SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0001288855
OPTIMUMBANK HOLDINGS, INC.
(Name of small business issuer in its charter)
FLORIDA 55-0865043
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2477 EAST COMMERCIAL BOULEVARD, FORT LAUDERDALE, FLORIDA 33308
(Address of principal executive offices) (Zip Code)
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Issuer's telephone number (954) 776-2332
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. |_|
Check whether the issuer has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |X| YES |_| NO
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. |X|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). |_| YES |X| NO
The issuer's revenues for its most recent fiscal year were $11,969,000.
The aggregate market value of the Common Stock of the issuer held by non-affiliates of the issuer (1,704,775 shares) on March 10, 2006, was approximately $18,599,100. The aggregate market value was computed by reference to the closing market price of the Common Stock of the issuer at $10.91 per share on March 10, 2006. For the purposes of this response, directors and executive officers, who are also all holders of 5% or more of the issuer's Common Stock, are considered the affiliates of the issuer at that date.
As of March 10, 2006, there were issued and outstanding 2,678,775 shares of the issuer's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on April 27, 2006 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 into Part III, Items 9 through 12, and 14, of this Annual Report on Form 10-KSB.
Transitional Small Business Disclosure Format (check one): |_| YES |X| NO
TABLE OF CONTENTS
Page
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PART I............................................................................................................1
Item 1. Business
Forward-Looking Statements......................................................................1
General.........................................................................................1
Recent Events...................................................................................1
Banking Products................................................................................1
Strategy........................................................................................2
Lending Activities..............................................................................2
Deposit Activities..............................................................................2
Investments.....................................................................................3
Correspondent Banking...........................................................................3
Data Processing.................................................................................3
Internet Banking................................................................................3
Competition.....................................................................................3
Employees.......................................................................................4
Supervision and Regulation......................................................................4
Statistical Profile and Other Financial Data....................................................8
Item 2. Properties...............................................................................................8
Item 3. Legal Proceedings........................................................................................8
Item 4. Submission of Matters to a Vote of Security Holders......................................................8
PART II...........................................................................................................8
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...............................8
Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations..................10
Item 7. Financial Statements....................................................................................24
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................24
Item 8A. Controls and Procedures.................................................................................24
Item 8B. Other Information.......................................................................................24
PART III.........................................................................................................24
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.......................................................24
Item 10. Executive Compensation..................................................................................24
Item 11. Security Ownership of Certain Beneficial Owners and Management..........................................24
Item 12. Certain Relationships and Related Transactions..........................................................25
Item 13. Exhibits ...............................................................................................25
Item 14. Principal Accountant Fees and Services..................................................................25
SIGNATURES.......................................................................................................26
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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:
o competitive pressure in the banking industry that increases
significantly;
o changes in the interest rate environment that reduce margins;
o 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;
o changes that occur in the regulatory environment; and
o changes that occur in business conditions and the rate of
inflation.
When used in this Annual Report, the words "believes," "estimates," "plans," "expects," "should," "may," "might," "outlook," and "anticipates," as well as similar expressions, as they relate to OptimumBank Holdings, Inc., or its management, are intended to identify forward-looking statements.
GENERAL
OptimumBank Holdings, Inc. (the "Company") was formed in March 2004 as a Florida corporation to serve as a one-bank holding company for OptimumBank (the "Bank"), a Florida state chartered bank. The Company acquired all of the shares of the Bank in May 2004 in a statutory share exchange. The Company's only business is the operation of the Bank which opened for business in November 2000. The Bank provides community banking services and products to individuals and businesses in Broward, Miami-Dade and Palm Beach counties. The Company currently operates out of its main office and three branch banking offices in Broward County, Florida. As a registered bank holding company, the Company is regulated by the Federal Reserve Board. The Bank is a member of the Federal Home Loan Bank of Atlanta and is regulated by the State of Florida Office of Financial Services and the Federal Deposit Insurance Corporation, the insurer of its deposits. As of December 31, 2005, the Company has grown to $206.0 million in assets, $170.2 million in net loans and $114.1 million in deposits.
BANKING PRODUCTS
Our revenues are primarily derived from interest on, and fees received in connection with, real estate, and other loans, and from interest from mortgage-backed securities and short-term investments. The principal sources of funds for our lending activities are deposits, borrowings, repayment of loans, and the repayment, or maturity of investment securities. Our principal expenses are the interest paid on deposits, and operating and general administrative expenses.
As is the case with banking institutions generally, our operations are materially and significantly influenced by general economic conditions and by related monetary and fiscal policies of financial institution regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation ("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. We face strong competition in attracting deposits (our primary source of lendable funds) and originating loans.
We provide a range of consumer and commercial banking services to
individuals, businesses and industries. The basic services we offer include:
demand interest-bearing and noninterest-bearing accounts, money market deposit
accounts, NOW accounts, time deposits, credit cards, cash management, direct
deposits, notary services, money orders, night depository, travelers' checks,
cashier's checks, domestic collections, savings bonds, bank drafts, automated
teller services, drive-in tellers, and banking by mail. In addition, we make
residential and commercial real estate loans and secured consumer loans. We
provide ATM cards, as a part of the Star, Presto and Cirrus networks, thereby
permitting customers to utilize the convenience of ATMs worldwide. We do not
have trust powers and provide no trust services.
STRATEGY
Our continuing goal is to become one of the leading community banking organizations in Broward County. We expect to accomplish our goal through steady and reasonable growth and a prudent operating strategy.
Our operating and business strategy emphasizes:
1. Local management and local decision making resulting in rapid,
personalized customer service, rapid credit decisions and
expedited closings;
2. Growing and expanding our presence in Broward County by
establishing new branch offices - we currently have three branch
banking offices in Broward County;
3. Emphasizing real estate lending activities by continuing to
originate adjustable rate residential and commercial mortgage
loans for our customers;
4. Maintaining high credit quality through strict underwriting
criteria and our knowledge of the real estate values in our
market area;
5. Personalized products and service - we strive to provide
innovative financial products, high service levels and to
maintain strong customer relationships. We seek customers who
prefer to conduct business with a locally owned and managed
institution.
LENDING ACTIVITIES
We offer primarily real estate and to a lesser extent, consumer loans, to individuals and small businesses and other organizations that are located in or conduct a substantial portion of their business in our market area. Our market area consists of the tri-county area of Broward, Miami-Dade and Palm Beach counties. Our net loans at December 31, 2005 were $170.2 million, or 82.6% of total assets. The interest rates charged on loans vary 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. We have no foreign loans or loans for highly leveraged transactions.
Our loans are concentrated in two major areas: residential and commercial real estate loans. As of December 31, 2005, approximately 99.7% of our loan portfolio consisted of loans secured by mortgages on real estate, of which approximately 38.3% of the total loan portfolio is secured by one-to-four family residential properties. Our real estate loans are located primarily in our tri-county market area. These real estate loans may be made at fixed or variable interest rates, but are primarily adjustable rate mortgages that adjust annually after an initial three to five year period. Our fixed rate loans generally are for terms of five years or less. Our loans are repayable in monthly installments based on a maximum 30-year amortization schedule.
Our consumer loan portfolio consists of loans to individuals secured by certificates of deposit at our bank. The majority of these loans are for terms of less than five years.
Loan originations are derived primarily from existing customers, direct marketing and independent mortgage brokers that process our loans. We pay fees to these mortgage brokers in connection with their services; however, we perform the underwriting and approval of each of the loans we fund.
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. We attempt to minimize credit losses through various means. On larger credits, we rely on the cash flow and assets of a debtor as the source of repayment as well as the value of the underlying collateral. We also generally limit our loans to 80% of the value of the underlying real estate collateral. We generally charge a prepayment penalty if a loan is repaid within the first two to three years of origination to recover any fees we paid for the origination of the loan.
DEPOSIT ACTIVITIES
Deposits are the major source of our funds for lending and other investment activities. We consider the majority of our regular savings, demand, NOW, money market deposit accounts and CD's under $100,000 to be core deposits. These accounts comprised approximately 65% of our total deposits at December 31, 2005. Approximately 93.5% of our deposits at December 31, 2005 were certificates of deposit. Generally, we attempt to maintain the rates paid on our deposits at a competitive level. Time deposits of $100,000 and over made up approximately 35% of our total deposits at December 31, 2005. Although these large deposits are not traditionally considered core deposits, the majority of these deposits have served as a stable source of funds in our targeted market. The majority of our deposits are generated from Broward County.
We may use brokered deposits to facilitate the funding of our mortgage lending activities in circumstances when larger than anticipated loan volumes occur and there is not enough time to fund the additional loan demand through traditional deposit solicitation. The time frame from the initial order to the final funding of brokered deposits is generally one to three days. The rates paid on these brokered deposits are typically equal to or slightly less than the high end of the interest rates in the Bank's competitive market area. Brokered deposits amounted to 8.1% and 6.5% of our total deposits at December 31, 2005 and 2004, respectively.
INVESTMENTS
We invest a portion of our assets in U.S. mortgage-backed securities and federal funds sold. Our investments are managed in relation to loan demand and deposit growth, and are generally used to provide for the investment of excess funds with minimal risk, for liquidity to fund increases in loan demand or to offset fluctuations in deposits, and for asset-liability management in order to decrease our exposure to interest-rate risk.
In addition to investments for our portfolio, we monitor our daily cash position to ensure that all available funds earn interest at the earliest possible date. A portion of the investment account is designated as secondary reserves and invested in liquid securities that can be readily converted to cash with minimum risk of market loss. These investments usually consist of federal funds sold. This money is invested on an overnight basis with approved correspondent banks.
The remainder of the investment account may be placed in investment securities of different type and longer maturity, primarily mortgage-backed securities. We attempt to stagger the maturities of our securities so as to produce a steady cash flow in the event we need cash and to better match our interest-rate sensitive liabilities. Mortgage-backed securities generally have a shorter life than the stated maturity.
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. We are required to purchase correspondent services offered by larger banks, including check collections, purchase of federal funds, security safekeeping, investment services, coin and currency supplies, overline and liquidity loan participations, and sales of loans to or participations with correspondent banks.
We have established a correspondent relationship with Independent Bankers Bank of Florida. We pay for such services in cash as opposed to keeping compensating balances. We also sell loan participations to other banks with respect to loans which exceed our lending limit.
DATA PROCESSING
We outsource most of our data processing services, including an automated general ledger and deposit accounting; however, we service all our loans in-house.
INTERNET BANKING
We maintain a website at www.optimumbank.com where customers can access account balances, view current account activity and their previous statement, view images of paid checks and transfer funds between accounts. Our website provides information regarding our Visa credit card offering.
COMPETITION
We encounter strong competition both in making loans and in 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 our business, we compete 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 we do not currently provide. In addition, many of our 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, we rely upon specialized services, responsive handling of customer needs, and personal contacts by our officers, directors, and staff. Large multi-branch banking competitors tend to compete primarily by rate and the number and location of branches while smaller, independent financial institutions tend to compete primarily by rate and personal service.
EMPLOYEES
As of December 31, 2005, we had 21 full-time employees (including executive officers). The employees are not represented by a collective bargaining unit. We consider relations with employees to be good.
SUPERVISION AND REGULATION
Banks and their holding companies are extensively regulated under both federal and state law. The following is a brief summary of certain statutes, rules, and regulations 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 and the Bank. Supervision, regulation, and examination of banks by regulatory agencies are intended primarily for the protection of depositors, rather than shareholders.
BANK HOLDING 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 also is 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 incident thereto. Under the Gramm-Leach-Bliley Financial Modernization Act of 1999 which is discussed below, bank holding companies now have the opportunity to seek broadened authority, subject to limitations on investment, to engage in activities that are "financial in nature" if all of their subsidiary depository institutions are well capitalized, well managed, and have at least a satisfactory rating under the Community Reinvestment Act, which is also discussed below.
In this regard, the BHCA prohibits a bank holding company, with certain limited exceptions, from (i) acquiring or retaining direct or indirect ownership or control of more than 5% of the outstanding voting stock of any company which is not a bank or bank holding company, or (ii) engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or performing services for its subsidiaries, unless such non-banking business is determined by the FRB to be so closely related to banking or managing or controlling banks as to be properly incident thereto. In making such determinations, the FRB is required to weigh the expected benefit to the public, such as greater convenience, increased competition or gains in efficiency, against the possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. Generally, bank holding companies, such as the Company, are required to obtain prior approval of the Federal Reserve to engage in any new activity not previously approved by the Federal Reserve.
CHANGE OF HOLDING COMPANY 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 Securities and Exchange Act of 1934 ("Exchange Act") would, under the circumstances set forth in the presumption, constitute acquisition of control of the bank holding company. In addition, any person or group of persons must obtain the approval of the Federal Reserve under the BHCA before acquiring 25% (5% in the case of an acquirer that is already a bank holding company) or more of the outstanding common stock of a bank holding company, or otherwise obtaining control or a "controlling influence" over the bank holding company.
INTERSTATE BANKING AND BRANCHING. The Interstate Banking and Branching Act provides for nationwide interstate banking and branching. Under the law, interstate acquisitions of banks or bank holding companies in any state by bank holding companies in any other state are permissible subject to certain limitations. Florida also has a law that allows out-of-state bank holding companies (located in states that allow Florida bank holding companies to acquire banks and bank holding companies in that state) to acquire Florida banks and Florida bank holding companies. The law essentially provides for out-of-state entry by acquisition only (and not by interstate branching) and requires the acquired Florida bank to have been in existence for at least three years. Interstate branching and consolidation of existing bank subsidiaries in different states is permissible. A Florida bank also may establish, maintain, and operate one or more branches in a state other than Florida pursuant to an interstate merger transaction in which the Florida bank is the resulting bank.
FINANCIAL MODERNIZATION. The Gramm-Leach-Bliley Act of 1999 (the "GLB Act") sought to achieve significant modernization of the federal bank regulatory framework by allowing the consolidation of banking institutions with other types of financial services firms, subject to various restrictions and requirements. In general, the GLB Act repealed most of the federal statutory barriers which separated commercial banking firms from insurance and securities firms and authorized the consolidation of such firms in a "financial services holding company". The Company has no current plans to utilize the structural options created by the GLB Act.
SARBANES-OXLEY ACT. In July 2002, the Sarbanes-Oxley Act of 2002 (the "Sarbanes Act") was enacted to curtail corporate accounting irregularities. The Securities and Exchange Commission (the "SEC") has promulgated regulations pursuant to the Sarbanes Act. The Sarbanes-Oxley Act amends the Exchange Act to prohibit a registered public accounting firm from performing specified nonaudit services contemporaneously with a mandatory audit. The Sarbanes-Oxley Act also vests the audit committee of an issuer with responsibility for the appointment, compensation, and oversight of any registered public accounting firm employed to perform audit services. It requires each committee member to be a member of the board of directors of the issuer, and to be otherwise independent. The Sarbanes-Oxley Act further requires the chief executive officer and chief financial officer of an issuer to make certain certifications as to each annual or quarterly report. The SEC also requires the company to issue a code of ethics for senior financial officers of the company. Further, the Sarbanes-Oxley Act adds a criminal penalty of fines and imprisonment of up to 10 years for securities fraud. The passage of the Sarbanes Act and the regulations implemented by the SEC subject publicly-traded companies such as the Company to additional and more extensive reporting regulations and disclosure.
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 (the "Florida Office") 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 Office, to whom it submits periodic reports regarding its financial condition and other matters. The FDIC and the Florida Office 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 Office also have the authority to approve or disapprove mergers, consolidations, and similar corporate actions.
DIVIDENDS. The Company's ability to pay dividends is substantially dependent on the ability of the Bank to pay dividends to the Company. The FDIC and the Florida Office have the general authority to limit the dividend payment by banks if such payment may be deemed to constitute an unsafe and unsound practice. For information on the restrictions on the right of the Bank to pay dividends to the Company, see Part II -- Item 5 "Market for the Registrant's Common Equity and Related Stockholder Matters."
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 is approximately $5.8 million, provided the unsecured portion does not exceed approximately $3.5 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 Office 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 Office 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 Office for its review and approval. Subsections 658.27(2)(c) 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 Office for prior approval.
OTHER CONSUMER LAWS. State 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:
|X| Federal Truth-In-Lending Act governing disclosures of credit
terms to consumer borrowers;
|X| 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;
|X| 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;
|X| Equal Credit Opportunity Act prohibiting discrimination on the
basis of race, creed or other prohibitive factors in extending
credit;
|X| 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;
|X| Fair Debt Collection Act governing the manner in which consumer
debts may be collected by collection agencies;
|X| 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
|X| 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:
|X| The Gramm-Leach-Bliley Act of 1999 privacy provisions, which
require us to maintain privacy policies intended to safeguard
consumer financial information, to disclose these policies to our
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;
|X| 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
|X| 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.
|X| USA Patriot Act and regulations, which require each financial
institution to develop a Customer Identification Program as part
of its Bank Secrecy Act/Anti-Money Laundering compliance program
to determine the true identity of its customers, document and
verify the information, and determine whether the customer
appears on any federal government list of known or suspected
terrorists.
|X| Check Clearing for the 21st Century Act, which went into effect
on October 28, 2004, and authorizes substitute checks to replace
paper checks if they contain the same information as the
original. This Act enables institutions to process checks
electronically. While the rules do not require institutions to
send or receive electronic images, once a properly created
substitute check is warranted by a financial institution, it
becomes the legal equivalent of the original check and must be
accepted by all persons for all purposes.
CAPITAL ADEQUACY REQUIREMENTS
The Federal Reserve Board and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. Under the risk-based standard, capital is classified into two tiers. Tier 1 capital consists of common and qualifying preferred shareholders' equity, excluding the unrealized gain (loss) on available-for-sale securities, minus certain intangible assets. Tier 2 capital consists of the general allowance for credit losses except for certain limitations. An institution's qualifying capital base for purposes of its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital. Bank holding companies and banks are also required to maintain capital at a minimum level based on total assets, which is known as the leverage ratio. The minimum requirement for the leverage ratio is 3%, but all but the highest rated institutions are required to maintain ratios 100 to 200 basis points above the minimum. At December 31, 2005 both the Company and the Bank met all capital requirements to which they were subject.
The FDIC Improvement Act of 1991 ("FDICIA") contains "prompt corrective action" provisions pursuant to which banks are to be classified into one of five categories based upon capital adequacy, ranging from "well capitalized" to "critically undercapitalized" and which require (subject to certain exceptions) the appropriate federal banking agency to take prompt corrective action with respect to an institution which becomes "significantly undercapitalized" or "critically undercapitalized." Under regulations implementing the "prompt corrective action" provisions of FDICIA, the FDIC possesses broad powers to take prompt corrective action as deemed appropriate for a bank, based on the bank's capital levels. The extent of these powers depends upon whether the bank in question is considered "well-capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized", or "critically undercapitalized". Generally, as a bank is deemed to be less well-capitalized, the scope and severity of the FDIC's powers increase, ultimately permitting the FDIC to appoint a receiver for the bank. Business activities may also be influenced by a bank's capital classification. For instance, only a "well-capitalized" bank may accept brokered deposits without prior regulatory approval, and can engage in various expansion activities with prior notice, rather than prior regulatory approval. Failure to meet these capital requirements could subject the bank to the prompt corrective action provisions of the FDIC, which may include filing with the FDIC a plan describing the means and a schedule for achieving the minimum capital requirements. In addition, a bank would not be able to receive regulatory approval of any application that required consideration of capital adequacy, such as a branch or merger application, unless it could demonstrate a reasonable plan to meet the capital requirement within an acceptable period of time. As of December 31, 2005, the Bank met the capital requirements of a "well capitalized" institution.
For additional information regarding the Company's and the Bank's capital ratios and requirements, see "Management's Discussion and Analysis -- Regulatory Capital Adequacy."
COMMUNITY REDEVELOPMENT ACT
Bank holding companies and their subsidiary banks are subject to the provisions of the Community Reinvestment Act of 1977 ("CRA") and the regulations promulgated thereunder by the appropriate bank regulatory agency. Under the terms of the CRA, the appropriate federal bank regulatory agency is required, in connection with its examination of a bank, to assess such bank's record in meeting the credit needs of the community served by that bank, including low-and moderate-income neighborhoods. The regulatory agency's assessment of the bank's record is made available to the public. Further, such assessment is required of any bank which has applied to charter a bank, obtain deposit insurance coverage for a newly chartered institution, establish a new branch office that will accept deposits, relocate an office, or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal Reserve will assess the record of each subsidiary bank of the applicant bank holding company, and such records may be the basis for denying the application.
EFFECT OF GOVERNMENTAL MONETARY POLICIES
The Company's earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve monetary policies have had, and will likely continue to have, an important impact on the operating results of financial institutions through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve have major effects upon the levels of loans, investments and deposits through its open market operations in United States Government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirement against member bank deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies.
STATISTICAL PROFILE AND OTHER FINANCIAL DATA
Reference is hereby made to the statistical and financial data contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations," for statistical and financial data providing a review of our business activities.
ITEM 2. PROPERTIES
The following table sets forth information with respect to our main office and branch offices as of December 31, 2005.
YEAR FACILITY
LOCATION OPENED FACILITY STATUS
-------- -------------- ---------------
Executive Office
2477 East Commercial Boulevard
Fort Lauderdale, Florida 33308 2004 Owned
Branch Offices
10197 Cleary Boulevard
Plantation, Florida 33324 2000 Owned
3524 North Ocean Boulevard
Fort Lauderdale, Florida 33308 June 2003 Owned
2215 West Hillsboro Boulevard
Deerfield Beach, Florida 22442 January 2004 Leased (1)
------------
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(1) Lease is for a ten-year term, with two five-year options to renew, for 2500 square feet. The monthly lease payment at as of December 2005 is $6,073.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 2005, we were not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the fourth quarter of the year ended December 31, 2005.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been traded on the NASDAQ Capital Market, currently under the symbol "OPHC," since May 8, 2003. Prior to May 8, 2003, there was no established trading market for our common stock. Prior to the reorganization of the Bank as a wholly owned subsidiary of the Company on May 6, 2004, the Bank's common stock traded under the symbol "OPBK." The table below presents the high and low bid prices on the Company and the Bank's common stock in 2004 and 2005. These prices represent inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
YEAR QUARTER HIGH LOW
---- ------- -------- --------
2004 First $ 9.50 $ 8.04
Second $ 12.90 $ 8.96
Third $ 11.50 $ 9.06
Fourth $ 13.45 $ 9.30
2005 First $ 13.50 $ 10.25
Second $ 12.00 $ 9.90
Third $ 11.20 $ 9.80
Fourth $ 10.50 $ 9.90
|
We had approximately 235 registered holders of record as of December 31, 2005.
We have not paid any cash dividends in the past. We intend that, for the foreseeable future, we will retain earnings to finance continued growth rather than pay cash dividends on our common stock.
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 Office, 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. In addition, a state-chartered bank in Florida is required to transfer at least 20% of its net income to surplus until its surplus equals the amount of paid-in capital. Under the Federal Deposit Insurance Act, an FDIC-insured institution may not pay any dividend if payment would cause it to become undercapitalized or while it is undercapitalized.
The Company has only two compensation plans under which shares of its common stock are issuable. These two plans are its Stock Option Plan, previously approved by our stockholders, and its Non-Employee Directors' Fee Compensation and Stock Purchase Plan, which was not approved by our shareholders. The following table sets forth information as of December 31, 2005 with respect to the number of shares of our common stock issuable pursuant to these two plans.
EQUITY COMPENSATION PLAN INFORMATION
(A) (B) (C)
NUMBER OF SECURITIES
WEIGHTED-AVERAGE REMAINING AVAILABLE FOR
EXERCISE PRICE OF FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES OUTSTANDING EQUITY COMPENSATION
TO BE ISSUED UPON EXERCISE OPTIONS, WARRANTS PLANS (EXCLUDING
OF OUTSTANDING OPTIONS AND SECURITIES REFLECTED
PLAN CATEGORY WARRANTS AND RIGHTS RIGHTS IN COLUMN (A)
-------------------- -------------------------- ----------------- -----------------------
Equity compensation plans
approved by security holders 474,800 $ 7.98 0
Equity compensation plans not
approved by security holders 9,808 (1)
Total 474,800 $ 7.98 9,808
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SELECTED FINANCIAL DATA
AT DECEMBER 31, OR FOR THE YEAR THEN ENDED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE FIGURES)
2005 2004 2003 2002 2001
---------- ---------- ----------- ---------- ----------
AT YEAR END:
Cash and cash equivalents $ 1,154 3,223 539 3,801 5,491
Securities held to maturity 25,618 24,134 16,539 6,550 --
Security available for sale 243 247 246 -- --
Loans, net 170,226 128,810 111,320 60,537 31,153
Loans held for sale -- 509 1,406 2,086 2,745
All other assets 8,803 7,635 5,129 2,309 1,415
---------- ---------- ----------- ---------- ----------
Total assets $ 206,044 164,558 135,179 75,283 40,804
========== ========== =========== ========== ==========
Deposit accounts 114,064 97,994 80,744 51,742 28,526
Federal Home Loan Bank advances 52,950 37,650 29,500 9,500 3,800
Other borrowings 12,950 5,000 8,750 -- --
Junior subordinated debenture 5,155 5,155 -- -- --
All other liabilities 2,515 2,036 1,285 415 81
Stockholders' equity 18,410 16,723 14,900 13,626 8,397
---------- ---------- ----------- ---------- ----------
Total liabilities and stockholders' equity $ 206,044 164,558 135,179 75,283 40,804
========== ========== =========== ========== ==========
FOR THE YEAR:
Total interest income 11,334 8,815 6,516 3,989 1,920
Total interest expense 5,841 4,032 2,986 1,922 1,010
---------- ---------- ----------- ---------- ----------
Net interest income 5,493 4,783 3,530 2,067 910
Provision for loan losses 149 136 204 115 27
---------- ---------- ----------- ---------- ----------
Net interest income after provision for loan losses 5,344 4,647 3,326 1,952 883
Noninterest income 635 690 323 243 118
Noninterest expenses 3,396 2,801 2,075 1,384 1,090
---------- ---------- ----------- ---------- ----------
Earnings (loss) before income taxes (benefit) 2,583 2,536 1,574 811 (89)
Income taxes (benefit) 982 966 600 309 (34)
---------- ---------- ----------- ---------- ----------
Net earnings (loss) $ 1,601 1,570 974 502 (55)
========== ========== =========== ========== ==========
Net earnings (loss) per share, basic $ .60 .60 .37 .25 (.03)
========== ========== =========== ========== ==========
Net earnings (loss) per share, diluted $ .58 .58 .37 .25 (.03)
========== ========== =========== ========== ==========
Weighted-average number of shares
outstanding, basic 2,658,848 2,636,324 2,609,248 2,016,680 1,643,500
========== ========== =========== ========== ==========
Weighted-average number of shares
outstanding, diluted 2,761,797 2,718,712 2,663,892 2,045,786 1,643,500
========== ========== =========== ========== ==========
RATIOS AND OTHER DATA:
Return on average assets .86% 1.06% .95% .87% (0.21%)
Return on average equity 9.09% 10.05% 6.99% 5.25% (0.75%)
Average equity to average assets 9.42% 10.53% 13.62% 16.61% 28.49%
Net interest margin during the year 3.08% 3.35% 3.56% 3.77% 3.79%
Interest-rate spread during the year 2.84% 3.05% 3.11% 3.21% 2.40%
Net yield on average interest-earning assets 6.36% 6.18% 6.56% 7.27% 8.00%
Noninterest expenses to average assets 1.82% 1.89% 2.03% 2.41% 4.26%
Ratio of average interest-earning assets to
average interest-bearing liabilities 1.08 1.11 1.15 1.16 1.33
Nonperforming loans and foreclosed real estate
as a percentage of total assets at end of year -- 2.54% -- -- --
Allowance for loan losses as a percentage of
total loans at end of year .46% .49% .44% .48% .56%
Total number of banking offices 3 3 3 1 1
Total shares outstanding at end of year 2,663,775 2,650,102 2,613,501 2,564,839 1,841,400
Book value per share at end of year $ 6.91 6.31 5.70 5.31 4.56
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DECEMBER 31, 2005 AND 2004 AND THE YEARS THEN ENDED
GENERAL
The Company was formed in 2004 as a Florida corporation to serve as a one-bank holding company for OptimumBank and acquired all of the shares of the Bank in May 2004 in a statutory share exchange. The Company's only business is the ownership and operation of the Bank which opened in November 2000. The Bank's deposits are insured by the FDIC. The Bank provides community banking services and products to individuals and businesses in Broward, Miami-Dade and Palm Beach counties. At December 31, 2005, the Company had total assets of $206 million, net loans of $170.2 million, total deposits of $114.1 million and stockholder's equity of $18.4 million. During 2005, the Company had net earnings of $1,601,000.
CRITICAL ACCOUNTING POLICIES
Our 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, we must use our best judgment to arrive at the carrying value of certain assets. One of the most critical accounting policies applied by us is related to the valuation of our loan portfolio.
A variety of estimates impact the carrying value of our loan portfolio including the calculation of the allowance for loan losses, valuation of underlying collateral, the timing of loan charge-offs and the amount and amortization of loan fees and deferred origination costs.
The allowance for loan losses is one of our most difficult and subjective judgments. The allowance is established and maintained at a level we believe is adequate to cover losses resulting from the inability of borrowers to make required payments on loans. Estimates for loan losses are determined by analyzing risks associated with specific loans and the loan portfolio, current trends in delinquencies and charge-offs, the views of our regulators, changes in the size and composition of the loan portfolio and peer comparisons. The analysis also requires consideration of the economic climate and direction, changes in the interest rate environment which may impact a borrower's ability to pay, legislation impacting the banking industry and economic conditions specific to the tri-county region we serve in Southeast Florida. Because the calculation of the allowance for loan losses relies on our estimates and judgments relating to inherently uncertain events, results may differ from management's estimates.
The allowance for loan losses is also discussed as part of "Results of Operations" and in Note 3 of Notes to the Financial Statements. Our significant accounting policies are discussed in Note 1 of Notes to the Consolidated Financial Statements.
REGULATION AND LEGISLATION
As a state-chartered commercial bank, the Bank is subject to extensive regulation by the Florida Office of Financial Regulation ("Florida Office") and the FDIC. We file reports with the Florida Office and the FDIC concerning our 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 Office and the FDIC to monitor our 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 CREDIT RISK
Our primary business is making real estate loans. This activity may subject us to potential loan losses, the magnitude of which depends on a variety of economic factors affecting borrowers which are beyond our control. We have instituted detailed loan policies and procedures which include underwriting guidelines to minimize loss exposure. We also have credit review procedures to protect us from avoidable credit losses. We believe our procedures are adequate to insure asset quality and protect against credit risk, but some losses beyond our control will inevitably occur. In 2005, we had a $243,000 charge-off related to one foreclosed residential property.
The following table sets forth the composition of our loan portfolio:
AT DECEMBER 31,
-----------------------------------------------
2005 2004
----------------------- --------------------
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
---------- ------- ---------- --------
(DOLLARS IN THOUSANDS)
Residential real estate................................. $ 65,016 38.29% $ 61,070 47.38%
Multi-family real estate................................ 15,135 8.91 10,853 8.42
Commercial real estate.................................. 54,286 31.97 38,064 29.53
Developed Land.......................................... 34,760 20.47 18,169 14.09
Commercial.............................................. 570 .33 581 .45
Consumer and other...................................... 43 .03 162 .13
---------- ------- ---------- --------
Total loans.......................................... 169,810 100.00% 128,899 100.00%
Add (deduct):
Allowance for loan losses............................. (777) -- (628) --
Net deferred loan costs................................ 1,193 -- 539 --
Loans, net.............................................. $ 170,226 -- $ 128,810 --
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The following table sets forth the activity in the allowance for loan losses (dollars in thousands):
YEAR ENDED DECEMBER 31,
-------------------------
2005 2004
-------- --------
Beginning balance................................................. $ 628 $ 492
Provision for loan losses......................................... 149 136
Loans charged off................................................. -- --
Recoveries on loans............................................... -- --
-------- --------
Ending balance.................................................... $ 777 $ 628
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We evaluate the allowance for loan losses on a regular basis. It is based upon our periodic review of the collectibility of the existing loan portfolio in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of underlying collateral and prevailing economic conditions. We base the allowance for loan losses on a grading system and also allocate an allowance by loan type based on the aggregate historical loss experience of similar banks. The allowance for loan losses represented .46% and .49% of the total loans outstanding at December 31, 2005 and 2004, respectively.
The following table sets forth our allowance for loan losses by loan type (dollars in thousands):
ALLOWANCE FOR LOAN LOSSES
AT DECEMBER 31,
----------------------------------------------
2005 2004
--------------------- ---------------------
% OF % OF
TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS
--------- --------- --------- ---------
Residential real estate............................. $ 206 38.29% $ 218 47.38%
Multi-family real estate............................ 81 8.91 52 8.42
Commercial real estate.............................. 347 31.97 240 29.53
Land................................................ 140 20.47 115 14.09
Commercial.......................................... 3 .33 3 .45
Consumer and other.................................. -- .03 - .13
--------- --------- --------- ---------
Total allowance for loan losses..................... $ 777 100.00% $ 628 100.00%
========= ========= ========= =========
Allowance for loan losses as a percentage of
total loans outstanding.......................... 0.46% -- 0.49% --
========= ========= ========= =========
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Loans identified as impaired are as follows (in thousands):
AT DECEMBER 31,
---------------------
2005 2004
-------- --------
Gross loans without related allowance for losses............................. $ -- $ 3,268
Gross loans with related allowance for losses recorded....................... -- --
Less: Allowance for these loans............................................. -- --
-------- --------
Net investment in impaired loans............................................. $ -- $ 3,268
======== ========
Total nonaccrual loans....................................................... $ -- $ 3,268
======== ========
Total loans past due 90 days or more and still accruing interest............. $ -- $ --
======== ========
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YEAR ENDED DECEMBER 31,
---------------------
2005 2004
-------- --------
Average net investment in impaired loans..................................... $ 844 $ 928
======== ========
Interest income recognized on impaired loans................................. $ -- $ --
======== ========
Interest income received on impaired loans................................... $ -- $ --
======== ========
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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. Our ability to respond to the needs of depositors and borrowers and to benefit from investment opportunities is facilitated through liquidity management.
Our primary sources of cash during the year ended December 31, 2005 were from net deposit inflows of $16.1 million, other borrowings of $8 million, Federal Home Loan Bank advances of $15.3 million, and principal repayments of securities held to maturity of $6.4 million. Cash was used primarily to originate real estate loans totaling $42.5 million and to purchase securities held to maturity totaling $7.8 million. In order to increase our core deposits, we have priced our deposit rates competitively. We will adjust rates on our deposits to attract or retain deposits as needed. In addition to obtaining funds from depositors in our market area, from time to time we have utilized brokers to obtain deposits outside our market area.
In addition to obtaining funds from depositors, we may borrow funds from other financial institutions. We are a member of the Federal Home Loan Bank of Atlanta, which allows us to borrow funds under a pre-arranged line of credit equal to 40% of the Bank's total assets. As of December 31, 2005, we had $53 million in borrowings outstanding from the Federal Home Loan Bank of Atlanta to facilitate loan fundings and manage our asset and liability structure. In addition, we have an unsecured "federal funds" line of credit with Independent Bankers Bank of Florida totaling $6 million, none of which was outstanding at December 31, 2005. This credit line is normally used to meet short-term funding demands. At December 31, 2005, we sold securities under an agreement to repurchase totaling $12,950,000. These borrowings are collateralized by securities held to maturity with a carrying value of $15.2 million at December 31, 2005. We believe our liquidity sources are adequate to meet our operating needs.
SECURITIES
Our securities portfolio is comprised of mortgage-backed securities and a mutual fund. The securities portfolio is categorized as either "held to maturity" or "available for sale." Securities held to maturity represent those securities which we have the positive intent and ability to hold to maturity. These securities are carried at amortized cost. Securities available for sale represent those investments which may be sold for various reasons including changes in interest rates and liquidity considerations. These securities are reported at fair market value and unrealized gains and losses are excluded from earnings and reported in other comprehensive income.
The following table sets forth the amortized cost and fair value of our securities portfolio (dollars in thousands):
AMORTIZED FAIR
COST VALUE
-------- --------
AT DECEMBER 31, 2005:
Securities held to maturity-
Mortgage-backed securities.............. $ 25,618 $ 25,096
======== ========
Available for sale -
Mutual fund............................. $ 250 $ 243
======== ========
AT DECEMBER 31, 2004:
Securities held to maturity-
Mortgage-backed securities.............. $ 24,134 $ 24,065
======== ========
Available for sale -
Mutual fund............................. $ 250 $ 247
======== ========
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The following table sets forth, by maturity distribution, certain information pertaining to the securities portfolio (dollars in thousands):
AFTER ONE AFTER FIVE
BUT WITHIN YEARS
WITHIN FIVE THROUGH AFTER TEN
ONE YEAR YEARS TEN YEARS YEARS TOTAL YIELD
======== ======== ======== ======== ======== ========
AT DECEMBER 31, 2005:
Mortgage-backed securities........ $ -- -- -- 25,618 25,618 4.49%
======== ======== ======== ======== ======== ========
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REGULATORY CAPITAL ADEQUACY
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the Federal and state banking agencies. As of December 31, 2005, the most recent notification from the regulatory authorities categorized our Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage percentages as set forth in the following tables. There are no conditions or events since that notification that management believes have changed our category. Prompt corrective action provisions are not applicable to bank holding companies.
The following table sets forth for the Company and the Bank the amount and the percentage of our actual regulatory capital, regulatory capital for capital adequacy purposes, and the minimum regulatory capital to be well capitalized under the prompt corrective action provisions of the Federal regulations.
REGULATORY CAPITAL REQUIREMENTS
MINIMUM
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
--------------------- --------------------- ---------------------
AMOUNT % AMOUNT % AMOUNT %
-------- -------- --------- -------- -------- --------
AS OF DECEMBER 31, 2005:
Total capital to Risk-
Weighted assets:
Company............... $ 24,169 16.45% $ 11,751 8.00% $ N/A 10.00%
Bank............ 23,891 16.27 11,746 8.00 14,684 10.00
Tier I Capital to Risk-
Weighted Assets:
Company............... 23,392 15.93 5,873 4.00 N/A N/A
Bank.................. 23,114 15.74 5,874 4.00 8,811 6.00
Tier I Capital
to Total Assets:
Company............... 23,392 11.64 8,247 4.00 N/A N/A
Bank.................. 23,114 11.50 8,040 4.00 10,050 5.00
AS OF DECEMBER 31, 2004:
Total capital to Risk-
Weighted assets:
Company............... 22,329 20.68 8,639 8.00 N/A 10.00
Bank.................. 22,207 20.57 8,636 8.00 10,795 10.00
Tier I Capital to Risk-
Weighted Assets:
Company............... 21,701 20.10 4,320 4.00 N/A N/A
Bank.................. 21,579 19.99 4,318 4.00 6,477 6.00
Tier I Capital
to Total Assets:
Company............... 21,701 13.49 6,433 4.00 N/A N/A
Bank.................. 21,579 13.42 6,433 4.00 8,041 5.00
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MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest-rate risk inherent in our lending and deposit-taking activities. We do not engage in securities trading or hedging activities and do not invest in interest-rate derivatives or enter into interest rate swaps.
We may utilize financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our 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.
Our primary objective in managing interest-rate risk is to minimize the potential adverse impact of changes in interest rates on our net interest income and capital, while adjusting our asset-liability structure to obtain the maximum yield-cost spread on that structure. We actively monitor and manage our interest-rate risk exposure by managing our asset and liability structure. However, a sudden and substantial increase in interest rates may adversely impact our 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.
We use 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 our asset and liability management, we have emphasized establishing and implementing internal asset-liability decision processes, as well as control procedures to aid in managing our earnings. Management believes that these processes and procedures provide us with better capital planning, asset mix and volume controls, loan-pricing guidelines, and deposit interest-rate guidelines, which should result in tighter controls and less exposure to interest-rate risk.
The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap". An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest-rate sensitivity gap is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. The gap ratio is computed as the amount of rate sensitive assets less the amount of rate sensitive liabilities divided by total assets. A gap is considered positive when the amount of interest-rate sensitive assets exceeds interest-rate sensitive liabilities. A gap is considered negative when the amount of interest-rate sensitive liabilities exceeds interest-rate sensitive assets. During a period of rising interest rates, a negative gap would adversely affect net interest income, while a positive gap would result in an increase in net interest income. During a period of falling interest rates, a negative gap would result in an increase in net interest income, while a positive gap would adversely affect net interest income.
In order to minimize the potential for adverse effects of material and prolonged increases in interest rates on the results of operations, our management continues to monitor our assets and liabilities to better match the maturities and repricing terms of our interest-earning assets and interest-bearing liabilities. Our 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 relating to our interest-earning assets and interest-bearing liabilities at December 31, 2005, that are estimated to mature or are scheduled to reprice within the period shown (dollars in thousands):
GAP MATURITY / REPRICING SCHEDULE
MORE MORE
THAN ONE THAN FIVE
ONE YEAR AND YEARS AND OVER
YEAR OR LESS THAN LESS THAN FIFTEEN
LESS FIVE YEARS FIFTEEN YEARS YEARS TOTAL
-------- -------- -------- -------- --------
Loans (1):
Residential real estate loans ...... $ 22,568 39,928 2,520 -- 65,016
Multi-family real estate loans ..... 4,077 10,739 319 -- 15,135
Commercial real estate loans ....... 3,436 47,356 225 3,269 54,286
Land ............................... 9,311 25,449 -- -- 34,760
Commercial ......................... 570 -- -- -- 570
Consumer loans ..................... 43 -- -- -- 43
-------- -------- -------- -------- --------
Total loans ........................ 40,005 123,472 3,064 3,269 169,810
Federal funds sold ...................... 652 -- -- -- 652
Securities (2) .......................... 243 8,726 12,188 4,704 25,861
Federal Home Loan Bank stock ............ 2,712 -- -- -- 2,712
-------- -------- -------- -------- --------
Total rate-sensitive assets ........ 43,612 132,198 15,252 7,973 199,035
-------- -------- -------- -------- --------
Deposit accounts (3):
Money-market deposits .............. 3,509 -- -- -- 3,509
Interest-bearing checking deposits.. 2,382 -- -- -- 2,382
Savings deposits ................... 1,159 -- -- -- 1,159
Time deposits ...................... 57,194 49,430 -- -- 106,624
-------- -------- -------- -------- --------
Total deposits ..................... 64,244 49,430 -- -- 113,674
Federal Home Loan Bank advances ......... 20,500 32,450 -- -- 52,950
Other borrowings ........................ 4,600 8,350 -- -- 12,950
Junior subordinated debenture ........... -- 5,155 -- -- 5,155
-------- -------- -------- -------- --------
Total rate-sensitive liabilities ........ 89,344 95,385 -- -- 184,729
-------- -------- -------- -------- --------
GAP (repricing differences) ............. $(45,732) 36,813 15,252 7,973 14,306
======== ======== ======== ======== ========
Cumulative GAP .......................... $(45,732) (8,919) 6,333 14,30 --
======== ======== ======== ======== ========
Cumulative GAP/total assets ............. (22.20)% (4.33)% 3.07% 6.94% --
======== ======== ======== ======== ========
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The following table sets forth loan maturities by type of loan at December 31, 2005 (dollars in thousands):
AFTER ONE
ONE YEAR BUT WITHIN AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- -------- -------- --------
Residential real estate ............... $ 1,601 8 63,407 65,016
Multi-family real estate .............. -- 3,740 11,395 15,135
Commercial real estate ................ -- 5,417 48,869 54,286
Developed land ........................ 7,239 7,405 20,116 34,760
Commercial ............................ -- 570 -- 570
Consumer and other .................... 43 -- -- 43
-------- -------- -------- --------
Total ................................. $ 8,883 17,140 143,787 169,810
======== ======== ======== ========
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The following table sets forth the maturity or repricing of loans by interest type at December 31, 2005 (dollars in thousands):
AFTER ONE
ONE YEAR BUT WITHIN AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- -------- -------- --------
Fixed interest rate.................... $ 1,383 9,619 6,038 17,040
Variable interest rate................. 38,622 113,853 295 152,770
-------- -------- -------- --------
Total.................................. $ 40,005 123,472 6,333 169,810
======== ======== ======== ========
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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
We are 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 and undisbursed loans in process. At December 31, 2005, we had outstanding commitments to originate real estate loans totaling $10 million and undisbursed loans in process totaling $456,000. 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.
Our 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. We use the same credit policies in making commitments as we do 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. We evaluate each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if we deem it necessary upon extension of credit, is based on management's credit evaluation of the counterparty.
The following is a summary of the Bank's contractual obligations, including certain on-balance sheet obligations, at December 31, 2005 (in thousands):
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------
LESS MORE
THAN 1 1-3 3-5 THAN 5
CONTRACTUAL OBLIGATIONS TOTAL YEAR YEARS YEARS YEARS
-------- -------- -------- -------- --------
Federal Home Loan Bank advances.......... $ 52,950 8,500 16,500 -- 27,950
Junior subordinated debenture............ 5,155 -- -- 5,155 --
Other borrowings......................... 12,950 4,600 8,350 - --
Operating leases......................... 597 71 148 154 224
Loan commitments......................... 10,015 10,015 -- -- --
Undisbursed loans in process............. 456 456 -- -- --
-------- -------- -------- -------- --------
Total.................................... $ 82,123 23,642 24,998 5,309 28,174
======== ======== ======== ======== ========
|
DEPOSITS
Deposits traditionally are the primary source of funds for our use in lending, making investments and meeting liquidity demands. We have focused on raising time deposits primarily within our market area, which is the tri-county area of Broward, Miami-Dade and Palm Beach counties. However, we offer a variety of deposit products, which we promote within our market area. Net deposits increased $16.1 million and $17.3 million, for the years ended December 31, 2005 and 2004, respectively.
We use brokered deposits to facilitate mortgage loan fundings in circumstances when larger than anticipated loan volumes occur and there is limited time to fund the additional loan demand through traditional deposit solicitation. In general, brokered deposits can be obtained in one to three days. The rates paid on these deposits are typically equal to or slightly less than the high end of the interest rates in our market area. Brokered deposits amounted to $9.3 million and $6.4 million as of December 31, 2005 and December 31, 2004, respectively.
The following table displays the distribution of the Bank's deposits and the average interest rate paid at December 31, 2005 and 2004 (dollars in thousands):
AT DECEMBER 31,
----------------------------------------------
2005 2004
-------------------- ---------------------
% OF % OF
AMOUNT DEPOSITS AMOUNT DEPOSITS
-------- -------- --------- --------
Noninterest-bearing demand deposits............... $ 390 .34% $ 558 .57%
Interest-bearing demand deposits.................. 2,382 2.09 1,662 1.70
Money-market deposits............................. 3,509 3.08 3,840 3.92
Savings........................................... 1,159 1.01 2,589 2.64
-------- -------- --------- --------
Subtotal..................................... 7,440 6.52 8,649 8.83
-------- -------- --------- --------
Time deposits:
1.00% - 1.99%................................ $ -- --% $ 3,463 3.53%
2.00% - 2.99%................................ 7,201 6.31 36,393 37.14
3.00% - 3.99%................................ 48,410 42.44 25,451 25.97
4.00% - 4.99%................................ 47,819 41.92 15,028 15.33
5.00% - 5.99%................................ 3,179 2.79 8,365 8.54
6.00% - 6.99%................................ -- -- 575 .59
7.00% - 7.99%................................ 15 .02 70 .07
-------- -------- --------- --------
Total time deposits (1)...................... 106,624 93.48 89,345 91.17
-------- -------- --------- --------
Total deposits............................... $114,064 100.00% $ 97,994 100.00%
======== ======== ========= ========
|
Deposits of $100,000 or more, or Jumbo Time Deposits, are generally considered a more unpredictable source of funds. The following table sets forth our maturity distribution of deposits of $100,000 or more at December 31, 2005 and 2004 (dollars in thousands):
AT DECEMBER 31,
2005 2004
--------- ---------
Due three months or less........................ $ 4,683 $ 3,308
Due more than three months to six months........ 7,528 5,082
More than six months to one year................ 8,260 6,133
One to five years............................... 19,463 12,478
--------- ---------
Total .......................................... $ 39,934 $ 27,001
|
ANALYSIS OF RESULTS OF OPERATIONS
Our operating results depend primarily on our neinterest income, which is the difference between interest income on interest-earning assets, (i.e., loans and investments) and interest expense paid on interest-bearing liabilities, (i.e., 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. Our interest-rate spread is affected by regulatory, economic, and competitive factors that influence interest rates, loan demand, and deposit flows. In addition, our net earnings are also affected by the level of nonperforming loans and foreclosed real estate, as well as the level of our noninterest income and our noninterest expenses, such as salaries and employee benefits, occupancy and equipment costs and income taxes.
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):
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
2005 2004
----------------------------------- ---------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE AND YIELD/ AVERAGE AND YIELD/
BALANCE DIVIDENDS RATE BALANCE DIVIDENDS RATE
--------- -------- -------- --------- -------- --------
Interest-earning assets:
Loans............................... $ 145,961 9,928 6.80% $ 118,887 7,876 6.62%
Securities.......................... 28,305 1,260 4.45 18,641 838 4.50
Other interest-earning assets (1)... 4,008 146 3.64 5,156 101 1.96
--------- -------- --------- --------
Total interest-earning assets/
interest income................. 178,274 11,334 6.36 142,684 8,815 6.18
--------- -------- --------- --------
Cash and due from banks................. 211 -- -- 417 -- --
Premises and equipment.................. 4,113 -- -- 2,857 -- --
Other assets............................ 4,383 -- -- 2,432 -- --
--------- ---------
Total assets...................... $ 186,981 -- -- $ 148,390 -- --
========= =========
Interest-bearing liabilities:
Savings, NOW and money-
market deposits................... 7,493 80 1.07 8,703 110 1.26
Time deposits....................... 99,236 3,620 3.65 82,106 2,727 3.32
Borrowings (4)...................... 59,050 2,141 3.63 37,806 1,195 3.16
--------- -------- --------- --------
Total interest-bearing liabilities/
interest expense................ 165,779 5,841 3.52 128,615 4,032 3.13
--------- -------- --------- --------
Noninterest-bearing demand deposits..... 953 -- -- 959 -- --
Other liabilities....................... 2,640 -- -- 3,193 -- --
Stockholders' equity.................... 17,609 -- -- 15,623 -- --
--------- ---------
Total liabilities and
stockholders' equity............ $ 186,981 -- -- $ 148,390 -- --
========= =========
Net interest income..................... -- $ 5,493 -- -- $ 4,783 --
======== =======
Interest rate spread (2)................ -- -- 2.84% -- -- 3.05%
==== ====
Net interest margin (3)................. -- -- 3.08% -- -- 3.35%
==== ====
|
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) (dollars in thousands):
YEAR ENDED DECEMBER 31,
2005 VERSUS 2004
INCREASES (DECREASES) DUE TO CHANGE IN:
--------------------------------------------------
RATE/
RATE VOLUME VOLUME TOTAL
------- -------- ------- -------
Interest income:
Loans.......................................... $ 210 1,794 48 2,052
Securities..................................... (8) 434 (4) 422
Other interest-earning assets.................. 87 (23) (19) 45
------- -------- ------- -------
Total interest income.......................... 289 2,205 25 2,519
------- -------- ------- -------
Interest expense:
Savings, NOW and money-market.................. (17) (15) 2 (30)
Time deposits.................................. 268 569 56 893
Borrowings..................................... 176 670 100 946
------- -------- ------- -------
Total interest expense......................... 427 1,224 158 1,809
------- -------- ------- -------
Net interest income............................ $ (138) 981 (133) 710
======= ======== ======= =======
|
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
GENERAL. Net earnings for the year ended December 31, 2005, were $1,601,000 or $.60 per basic and $.58 per diluted share compared to net earnings of $1,570,000 or $.60 per basic and $.58 per diluted share for the year ended December 31, 2004. This increase in the Company's net earnings was primarily due to an increase in net interest income which was partially offset by an increase in interest and noninterest expenses, all of which were due to the overall growth of the Company.
INTEREST INCOME. Interest income increased to $11.3 million for the year ended December 31, 2005 from $8.8 million for the year ended December 31, 2004. Interest income on loans increased to $9.9 million due primarily to an increase in the average loan portfolio balance for the year ended December 31, 2005, and an increase in the average yield earned from 6.62% for the year ended December 31, 2004 to 6.80% for the year ended December 31, 2005. Interest on securities increased to $1.3 million due to an increase in the average balance during the year ended December 31, 2005.
INTEREST EXPENSE. Interest expense on deposit accounts increased to $3.7 million for the year ended December 31, 2005, from $2.8 million for the year ended December 31, 2004. Interest expense increased primarily because of an increase in the average balance of deposits during 2005. Interest expense on borrowings increased to $2.1 million for the year ended December 31, 2005 from $1.2 million for the year ended December 31, 2004 due to an increase in the average balance of Federal Home Loan Bank advances and other borrowings.
PROVISION FOR LOAN LOSSES. The provision for loan losses is charged to earnings to bring the total allowance to a level deemed appropriate by management and is based upon historical experience, the volume and type of lending conducted by us, industry standards, the amount of nonperforming loans, general economic conditions, particularly as they relate to our market areas, and other factors related to the estimated collectibility of our loan portfolio. The provision for the year ended December 31, 2005, was $149,000 compared to $136,000 for the same period in 2004. Management believes the balance in the allowance for loan losses of $777,000 at December 31, 2005, is adequate.
NONINTEREST INCOME. Total noninterest income decreased to $635,000 for the year ended December 31, 2005, from $690,000 for the year ended December 31, 2004 primarily as a result of a decrease in service charges and fees of $64,000.
NONINTEREST EXPENSES. Total noninterest expenses increased to $3.4 million for the year ended December 31, 2005 from $2.8 million for the year ended December 31, 2004, primarily due to an increase in salaries and employee benefits of $107,000 and an increase in occupancy and equipment of $153,000, and a $243,000 charge-off related to one foreclosed residential property.
INCOME TAXES. Income taxes for the year ended December 31, 2005, were $982,000 (an effective rate of 38.0%) compared to income taxes of $966,000 (an effective rate of 38.1%) for the year ended December 31, 2004.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, since such prices are affected by inflation to a larger extent than interest rates.
SELECTED QUARTERLY RESULTS
Selected quarterly results of operations for the four quarters ended December 31, 2005 and 2004 are as follows (in thousands, except share amounts):
2005 2004
--------------------------------------- --------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
Interest income.............. $ 3,231 2,891 2,796 2,416 2,321 2,254 2,093 2,147
Interest expense............. 1,693 1,528 1,423 1,197 1,143 995 943 951
------- ------- ------- ------- ------- ------- ------- -------
Net interest income.......... 1,538 1,363 1,373 1,219 1,178 1,259 1,150 1,196
Provision (credit) for
loan losses............... 44 (40) 112 33 29 52 25 30
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses. 1,494 1,403 1,261 1,186 1,149 1,207 1,125 1,166
Noninterest income........... (7) 163 221 258 159 115 195 221
Noninterest expense.......... 796 918 855 827 697 712 690 702
------- ------- ------- ------- ------- ------- ------- -------
Earnings before
income taxes.............. 691 648 627 617 611 610 630 685
Net earnings................. 428 401 388 384 378 379 389 424
Basic earnings per
common share.............. .16 .15 .15 .14 .15 .14 .15 .16
Diluted earnings per
common share.............. .15 .15 .14 .14 .14 .14 .14 .16
|
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company as of and for the years ended
December 31, 2005 and 2004 are set forth in this Form 10-KSB as Exhibit 99.1and
incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 8A. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have evaluated the Company's disclosure controls and procedures as of the end of the fiscal year covered by this Report on Form 10-KSB and have concluded that Company's disclosure controls and procedures are effective. During the fourth quarter of 2005, there were no changes in Company's internal control over financial reporting that have materially affected, or that are reasonably likely to materially affect, Company's internal control over financial reporting.
ITEM 8B. OTHER INFORMATION
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The Company has a Code of Ethics that applies to its chief executive officer, chief operating officer, chief financial officer (who is also its chief accounting officer) and controller, a copy of which is filed as Exhibit 14.1 to the company's Form 10-KSB for the year ended December 31, 2004, and is incorporated herein by reference.
The information contained under the sections captioned "Nominees" and
"Executive Officers Who Are Not Directors" under "Proposal 1: Election of
Directors and Management Information" and "The Board of Directors Meetings and
Committees" under "Information About the Board and its Committees", and "Section
16(a) Beneficial Ownership Reporting Compliance," in the Company's definitive
definitive Proxy Statement for the Annual Meeting of Shareholders to be held on
April 27, 2006, to be filed with the SEC pursuant to Regulation 14A within 120
days of the registrant's fiscal year end (the "Proxy Statement"), is
incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information contained under the sections captioned "Directors' Compensation" under "Information About the Board and Its Committees", "Information Regarding Executive Compensation", and "Certain Relationship and Related Transactions", in the Proxy Statement, is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the section captioned "Information Regarding Beneficial Ownership of Principal Shareholders, Directors and Management" in the Proxy Statement is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the sections captioned "Certain Relationships and Related Transactions", in the Proxy Statement is incorporated herein by reference.
ITEM 13. EXHIBITS
The following exhibits are filed with or incorporated by reference into
this report. The exhibits denominated by (i) an asterisk (*) were previously
filed as a part of a Registration Statement on Form 10-SB under the Exchange
Act, filed with the Federal Deposit Insurance Corporation on March 28, 2003;
(ii) a double asterisk (**) were previously filed as a part of an Annual Report
on Form 10-KSB filed with the Securities and Exchange Commission ("SEC") on
March 30, 2004; (iii) a triple asterisk (***) were previously filed as part of a
current report on Form 8-K filed with the SEC on May 11, 2004; and (iv) a
quadruple asterisk (****)were previously filed as part of a Quarterly Report on
Form 10-QSB filed with the SEC on August 12, 2004; and a quintuple aseterisk
(*****) were previously filed as part of an Annual Report on Form 10-KSB filed
with the SEC on March 31, 2005.
Browdy dated June 14, 2002 (A)
***** 14.1 Code of Ethics for Chief Executive Officer and Senior
Financial Officers
31.1 Certification of Chief Executive Officer under ss.302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer under ss.302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer under ss.906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer under ss.906 of the
Sarbanes-Oxley Act of 2002
99.1 Consolidated Financial Statements of OptimumBank Holdings,
Inc. and Subsidiary and Report of Independent Registered
Public Accounting Firm
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained under the section captioned "Independent Accountants" in the Proxy Statement is incorporated herein by reference.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fort Lauderdale, State of Florida, on the 31st day of March 2006.
OPTIMUMBANK HOLDINGS, INC.
/s/ Albert J. Finch ------------------------------------------------- Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ Richard L. Browdy ------------------------------------------------- Richard L. Browdy President and Chief Financial Officer (Principal Financial and Accounting Officer) |
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 31, 2006.
SIGNATURE TITLE --------- ------ /s/ Albert J. Finch Chairman of the Board, Chief Executive ------------------------------- Officer, and Director Albert J. Finch /s/ Richard L. Browdy President, Chief Financial Officer, ------------------------------- and Director Richard L. Browdy /s/ Michael Bedzow Director ------------------------------ Michael Bedzow /s/ Sam Borek Director ------------------------------ Sam Borek /s/ Irving P. Cohen Vice Chairman of the Board and Director ------------------------------ Irving P. Cohen /s/ Gordon Deckelbaum Director ------------------------------ Gordon Deckelbaum /s/ David Krinsky Director ------------------------------ H. David Krinsky /s/ Wendy Mitchler Director ------------------------------ Wendy Mitchler /s/ Larry Willis Director ------------------------------ Larry Willis |
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ---------------------
10.1 Amended and Restated Stock Option Plan
31.1 Certification of Chief Executive Officer under ss.302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer under ss.302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer under ss.906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer under ss.906 of the
Sarbanes-Oxley Act of 2002
99.1 Consolidated Financial Statements of OptimumBank Holdings, Inc.
and Subsidiary and Report of Independent Registered Public
Accounting Firm
|
EXHIBIT 10.1
AMENDED AND RESTATED OPTIMUMBANK HOLDINGS, INC.
STOCK OPTION PLAN
1. Purpose. The purpose of the OptimumBank Holdings, Inc. Stock Option Plan (the "Plan", is to provide an incentive to officers, directors and employees of OptimumBank Holdings, Inc. and/or its Subsidiaries (collectively, the "Company") to remain in the employ of the Company or provide services to the Company and contribute to its success.
As used in the Plan, the term "Code" shall mean the Internal Revenue Code of 1986, as amended, and any successor statute, and the term "Subsidiary" shall have the meaning set forth in Section 424(f) of the Code. References to Subsidiaries herein shall apply to any Subsidiaries which the Company may acquire in the future.
2. Administration.
(a) The Plan shall be administered by the Board of Directors of the Company (the "Board"), which may from time to time delegate all or any part of its authority under the Plan to a committee (the "Plan Committee") of two or more non-employee Directors (as defined in Rule 16b-3 as promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934) who also qualify as "outside directors" for purposes of Section 162(m) of the Code. A majority of the Board or Plan Committee shall constitute a quorum, and the action of the members of the Board of Plan Committee present at any meeting at which the quorum is present, or acts unanimously approved in writing, shall be the acts of the Board or Plan Committee.
(b) The interpretation and construction by the Board of any provisions of the Plan or of any agreement, notification or document evidencing the grant of Options and any determination by the Board pursuant to any provision of the Plan or of any such agreement, notification or document shall be final and conclusive. No member of the Board shall be liable for any such action or determination made in good faith, except that the Board may be liable to reimburse the Company for any loss sustained by reason of the grant of an option at less than par value or fair market value.
(c) Subject to the provisions of the Plan, the Board shall have the sole authority to determine:
(1) The persons to whom options to purchase stock (as defined herein) shall be granted:
(2) The number of options to be granted to each person and the number of shares of Stock to which each option pertains, subject to the limitations set forth in section 4 of the Plan;
(3) The price to be paid for the Stock upon the exercise of each option, which shall be equal to or greater than the fair market value and par value per share of Stock on the date the option is granted;
(4) The period within which each option shall be exercised and, with the consent of the optinee, any extensions of such period (provided, however, that the original period and all extensions shall not exceed the maximum period permissible under the Plan); and
(5) The terms and conditions of each stock option agreement entered into between the Company and persons to whom the Company has granted an option of any amendments thereto (provided that the optionee consents to each such amendment).
3. Eligibility. Officers, directors and employees of the Company shall be eligible to receive grants of options under the Plan.
4. Stock Subject to Plan.
(a) There shall be reserved for issue upon the exercise of options granted under the Plan 522,000 shares of Common Stock of the Company ("Stock") or the number of shares of stock, which, in accordance with the provisions of Section 10 hereof, shall be substituted therefore. Such shares may be shares of original issuance or treasury shares or a combination thereof. If necessary shares are to be provided by treasury shares, the Company must have a capital to assets ratio of at least 8 percent.
(b) Upon the full or partial payment of any option price by the transfer to the Company of shares of Stock or upon satisfaction of tax withholding provisions in connection with any such exercise or any other payment made or benefit realized under the Plan by the transfer or relinquishment of shares of Stock, there shall be deemed to have been issued or transferred under the Plan only the net number of shares of Stock actually issued or transferred by the Company.
(c) Upon payment in cash of the benefit provided by any award granted under the Plan, any shares of Stock that were covered by that option shall again be available for issuance or transfer hereunder.
5. Terms of Options.
(a) Incentive Stock Options. It is intended that options granted pursuant to this Section 5(a) qualify as incentive stock options as defined in Section 422 of the Code. Incentive stock options shall be granted only to employees of the Company. Each stock option agreement evidencing an incentive stock option shall provide that the option is subject to the following terms and conditions and to such other terms and conditions not inconsistent therewith as the Board may deem appropriate in each case.
(1) Option Price. The price to be paid for each share of
Stock upon the exercise of each incentive stock option
shall be determined by the Board at the time the option
is granted, but shall in no event be less than 100% of
the greater of the par value or the fair market value
of the shares on the date the option is granted, or not
less than 110% of the fair market value of such shares
on the date such option is granted in the case of an
individual then owning (within the meaning of Section
424(d) of the Code) more than 10% of the total combined
voting power of all classes of stock of the Company or
Subsidiaries. As used in this Plan the term "date the
option is granted" means the date on which the Board
authorizes the grant of an option hereunder or any
later date specified by the board. Fair market value of
the shares shall be (i) the mean of the high and low
prices of shares of stock sold on the New York or
American Stock Exchange on the date the option is
granted (or if there was no sale on such date, the
highest asked price for the Stock on such date), or
(ii) the last reported closing price in the NASDAQ
National or Capital Market; (iii) the mean between the
bid and quote prices of the stock in the
Over-The-Counter Market or Bulletin board on the date
the option is granted, or (iv) if the Stock is not
traded in any market, the greater of the (i) fair
market value of the shares as determined by common
valuation techniques or (ii) book value.
(2) Period of Option and Limitations on Exercise. The
period or periods within which an option may be
exercised shall be determined by the Board at the time
the option is granted, but in no event shall any option
granted hereunder be exercised more than ten years from
the date the option was granted nor more than five
years from the date the option was granted in the case
of an individual then owning (within the meaning of
Section 424(d) of the Code) more than 10% of the total
combined voting power of all classes of stock of the
Company or Subsidiaries. Notwithstanding the foregoing,
during the first three years of the Plan, no option may
be granted which provides for the exercise of more than
one-third of such option during each of the first three
years of the term of the option.
(3) Payment for Stock.
(A) Each grant of an incentive stock option shall specify
the form of consideration to be paid in satisfaction of the
option price and the manner of payment of such
consideration, which may include (i) cash in the form of
currency or check or other cash equivalent acceptable to the
Company, (ii) non-forfeitable, unrestricted shares of Stock
which are already owned by the optionee and have a value at
the time of exercise that is equal to the option price,
(iii) any other legal consideration that the Board may deem
appropriate, including without limitation any form of
consideration authorized under Section 5(a)(3)(B) below, on
such basis as the Board may determine in accordance with the
Plan and (iv) any combination of the foregoing.
(B) Any grant may provide that payment of the option price may also be made in whole or in part in the form of other shares of stock that are subject to risk of forfeiture or restrictions on transfer. Unless otherwise determined by the Board whenever any option price is paid in whole or in part by means of any of the forms of consideration specified in this Section 5(b)(3)(B), the shares received by the optionee upon the exercise of the option shall be subject to the same risks of forfeiture or restrictions on transfer as those that applied to the consideration surrendered by the optionee; provided, however, that such risks of forfeiture and restrictions on transfer shall apply only to the same number of shares received by the optionee as applied to the forfeitable or restriction shares surrendered by the optionee.
(C) Any grant may provide for deferred payment of the option price from the proceeds of sale through a bank or broker on the date of exercise of some or all of the shares to which exercise relates.
(b) Nonqualified Stock Options. Nonqualified stock options may be granted not only to employees but also to directors who are not employees of the Company. Each nonqualified stock option granted under the Plan shall be evidenced by a stock option agreement between the person to whom such option is granted and the Company. Such stock option agreement shall provide that the option is subject to the following terms and conditions and to such other terms and conditions not inconsistent therewith as the Board may deem appropriate in each case.
(1) Option Price. The price to be paid for each share of
Stock upon the exercise of each incentive stock option
shall be determined by the Board at the time the option
is granted, but shall in no event be less than 100% of
the greater of the par value or the fair market value
of the shares on the date the option is granted. As
used in this Plan the term "date the option is granted"
means the date on which the Board authorizes the grant
of an option hereunder or any later date the option is
issued as specified by the Board. Fair market value of
the shares shall be (i) the mean of the high and low
prices of shares of stock sold on the New York or
American Stock Exchange on the date the option is
granted (or if there was no sale on such date, the
highest asked price for the Stock on such date), or
(ii) the last reported closing price in the NASDAQ
National or Capital Market; (iii) the mean between the
bid and quote prices of the stock in the
Over-The-Counter Market or Bulletin board on the date
the option is granted, or (iv) if the Stock is not
traded in any market, the greater of the (i) fair
market value of the shares as determined by common
valuation techniques or (ii) book value.
The price to be paid for each share of Stock upon the exercise of an option shall be determined by the Board at the time the option is granted. As used in this Plan, the term "date the option is granted" means the date on which the Board authorizes the grant of an option hereunder or any later date specified as the date the stock option is issued by the Board.
(2) Period of Option and Limitations on Exercise. The period or periods within which an option may be exercised shall be determined by the Board at the time the option is granted, but in no event shall such period exceed 10 years from the date the option is granted. Notwithstanding the foregoing, during the first three years of the Plan, no option may be granted which allows the exercise or vesting of more than one-third of such option during each of the first three years of the term of the option.
(3) Payment for Stock.
(A) Each grant of a Nonqualified Stock Option shall specify
the form of consideration to be paid in satisfaction of the
option price and the manner of payment of such
consideration, which may include (i) cash in the form of
currency or check or other cash equivalent acceptable to the
Company, (ii) non-forfeitable, unrestricted shares of Stock,
which are already owned by the optionee and have a value at
the time of exercise that is equal to the option price,
(iii) any other legal consideration that the Board may deem
appropriate, including without limitation any form of
consideration authorized under Section 5(b)(3)(B) below, on
such basis as the Board may determine in accordance with the
Plan and (iv) any combination of the foregoing.
(B) Any grant may provide that payment of the option price may also be made in whole or in part in the form of other shares of stock that are subject to risk of forfeiture or restrictions on transfer. Unless otherwise determined by the Board whenever any option price is paid in whole or in part by means of any of the forms of consideration specified in this Section 5(b)(3)(B), the shares received by the optionee upon the exercise of the option shall be subject to the same risks of forfeiture or restrictions on transfer as those that applied to the consideration surrendered by the optionee; provided, however, that such risks of forfeiture or restrictions on transfer shall apply only to the same number of shares received by the optionee as applied to the forfeitable or restricted shares surrendered by the optionee.
(C) Any grant may provide for deferred payment of the option price from the proceeds of sale through a bank or broker on the date of exercise of some or all of the shares to which the exercise relates.
6. Nontransferability. The options granted pursuant to the Plan shall be nontransferable except by will or the laws of descent and distribution, and shall be exercisable during the optionee's lifetime only by him and after his death, by this personal representative or by the person entitled thereto under his will or the laws of intestate succession, provided that such personal representative or other person shall have a reasonable time to exercise the options.
7. Termination of Employment or Other Relationship. Upon termination of the optionee's employment or other relationship with the Company, his rights to exercise options then held by him shall be only as follows (in no case do the time periods referred to below extend the term specified in any option):
(a) Death or Disability. Upon the death of an optionee, any option which he holds may be exercised (to the extent exercisable at his death), unless it otherwise expires, within such period after the date of his death (not to exceed twelve (12) months) as the Board shall prescribe in his option agreement, by the employee's representative or by the person entitled thereto under his will or the laws of intestate succession. Upon the disability (within the meaning of Section 22(e)(3) of the Code) of an employee, any option which he holds may be exercised (to the extent exercisable as of the date of disability), unless it otherwise expires, within such period after the date of his disability (not to exceed twelve (12) months) as the Board shall prescribe in his option agreement.
(b) Retirement. Upon the retirement of an officer, director or employee or the cessation of services provided by a nonemployee (either pursuant to a Company retirement plan, if any, or pursuant to the approval of the Board), an option my be exercised (to the extent exercisable at the date of such termination or cessation)by him within such period after the date of his retirement or cessation of services (not to exceed three (3) months) as the Board shall prescribe in his option agreement.
(c) Other Termination. In the event an officer, director or employee ceases to serve as an officer or director or leaves the employ of the Company for any reason other than as set forth in (a) and (b), above, any option which he holds shall terminate at the date his employment terminates or he ceases providing services to the Company or within such period after the date of his cessation of services to the Company or within such period after the date of his cessation of services (not to exceed three (3) months) as the Board shall prescribe in his option agreement. Notwithstanding the foregoing, all rights to an option will cease if the employment of the optionee is terminated by the Company for Cause. For purposes of this Plan, Cause shall mean:
(i) Optionee's conviction by, or entry of a
plea of guilty or nolo centendere in a
court of competent and final
jurisdiction for any crime involving
moral turpitude or punishable by
imprisonment in the jurisdiction;
(ii) Optionee's commission of an act of fraud
whether prior to or subsequent to the
date of optionee's employment by the
Company, upon the Company;
(iii) Optionee's continuing repeated willful
failure or refusal to perform his
duties, gross insubordination or
material violation by optionee of any
duty of loyalty to the Company or any
other material misconduct on the part of
optionee.
(d) Board Discretion. The Board may in its sole discretion accelerate the exercisability of any or all options upon termination of employment or cessation of services.
8. Change of Control of the Company. If there is a change in control of the Company, an option granted under the Plan will, in the sole discretion of the Board, become immediately exercisable in full. For purposes of the Plan, "Change of Control" shall mean the occurrence of any of the following events:
(a) The Company shall merge into itself, or be merged or consolidated with, another corporation and as a result of such merger or consolidation less than 50% of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the former shareholders of the company as the same shall have existed immediately prior to such merger or consolidation;
(b) The Company shall sell or otherwise transfer all or substantially all of its assets to any other corporation or other legal person, and immediately after such sale or transfer less than 50% of the combined voting power of the outstanding voting securities of such corporation or person is held in the aggregate by the former shareholders of the Company as the same shall have existed immediately prior to such sale or transfer;
(c) A person, within the meaning of Sections 3(a)(9), Section 13(d)(3) or 14(d)(2) (as in effect on the date hereof) of the Securities Exchange Act of 1934, shall become the beneficial owner (as defined in Rule 13d-3 of the Securities and Exchange Commission pursuant to the Securities and Exchange Act of 1934) of 25% or more the outstanding voting securities of the Company (whether directly or indirectly); or
(d) During any period of three consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company cease, for any reason, to constitute at least a majority thereof, unless the election, or the nomination for election by the shareholders of the Company, of each Director first elected during any such period as approved by a vote of a least one-third of the Directors of the Company who are Directors of the Company on the date of the beginning of any such period.
9. Transfer to Related Corporation. In the event an employee leaves the employ of the Company to become an employee of a Subsidiary or any employee leaves the employ of a Subsidiary to become an employee of the Company or another Subsidiary, such employee shall be deemed to continue as an employee for purposes of this Plan.
10. Adjustment of Shares. In the event of changes in the outstanding Stock by reason of stock dividends, split-ups, consolidations, recapitalization, reorganizations or like events (as determined by the Board), an appropriate adjustment shall be made by the Board in the number and kind of shares reserved under the Plan, in the number and kind of shares set forth in Section 4 hereof, and in the number and kind of shares and the option price per share specified in any stock option agreement with respect to any purchased shares. The determination of the Board as to what adjustments shall be made shall be conclusive. Adjustments for any options to purchase fractional shares shall also be determined by the Board. The Board shall give prompt notice to all optionees of any adjustment pursuant to this Section.
11. Securities Law Requirements. The Board may require prospective optionees, as a condition of either the grant or the exercise of an option, to represent and establish to the satisfaction of the Board that all shares of Stock acquired upon the exercise of such option will be acquired for investment and not for resale. The Company may refuse to permit the sale or other disposition of any shares acquired pursuant to any such representation until it is satisfied that such sale or other disposition would not be in contravention of applicable state or federal securities law.
12. Tax Withholding. To the extent that the Company is required to withhold federal, state, local or foreign taxes in connection with any payment made or benefit realized by an optionee or other person under the Plan, and the amounts available to the Company for such withholding are insufficient, it shall be a condition to the receipt of such payment or the realization of such benefit that an optionee or such other person make arrangements satisfactory to the Company for payment of the balance of such taxes required to be withheld. At the discretion of the Board, such arrangements may include relinquishment of a portion of such benefit. The Company and any optionee or such other person may also make similar arrangements with respect to the payment of any taxes with respect to which withholder is not required.
13. Failure to Meet Minimum Capital Requirements. Each stock option agreement evidencing a stock option granted pursuant to the Plan shall contain a provision that requires that optionee to exercise or forfeit the optionee's options if directed to do so by the institution's primary federal regulator in the event the Company's capital falls below the minimum requirements, as determined by its state or primary federal regulator.
14. Amendment. The Board may amend the Plan at any time, except that:
(a) Without shareholder approval, the number of shares of Stock which may be reserved for issuance under the Plan shall not be increased except as provided in Section 10 hereof;
(b) The option price per share of Stock may not be fixed at less than the greater of the par value or 100% of the fair market value of a share of Stock on the date the option is granted;
(c) The maximum period of ten (10) years during which the options may be exercised may not be extended:
(d) The class of persons eligible to receive options under the Plan as set forth in Section 3 shall not be changed; and
(e) Without shareholder approval, this Section 14 may not be amended in a manner that limits or reduces the amendments which require shareholder approval.
15. Effective Date. The Plan shall be effective upon its adoption by the Board of Directors and the stockholders of OptimumBank, the predecessor to the Company, and approval by the State of Florida Department of Banking and Finance
16. Termination. The Plan shall terminate automatically as of the close of business on the date preceding the 10th anniversary date of its initial adoption by the Board of Directors or earlier by resolution of the Board of Directors or upon consummation of the disposition of capital stock or assets of the Company, as described in Sections 8 hereof. Unless otherwise provided herein, the termination of the Plan shall not affect the validity of any option agreement outstanding at the date of such termination.
Approved by Stockholders: October 2, 2000 Approved by Board of Directors: October 24, 2000 Approved by Department of Banking and Finance: February 27, 2001
Amendment #1- Approved by Board of Directors: February 28, 2002 Amendment #1- Approved by Stockholders: March 21, 2002 Amendment #1-Approved by Department of Banking and Finance: April 18, 2002
Amendment #2- Approved by Board of Directors: January 29, 2004
Amendment #2-Approved by Department of Banking and Finance: February
24, 2004
Amendment #2 - Approved by Stockholders: April 29, 2004
Technical Amendments and Restatement - Approved by Board of Directors:
December 2, 2004
Technical Amendments and Restatement- Approved by Board of Directors
March 21, 2006
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Albert J. Finch, certify that:
1. I have reviewed this annual report on Form 10-KSB of OptimumBank Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and
6. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.
Date: March 31, 2006 By: /s/ Albert J. Finch
----------------------------------------
Albert J. Finch, Chief Executive Officer
|
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Richard L. Browdy, certify that:
1. I have reviewed this annual report on Form 10-KSB of OptimumBank Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:
e. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
f. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
g. Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
h. Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and
7. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.
Date: March 31, 2006 By: /s/ Richard L. Browdy
------------------------------------------
Richard L. Browdy, Chief Financial Officer
|
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXEUCTIVE OFFICER UNDER
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of OptimumBank Holdings, Inc. (the "Company") on Form 10-KSB for the year ended December 31, 2005 as filed with the Securities and Exchange Commission (the "Report"), I, Albert J. Finch, Chief Executive Officer of the Company, certify, pursuant to 19 U.S.C. ss. 1350, as added by ss. 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. To my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.
Date: March 31, 2006 /s/ Albert J. Finch
----------------------------------------
Albert J. Finch, Chief Executive Officer
|
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER UNDER
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of OptimumBank Holdings, Inc. (the "Company") on Form 10-KSB for the year ended December 31, 2005 as filed with the Securities and Exchange Commission (the "Report"), I, Richard L. Browdy, Chief Financial Officer of the Company, certify, pursuant to 19 U.S.C. ss. 1350, as added by ss. 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. To my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.
Date: March 31, 2006 /s/ Richard L. Browdy
------------------------------------------
Richard L. Browdy, Chief Financial Officer
|
EXHIBIT 99.1
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
Fort Lauderdale, Florida
Audited Consolidated Financial Statements
At December 31, 2005 and 2004 and for the Years Then Ended
(Together with Report of Independent Registered Public Accounting Firm)
INDEX TO FINANCIAL STATEMENTS
Independent Auditors'
Report.................................................................... F-2
Consolidated Balance Sheets, December 31, 2005 and 2004................... F-3
Consolidated Statements of Earnings
for the Years Ended December 31, 2005 and 2004 .................. F-4
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 2005 and 2004................... F-5
Consolidated Statements of Cash Flows
for the Years Ended December 31, 2005 and 2004 .................. F-6
|
Notes to Financial Statements, December 31, 2005 and 2004 and for the Years Then Ended ................................... F-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
OptimumBank Holdings, Inc.
Fort Lauderdale, Florida:
We have audited the accompanying consolidated balance sheets of OptimumBank Holdings, Inc. and Subsidiary (the "Company") at December 31, 2005 and 2004, and the related consolidated statements of earnings, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 2005 and 2004, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Hacker, Johnson & Smith PA HACKER, JOHNSON & SMITH PA Fort Lauderdale, Florida March 10, 2006 |
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
-------------------------
2005 2004
--------- ---------
ASSETS
Cash and due from banks ......................................... $ 502 $ 383
Federal funds sold .............................................. 652 2,840
--------- ---------
Total cash and cash equivalents ................... 1,154 3,223
Securities held to maturity (fair value approximates $25,096
and $24,065) ................................................ 25,618 24,134
Security available for sale ..................................... 243 247
Loans, net of allowance for loan losses of $777 and $628 ........ 170,226 128,810
Loans held for sale ............................................. -- 509
Federal Home Loan Bank stock .................................... 2,712 1,965
Premises and equipment, net ..................................... 4,074 4,114
Accrued interest receivable ..................................... 1,030 878
Other assets .................................................... 987 678
--------- ---------
Total assets ...................................... $ 206,044 $ 164,558
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Noninterest-bearing demand deposits ......................... $ 390 $ 558
Savings, NOW and money-market deposits ...................... 7,050 8,091
Time deposits ............................................... 106,624 89,345
--------- ---------
Total deposits .................................... 114,064 97,994
Federal Home Loan Bank advances ............................. 52,950 37,650
Other borrowings ............................................ 12,950 5,000
Junior subordinated debenture ............................... 5,155 5,155
Official checks ............................................. 1,593 1,209
Other liabilities ........................................... 735 522
Deferred income tax liability ............................... 187 305
--------- ---------
Total liabilities ................................. 187,634 147,835
--------- ---------
Commitments and contingencies (Notes 4, 8 and 15)
Stockholders' equity:
Common stock, $.01 par value; 6,000,000 shares authorized,
2,663,775 and 2,650,102 shares issued and outstanding ... 27 27
Additional paid-in capital ................................... 14,141 14,051
Retained earnings ............................................ 4,249 2,648
Accumulated other comprehensive income (loss) ................ (7) (3)
--------- ---------
Total stockholders' equity ......................... 18,410 16,723
--------- ---------
Total liabilities and stockholders' equity ......... $ 206,044 $ 164,558
========= =========
|
See Accompanying Notes to Consolidated Financial Statements
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
----------------------------
2005 2004
--------- -------
Interest income:
Loans........................................................ $ 9,928 $ 7,876
--------- -------
Securities................................................... 1,260 838
Other........................................................ 146 101
--------- -------
Total interest income.............................. 11,334 8,815
--------- -------
Interest expense:
Deposits ................................................... 3,700 2,837
Borrowings................................................... 2,141 1,195
--------- -------
Total interest expense............................. 5,841 4,032
--------- -------
Net interest income.............................................. 5,493 4,783
Provision for loan losses.......................... 149 136
--------- -------
Net interest income after provision for loan losses.............. 5,344 4,647
--------- -------
Noninterest income:
Service charges and fees..................................... 65 129
Loan prepayment fees......................................... 522 541
Other........................................................ 48 20
--------- -------
Total noninterest income........................... 635 690
Noninterest expenses:
Salaries and employee benefits............................... 1,684 1,577
Occupancy and equipment...................................... 621 468
Provision for losses on foreclosed assets.................... 243 -
Data processing.............................................. 200 161
Professional fees............................................ 169 161
Insurance ................................................... 69 58
Stationary and supplies...................................... 42 55
Other........................................................ 368 321
--------- -------
Total noninterest expenses......................... 3,396 2,801
--------- -------
Earnings before income taxes..................................... 2,583 2,536
Income taxes................................................. 982 966
--------- -------
Net earnings..................................................... $ 1,601 $ 1,570
========= =======
Net earnings per share:
Basic........................................................ $ .60 $ .60
========= =======
Diluted...................................................... $ .58 $ .58
========= =======
Dividends per share.............................................. $ -- $ --
========= =======
|
See Accompanying Notes to Consolidated Financial Statements.
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2005 AND 2004
(DOLLARS IN THOUSANDS)
ACCUMULATED
OTHER
COMPRE-
COMMON STOCK ADDITIONAL HENSIVE TOTAL
------------------------- PAID-IN RETAINED INCOME STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS (LOSS) EQUITY
---------- --------- --------- --------- --------- ---------
Balance at December 31, 2003 ........... 2,613,501 $ 26 $ 13,800 $ 1,078 $ (4) $ 14,900
---------
Proceeds from sale of common stock ..... 1,534 -- 15 -- -- 15
---------
Proceeds from exercise of common
stock options ..................... 35,067 1 236 -- -- 237
---------
Comprehensive income:
Net earnings ...................... -- -- -- 1,570 -- 1,570
Net change in unrealized loss on
securities available for
sale .......................... -- -- -- -- 1 1
---------
Comprehensive income .............. -- -- -- -- -- 1,571
---------- --------- --------- --------- --------- ---------
Balance at December 31, 2004 ........... 2,650,102 $ 27 $ 14,051 $ 2,648 $ (3) $ 16,723
---------
Proceeds from sale of common stock ..... 1,540 -- 16 -- -- 16
---------
Proceeds from exercise of common
stock options ..................... 12,133 -- 74 -- -- 74
---------
Comprehensive income:
Net earnings ...................... -- -- -- 1,601 -- 1,601
Net change in unrealized loss on
securities available for
sale .......................... -- -- -- -- (4) (4)
---------
Comprehensive income .............. -- -- -- -- -- 1,597
---------- --------- --------- --------- --------- ---------
Balance at December 31, 2005 ........... 2,663,775 $ 27 $ 14,141 $ 4,249 $ (7) $ 18,410
========== ========= ========= ========= ========= =========
|
See Accompanying Notes to Consolidated Financial Statements.
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------
2005 2004
--------- --------
Cash flows from operating activities:
Net earnings..................................................................... $ 1,601 $ 1,570
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization............................................... 258 188
Provision for loan losses................................................... 149 136
Provision for losses on foreclosed assets................................... 243 --
Net amortization of fees, premiums and discounts............................ 164 214
Deferred income tax benefit................................................. (118) (279)
Repayments of loans held for sale........................................... 509 897
(Increase) decrease in accrued interest receivable.......................... (152) 346
Increase in other assets.................................................... (300) (210)
Increase in official checks and other liabilities........................... 597 1,084
--------- --------
Net cash provided by operating activities.......................... 2,951 3,946
--------- --------
Cash flows from investing activities:
Purchases of securities held to maturity......................................... (7,843) (11,018)
Principal repayments and calls of securities held to maturity.................... 6,384 3,440
Net increase in loans............................................................ (42,502) (17,857)
Purchase of premises and equipment............................................... (218) (2,390)
Purchase of Federal Home Loan Bank stock......................................... (747) (440)
Proceeds from sale of foreclosed assets, net..................................... 505 --
--------- --------
Net cash used in investing activities.............................. (44,421) (28,265)
--------- --------
Cash flows from financing activities:
Net increase in deposits......................................................... 16,070 17,250
Net increase (decrease) in other borrowings...................................... 7,950 (3,750)
Proceeds from sale of common stock............................................... 16 15
Net increase in Federal Home Loan Bank advances.................................. 15,300 8,150
Issuance of junior subordinated debenture........................................ - 5,155
Proceeds from exercise of common stock options................................... 65 183
--------- --------
Net cash provided by financing activities.......................... 39,401 27,003
--------- --------
Net (decrease) increase in cash and cash equivalents................................. (2,069) 2,684
Cash and cash equivalents at beginning of the year................................... 3,223 539
--------- --------
Cash and cash equivalents at end of the year......................................... $ 1,154 $ 3,223
========= ========
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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------
2005 2004
--------- --------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest.................................................................... $ 5,764 $ 4,013
========= ========
Income taxes................................................................ $ 1,454 $ 1,033
========= ========
Noncash transactions:
Change in accumulated other comprehensive income, net
change in unrealized loss on security available for sale............... $ (4) $ 1
========= ========
Tax benefit from common stock options exercised............................. $ 9 $ 54
========= ========
Loan reclassified to foreclosed assets...................................... $ 3,268 $ --
========= ========
Loan made in connection with sale of foreclosed assets...................... $ 2,520 $ --
========= ========
|
See Accompanying Notes to Consolidated Financial Statements.
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004 AND THE YEARS THEN ENDED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION. OptimumBank Holdings, Inc. (the "Holding Company") is a one-bank holding company and owns 100% of OptimumBank (the "Bank"), a state (Florida)-chartered commercial bank (collectively, the "Company"). The Holding Company's only business is the operation of the Bank. The Bank's deposits are insured by the Federal Deposit Insurance Corporation. The Bank offers a variety of community banking services to individual and corporate customers through its three banking offices located in Broward County, Florida.
The Holding Company was formed on March 23, 2004 and on April 29, 2004, the Bank's stockholders approved a plan of corporate reorganization under which the Bank became a wholly-owned subsidiary of the Holding Company. Effective May 6, 2004, the Bank's stockholders exchanged their common shares for shares of the Holding Company. As a result, all of the previously issued $2.50 par value common shares of the Bank were exchanged for 2,633,310 shares of the $.01 par value common shares of the Holding Company. The Holding Company's acquisition of the Bank has been accounted for as a combination of entities under common control at historical cost, similar to a pooling of interests and, accordingly, the financial data for all periods presented include the results of the Bank.
BASIS OF PRESENTATION. The accompanying consolidated financial statements include the accounts of the Holding Company and the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation. The accounting and reporting practices of the Company conform to U.S. generally accepted accounting principles and to general practices within the banking industry. The following summarizes the more significant of these policies and practices:
USE OF ESTIMATES. In preparing consolidated financial statements in conformity with U.S. generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses.
CASH AND CASH EQUIVALENTS. For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks and federal funds sold, both of which mature within ninety days.
The Company is required by law or regulation to maintain cash reserves in the form of vault cash or in accounts with other banks. There were no reserve balances required at December 31, 2005 and 2004.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED SECURITIES. Securities may be classified as either trading, held to maturity or available for sale. Trading securities are held principally for resale and recorded at their fair values. Unrealized gains and losses on trading securities are included immediately in earnings. Held to maturity securities are those which management has the positive intent and ability to hold to maturity and are reported at amortized cost. Available for sale securities consist of securities not classified as trading securities nor as held to maturity securities. Unrealized holding gains and losses, on available for sale securities are reported as a net amount in accumulated other comprehensive income (loss) in stockholders' equity until realized. Gains and losses on the sale of available for sale securities are determined using the specific-identification method. Premiums and discounts on securities available for sale and held to maturity are recognized in interest income using the interest method over the period to maturity.
LOANS. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs.
Commitment fees, and loan origination fees are deferred and certain direct origination costs are capitalized. Both are recognized as an adjustment of the yield of the related loan.
The accrual of interest on loans is discontinued at the time the loan is ninety days delinquent unless the loan is well collateralized and in process of collection. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED ALLOWANCE FOR LOAN LOSSES, CONTINUED. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific and general components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial real estate, developed land, multi-family real estate and commercial loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral-dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures.
FORECLOSED ASSETS. Assets repossessed or acquired by foreclosure or deed in lieu of foreclosure are carried at the lower of estimated fair value or the balance of the loan on the assets at date of acquisition. Costs relating to the development and improvement of assets are capitalized, whereas those relating to holding the assets are charged to expense. Valuations are periodically performed by management and losses are charged to earnings if the carrying value of the assets exceeds its estimated fair value.
LOANS HELD FOR SALE. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to earnings. At December 31, 2004 fair value exceeded book value in the aggregate. The Company had no loans held for sale at December 31, 2005.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED PREMISES AND EQUIPMENT. Land is stated at cost. Buildings and improvements, furniture, fixtures, equipment, and leasehold improvements are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization expense are computed using the straight-line method over the estimated useful life of each type of asset or lease term, if shorter.
PREFERRED SECURITIES OF UNCONSOLIDATED SUBSIDIARY TRUST. On September 30,
2004, the Company acquired the common stock of OptimumBank Holdings Capital Trust I (Issuer Trust), an unconsolidated subsidiary trust. The Issuer Trust used the proceeds from the issuance of $5,000,000 of its preferred securities to third-party investors and common stock to acquire a $5,155,000 debenture issued by the Company. This debenture and certain capitalized costs associated with the issuance of the preferred stock comprise the Issuer Trust's only assets and the interest payments from the debentures finance the distributions paid on the preferred securities. The Company recorded the debenture in "Junior Subordinated Debenture" and its equity interest in the business trust in "Other assets" on the consolidated balance sheets.
The Company has entered into agreements which, taken collectively, fully and unconditionally guarantee the preferred securities of the Issuer Trust subject to the terms of the guarantee.
The debenture held by the Issuer Trust currently qualifies as Tier I capital for the Company under Federal Reserve Board guidelines.
TRANSFER OF FINANCIAL ASSETS. Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
INCOME TAXES. Deferred income tax assets and liabilities are recorded to reflect the tax consequences on future years of temporary differences between revenues and expenses reported for financial statement and those reported for income tax purposes. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. Valuation allowances are provided against assets which are not likely to be realized.
The Holding Company and the Bank file a consolidated income tax return. Income taxes are allocated proportionately to the Holding Company and subsidiary as though separate income tax returns were filed.
ADVERTISING. The Company expenses all media advertising as incurred. Media advertising expense included in other in the accompanying consolidated statements of earnings was approximately $41,000 and $34,000 during the years ended December 31, 2005 and 2004, respectively.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
STOCK COMPENSATION PLANS. Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, as amended by
SFAS No. 148, Accounting for Stock-Based Compensation Transition and
Disclosure (collectively, "SFAS No. 123") encourages all entities to
adopt a fair value based method of accounting for employee stock
compensation plans, whereby compensation cost is measured at the grant
date based on the value of the award and is recognized over the service
period, which is usually the vesting period. However, it also allows an
entity to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB No. 25"), whereby compensation cost is the excess, if
any, of the quoted market price of the stock at the grant date (or
other measurement date) over the amount an employee must pay to acquire
the stock. The Company accounts for their stock option plans under the
recognition and measurement principles of APB No. 25. No stock-based
employee compensation cost is reflected in net earnings, as all options
granted under those plans had an exercise price which approximated the
market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net earnings if the Company
had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation (in thousands, except per share
amounts).
YEAR ENDED DECEMBER 31,
------------------------
2005 2004
--------- ---------
Net earnings, as reported....................................... $ 1,601 $ 1,570
Deduct: Total stock-based employee compensation
determined under the fair value based method for all
awards, net of related tax effect........................... 647 162
--------- ---------
Proforma net earnings........................................... $ 954 $ 1,408
========= =========
Basic earnings per share:
As reported................................................. $ .60 $ .60
========= =========
Proforma.................................................... $ .36 $ .53
========= =========
Diluted earnings per share:
As reported................................................. $ .58 $ .58
========= =========
Proforma.................................................... $ .35 $ .52
========= =========
|
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED STOCK COMPENSATION PLANS, CONTINUED. In order to calculate the fair value of the options granted using the Black-Scholes option pricing model, it was assumed that the risk-free interest rate was 4.4% in 2005 and 5.2% in 2004, there would be no dividends paid by the Company over the exercise period, the expected life of the options would be the entire exercise period and stock volatility was 24% in 2005 and 11% in 2004. For purposes of pro forma disclosures, the estimated fair value is included in expense in the period vesting occurs (in thousands, except per share amounts).
YEAR ENDED DECEMBER 31,
---------------------
2005 2004
-------- --------
Grant-date fair value of options issued during the year .......... $ 469 $ 427
======== ========
Per share value of options at grant date.......................... $ 4.57 $ 3.43
======== ========
EARNINGS PER SHARE. Basic earnings per share is computed on the basis of
the weighted-average number of common shares outstanding. Diluted
earnings per share is computed based on the weighted-average number of
shares outstanding plus the effect of outstanding stock options,
computed using the treasury stock method. Earnings per common share
have been computed based on the following:
|
YEAR ENDED DECEMBER 31,
---------------------
2005 2004
--------- ---------
Weighted-average number of common shares outstanding
used to calculate basic earnings per common share............. 2,658,848 2,636,324
Effect of dilutive stock options................................... 102,949 82,388
--------- ---------
Weighted-average number of common shares outstanding
used to calculate diluted earnings per common share........... 2,761,797 2,718,712
========= =========
|
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS. In the ordinary course of business the Company has entered into off-balance-sheet financial instruments consisting of commitments to extend credit and undisbursed loans in process. Such financial instruments are recorded in the consolidated financial statements when they are funded.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED FAIR VALUES OF FINANCIAL INSTRUMENTS. The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument or may not necessarily represent the underlying fair value of the Company. The following methods and assumptions were used by the Company in estimating fair values of financial instruments disclosed herein:
CASH AND CASH EQUIVALENTS. The carrying amounts of cash and cash equivalents approximate their fair value.
SECURITIES. Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
FEDERAL HOME LOAN BANK STOCK. Fair value of the Company's investment in Federal Home Loan Bank stock is based on its redemption value, which is its cost of $100 per share.
LOANS. For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for certain fixed-rate mortgage (e.g. one-to-four family residential), commercial real estate and commercial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
DEPOSIT LIABILITIES. The fair values disclosed for demand, NOW, money-market and savings deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). Fair values for fixed-rate time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated expected monthly maturities on time deposits.
ACCRUED INTEREST. The carrying amounts of accrued interest approximate their fair values.
FEDERAL HOME LOAN BANK ADVANCES, JUNIOR SUBORDINATED DEBENTURE AND OTHER BORROWINGS. Fair values of Federal Home Loan Bank advances, junior subordinated debenture and other borrowings which consist of securities sold under an agreement to repurchase are estimated using discounted cash flow analysis based on the Company's current incremental borrowings rates for similar types of borrowings.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS. Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED COMPREHENSIVE INCOME. Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net earnings. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the consolidated balance sheets, such items along with net earnings, are components of comprehensive income. The only component of other comprehensive income is the net change in unrealized loss on securities available for sale for the years ended December 31, 2005 and 2004.
RECENT ACCOUNTING PRONOUNCEMENTS. In December 2003, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer. This SOP requires acquired impaired loans for which it is probable that the investor will be unable to collect all contractually required payments receivable to be recorded at the present value of amounts expected to be received. The SOP also prohibits carrying over or creation of valuation allowances in the initial accounting for these loans. The SOP was effective for loans acquired in fiscal years beginning after December 15, 2004. The adoption of this SOP did not impact the Company's consolidated financial position or results of operations.
In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123 (Revised), Share-Based Payment ("SFAS No. 123(R)"). This Statement replaces SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), and supersedes Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25"). SFAS No. 123(R) clarifies and expands SFAS No. 123's guidance in several areas, including measuring fair value, classifying an award as equity or as a liability, accounting for nonsubstantive vesting provisions, and attributing compensation cost to reporting periods. Under the provisions of SFAS No. 123(R), the alternative to use APB No. 25's intrinsic value method of accounting that was provided in SFAS No. 123, as originally issued, is eliminated. Effective January 1, 2006, the Company will begin expensing the fair value of unvested stock options and any future grants of stock options. There were no unvested stock options at December 31, 2005.
In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections, which replaces APB Opinion No. 20, Accounting Changes, and SFAS 3, Reporting Accounting Changes in Interim Financial Statements An Amendment of APB Opinion No. 28. SFAS 154 changes the requirements for the accounting and reporting of a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.
RECLASSIFICATIONS. Certain reclassifications of prior year amounts have been made to conform to the current year presentation.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) SECURITIES Securities have been classified according to management's intent. The carrying amount of securities and approximate fair values are as follows (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- -------- --------- --------
AT DECEMBER 31, 2005:
SECURITIES HELD TO MATURITY-
Mortgage-backed securities............. $ 25,618 $ 2 $ (524) $ 25,096
======== ======== ========= ========
SECURITY AVAILABLE FOR SALE-
Mutual fund............................ $ 250 $ -- $ (7) $ 243
======== ======== ========= ========
AT DECEMBER 31, 2004:
SECURITIES HELD TO MATURITY-
Mortgage-backed securities............. $ 24,134 $ 87 $ (156) $ 24,065
======== ======== ========= ========
SECURITY AVAILABLE FOR SALE-
Mutual fund............................ $ 250 $ -- $ (3) $ 247
======== ======== ========= ========
|
There were no securities sold during the years ended December 31, 2005 or 2004.
Securities with gross unrealized losses at December 31, 2005, aggregated by investment category and length of time that individual securities have been in a continuous loss position, is as follows (in thousands):
LESS THAN TWELVE MONTHS OVER TWELVE MONTHS
------------------------ ------------------------
GROSS GROSS
UNREALIZED FAIR UNREALIZED FAIR
LOSSES VALUE LOSSES VALUE
--------- --------- --------- ---------
SECURITIES HELD TO MATURITY-
Mortgage-backed securities.......... $ (218) $ 11,919 $ (306) $ 12,500
========= ========= ========= =========
SECURITY AVAILABLE FOR SALE-
Mutual fund......................... $ - $ -- $ (7) $ 243
========= ========= ========= =========
|
Management evaluates securities for other-than-temporary impairment at
least on a quarterly basis, and more frequently when economic or
market concerns warrant such evaluation. Consideration is given to
(1) the length of time and the extent to which the fair value has
been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the
Company to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) SECURITIES, CONTINUED The unrealized losses on investment securities held to maturity were caused by interest rate changes. It is expected that the securities would not be settled at a price less than the par value of the investments. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.
(3) LOANS The components of loans are as follows (in thousands):
AT DECEMBER 31,
--------------------------
2005 2004
--------- ---------
Residential real estate........................................... $ 65,016 $ 61,070
Multi-family real estate.......................................... 15,135 10,853
Commercial real estate............................................ 54,286 38,064
Land and construction............................................. 34,760 18,169
Commercial ..................................................... 570 581
Consumer ..................................................... 43 162
--------- ---------
Total loans ..................................................... 169,810 128,899
Add (deduct):
Net deferred loan fees, costs and premiums.................... 1,227 637
Loan discounts................................................ (34) (98)
Allowance for loan losses..................................... (777) (628)
--------- ---------
Loans, net........................................................ $ 170,226 $ 128,810
========= =========
|
An analysis of the change in the allowance for loan losses follows (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------
2005 2004
--------- ---------
Beginning balance................................................. $ 628 $ 492
Provision for loan losses......................................... 149 136
--------- ---------
Ending balance.................................................... $ 777 $ 628
========= =========
|
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) LOANS, CONTINUED The following is a summary of information pertaining to impaired and nonaccrual loans (in thousands):
AT DECEMBER 31,
--------------------------
2005 2004
--------- ---------
Impaired loans without a valuation allowance.............................. $ -- $ 3,268
Impaired loans with a valuation allowance................................. -- --
--------- ---------
Total impaired loans.................................................. $ -- $ 3,268
========= =========
Valuation allowance related to impaired loans............................. $ -- $ --
========= =========
Total nonaccrual loans.................................................... $ -- $ 3,268
========= =========
Total loans paid-due ninety days or more and still accruing............... $ -- $ --
========= =========
|
YEAR ENDED DECEMBER 31,
--------------------------
2005 2004
--------- ---------
Average investment in impaired loans...................................... $ 844 $ 928
========= =========
Interest income recognized on impaired loans.............................. $ -- $ --
========= =========
Interest income recognized on a cash basis on impaired loans.............. $ -- $ --
========= =========
|
During the year ended December 31, 2005 the Company recorded a $243,000 provision for losses on foreclosed assets with respect to one foreclosed residential real estate loan which was also sold during the year ended December 31, 2005 at no additional loss to the Company.
(4) PREMISES AND EQUIPMENT A summary of premises and equipment follows (in thousands):
AT DECEMBER 31,
--------------------------
2005 2004
--------- ---------
Land...................................................................... $ 1,371 $ 1,371
Buildings and improvements................................................ 2,330 2,187
Furniture, fixtures and equipment......................................... 853 843
Leasehold improvements.................................................... 109 107
--------- ---------
Total, at cost........................................................ 4,663 4,508
Less accumulated depreciation and amortization........................ (589) (394)
--------- ---------
Premises and equipment, net........................................... $ 4,074 $ 4,114
========= =========
|
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) PREMISES AND EQUIPMENT, CONTINUED The Company leases one branch facility under an operating lease. The lease contains two five-year renewal options and requires the Company to pay an allowable share of common area maintenance and real estate taxes. Rent expense under operating leases during each of the years ended December 31, 2005 and 2004 was $70,000. At December 31, 2005, the future minimum lease payments are approximately as follows (in thousands):
YEAR ENDING AMOUNT
----------- ------
2006................................... $ 71
2007................................... 71
2008................................... 77
2009................................... 77
2010................................... 77
Thereafter............................. 224
------
$ 597
======
(5) DEPOSITS
|
The aggregate amount of time deposits with a minimum denomination of $100,000, was approximately $39.9 million and $27.0 million at December 31, 2005 and 2004, respectively.
A schedule of maturities of time deposits follows (in thousands):
YEAR ENDING
DECEMBER 31, AMOUNT
2006........................................ $ 57,194
2007........................................ 13,968
2008........................................ 20,934
2009........................................ 10,576
2010........................................ 3,952
---------
$ 106,624
=========
(continued)
|
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(6) FEDERAL HOME LOAN BANK ADVANCES AND JUNIOR SUBORDINATED DEBENTURE The maturities and interest rates on the Federal Home Loan Bank ("FHLB") advances were as follows (dollars in thousands):
MATURITY AT DECEMBER 1,
YEAR ENDING CALL INTEREST --------------------------
DECEMBER 31, DATE RATE 2005 2004
------------ ------ -------- -------- --------
2006...................... -- 4.44% $ 6,300 $ --
2006...................... -- 2.44 2,200 2,200
2007...................... -- 3.48 2,500 2,500
2007...................... -- 3.70 2,000 2,000
2008...................... 2005 2.03 -- 3,000
2012...................... 2007 4.05 3,000 3,000
2013...................... 2008 3.42 2,000 2,000
2013...................... 2008 3.09 3,000 3,000
2013...................... 2008 2.80 1,950 1,950
2013...................... 2008 2.56 3,000 3,000
2013...................... 2008 3.44 3,000 3,000
2014...................... 2007 3.14 4,000 4,000
2014...................... 2009 3.64 8,000 8,000
2008...................... -- 4.34 7,000 --
2008...................... -- 4.91 5,000 --
-------- --------
$ 52,950 $ 37,650
======== =========
|
Certain of the above advances are callable by the FHLB at the dates indicated.
At December 31, 2005 and 2004, the FHLB advances were collateralized by a blanket lien on qualifying residential one-to-four family mortgage loans, commercial and multi-family real estate loans and all of the Company's Federal Home Loan Bank stock.
On September 30, 2004, the Company issued a $5,155,000 junior subordinated debenture to an unconsolidated subsidiary. The debenture has a term of thirty years. The interest rate is fixed at 6.4% for the first five years, and thereafter, the coupon rate will float quarterly at the three-month LIBOR rate plus 2.45%. The junior subordinated debenture, due in 2034, is redeemable in certain circumstances after October 2009.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) OTHER BORROWINGS Other borrowings consists of securities sold under an agreement to repurchase. The securities sold under the agreement to repurchase were delivered to the broker-dealer who arranged the transactions. Information concerning the securities sold under an agreement to repurchase is summarized as follows (dollars in thousands):
YEAR ENDED DECEMBER 31,
-------------------------
2005 2004
-------- --------
Balance at year end........................................................ $ 12,950 $ 5,000
Average balance during the year............................................ $ 10,392 $ 7,719
Average interest rate during the year...................................... 3.28% 2.25%
Maximum month-end balance during the year.................................. $ 12,950 $ 8,750
Securities held to maturity pledged as collateral.......................... $ 15,174 $ 5,672
|
The maturities and interest rates on securities sold under an agreement to repurchase are as follows (dollars in thousands):
MATURING AT DECEMBER 31,
YEAR ENDE INTEREST --------------------------
DECEMBER 31, RATE 2005 2004
------------ --------- --------
2005................................... 2.33% $ -- $ 3,000
2006 .................................. 2.95% 2,000 2,000
2006 .................................. 4.41% 2,600 --
2007 .................................. 4.02% 5,350 --
2007 .................................. 4.85% 3,000 --
--------- --------
$ 12,950 $ 5,000
========= ========
|
At December 31, 2005, the Company also had $6 million available under a line of credit. There were no amounts outstanding in connection with this agreement at December 31, 2005.
(8) FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments were as follows (in thousands):
AT DECEMBER 31, 2005 AT DECEMBER 31, 2004
----------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ---------
Financial assets:
Cash and cash equivalents....................... $ 1,154 $ 1,154 $ 3,223 $ 3,223
Securities held to maturity..................... 25,618 25,096 24,134 24,065
Security available for sale..................... 243 243 247 247
Loans........................................... 170,226 170,020 129,319 129,376
Federal Home Loan Bank stock.................... 2,712 2,712 1,965 1,965
Accrued interest receivable..................... 1,030 1,030 878 878
Financial liabilities:
Deposit liabilities............................. 114,064 113,283 97,994 98,404
Federal Home Loan Bank advances................. 52,950 50,793 37,650 38,075
Other borrowings................................ 12,950 12,858 5,000 4,952
Junior subordinated debenture................... 5,155 5,190 5,155 5,383
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(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(8) FINANCIAL INSTRUMENTS, CONTINUED The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are commitments to extend credit and undisbursed loans in process and may involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated balance sheet. The contract amounts of these instruments reflect the extent of involvement the Company has in these financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and undisbursed loans in process is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit, is based on management's credit evaluation of the counterparty.
Commitments to extend credit typically result in loans with a market interest rate when funded. A summary of the amounts of the Company's financial instruments with off-balance-sheet risk at December 31, 2005 follows (in thousands):
ESTIMATED
CONTRACT CARRYING FAIR
AMOUNT AMOUNT VALUE
--------- ======== ========
Undisbursed loans in process......................... $ 456 -- --
========= ======== ========
Commitments to extend credit......................... $ 10,015 -- --
========= ======== ========
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(9) CREDIT RISK The Company grants the majority of its loans to borrowers throughout Broward and portions of Palm Beach and Miami-Dade Counties, Florida. Although the Company has a diversified loan portfolio, a significant portion of its borrowers' ability to honor their contracts is dependent upon the economy in Broward, Palm Beach and Miami-Dade Counties, Florida.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) INCOME TAXES Income taxes consisted of the following (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------
2005 2004
--------- ---------
Current:
Federal....................................................... $ 938 $ 1,071
State......................................................... 162 174
--------- ---------
Total current........................................ 1,100 1,245
--------- ---------
Deferred:
Federal....................................................... (99) (246)
State......................................................... (19) (33)
--------- ---------
Total deferred....................................... (118) (279)
--------- ---------
Total................................................ $ 982 $ 966
========= =========
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The reasons for the differences between the statutory Federal income tax rate and the effective tax rate are summarized as follows (dollars in thousands):
YEAR ENDED DECEMBER 31,
--------------------------------------------
2005 2004
-------------------- --------------------
% OF % OF
PRETAX PRETAX
AMOUNT EARNINGS AMOUNT EARNINGS
-------- -------- -------- --------
Income taxes at statutory rate...................... $ 878 34.0% $ 862 34.0%
Increase resulting from:
State taxes, net of Federal tax benefit......... 94 3.6 93 3.7
Other........................................... 10 .4 11 .4
-------- -------- -------- --------
$ 982 38.0% $ 966 38.1%
======== ======== ======== ========
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(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) INCOME TAXES, CONTINUED The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (in thousands).
AT DECEMBER 31,
--------------------
2005 2004
-------- --------
Deferred tax asset:
Allowance for loan losses............................................. $ 182 $ 126
Organizational and preopening costs................................... -- 28
Other................................................................. -- 3
-------- --------
Deferred tax assets.......................................... 182 157
-------- --------
Deferred tax liabilities:
Loan costs............................................................ 38 68
Accrual to cash adjustment............................................ 186 248
Premises and equipment................................................ 110 129
Other................................................................. 35 17
-------- --------
Deferred tax liabilities..................................... 369 462
-------- --------
Net deferred income tax liability............................ $ 187 $ 305
======== ========
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(11) RELATED PARTY TRANSACTIONS The Company has entered into transactions with its executive officers, directors and their affiliates in the ordinary course of business. There were no loans to related parties at December 31, 2005 or 2004. At December 31, 2005 and 2004, these same related parties had approximately $1,383,000 and $1,362,000, respectively on deposit with the Company.
(12) STOCK COMPENSATION The Company established an Incentive Stock Option Plan (the "Plan") for officers, directors and employees of the Company and reserved 522,000 shares of common stock for the plan. Both incentive stock options and nonqualified stock options may be granted under the plan. The exercise price of the stock options is determined by the board of directors at the time of grant, but cannot be less than the fair market value of the common stock on the date of grant. The options vest over three and five years. However, the Company's board of directors authorized the immediate vesting of all stock options outstanding as of December 29, 2005 in order to reduce noncash compensation expense that would have been recorded in its consolidated statements of earnings in future years upon adoption of SFAS No. 123R in January 2006. The options must be exercised within ten years from the date of grant. At December 31, 2005, no options were available for grant.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(12) STOCK COMPENSATION, CONTINUED
A summary of the activity in the Company's stock option plan is as
follows (dollars in thousands, except per share amounts):
RANGE OF WEIGHTED-
PER SHARE AVERAGE AGGREGATE
NUMBER OF OPTION EXERCISE OPTION
OPTIONS PRICE PRICE PRICE
-------- ----------- --------- -------
Outstanding at December 31, 2003............ 287,000 $ 5.00-8.20 $ 5.72 $ 1,643
Granted..................................... 124,500 10.00 10.00 1,245
Exercised................................... (35,067) 5.00-6.75 5.22 (183)
Forfeited................................... (6,000) 6.75-8.20 7.23 (43)
-------- -------
Outstanding at December 31, 2004............ 370,433 5.00-10.00 7.19 2,662
Granted..................................... 119,500 10.00-12.49 10.21 1,220
Exercised................................... (12,133) 5.00-6.75 5.35 (65)
Forfeited................................... (3,000) 6.78-10.00 8.33 (25)
-------- -------
Outstanding at December 31, 2005............ 474,800 $ 5.00-12.49 $ 7.98 $ 3,792
======== =======
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The weighted-average contractual lives of the outstanding stock options at December 31, 2005 and 2004 were 98 months and 91 months, respectively. At December 31, 2005, all of the stock options granted under the plan are exercisable.
Effective January 1, 2002, the Board of Directors adopted a nonemployee director compensation and stock purchase plan under which each outside director is required to purchase Company stock with compensation for board meetings at a price no less than fair market value. A total of 15,000 shares have been authorized for issuance to outside directors under this plan. A total of 1,540 and 1,534 shares of common stock were sold to outside directors under this plan during the years ended December 31, 2005 and 2004, respectively. A total of 9,808 shares are available for issuance at December 31, 2005.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(13) REGULATORY MATTERS The Company and the Bank are subject to various regulatory capital requirements administered by the regulatory banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and percentages (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2005, the Company and the Bank met all capital adequacy requirements to which they are subject.
As of December 31, 2005, the most recent notification from the regulatory authorities categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage percentages as set forth in the following tables. There are no conditions or events since that notification that management believes have changed the Bank's category. The Company's and the Bank's actual capital amounts and percentages are also presented in the table (dollars in thousands).
MINIMUM
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
---------------------- ----------------------- -----------------------
AMOUNT % AMOUNT % AMOUNT %
-------- ------- -------- ------ -------- --------
AS OF DECEMBER 31, 2005:
Total capital to Risk-
Weighted assets:
Company............... $ 24,169 16.45% $ 11,751 8.00% N/A 10.00%
Bank.................. 23,891 16.27 11,746 8.00 $ 14,684 10.00
Tier I Capital to Risk-
Weighted Assets:
Company............... 23,392 15.93 5,873 4.00 N/A N/A
Bank.................. 23,114 15.74 5,874 4.00 8,811 6.00
Tier I Capital
to Total Assets:
Company............... 23,392 11.64 8,247 4.00 N/A N/A
Bank.................. 23,114 11.50 8,040 4.00 10,050 5.00
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(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(13) REGULATORY MATTERS, CONTINUED
MINIMUM
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
---------------------- ----------------------- -----------------------
AMOUNT % AMOUNT % AMOUNT %
-------- ------- -------- ------ -------- --------
AS OF DECEMBER 31, 2004:
Total capital to Risk-
Weighted assets:
Company............... $ 22,329 20.68% $ 8,639 8.00% N/A 10.00%
Bank.................. 22,207 20.57 8,636 8.00 $ 10,795 10.00
Tier I Capital to Risk-
Weighted Assets:
Company............... 21,701 20.10 4,320 4.00 N/A N/A
Bank.................. 21,579 19.99 4,318 4.00 6,477 6.00
Tier I Capital
to Total Assets:
Company............... 21,701 13.49 6,433 4.00 N/A N/A
Bank.................. 21,579 13.42 6,433 4.00 8,041 5.00
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(14) DIVIDENDS The Company is limited in the amount of cash dividends that may be paid. Banking regulations place certain restrictions on dividends and loans or advances made by the Bank to the Holding Company. The amount of cash dividends that may be paid by the Bank to the Holding Company is based on the Bank's net earnings of the current year combined with the Bank's retained earnings of the preceding two years, as defined by state banking regulations. However, for any dividend declaration, the Company must consider additional factors such as the amount of current period net earnings, liquidity, asset quality, capital adequacy and economic conditions. It is likely that these factors would further limit the amount of dividend which the Company could declare. In addition, bank regulators have the authority to prohibit banks from paying dividends if they deem such payment to be an unsafe or unsound practice.
(15) CONTINGENCIES Various claims also arise from time to time in the normal course of business. In the opinion of management, none have occurred that will have a material effect on the Company's consolidated financial statements.
(16) SIMPLE IRA The Company has a Simple IRA Plan whereby substantially all employees participate in the Plan. Employees may contribute up to 15 percent of their compensation subject to certain limits based on federal tax laws. The Company makes matching contributions equal to the first 3% of an employee's compensation contributed to the Plan. Matching contributions vest to the employee immediately. For the years ended December 31, 2005 and 2004, expense attributable to the Plan amounted to $36,737 and $32,124, respectively.
(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(17) HOLDING COMPANY FINANCIAL INFORMATION The Holding Company's unconsolidated financial information as of December 31, 2005 and 2004 and for the years then ended follows (in thousands):
CONDENSED BALANCE SHEETS
AT DECEMBER 31,
---------------------
2005 2004
-------- --------
ASSETS
Cash..................................................... $ 35 $ 105
Investment in subsidiary................................. 23,107 21,576
Other assets ............................................ 519 282
-------- --------
Total assets......................................... $ 23,661 $ 21,963
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities........................................ $ 96 $ 85
Junior subordinated debenture............................ 5,155 5,155
Stockholders' equity..................................... 18,410 16,723
Total liabilities and stockholders' equity........... $ 23,661 $ 21,963
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CONDENSED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,
-------- --------
2005 2004
-------- --------
Earnings of subsidiary................................... $ 1,848 $ 1,651
Interest expense......................................... (320) (86)
Other expense............................................ (79) (45)
-------- --------
Earnings before income tax benefit................... 1,449 1,520
Income tax benefit....................................... (152) (50)
-------- --------
Net earnings......................................... $ 1,601 $ 1,570
======== ========
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(continued)
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(17) HOLDING COMPANY FINANCIAL INFORMATION, CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------
2005 2004
------- -------
Cash flows from operating activities:
Net earnings......................................................... $ 1,601 $ 1,570
Adjustments to reconcile net earnings to net cash used in
operating activities:
Equity in undistributed earnings of subsidiary................... (1,848) (1,651)
Increase in other assets......................................... (228) (282)
Increase in accrued other liabilities............................ 11 85
------- -------
Net cash used in operating activities............................ (464) (278)
------- -------
Cash flow from investing activities:
Dividend from subsidiary......................................... 394 150
Investment in subsidiary......................................... (81) (5,120)
------- -------
Net cash provided by (used in) investing activities.............. 313 (4,970)
------- -------
Cash flows from financing activities:
Issuances of junior subordinated debenture........................... -- 5,155
Proceeds from sale of common stock................................... 16 15
Proceeds from exercise of common stock options....................... 65 183
------- -------
Net cash provided by financing activities........................ 81 5,353
------- -------
Net (decrease) increase in cash.................................. (70) 105
Cash at beginning of the year............................................ 105 --
------- -------
Cash at end of year .......................................... $ 35 $ 105
======= =======
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