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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

ANNUAL REPORT

 

PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

(Mark One)

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2023

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 000-50755

 

OPTIMUMBANK HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Florida   55-0865043

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

2929 East Commercial Blvd. Suite 303, Fort Lauderdale, FL 33308

(Address of principal executive offices)

 

Registrant’s telephone number, including area code: (954) 900-2800

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol   Name of each exchange on which registered
Common Stock, par value $0.01 per share   OPHC   Nasdaq Capital Market

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933. Yes ☐ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934. Yes ☐ No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐
   
Non-accelerated filer Smaller reporting company
   
  Emerging Growth Company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

 

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.

 

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes ☐ No

 

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant 5,696,152 shares on June 30, 2023, was approximately $16,404,918, computed by reference to the closing market price at $2.88 per share as of June 30, 2023. For purposes of this information, the outstanding shares of common stock beneficially owned by directors and executive officers of the registrant were deemed to be shares of common stock held by affiliates.

 

The number of shares of common stock, par value $0.01 per share, of the registrant outstanding as of March 8, 2024 was 7,867,386 shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Proxy Statement for the 2024 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the issuer’s fiscal year end are incorporated by reference into Part III, Items 10 through 14, of this Annual Report on Form 10-K.

 

 

 

 
 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

INDEX

 

PART I  
Item 1. Business 1
Item 1A. Risk Factors 12
Item 1B. Unresolved Staff Comments 12
Item 1C. Cybersecurity 12
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Mine Safety Disclosure 13
   
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 14
Item 6. [Reserved] 14
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 14
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 62
Item 9A. Controls and Procedures 62
Item 9B. Other Information 62
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 62
   
PART III
Item 10. Directors, Executive Officers, and Corporate Governance 63
Item 11. Executive Compensation 63
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 63
Item 13. Certain Relationships and Related Transactions, and Director Independence 63
Item 14. Principal Accounting Fees and Services 63
   
PART IV
Item 15. Exhibits and Financial Statement Schedules 64
Item 16. Form 10-K Summary 65
SIGNATURES 66

 

i
 

 

PART I

 

Item 1. Business

 

Forward-Looking Statements

 

We have made forward-looking statements in this Annual Report about the financial condition, results of operations, and business of our company. These statements are not historical facts and include expressions concerning the future that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among other things, the following possibilities:

 

  general economic conditions, either nationally or regionally, that are less favorable than expected resulting in, among other things, a deterioration in credit quality and an increase in credit risk-related losses and expenses;
     
  changes in the interest rate environment that reduce margins;
     
  competitive pressure in the banking industry that increases significantly;
     
  changes that occur in the regulatory environment; and
     
  changes that occur in business conditions and the rate of inflation.

 

When used in this Annual Report, the words “believes,” “estimates,” “plans,” “expects,” “should,” “may,” “might,” “outlook,” and “anticipates,” as well as similar expressions, as they relate to us or our management, are intended to identify forward-looking statements.

 

General

 

OptimumBank Holdings, Inc. is a Florida corporation (the “Company”) formed in 2004 as a bank holding company for OptimumBank (the “Bank”). The Company’s only business is the ownership and operation of the Bank. The Bank is a Florida state-chartered bank established in 2000, with deposits insured by the Federal Deposit Insurance Corporation (“FDIC”). The Bank offers a variety of commercial banking services to individual and corporate customers through its two banking offices located in Broward County, Florida.

 

The Company is subject to the supervision and regulation of The Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Bank is subject to the supervision and regulation of the State of Florida Office of Financial Regulation (“OFR”) and the FDIC. The Bank is a member of the Federal Home Loan Bank of Atlanta.

 

At December 31, 2023, the Company had total assets of $791 million, net loans of $671 million, total deposits of $640 million and stockholders’ equity of $70 million. During 2023, the Company had a net income of $6 million.

 

Banking Products

 

The Bank’s revenues are primarily derived from interest and fees received in connection with, real estate and other loans, interest from securities and short-term investments, and service charges on payment transactions. The principal sources of funds for the Bank’s lending activities are deposits, borrowings, repayment of loans, and the repayment, or maturity of securities. The Bank’s principal expenses are the interest paid on deposits, and operating and general administrative expenses.

 

As is the case with banking institutions generally, the Bank’s operations are materially and significantly influenced by general economic conditions and by related monetary and fiscal policies of financial institution regulatory agencies, including the Federal Reserve and the FDIC. Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered and other factors affecting local demand and availability of funds. The Bank faces strong competition attracting deposits (its primary source of lendable funds) and originating loans.

 

1
 

 

The Bank provides a range of consumer and commercial banking services to individuals and businesses. The basic services offered include: demand interest-bearing and noninterest-bearing accounts, money market deposit accounts, NOW accounts, time deposits, Wire transfers, ACH services, Visa debit and ATM cards, cash management, direct deposits, notary services, money orders, night depository, cashier’s checks, domestic collections, and banking by mail. The Bank provides ATM cards and Visa debit cards, as a part of the Star, Presto and Cirrus networks, thereby permitting customers to utilize the convenience of ATMs worldwide. In December 2022, the Bank began participating as a member of the IntraFi Network, which is the largest provider of reciprocal deposits. With IntraFi’s reciprocal deposit services, the Bank can offer depositors access to FDIC insurance for an unlimited amount, well beyond the standard maximum of $250,000 for funds placed into demand deposit accounts, money market deposit accounts, or CDs. The Bank does not have trust powers and provides no trust services. The Bank makes multi-family real estate loans, residential real estate loans, commercial real estate loans, land and construction, and consumer loans. The Bank offers business lending lines for working capital needs. Growing businesses can use the loans to expand inventory, take discounts, offset receivables, or establish new structured financing and repayment plans that are consistent with the cash flow of the business. During the third quarter of 2023, the Bank started providing small businesses administration government loans to small and middle market businesses.

 

Operating and Business Strategy

 

Our key strategic initiatives are designed to generate continued growth in earning assets, core transaction and savings deposits, treasury management fee income, and lower costs. Continued emphasis on expansion of our footprint and exploring additional lines of business are also part of our plans.

 

On the loan side, we intend to continue our focus on increasing our multi-family, non-owner occupied, commercial real estate, and skilled nursing facility loan portfolios. As to deposits, we are focused on identifying deposit growth opportunities among our existing customer base and prospects throughout Florida and the United States. With respect to treasury management, our focus will remain on merchant cash advance providers and the related electronic funds transfer line of business. For this revenue source to increase further in a meaningful way, automation will be necessary in order to further improve efficiency. We are currently investing in the necessary technology to achieve this end.

 

Going forward, our strategic plan will continue to emphasize and build upon initiatives focused on strengthening credit oversight and credit administrative processes and procedures. Moreover, management continues to identify loan growth opportunities that are designed to improve overall profitability without sacrificing credit quality and underwriting standards. This growth oriented strategic direction is expected to be facilitated by maintaining credit administration objectives including a risk-based and comprehensive credit culture and a credit administrative infrastructure that reinforces appropriate risk management practices.

 

During the third quarter of 2023, the Bank commenced offering U.S. Small Business Administration (“SBA”) SBA 7A loans. SBA 7A loans are generally used to establish a new business or assist in the acquisition, operation, or expansion of an existing business. With SBA loan programs, there are set eligibility requirements and underwriting standards outlined by SBA that can change as the government alters its fiscal policy. These loans are generally secured by accounts receivable, inventory, equipment, and real estate. The Bank hired two full-time SBA staff. At December 31, 2023, SBA 7A loans amounted to $1.4 million.

 

Additionally, management has implemented initiatives that have enabled us to grow our loan portfolio primarily with locally generated relationships in the non-owner occupied, multi-family and commercial real estate sectors. However, out-of-area loans and loan pool purchases will be considered as deemed appropriate and subject to proper due diligence to further increase interest income and for portfolio diversification purposes.

 

Lending Activities

 

The Bank offers real estate, commercial and consumer loans to individuals and small businesses and other organizations that are located in or conduct a substantial portion of their business in its market area. The Bank’s primary market area consists of Broward, Miami-Dade, Palm Beach, Martin, and St. Lucie counties, and secondarily throughout the State of Florida. The Bank’s net loans at December 31, 2023 were $671 million, or 85% of total assets. During 2023 net loans increased by $194 million, attributed to the bank’s successful pursuit of new lending opportunities in South Florida. Loan balances increased by $21 million in residential real estate loans, $112 million in commercial real estate loans, $15 million in land and construction loans, $37 million in commercial loans, and $14 million in consumer loans. The interest rates charged on loans varied with the degree of risk, maturity, and amount of the loan, and are further subject to competitive pressures, money market rates, availability of funds, and government regulations. The Bank has no loans to non-U.S. borrowers.

 

2
 

 

The Bank’s loan portfolio is concentrated in three major areas: residential, commercial real estate loans , and land and construction loans. As of December 31, 2023, 91% of the loan portfolio consisted of loans secured by mortgages on real estate, of which approximately 62% of the total loan portfolio was secured by commercial real estate properties. The real estate loans are located primarily in the counties the Bank serves in the State of Florida.

 

The Bank’s real estate loans are secured by mortgages and consist primarily of loans to individuals and businesses for the purchase or improvement of, or investment in, real estate. These real estate loans were made at fixed or variable interest rates and are normally variable rate mortgages which adjust annually after the initial three to five-year period of the loan. The Bank’s fixed rate loans generally are for terms of five years or less, and are repayable in monthly instalments based on a maximum 30-year amortization schedule.

 

Loan originations are derived primarily from director and employee referrals, existing customers, and direct marketing. Certain credit risks are inherent in making loans. These include prepayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting from changes in economic and industry conditions including interest rates, and risks inherent in dealing with individual borrowers. A significant portion of the Bank’s portfolio is collateralized by real estate in South Florida, which is susceptible to local economic downturns. The Bank attempts to minimize credit losses through various means. On most credits, it relies on the cash flow and assets of a debtor as the source of repayment as well as the value of the underlying collateral. The Bank also generally limits its loans to up to 80% of the value of the underlying real estate collateral. The Bank generally charges a prepayment penalty if a loan is repaid within the first two to three years of origination to recover any costs it paid for the origination of the loan.

 

Deposit Activities

 

Deposits are the major source of the Bank’s funds for lending and other investment activities. Deposits are gathered principally from within the South Florida area through the offering of a broad variety of deposit products, including checking accounts, money-market accounts, regular savings accounts, term certificate of deposit accounts. The Company also gathers deposits via listing services. The Bank had no brokered deposits at December 31, 2023 or 2022. The Bank considers the majority of its regular savings, demand, NOW, money market deposit accounts and certificates of deposit under $250,000 to be core deposits. Deposits are insured up to the maximum amount allowed by law by the FDIC. The Company also facilitates depositor access to additional FDIC insurance via the IntraFi network.

 

Maturity terms, service fees, and withdrawal penalties are established by the Bank on a periodic basis. The determination of rates and terms is predicated on funds acquisition and liquidity requirements, market rate competition, growth goals, and federal regulations.

 

Investments

 

The Bank’s investment securities portfolio was approximately $24.7 million and $ 25.6 million at December 31, 2023 and 2022, respectively, representing 3% and 4% of its total assets. At December 31, 2023, 48% of this portfolio was invested in asset-backed securities. Mortgage-backed securities generally have a shorter life than the stated maturity. The Bank’s investments are managed in relation to loan demand and deposit growth, and are generally used to provide for the investment of excess funds at minimal risk levels while providing liquidity to fund increases in loan demand or to offset fluctuations in deposits.

 

The excess balance account is the excess cash the Bank has available over and above daily cash needs. This money is invested on an overnight basis with the Federal Reserve.

 

3
 

 

Correspondent Banking

 

Correspondent banking involves one bank providing services to another bank which cannot provide that service for itself from an economic or practical standpoint. The Bank is required to purchase correspondent services offered by larger banks, including check collections, purchase of federal funds, security safekeeping, investment services, coin and currency supplies.

 

The Bank has established a correspondent relationship with the Federal Reserve Bank. The Bank pays for such services in cash as opposed to keeping compensating balances. The Bank may sell loan participations to other banks with respect to loans which exceed its lending limit. The Bank may purchase loan participations to supplement loan demand.

 

Data Processing

 

The Bank outsources most of its data processing services, including an automated general ledger, deposit accounting, and loan sub-system.

 

Internet Banking

 

The Bank maintains a website at www.optimumbank.com where retail and business customers can access account balances, view current account activity and previous statements, view images of paid checks, transfer funds between accounts, and pay bills. The Bank offers its customers mobile access to their account information, with the option to setup alerts, and deposit checks across a broad range of phones and mobile devices. The Bank also offers its business customers remote deposit capture and online cash management services that include ACH origination and wire transfers using soft token technology for security.

 

Competition

 

The Bank encounters strong competition in making loans and attracting deposits. The deregulation of the banking industry and the widespread enactment of state laws which permit multi-bank holding companies as well as an increasing level of interstate banking have created a highly competitive environment for commercial banking. In one or more aspects of its business, the Bank competes with other commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries. Most of these competitors, some of which are affiliated with bank holding companies, have substantially greater resources and lending limits, and may offer certain services that the Bank does not currently provide. In addition, many of its non-bank competitors are not subject to the same extensive federal regulations that govern federally insured banks. Recent federal and state legislation has heightened the competitive environment in which financial institutions must conduct their business, and the potential for competition among financial institutions of all types has increased significantly.

 

To compete, the Bank relies upon specialized services, responsive handling of customer needs, and personal contacts by its officers, directors and staff. Large multi-branch banking competitors tend to compete primarily by rate and the number and location of branches while smaller, independent financial institutions tend to compete primarily by rate and personal service.

 

4
 

 

Human Capital

 

The Bank is committed to establishing personal relationships with its customers and providing personalized banking services that meet their specific needs. The Bank’s employees are critical to achieving this goal. It is therefore crucial that the Bank continues to attract and retain experienced and skilled employees.

 

As part of these efforts, the Bank seeks to offer competitive compensation and benefits, maintain a community in which all employees are empowered to perform their duties to the best of their abilities, and give employees the opportunity to contribute to the local community.

 

As of December 31, 2023, the Bank had 60 full-time employees, including executive officers. These employees are not represented by a collective bargaining unit. The Bank considers its relations with its employees to be good.

 

Compensation and Benefits Program. The Bank’s compensation program is designed to attract and reward talented individuals who possess the skills necessary to support our business objectives, assist in the achievement of our strategic goals and create long-term value for our shareholders. The Bank provides its employees with compensation packages that include base salary and annual incentive bonuses. The Bank believes that its compensation program provides fair and competitive compensation and aligns associate and shareowner interests, including by incentivizing business and individual performance and integrating compensation with our business plans. In addition to cash compensation, the Bank also offers employees benefits such as life and health insurance, paid time off, paid parental leave and a 401(k) plan.

 

Diversity and Inclusion. The Bank believes that an equitable and inclusive environment produces more creative solutions, results in better services and is crucial to our efforts to attract and retain key talent. The Bank strives to promote inclusion through our corporate values of integrity, advocacy, partnership, relationships, community, and personalized service. The Bank is focused on building an inclusive culture through a variety of diversity and inclusion initiatives, including related to internal promotions and hiring practices.

 

Community Involvement. The Bank aims to give back to the local community and believes that this commitment helps in our efforts to attract and retain employees. The Bank encourages its employees to volunteer with local service organizations and philanthropic groups.

 

Health and Safety. The success of the Bank’s business is fundamentally connected to the well-being of its employees. Accordingly, the Bank is committed to the health, safety and the wellness of its employees. The Bank provides employees and their families with access to a variety of flexible and convenient health and welfare programs, including benefits that support their physical and mental health by providing tools and resources to help them improve or maintain their health status; and that offer choice where possible so they can customize their benefits to meet their needs and the needs of their families.

 

Supervision and Regulation

 

Banks and their holding companies are extensively regulated under both federal and state law. The following is a brief summary of certain statutes, rules, regulations and enforcement actions affecting the Company and the Bank. This summary is qualified in its entirety by reference to the particular statutory and regulatory provisions referred to below and is not intended to be an exhaustive description of the statutes or regulations applicable to the business of the Company or the Bank. Supervision, regulation, and examination of banks by regulatory agencies are intended primarily for the protection of depositors, rather than shareholders.

 

5
 

 

Regulatory Matters

 

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.

 

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 community bank leverage ratio 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. The community bank leverage ratio minimum requirement is 9%. Under the CBLR framework, 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, 2023, that the Bank met all capital adequacy requirements to which it was subject. The Bank’s actual capital amounts and percentages are presented in the table ($’s in thousands):

 

       To Be Well Capitalized 
       Under Prompt Corrective 
       Action Regulations (CBLR 
   Actual   Framework) 
   Amount   %   Amount   % 
As of December 31, 2023:                    
Tier 1 Capital to Total Assets  $74,999    10.00%  $67,499    9.00%
                     
As of December 31, 2022:                    
Tier 1 Capital to Total Assets  $66,291    11.29%  $52,865    9.00%

 

Dodd-Frank Act

 

The Company and the Bank are subject to the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act. The Dodd-Frank Act has had a broad impact on the financial services industry, including significant regulatory and compliance changes including, among other things, (1) enhanced resolution authority of troubled and failing banks and their holding companies; (2) changes to capital and liquidity requirements; (3) changes to regulatory examination fees; (4) changes to assessments to be paid to the FDIC for federal deposit insurance; and (5) numerous other provisions designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector.

 

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The following items provide a brief description of the impact of the Dodd-Frank Act on the Bank’s operations and activities, both currently and prospectively.

 

Increased Capital Standards and Enhanced Supervision. The Dodd-Frank Act revised capital rules became effective for community banks with assets less than $10 billion and their holding companies pursuant to the requirements of the Dodd-Frank Act and standards adopted by the Basel Committee on Banking Supervision (referred to as “Basel III”). The Dodd-Frank Act also increased regulatory oversight, supervision and examination of banks, bank holding companies and their respective subsidiaries by the appropriate regulatory agency. Compliance with new regulatory requirements and expanded examination processes could increase the Company’s cost of operations.

 

The Consumer Financial Protection Bureau. The Dodd-Frank Act created a new, independent Consumer Financial Protection Bureau, or the Bureau, within the Federal Reserve. The Bureau is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The Bureau has rulemaking authority over many of the statutes governing products and services offered to bank consumers. Generally, we will not be directly subject to the rules and regulations of the Bureau. However, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are stricter than those regulations promulgated by the Bureau and state attorneys general are permitted to enforce consumer protection rules adopted by the Bureau against certain state-chartered institutions. Any such new regulations could increase the cost of operations and, as a result, could limit the Bank’s ability to expand into these products and services.

 

Deposit Insurance. The Dodd-Frank Act made permanent the $250,000 deposit insurance limit for insured deposits. Amendments to the Federal Deposit Insurance Act also revised the assessment base against which an insured depository institution’s deposit insurance premium paid to the FDIC’s Deposit Insurance Fund (the “DIF”) is calculated. Under the amendments, the assessment base will be its average consolidated total assets less its average tangible equity. Additionally, the Dodd-Frank Act made changes to the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15 percent to 1.35 percent of the estimated amount of total insured deposits, and eliminated the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. The Dodd-Frank Act also provides that depository institutions may pay interest on demand deposits, which assists the Bank in obtaining more deposits. In December 2022, the Bank began participating as a member of the IntraFi Network, which is the largest provider of reciprocal deposits. With IntraFi’s deposit services, the Bank can offer depositors access to FDIC insurance for an unlimited amount, well beyond the standard maximum of $250,000 for funds placed into demand deposit accounts, money market deposit accounts, or CDs. The Company uses IntraFi Network’s reciprocal deposit program and not its one-way deposit program. At December 31, 2023, 15% of depositors were benefiting from the additional FDIC insurance provided by the IntraFi network.

 

Transactions with Affiliates. The Dodd-Frank Act enhanced the requirements for certain transactions with affiliates under Sections 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and increasing the amount of time for which collateral requirements regarding covered transactions must be maintained.

 

Transactions with Insiders. Insider transaction limitations were expanded through the strengthening on loan restrictions to insiders and the expansion of the types of transactions subject to the various limits.

 

Enhanced Lending Limits. The Dodd-Frank Act strengthened the existing limits on a depository institution’s credit exposure to one borrower. The Dodd-Frank Act expanded the scope of these restrictions to include credit exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing transactions.

 

7
 

 

Company Regulation

 

General. As a bank holding company registered under the Bank Holding Company Act of 1956 (the “BHCA”), the Company is subject to the regulation and supervision of, and inspection by, the Federal Reserve Board (“Federal Reserve”). The Company is also required to file with the Federal Reserve annual reports and other information regarding its business operations, and those of its subsidiaries. In the past, the BHCA limited the activities of bank holding companies and their subsidiaries to activities which were limited to banking, managing or controlling banks, furnishing services to or performing services for their subsidiaries or engaging in any other activity which the Federal Reserve determined to be so closely related to banking or managing or controlling banks as to be properly incidental thereto. Under the Gramm-Leach-Bliley Financial Modernization Act of 1999 which is discussed below, bank holding companies have the opportunity to seek broadened authority, subject to limitations on investment, to engage in activities that are “financial in nature” if all of their subsidiary depository institutions are well capitalized, well managed, and have at least a satisfactory rating under the Community Reinvestment Act, which is also discussed below.

 

In this regard, the BHCA prohibits a bank holding company, with certain limited exceptions, from (i) acquiring or retaining direct or indirect ownership or control of more than 5% of the outstanding voting stock of any company which is not a bank or bank holding company, or (ii) engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or performing services for its subsidiaries, unless such non-banking business is determined by the FRB to be so closely related to banking or managing or controlling banks as to be properly incident thereto. In making such determinations, the FRB is required to weigh the expected benefit to the public, such as greater convenience, increased competition or gains in efficiency, against the possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. Generally, bank holding companies, such as the Company, are required to obtain prior approval of the Federal Reserve to engage in any new activity not previously approved by the Federal Reserve.

 

Change of Control. The BHCA also requires that every bank holding company obtain the prior approval of the Federal Reserve before it may acquire all or substantially all of the assets of any bank, or ownership or control of any voting shares of any bank, if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. In approving bank acquisitions by bank holding companies, the Federal Reserve is required to consider the financial and managerial resources and future prospects of the bank holding company and the banks concerned, the convenience and needs of the communities to be served, including the parties’ performance under the Community Reinvestment Act (discussed below) and various competitive factors. As described in greater detail below, pursuant to the Riegle-Neal Interstate Banking and Branch Efficiency Act of 1994 (the “Interstate Banking and Branching Act”), a bank holding company is permitted to acquire banks in states other than its home state.

 

The BHCA further prohibits a person or group of persons from acquiring “control” of a bank holding company unless the Federal Reserve Bank has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act would, under the circumstances set forth in the presumption, constitute acquisition of control of the bank holding company. In addition, any person or group of persons must obtain the approval of the Federal Reserve under the BHCA before acquiring 25% (5% in the case of an acquirer that is already a bank holding company) or more of the outstanding common stock of a bank holding company, or otherwise obtaining control or a “controlling influence” over the bank holding company.

 

8
 

 

Interstate Banking and Branching. The Interstate Banking and Branching Act provides for nationwide interstate banking and branching. Under the law, interstate acquisitions of banks or bank holding companies in any state by bank holding companies in any other state are permissible subject to certain limitations. Florida also has a law that allows out-of-state bank holding companies (located in states that allow Florida bank holding companies to acquire banks and bank holding companies in that state) to acquire Florida banks and Florida bank holding companies. The law essentially provides for out-of-state entry by acquisition only (and not by interstate branching) and requires the acquired Florida bank to have been in existence for at least three years. Interstate branching and consolidation of existing bank subsidiaries in different states is permissible. A Florida bank also may establish, maintain, and operate one or more branches in a state other than Florida pursuant to an interstate merger transaction in which the Florida bank is the resulting bank.

 

Financial Modernization. The Gramm-Leach-Bliley Financial Modernization Act of 1999 (the “GLB Act”) sought to achieve significant modernization of the federal bank regulatory framework by allowing the consolidation of banking institutions with other types of financial services firms, subject to various restrictions and requirements. In general, the GLB Act repealed most of the federal statutory barriers which separated commercial banking firms from insurance and securities firms and authorized the consolidation of such firms in a “financial services holding company.” The Bank has no current plans to utilize the structural options created by the GLB Act.

 

Securities Regulation and Corporate Governance. The Company’s common stock is registered with the Securities and Exchange Commission (the “SEC”) under Section 12(b) of the Securities Exchange Act of 1934, and we are subject to restrictions, reporting requirements and review procedures under federal securities laws and regulations. The Company is also subject to the rules and reporting requirements of the Nasdaq Capital Market, on which its common stock is traded. Like other issuers of publicly traded securities, the Company must also comply with the corporate governance reforms enacted under the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and the rules of the SEC and Nasdaq Stock Market adopted pursuant to the Sarbanes-Oxley Act. Among other things, these reforms, effective as of various dates, require certification of consolidated financial statements by the chief executive officer and chief financial officer, prohibit the provision of specified services by independent auditors, require pre-approval of independent auditor services, define director independence and require certain committees, and a majority of a subject company’s board of directors, to consist of independent directors, establish additional disclosure requirements in reports filed with the SEC, require expedited filing of reports, require management evaluation and auditor attestation of internal controls, prohibit loans by the issuer (but not by certain depository institutions) to directors and officers, set record-keeping requirements, mandate complaint procedures for the reporting of accounting and audit concerns by employees, and establish penalties for non-compliance.

 

Bank Regulation

 

General. The Bank is chartered under the laws of the State of Florida, and its deposits are insured by the FDIC to the extent provided by law. The Bank is subject to comprehensive regulation, examination and supervision by the FDIC and the Florida Office of Financial Regulation, or the Florida OFR, and to other laws and regulations applicable to banks. Such regulations include limitations on loans to a single borrower and to its directors, officers and employees; limitations on the types of activities a state bank can conduct; restrictions on the opening and closing of branch offices; the maintenance of required capital ratios; the granting of credit under equal and fair conditions; and the disclosure of the costs and terms of such credit. The Bank is examined periodically by the FDIC and the Florida OFR, to whom it submits periodic reports regarding its financial condition and other matters. The FDIC and the Florida OFR have a broad range of powers to enforce regulations under their jurisdiction, and to take discretionary actions determined to be for the protection and safety and soundness of banks, including the institution of cease and desist orders and the removal of directors and officers. The FDIC and the Florida OFR also have the authority to approve or disapprove mergers, consolidations, and similar corporate actions.

 

9
 

 

Dividends. The Company’s ability to pay dividends is substantially dependent on the ability of the Bank to pay dividends to the Company. As a state-chartered bank, the Bank is subject to dividend restrictions set by Florida law and the FDIC. Except with the prior approval of the Florida OFR, all dividends of any Florida bank must be paid out of retained net profits from the current period and the previous two years, after deducting expenses, including losses and bad debts. As of December 31, 2023, the maximum dividend payable by the Bank to the Company was $17 million. However, under the Federal Deposit Insurance Act, an FDIC-insured institution may not pay any dividend if payment would cause it to become undercapitalized or while it is undercapitalized. Further, the FDIC and the Florida OFR also have the general authority to limit the dividend payment by banks if such payment may be deemed to constitute an unsafe and unsound practice. It is likely that those agencies would view a Bank dividend which materially reduced the capital ratios of the Bank to be such an unsafe or unsound practice.

 

Loans to One Borrower. Florida law generally allows a state bank such as the Bank to extend credit to any one borrower (and certain related entities of such borrower) in an amount up to 25% of its capital accounts, provided that the unsecured portion may not exceed 15% of the capital accounts of the bank. Based upon the Bank’s capital, the maximum loan the Bank is currently permitted to make to any one borrower (and certain related entities of such borrower) is approximately $18.7 million, provided the unsecured portion does not exceed approximately $11.2 million.

 

Transactions with Affiliates. Under federal law, federally insured banks are subject, with certain exceptions, to certain restrictions on any extension of credit to their parent holding companies or other affiliates, on investment in the stock or other securities of affiliates, and on the taking of such stock or securities as collateral from any borrower. In addition, banks are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or the providing of any property or service.

 

Change of Bank Control. Florida law restricts the amount of voting stock of a bank that a person may acquire without the prior approval of banking regulators. The overall effect of such laws is to make it more difficult to acquire a bank by tender offer or similar means than it might be to acquire control of another type of corporation. Consequently, shareholders of financial institutions are less likely to benefit from the rapid increases in stock prices that often result from tender offers or similar efforts to acquire control of other companies.

 

Under Florida law, no person or group of persons may, directly or indirectly or acting by or through one or more persons, purchase or acquire a controlling interest in any bank which would result in the change in control of that bank unless the Florida OFR first shall have approved such proposed acquisition. A person or group will be deemed to have acquired “control” of a bank (i) if the person or group, directly or indirectly or acting by or through one, or more other persons, owns, controls, or has power to vote 25% or more of any class of voting securities of the bank, or controls in any manner the election of a majority of the directors of the bank, or (ii) if the Florida OFR determines that such person exercises a controlling influence over the management or policies of the bank. In any case where a proposed purchase of voting securities would give rise to a presumption of control, the person or group who proposes to purchase the securities must first file written notice of the proposal to the Florida OFR for its review and approval. Subsections 658.27(2) and 658.28(3), Florida Statutes, refer to a potential change of control of a financial institution at a 10% or more threshold and rebuttable presumption of control. Accordingly, the name of any subscriber acquiring more than 10% of the voting securities of the Bank must be submitted to the Florida OFR for prior approval.

 

USA Patriot Act. The Bank is subject to the requirements of the USA Patriot Act, which was enacted in 2001 to provide the federal government with powers to prevent, detect, and prosecute terrorism and international money laundering, and has resulted in promulgation of several regulations that have a direct impact on banks. There are a number of programs that financial institutions must have in place such as: (i) Bank Secrecy Act/Anti-Money Laundering programs to manage risk; (ii) Customer Identification Programs to determine the true identity of customers, document and verify the information, and determine whether the customer appears on any federal government list of known or suspected terrorist or terrorist organizations; and (iii) monitoring for the timely detection and reporting of suspicious activity and reportable transactions. The Bank has devoted substantial attention and resources to compliance with these laws.

 

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Other Consumer Laws. Florida usury laws and federal laws concerning interest rates limit the amount of interest and various other charges collected or contracted by a bank. The Bank’s loans are also subject to federal laws applicable to consumer credit transactions, such as the:

 

● Federal Truth-In-Lending Act governing disclosures of credit terms to consumer borrowers;

 

● Community Reinvestment Act requiring financial institutions to meet their obligations to provide for the total credit needs of the communities they serve, including investing their assets in loans to low and moderate-income borrowers;

 

● Home Mortgage Disclosure Act requiring financial institutions to provide information to enable public officials to determine whether a financial institution is fulfilling its obligations to meet the housing needs of the community it serves;

 

● Equal Credit Opportunity Act prohibiting discrimination on the basis of race, creed or other prohibitive factors in extending credit;

 

● Real Estate Settlement Procedures Act which requires lenders to disclose certain information regarding the nature and cost of real estate settlements, and prohibits certain lending practices, as well as limits escrow account amounts in real estate transactions;

 

● Fair Debt Collection Act governing the manner in which consumer debts may be collected by collection agencies;

 

● Fair and Accurate Credit Transactions Act which establishes additional rights for consumers to obtain and correct credit reports, addresses identity theft, and establishes additional requirements for consumer reporting agencies and financial institutions that provide adverse credit information to a consumer reporting agency; and

 

● The rules and regulations of various federal agencies charged with the responsibility of implementing such federal laws.

 

The Bank’s deposit and loan operations are also subject to the following:

 

GLB Act privacy provisions, which require the Bank maintain privacy policies intended to safeguard consumer financial information, to disclose these policies to its customers, and allow customers to “opt-out” of having their financial service providers disclose their confidential financial information to non-affiliated third parties, subject to certain exceptions;

 

● Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and

 

● Electronic Funds Transfer Act and Regulation E, which govern automatic deposits to, and withdrawals from, deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.

 

Other Regulation

 

Enforcement Powers. Congress has provided the federal bank regulatory agencies with an array of powers to enforce laws, rules, regulations and orders. Among other things, the agencies may require that institutions cease and desist from certain activities, may preclude persons from participating in the affairs of insured depository institutions, may suspend or remove deposit insurance, and may impose civil money penalties against institution-affiliated parties for certain violations.

 

11
 

 

Community Reinvestment Act. Bank holding companies and their subsidiary banks are subject to the provisions of the Community Reinvestment Act of 1977 (the “CRA”) and the regulations promulgated thereunder by the appropriate bank regulatory agency. Under the terms of the CRA, the appropriate federal bank regulatory agency is required, in connection with its examination of a bank, to assess such bank’s record in meeting the credit needs of the community served by that bank, including low-and moderate-income neighborhoods. The regulatory agency’s assessment of the Bank’s record is made available to the public. Further, such assessment is required of any bank which has applied to charter a bank, obtain deposit insurance coverage for a newly chartered institution, establish a new branch office that will accept deposits, relocate an office, or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal Reserve will assess the record of each subsidiary bank of the applicant bank holding company, and such records may be the basis for denying the application.

 

Effect of Governmental Monetary Policies

 

The Company’s earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve monetary policies have had, and will likely continue to have, an important impact on the operating results of financial institutions through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve have major effects upon the levels of loans, investments and deposits through its open market operations in United States Government securities and through its regulation of the discount rate on borrowings of member banks. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies.

 

Statistical Profile and Other Financial Data

 

Reference is hereby made to the statistical and financial data contained in the sections captioned “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for statistical and financial data providing a review of the Bank’s business activities.

 

Item 1A. Risk Factors

 

Not applicable.

 

Item 1B. Unresolved Staff Comments

 

Not applicable.

 

Item 1C. Cybersecurity

 

Cybersecurity Risk Management and Strategy

 

OptimumBank believes that risk management is a component of our overall governance, and that Information Technology Risk Management (ITRM) is a component of overall risk management. Our institution recognizes that IT (Information Technology) supports most aspects of our business; therefore, effective ITRM is not just limited to technology. Our IT systems connect with affiliates, customers, internal lines of business, third parties (e.g., third-party providers), and the public. IT also creates interdependencies among infrastructure, application, and web content. These independencies affect the decision-making process necessary to support existing products and services and provide for the delivery of new products and services. For all these reasons, IT management is critical to the performance and success of our Institution. Furthermore, ITRM involves more than containing costs and controlling operational risks and does not work in isolation. A financial institution capable of aligning its IT infrastructure to support its business strategy adds value to the institution and positions itself for sustained success. The Institution also recognizes its many strategic challenges in today’s marketplace, including cybersecurity threats, further increasing the need for effective ITRM.

 

The Institution’s Information Security Program addresses how we assess and manage risk to all information including Non-Public Information (NPI) and other confidential information in every form (written, paper, or digital). We adhere to standards outlined in the Gramm Leach Bliley Act (GLBA) and Federal Financial Institutions Examination Council (FFIEC) Information Security Booklet(s) for the origination, collection, storage, use, transmission, and disposal of sensitive information, including the protection of hardware and infrastructure used to store and transmit such information. Information security promotes the commonly accepted objectives of confidentiality, integrity, and availability (CIA Triad) of information and is essential to the overall safety and soundness of our institution. Information security exists to provide protection from malicious and non-malicious action that increase the risk of adverse effects on earnings, capital, and enterprise value.

 

Our Information Security Program represents the standards, policies, procedures, and guidelines defining our intuition’s security requirements and related activities. information.

 

Threat monitoring procedures provide for continual and ad hoc monitoring of threat intelligence communication and systems, effective incident detection and response, and the use of monitoring tools and reports in any subsequent forensic or legal procedures. Management reviews and approves the tools used and the conditions for use, whether developed internally, or outsourced.

 

The Institution actively monitors company networks and systems to detect suspicious or malicious events, including through penetration testing and routine vulnerability scans. Management has developed procedures for obtaining, monitoring, assessing, and responding to evolving threat and vulnerability information. The identification of threats involves the understanding of the sources of threats, their capabilities, and their objectives. Knowledge of threat sources is especially important to help identify vulnerabilities. Vulnerabilities can occur in many areas, such as the system design, the system operation, security procedures, business line controls, and the implementation of the system and controls.

 

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We maintain policies and procedures for the safe storage, handling and secure disposal of customer information. Each employee is expected to be responsible for the security and confidentiality of customer information, and we communicate this responsibility to employees upon hiring and regularly throughout their employment. We provide employees with mandatory security awareness training. The curriculum includes the recognition and appropriate handling of potential phishing emails, which could, ultimately, place sensitive consumer/customer, proprietary, and/or employee information at risk. The Company employs a number of technical controls to mitigate the risk of phishing emails targeting employees. We test employees monthly to determine their susceptibility to phishing test emails, and we require susceptible employees to take additional training. Through the IT Steering Committee, management is provided regular reporting for oversight.

 

As part of our information security program, we have adopted an Incident Response Plan (“Incident Response Plan”) which is administered by our Information Security Officer who works in consultation with an Incident Response Team . The Incident Response Plan describes the Institution’s processes, procedures, and responsibilities for responding to incidents, including cybersecurity, and identifies team members responsible for assessing potential security incidents, declaring an incident, and initiating a response. The Incident Response Plan outlines action steps for investigating, containing, controlling, responding to, and remediating a cybersecurity incident. Our Plan includes notification procedures for reporting incidents to appropriate stakeholders, including the Company’s Executive Management Team and the Board of Directors. Annually, our Incident Response Team performs a tabletop exercise to simulate the Institution’s responses to events, including cybersecurity. Each exercise results in lessons learned and subsequent improvement to the Incident Response Plan, as warranted.

 

The Institution’s third-party risk management program is appropriate to the nature, size, complexity, and scope of our third-party relationships and provides the internal control framework for management to identify, measure, mitigate, monitor, and report risks associated with the use of third-party providers. Third-party service providers are required to comply with the Company’s policies regarding non-public personal information and information security. Third parties processing non-public personal information are contractually required to meet all legal and regulatory obligations to protect customer data against security threats or unauthorized access.

 

While we do not believe that our business strategy, results of operations or financial condition have been materially adversely affected by any cybersecurity incidents, cybersecurity threats are pervasive, and cybersecurity risk has increased in recent years. Despite our efforts, there can be no assurance that our cybersecurity risk management processes and measures described will be fully implemented, complied with or effective in protecting our systems and information. We face risks from certain cybersecurity threats that, if realized, are reasonably likely to materially affect our business strategy, result of operations or financial condition.

 

Cybersecurity Governance

 

We recognize our overall security culture contributes to the effectiveness of our Information Security Program. The Board of Directors sets the tone and direction for our institution’s use of technology. The Board will initially approve, and periodically review and re-approve, the IT Strategic Plan, Information Security Program, and other IT-related policies. While the Board may delegate the design, implementation, and monitoring or certain IT activities to the IT Steering Committee (ITSC), the Board remains response over overseeing the IT activities and is strongly encouraged to prove a credible challenge to management. To help carry out their responsibilities, the Board will be periodically trained to understand IT activities and risk, including cyber risks. Cybersecurity matters and assessments are regularly included in ITC meetings.

 

The Board’s oversight of cybersecurity risk is supported by our Information Security Officer (“ISO”). The ISO attends ITC meetings and provides cybersecurity updates to these Management committees. The ISO also provides annual risk assessments and reports regarding the information security program summary report to the full Board of Directors.

 

The Company’s ISO directs the company’s Information Security Program and our information technology risk management. In this role, in addition to the responsibilities discussed above, the ISO manages the Company’s information security and day-to-day cybersecurity operations and supports the information security risk oversight responsibilities of the Board and its committees. The ISO is also responsible for the Company’s information technology governance, risk, and compliance program and ensures that high level risks receive appropriate attention. The Information Security team examines risks to the Company’s information systems and assets, designs and implements security solutions, monitors the environment, and provides responses to threats.

 

Item 2. Properties

 

The Bank operates a main office and one branch office in Broward County, Florida, and currently plans to open an additional branch office in Miami-Dade County in the second quarter of 2024. The following table sets forth information with respect to the Bank’s offices as of December 31, 2023.

 

Location   Year Facility Opened   Facility Status
         
Executive Office and Ft. Lauderdale Branch Office:   2019   Leased
2929 East Commercial Boulevard Suite 101, 303 - 306 Fort Lauderdale, Florida 33308        
         
Deerfield Beach Branch Office:   2004   Leased
2215 West Hillsboro Boulevard Deerfield Beach, Florida 33442        
         
Planned North Miami Beach Office:        
757 NE 167th Street, North Miami Beach FL 33162       Leased

 

Item 3. Legal Proceedings

 

From time-to-time, the Bank is involved in litigation arising in the ordinary course of its business. As of the date of the filing of this Form 10-K, management is of the opinion that the ultimate aggregate liability in connection with any pending litigation will not have a material adverse effect on the Company’s consolidated financial condition or results of operations.

 

Item 4. Mine Safety Disclosure

 

Not applicable.

 

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PART II

 

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

The Company’s common stock currently trades on the Nasdaq Capital Market under the symbol “OPHC.”

 

The Company had approximately 751 record holders of its common stock as of December 31, 2023.

 

During the first quarter of 2023, the Company issued 72,221 shares of its common stock in a private placement transaction to two accredited investors at a price of $4.50 per share. None of these investors was an officer, director or affiliate of the Company. The Company issued these shares in reliance on Section 4(a)(2) of the Securities Act as a transaction by an issuer not involving a public offering. The Company used the proceeds to make capital contributions to the Bank in order to augment the Bank’s regulatory capital ratios.

 

The Bank is currently permitted to pay cash dividends subject to restrictions imposed by the Florida Financial Institution Codes and federal banking law. The Company is currently permitted to pay cash dividends subject to restrictions under the Florida Business Corporation Act. The Company does not plan to pay any dividends in the foreseeable future. Instead, the Company intends to retain any income for the purpose of enhancing its financial position and supporting the growth of the Bank.

 

Item 6. [Reserved]

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

General

 

Critical Accounting Policies

 

The Company’s financial condition and results of operations are sensitive to accounting measurements and estimates of matters that are inherently uncertain. When applying accounting policies in areas that are subjective in nature, the Company must use its best judgment to arrive at the carrying value of certain assets. One of the most critical accounting policies applied by the Company is related to the valuation of its loan portfolio.

 

A variety of estimates impact the carrying value of the Company’s loan portfolio including the calculation of the allowance for credit 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 credit 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 credit losses are determined by analyzing risks associated with specific loans and the loan portfolio, current trends in delinquencies and charge-offs, 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 credit losses relies on the Company’s estimates and judgments relating to inherently uncertain events, results may differ from management’s estimates.

 

The allowance for credit losses is also discussed as part of “Loan Portfolio, Asset Quality and Allowance for Credit 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.

 

14
 

 

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 credit losses, the magnitude of which depends on a variety of economic factors affecting borrowers which are beyond its control. As of December 31, 2023, the Bank’s nonperforming loans were approximately $1 million, or .15% of gross loan portfolio. At December 31, 2022, the Bank had not no nonperforming loans.

 

The following table sets forth the composition of the Bank’s loan portfolio (dollars in thousands):

 

   At December 31, 
   2023   2022   2021 
       % of       % of       % of 
   Amount   Total   Amount   Total   Amount   Total 
                 
Residential real estate  $71,400    10.50%  $50,354    10.42%  $32,583    12.96%
Multi-family real estate   67,498    9.93    69,555    14.39    48,592    19.33 
Commercial real estate   422,680    62.15    310,695    64.27    129,468    51.50 
Land and construction   32,600    4.79    17,286    3.58    3,772    1.50 
Commercial   41,870    6.16    5,165    1.07    14,157    5.63 
Consumer   44,023    6.47    30,323    6.27    22,827    9.08 
                               
Total loans  $680,071    100.00%  $483,378    100.00%  $251,399    100.00%
                               
(Deduct) add:                              
Net deferred loan fees   (1,294)        (367)        (422)     
Allowance for credit losses   (7,683)        (5,793)        (3,075)     
                               
Loans, net  $671,094        $477,218        $247,902      

 

The following table sets forth the activity in the allowance for credit losses (in thousands):

 

   Year Ended December 31, 
   2023   2022   2021 
             
Beginning balance  $5,793   $3,075   $1,906 
Additional allowance recognized due to adoption of Topic 326   218         
Credit loss expense   3,759    3,466    1,173 
Loans charged off   (2,442)   (901)   (277)
Recoveries   355    153    273 
                
Ending balance  $7,683   $5,793   $3,075 

 

15
 

 

The allowance for credit losses represents management’s estimate of expected losses in the existing loan portfolio. The allowance for credit losses is increased by the credit loss expense charged to earnings and reduced by loans charged off, net of recoveries. The allowance for credit losses represented 1.13% and 1.20% of the total loans outstanding at December 31, 2023, and 2022, respectively.

 

The allowance for credit losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. The allowance for credit losses is adjusted by a credit loss expense which is reported in earnings and reduced by the charge-off of loan amounts, net of recoveries. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Expected credit loss inherent in non-cancellable off-balance sheet credit exposures is provided through the credit loss expense, but recorded separately in other liabilities.

 

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical loan default and loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information incorporate management’s view of current conditions and forecasts.

 

The following table sets forth the Bank’s allowance for credit losses by loan type (dollars in thousands):

 

   At December 31, 
   2023   2022 
   Amount  

% of

Total

Loans

   Amount   % of
Total
Loans
 
                 
Residential real estate  $1,020    10%  $768    11%
Multi-family real estate   1,041    11    748    14 
Commercial real estate   3,793    62    3,262    64 
Land and construction   1,019    5    173    4 
Commercial   281    6    277    1 
Consumer   529    6    565    6 
                     
Total allowance for credit losses  $7,683    100%  $5,793    100%
                     
Allowance for credit losses as a percentage of total loans outstanding        1.13%        1.20%

 

16
 

 

The following summarizes the amount of nonperforming loans (in thousands):

 

   At December 31, 
   2023   2022 
       Unpaid           Unpaid     
   Recorded   Principal   Related   Recorded   Principal   Related 
   Investment   Balance   Allowance   Investment   Balance   Allowance 
With no related allowance recorded:                              
Consumer  $1,025   $1,025   $   $   $   $ 
                               
With an allowance recorded:                              
Consumer                        
                               
Total  $1,025   $1,025   $   $   $   $ 

 

During 2023, 2022, and 2021, 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, 
   2023   2022   2021 
             
Average investment in impaired loans  $85   $    658 
Interest income recognized on impaired loans  $   $    7 
Interest income received on a cash basis on impaired loans  $   $    7 

 

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. Management monitors the liquidity position daily.

 

The Bank’s liquidity is derived primarily from our deposit base, scheduled amortization and prepayments of loans and investment securities, funds provided by operations, and capital. Additionally, as a commercial bank, we are expected to maintain an adequate liquidity position. The liquidity position may consist of cash on hand, cash on demand deposit with correspondent banks, federal funds sold, and marketable securities such as United States government treasury and agency securities, municipal securities, U.S. agency mortgage-backed securities and asset-backed securities.

 

The Bank’s primary sources of cash during the year ended December 31, 2023, 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 and secondarily from listing services.

 

17
 

 

The Bank also has external sources of funds through the FHLB and with unsecured lines of credit with correspondent banks and the Federal Reserve. 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, 2023, the Bank had outstanding borrowings of $62 million against its $178 million in established borrowing capacity with the FHLB. The Company’s borrowing facility is subject to collateral and stock ownership requirements, as well as prior FHLB consent to each advance. The Company also has a $13.6 million advance with the Federal Reserve that matures in August 2024. At December 31, 2023, the Company also had available lines of credit amounting to $29.5 million with five correspondent banks to purchase federal funds. Disbursements on the lines of credit are subject to the approval of the correspondent banks. We measure and monitor our liquidity daily and believe our liquidity sources are adequate to meet our operating needs.

 

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, 2023:          
Held-to-maturity:          
Collateralized mortgage obligations  $353   $318 
Mortgage-backed Securities   7    8 
Total  $360   $326 
Available for sale:          
SBA Pool Securities  $706   $690 
Collateralized mortgage obligation   138    123 
Taxable municipal securities   16,690    12,210 
Mortgage-backed Securities.   13,927    11,332 
Total  $31,461   $24,355 
At December 31, 2022:          
Held-to-maturity:          
Collateralized mortgage obligations  $475   $440 
Mortgage-backed Securities   65    64 
Total  $540   $504 
Available for sale:          
SBA Pool Securities  $834   $817 
Collateralized mortgage obligations   145    130 
Taxable municipal securities   16,729    11,620 
Mortgage-backed Securities.   15,180    12,535 
Total  $32,888   $25,102 

 

18
 

 

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, 2023:                    
Collateralized mortgage obligation  $   $490   $490    2.19%
Mortgage-backed securities       13,935    13,935    1.99%
Taxable municipal securities       16,690    16,690    2.17%
SBA pool securities       706    706    5.18%
   $   $31,821   $31,821      
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      

 

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 effective controls and limited exposure to interest-rate risk.

 

19
 

 

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, 2023, 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  $6,109    55,919    9,372       $71,400 
Multi—family real estate loans   1,695    63,798    2,005        67,498 
Commercial real estate loans   34,870    343,538    44,272        422,680 
Land and construction   5,598    21,370    5,632        32,600 
Commercial   27,874    13,748    248        41,870 
Consumer   17,151    2,423        24,449    44,023 
                          
Total loans   93,297    500,796    61,529    24,449    680,071 
                          
Securities    690        6,337    17,688    24,715 
Interest—bearing deposits in banks   62,654                62,654 
                      
Federal Home Loan Bank stock   3,354                3,354 
                          
Total rate—sensitive assets   159,995    500,796    67,866    42,137    770,794 
                          
Deposit accounts (2):                          
Money—market deposits   216,309                216,309 
Interest—bearing checking deposits   106,172                106,172 
Savings deposits   451                451 
Time deposits   81,302    40,455            121,757 
                          
Total deposits   404,234    40,455            444,689 
                          
Federal Home Loan Bank advances   52,000    10,000            62,000 
Federal Reserve Bank advances   13,600                13,600 
Total rate—sensitive liabilities   469,834    50,455            520,289 
                          
GAP (repricing differences)  $(309,839)  $450,341   $67,866   $42,137   $250,505 
                          
Cumulative GAP  $(309,839)  $140,502   $208,368   $250,505      
                          
Cumulative GAP/total assets   (39)%   18%   26%   32%     

 

20
 

 

(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) 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, 2023 (in thousands):

 

   One Year or   After One But Within   After Five     
   Less   Five Years   Years   Total 
                 
Residential real estate  $747   $9,188   $61,465   $71,400 
Multi-family real estate       2,158    65,340    67,498 
Commercial real estate   4,827    65,721    352,132    422,680 
Land and construction       1,488    31,112    32,600 
Commercial   19,622    13,748    8,500    41,870 
Consumer   19,575        24,448    44,023 
                     
Total  $44,771   $92,303   $542,997   $680,071 

 

The following table sets forth the maturity or repricing of loans by interest type at December 31, 2023 (in thousands):

 

   One Year or   After One But Within Five   After Five     
   Less   Years   Years   Total 
                 
Fixed interest rate  $3,223   $44,758   $362,792   $410,773 
Variable interest rate   41,548    47,545    180,205    269,298 
                     
Total  $44,771   $92,303   $542,997   $680,071 

 

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.

 

21
 

 

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, 2023, follows (in thousands):

 

Commitments to extend credit  $31,044 
      
Unused lines of credit  $69,978 
      
Standby letters of credit  $4,559 

 

The following is a summary of the Company’s on-balance sheet contractual obligations at December 31, 2023 (in thousands):

 

       Payments Due by Period     
      

Less

Than 1

   1-3   3-5  

More

Than 5

 
Contractual Obligations  Total   Year   Years   Years   Years 
Federal Home Loan Bank advances  $62,000   $52,000   $10,000   $   $ 
Federal Reserve Bank Advances   13,600    13,600             
Operating lease liabilities   2,530    321    672    749    788 
                          
Total  $78,130   $65,921    10,672    749    788 

 

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 $132 million in 2023. The increase in deposit balances primarily consisted of an increase of $36 million in noninterest-bearing demand deposits, increase of $156 million in money market accounts, and an increase of $59 million in NOW deposits. These increases were partially offset by a decrease of $1 million in savings, decrease of $118 in time deposits. The increase in money market consisted of $105 million in deposits sourced through an online listing service and $51 million in deposits from competitive offerings at our branch offices.

 

22
 

 

The following table displays the distribution of the Company’s deposits by product at December 31, 2023 and 2022 (in thousands):

 

   2023   2022 
   Amount   % of Deposits   Amount  

% of Deposits

 
Noninterest-bearing demand deposits  $194,892    30.5%  $159,193    31.3%
NOW deposits   106,172    16.6    47,224    9.3 
Money-market deposits   216,309    33.8    60,020    11.8 
Savings   451    0.1    1,482    0.3 
                     
Subtotal   517,824    81.0%  $267,919    52.7%
                     
Time deposits:                    
0.00% – 0.99%   416    0.1%  $2,618    0.5%
1.00% – 1.99%   2,169    0.3    5,660    1.2 
2.00% – 2.99%   2,087    0.3    231,702    45.6 
3.00% – 3.99%   13,135    2.1         
4.00% – 4.99%   4,637    0.7         
5.00% – 5.99%   99,313    15.5         
                     
Total time deposits (1)   121,757    19.0%   239,980    47.3%
                     
Total deposits  $639,581    100.0%  $507,899    100.0%

 

(1) Includes Individual Retirement Accounts (IRA’s) totaling $2,267,000 and $1,537,000 at December 31, 2023 and 2022, respectively, all of which are in the form of time deposits.

 

The following table displays the distribution of the Company’s deposits by source at December 31, 2023 and 2022 (in thousands):

 

   At December 31, 2023   At December 31, 2022 
   Retail   Listing
Services
   Total   Retail   Listing
Services
   Total 
Noninterest-bearing demand deposits   194,892        194,892    159,193        159,193 
NOW deposits   106,172        106,172    47,224        47,224 
Money-market deposits   110,524    105,785    216,309    60,020        60,020 
Savings   451        451    1,482        1,482 
Time deposits   87,150    34,607    121,757    75,438    164,542    239,980 
    499,189    140,392    639,581    343,357    164,542    507,899 

 

The Company uses the listing services from QwickRate, National CD RateLine and Raisin. None of the deposits obtained from the listing services are considered brokered deposits. At December 31, 2023 and 2022, listing service deposits comprised 22% and 32% of total deposits, respectively.

 

The following table sets forth the Company’s maturity distribution of time deposits of $250,000 or more at December 31, 2023 and 2022 (in thousands):

 

   At December 31, 
   2023   2022 
         
Due three months or less  $3,847   $ 
Due more than three months to six months   2,671     
More than six months to one year   18,444    44,680 
One to five years   14,171    2,656 
           
Total  $39,133   $47,336 

 

23
 

 

Analysis of Results of Operations

 

The Company’s profitability depends primiarlly 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, 
   2023   2022 
       Interest   Average       Interest   Average 
   Average   And   Yield/   Average   And   Yield/ 
   Balance   Dividends   Rate   Balance   Dividends   Rate 
Interest-earning assets:                              
Loans  $543,745    31,759    5.8%  $354,521    17,952    5.1%
Securities   24,841    686    2.8%   29,263    649    2.2%
Other interest-earning assets (1)   63,804    3,335    5.2%   64,989    1,281    2.0%
                               
Total interest-earning assets/interest income   632,390    35,780    5.7%   448,773    19,882    4.4%
                               
Cash and due from banks   13,344              16,430           
Premises and equipment   1,157              867           
Other assets   4,174              4,480           
                               
Total assets   651,065             $470,550           
                               
Interest-bearing liabilities:                              
Savings, NOW and money-market deposits   189,286    4,315    2.3%  $152,588    669    0.4%
Time deposits   185,727    7,284    3.9%   83,324    2,565    3.1%
Borrowings (4)   16,739    468    2.8%   39,152    812    2.1%
                               
Total interest-bearing liabilities/interest expense   391,752    12,067    3.1%   275,064    4,046    1.5%
                               
Noninterest-bearing demand deposits   188,826              145,670           
Other liabilities   4,992              3,014           
Stockholders’ equity   65,495              46,802           
                               
Total liabilities and stockholders’ equity  $651,065             $470,550           
                               
Net interest income        23,713              15,836      
                               
Interest rate spread (2)             2.58%             2.96%
                               
Net interest margin (3)             3.75%             3.53%
                               
Ratio of average interest-earning assets to average interest- bearing liabilities             1.61              1.63 

 

(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 and Federal Reserve Bank advances.

 

24
 

 

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, 
   2023 versus 2022 
   Increases (Decreases) Due to Change In: 
   Rate   Volume   Rate/Volume   Total 
Interest-earning assets:                    
Loans  $2,755   $9,582   $1,470   $13,807 
Securities   159    (98)   (24)   37 
Other interest-earning assets   2,116    (23)   (39)   2,054 
                     
Total interest-earning assets   5,030    9,461    1,407    15,898 
                     
Interest-bearing liabilities:                    
Savings, NOW and money-market   2,809    160    676    3,645 
Time deposits   704    3,151    865    4,720 
Other   283    (465)   (162)   (344)
                     
Total interest-bearing liabilities   3,796    2,846    1,379    8,021 
                     
Net interest income  $1,234   $6,615   $28   $7,877 

 

Financial Condition as of December 31, 2023 Compared to December 31, 2022

 

The Company’s total assets at December 31, 2023, were $791 million, an increase of $206 million from December 31, 2022. The increase primarily consisted of increases of $5 million in cash and cash equivalents, $194 million in net loans, and $5 million in other assets offset by a $747,000 reduction in debt securities available for sale due to principal paydowns and unrealized gains during the year, and $933,000 in decreased value of our deferred tax asset. The Company experienced growth across the various loan types due to new organic originations. The net increase in loans resulted from $112 million in commercial real estate loans, $15 million in land and construction loans, $37 million in commercial, and $21 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, 2023, were $721 million, an increase of $199 million from December 31, 2022. The increase in total liabilities was mainly due to an increase of $132 million in total deposits, $13.6 in Federal Reserve Bank advances, and increase of $52 million in Federal Home Loan Bank advances.

 

The Company’s total stockholders’ equity at December 31, 2023, was $70 million, an increase of $7.4 million from December 31, 2022. The increase was principally due to the, issuance of common stock for an aggregate amount of $324,000, increase in unrealized gain on debt securities of $511,000, and net income of $6.3 million.

 

At December 31, 2023, the Bank had a Tier 1 leverage ratio of 10%.

 

25
 

 

Results of Operations for Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

 

   Years Ended December 31,   Increase / (Decrease) 
(dollars in thousands)  2023   2022   Amount   Percentage 
Total interest income  $35,780   $19,882   $15,898    80%
Total interest expense   12,067    4,046    8,021    198%
Net interest income   23,713    15,836    7,877    50%
Credit loss expense   4,047    3,466    581    17%
Net interest income after credit loss expense   19,666    12,370    7,296    59%
Total noninterest income   3,452    2,960    492    17%
Total noninterest expenses   14,661    9,938    4,723    48%
Net earnings before income taxes   8,457    5,392    3,065    57%
Income taxes   2,174    1,369    805    59%
Net earnings  $6,283   $4,023   $2,260    56%
Net earnings per share - Basic and diluted  $0.87   $0.68           

 

Net earnings. The Company had net earnings of $6.3 million for the year ended December 31, 2023 compared to a net earnings of $4.0 million for the year ended December 31, 2022. Adversely affecting net income was the Company recording a credit loss expense amounting to $4.0 million during the year ended December 31, 2023, which was largely due to the growth in the loan portfolio of $196.7 million. This compared to the Company recording a credit loss expense amounting to $3.5 million during the year ended December 31, 2022.

 

Interest Income. Interest income increased by $15.9 million to $35.8 million for the year ended December 31, 2023 from $19.9 million for the year ended December 31, 2022, primarily due to an increase in loan volume.

 

Interest Expense. Interest expense on deposits and borrowings increased by $8.0 million to $12.1 million for the year ended December 31, 2023 compared to the prior year. The increase in interest expense was caused by increases in interest rates paid on deposits and borrowings offset by volume increases in deposits and borrowings.

 

Credit loss expense.

 

Expected credit loss expense was $4.0 million during the year ended December 31, 2023, and $3.5 million for the year ended December 31, 2022. The expected credit loss expense is charged to earnings as losses are expected in order to bring the total allowance for credit losses to a level deemed appropriate by management to absorb losses expected. Management’s periodic evaluation of the adequacy of the allowance for credit losses is based upon historical experience, the volume and type of lending conducted by the Company, adverse situations that may affect the borrower’s ability to repay, estimated value of the underlying collateral, general economic conditions, particularly as they relate to our market areas, economic forecasts and other factors related to the estimated collectability of our loan portfolio. The allowance for credit losses totaled $7.6 million or 1.13% of loans outstanding at December 31, 2023, compared to $5.8 million or 1.20% of loans outstanding at December 31, 2022. The increase in the credit loss expense during the year ended on December 31, 2023 was primarily due to loan volume growth and the evaluation of the other factors noted above. During the year ended December 31, 2023, the net charge off amounting to $2 million resulted from consumer lending.

 

Noninterest Income. Total noninterest income of $3.5 million increased by $492,000 for the year ended December 31, 2023, from $3 million for the year ended December 31, 2022. The increase is primarily related to service charges, wire transfers, and ACH fees on deposit payment transactions.

 

Noninterest Expenses. Total noninterest expenses of $14.7 million increased by $4.7 million for the year ended December 31, 2023, compared to $9.9 million for the year ended December 31, 2022. The increase is primarily due to a one-time litigation settlement, increases in salaries and employee benefits, data processing, and other operating costs. The headcount of full-time equivalent employees increased from 48 to 60. The increase in noninterest expenses is directly attributable to the growth of the Bank.

 

Income Taxes. The Company recorded income taxes of $2.2 million for the year ended December 31, 2023 compared to an income tax expense of $1.4 million for the year ended December 31, 2022.

 

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.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 8. Financial Statements and Supplementary Data

 

26
 

 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and the Board of Directors

OptimumBank Holdings, Inc.

Fort Lauderdale, Florida:

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of OptimumBank Holdings, Inc. and subsidiary (the “Company”) as of December 31, 2023, and 2022, and the related consolidated statements of earnings, comprehensive income (loss), stockholders’ equity and cash flows for the years then ended and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2023 and 2022, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, the Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

27
 

 

Critical Audit Matters

 

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

Allowance for Credit Losses (“ACL”)

 

The Company’s loans portfolio totaled $671.1 million as of December 31, 2023, and the ACL on loans was $7.7 million.

 

As more fully described in Notes 1 and 3 to the Company’s consolidated financial statements, the Company estimates its exposure to expected credit losses as of the statement of financial condition date for existing financial instruments held at amortized cost and off-balance sheet exposures, such as unfunded loan commitments, lines of credit and other unused commitments that are not unconditionally cancelable by the Company.

 

The determination of the ACL requires management to exercise significant judgment and consider numerous subjective factors, including determining qualitative factors utilized to adjust historical loss rates and identifying loans requiring individual evaluation among others. As disclosed by management, different assumptions and conditions could result in a materially different amount for the estimate of the ACL.

 

We identified the ACL at December 31, 2023, as a critical audit matter. Auditing the ACL involved a high degree of subjectivity in evaluating management’s estimates, such as evaluating management’s identification of credit quality indicators, grouping of loans determined to be similar into pools, estimating the remaining life of loans in a pool, assessment of economic conditions and other environmental factors and evaluating the adequacy of specific allowances associated with individually evaluated loans.

 

The primary procedures we performed as of December 31, 2023, to address this critical audit matter included:

 

  - Obtained an understanding of the Company’s process for establishing the ACL, including the qualitative factor adjustments of the ACL
  - Tested the completeness and accuracy of the information utilized in the ACL, including evaluating the relevance and reliability of such information
  - Tested the ACL model’s computational accuracy
  - Evaluated the qualitative adjustments to the ACL, including assessing the basis for adjustments and the reasonableness of the significant assumptions
  - Evaluated the reasonableness of specific allowances on individually evaluated loans
  - Evaluated the overall reasonableness of assumptions used by management considering trends identified within peer groups
  - Evaluated the accuracy and completeness of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, disclosures in the consolidated financial statements
  - Evaluated credit quality trends in delinquencies, non-accruals, charge-offs and loan risk ratings

 

(PCAOB ID: 400)

 

/s/ HACKER, JOHNSON & SMITH PA  
We have served as the Company’s auditor since 2000.  
Fort Lauderdale, Florida  
March 8, 2024  

 

28
 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Consolidated Balance Sheets

(Dollars in thousands, except per share amounts)

 

   2023   2022 
   December 31, 
   2023   2022 
Assets:          
Cash and due from banks  $14,009   $19,788 
Interest-bearing deposits with banks   62,654    52,048 
Total cash and cash equivalents   76,663    71,836 
Debt securities available for sale   24,355    25,102 
Debt securities held-to-maturity (fair value of $326 and $504)   360    540 
Loans, net of allowance for credit losses of $7,683 and $5,793   671,094    477,218 
Federal Home Loan Bank stock   3,354    600 
Premises and equipment, net   1,375    934 
Right-of-use lease assets   2,161    2,119 
Accrued interest receivable   2,474    1,444 
Deferred tax asset   2,903    3,836 
Other assets   6,515    1,590 
           
Total assets  $791,254   $585,219 
Liabilities and Stockholders’ Equity:          
           
Liabilities:          
Noninterest-bearing demand deposits  $194,892   $159,193 
Savings, NOW and money-market deposits   322,932    108,726 
Time deposits   121,757    239,980 
           
Total deposits   639,581    507,899 
           
Federal Home Loan Bank advances   62,000    10,000 
Federal Reserve Bank advances   13,600     
Operating lease liabilities   2,248    2,172 
Other liabilities   3,818    2,568 
           
Total liabilities   721,247    522,639 
           
Commitments and contingencies (Notes 8 and 14)   -    - 
Stockholders’ equity:        
Preferred stock, no par value; 6,000,000 shares authorized:        
Series A Preferred, no par value, no shares issued and outstanding        
Series B Convertible Preferred, no par value, 1,520 shares authorized, 1,360 shares issued and outstanding        
Common stock, $.01 par value; 30,000,000 and 10,000,000 shares authorized, 7,250,219 and 7,058,897 shares issued and outstanding   72    71 
Additional paid-in capital   91,221    90,408 
Accumulated deficit   (15,971)   (22,073)
Accumulated other comprehensive loss   (5,315)   (5,826)
           
Total stockholders’ equity   70,007    62,580 
Total liabilities and stockholders’ equity  $791,254   $585,219 

 

See accompanying notes to Consolidated Financial Statements

 

29
 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Consolidated Statements of Earnings

(In thousands)

 

   2023   2022 
   Year Ended December 31, 
   2023   2022 
Interest income:          
Loans  $31,759   $17,952 
Debt securities   686    649 
Other   3,335    1,281 
           
Total interest income   35,780    19,882 
           
Interest expense:          
Deposits   11,599    3,234 
Borrowings   468    812 
           
Total interest expense   12,067    4,046 
           
Net interest income   23,713    15,836 
           
Credit loss expense   4,047    3,466 
           
Net interest income after credit loss expense   19,666    12,370 
           
Noninterest income:          
Service charges and fees   3,329    2,550 
Other   123    410 
           
Total noninterest income   3,452    2,960 
           
Noninterest expenses:          
Salaries and employee benefits   8,261    5,449 
Professional fees   729    546 
Occupancy and equipment   773    717 
Data processing   1,699    1,227 
Regulatory assessment   550    255 
Litigation Settlement   375     
Other   2,274    1,744 
           
Total noninterest expenses   14,661    9,938 
           
Net earnings before income taxes   8,457    5,392 
           
Income taxes   2,174    1,369 
           
Net earnings  $6,283   $4,023 
           
Net earnings per share - basic and diluted  $0.87   $0.68 

 

See Accompanying Notes to Consolidated Financial Statements.

 

30
 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

 

   2023   2022 
   Year Ended 
   December 31, 
   2023   2022 
         
Net earnings   6,283   $4,023 
           
Other comprehensive income (loss):          
Change in unrealized gain on debt securities:          
Unrealized gain (loss) arising during the year   680    (6,970)
Amortization of unrealized loss on debt securities transferred to held-to-maturity   5    16 
           
Other comprehensive income (loss) before income taxes   685    (6,954)
           
Deferred income taxes   (174)   1,763 
           
Total other comprehensive income (loss)   511    (5,191)
           
Comprehensive income (loss)   6,794   $(1,168)

 

See Accompanying Notes to Consolidated Financial Statements.

 

31
 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Consolidated Statements of Stockholders’ Equity

 

Years Ended December 31, 2023 and 2022

(Dollars in thousands except per share amounts)

 

   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Loss   Equity 
   Preferred   Preferred               Accumulated     
   Stock   Stock       Additional       Other   Total 
   Series A   Series B   Common Stock   Paid-In   Accumulated   Comprehensive   Stockholders’ 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Loss   Equity 
                                         
Balance at December 31, 2021           760        4,775,281    48    65,193    (26,096)   (635)                  38,510 
Proceeds from the sale of preferred stock           600                15,000            15,000 
Proceeds from the sale of common stock                   2,191,940    22    9,844            9,866 
Stock-based compensation                   91,676    1    371            372 
Net change in unrealized loss on debt securities available for sale                                   (5,207)   (5,207)
Amortization of unrealized loss on debt securities transferred to held-to-maturity                                   16    16 
Net earnings                               4,023        4,023 
Balance at December 31, 2022           1,360        7,058,897    71    90,408    (22,073)   (5,826)   62,580 
Proceeds from the sale of common stock                   72,221        324             324 
Additional allowance recognized due to adoption of Topic 326