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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_______________
FORM 10-KSB
_______________
|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)
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
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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
i
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this Annual Report about the
financial condition, results of operations, and business of our company. These
statements are not historical facts and include expressions concerning the
future that are subject to risks and uncertainties. Factors that may cause
actual results to differ materially from those contemplated by such
forward-looking statements include, among other things, the following
possibilities:
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.
1
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.
2
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.
3
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.
4
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.
5
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
6
|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.
7
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)
------------
(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.
8
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
------------
(1) Shares purchased by non-employee directors with fees for attendance at
Board of Director meetings under the Non-Employee Directors' Fee
Compensation and Stock Purchase Plan. Annual accumulated fees are used to
purchase stock after the end of each year at the closing price of the stock
on the last business day of each quarter in which the fees are earned. For
the year ended December 31, 2005, the Company sold 1,540 shares of stock at
an average price of $10.41-$10.47 per share to its outside directors under
the Plan. The shares are exempt from registration under Section 4(2) of the
Securities Act of 1933 which contains an exemption for transactions by an
issuer not involving any public offering.
9
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
10
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.
11
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 --
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
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.
12
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% --
========= ========= ========= =========
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............. $ -- $ --
======== ========
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................................... $ -- $ --
======== ========
13
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
======== ========
14
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%
======== ======== ======== ======== ======== ========
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
15
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.
16
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% --
======== ======== ======== ======== ========
------------
(1) In preparing the table above, adjustable-rate loans are included in the
period in which the interest rates are next scheduled to adjust rather than
in the period in which the loans mature. Fixed-rate loans are scheduled,
including repayment, according to their maturities. (2) Securities are
scheduled through the repricing date. (3) Money-market, interest-bearing
checking and savings deposits are regarded as readily accessible
withdrawable accounts. All other time deposits are scheduled through the
maturity dates.
17
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
======== ======== ======== ========
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
======== ======== ======== ========
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.
18
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%
======== ======== ========= ========
------------
(1) Included are Individual Retirement Accounts (IRA's) totaling $7,134,000 and
$6,575,000 at December 31, 2005 and 2004, respectively, all of which are in
the form of time deposits.
19
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.
20
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%
==== ====
------------
(1) Includes interest-earning deposits with banks, Federal funds sold and
Federal Home Loan Bank stock dividends.
(2) Interest rate spread represents the difference between average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin is net interest income divided by average
interest-earning assets.
(4) Includes Federal Home Loan Bank advances, junior subordinated debenture and
securities sold under an agreement to repurchase.
21
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.
22
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
23
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.
24
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.
25
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.
EXHIBIT NO. DESCRIPTION
----------- -----------
** 2.1 Agreement and Plan of Reorganization between OptimumBank and
OptimumBank Holdings, Inc. dated March 23, 2004
*** 3.1 Articles of Incorporation
*** 3.3 Bylaws
**** 4.1 Form of stock certificate
10.1 Amended and Restated Stock Option Plan (A)
* 10.2 Non-employee Directors' Fee Compensation and Stock Purchase
Plan (A)
* 10.3 Agreement between OptimumBank, Albert J. Finch and Richard L.
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
------------
(a) Represents a management contract or compensatory plan or arrangement
required to be filed as an exhibit.
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.
26
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
27
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