums will be considered to have satisfied the
generally applicable risk based and leverage capital requirements in the agencies’ capital rules (generally applicable rule) and,
if applicable, will be considered to have met the well capitalized ratio requirements for purposes of section 38 of the Federal Deposit
Insurance Act. Under the CBLR Framework, the community bank leverage ratio minimum requirement is 9%. Under the final rule, an eligible
community banking organization can opt out of the CBLR framework and revert back to the risk-weighting framework without restriction.
Management
believes, as of December 31, 2022, that the Bank meets all capital adequacy requirements to which it is subject. The Bank’s actual
capital amounts and percentages are presented in the table ($ in thousands):
Schedule
of Capital Amount and Percentages
| |
| | |
To Be Well Capitalized Under Prompt Corrective | |
| |
Actual | | |
Action Regulations (CBLR Framework) | |
| |
Amount | | |
% | | |
Amount | | |
% | |
As of December 31, 2022: | |
| | | |
| | | |
| | | |
| | |
Tier I Capital to Total Assets | |
$ | 66,291 | | |
| 11.29 | % | |
$ | 52,865 | | |
| 9.00 | % |
| |
| | | |
| | | |
| | | |
| | |
As of December 31, 2021: | |
| | | |
| | | |
| | | |
| | |
Tier I Capital to Total Assets | |
$ | 35,338 | | |
| 10.64 | % | |
$ | 28,235 | | |
| 8.50 | % |
(13)
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 Company. The amount of cash dividends that may be paid by the Bank to the Company is based
on the Bank’s net earnings of the current year combined with the Bank’s retained earnings of the preceding two years, as
defined by state banking regulations. However, for any dividend declaration, the Company must consider additional factors such as the
amount of current period net earnings, liquidity, asset quality, capital adequacy and economic conditions. It is likely that these factors
would further limit the amount of dividends which the Company could declare. 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.
(14)
Contingencies.
Various
claims also arise from time to time in the normal course of business. In the opinion of management, none have occurred that will have
a material adverse effect on the Company’s consolidated financial statements.
(15)
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 matching contributions in connection with this plan during
the year ended December 31, 2022 was $86,000. There were no matching contributions during the year ended December 31, 2021.
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(16)
Fair Value Measurement
Debt
securities available for sale measured at fair value on a recurring basis are summarized below (in thousands):
Schedule
of Debt Securities Available for Sale Measured at Fair Value on Recurring Basis
| |
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, 2022: | |
| | | |
| | | |
| | | |
| | |
SBA Pool Securities | |
$ | 817 | | |
$ | — | | |
$ | 817 | | |
$ | — | |
Collateralized mortgage obligations | |
| 130 | | |
| — | | |
| 130 | | |
| — | |
Taxable municipal securities | |
| 11,620 | | |
| — | | |
| 11,620 | | |
| — | |
Mortgage-backed securities | |
| 12,535 | | |
| — | | |
| 12,535 | | |
| — | |
Total | |
$ | 25,102 | | |
$ | — | | |
$ | 25,102 | | |
$ | — | |
| |
| | | |
| | | |
| | | |
| | |
At December 31, 2021: | |
| | | |
| | | |
| | | |
| | |
SBA Pool Securities | |
$ | 1,072 | | |
$ | — | | |
$ | 1,072 | | |
$ | — | |
Collateralized mortgage obligations | |
| 217 | | |
| — | | |
| 217 | | |
| — | |
Taxable municipal securities | |
| 16,426 | | |
| — | | |
| 16,426 | | |
| — | |
Mortgage-backed securities | |
| 16,679 | | |
| — | | |
| 16,679 | | |
| — | |
Total | |
$ | 34,394 | | |
$ | — | | |
$ | 34,394 | | |
$ | — | |
During
the years ended December 31, 2022 and 2021, no debt securities were transferred in or out of Level 3.
(17)
Company Unconsolidated Financial Information
The
Company’s unconsolidated financial information as of December 31, 2022 and 2021 and for the years then ended follows (in thousands):
Condensed
Balance Sheets
Schedule
of Condensed Balance Sheet
| |
2022 | | |
2021 | |
| |
At December 31, | |
| |
2022 | | |
2021 | |
Assets | |
| | | |
| | |
| |
| | | |
| | |
Cash | |
$ | 602 | | |
$ | 508 | |
Investment in subsidiary | |
| 60,464 | | |
| 36,364 | |
Other assets | |
| 2,149 | | |
| 1,843 | |
| |
| | | |
| | |
Total assets | |
$ | 63,215 | | |
$ | 38,715 | |
| |
| | | |
| | |
Liabilities and Stockholders’ Equity | |
| | | |
| | |
| |
| | | |
| | |
Other liabilities | |
$ | 636 | | |
$ | 205 | |
Stockholders’ equity | |
| 62,579 | | |
| 38,510 | |
| |
| | | |
| | |
Total liabilities and stockholders’ equity | |
$ | 63,215 | | |
$ | 38,715 | |
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(17)
Company Unconsolidated Financial Information Continued
Condensed
Statements of Earnings
Schedule
of Condensed Statements of Earnings
| |
2022 | | |
2021 | |
| |
Year Ended December 31, | |
| |
2022 | | |
2021 | |
Income of subsidiary | |
$ | 4,791 | | |
$ | 5,412 | |
Interest expense | |
| - | | |
| (41 | ) |
Other expense | |
| (1,029 | ) | |
| (751 | ) |
Income tax benefit | |
| 261 | | |
| 1,676 | |
| |
| | | |
| | |
Net earnings | |
$ | 4,023 | | |
$ | 6,296 | |
Condensed
Statements of Cash Flows
Schedule
of Condensed Statements of Cash Flows
| |
2022 | | |
2021 | |
| |
Year Ended December 31, | |
| |
2022 | | |
2021 | |
Cash flows from operating activities: | |
| | | |
| | |
Net earnings | |
$ | 4,023 | | |
$ | 6,296 | |
Adjustments to reconcile net earnings to net cash (used in) provided by operating activities: | |
| | | |
| | |
Stock-based compensation | |
| 372 | | |
| 199 | |
Equity in undistributed income of subsidiary | |
| (4,792 | ) | |
| (5,412 | ) |
Deferred income tax benefit | |
| (261 | ) | |
| (1,676 | ) |
Increase in other liabilities | |
| 431 | | |
| 149 | |
(Increase) decrease in other assets | |
| (45 | ) | |
| 475 | |
| |
| | | |
| | |
Net cash (used in) provided by operating activities | |
| (272 | ) | |
| 31 | |
| |
| | | |
| | |
Cash flow from investing activities: | |
| | | |
| | |
Capital infusion to bank subsidiary | |
| (24,500 | ) | |
| (12,324 | ) |
| |
| | | |
| | |
Cash flow from financing activities: | |
| | | |
| | |
Proceeds from sale of preferred stock | |
| 15,000 | | |
| 9,000 | |
Proceeds from sale of common stock | |
| 9,866 | | |
| 3,678 | |
| |
| | | |
| | |
Cash provided by financing activities | |
| 24,866 | | |
| 12,678 | |
| |
| | | |
| | |
Net increase in cash | |
| 94 | | |
| 385 | |
| |
| | | |
| | |
Cash at beginning of the year | |
| 508 | | |
| 123 | |
| |
| | | |
| | |
Cash at end of year | |
$ | 602 | | |
$ | 508 | |
| |
| | | |
| | |
Noncash transactions: | |
| | | |
| | |
| |
| | | |
| | |
Change in accumulated other comprehensive loss of subsidiary, net change in unrealized loss on debt securities available for sale, net of income taxes | |
$ | (5,191 | ) | |
$ | (566 | ) |
| |
| | | |
| | |
Issuance of common stock in exchange for Trust Preferred Securities | |
$ | - | | |
$ | 2,068 | |
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(18)
Preferred Stock
During
2022 and 2021, the Company issued 600
and 360
shares, respectively, of the Company’s Series B Participating Preferred Stock (the “Series B Preferred”) at a
price of $25,000
per share, or an aggregate of $15
million during 2022 and $9,000,000
during 2021. The Preferred Stock has no par value. Except in the event of liquidation, if the Company declares or pays a dividend or
distribution on the common stock, the Company shall simultaneously declare and pay a dividend on the Series B Preferred on a pro
rata basis with the common stock determined on an as-converted basis assuming all shares of Series B Preferred Stock had been
converted immediately prior to the record date of the applicable dividend. The Preferred Stock is convertible into 11,114,000
shares of common stock, at the option of the Company, subject to the prior fulfilment of the following conditions: (i) such
conversion shall have been approved by the holders of a majority of the outstanding common stock of the Company; and (ii) such
conversion shall not result in any holder of the Series B Preferred Stock and any persons with whom the holder may be acting in
concert, becoming beneficial owners of more than 9.9%
of the outstanding shares of the common stock. The number of shares issuable upon conversion is subject to adjustment based on the
terms of the applicable Certificate of Designation for the Series B Preferred (the “Certificate of Designation”) The
Series B Preferred has preferential liquidation rights over common stockholders and holders. The liquidation price is the greater of
$25,000
per share of Series B Preferred or such amount per share of Series A Preferred that would have been payable had all shares of the
Series B Preferred had been converted into common stock pursuant to the terms of the Certificate of Designation immediately prior to
a liquidation. The
Series B Preferred generally has no voting rights except as provided in the Certificate of Designation.
Exhibit B
Management’s
Discussion and Analysis of Financial Condition and Results of Operations for the Years ended December 31, 2022 and 2021.
General
Critical
Accounting Policies
The
Company’s financial condition and results of operations are sensitive to accounting measurements and estimates of matters that
are inherently uncertain. When applying accounting policies in areas that are subjective in nature, the Company must use its best judgment
to arrive at the carrying value of certain assets. One of the most critical accounting policies applied by the Company is related to
the valuation of its loan portfolio and deferred income to valuation allowance.
A
variety of estimates impact the carrying value of the Company’s loan portfolio including the calculation of the allowance for loan
losses, valuation of underlying collateral, the timing of loan charge-offs and the amount and amortization of loan fees and deferred
origination costs.
The
calculation of the allowance for loan losses is a complex process containing estimates which are inherently subjective and susceptible
to significant revision as current information becomes available. The allowance is established and maintained at a level management believes
is adequate to cover losses resulting from the inability of borrowers to make required payments on loans. Estimates for loan losses are
determined by analyzing risks associated with specific loans and the loan portfolio, current trends in delinquencies and charge-offs,
the views of the Company’s regulators, changes in the size and composition of the loan portfolio and peer comparisons. The analysis
also requires consideration of the economic climate and direction, changes in the economic and interest rate environment which may impact
a borrower’s ability to pay, legislation impacting the banking industry and economic conditions specific to the counties the Bank
serves in the State of Florida. Because the calculation of the allowance for loan losses relies on the Company’s estimates and
judgments relating to inherently uncertain events, results may differ from management’s estimates.
The
allowance for loan losses is also discussed as part of “Loan Portfolio, Asset Quality and Allowance for Loan Losses” and
in Note 3 of Notes to the consolidated financial statements. The Company’s significant accounting policies are discussed in Note
1 of Notes to the consolidated financial statements.
During
the year ended December 31, 2021, the Company assessed its earnings history and trend over the past year and its estimate of future earnings.
In 2021, the Company determined that it was more likely than not that the deferred tax assets would be realized in the near term. Accordingly,
in 2021, the valuation allowance in the amount of $4 million that has been previously recorded against the net deferred tax asset for
the amount not expected to be realized in the future was fully reversed.
Regulation
and Legislation
As
a state-chartered commercial bank, the Bank is subject to extensive regulation by the Florida Office of Financial Regulation, or Florida
OFR, and the FDIC. The Bank files reports with the Florida OFR and the FDIC concerning its activities and financial condition, in addition
to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other financial
institutions. Periodic examinations are performed by the Florida OFR and the FDIC to monitor the Bank’s compliance with the various
regulatory requirements. The Company is also subject to regulation and examination by the Federal Reserve Board of Governors.
Loan
Portfolio, Asset Quality and Allowance for Loan Losses
The
Bank’s primary business is making business loans. This activity may subject the Bank to potential loan losses, the magnitude of
which depends on a variety of economic factors affecting borrowers which are beyond its control. As of December 31, 2022 and 2021 the
Bank did not have any impaired loans.
The
following table sets forth the composition of the Bank’s loan portfolio (dollars in thousands):
| |
At
December 31, | |
| |
2022 | | |
2021 | | |
2020 | |
| |
| | |
% of | | |
| | |
% of | | |
| | |
% of | |
| |
Amount | | |
Total | | |
Amount | | |
Total | | |
Amount | | |
Total | |
| |
| | |
| | |
| | |
| |
Residential real estate | |
$ | 50,354 | | |
| 11 | % | |
$ | 32,583 | | |
| 13 | % | |
$ | 28,997 | | |
| 20 | % |
Multi-family real estate | |
| 69,555 | | |
| 14 | | |
| 48,592 | | |
| 19 | | |
| 19,210 | | |
| 13 | |
Commercial real estate | |
| 310,695 | | |
| 64 | | |
| 129,468 | | |
| 51 | | |
| 74,398 | | |
| 46 | |
Land and construction | |
| 17,286 | | |
| 4 | | |
| 3,772 | | |
| 2 | | |
| 4,750 | | |
| 3 | |
Commercial | |
| 5,165 | | |
| 1 | | |
| 14,157 | | |
| 6 | | |
| 21,849 | | |
| 14 | |
Consumer | |
| 30,323 | | |
| 6 | | |
| 22,827 | | |
| 9 | | |
| 5,715 | | |
| 4 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total loans | |
$ | 483,378 | | |
| 100 | % | |
$ | 251,399 | | |
| 100 | % | |
$ | 154,919 | | |
| 100 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Deduct: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net deferred loan fees | |
| (367 | ) | |
| | | |
| (422 | ) | |
| | | |
| (544 | ) | |
| | |
Allowance for loan losses | |
| (5,793 | ) | |
| | | |
| (3,075 | ) | |
| | | |
| (1,906 | ) | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans, net | |
$ | 477,218 | | |
| | | |
$ | 247,902 | | |
| | | |
$ | 152,469 | | |
| | |
The
following table sets forth the activity in the allowance for loan losses (in thousands):
| |
Year
Ended December 31, | |
| |
2022 | | |
2021 | | |
2020 | |
| |
| | |
| | |
| |
Beginning balance | |
$ | 3,075 | | |
$ | 1,906 | | |
$ | 2,009 | |
Provision for loan losses | |
| 3,466 | | |
| 1,173 | | |
| 1,020 | |
Loans charged off | |
| (901 | ) | |
| (277 | ) | |
| (1,184 | ) |
Recoveries | |
| 153 | | |
| 273 | | |
| 61 | |
| |
| | | |
| | | |
| | |
Ending balance | |
$ | 5,793 | | |
$ | 3,075 | | |
$ | 1,906 | |
The
allowance for loan losses represents management’s estimate of probable incurred losses inherent in the existing loan portfolio.
The allowance for loan losses is increased by the provision for loan losses charged to earnings and reduced by loans charged off, net
of recoveries. The allowance for loan losses represented 1.20% and 1.22% of the total loans outstanding at December 31, 2022 and 2021,
respectively.
The
Bank evaluates the allowance for loan losses on a regular basis. The allowance for loan losses is determined based on a periodic review
of several factors: reviews and evaluation of individual loans, historical loan loss experiences, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and current economic
conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information
becomes available.
The
allowance consists of two components. The first component consists of amounts specifically reserved (“specific allowance”)
for specific loans identified as impaired, as defined by FASB Accounting Standards Codification No. 310 (“ASC 310”). Impaired
loans are those loans that management has estimated will not be repaid as agreed upon. The Bank measures impairment on a loan by loan
basis for all of its loans by either the present value of expected future cash flows discounted at the loan’s effective interest
rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent. A loan may be
impaired (i.e. not expected to be repaid as agreed), but may be sufficiently collateralized such that the Bank expects to recover all
principal and interest eventually, and therefore no specific reserve is warranted.
The
second component is a general reserve (“general allowance”) on all of the Bank’s loans, other than those identified
as impaired. The Bank groups these loans into categories with similar characteristics and then applies a loss factor to each group which
is derived from the Bank’s historical loss experience for that category adjusted for qualitative factors such as economic conditions
and other trends or uncertainties that could affect management’s estimate of probable loss. The aggregate of these two components
results in the Bank’s total allowance for loan losses.
The
following table sets forth the Bank’s allowance for loan losses by loan type (dollars in thousands):
| |
At
December 31, | |
| |
2022 | | |
2021 | | |
2020 | |
| |
| | |
% of | | |
| | |
% of | | |
| | |
% of | |
| |
| | |
Total | | |
| | |
Total | | |
| | |
Total | |
| |
Amount | | |
Loans | | |
Amount | | |
Loans | | |
Amount | | |
Loans | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Residential real estate | |
$ | 768 | | |
| 11 | % | |
$ | 482 | | |
| 13 | % | |
$ | 463 | | |
| 20 | % |
Multi-family real estate | |
| 748 | | |
| 14 | | |
| 535 | | |
| 19 | | |
| 253 | | |
| 13 | |
Commercial real estate | |
| 3,262 | | |
| 64 | | |
| 1535 | | |
| 51 | | |
| 884 | | |
| 46 | |
Land and construction | |
| 173 | | |
| 4 | | |
| 32 | | |
| 2 | | |
| 52 | | |
| 3 | |
Commercial | |
| 277 | | |
| 1 | | |
| 74 | | |
| 6 | | |
| 103 | | |
| 14 | |
Consumer | |
| 565 | | |
| 6 | | |
| 417 | | |
| 9 | | |
| 151 | | |
| 4 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total allowance for
loan losses | |
$ | 5,793 | | |
| 100 | % | |
$ | 3,075 | | |
| 100 | % | |
$ | 1,906 | | |
| 100 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Allowance for loan losses
as a percentage of total loans outstanding | |
| | | |
| 1.20 | % | |
| | | |
| 1.22 | % | |
| | | |
| 1.23 | % |
The
following summarizes the amount of impaired loans (in thousands):
| |
At
December 31, | |
| |
2022 | | |
2021 | | |
2020 | |
| |
| | |
Unpaid | | |
| | |
| | |
Unpaid | | |
| | |
| | |
Unpaid | | |
| |
| |
Recorded | | |
Principal | | |
Related | | |
Recorded | | |
Principal | | |
Related | | |
Recorded | | |
Principal | | |
Related | |
| |
Investment | | |
Balance | | |
Allowance | | |
Investment | | |
Balance | | |
Allowance | | |
Investment | | |
Balance | | |
Allowance | |
With no related allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial real estate | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 2,193 | | |
$ | 2,193 | | |
$ | — | |
Commercial | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
With an allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential real estate | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Commercial real estate | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Commercial | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential real estate | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
Commercial real estate | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 2,193 | | |
$ | 2,193 | | |
$ | — | |
Commercial | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
Total | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 2,193 | | |
$ | 2,193 | | |
$ | — | |
During
2022, 2021, and 2020, the average recorded investment in impaired loans and interest income recognized and received on impaired loans
were as follows (in thousands):
| |
Year
Ended December 31, | |
| |
2022 | | |
2021 | | |
2020 | |
| |
| | |
| | |
| |
Average
investment in impaired loans | |
$ | — | | |
$ | 658 | | |
$ | 3,344 | |
Interest income recognized
on impaired loans | |
$ | — | | |
$ | 7 | | |
$ | 96 | |
Interest income received
on a cash basis on impaired loans | |
$ | — | | |
$ | 7 | | |
$ | 89 | |
Liquidity
and Capital Resources
Liquidity
represents an institution’s ability to meet current and future obligations through liquidation or maturity of existing assets or
the acquisition of additional liabilities. The Bank’s ability to respond to the needs of depositors and borrowers and to benefit
from investment opportunities is facilitated through liquidity management.
The
Bank’s primary sources of cash during the year ended December 31, 2022, were payments of principal and interest on loans made by
the Bank to third parties, payments of principal and interest on debt securities held by the Bank and deposits made by third parties
at the Bank. Cash was used primarily to fund loans and repay Federal Home Loan Bank of Atlanta (“FHLB”) advances. The Bank
adjusts rates on its deposits to attract or retain deposits as needed. The Bank primarily obtains deposits from its market area.
The
Bank may borrow funds from other financial institutions. The Bank is a member of the FHLB, which allows it to borrow funds under a pre-arranged
line of credit. As of December 31, 2022, the Bank had $10 million in borrowings outstanding from the FHLB of Atlanta to facilitate lending
and manage its asset and liability structure, and remaining credit availability with the FHLB of $125.7 million. At December 31, 2022,
the Bank also had lines of credit amounting to $19.5 million with five correspondent banks to purchase federal funds.
Debt
Securities
The
Bank’s securities portfolio is comprised of SBA pool securities, mortgage-backed securities, taxable municipal securities and collateralized
mortgage obligations. The securities portfolio is categorized as either “held-to-maturity” or “available for sale.”
Debt securities held-to-maturity represent those securities which the Bank has the positive intent and ability to hold to maturity. These
debt securities are carried at amortized cost. Debt securities available for sale represent those investments which may be sold for various
reasons including changes in interest rates and liquidity considerations. These debt securities are reported at fair market value and
unrealized gains and losses are excluded from earnings and reported in other comprehensive loss.
The
following table sets forth the amortized cost and fair value of the Bank’s debt securities portfolio (in thousands):
| |
Amortized
Cost | | |
Fair
Value | |
At December 31, 2022: | |
| | | |
| | |
Held-to-maturity: | |
| | | |
| | |
Collateralized mortgage obligations | |
$ | 475 | | |
$ | 440 | |
Mortgage-backed Securities | |
| 65 | | |
| 64 | |
Total | |
$ | 540 | | |
$ | 504 | |
Available for sale: | |
| | | |
| | |
SBA Pool Securities | |
$ | 834 | | |
$ | 817 | |
Collateralized mortgage obligation | |
| 145 | | |
| 130 | |
Taxable municipal securities | |
| 16,729 | | |
| 11,620 | |
Mortgage-backed Securities. | |
| 15,180 | | |
| 12,535 | |
Total | |
$ | 32,888 | | |
$ | 25,102 | |
At December 31, 2021: | |
| | | |
| | |
Held-to-maturity: | |
| | | |
| | |
Collateralized mortgage obligations | |
$ | 854 | | |
$ | 882 | |
Mortgage-backed Securities | |
| 186 | | |
| 189 | |
Total | |
$ | 1,040 | | |
$ | 1,071 | |
Available for sale: | |
| | | |
| | |
SBA Pool Securities | |
$ | 1,097 | | |
$ | 1,072 | |
Collateralized mortgage obligations | |
| 210 | | |
| 217 | |
Taxable municipal securities | |
| 16,766 | | |
| 16,426 | |
Mortgage-backed Securities. | |
| 17,137 | | |
| 16,679 | |
Total | |
$ | 35,210 | | |
$ | 34,394 | |
The
following table sets forth, by maturity distribution, certain information pertaining to the debt securities portfolio at amortized cost
(dollars in thousands):
| |
After One | | |
| | |
| | |
| |
| |
Year | | |
| | |
| | |
| |
| |
Through Five | | |
After Ten | | |
| | |
| |
| |
Years | | |
Years | | |
Total | | |
Yield | |
| |
| | |
| | |
| | |
| |
At December 31, 2022: | |
| | | |
| | | |
| | | |
| | |
Collateralized mortgage obligation | |
$ | — | | |
$ | 620 | | |
$ | 620 | | |
| 2.29 | % |
Mortgage-backed securities | |
| — | | |
| 15,245 | | |
| 15,245 | | |
| 2.04 | % |
Taxable municipal securities | |
| — | | |
| 16,729 | | |
| 16,729 | | |
| 2.17 | % |
SBA pool securities | |
| — | | |
| 834 | | |
| 834 | | |
| 4.54 | % |
| |
$ | — | | |
$ | 33,428 | | |
$ | 33,428 | | |
| | |
At December 31, 2021: | |
| | | |
| | | |
| | | |
| | |
Collateralized mortgage obligation | |
| — | | |
$ | 1,064 | | |
$ | 1,064 | | |
| 0.52 | % |
Mortgage-backed securities | |
$ | — | | |
| 17,323 | | |
| 17,323 | | |
| 1.57 | % |
Taxable municipal securities | |
| — | | |
| 16,766 | | |
| 16,766 | | |
| 2.16 | % |
SBA pool securities | |
| — | | |
| 1,097 | | |
| 1,097 | | |
| 0.26 | % |
| |
$ | — | | |
$ | 36,250 | | |
$ | 36,250 | | |
| | |
Expected
maturities of these debt securities will differ from contractual maturities because borrowers have the right to call or repay obligations
with or without call or prepayment penalties.
Market
Risk
Market
risk is the risk of loss from adverse changes in market prices and rates. The Bank’s market risk arises primarily from interest-rate
risk inherent in its lending and deposit-taking activities. The Bank does not engage in securities trading or hedging activities and
does not invest in interest-rate derivatives or enter into interest rate swaps.
The
Bank may utilize financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its
customers. The measurement of market risk associated with financial instruments is meaningful only when all related and offsetting on-
and off-balance-sheet transactions are aggregated, and the resulting net positions are identified. Disclosures about the fair value of
financial instruments, which reflect changes in market prices and rates, can be found in Note 8 of notes to consolidated financial statements.
The
Bank’s primary objective in managing interest-rate risk is to minimize the potential adverse impact of changes in interest rates
on its net interest income and capital, while adjusting its asset-liability structure to obtain the maximum yield-cost spread on that
structure. The Bank actively monitors and manages its interest-rate risk exposure by managing its asset and liability structure. However,
a sudden and substantial increase in interest rates may adversely impact its earnings, to the extent that the interest-earning assets
and interest-bearing liabilities do not change or reprice at the same speed, to the same extent, or on the same basis.
The
Bank uses modeling techniques to simulate changes in net interest income under various rate scenarios. Important elements of these techniques
include the mix of floating versus fixed-rate assets and liabilities, and the scheduled, as well as expected, repricing and maturing
volumes and rates of the existing balance sheet.
Asset
Liability Management
As
part of its asset and liability management, the Bank has emphasized establishing and implementing internal asset-liability decision processes,
as well as control procedures to aid in managing its earnings. Management believes that these processes and procedures provide us with
better capital planning, asset mix and volume controls, loan-pricing guidelines, and deposit interest-rate guidelines, which should result
in tighter controls and less exposure to interest-rate risk.
The
matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate
sensitive” and by monitoring an institution’s interest rate sensitivity “gap.” An asset or liability is said
to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest-rate sensitivity
gap is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given
time period. The gap ratio is computed as the amount of rate sensitive assets less the amount of rate sensitive liabilities divided by
total assets. A gap is considered positive when the amount of interest-rate sensitive assets exceeds interest-rate sensitive liabilities.
A gap is considered negative when the amount of interest-rate sensitive liabilities exceeds interest-rate sensitive assets. During a
period of rising interest rates, a negative gap would adversely affect net interest income, while a positive gap would result in an increase
in net interest income. During a period of falling interest rates, a negative gap would result in an increase in net interest income,
while a positive gap would adversely affect net interest income.
In
order to minimize the potential for adverse effects of material and prolonged increases in interest rates on the results of operations,
the Bank’s management continues to monitor its assets and liabilities to better match the maturities and repricing terms of its
interest-earning assets and interest-bearing liabilities. The Bank’s policies emphasize the origination of adjustable-rate loans,
building a stable core deposit base and, to the extent possible, matching deposit maturities with loan repricing timeframes or maturities.
The
following table sets forth certain information related to the Bank’s interest-earning assets and interest-bearing liabilities at
December 31, 2022, that are estimated to mature or are scheduled to reprice within the period shown (dollars in thousands):
Gap
Maturity / Repricing Schedule
| |
| | |
| | |
More than | | |
| | |
| |
| |
| | |
More than | | |
Five Years | | |
| | |
| |
| |
| | |
One Year | | |
and Less | | |
| | |
| |
| |
One | | |
and Less | | |
than | | |
Over | | |
| |
| |
Year | | |
than Five | | |
Fifteen | | |
Fifteen | | |
| |
| |
or
Less | | |
Years | | |
Years | | |
Years | | |
Total | |
Loans (1): | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential real estate loans | |
$ | 2,087 | | |
$ | 38,580 | | |
$ | 9,600 | | |
$ | 87 | | |
$ | 50,354 | |
Multi-family real estate loans | |
| 701 | | |
| 65,755 | | |
| 3,099 | | |
| - | | |
| 69,555 | |
Commercial real estate loans | |
| 14,870 | | |
| 255,340 | | |
| 40,485 | | |
| - | | |
| 310,695 | |
Land and construction | |
| - | | |
| 13,688 | | |
| 3,598 | | |
| - | | |
| 17,286 | |
Commercial | |
| 2,809 | | |
| 1,797 | | |
| - | | |
| 559 | | |
| 5,165 | |
Consumer | |
| 892 | | |
| 21,683 | | |
| - | | |
| 7,748 | | |
| 30,323 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total loans | |
| 21,359 | | |
| 396,843 | | |
| 56,782 | | |
| 8,394 | | |
| 483,378 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Securities (2) | |
| 816 | | |
| - | | |
| 5,632 | | |
| 19,194 | | |
| 25,642 | |
Interest-bearing deposits in banks | |
| 52,048 | | |
| - | | |
| - | | |
| - | | |
| 52,048 | |
Federal Home Loan Bank
stock | |
| 600 | | |
| - | | |
| - | | |
| - | | |
| 600 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total rate-sensitive
assets | |
| 74,823 | | |
| 396,843 | | |
| 62,414 | | |
| 27,588 | | |
| 561,668 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Deposit accounts (3): | |
| | | |
| | | |
| | | |
| | | |
| | |
Money-market deposits | |
| 60,020 | | |
| - | | |
| - | | |
| - | | |
| 60,020 | |
Interest-bearing checking deposits | |
| 47,224 | | |
| - | | |
| - | | |
| - | | |
| 47,224 | |
Savings deposits | |
| 1,482 | | |
| - | | |
| - | | |
| - | | |
| 1,482 | |
Time deposits | |
| 223,840 | | |
| 16,140 | | |
| - | | |
| - | | |
| 239,980 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total deposits | |
| 332,566 | | |
| 16,140 | | |
| - | | |
| - | | |
| 348,706 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Federal Home Loan Bank
advances | |
| - | | |
| 10,000 | | |
| - | | |
| - | | |
| 10,000 | |
Total rate-sensitive
liabilities | |
| 332,566 | | |
| 26,140 | | |
| - | | |
| - | | |
| 358,706 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
GAP (repricing differences) | |
$ | (257,743 | ) | |
$ | 370,703 | | |
$ | 62,414 | | |
$ | 27,588 | | |
$ | 202,962 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Cumulative GAP | |
$ | (257,743 | ) | |
$ | 112,960 | | |
$ | 175,374 | | |
$ | 202,962 | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Cumulative GAP/total
assets | |
| (44 | )% | |
| 19 | % | |
| 30 | % | |
| 35 | % | |
| | |
1 |
In
preparing the table above, adjustable-rate loans are included in the period in which the interest rates are next scheduled to adjust
rather than in the period in which the loans mature. Fixed-rate loans are scheduled, including repayment, according to their maturities. |
|
|
2 |
Securities
are scheduled through the repricing date. |
|
|
3 |
Money-market,
interest-bearing checking and savings deposits are regarded as readily accessible withdrawable accounts. Time deposits are scheduled
through the maturity dates. |
The
following table sets forth loan maturities by type of loan at December 31, 2022 (in thousands):
| |
One Year or | | |
After One
But Within | | |
After Five | | |
| |
| |
Less | | |
Five
Years | | |
Years | | |
Total | |
| |
| | |
| | |
| | |
| |
Residential real estate | |
$ | - | | |
$ | 6,916 | | |
$ | 43,438 | | |
$ | 50,354 | |
Multi-family real estate | |
| - | | |
| 2,635 | | |
| 66,920 | | |
| 69,555 | |
Commercial real estate | |
| 2,802 | | |
| 44,001 | | |
| 263,892 | | |
| 310,695 | |
Land and construction | |
| - | | |
| 1,529 | | |
| 15,757 | | |
| 17,286 | |
Commercial | |
| 2,635 | | |
| 1,871 | | |
| 659 | | |
| 5,165 | |
Consumer | |
| 772 | | |
| 21,684 | | |
| 7,867 | | |
| 30,323 | |
| |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 6,209 | | |
$ | 78,636 | | |
$ | 398,533 | | |
$ | 483,378 | |
The
following table sets forth the maturity or repricing of loans by interest type at December 31, 2022 (in thousands):
| |
One Year or | | |
After One
But Within Five | | |
After Five | | |
| |
| |
Less | | |
Years | | |
Years | | |
Total | |
| |
| | |
| | |
| | |
| |
Fixed interest rate | |
$ | 3,574 | | |
$ | 43,216 | | |
$ | 45,730 | | |
$ | 92,520 | |
Variable interest rate | |
| 2,635 | | |
| 35,420 | | |
| 352,803 | | |
| 390,858 | |
| |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 6,209 | | |
$ | 78,636 | | |
$ | 398,533 | | |
$ | 483,378 | |
Scheduled
contractual principal repayments of loans do not reflect the actual life of such assets. The average life of loans is substantially less
than their average contractual terms due to prepayments. In addition, due-on-sale clauses on loans generally give us the right to declare
a conventional loan immediately due and payable in the event, among other things, that the borrower sells real property subject to a
mortgage and the loan is not repaid. The average life of mortgage loans tends to increase, however, when current mortgage loan rates
are substantially higher than rates on existing mortgage loans and, conversely, decrease when rates on existing mortgages are substantially
higher than current mortgage rates.
Off-Balance
Sheet Arrangements and Aggregate Contractual Obligations
The
Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to extend credit, unused lines of credit, and standby letters of credit.
These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amounts recognized in the consolidated
balance sheet. The contractual amounts of those instruments reflect the extent of the Company’s involvement in particular classes
of financial instruments.
The
Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments
to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments
as it does for on-balance-sheet instruments.
Commitments
to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.
Commitments generally have fixed-expiration dates or other termination clauses and may require payment of a fee. Since certain commitments
expire without being drawn upon, the total committed amounts do not necessarily represent future cash requirements. The Company evaluates
each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary in order to extend
credit, is based on management’s credit evaluation of the counterparty.
A
summary of the contractual amounts of the Company’s financial instruments with off-balance sheet risk at December 31, 2022 follows
(in thousands):
Commitments to extend credit | |
$ | 15,447 | |
| |
| | |
Unused lines of credit | |
$ | 17,400 | |
| |
| | |
Standby letters of credit | |
$ | 4,313 | |
The
following is a summary of the Company’s on-balance sheet contractual obligations at December 31, 2022 (in thousands):
| |
| | |
Payments
Due by Period | | |
| |
| |
| | |
Less | | |
1-3 | | |
3-5 | | |
More Than
5 | |
Contractual
Obligations | |
Total | | |
Than
1 Year | | |
Years | | |
Years | | |
Years | |
Federal Home Loan Bank advances | |
$ | 10,000 | | |
$ | — | | |
$ | 10,000 | | |
$ | - | | |
$ | - | |
Operating lease liabilities | |
| 2,480 | | |
| 264 | | |
| 546 | | |
| 602 | | |
| 1,068 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 12,480 | | |
$ | 264 | | |
| 10,546 | | |
| 602 | | |
| 1,068 | |
Deposits
Deposits
traditionally are the primary source of funds for the Company’s use in lending, making investments and meeting liquidity demands.
The Company has focused on raising time deposits primarily within its market area, which is the area of Broward, Miami-Dade, Palm Beach,
Martin, and St. Lucie counties. However, the Company offers a variety of deposit products, which are promoted within its market area.
Deposits increased $215.4 million in 2022. The increase in deposit balances primarily consisted of an increase of $35.1 million in noninterest-bearing
commercial demand deposits and an increase of $226.7 million in time deposits. These increases were partially offset by a decrease of
$46.4 million in Savings, NOW and money-market deposits. The increase in time deposits consisted of $165 million in deposits sourced
through an online listing service and $61.7 million in deposits from competitive offerings at our branch offices.
The
following table displays the distribution of the Company’s deposits at December 31, 2022 and 2021 (in thousands):
| |
2022 | | |
2021 | |
| |
| | |
% of | | |
| | |
% of | |
| |
Amount | | |
Deposits | | |
Amount | | |
Deposits | |
Noninterest-bearing demand deposits | |
| 159,193 | | |
| 31.3 | % | |
$ | 124,119 | | |
| 42.4 | |
Interest-bearing demand deposits | |
| 47,224 | | |
| 9.3 | | |
| 33,083 | | |
| 11.3 | |
Money-market deposits | |
| 60,020 | | |
| 11.8 | | |
| 121,083 | | |
| 41.4 | |
Savings | |
| 1,482 | | |
| 0.3 | | |
| 936 | | |
| 0.3 | |
| |
| | | |
| | | |
| | | |
| | |
Subtotal | |
$ | 267,919 | | |
| 52.7 | % | |
$ | 279,221 | | |
| 95.4 | % |
| |
| | | |
| | | |
| | | |
| | |
Time deposits: | |
| | | |
| | | |
| | | |
| | |
0.00% – 0.99% | |
| 2,618 | | |
| 0.5 | | |
$ | 10,295 | | |
| 3.5 | |
1.00% – 1.99% | |
| 5,660 | | |
| 1.2 | | |
| 2,183 | | |
| 0.8 | |
2.00% – 2.99% | |
| 231,702 | | |
| 45.6 | | |
| 758 | | |
| 0.3 | |
| |
| | | |
| | | |
| | | |
| | |
Total time deposits
(1) | |
| 239,980 | | |
| 47.3 | | |
| 13,236 | | |
| 4.6 | |
| |
| | | |
| | | |
| | | |
| | |
Total deposits | |
$ | 507,899 | | |
| 100 | % | |
$ | 292,457 | | |
| 100 | % |
(1) |
Includes
Individual Retirement Accounts (IRA’s) totaling $1,537,000 and $1,207,000 at December 31, 2022 and 2021, respectively, all
of which are in the form of time deposits. |
Time
Deposits of $250,000 or more, or Jumbo Time Deposits, are generally considered a more unpredictable source of funds. The following table
sets forth the Company’s maturity distribution of time deposits of $250,000 or more at December 31, 2022 and 2021 (in thousands):
| |
At
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Due three months or less | |
$ | - | | |
$ | 583 | |
Due more than three months to six months | |
| - | | |
| 787 | |
More than six months to one year | |
| 44,680 | | |
| 320 | |
One to five years | |
| 2,656 | | |
| — | |
| |
| | | |
| | |
Total | |
$ | 47,336 | | |
$ | 1,690 | |
Analysis
of Results of Operations
The
Company’s profitability depends to a large extent on net interest income, which is the difference between the interest received
on earning assets, such as loans and securities, and the interest paid on interest-bearing liabilities, principally deposits and borrowings.
Net interest income is determined by the difference between yields earned on interest-earning assets and rates paid on interest-bearing
liabilities (“interest-rate spread”) and the relative amounts of interest-earning assets and interest-bearing liabilities.
The Company’s interest-rate spread is affected by regulatory, economic, and competitive factors that influence interest rates,
loan demand, and deposit flows. The Company’s results of operations are also affected by the provision for loan losses, operating
expenses such as salaries and employee benefits, occupancy and other operating expenses including income taxes, and noninterest income
such as loan prepayment fees.
The
following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning
assets and the resultant average yield; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant
average cost; (iii) net interest income; (iv) interest rate spread; and (v) net interest margin. Average balances are based on average
daily balances (dollars in thousands):
| |
Year
Ended December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
Interest | | |
Average | | |
| | |
Interest | | |
Average | |
| |
Average | | |
And | | |
Yield/ | | |
Average | | |
And | | |
Yield/ | |
| |
Balance | | |
Dividends | | |
Rate | | |
Balance | | |
Dividends | | |
Rate | |
Interest-earning assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans | |
$ | 354,521 | | |
| 17,952 | | |
| 5.1 | % | |
$ | 191,561 | | |
| 9,756 | | |
| 5.1 | % |
Securities | |
| 29,263 | | |
| 649 | | |
| 2.2 | % | |
| 30,075 | | |
| 488 | | |
| 1.6 | % |
Other interest-earning
assets (1) | |
| 64,989 | | |
| 1,281 | | |
| 2.0 | % | |
| 42,399 | | |
| 145 | | |
| 0.3 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total interest-earning
assets/interest income | |
| 448,773 | | |
| 19,882 | | |
| 4.4 | % | |
| 264,035 | | |
| 10,389 | | |
| 3.9 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash and due from banks | |
| 16,430 | | |
| | | |
| | | |
| 19,169 | | |
| | | |
| | |
Premises and equipment | |
| 867 | | |
| | | |
| | | |
| 3,045 | | |
| | | |
| | |
Other assets | |
| 4,480 | | |
| | | |
| | | |
| 3,762 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total assets | |
| 470,550 | | |
| | | |
| | | |
$ | 290,011 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Savings, NOW and money-market deposits | |
| 152,588 | | |
| 669 | | |
| 0.4 | % | |
$ | 129,792 | | |
| 533 | | |
| 0.4 | % |
Time deposits | |
| 83,324 | | |
| 2,565 | | |
| 3.1 | % | |
| 16,970 | | |
| 118 | | |
| 0.7 | % |
Borrowings (4) | |
| 39,152 | | |
| 812 | | |
| 2.1 | % | |
| 20,271 | | |
| 334 | | |
| 1.7 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total interest-bearing
liabilities/interest expense | |
| 275,064 | | |
| 4,046 | | |
| 1.5 | % | |
| 167,033 | | |
| 985 | | |
| 0.6 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Noninterest-bearing demand deposits | |
| 145,670 | | |
| | | |
| | | |
| 93,758 | | |
| | | |
| | |
Other liabilities | |
| 3,014 | | |
| | | |
| | | |
| 1,690 | | |
| | | |
| | |
Stockholders’
equity | |
| 46,802 | | |
| | | |
| | | |
| 27,530 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total liabilities and
stockholders’ equity | |
$ | 470,550 | | |
| | | |
| | | |
$ | 290,011 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net interest income | |
| | | |
| 15,836 | | |
| | | |
| | | |
| 9,404 | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest rate spread
(2) | |
| | | |
| | | |
| 2.96 | % | |
| | | |
| | | |
| 3.3 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net interest margin
(3) | |
| | | |
| | | |
| 3.53 | % | |
| | | |
| | | |
| 3.6 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ratio of average interest-earning
assets to average interest- bearing liabilities | |
| | | |
| | | |
| 1.63 | | |
| | | |
| | | |
| 1.58 | |
1 |
Includes
interest-earning deposits with banks, Federal funds sold and Federal Home Loan Bank stock dividends. |
2 |
Interest
rate spread represents the difference between average yield on interest-earning assets and the average cost of interest-bearing liabilities. |
3 |
Net
interest margin is net interest income divided by average interest-earning assets. |
4 |
Includes
Federal Home Loan Bank advances. |
Rate/Volume
Analysis
The
following tables set forth certain information regarding changes in interest income and interest expense for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes
in rate (change in rate multiplied by prior volume), (2) changes in volume (change in volume multiplied by prior rate) and (3) changes
in rate-volume (change in rate multiplied by change in volume) (in thousands):
| |
Year Ended
December 31, | |
| |
2022 versus
2021 | |
| |
Increases
(Decreases) Due to Change In: | |
| |
Rate | | |
Volume | | |
Rate/Volume | | |
Total | |
Interest-earning assets: | |
| | | |
| | | |
| | | |
| | |
Loans | |
$ | (56 | ) | |
$ | 8,299 | | |
$ | (48 | ) | |
$ | 8,195 | |
Securities | |
| 179 | | |
| (13 | ) | |
| (5 | ) | |
| 161 | |
Other interest-earning
assets | |
| 691 | | |
| 77 | | |
| 368 | | |
| 1,136 | |
| |
| | | |
| | | |
| | | |
| | |
Total interest-earning
assets | |
| 814 | | |
| 8,363 | | |
| 315 | | |
| 9,492 | |
| |
| | | |
| | | |
| | | |
| | |
Interest-bearing liabilities: | |
| | | |
| | | |
| | | |
| | |
Savings, NOW and money-market | |
| 35 | | |
| 94 | | |
| 6 | | |
| 135 | |
Time deposits | |
| 405 | | |
| 460 | | |
| 1,582 | | |
| 2,447 | |
Other | |
| 63 | | |
| 349 | | |
| 66 | | |
| 478 | |
| |
| | | |
| | | |
| | | |
| | |
Total interest-bearing
liabilities | |
| 503 | | |
| 903 | | |
| 1,654 | | |
| 3,060 | |
| |
| | | |
| | | |
| | | |
| | |
Net interest income | |
$ | 311 | | |
$ | 7,460 | | |
$ | (1,339 | ) | |
$ | 6,432 | |
Financial
Condition as of December 31, 2022 Compared to December 31, 2021
The
Company’s total assets at December 31, 2022, were $585.2 million, an increase of $233.3 million from December 31, 2021. The increase
of $233.3 million in total assets primarily consisted of increases of $12.9 million in cash and cash equivalents, and $229.3 million
in net loans offset by a $9.2 million reduction in debt securities available for sale due to principal paydowns and unrealized losses
during the year. The Company experienced growth across the various loan types due to new organic originations. The net increase in loans
resulted from $21.0 million in multi-family real estate loans, $181.2 million in commercial real estate loans and $17.8 million in residential
real estate loans. The growth experienced in the loan portfolio is due to the implementation of our relationship based banking model
and the success of our lenders in competing for new business in a highly competitive South Florida area.
The
Company’s total liabilities at December 31, 2022, were $522.6 million, an increase of $209.3 million from December 31, 2021. The
increase of $209.3 million in total liabilities was mainly due to an increase of $215.4 million in total deposits and a decrease of $8.0
million in Federal Home Loan Bank advances.
The
Company’s total stockholders’ equity at December 31, 2022, was $62.6 million, an increase of $24.1 million. The increase
of $24.1 was principally due to the Company’s issuance of shares of Series B Participating Preferred Stock for an aggregate amount
of $15.0 million, issuance of common stock for an aggregate amount of $9.9 million and net income of $4.0 million, offset by an increase
in unrealized loss on debt securities of $5.2 million.
At
December 31, 2022, the Bank had a Tier 1 leverage ratio of 11.29%.
Results
of Operations for Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
| |
Years
Ended December 31, | | |
Increase
/ (Decrease) | |
(dollars in thousands) | |
2022 | | |
2021 | | |
Amount | | |
Percentage | |
Total interest income | |
$ | 19,882 | | |
$ | 10,389 | | |
$ | 9,493 | | |
| 91 | % |
Total interest expense | |
| 4,046 | | |
| 985 | | |
| 3,061 | | |
| 311 | % |
Net interest income | |
| 15,836 | | |
| 9,404 | | |
| 6,432 | | |
| 68 | % |
Provision for loan losses | |
| 3,466 | | |
| 1,173 | | |
| 2,293 | | |
| 195 | % |
Net interest income after provision for loan
losses | |
| 12,370 | | |
| 8,231 | | |
| 4,139 | | |
| 50 | % |
Total noninterest income | |
| 2,960 | | |
| 1,774 | | |
| 1,186 | | |
| 67 | % |
Total noninterest expenses | |
| 9,938 | | |
| 6,936 | | |
| 3,002 | | |
| 43 | % |
Net earnings before income taxes (benefit) | |
| 5,392 | | |
| 3,069 | | |
| 2,323 | | |
| 76 | % |
Income taxes expense
(benefit) | |
| 1,369 | | |
| (3,227 | ) | |
| 4,596 | | |
| 142 | % |
Net earnings | |
$ | 4,023 | | |
$ | 6,296 | | |
$ | (2,273 | ) | |
| (36 | )% |
Net earnings per share
- Basic and diluted | |
$ | 0.68 | | |
$ | 1.61 | | |
| | | |
| | |
Net
earnings. The Company had net earnings of $4.0 million for the year ended December 31, 2022 compared to a net earnings of $6.3 million
for the year ended December 31, 2021. The Company recorded a provision for loan losses amounting to $3,446,000 during year ended December
31, 2022, which was largely due to the growth in the loan portfolio of $229.3 million. The Company recorded a provision for loan losses
amounting to $1,173,000 during the year ended December 31, 2021.
Interest
Income. Interest income increased by $9.5 million to $19.9 million for the year ended December 31, 2022 from $10.4 million for
the year ended December 31, 2021, primarily due to an increase in loan volume.
Interest
Expense. Interest expense on deposits and borrowings increased by $3.1 million to $4 million for the year ended December 31,
2022 compared to the prior year. The increase in interest expense was caused by increased in interest rates paid on deposits and borrowings
offset by volume increases in deposits and borrowings.
Provision
for Loan Losses. The provision for losses during the year ended December 31, 2022 amounted to $3,446,000. The provision for loan
losses is charged to earnings in order to bring the total allowance for loan losses to a level deemed appropriate by management to absorb
losses inherent in the portfolio. Management’s periodic evaluation of the adequacy of the allowance is based upon historical experience,
the volume and type of lending conducted by us, adverse situations that may affect the borrower’s ability to repay, estimated value
of the underlying collateral, loans identified as impaired, general economic conditions, particularly as they relate to our market areas,
and other factors related to the estimated collectability of our loan portfolio. The allowance for loan losses totaled $5.8 million or
1.20% of loans outstanding at December 31, 2022, compared to $3.1 million or 1.22% of loans outstanding at December 31, 2021.
Noninterest
Income. Total noninterest income increased by $1,186,000 for the year ended December 31, 2022, from $1,774,000 for the year ended
December 31, 2021. The increase is primarily related to service charges on deposit payment transactions.
Noninterest
Expenses. Total noninterest expenses increased by $3,002,000 to $9.9 million for the year ended December 31, 2022, compared to
$6.9 million for the year ended December 31, 2021. The increase is primarily due to an increase of $1.8 million in salaries and employee
benefits during the year ended December 31, 2022. The headcount of full-time equivalent employees increased from 38 to 48. Further, data
processing and regulatory assessments and related costs increased $0.5 million and $0.7 million, respectively, during the year ended
December 31, 2022. The increase in noninterest expenses is directly attributable to the growth of the Bank.
Income
taxes (benefit). The Company recorded income tax expense of $1,369,000 for the year ended December 31, 2022 compared to an income
tax benefit of $3,227,000 for the year ended December 31, 2021. The income tax benefit was the result of the reversal of a valuation
allowance that had previously been recognized.
Impact
of Inflation and Changing Prices
The
consolidated financial statements and related data presented herein have been prepared in accordance with accounting principles generally
accepted in the United States of America, which requires the measurement of financial position and operating results in terms of historical
dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies,
substantially all of the Bank’s assets and liabilities are monetary in nature. As a result, interest rates have a more significant
impact on its performance than the effects of general levels of inflation. However, inflation affects financial institutions by increasing
their cost of goods and services purchased, as well as the cost of salaries and benefits, occupancy expense, and similar items. Inflation
and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity,
earnings, and stockholders’ equity. Loan originations and re-financings tend to slow as interest rates increase. As a general principle,
higher, interest rates are likely to reduce the Company’s earnings.
Exhibit
C
Unaudited
Financial Statements For The Quarters Ended March 31, 2023 and 2022
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Condensed
Consolidated Balance Sheets
(Dollars
in thousands, except share amounts)
| |
March 31, | | |
December 31, | |
| |
2023 | | |
2022 | |
| |
(Unaudited) | | |
| |
Assets: | |
| | | |
| | |
Cash and due from banks | |
$ | 20,692 | | |
$ | 19,788 | |
Interest-bearing deposits with banks | |
| 65,966 | | |
| 52,048 | |
Total cash and cash equivalents | |
| 86,658 | | |
| 71,836 | |
Debt securities available for sale | |
| 25,554 | | |
| 25,102 | |
Debt securities held-to-maturity (fair value of $468 and $504) | |
| 498 | | |
| 540 | |
Loans, net of allowance for credit losses of $6,353 and $5,793 | |
| 495,556 | | |
| 477,218 | |
Federal Home Loan Bank stock | |
| 1,354 | | |
| 600 | |
Premises and equipment, net | |
| 1,117 | | |
| 934 | |
Right-of-use lease assets | |
| 2,369 | | |
| 2,119 | |
Accrued interest receivable | |
| 1,427 | | |
| 1,444 | |
Deferred tax asset | |
| 3,323 | | |
| 3,836 | |
Other assets | |
| 4,180 | | |
| 1,590 | |
| |
| | | |
| | |
Total assets | |
$ | 622,036 | | |
$ | 585,219 | |
Liabilities and Stockholders’ Equity: | |
| | | |
| | |
| |
| | | |
| | |
Liabilities: | |
| | | |
| | |
Noninterest-bearing demand deposits | |
$ | 159,784 | | |
$ | 159,193 | |
Savings, NOW and money-market deposits | |
| 134,020 | | |
| 108,726 | |
Time deposits | |
| 233,583 | | |
| 239,980 | |
| |
| | | |
| | |
Total deposits | |
| 527,387 | | |
| 507,899 | |
| |
| | | |
| | |
Federal Home Loan Bank advances | |
| 25,000 | | |
| 10,000 | |
| |
| | | |
| | |
Official checks | |
| 981 | | |
| 110 | |
Operating lease liabilities | |
| 2,431 | | |
| 2,172 | |
Other liabilities | |
| 1,332 | | |
| 2,458 | |
| |
| | | |
| | |
Total liabilities | |
| 557,131 | | |
| 522,639 | |
| |
| | | |
| | |
Commitments and contingencies (Notes 8 and 11) | |
| | | |
| | |
Stockholders’ equity: | |
| | | |
| | |
Preferred stock, no par value; 6,000,000 shares authorized: | |
| | | |
| | |
Series A Preferred, no par value, no shares issued and outstanding | |
| — | | |
| — | |
Series B Convertible Preferred, no par value, 1,520 shares authorized, 1,360 shares issued and outstanding | |
| — | | |
| — | |
| |
| | | |
| | |
Common stock, $.01 par value; 10,000,000 shares authorized, 7,250,218 and 7,058,897 shares issued
and outstanding | |
| 72 | | |
| 71 | |
Additional paid-in capital | |
| 91,221 | | |
| 90,408 | |
Accumulated deficit | |
| (21,101 | ) | |
| (22,073 | ) |
Accumulated other comprehensive loss | |
| (5,287 | ) | |
| (5,826 | ) |
| |
| | | |
| | |
Total stockholders’ equity | |
| 64,905 | | |
| 62,580 | |
Total liabilities and stockholders’ equity | |
$ | 622,036 | | |
$ | 585,219 | |
See
accompanying notes to condensed consolidated financial statements.
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Condensed
Consolidated Statements of Earnings (Unaudited)
(in thousands, except per share amounts)
| |
Three Months Ended | |
| |
March 31, | |
| |
2023 | | |
2022 | |
Interest income: | |
| | | |
| | |
Loans | |
$ | 6,589 | | |
$ | 3,263 | |
Debt securities | |
| 178 | | |
| 163 | |
Other | |
| 749 | | |
| 37 | |
| |
| | | |
| | |
Total interest income | |
| 7,516 | | |
| 3,463 | |
| |
| | | |
| | |
Interest expense: | |
| | | |
| | |
Deposits | |
| 2,432 | | |
| 175 | |
Borrowings | |
| 25 | | |
| 61 | |
| |
| | | |
| | |
Total interest expense | |
| 2,457 | | |
| 236 | |
| |
| | | |
| | |
Net interest income | |
| 5,059 | | |
| 3,227 | |
| |
| | | |
| | |
Credit loss expense | |
| 820 | | |
| 392 | |
| |
| | | |
| | |
Net interest income after credit loss expense | |
| 4,239 | | |
| 2,835 | |
| |
| | | |
| | |
Noninterest income: | |
| | | |
| | |
Service charges and fees | |
| 719 | | |
| 589 | |
Other | |
| 10 | | |
| 61 | |
| |
| | | |
| | |
Total noninterest income | |
| 729 | | |
| 650 | |
| |
| | | |
| | |
Noninterest expenses: | |
| | | |
| | |
Salaries and employee benefits | |
| 1,966 | | |
| 1,335 | |
Professional fees | |
| 197 | | |
| 147 | |
Occupancy and equipment | |
| 189 | | |
| 167 | |
Data processing | |
| 366 | | |
| 277 | |
Regulatory assessment | |
| 209 | | |
| 77 | |
Other | |
| 495 | | |
| 337 | |
| |
| | | |
| | |
Total noninterest expenses | |
| 3,422 | | |
| 2,340 | |
| |
| | | |
| | |
Net earnings before income taxes | |
| 1,546 | | |
| 1,145 | |
| |
| | | |
| | |
Income taxes | |
| 393 | | |
| 290 | |
| |
| | | |
| | |
Net earnings | |
$ | 1,153 | | |
$ | 855 | |
| |
| | | |
| | |
Net earnings per share - Basic and diluted | |
$ | .16 | | |
$ | .17 | |
See
accompanying notes to condensed consolidated financial statements.
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Condensed
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(In thousands)
| |
Three Months Ended | |
| |
March 31, | |
| |
2023 | | |
2022 | |
| |
| | |
| |
Net earnings | |
$ | 1,153 | | |
$ | 855 | |
| |
| | | |
| | |
Other comprehensive income (loss): | |
| | | |
| | |
Change in unrealized loss on debt securities: | |
| | | |
| | |
Unrealized gain (loss) arising during the period | |
| 715 | | |
| (2,781 | ) |
| |
| | | |
| | |
Amortization of unrealized loss on debt securities transferred to held-to-maturity | |
| 1 | | |
| 7 | |
| |
| | | |
| | |
Other comprehensive income (loss) before income taxes | |
| 716 | | |
| (2,774 | ) |
| |
| | | |
| | |
Deferred income taxes (benefit) | |
| 177 | | |
| (703 | ) |
| |
| | | |
| | |
Total other comprehensive income (loss) | |
| 539 | | |
| (2,071 | ) |
| |
| | | |
| | |
Comprehensive income (loss) | |
$ | 1,692 | | |
$ | (1,216 | ) |
See
accompanying notes to condensed consolidated financial statements.
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Condensed
Consolidated Statements of Stockholders’ Equity
Three
Months Ended March 31, 2023 and 2022
(Dollars
in thousands)
| |
Preferred Stock | | |
| | |
Additional | | |
| | |
Accumulated | | |
| |
| |
Series A | | |
Series B | | |
Common Stock | | |
Paid-In | | |
Accumulated | | |
Comprehensive | | |
Stockholders’ | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Loss | | |
Equity | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balance at December 31, 2021 | |
| — | | |
$ | — | | |
| 760 | | |
$ | — | | |
| 4,775,281 | | |
$ | 48 | | |
$ | 65,193 | | |
$ | (26,096 | ) | |
$ | (635 | ) | |
$ | 38,510 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Proceeds from the sale of preferred stock (unaudited) | |
| — | | |
| — | | |
| 260 | | |
| — | | |
| — | | |
| — | | |
| 6,500 | | |
| — | | |
| — | | |
| 6,500 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Proceeds from the sale of common stock (unaudited) | |
| — | | |
| — | | |
| — | | |
| — | | |
| 1,227,331 | | |
| 12 | | |
| 5,511 | | |
| — | | |
| — | | |
| 5,523 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net change in unrealized loss on debt securities available for sale (unaudited) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (2,078 | ) | |
| (2,078 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Amortization of unrealized loss on debt securities transferred to held-to-maturity (unaudited) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 7 | | |
| 7 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net earnings for three months ended March 31, 2022 (unaudited) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 855 | | |
| — | | |
| 855 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance at March 31, 2022 (unaudited) | |
| — | | |
$ | — | | |
| 1,020 | | |
$ | — | | |
| 6,002,612 | | |
$ | 60 | | |
$ | 77,204 | | |
$ | (25,241 | ) | |
$ | (2,706 | ) | |
$ | 49,317 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance at December 31, 2022 | |
| — | | |
$ | — | | |
| 1,360 | | |
$ | — | | |
| 7,058,897 | | |
$ | 71 | | |
$ | 90,408 | | |
$ | (22,073 | ) | |
$ | (5,826 | ) | |
$ | 62,580 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Additional allowance recognized due to adoption of Topic 326 | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (181 | ) | |
| — | | |
| (181 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Proceeds from the sale of common stock (unaudited) | |
| — | | |
| — | | |
| — | | |
| — | | |
| 72,221 | | |
| — | | |
| 324 | | |
| — | | |
| — | | |
| 324 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based Compensation (unaudited) | |
| — | | |
| — | | |
| — | | |
| — | | |
| 119,101 | | |
| 1 | | |
| 489 | | |
| — | | |
| — | | |
| 490 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net change in unrealized loss on debt securities available for sale (unaudited) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 538 | | |
| 538 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Amortization of unrealized loss on debt securities transferred to held-to-maturity (unaudited) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 1 | | |
| 1 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net earnings for three months ended March 31, 2023 (unaudited) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 1,153 | | |
| — | | |
| 1,153 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance at March 31, 2023 (unaudited) | |
| — | | |
$ | — | | |
| 1,360 | | |
$ | — | | |
| 7,250,219 | | |
$ | 72 | | |
$ | 91,221 | | |
$ | (21,101 | ) | |
$ | (5,287 | ) | |
$ | 64,905 | |
See
accompanying notes to condensed consolidated financial statements.
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Condensed
Consolidated Statements of Cash Flows (Unaudited)
(In
thousands)
| |
Three Months Ended | |
| |
March 31, | |
| |
2023 | | |
2022 | |
Cash flows from operating activities: | |
| | | |
| | |
Net earnings | |
$ | 1,153 | | |
$ | 855 | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | |
| | | |
| | |
Credit loss expense | |
| 820 | | |
| 392 | |
Depreciation and amortization | |
| 57 | | |
| 56 | |
Deferred income taxes | |
| 397 | | |
| 290 | |
Net accretion of fees, premiums and discounts | |
| 8 | | |
| (62 | ) |
Stock-based compensation expense | |
| 490 | | |
| 96 | |
Decrease in accrued interest receivable | |
| 17 | | |
| 44 | |
Amortization of right of use asset | |
| 65 | | |
| 156 | |
Net decrease in operating lease liabilities | |
| (56 | ) | |
| (155 | ) |
(Increase) decrease in other assets | |
| (2,590 | ) | |
| 291 | |
Decrease in official checks and other liabilities | |
| (332 | ) | |
| (317 | ) |
Net cash provided by operating activities | |
| 29 | | |
| 1,646 | |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Principal repayments of debt securities available for sale | |
| 232 | | |
| 617 | |
Principal repayments of debt securities held-to-maturity | |
| 42 | | |
| 236 | |
Net increase in loans | |
| (19,299 | ) | |
| (26,061 | ) |
Purchases of premises and equipment | |
| (240 | ) | |
| (47 | ) |
Purchase of FHLB stock | |
| (754 | ) | |
| (57 | ) |
| |
| | | |
| | |
Net cash used in investing activities | |
| (20,019 | ) | |
| (25,312 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Net increase in deposits | |
| 19,488 | | |
| 24,865 | |
Net increase in FHLB Advances | |
| 15,000 | | |
| — | |
Proceeds from sale of preferred stock | |
| — | | |
| 6,500 | |
Proceeds from sale of common stock | |
| 324 | | |
| 5,523 | |
| |
| | | |
| | |
Net cash provided by financing activities | |
| 34,812 | | |
| 36,888 | |
| |
| | | |
| | |
Net increase in cash and cash equivalents | |
| 14,822 | | |
| 13,222 | |
| |
| | | |
| | |
Cash and cash equivalents at beginning of the period | |
| 71,836 | | |
| 58,970 | |
| |
| | | |
| | |
Cash and cash equivalents at end of the period | |
$ | 86,658 | | |
$ | 72,192 | |
| |
| | | |
| | |
Supplemental disclosure of cash flow information: | |
| | | |
| | |
Cash paid during the period for: | |
| | | |
| | |
Interest | |
$ | 2,327 | | |
$ | 237 | |
| |
| | | |
| | |
Income taxes | |
$ | — | | |
$ | — | |
| |
| | | |
| | |
Noncash transactions: | |
| | | |
| | |
Change in accumulated other comprehensive loss, net change in unrealized loss
on debt securities available for sale, net of income taxes | |
$ | 538 | | |
$ | (2,078 | ) |
| |
| | | |
| | |
Amortization of unrealized loss on debt securities transferred to held-to-maturity | |
$ | 1 | | |
$ | 7 | |
| |
| | | |
| | |
Reduction of stockholder’s equity due to adoption of topic 326, net | |
$ | (181 | ) | |
| — | |
Right-of use lease assets obtained in exchange for operating lease liabilities | |
$ | 315 | | |
$ | — | |
Increase in other liabilities for stock-based compensation | |
$ | — | | |
$ | 96 | |
See
accompanying notes to condensed consolidated financial statements.
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(1)
General. OptimumBank Holdings, Inc. (the “Company”) is a one-bank holding company and owns 100% of OptimumBank
(the “Bank”), a Florida-chartered community bank. The Company’s only business is the operation of the Bank. The Bank’s
deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). The Bank offers a variety
of community banking services to individual and corporate customers through its two banking offices located in Broward County, Florida.
Basis
of Presentation. In the opinion of management, the accompanying condensed consolidated financial statements of the Company contain
all adjustments (consisting principally of normal recurring accruals) necessary to present fairly the financial position at March 31,
2023, and the results of operations and cash flows for the three month periods ended March 31, 2023 and 2022. All significant intercompany
accounts and transactions have been eliminated in consolidation. The results of operations for the three months ended March 31, 2023,
are not necessarily indicative of the results to be expected for the full year.
Comprehensive
Income (Loss). Generally Accepted Accounting Principles generally require that recognized revenue, expenses, gains and losses
be included in net earnings. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale
debt securities, are reported as a separate component of the equity section of the condensed consolidated balance sheets, such items
along with net earnings, are components of comprehensive income (loss).
Accumulated
other comprehensive loss consists of the following (in thousands):
| |
March 31, | | |
December 31, | |
| |
2023 | | |
2022 | |
| |
| | |
| |
Unrealized loss on debt securities available for sale | |
$ | (7,072 | ) | |
$ | (7,786 | ) |
Unamortized portion of unrealized loss related to debt securities available for sale transferred
to securities held-to-maturity | |
| (17 | ) | |
| (18 | ) |
Income tax benefit | |
| 1,802 | | |
| 1,978 | |
| |
| | | |
| | |
Accumulated other comprehensive loss | |
$ | (5,287 | ) | |
$ | (5,826 | ) |
Reclassifications.
Certain amounts have been reclassified to allow for consistent presentation for the periods presented.
Adoption
of New Accounting Standards. The Company adopted Accounting Standards Update 2016-13, Financial Instruments – Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and the related amendments (collectively, Accounting Standards
Codification 326), effective January 1, 2023. The guidance replaces the incurred loss methodology with an expected loss methodology that
is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under
the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt
securities. It also applies to certain off-balance sheet credit exposures not accounted for as insurance, including loan commitments,
standby letters of credits, financial guarantees, and other similar instruments. In addition, Accounting Standards Codification 326 (“ASC
326”) made changes to the accounting for debt securities available for sale. One such change is to require credit losses to be
presented as an allowance rather than as a write-down on debt securities available for sale that management does not intend to sell or
believes that it is more likely than not they will not be required to sell. ASC 326 also changed the accounting for purchased financial
assets with credit deterioration.
The
Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet
credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts
continue to be reported in accordance with previously applicable GAAP. The adoption of CECL resulted in the recognition of $219,000 allowance
for credit losses, $23,000 of liability for unfunded commitments, a deferred income tax asset of $61,000 and a reduction in retained
earnings of $181,000. With this transition method, the Company did not have to restate comparative prior periods presented in the consolidated
financial statements related to ASC 326 but will present comparative prior periods disclosures using the previous accounting guidance
for the allowance for loan losses. The Company adopted ASC 326 using the prospective transition approach for debt securities available
for sale. As of January 1, 2023, the Company did not have any allowance for credit losses on debt securities.
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(1)
General, Continued.
Allowance
for Credit Losses (“ACL”). The following is a summary of the Company’s significant accounting policies with
respect to ASC 326:
ACL
- Debt Securities Available for Sale. Management uses a systematic methodology to determine its ACL for debt securities available
for sale. Each quarter management evaluates impairment where there has been a decline in fair value below the amortized cost basis to
determine whether there is a credit loss associated with the decline in fair value. The Company first assesses whether it intends to
sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either
one of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair
value through income. For debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in
fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which the
fair value is less than the amortized cost basis, among various other factors, including the nature of the collateral, potential future
changes in collateral values, default rates, delinquency rates, third-party guarantees, credit ratings, interest rate changes since purchase,
volatility of the security’s fair value and historical loss information for financial assets secured with similar collateral among
other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from
the security are compared to the amortized cost basis. If the present value of cash flows expected to be collected is less than the amortized
cost basis, an ACL is recorded, which is limited by the amount that the fair value is less than the amortized cost basis. Credit losses
are calculated individually, rather than collectively. Any impairment that has not been recorded through an ACL is recognized in other
comprehensive loss.
Changes
in the ACL are recorded as credit loss expense (reversal). Losses are charged against the ACL when management believes the collectability
of the debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Management
excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on the debt securities
available for sale and does not record an ACL on accrued interest receivable. As of March 31, 2023, the accrued interest receivable for
debt securities available for sale recognized in accrued interest receivable was $140,000.
ACL
– Debt Securities Held to Maturity. The Company measures expected credit losses on debt securities held to maturity on
a collective basis by major security type. U.S. Government agency securities, Mortgage-backed securities and collateralized mortgage
obligations are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have
a long history of no credit losses. Taxable municipal securities are highly rated by major credit agencies.
ACL
- Loans. The ACL reflects management’s estimate of losses that will result from the inability of our borrowers to make
required loan payments. The Company records loans charged-off against the ACL when management believes the uncollectability of a loan
balance is confirmed and subsequent recoveries, if any, increase the ACL when they are recognized.
Management
uses systematic methodologies to determine its ACL for loans and certain off- balance sheet credit exposures. The ACL is a valuation
account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio. Management
estimates the ACL using relevant available information, from internal and external sources, relating to past events, current conditions,
and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of the expected credit
losses. Adjustments to historical loss information are made for the differences in current loan-specific risk characteristics such as
differences in underwriting standards, portfolio mix, delinquency level, or term as well as changes in environmental conditions, such
as changes in unemployment rates, property values, or other relevant factors.
The
Company’s estimate of its ACL involves a high degree of judgment; therefore, management’s process for determining expected
credit losses may result in a range of expected credit losses.
The
Company’s ACL recorded in the balance sheet reflects management’s best estimate of expected credit losses. The Company recognizes
in earnings the amount needed to adjust the ACL for management’s current estimate of expected credit losses. The Company’s
ACL is calculated using collectively evaluated and individually evaluated loans.
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(1)
General, Continued.
The
ACL is measured on a collective pool basis when similar risk characteristics exist. Loans with similar risk characteristics are grouped
into homogenous segments for analysis. The Company’s ACL is measured based on FDIC call report codes as these types of loans exhibit
similar risk characteristics. The loan portfolio is further segmented by loan product type, collateral codes, occupancy codes, property
code or lien position and are representative of the manner in which the Company lends.
The
ACL for each segment is measured through the use of the average charge-off method. In accordance with the average charge-off method,
an annual loss rate is applied to the amortized cost of an asset or pool of assets over the remaining expected life. The annual loss
rate consists of historical and forecasted loss components. The forecasted component is applied using loss rates from historical periods
that management believes are representative of economic conditions over a full economic cycle. For certain loan segments with limited
credit loss histories, management determined the loss experience of peer banks provides the best basis for its assessment of expected
credit losses. Other loan segments with more established loss histories utilize historical loss experience of the Company. Management
determined that the appropriate historical loss period will begin in the first quarter of 2001 and continue through the most recent quarter,
which represents a full peak to peak economic cycle. Additionally, management has determined that the Company’s reasonable and
supportable forecast period is one year.
Included
in its systematic methodology to determine its ACL, management considers the need to qualitatively adjust model results for risk factors
that are not considered within the Company’s loss estimation process but are nonetheless relevant in assessing the expected credit
losses within our loan pools.
These
qualitative factors (“Q-Factors”) may increase or decrease management’s estimate of expected credit losses by a calculated
percentage based upon the estimated level of risk. The various risks that may be considered in making Q-Factor adjustments include, among
other things, the impact of 1) changes in lending policies and procedures, including changes in underwriting standards; 2) changes in
international, national, regional and local economic conditions; 3) changes in the volume and severity of past due and nonaccrual status;
4) the effect of any concentrations of credit and changes in the levels of such concentrations; 5) changes in the experience, depth,
and ability of lending management; 6) changes in nature and volume of the portfolio; 7) trends in underlying collateral values; 8) changes
in the quality of the loan review system and 9) the effect of other external factors (i.e., competition, legal and regulatory requirements)
on the level of estimated credit losses.
The
annual loss rates, as defined above, adjusted for Q-Factors, are applied to the amortized loan balances over each subsequent period and
aggregated to arrive at the General ACL. The amortized loan balances are adjusted based on management’s estimate of loan repayments
in future periods.
When
a loan no longer shares similar risk characteristics with its segment, the asset is assessed to determine whether it should be included
in another segment or should be individually evaluated. Under ASC 326, the Company has adopted the collateral maintenance practical expedient
to measure the ACL based on the fair value of collateral. Collateral dependent loans are loans for which the repayment is expected to
be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. These
loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining ACL. A Specific
ACL is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral, which is
adjusted for selling costs, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required.
Financial assets that have been individually evaluated can be returned to a pool for purposes of estimating the expected credit loss
to the extent their credit profile improves and that the repayment terms were not considered to be unique to the asset.
Management
measures expected credit losses over the contractual term of a loan. The contractual term excludes expected extensions, renewals, and
modifications unless either of the following applies:
|
●
|
Management
has a reasonable expectation at the reporting date that a loan modification will be executed with an individual borrower. |
|
|
|
|
● |
The
extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally
cancellable by the Company. |
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(1)
General, Continued.
The
Company follows its nonaccrual policy by reversing contractual interest income in the consolidated statements of income when the Company
places a loan on nonaccrual status. Therefore, management excludes the accrued interest receivable balance from the amortized cost basis
in measuring expected credit losses on the portfolio and does not record an ACL on accrued interest receivable. As of March 31, 2023,
the accrued interest receivable for loans recorded in accrued interest receivable was $1,277,000.
Also,
various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for
credit losses. Such agencies may require the Company to recognize additions to the allowance for credit losses based on their judgments
of information available to them at the time of their examination.
Prior
to the adoption of ASC 326, the allowance for loan losses represented management’s best estimate of inherent losses that had been
incurred within the existing portfolio of loans. The allowance for loan losses included allowance allocations calculated in accordance
with ASC 310, “Receivables” and allowance allocations calculated in accordance with ASC 450, “Contingencies.”
ACL
- Off -Balance Sheet Credit Exposures. The Company has a variety of assets that have a component that qualifies as an off-balance
sheet exposure. These primarily include commitments to extend credit, standby letters of credit, and unfunded commitments under revolving
lines of credit. The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk
via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. Management has determined
that a majority of the Company’s off-balance-sheet credit exposures are not unconditionally cancellable.
The
estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected
to be funded over their expected lives. Management used its judgement to determinate funding rates. Management applied the funding rates,
along with the loss factor rate determined for each pooled loan segment, to unfunded loan commitments, excluding unconditionally cancellable
exposures and letters of credit, to arrive at the reserve for unfunded loan commitments.
As
of March 31, 2023, the liability recorded for expected credit losses on unfunded commitments was $77,000 and is included in “other
liabilities” on the accompanying condensed consolidated balance sheets. The current adjustment to the ACL for unfunded commitments
is recognized through credit loss expense in the condensed consolidated statements of earnings.
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(2)
Debt Securities. Debt Securities have been classified according to management’s intent. The carrying amount of debt
securities and approximate fair values are as follows (in thousands):
| |
| | |
Gross | | |
Gross | | |
| |
| |
Amortized | | |
Unrealized | | |
Unrealized | | |
Fair | |
| |
Cost | | |
Gains | | |
Losses | | |
Value | |
| |
| | |
| | |
| | |
| |
At March 31, 2023: | |
| | | |
| | | |
| | | |
| | |
Available for sale: | |
| | | |
| | | |
| | | |
| | |
SBA Pool Securities | |
$ | 802 | | |
$ | 1 | | |
$ | (18 | ) | |
$ | 785 | |
Collateralized mortgage obligations | |
| 142 | | |
| — | | |
| (12 | ) | |
| 130 | |
Taxable municipal securities | |
| 16,719 | | |
| — | | |
| (4,550 | ) | |
| 12,169 | |
Mortgage-backed securities | |
| 14,962 | | |
| — | | |
| (2,492 | ) | |
| 12,470 | |
Total | |
$ | 32,625 | | |
$ | 1 | | |
$ | (7,072 | ) | |
$ | 25,554 | |
| |
| | | |
| | | |
| | | |
| | |
Held-to-maturity: | |
| | | |
| | | |
| | | |
| | |
Collateralized mortgage obligations | |
$ | 449 | | |
$ | — | | |
$ | (29 | ) | |
$ | 420 | |
Mortgage-backed securities | |
| 49 | | |
| — | | |
| (1 | ) | |
| 48 | |
Total | |
$ | 498 | | |
$ | — | | |
$ | (30 | ) | |
$ | 468 | |
| |
| | | |
| | | |
| | | |
| | |
At December 31, 2022: | |
| | | |
| | | |
| | | |
| | |
Available for sale: | |
| | | |
| | | |
| | | |
| | |
SBA Pool Securities | |
$ | 834 | | |
$ | 1 | | |
$ | (18 | ) | |
$ | 817 | |
Collateralized mortgage obligations | |
| 145 | | |
| — | | |
| (15 | ) | |
| 130 | |
Taxable municipal securities | |
| 16,729 | | |
| — | | |
| (5,109 | ) | |
| 11,620 | |
Mortgage-backed securities | |
| 15,180 | | |
| — | | |
| (2,645 | ) | |
| 12,535 | |
Total | |
$ | 32,888 | | |
$ | 1 | | |
$ | (7,787 | ) | |
$ | 25,102 | |
| |
| | | |
| | | |
| | | |
| | |
Held-to-maturity: | |
| | | |
| | | |
| | | |
| | |
Collateralized mortgage obligations | |
$ | 475 | | |
$ | — | | |
$ | (35 | ) | |
$ | 440 | |
Mortgage-backed securities | |
| 65 | | |
| — | | |
| (1 | ) | |
| 64 | |
Total | |
$ | 540 | | |
$ | — | | |
$ | (36 | ) | |
$ | 504 | |
There
were no sales of debt securities during the three months ended March 31, 2023, and 2022.
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(2)
Debt Securities, Continued.
Debt
Securities available for sale with gross unrealized losses, aggregated by investment category and length of time that individual debt
securities have been in a continuous loss position, is as follows (in thousands):
| |
Over Twelve Months | | |
Less Than Twelve Months | |
| |
Gross | | |
| | |
Gross | | |
| |
| |
Unrealized | | |
Fair | | |
Unrealized | | |
Fair | |
| |
Losses | | |
Value | | |
Losses | | |
Value | |
At March 31, 2023: | |
| | |
| | |
| | |
| |
Available for Sale: | |
| | | |
| | | |
| | | |
| | |
SBA Pool Securities | |
$ | 18 | | |
$ | 629 | | |
$ | — | | |
$ | — | |
Collateralized mortgage obligation | |
| 12 | | |
| 130 | | |
| — | | |
| — | |
Taxable municipal securities | |
| 4,550 | | |
| 12,169 | | |
| — | | |
| — | |
Mortgage-backed securities | |
| 2,492 | | |
| 12,227 | | |
| — | | |
| — | |
Total | |
$ | 7,072 | | |
$ | 25,155 | | |
$ | — | | |
$ | — | |
| |
| | | |
| | | |
| | | |
| | |
At December 31, 2022: | |
| | | |
| | | |
| | | |
| | |
Available for Sale: | |
| | | |
| | | |
| | | |
| | |
SBA Pool Securities | |
$ | 18 | | |
$ | 657 | | |
$ | — | | |
$ | — | |
Collateralized mortgage obligation | |
| - | | |
| - | | |
| 15 | | |
| 130 | |
Taxable municipal securities | |
| 5,109 | | |
| 11,620 | | |
| — | | |
| — | |
Mortgage-backed securities | |
| 2,621 | | |
| 12,292 | | |
| 24 | | |
| 243 | |
Total | |
$ | 7,748 | | |
$ | 24,569 | | |
$ | 39 | | |
$ | 373 | |
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(2)
Debt Securities, Continued.
At
March 31, 2023 and December 31, 2022, the unrealized losses on forty-two and forty investment debt securities, respectively, were caused
by interest-rate changes.
Management
evaluates debt securities for impairment where there has been a decline in fair value below the amortized cost basis of a security to
determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently
when economic or market concerns warrant such evaluation. Consideration is given to (1) the financial condition and near-term prospects
of the issuer including looking at default and delinquency rates, (2) the outlook for receiving the contractual cash flows of the investments,
(3) the length of time and the extent to which the fair value has been less than cost, (4) the intent and ability to retain its investment
in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is
more-likely-than-not that the Company will be required to sell the debt security prior to recovering its fair value, (5) the anticipated
outlook for changes in the general level of interest rates, (6) credit ratings, (7) third party guarantees, and (8) collateral values.
In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government
or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer’s financial condition,
and the issuer’s anticipated ability to pay the contractual cash flows of the investments.
The
Company performed an analysis that determined that the mortgage-backed securities, collateralized mortgage obligations, and U.S. government
securities, have a zero expected credit loss as they have the full faith and credit backing of the U.S. government or one of its agencies.
Municipal bonds that do not have a zero expected credit loss are evaluated at least quarterly to determine whether there is a credit
loss associated with a decline in fair value. At March 31, 2023 and December 31, 2022 all municipal securities were rated as investment
grade. All debt securities in an unrealized loss position as of March 31, 2023 continue to perform as scheduled and the Company does
not believe that there is a credit loss or that credit loss expense is necessary. Also, as part of our evaluation of our intent and ability
to hold investments for a period of time sufficient to allow for any anticipated recovery in the market, the Company considers our investment
strategy, cash flow needs, liquidity position, capital adequacy and interest rate risk position. The Company does not currently intend
to sell the investments within the portfolio, and it is not more-likely-than-not that a sale will be required.
Management
continues to monitor all of our investments with a high degree of scrutiny. There can be no assurance that in a future period conditions
may not exist at that time indicating that some or all of the Company’s securities may be sold that would require a charge to earnings
as credit loss expense in such period.
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(3)
Loans. The segments of loans are as follows (in thousands):
| |
March 31, | | |
December 31, | |
| |
2023 | | |
2022 | |
| |
| | |
| |
Residential real estate | |
$ | 52,087 | | |
$ | 50,354 | |
Multi-family real estate | |
| 68,126 | | |
| 69,555 | |
Commercial real estate | |
| 319,446 | | |
| 310,695 | |
Land and construction | |
| 19,629 | | |
| 17,286 | |
Commercial | |
| 3,720 | | |
| 5,165 | |
Consumer | |
| 39,527 | | |
| 30,323 | |
| |
| | | |
| | |
Total loans | |
| 502,535 | | |
| 483,378 | |
| |
| | | |
| | |
Deduct: | |
| | | |
| | |
Net deferred loan fees, and costs | |
| (626 | ) | |
| (367 | ) |
Allowance for credit losses | |
| (6,353 | ) | |
| (5,793 | ) |
| |
| | | |
| | |
Loans, net | |
$ | 495,556 | | |
$ | 477,218 | |
An
analysis of the change in the allowance for credit losses follows (in thousands):
| |
Residential Real Estate | | |
Multi-Family Real Estate | | |
Commercial Real Estate | | |
Land
and Construction | | |
Commercial | | |
Consumer | | |
Total | |
Three Months Ended March 31, 2023: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Beginning balance Dec 31, 2022 | |
$ | 768 | | |
$ | 748 | | |
$ | 3,262 | | |
$ | 173 | | |
$ | 277 | | |
$ | 565 | | |
$ | 5,793 | |
Additional allowance recognized due to adoption of Topic 326 | |
| 33 | | |
| 327 | | |
| (367 | ) | |
| 278 | | |
| (262 | ) | |
| 209 | | |
| 218 | |
Balance January 1, 2023 | |
| 801 | | |
| 1,075 | | |
| 2,896 | | |
| 451 | | |
| 15 | | |
| 774 | | |
| 6,011 | |
Credit loss expense | |
| (59 | ) | |
| 2 | | |
| 135 | | |
| 82 | | |
| 37 | | |
| 568 | | |
| 765 | |
Charge-offs | |
| — | | |
| — | | |
| — | | |
| — | | |
| (26 | ) | |
| (437 | ) | |
| (463 | ) |
Recoveries | |
| — | | |
| — | | |
| — | | |
| — | | |
| - | | |
| 40 | | |
| 40 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending balance (March 31, 2023) | |
$ | 742 | | |
$ | 1,077 | | |
$ | 3,030 | | |
$ | 533 | | |
$ | 26 | | |
$ | 945 | | |
$ | 6,353 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Three Months Ended March 31, 2022: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Beginning balance Dec. 31, 2021 | |
$ | 482 | | |
$ | 535 | | |
$ | 1,535 | | |
$ | 32 | | |
$ | 74 | | |
$ | 417 | | |
$ | 3,075 | |
Provision (credit) for loan losses | |
| 93 | | |
| 14 | | |
| 72 | | |
| 47 | | |
| (6 | ) | |
| 172 | | |
| 392 | |
Charge-offs | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (73 | ) | |
| (73 | ) |
Recoveries | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 14 | | |
| 14 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending balance (March 31, 2022) | |
$ | 575 | | |
$ | 549 | | |
$ | 1,607 | | |
$ | 79 | | |
$ | 68 | | |
$ | 530 | | |
$ | 3,408 | |
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(3)
Loans, Continued.
| |
Residential Real Estate | | |
Multi-Family Real
Estate | | |
Commercial Real Estate | | |
Land and Construction | | |
Commercial | | |
Consumer | | |
Total | |
At December 31, 2022: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually evaluated for impairment: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Recorded investment | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
Balance in allowance for loan losses | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Collectively evaluated for impairment: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Recorded investment | |
$ | 50,354 | | |
$ | 69,555 | | |
$ | 310,695 | | |
$ | 17,286 | | |
$ | 5,165 | | |
$ | 30,323 | | |
$ | 483,378 | |
Balance in allowance for loan losses | |
$ | 768 | | |
$ | 748 | | |
$ | 3,262 | | |
$ | 173 | | |
$ | 277 | | |
$ | 565 | | |
$ | 5,793 | |
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(3)
Loans, Continued. The Company has divided the loan portfolio into six portfolio segments, each with different risk characteristics
and methodologies for assessing risk. All loans are underwritten based upon standards set forth in the policies approved by the Company’s
Board of Directors (the “Board”). The Company identifies the portfolio segments as follows:
Residential
Real Estate, Multi-Family Real Estate, Commercial Real Estate, Land and Construction. Residential real estate loans are underwritten
based on repayment capacity and source, value of the underlying property, credit history and stability. The Company offers first and
second one-to-four family mortgage loans; the collateral for these loans is generally the clients’ owner-occupied residences. Although
these types of loans present lower levels of risk than commercial real estate loans, risks do still exist because of possible fluctuations
in the value of the real estate collateral securing the loan, as well as changes in the borrowers’ financial condition. Multi-family
and commercial real estate loans are secured by the subject property. Underwriting 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 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 Condensed Consolidated Financial Statements (Unaudited)
(3)
Loans, Continued. The following summarizes the loan credit quality (in thousands):
| |
| | |
OLEM | | |
| | |
| | |
| | |
| |
| |
| | |
(Other Loans Especially | | |
Sub- | | |
| | |
| | |
| |
| |
Pass | | |
Mentioned) | | |
Standard | | |
Doubtful | | |
Loss | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| |
At March 31, 2023: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential real estate | |
$ | 52,087 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 52,087 | |
Multi-family real estate | |
| 68,126 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 68,126 | |
Commercial real estate | |
| 318,216 | | |
| — | | |
| 1,230 | | |
| — | | |
| — | | |
| 319,446 | |
Land and construction | |
| 19,629 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 19,629 | |
Commercial | |
| 3,720 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 3,720 | |
Consumer | |
| 39,527 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 39,527 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 501,305 | | |
$ | — | | |
$ | 1,230 | | |
$ | — | | |
$ | — | | |
$ | 502,535 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
At December 31, 2022: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential real estate | |
$ | 50,354 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 50,354 | |
Multi-family real estate | |
| 69,555 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 69,555 | |
Commercial real estate | |
| 309,458 | | |
| — | | |
| 1,237 | | |
| — | | |
| — | | |
| 310,695 | |
Land and construction | |
| 17,286 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 17,286 | |
Commercial | |
| 5,165 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 5,165 | |
Consumer | |
| 30,323 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 30,323 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 482,141 | | |
$ | — | | |
$ | 1,237 | | |
$ | — | | |
$ | — | | |
$ | 483,378 | |
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
– 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 net 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 effected in the future. The Company fully
charges off any loan classified as Loss. |
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(3)
Loans, Continued. Age analysis of past-due loans is as follows (in thousands):
| |
Accruing Loans | | |
| | |
| |
| |
| | |
| | |
Greater | | |
| | |
| | |
| | |
| |
| |
30-59 Days | | |
60-89 Days | | |
Than
90 Days | | |
Total | | |
| | |
| | |
| |
| |
Past | | |
Past | | |
Past | | |
Past | | |
| | |
Nonaccrual | | |
Total | |
| |
Due | | |
Due | | |
Due | | |
Due | | |
Current | | |
Loans | | |
Loans | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
At March 31, 2023: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential real estate | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 52,087 | | |
$ | — | | |
$ | 52,087 | |
Multi-family real estate | |
| — | | |
| — | | |
| — | | |
| — | | |
| 68,126 | | |
| — | | |
| 68,126 | |
Commercial real estate | |
| — | | |
| — | | |
| — | | |
| — | | |
| 319,446 | | |
| — | | |
| 319,446 | |
Land and construction | |
| — | | |
| — | | |
| — | | |
| — | | |
| 19,629 | | |
| — | | |
| 19,629 | |
Commercial | |
| — | | |
| — | | |
| — | | |
| — | | |
| 3,720 | | |
| — | | |
| 3,720 | |
Consumer | |
| 197 | | |
| 49 | | |
| — | | |
| 246 | | |
| 39,281 | | |
| — | | |
| 39,527 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 197 | | |
$ | 49 | | |
$ | — | | |
$ | 246 | | |
$ | 502,289 | | |
$ | — | | |
$ | 502,535 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
At December 31, 2022: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential real estate | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 50,354 | | |
$ | — | | |
$ | 50,354 | |
Multi-family real estate | |
| — | | |
| — | | |
| — | | |
| — | | |
| 69,555 | | |
| — | | |
| 69,555 | |
Commercial real estate | |
| — | | |
| — | | |
| — | | |
| — | | |
| 310,695 | | |
| — | | |
| 310,695 | |
Land and construction | |
| — | | |
| — | | |
| — | | |
| — | | |
| 17,286 | | |
| — | | |
| 17,286 | |
Commercial | |
| — | | |
| — | | |
| — | | |
| — | | |
| 5,165 | | |
| — | | |
| 5,165 | |
Consumer | |
| 150 | | |
| 27 | | |
| — | | |
| 177 | | |
| 30,146 | | |
| — | | |
| 30,323 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 150 | | |
$ | 27 | | |
$ | — | | |
$ | 177 | | |
$ | 483,201 | | |
$ | — | | |
$ | 483,378 | |
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(3)
Loans, Continued.
|
The
Company has not made any modifications of loans to borrowers experiencing financial difficulties during the three months ended March
31, 2023. |
|
|
|
No
loans have been determined to be troubled debt restructurings (TDR’s) during the three-month period ended March 31, 2022. At
March 31, 2023 and 2022, there were no loans modified and entered into as TDR’s within the past twelve months, that subsequently
defaulted during the three-month periods ended March 31, 2023 and 2022. |
The
Company’s loans to customers as of March 31, 2023, based on year of origination within each credit quality indicator are as follows
(in thousands):
Term
Loans
Amortized
Cost Basis by Origination Year
Construction and land real estate | |
2023 | | |
2022 | | |
2021 | | |
2020 | | |
2019 | | |
Prior | | |
Revolving Loans (Amortized Cost Basis) | | |
Revolving Loans Converted to Term Loans (Amortized
Cost Basis) | | |
Total | |
Pass | |
$ | 808 | | |
$ | 15,223 | | |
$ | 2,079 | | |
$ | 1,519 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 19,629 | |
OLEM (Other Loans Especially Mentioned) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Substandard | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Doubtful | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| | | |
| - | | |
| - | |
Loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Subtotal loans | |
$ | 808 | | |
$ | 15,223 | | |
$ | 2,079 | | |
$ | 1,519 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 19,629 | |
Current period Gross write-offs | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
Residential real estate | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | - | | |
$ | 26,695 | | |
$ | 9,908 | | |
$ | 6,841 | | |
$ | 4,122 | | |
$ | 3,634 | | |
$ | 887 | | |
$ | - | | |
$ | 52,087 | |
OLEM (Other Loans Especially Mentioned) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Substandard | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Doubtful | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Subtotal loans | |
$ | - | | |
$ | 26,695 | | |
$ | 9,908 | | |
$ | 6,841 | | |
$ | 4,122 | | |
$ | 3,634 | | |
$ | 887 | | |
$ | - | | |
$ | 52,087 | |
Current period Gross write-offs | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(3)
Loans, Continued.
Term
Loans
Amortized
Cost Basis by Origination Year
Multi-family real estate | |
2023 | | |
2022 | | |
2021 | | |
2020 | | |
2019 | | |
Prior | | |
Revolving Loans (Amortized Cost Basis) | | |
Revolving Loans Converted to Term Loans (Amortized
Cost Basis) | | |
Total | |
Pass | |
$ | 1,000 | | |
$ | 27,736 | | |
$ | 29,762 | | |
$ | 6,233 | | |
$ | 2,103 | | |
$ | 1,292 | | |
$ | - | | |
$ | - | | |
$ | 68,126 | |
OLEM (Other Loans Especially Mentioned) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Substandard | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Doubtful | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Subtotal loans | |
$ | 1,000 | | |
$ | 27,736 | | |
$ | 29,762 | | |
$ | 6,233 | | |
$ | 2,103 | | |
$ | 1,292 | | |
$ | - | | |
$ | - | | |
| 68,126 | |
Current period Gross write-offs | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
Commercial real estate (CRE) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | 12,084 | | |
$ | 201,594 | | |
$ | 55,395 | | |
$ | 16,990 | | |
$ | 15,805 | | |
$ | 16,348 | | |
$ | - | | |
$ | - | | |
$ | 318,216 | |
OLEM (Other Loans Especially Mentioned) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Substandard | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,230 | | |
| - | | |
| - | | |
| - | | |
| 1,230 | |
Doubtful | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Subtotal loans | |
$ | 12,084 | | |
$ | 201,594 | | |
$ | 55,395 | | |
$ | 16,990 | | |
$ | 17,035 | | |
$ | 16,348 | | |
$ | - | | |
$ | - | | |
$ | 319,446 | |
Current period Gross write-offs | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
Commercial business loans | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | 123 | | |
$ | 1,055 | | |
$ | 1,426 | | |
$ | 295 | | |
$ | 821 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 3,720 | |
OLEM (Other Loans Especially Mentioned) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Substandard | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Doubtful | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Subtotal loans | |
$ | 123 | | |
$ | 1,055 | | |
$ | 1,426 | | |
$ | 295 | | |
$ | 821 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 3,720 | |
Current period Gross write-offs | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | (26 | ) | |
$ | - | | |
$ | - | | |
$ | (26 | ) |
Consumer | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | 5,508 | | |
$ | | | |
$ | 4,006 | | |
$ | - | | |
$ | 22,499 | | |
$ | - | | |
$ | 12,813 | | |
$ | - | | |
$ | 39,527 | |
OLEM (Other Loans Especially Mentioned) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Substandard | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Doubtful | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Subtotal loans | |
$ | 5,508 | | |
$ | | | |
$ | 4,006 | | |
$ | | | |
$ | 22,499 | | |
$ | - | | |
$ | 12,813 | | |
$ | - | | |
$ | 39,527 | |
Current period Gross write-offs | |
$ | - | | |
$ | (243 | ) | |
$ | (191 | ) | |
$ | (3 | ) | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | (437 | ) |
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(3)
Loans, Continued.
(4)
Earnings Per Share. Basic earnings per share have been computed on the basis of the weighted-average number of shares of common
stock outstanding during the periods. During the three-month periods ended March 31, 2023 and 2022, basic and diluted earnings per share
is the same as there were no outstanding potentially dilutive securities. Earnings per common share have been computed based on the following:
| |
Three Months Ended | |
| |
March 31, | |
| |
2023 | | |
2022 | |
Weighted-average number of common shares outstanding used to calculate
basic and diluted earnings per common share | |
| 7,204,168 | | |
| 4,892,323 | |
(5)
Stock-Based Compensation
The
Company is authorized to grant stock options, stock grants and other forms of equity-based compensation under its 2018 Equity Incentive
Plan (the “2018 Plan”). The plan has been approved by the shareholders. The Company is authorized to issue up to 550,000
shares of common stock under the 2018 Plan, of which 39,320 shares remain available for grant. No stock options are outstanding at March
31, 2023.
During
the first quarter ended March 31, 2023, the Company issued 66,479 shares to a director for services performed and recorded compensation
expense of $274,000.
During
the first quarter ended March 31, 2023, the Company issued 52,622 shares to employees for services performed and recorded compensation
expense of $216,000.
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(6)
Fair Value Measurements.
Debt
securities available for sale 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 March 31, 2023: | |
| | | |
| | | |
| | | |
| | |
SBA Pool Securities | |
$ | 785 | | |
$ | — | | |
$ | 785 | | |
$ | — | |
Collateralized mortgage obligations | |
| 130 | | |
| — | | |
| 130 | | |
| — | |
Taxable municipal securities | |
| 12,169 | | |
| — | | |
| 12,169 | | |
| — | |
Mortgage-backed securities | |
| 12,470 | | |
| — | | |
| 12,470 | | |
| — | |
Total | |
$ | 25,554 | | |
$ | — | | |
$ | 25,554 | | |
$ | — | |
| |
| | | |
| | | |
| | | |
| | |
At December 31, 2022: | |
| | | |
| | | |
| | | |
| | |
SBA Pool Securities | |
$ | 817 | | |
$ | — | | |
$ | 817 | | |
$ | — | |
Collateralized mortgage obligations | |
| 130 | | |
| — | | |
| 130 | | |
| — | |
Taxable municipal securities | |
| 11,620 | | |
| — | | |
| 11,620 | | |
| — | |
Mortgage-backed securities | |
| 12,535 | | |
| — | | |
| 12,535 | | |
| — | |
Total | |
$ | 25,102 | | |
$ | — | | |
$ | 25,102 | | |
$ | — | |
(7)
Fair Value of Financial Instruments. The estimated fair values and fair value measurement method with respect to the Company’s
financial instruments were as follows (in thousands):
| |
At March 31, 2023 | | |
At December 31, 2022 | |
| |
Carrying Amount | | |
Fair Value | | |
Level | | |
Carrying Amount | | |
Fair Value | | |
Level | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Financial assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash and cash equivalents | |
$ | 86,658 | | |
$ | 86,658 | | |
| 1 | | |
$ | 71,836 | | |
$ | 71,836 | | |
| 1 | |
Debt securities available for sale | |
| 25,554 | | |
| 25,554 | | |
| 2 | | |
| 25,102 | | |
| 25,102 | | |
| 2 | |
Debt securities held-to-maturity | |
| 498 | | |
| 468 | | |
| 2 | | |
| 540 | | |
| 504 | | |
| 2 | |
Loans | |
| 495,556 | | |
| 488,175 | | |
| 3 | | |
| 477,218 | | |
| 476,566 | | |
| 3 | |
Federal Home Loan Bank stock | |
| 1,354 | | |
| 1,354 | | |
| 3 | | |
| 600 | | |
| 600 | | |
| 3 | |
Accrued interest receivable | |
| 1,427 | | |
| 1,427 | | |
| 3 | | |
| 1,444 | | |
| 1,444 | | |
| 3 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Financial liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Deposit liabilities | |
| 527,387 | | |
| 531,928 | | |
| 3 | | |
| 507,899 | | |
| 512,357 | | |
| 3 | |
Federal Home Loan Bank advances | |
| 25,000 | | |
| 24,526 | | |
| 3 | | |
| 10,000 | | |
| 9,450 | | |
| 3 | |
Off-balance sheet financial instruments | |
| — | | |
| — | | |
| 3 | | |
| — | | |
| — | | |
| 3 | |
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(8)
Off- Balance Sheet Financial Instruments. The Company is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These financial instruments are commitments to extend credit,
unused lines of credit, and standby letters of credit and may involve, to varying degrees, elements of credit and interest-rate risk
in excess of the amount recognized in the condensed 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 non-performance by the other party to the financial instrument for commitments
to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments
as it does for on-balance-sheet instruments.
Commitments
to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because some of the
commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Company, upon extension of credit, is based on management’s credit evaluation of the counterparty.
Standby
letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit to customers is essentially the same as that involved in extending loan facilities to customers.
The Bank generally holds collateral supporting those commitments. Standby letters of credit generally have expiration dates within one
year.
Commitments
to extend credit, unused lines of credit, and standby letters of credit typically result in loans with a market interest rate when funded.
A summary of the contractual amounts of the Company’s financial instruments with off-balance-sheet risk at March 31, 2023 follows
(in thousands):
Commitments to extend credit | |
$ | 25,600 | |
| |
| | |
Unused lines of credit | |
$ | 33,628 | |
| |
| | |
Standby letters of credit | |
$ | 4,313 | |
(9)
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.
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(9)
Regulatory Matters, Continued.
Management
believes, as of March 31, 2023 and December 31, 2022, that the Bank meets all capital adequacy requirements to which it is subject. The
Bank’s actual capital amounts and percentages are presented in the table ($ in thousands):
| |
Actual | | |
To Be Well Capitalized
Under Prompt
Corrective Action Regulations
(CBLR Framework) | |
| |
Amount | | |
% | | |
Amount | | |
% | |
As of March 31, 2023: | |
| | |
| | |
| | |
| |
Tier I Capital to Total Assets | |
$ | 67,652 | | |
| 11.24 | % | |
$ | 54,158 | | |
| 9.00 | % |
| |
| | | |
| | | |
| | | |
| | |
As of December 31, 2022: | |
| | | |
| | | |
| | | |
| | |
Tier I Capital to Total Assets | |
$ | 66,291 | | |
| 11.29 | % | |
$ | 52,865 | | |
| 9.00 | % |
(10)
Preferred Stock
During
the first quarter of 2022, the Company issued 260 shares of Series B Preferred Stock to an unrelated party at a cash price of $25,000
per share, or an aggregate of $6,500,000.
(continued)
OPTIMUMBANK
HOLDINGS, INC. AND SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(10)
Preferred Stock, Continued.
The
Preferred Stock has no par value. Except in the event of liquidation, if the Company declares or pays a dividend or distribution on the
common stock, the Company shall simultaneously declare and pay a dividend on the Series B Preferred on a pro rata basis with the common
stock determined on an as-conve1ted basis assuming all shares of Series B Preferred Stock had been converted immediately prior to the
record date of the applicable dividend. As of March 31, 2023 the Series B Preferred Stock is convertible into 11,114,000 shares of common
stock, at the option of the Company, subject to the prior fulfilment of the following conditions: (i) such conversion shall have been
approved by the holders of a majority of the outstanding common stock of the Company; and (ii) such conversion shall not result in any
holder of the Series B Preferred Stock and any persons with whom the holder may be acting in concert, becoming beneficial owners of more
than 9.9% of the outstanding shares of the common stock. The number of shares issuable upon conversion is subject to adjustment based
on the terms of the applicable Certificate of Designation for the Series B Preferred (the “Certificate of Designation”).
The Series B Preferred has preferential liquidation rights over common stockholders. The liquidation price is the greater of $25,000
per share of Series B Preferred or such amount per share of Series B Preferred that would have been payable had all shares of the Series
B Preferred had been converted into common stock pursuant to the terms of the Certificate of Designation immediately prior to a liquidation.
The Series B Preferred generally has no voting rights except as provided in the Certificate of Designation.
(11)
Contingencies. Various claims 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 condensed consolidated financial statements.
Capital
Levels
As
of March 31, 2023, the Bank is well capitalized under regulatory guidelines.
Refer
to Note 9 for the Bank’s actual and required minimum capital ratios.
Exhibit
D
Management’s
Discussion and Analysis of Financial Condition and Results of Operations for the Quarters
ended
March 31, 2023 and 2022
Financial
Condition at March 31, 2023 and December 31, 2022
Overview
The
Company’s total assets increased by approximately $37 million to $622 million at March 31, 2023, from $585 million at December
31, 2022, primarily due to increases in loans, and cash and cash equivalents. The growth in assets was attributable to the success of
the Company’s efforts to increase loans and deposits from new customers. Net loans grew by $18 million. Deposits grew by approximately
$19 million to $527 million at March 31, 2023, from $508 million at December 31, 2022. The Company increased the Federal Home Loan Bank
advances by $15 million to $25 million at March 31, 2023. Total stockholders’ equity increased by approximately $2 million to $65
million at March 31, 2023, from $63 million at December 31, 2022, primarily due to proceeds from common stock sales and changes in unrealized
loss on debt securities available for sale and net earnings.
The
following table shows selected information for the periods ended or at the dates indicated:
| |
Three
Months Ended
March
31, 2023 | | |
Year
Ended
December
31, 2022 | |
| |
| | |
| |
Average equity as a percentage of average assets | |
| 10.6 | % | |
| 9.9 | % |
| |
| | | |
| | |
Equity to total assets at end of period | |
| 10.4 | % | |
| 10.7 | % |
| |
| | | |
| | |
Return on average assets (1) | |
| 0.8 | % | |
| 0.9 | % |
| |
| | | |
| | |
Return on average equity (1) | |
| 7.7 | % | |
| 8.6 | % |
| |
| | | |
| | |
Noninterest expenses to average assets (1) | |
| 2.3 | % | |
| 2.1 | % |
(1)
Annualized for the three months ended March 31, 2023.
Liquidity
and Sources of Funds
The
Company’s sources of funds include customer deposits, advances from the Federal Home Loan Bank of Atlanta (“FHLB”),
principal repayments and sales of debt securities, loan repayments, the use of Federal Funds markets, net earnings, and loans taken out
at the Federal Reserve Bank discount window.
Deposits
are our primary source of funds. In order to increase its core deposits, the Company has priced its deposit rates competitively. The
Company will adjust rates on its deposits to attract or retain deposits as needed.
The
Company increased deposits by approximately $19 million during the three-month period ended March 31, 2023. The proceeds were used to
originate new loans.
In
addition to obtaining funds from depositors, the Company may borrow funds from other financial institutions. At March 31, 2023, the Company
had outstanding borrowings of $25 million, against its $146 million in established borrowing capacity with the FHLB. The Company’s
borrowing facility is subject to collateral and stock ownership requirements, as well as prior FHLB consent to each advance. At March
31, 2023, the Company also had available lines of credit amounting to $25 million with six correspondent banks to purchase federal funds.
Disbursements on the lines of credit are subject to the approval of the correspondent banks. We measure and monitor our liquidity daily
and believe our liquidity sources are adequate to meet our operating needs.
Off-Balance
Sheet Arrangements
Refer
to Note 8 in the condensed consolidated financial statements for Off-Balance Sheet Arrangements.
(continued)
The
following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest and dividend income
of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing
liabilities and the resultant average cost; (iii) net interest income; (iv) interest-rate spread; (v) net interest margin; and (vi) the
ratio of average interest-earning assets to average interest-bearing liabilities.
| |
Three Months Ended March 31, | |
| |
2023 | | |
2022 | |
| |
| | |
Interest | | |
Average | | |
| | |
Interest | | |
Average | |
| |
Average | | |
and | | |
Yield/ | | |
Average | | |
and | | |
Yield/ | |
(dollars in thousands) | |
Balance | | |
Dividends | | |
Rate(5) | | |
Balance | | |
Dividends | | |
Rate(5) | |
Interest-earning assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans | |
$ | 492,658 | | |
$ | 6,589 | | |
| 5.35 | % | |
$ | 264,442 | | |
$ | 3,263 | | |
| 4.94 | % |
Securities | |
| 25,876 | | |
| 178 | | |
| 2.75 | % | |
| 34,107 | | |
| 163 | | |
| 1.91 | % |
Other (1) | |
| 61,050 | | |
| 749 | | |
| 4.90 | % | |
| 71,631 | | |
| 37 | | |
| 0.21 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total interest-earning assets/interest income | |
| 579,584 | | |
| 7,516 | | |
| 5.19 | % | |
| 370,180 | | |
| 3,463 | | |
| 3.74 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash and due from banks | |
| 16,949 | | |
| | | |
| | | |
| 17,143 | | |
| | | |
| | |
Premises and equipment | |
| 989 | | |
| | | |
| | | |
| 727 | | |
| | | |
| | |
Other | |
| 4,974 | | |
| | | |
| | | |
| 4,821 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total assets | |
$ | 602,496 | | |
| | | |
| | | |
$ | 392,871 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Savings, NOW and money-market deposits | |
$ | 121,779 | | |
| 271 | | |
| 0.89 | % | |
$ | 182,585 | | |
| 160 | | |
| 0.35 | % |
Time deposits | |
| 238,537 | | |
| 2,161 | | |
| 3.62 | % | |
| 12,237 | | |
| 15 | | |
| 0.49 | % |
Borrowings (2) | |
| 10,167 | | |
| 25 | | |
| 0.98 | % | |
| 18,000 | | |
| 61 | | |
| 1.36 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total interest-bearing liabilities/interest expense | |
| 370,483 | | |
| 2,457 | | |
| 2.65 | % | |
| 212,822 | | |
| 236 | | |
| 0.44 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Noninterest-bearing demand deposits | |
| 165,081 | | |
| | | |
| | | |
| 139,128 | | |
| | | |
| | |
Other liabilities | |
| 3,307 | | |
| | | |
| | | |
| 2,677 | | |
| | | |
| | |
Stockholders’ equity | |
| 63,625 | | |
| | | |
| | | |
| 38,244 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total liabilities and stockholders’ equity | |
$ | 602,496 | | |
| | | |
| | | |
$ | 392,871 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net interest income | |
| | | |
$ | 5,059 | | |
| | | |
| | | |
$ | 3,227 | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest rate spread (3) | |
| | | |
| | | |
| 2.54 | % | |
| | | |
| | | |
| 3.30 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net interest margin (4) | |
| | | |
| | | |
| 3.49 | % | |
| | | |
| | | |
| 3.49 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ratio of average interest-earning assets to average interest-bearing liabilities | |
| 1.56 | | |
| | | |
| | | |
| 1.74 | | |
| | | |
| | |
(1) |
Includes
interest-earning deposits with banks and Federal Home Loan Bank stock dividends. |
(2) |
Includes
Federal Home Loan Bank advances and other borrowings. |
(3) |
Interest-rate
spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. |
(4) |
Net
interest margin is net interest income divided by average interest-earning assets. |
(5) |
Annualized. |