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Section 1: 8-K/A (8-K/A)

catc-8ka_20190417.htm

 

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 8-K/A 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): April 17, 2019

 

CAMBRIDGE BANCORP

(Exact name of Registrant as Specified in Its Charter)

 

 

Massachusetts

(State or Other Jurisdiction of Incorporation)

001-38184

(Commission File Number)

04-2777442

(IRS Employer Identification No.)

 

 

 

 

 

1336 Massachusetts Avenue

Cambridge, MA 02138

 

 

(Address of Principal Executive Offices) (Zip Code)

 

Registrant’s Telephone Number, Including Area Code: (617) 876-5500 

 

Not Applicable

(Former Name or Former Address, if Changed Since Last Report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instructions A.2. below):

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Indicate by check mark whether the registrant is an emerging growth company as defined in as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

 

Emerging growth company

 

Common Stock

CATC

NASDAQ

(Title of each class)

(Trading symbol)

(Name of each exchange on which registered)

 

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

 

 

 

 


 

Item 2.01 - Completion of Acquisition or Disposition of Assets.

 

On April 18, 2019, Cambridge Bancorp, Inc. (the “Company”), the holding company for Cambridge Trust Company, filed a Current Report on Form 8-K (the “Original Report”) reporting the completion of its merger of Optima Bank & Trust (“Optima”).

 

This Current Report on Form 8-K/A amends and supplements the disclosure provided in Item 9.01 of the Original Report to provide the historical financial statements of Optima as described in Item 9.01(a) below and the unaudited pro forma financial information described in Item 9.01(b) below.

Item 9.01 - Financial Statements and Exhibits.

 

(a)

Financial Statements of Business Acquired

 

Optima Bank & Trust Company - Audited consolidated financial statements of Optima Bank & Trust as of and for the years ended December 31, 2018 and 2017, the notes related thereto and the Independent Auditor’s Report, dated February 14, 2019, are filed herewith as Exhibit 99.1 and are incorporated into this Item 9.01(a) by reference.

 

(b)

Pro Forma Financial Information

 

The following pro forma financial statements giving effect to the merger with Optima are filed herewith as Exhibit 99.2 and are incorporated into this Item 9.01(b) by reference:

 

 

Cambridge Bancorp Unaudited Pro Forma Combined Consolidated Balance Sheet as of December 31, 2018 and Cambridge Bancorp Unaudited Pro Forma Combined Consolidated Statement of income for the year ended December 31, 2018. 

 

(c)

Exhibits

 

Exhibit 23.1 - Consent of Baker Newman & Noyes LLC

 


 

Exhibit Index

 

Exhibit

Number

 

Description

23.1*

 

Consent of Baker Newman & Noyes LLC

99.1*

 

Optima Bank & Trust Company - The audited consolidated financial statements of Optima Bank & Trust as of and for the years ended December 31, 2018 and 2017, the notes related thereto and the Independent Auditor’s Report, dated February 14, 2019

99.2*

 

Cambridge Bancorp Unaudited Pro Forma Combined Consolidated Financial Statements as of and for the year ended December 31, 2018

 

 

 

 

*

Filed herewith.

 

 


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

CAMBRIDGE BANCORP

 

 

 

May 8, 2019

 

 

 

By:

  /s/  Michael F. Carotenuto

 

 

Michael F. Carotenuto

 

 

Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

 

 

 

 

 

 

 

 

 

 

 

(Back To Top)

Section 2: EX-23.1 (EX-23.1)

catc-ex231_58.htm

 

Ex: 23.1

 

 

 

 

 

 

 

 

 

CONSENT OF INDEPENDENT AUDITOR

 

 

We consent to the incorporation by reference in this Registration Statement No. 333-225720 on Form S-8 of Cambridge Bancorp of our report dated February 14, 2019, relating to the financial statements of Optima Bank & Trust Company as of and for the years ended December 31, 2018 and 2017, appearing in this Current Report on Form 8-K/A dated May 8, 2019.

 

 

 

 

/s/  Baker Newman & Noyes LLC

Portland, Maine

May 8, 2019

 

(Back To Top)

Section 3: EX-99.1 (EX-99.1)

catc-ex991_57.htm

 

Ex: 99.1

 

 

 

 

Optima Bank & Trust Company

 

 

Audited Financial Statements

 

 

Years Ended December 31, 2018 and 2017

With Independent Auditors’ Report

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

INDEPENDENT AUDITORS’ REPORT

 

To the Board of Directors

Optima Bank & Trust Company

 

Report on the Financial Statements

 

We have audited the accompanying financial statements of Optima Bank & Trust Company (the Bank), which comprise the balance sheets as of December 31, 2018 and 2017, the related statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the years then ended, and the related notes to the financial statements.

 

Management’s Responsibility for the Financial Statements

 

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditors’ Responsibility

 

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Banks internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Optima Bank & Trust Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

1


 

To the Board of Directors

Optima Bank & Trust Company

 

 

Emphasis of Matter

 

As discussed in notes 1 and 14 to the financial statements, the Bank entered into an Agreement and Plan of Merger on December 5, 2018 whereby the Bank will merge with and into another financial institution. Our opinion is not modified with respect to this matter.

 

 

Portland, Maine

February 14, 2019

2


 

OPTIMA BANK & TRUST COMPANY

 

BALANCE SHEETS

 

December 31, 2018 and 2017

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

35,322,418

 

 

$

36,747,811

 

Federal funds sold

 

 

17,000

 

 

 

918,000

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

35,339,418

 

 

 

37,665,811

 

 

 

 

 

 

 

 

 

 

Investment securities available for sale

 

 

21,941,204

 

 

 

27,316,420

 

Loans, net of allowance for loan losses

 

 

458,836,536

 

 

 

417,243,076

 

Accrued interest receivable

 

 

1,198,547

 

 

 

985,732

 

Federal Home Loan Bank stock

 

 

1,103,300

 

 

 

788,600

 

Bank premises and equipment, net

 

 

5,616,019

 

 

 

4,902,668

 

Bank-owned life insurance

 

 

5,737,639

 

 

 

5,584,550

 

Other assets

 

 

1,821,194

 

 

 

1,415,547

 

Total assets

 

$

531,593,857

 

 

$

495,902,404

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Liabilities:

 

 

 

 

 

 

 

 

Deposit accounts

 

$

494,973,242

 

 

$

458,513,937

 

Customer repurchase agreements

 

 

827,643

 

 

 

5,471,267

 

Deferred income tax liability, net

 

 

201,481

 

 

 

9,771

 

Accrued expenses and other liabilities

 

 

605,873

 

 

 

646,411

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

496,608,239

 

 

 

464,641,386

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $1.00 par value; 9,000,000 shares authorized;

   2,182,821 and 2,033,211 shares issued and outstanding at

   December 31, 2018 and 2017, respectively

 

 

2,182,821

 

 

 

2,033,211

 

 

 

 

 

 

 

 

 

 

Additional paid-in capital

 

 

22,779,020

 

 

 

21,688,312

 

Accumulated surplus

 

 

10,282,722

 

 

 

7,707,007

 

Accumulated other comprehensive loss

 

 

(258,945

)

 

 

(167,512

)

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

34,985,618

 

 

 

31,261,018

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

531,593,857

 

 

$

495,902,404

 

 

See accompanying notes.

3


 

OPTIMA BANK & TRUST COMPANY

 

STATEMENTS OF INCOME

 

Years Ended December 31, 2018 and 2017

 

 

 

2018

 

 

2017

 

Interest income:

 

 

 

 

 

 

 

 

Interest on loans

 

$

19,633,872

 

 

$

16,300,832

 

Interest on investments

 

 

595,004

 

 

 

523,122

 

Interest from interest-bearing deposits in other banks

 

 

318,775

 

 

 

247,181

 

 

 

 

 

 

 

 

 

 

Total interest income

 

 

20,547,651

 

 

 

17,071,135

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

Interest on deposits

 

 

5,948,635

 

 

 

3,775,262

 

Interest on borrowings

 

 

3,542

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest expense

 

 

5,952,177

 

 

 

3,775,262

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

14,595,474

 

 

 

13,295,873

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

246,000

 

 

 

428,093

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

 

14,349,474

 

 

 

12,867,780

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

Service charges, fees and other income

 

 

924,099

 

 

 

669,936

 

Gain on sale of loans

 

 

206,370

 

 

 

310,684

 

Net gain on sale of investments

 

 

22,272

 

 

 

1,939

 

Bank-owned life insurance income

 

 

153,089

 

 

 

149,517

 

 

 

 

 

 

 

 

 

 

Total noninterest income

 

 

1,305,830

 

 

 

1,132,076

 

 

 

 

 

 

 

 

 

 

Noninterest expenses:

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

7,104,047

 

 

 

6,477,622

 

Occupancy expense

 

 

1,492,605

 

 

 

1,298,841

 

Equipment expense

 

 

692,044

 

 

 

662,289

 

Other

 

 

2,788,393

 

 

 

2,608,756

 

 

 

 

 

 

 

 

 

 

Total noninterest expenses

 

 

12,077,089

 

 

 

11,047,508

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

3,578,215

 

 

 

2,952,348

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

1,002,500

 

 

 

1,068,000

 

 

 

 

 

 

 

 

 

 

Net income

 

$

2,575,715

 

 

$

1,884,348

 

 

See accompanying notes.

4


 

OPTIMA BANK & TRUST COMPANY

 

STATEMENTS OF COMPREHENSIVE INCOME

 

Years Ended December 31, 2018 and 2017

 

 

 

2018

 

 

2017

 

Net income

 

$

2,575,715

 

 

$

1,884,348

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, net of income taxes:

 

 

 

 

 

 

 

 

Unrealized (loss) gain on securities available-for-sale:

 

 

 

 

 

 

 

 

Unrealized holding gains/losses arising during the period, net of

   income taxes of $36,098 and $(32,959) in 2018 and 2017,

   respectively

 

 

(94,999

)

 

 

50,270

 

Reclassification adjustment for gains and losses and net accretion or

   amortization of investment securities included in net income, net

   of income taxes of $(1,352) and $(16,769) in 2018 and 2017,

   respectively

 

 

3,566

 

 

 

25,578

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income

 

 

(91,433

)

 

 

75,848

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

2,484,282

 

 

$

1,960,196

 

 

See accompanying notes.

5


 

OPTIMA BANK & TRUST COMPANY

 

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

Years Ended December 31, 2018 and 2017

 

 

 

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Accumulated

Surplus

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

$

2,018,086

 

 

$

21,440,089

 

 

$

5,794,663

 

 

$

(215,364

)

 

$

29,037,474

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

1,884,348

 

 

 

 

 

 

1,884,348

 

Exercise of stock warrants

 

 

15,000

 

 

 

135,000

 

 

 

 

 

 

 

 

 

150,000

 

Exercise of stock options

 

 

125

 

 

 

2,250

 

 

 

 

 

 

 

 

 

2,375

 

Change in net unrealized

   loss on available-

   for-sale securities, net

   of income taxes

 

 

 

 

 

 

 

 

 

 

 

75,848

 

 

 

75,848

 

Tax rate adjustment

 

 

 

 

 

 

 

 

27,996

 

 

 

(27,996

)

 

 

 

Stock-based compensation

 

 

 

 

 

110,973

 

 

 

 

 

 

 

 

 

110,973

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

 

2,033,211

 

 

 

21,688,312

 

 

 

7,707,007

 

 

 

(167,512

)

 

 

31,261,018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

2,575,715

 

 

 

 

 

 

2,575,715

 

Exercise of stock options

 

 

119,609

 

 

 

1,090,881

 

 

 

 

 

 

 

 

 

1,210,490

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net exercise of stock

   warrants

 

 

30,001

 

 

 

(30,001

)

 

 

 

 

 

 

 

 

 

Change in net unrealized

   loss on available-

   for-sale securities, net

   of income taxes

 

 

 

 

 

 

 

 

 

 

 

(91,433

)

 

 

(91,433

)

Stock-based compensation

 

 

 

 

 

29,828

 

 

 

 

 

 

 

 

 

29,828

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

$

2,182,821

 

 

$

22,779,020

 

 

$

10,282,722

 

 

$

(258,945

)

 

$

34,985,618

 

 

See accompanying notes.

6


 

OPTIMA BANK & TRUST COMPANY

 

STATEMENTS OF CASH FLOWS

 

Years Ended December 31, 2018 and 2017

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

2,575,715

 

 

$

1,884,348

 

Adjustments to reconcile net income to net

 

 

 

 

 

 

 

 

cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

697,376

 

 

 

481,749

 

Amortization of mortgage servicing rights

 

 

99,599

 

 

 

144,011

 

Net amortization of bond premiums/discounts

 

 

27,190

 

 

 

44,286

 

Net realized gain on sale of investments

 

 

(22,272

)

 

 

(1,939

)

Stock-based compensation

 

 

29,828

 

 

 

110,973

 

Gain on sale of loans

 

 

(206,370

)

 

 

(310,684

)

Loss on sale of other real estate owned

 

 

 

 

 

154

 

Provision for loan losses

 

 

246,000

 

 

 

428,093

 

Loans originated for sale

 

 

(9,598,392

)

 

 

(18,830,444

)

Proceeds from sale of loans originated for sale

 

 

9,727,281

 

 

 

19,141,128

 

Capitalized mortgage servicing rights

 

 

(145,335

)

 

 

 

Deferred income tax expense

 

 

226,456

 

 

 

57,692

 

Deferred origination costs, net

 

 

(71,405

)

 

 

(45,230

)

Income on bank-owned life insurance

 

 

(153,089

)

 

 

(149,517

)

Changes in:

 

 

 

 

 

 

 

 

Interest receivable

 

 

(212,815

)

 

 

(219,893

)

Other assets

 

 

(359,911

)

 

 

118,178

 

Accrued expenses and other liabilities

 

 

(40,538

)

 

 

(98,241

)

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

2,819,318

 

 

 

2,754,664

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Sale and maturity of investment securities available for sale

 

 

4,498,563

 

 

 

4,006,705

 

Purchases of investment securities available for sale

 

 

(993,350

)

 

 

(10,535,993

)

Principal collected on mortgage-backed securities available for sale

 

 

1,738,906

 

 

 

1,976,342

 

Net purchases and redemptions of Federal Home Loan Bank stock

 

 

(314,700

)

 

 

(33,900

)

Net increase in loans

 

 

(54,087,408

)

 

 

(77,648,101

)

Sale of portfolio loans

 

 

12,396,834

 

 

 

 

Acquisition of bank premises and equipment

 

 

(1,410,727

)

 

 

(1,504,261

)

Proceeds from sale of other real estate owned

 

 

 

 

 

173,033

 

 

 

 

 

 

 

 

 

 

Net cash used by investing activities

 

 

(38,171,882

)

 

 

(83,566,175

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net decrease in certificates of deposit

 

 

(8,698,357

)

 

 

(7,061,488

)

Net increase in other deposit accounts

 

 

45,157,662

 

 

 

74,664,546

 

Proceeds from exercise of stock warrants

 

 

 

 

 

150,000

 

Proceeds from exercise of stock options

 

 

1,210,490

 

 

 

2,375

 

Net decrease in customer repurchase agreements

 

 

(4,643,624

)

 

 

(1,226,755

)

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

33,026,171

 

 

 

66,528,678

 

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(2,326,393

)

 

 

(14,282,833

)

Cash and cash equivalents, beginning of year

 

$

37,665,811

 

 

$

51,948,644

 

Cash and cash equivalents, end of year

 

$

35,339,418

 

 

$

37,665,811

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

5,886,744

 

 

$

3,787,236

 

Income taxes paid

 

 

934,000

 

 

 

1,055,500

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of noncash transactions:

 

 

 

 

 

 

 

 

Change in fair value of investments available for sale:

 

 

 

 

 

 

 

 

Investments available for sale

 

 

(126,179

)

 

 

125,576

 

Change in deferred tax asset

 

 

34,746

 

 

 

(49,728

)

Accumulated other comprehensive income

 

 

(91,433

)

 

 

75,848

 

 

See accompanying notes.

 

7


OPTIMA BANK & TRUST COMPANY

 

NOTES TO FINANCIAL STATEMENTS

 

December 31, 2018 and 2017

 

1.

Summary of Significant Accounting Policies

 

Business

 

Optima Bank & Trust Company (the Bank) provides a full range of banking services to individual and corporate customers in southern and coastal areas of New Hampshire. The Bank is subject to the regulations of certain state and federal agencies and undergoes periodic examinations by those regulatory authorities.

 

On December 5, 2018, Cambridge Bancorp (Cambridge), its wholly owned subsidiary, Cambridge Trust Company (Cambridge Trust) and the Bank entered into an Agreement and Plan of Merger (the Merger Agreement), pursuant to which the Bank will merge with and into Cambridge Trust, in a stock and cash transaction. Under the terms of the merger agreement, each share of the Bank’s common stock will be exchanged for either 0.3468 shares of Cambridge common stock, or $32.00 in cash, subject to customary pro-ration procedures which will result in an aggregate stock / cash consideration mix of 95% / 5%. Consummation of the merger is subject to certain conditions, and is expected to occur in the second quarter of 2019. See note 14 for further information.

 

Basis of Financial Statement Presentation

 

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates.

 

Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses.   A substantial portion of the Bank’s loans are in the southern and coastal areas of New Hampshire. Accordingly, the ultimate collectability of a substantial portion of the Banks loan portfolio is susceptible to changes in economic conditions in those areas. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties.

 

Investment Securities

 

Available for sale securities (AFS) consist of debt securities that the Bank anticipates could be made available for sale in response to changes in market interest rates, liquidity needs, funding sources and other similar factors. These assets are specifically identified and are carried at fair value. Unrealized holding gains and losses on these assets, net of related income taxes, are excluded from earnings and are included in accumulated other comprehensive loss and reported as a separate component of stockholders’ equity. Gains and losses on the sale of available for sale securities are computed on the specific identification of the adjusted costs of each security sold, are recognized upon realization and are shown separately in the statements of income. Premiums and discounts on investment securities are amortized using methods that approximate the effective yield method.

8


OPTIMA BANK & TRUST COMPANY

 

NOTES TO FINANCIAL STATEMENTS

 

December 31, 2018 and 2017

 

1.

Summary of Significant Accounting Policies (Continued)

 

Management of the Bank, in addition to considering current trends and economic conditions that may affect the quality of individual securities within the Banks investment portfolio, also considers the Bank’s ability and intent to hold available for sale debt securities or whether it is more likely than not it will be required to sell debt securities before recovery of the amortized cost basis. When a decline in fair value of AFS is considered other than temporary and there is intent to hold the debt security, the credit loss portion is recognized in the statements of income, resulting in the establishment of a new cost basis for the security. If the Bank intends to sell the security, the entire unrealized loss for the security is recognized in the statements of income.   There were no other-than-temporary declines in fair value as of December 31, 2018 and 2017.

 

Loans and Interest Income on Loans

 

Loans are stated at the principal amounts outstanding, plus net deferred loan origination costs. Interest is recognized on loans using the accrual method, unless it is no longer probable of collection or the loan is 90 days or more past due, at which time interest ceases to accrue and is recognized on the cash basis. Loans are restored to accrual status when there has been a period of sustained positive performance on the loans, the borrower has demonstrated the ability to make future payments of principal and interest, and management believes outstanding principal and interest receivable are collectible.  Interest received on an impaired loan for which the Bank does not expect full collection of principal will generally be recorded as a reduction in the recorded investment in the loan. When the recorded carrying value in the impaired loan has been reduced to a point at which ultimate collection is probable, then interest income may be recognized.

 

Allowance for Loan Losses

 

The allowance for loan losses is established by management to absorb probable future charge-offs of loans deemed uncollectible. This allowance is increased by provisions charged to operating expense and by recoveries on loans previously charged off. Loan losses are charged against the allowance when management believes that the collectibility of the loan principal is unlikely. Management, considering current information and events regarding the borrowers’ ability to repay their obligations, considers loans to be impaired when it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the note agreement. When a loan is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the note’s effective interest rate, or the fair value of collateral if the loan is collateral dependent. Impairment losses are included in the allowance for loan losses through a charge to provision for loan losses.

 

Management believes that the allowance for loan losses is adequate. Arriving at an appropriate level of allowance for loan loss involves judgment; the primary considerations are the level of delinquencies (based on contractual terms), the nature of the loan portfolio, prior loan loss experience by loan category, and qualitative factors including the local economic conditions and current real estate market trends. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Banks allowance for loan losses.   Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management.

9


OPTIMA BANK & TRUST COMPANY

 

NOTES TO FINANCIAL STATEMENTS

 

December 31, 2018 and 2017

 

1.

Summary of Significant Accounting Policies (Continued)

 

The qualitative factors are determined based on the various risk characteristics of each portfolio segment. Risk characteristics relevant to each portfolio segment are as follows:

 

Residential real estate and home equity lines of credit: The Bank generally does not originate loans with a loan-to-value ratio greater than 80 percent and does not grant subprime loans. Loans with loan-to-value ratios greater than 85 percent require the purchase of private mortgage insurance unless strong mitigating factors are identified. Loans in these segments are collateralized primarily by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, may have an effect on the credit quality in these segments.

 

Commercial real estate and multi-family residential: Loans in these segments are primarily income-producing properties throughout southern and coastal areas of New Hampshire. The underlying cash flows generated by the properties may be adversely impacted by a downturn in the economy as evidenced by increased vacancy rates which, in turn, may have an effect on the credit quality in these segments. Management periodically obtains rent rolls and continually monitors the cash flows of these loans.

 

Construction loans: The loans in this segment are primarily residential and commercial construction-to-permanent loans collateralized by owner-occupied residential and commercial real estate, and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, may have an effect on the credit quality in this segment.

 

Commercial loans: Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, may have an effect on the credit quality in this segment.

 

Consumer loans: Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.

 

A substantial portion of the loan portfolio consists of loans to borrowers in southern and coastal areas of New Hampshire. The ability of the Bank’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in these areas.

 

Origination Fees and Costs

 

Loan origination fees and direct origination costs are deferred and amortized over the life of the related loan on the level yield method. Amortization ceases while loans are on nonaccrual status. The Bank does not anticipate prepayments in determining the amortization but recognizes the amortization at the time of prepayment.

10


OPTIMA BANK & TRUST COMPANY

 

NOTES TO FINANCIAL STATEMENTS

 

December 31, 2018 and 2017

 

1.

Summary of Significant Accounting Policies (Continued)

 

Loan Servicing

 

The Bank recognizes as separate assets the rights to service mortgage loans for others, and performs an assessment of capitalized mortgage servicing rights for impairment, based on the current fair value of those rights. The Bank capitalizes mortgage servicing rights at their fair values upon the sale of the related loans.   Capitalized mortgage servicing rights are amortized in proportion to, and over the period of, estimated future net servicing income. Fair values are estimated using bid quotations received from dealers for similar instruments. For purposes of measuring impairment, the rights are stratified, as necessary, based on interest rates and the expected maturities of the underlying loans.

 

Federal Home Loan Bank Stock

 

Stock in the Federal Home Loan Bank (FHLB) is a required investment due to membership in FHLB, and is carried at cost and can be redeemed at the FHLB subject to current redemption policies.

 

Other Real Estate Owned (OREO)

 

Collateral acquired through foreclosure is recorded at fair value, less estimated costs to sell, at the time of acquisition. The excess, if any, of the loan balance over the fair value of the property at the time of transfer from loans to OREO, is charged to the allowance for loan losses. Subsequent declines in the fair value of the properties are recorded as noninterest expense. Net operating income or expense related to foreclosed property is included in noninterest expense in the accompanying statements of income. There are inherent uncertainties in the assumptions with respect to the estimated fair value of other real estate owned, and the amounts ultimately realized on other real estate owned may differ from the amounts reflected in the accompanying financial statements. There was no OREO at December 31, 2018 and 2017.

 

Bank Premises and Equipment

 

Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the expected lease term or the estimated useful life. Maintenance and repairs are charged to current expense as incurred and the cost of major renewals and betterments are capitalized.

 

Income Taxes

 

The Bank follows the asset and liability method of accounting for income taxes, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. If it is not determined that realization of the deferred tax assets is more likely than not to occur, then a valuation allowance is established. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. See note 9 for additional information.

11


OPTIMA BANK & TRUST COMPANY

 

NOTES TO FINANCIAL STATEMENTS

 

December 31, 2018 and 2017

 

1.

Summary of Significant Accounting Policies (Continued)

 

Assets and liabilities are established for certain tax positions taken or positions expected to be taken in income tax returns when such positions are judged to not meet the more-likely-than-not” threshold, based upon the technical merits of the position. Estimated interest and penalties, if applicable, related to uncertain tax positions are included as a component of income tax expense. Management has determined that the Bank has not taken, nor does it expect to take, any uncertain tax positions in any income tax return.

 

Advertising and Marketing Expense

 

Advertising and marketing costs are expensed as incurred.   Advertising and marketing expense was approximately $305,000 and $393,800 in 2018 and 2017, respectively.

 

Stock-Based Compensation

 

Stock-based compensation represents the cost related to stock-based awards to employees and directors. The Bank measures stock-based compensation cost at the grant date based upon the estimated fair value of the award, and recognizes the cost as expense on a straight-line basis over the employee requisite service period. Forfeitures are recognized as they occur. The Bank estimates the fair value of stock options using the Black-Scholes valuation method.

 

Statement of Cash Flows

 

For the purpose of reporting cash flows, cash and cash equivalents includes cash and due from banks, interest-bearing deposits in other banks with an original maturity of three months or less and federal funds sold.

 

Comprehensive Income

 

The only component of other comprehensive income reported in the accompanying statements of comprehensive income and of accumulated other comprehensive loss on the balance sheets is the unrealized net holding gains or losses on securities available-for-sale, net of tax.   Components of accumulated other comprehensive loss are presented net of taxes, which are determined using a 27.5% tax rate.

 

Transfers of Financial Assets

 

Transfers of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets.

12


OPTIMA BANK & TRUST COMPANY

 

NOTES TO FINANCIAL STATEMENTS

 

December 31, 2018 and 2017

 

1.

Summary of Significant Accounting Policies (Continued)

 

During the normal course of business, the Bank may transfer a portion of a financial asset, for example, a participation loan or the government-guaranteed portion of a loan. In order to be eligible for sales treatment, the transfer of the portion of the loan must meet the criteria of a participating interest. If it does not meet the criteria of a participating interest, the transfer must be accounted for as a secured borrowing. In order to meet the criteria for a participating interest, all cash flows from the loan must be divided proportionately, the rights of each loan holder must have the same priority, the loan holders must have no recourse to the transferor other than standard representations and warranties and no loan holder has the right to pledge or exchange the entire loan.

 

Subsequent Events

 

Events occurring after the balance sheet date are evaluated by management to determine whether such events should be recognized or disclosed in the financial statements. Management has evaluated subsequent events through February 14, 2019, which is the date the financial statements were available to be issued.

 

New Accounting Pronouncements

 

Recognition and Measurement of Financial Instruments

 

In January 2016 the FASB issued Accounting Standards Update (ASU) 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The more significant changes are:

 

 

1.

Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

 

 

2.

Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value.

 

 

3.

Eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost (only for companies that are not considered public business entities).

 

 

4.

Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entitys other deferred tax assets.

13


OPTIMA BANK & TRUST COMPANY

 

NOTES TO FINANCIAL STATEMENTS

 

December 31, 2018 and 2017

 

1.

Summary of Significant Accounting Policies (Continued)

 

ASU 2016-01 is effective for years beginning after December 15, 2018. Early application of certain amendments within the ASU is permitted for entities not considered public business entities. The Bank early adopted number 3 above and eliminated certain fair value disclosures for financial instruments measured at amortized cost. The remaining amendments in ASU 2016-01 will not have a material impact on the Banks financial statements.

 

Accounting for Leases

 

In February 2016, the FASB issued ASU 2016-02, Leases. This ASU requires that an operating lease be recognized on the statement of financial condition as a “right-to-use” asset along with a corresponding liability representing the rent obligation. The asset and liability will initially be measured at the present value of the future lease payments. The standard is expected to result in an increase to assets and liabilities recognized and, therefore, increase risk-weighted assets for regulatory capital purposes. The