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 | |
Collacteralized 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.