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OptimumBank Holdings, Inc. - Quarter Report: 2019 September (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

 

or

 

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

 

For the transition period from __________ to _________

 

Commission File Number: 000-50755

 

OPTIMUMBANK HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Florida   55-0865043
(State or other jurisdiction of
incorporation or organization)
  (IRS Employer
Identification No.)

 

2477 East Commercial Boulevard, Fort Lauderdale, FL 33308

(Address of principal executive offices)

 

954-900-2800

(Registrant’s telephone number, including area code)

 

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

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, $.01 Par Value   OPHC   Optimum Bank Holdings Inc

 

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

 

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

 

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

 

Large accelerated filer [  ]   Accelerated filer [  ]
Non-accelerated filer [X]   Smaller reporting company [X]
    Emerging growth company [  ]

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 1,928,776 shares of Common Stock, $0.01 par value, issued and outstanding as of November 14, 2019.

 

 

 

 

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

INDEX

 

  Page
   
PART I. FINANCIAL INFORMATION  
   
Item 1. Financial Statements 1
   
Condensed Consolidated Balance Sheets - September 30, 2019 (unaudited) and December 31, 2018 1
   
Condensed Consolidated Statements of Operations – Three and Nine Months ended September 30, 2019 and 2018 (unaudited) 2
   
Condensed Consolidated Statements of Comprehensive (Loss) Income - Three and Nine Months ended September 30, 2019 and 2018 (unaudited) 3
   
Condensed Consolidated Statements of Stockholders’ Equity - Three and Nine Months ended September 30, 2019 and 2018 (unaudited) 4
   
Condensed Consolidated Statements of Cash Flows - Nine Months ended September 30, 2019 and 2018 (unaudited) 5
   
Notes to Condensed Consolidated Financial Statements (unaudited) 7
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
   
Item 4. Controls and Procedures 30
   
PART II. OTHER INFORMATION  
   
Item 1. Legal Proceedings 30
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30
   
Item 3. Defaults Upon Senior Securities 30
   
Item 4. Mine Safety Disclosures 30
   
Item 5. Other Information 30
   
Item 6. Exhibits 30
   
SIGNATURES 31

 

i

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)

 

   September 30, 2019   December 31, 2018 
    (Unaudited)      
Assets:          
Cash and due from banks  $2,058   $1,934 
Interest-bearing deposits with banks   6,342    6,049 
Total cash and cash equivalents   8,400    7,983 
Securities available for sale   5,861    2,359 
Securities held-to-maturity (fair value of $6,421 and $7,175)   6,195    7,139 
Loans, net of allowance for loan losses of $2,104 and $2,243   92,081    77,200 
Federal Home Loan Bank stock   642    1,132 
Premises and equipment, net   2,753    2,668 
Right-of-use lease assets   1,092     
Accrued interest receivable   354    314 
Other assets   1,927    1,350 
           
Total assets  $119,305   $100,145 
           
Liabilities and Stockholders’ Equity:          
           
Liabilities:          
Noninterest-bearing demand deposits  $11,513   $9,638 
Savings, NOW and money-market deposits   48,063    26,682 
Time deposits   33,689    26,058 
           
Total deposits   93,265    62,378 
           
Federal Home Loan Bank advances   13,000    24,600 
Federal funds purchased   -    560 
Junior subordinated debenture   5,155    5,155 
Official checks   70    274 
Operating lease liabilities   1,095     
Other liabilities   1,928    1,872 
           
Total liabilities   114,513    94,839 
           
Commitments and contingencies (Notes 8, 10, 11 and 12)          
Stockholders’ equity:          
Preferred stock, no par value; 6,000,000 shares authorized: Designated Series A, no par value, $25,000 liquidation value per share, no shares issued and outstanding        
Common stock, $.01 par value; 5,000,000 shares authorized, 1,928,776 shares issued and outstanding in 2019 and 1,858,020 shares issued and outstanding in 2018   19     18 
Additional paid-in capital   36,359   36,128 
Accumulated deficit   (31,366)   (30,510)
Accumulated other comprehensive loss   (220)   (330)
           
Total stockholders’ equity   4,792    5,306 
Total liabilities and stockholders’ equity  $119,305   $100,145 

 

See accompanying notes to condensed consolidated financial statements.

 

1

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except per share amounts)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2019   2018   2019   2018 
Interest income:                    
Loans  $1,140   $1,015   $3,328   $2,870 
Securities   63    54    184    187 
Other   58    36    184    103 
                     
Total interest income   1,261    1,105    3,696    3,160 
                     
Interest expense:                    
Deposits   408    107    1,057    312 
Borrowings   130    216    415    554 
                     
Total interest expense   538    323    1,472    866 
                     
Net interest income   723    782    2,224    2,294 
                     
Provision (credit) for loan losses   45        45    (2,100)
                     
Net interest income after provision (credit) for loan losses   678    782    2,179    4,394 
                     
Noninterest income:                    
Service charges and fees   4    2    11    10 
Other   25    19    142    59 
                     
Total noninterest income   29    21    153    69 
                     
Noninterest expenses:                    
Salaries and employee benefits   492    460    1,522    1,358 
Professional fees   114    156    341    379 
Occupancy and equipment   119    116    366    322 
Data processing   141    112    394    288 
Insurance   24    21    66    71 
Regulatory assessment   18    30    40    108 
Other   79    110    511    520 
                     
Total noninterest expenses   987    1,005    3,240    3,046 
                     
Net (loss) earnings before income tax benefit   (280)   (202)   (908)   1,417 
                     
Income tax benefit           (52)    
                     
Net (loss) earnings  $(280)  $(202)  $(856)  $1,417 
                     
Net (loss) earnings per share - Basic and diluted  $(.15)  $(.13)  $(.45)  $1.03 

 

See accompanying notes to condensed consolidated financial statements.

 

2

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited)
(In thousands)

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2019     2018     2019     2018  
                         
Net (loss) earnings   $ (280 )    $ (202 )   $ (856 )    $ 1,417  
                                 
Other comprehensive income (loss):                                
Change in unrealized gain (loss) on securities:                                
Unrealized gain (loss) arising during the period     5       (20 )      80       262  
                                 
Amortization of unrealized loss on securities transferred to held-to-maturity     28       27       67        33  
Reclassification adjustment for unrealized loss on securities transferred to held-to-maturity     -       -       -       (432 )
                                 
Other comprehensive income (loss) before income tax (expense) benefit     33       7       147       (137 )
                                 
Deferred income tax (expense) benefit on above change     (8 )      (3 )     (37 )      35  
                                 
Total other comprehensive income (loss)     25       4       110       (102 )
                                 
Comprehensive (loss) income   $ (254 )   $ (198 )   $ (746 )   $ 1,315  

 

See accompanying notes to condensed consolidated financial statements.

 

3

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Condensed Consolidated Statements of Stockholders’ Equity

Three and Nine Months Ended September 30, 2019 and 2018

(Dollars in thousands)

 

                           Accumulated     
   Preferred Stock   Common Stock   Additional
Paid-In
   Accumulated   Other Comprehensive   Total
Stockholders’
 
   Shares   Amount   Shares   Amount   Capital   Deficit   Loss   Equity 
Balance at December 31, 2017       7   $          -    1,120,947   $    11   $34,090   $(31,306)  $           (250)  $         2,545 
                                         
Proceeds from Sale of Common Stock (unaudited)   -    -    20,814    -    46    -    -    46 
                                         
Common stock issued as compensation to directors (unaudited)   -    -    144,742    1    614    -    -    615 
                                         
Net loss for the three months ended March 31, 2018 (unaudited)   -    -    -    -    -    (285)   -    (285)
                                         
Net change in unrealized loss on securities available for sale, net of income tax benefit (unaudited)   -    -    -    -    -    -    (47)   (47)
                                         
Balance at March 31, 2018 (unaudited)   7   $-    1,286,503   $12   $34,750   $(31,591)  $(297)  $2,874 
                                         
Proceeds from Sale of Common Stock (unaudited)   -    -    143,203    2    356    -    -    358 
                                         
Common stock issued in exchange for Preferred Stock (unaudited)   (7)   -    79,186    1    (1)   -    -    - 
                                         
Net earnings for the three months ended June 30, 2018 (unaudited)   -    -    -    -    -    1,904    -    1,904 
                                         
Net change in unrealized loss on securities available for sale, net of income taxes (unaudited)   -    -    -    -    -    -    259    259 
                                         
Amortization of unrealized loss on securities transferred to held to maturity (unaudited)   -    -    -    -    -    -    6    6 
                                         
Unrealized loss on securities transferred to held to maturity, net of income tax benefit (unaudited)   -    -    -    -    -    -    (324)   (324)
                                         
Balance at June 30, 2018 (unaudited)      $    1,508,892   $15   $35,105   $(29,687)  $(356)  $5,077 
                                         
Proceeds from Sale of Common Stock (unaudited)           3,000        11            11 
                                         
Common stock issued in exchange for Trust Preferred Securities (unaudited)           301,778    3    902            905 
                                         
Net loss for the three months ended September 30, 2018 (unaudited)                       (202)       (202)
                                         
Net change in unrealized loss on securities available for sale, net of income taxes (unaudited)                           4    4 
                                         
Balance at September 30, 2018 (unaudited)      $    1,813,670   $18   $36,018   $(29,889)  $(352)  $5,795 
                                         
Balance at December 31, 2018   -   $-    1,858,020   $18   $36,128   $(30,510)  $(330)  $5,306 
                                         
Net loss for the three months ended March 31, 2019 (unaudited)   -    -    -    -    -    (146)   -    (146)
                                         
Net change in unrealized loss on securities available for sale, net of income taxes (unaudited)   -    -    -    -    -    -    3    3 
                                         
Amortization of unrealized loss on securities transferred to held-to-maturity (unaudited)   -    -    -    -    -    -    14    14 
                                         
Balance at March 31, 2019 (unaudited)   -   $-    1,858,020   $18   $36,128   $(30,656)  $(313)  $5,177 
                                         
Common stock issued and reclassified from other liabilities (unaudited)   -    -    11,250    -    28    -    -    28 
                                         
Common stock issued as compensation to directors (unaudited)   -    -    58,309    1    200    -    -    201 
                                         
Net loss for the three months ended June 30, 2019 (unaudited)   -    -    -    -    -    (430)   -    (430)
                                         
Net change in unrealized loss on securities available for sale, net of income taxes (unaudited)   -    -    -    -    -    -    53    53 
                                         
Amortization of unrealized loss on securities transferred to held-to-maturity (unaudited)   -    -    -    -    -    -    15    15 
                                         
Balance at June 30, 2019 (unaudited)      $    1,927,579   $19   $36,356   $(31,086)  $(245)  $5,044 
                                         
Common stock issued and reclassified from other liabilities (unaudited)           1,197        3            3 
                                         
Net loss for the three months ended September 30, 2019 (unaudited)                       (280)       (280)
                                         
Net change in unrealized loss on securities available for sale, net of income taxes (unaudited)                           4   4
                                         
Amortization of unrealized loss on securities transferred to held to maturity (unaudited)                           21    21 
                                         
Balance at September 30, 2019 (unaudited)      $    1,928,776   $19   $36,359   $(31,366)  $(220)  $4,792 

 

See accompanying notes to condensed consolidated financial statements

 

4

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

    Nine Months Ended
September 30,
 
    2019     2018  
Cash flows from operating activities:                
Net (loss) earnings   $ (856 )    $ 1,417  
Adjustments to reconcile net (loss) earnings to net cash (used in) provided by operating activities:            
Depreciation and amortization     132       115  
Provision (credit) for loan losses     45       (2,100 )
Common stock issued as compensation for services     201        
Net amortization of fees, premiums and discounts     153       168  
Increase in accrued interest receivable     (40 )      (45 )
(Increase) decrease in other assets     (614 )      61  
Decrease in operating lease liabilities     (49 )      
Amortization of right-of-use lease assets     52        
(Decrease) increase in official checks and other liabilities     (117 )      779  
Net cash (used in) provided by operating activities     (1,093 )      395  
                 
Cash flows from investing activities:                
Purchase of securities available for sale     (4,153 )       
Principal repayments of securities available for sale     676       666  
Principal repayments of securities held-to-maturity     977       559  
Net increase in loans     (14,990 )      (6,061 ) 
Purchases of premises and equipment, net     (217 )      (194 )
Redemption (purchase) of FHLB stock     490       (236 )
                 
Net cash used in investing activities     (17,217 )      (5,266 ) 
                 
Cash flows from financing activities:                
Net increase (decrease) in deposits     30,887       (7,212 )
Net decrease in federal funds purchased     (560 )       
Net (decrease) increase in FHLB Advances     (11,600 )      6,050  
                 
Net cash provided by (used in) financing activities     18,727       (747 )
                 
Net increase (decrease) in cash and cash equivalents     417       (5,618 )
                 
Cash and cash equivalents at beginning of the period     7,983       11,665  
                 
Cash and cash equivalents at end of the period   $ 8,400     $ 6,047  

 

See accompanying notes to condensed consolidated financial statements

 

5

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Condensed Consolidated Statements of Cash Flows (Unaudited), Continued

(In thousands)

 

    Nine Months Ended
September 30,
 
    2019     2018  
Supplemental disclosure of cash flow information:                
Cash paid during the period for:                
Interest   $ 1,249     $ 628  
                 
Income taxes   $     $  
                 
Noncash transactions -                
Change in accumulated other comprehensive loss, net change in unrealized gain (loss) on securities available for sale, net of income taxes   $ 110     $ (102 )
                 
Transfer of securities from available for sale to held-to-maturity           7,945  
                 
Amortization of unrealized loss on securities transferred to held-to-maturity   $ 67     $ 33  
                 
Reclassification of stock compensation issued as compensation to directors from other liabilities to common stock   $     $ 615  
                 
Common stock issued and reclassified from other liabilities     31        
                 
Issuance of common stock in exchange for Trust Preferred Securities           905  
                 
Right-of-use lease assets obtained in exchange for operating lease liabilities     1,144        

 

See accompanying notes to condensed consolidated financial statements

 

6

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(1) General. OptimumBank Holdings, Inc. (the “Company”) is a one-bank holding company and owns 100% of OptimumBank (the “Bank”), a Florida-chartered commercial bank. The Company’s only business is the operation of the Bank (collectively, the “Company”). The Bank’s deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). The Bank offers a variety of community banking services to individual and corporate customers through its three banking offices located in Broward County, Florida.
   
  Basis of Presentation. In the opinion of management, the accompanying condensed consolidated financial statements of the Company contain all adjustments (consisting principally of normal recurring accruals) necessary to present fairly the financial position at September 30, 2019, and the results of operations and cash flows for the three and nine month periods ended September 30, 2019 and 2018. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and nine month periods ended September 30, 2019, are not necessarily indicative of the results to be expected for the full year.
   
 

Junior Subordinated Debenture. The Company is in default with respect to its $5,155,000 Junior Subordinated Debenture (the “Debenture”) due to its failure to make certain required interest payments under the Debenture. The Debenture was issued to OptimumBank Holdings Capital Trust I, a Delaware statutory trust formed by the Company for the purpose of issuing and selling certain securities (the “Trust Preferred Securities”) representing undivided beneficial interests in the Debenture. The trust issued a total of 5,000 Trust Preferred Securities.

 

The Trustee, Wells Fargo Bank, for the Debenture (the “Trustee”) and the beneficial owners of the Debenture are entitled to accelerate the payment of the $5,155,000 principal balance plus accrued and unpaid interest totaling $1,947,000 at September 30, 2019. To date, neither the Trustee nor the holders have accelerated the outstanding balance of the Debenture. No adjustments to the accompanying condensed consolidated financial statements have been made as a result of this uncertainty.

 

In May 2018, a company affiliated with a director of the Company (the “New Holder”) purchased all 5,000 Trust Preferred Securities from a third party. During the third quarter of 2018, the New Holder sold its rights in 694 of the Trust Preferred Securities to several unaffiliated third parties, who subsequently exchanged these Trust Preferred Securities for 301,778 shares of the Company’s common stock. The transaction was recorded as an increase in the Company’s equity interest in the unconsolidated subsidiary trust, presented in “Other Assets” in the accompanying condensed consolidated balance sheets.

 

Although the Company and the New Holder have not executed a formal, definitive bilateral agreement, the New Holder has provided the Company with written representations that the New Holder will not accelerate and demand payment of any of the remaining 4,306 Trust Preferred Securities principal or accrued interest within twelve months from November 14, 2019, the date the Company’s Form 10-Q as of and for the period ended September 30, 2019, was filed with the Securities and Exchange Commission.

   
  Comprehensive (Loss) Income. GAAP generally requires that recognized revenue, expenses, gains and losses be included in net (loss) earnings. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the condensed consolidated balance sheets, such items along with net (loss) earnings, are components of comprehensive (loss) income.

 

Accumulated other comprehensive loss consists of the following (in thousands):

 

    September 30,     December 31,  
    2019     2018  
             
Unrealized gain (loss) on securities available for sale   $ 16     $ (64 )
Unamortized portion of unrealized loss related to securities available for sale transferred to securities held-to-maturity     (310 )      (377 )
Income tax benefit     74       111  
                 
    $ (220 )   $ (330 )

 

  Income Taxes. The Company assessed its earnings history and trends and estimates of future earnings, and determined that the deferred tax asset could not be realized as of September 30, 2019. Accordingly, a valuation allowance was recorded against the net deferred tax asset.
   
  (continued)

 

7

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(1) General, Continued.

 

Reclassifications. Certain amounts have been reclassified to allow for consistent presentation in the periods presented.

 

Recent Pronouncements. In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-02, Leases (Topic 842). ASU 2016-02 is intended to improve financial reporting of leasing transactions by requiring organizations that lease assets to recognize assets and liabilities for the rights and obligations created by leases on the condensed consolidated balance sheet. The Company adopted ASU 2016-02 on January 1, 2019. Our only lease at the adoption date was an operating lease for a branch location that has a “5 year term”, commenced in December 2017, does not offer any options to extend, and does contain a rent escalation clause. The effect of this ASU increased total assets by $281,000 and total liabilities by $281,000, at the adoption date. During June 2019, the Company entered into another operating lease agreement which commenced in September 2019, has a “10 year term”, does not offer any options to extend, and does contain a rent escalation clause. This resulted in an additional increase to total assets of $863,000 and total liabilities of $863,000.

 

  In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments-Credit Losses (Topic 326). The ASU improves financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by the Company. The ASU requires the Company to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. The Company will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the condensed consolidated financial statements. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The ASU will take effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, as the FASB approved delaying the initially anticipated effective date of January 1, 2020. Early adoption is permitted. The Company is in the process of determining the effect of the ASU on its condensed consolidated financial statements.
   
  (continued)

 

8

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(2) Securities. Securities have been classified according to management’s intent. The carrying amount of securities and approximate fair values are as follows (in thousands):

 

    Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair
Value
 
                         
At September 30, 2019:                                
Held-to-Maturity:                                
Collateralized mortgage obligations   $ 4,529     $ 171     $   $ 4,700  
Mortgage-backed securities     1,666       55             1,721  
Total     6,195       226           6,421  
Available for Sale:                                
SBA Pool Securities   $ 1,904     $     $ (53 )   $ 1,851  
Collateralized mortgage obligations     1,146       22             1,168  
Mortgage-backed securities     2,795       47             2,842  
Total   $ 5,845     $ 69     $ (53 )   $

5,861 

 

 

    Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair
Value
 
                         
At December 31, 2018:                                
Held-to-Maturity:                                
Collateralized mortgage obligations   $ 5,183     $ 25     $ (4 )   $ 5,204  
Mortgage-backed securities     1,956       15             1,971  
Total   $ 7,139     $ 40     $ (4 )   $ 7,175  
Available for Sale -                                
SBA Pool Securities   $ 2,423     $     $ (64 )   $ 2,359  

 

In April 2018, the bank transferred $7,945,000 of securities from the available-for-sale category to the held-to-maturity category at their then fair values resulting in unrealized losses of $432,000. The unrealized loss was recorded in stockholders’ equity net of amortization and net of tax and is being amortized over the remaining term of the securities. At September 30, 2019 and December 31, 2018, $122,000 and $55,000, respectively, has been amortized.

 

There were no sales of securities during the three and nine month periods ended September 30, 2019 and 2018.

 

Securities with gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous loss position, is as follows (in thousands):

 

    At September 30, 2019  
    Over Twelve Months    

Less Than Twelve

Months

 
    Gross
Unrealized
Losses
    Fair
Value
    Gross
Unrealized
Losses
    Fair
Value
 
                         
Available for Sale -                                
SBA Pool Securities   $

    53 

    $ 1,851     $     $        

 

    At December 31, 2018  
    Over Twelve Months    

Less Than Twelve

Months

 
    Gross
Unrealized
Losses
    Fair
Value
    Gross
Unrealized
Losses
    Fair
Value
 
                         
Held-to-Maturity -                                
Collateralized mortgage obligations   $  4     $ 1,361     $  —     $  
Available for Sale -                                
SBA Pool Securities   $ 24     $ 829     $ 40     $ 1,530  

 

(continued)

 

9

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(2)

Securities, Continued.

 

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospectus of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

 

At September 30, 2019 and December 31, 2018, the unrealized losses on six and seven investment securities, respectively, were caused by market conditions. It is expected that the securities would not be settled at a price less than the book value of the investments. Because the decline in fair value is attributable to market conditions and not credit quality, and because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

   
  (continued)

 

10

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(3) Loans. The components of loans are as follows (in thousands):

 

   

At
September 30,

2019

   

At
December 31,

2018

 
             
Residential real estate   $ 26,683     $ 27,204  
Multi-family real estate     4,172       8,195  
Commercial real estate     51,997       34,971  
Land and construction     2,077       3,661  
Commercial     4,674       4,997  
Consumer     4,548       260  
                 
Total loans     94,151       79,288  
                 
Add (deduct):                
Net deferred loan fees, costs and premiums     34       155  
Allowance for loan losses     (2,104 )      (2,243 )
                 
Loans, net   $ 92,081     $ 77,200  

 

(continued)

 

11

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(3) Loans, Continued. An analysis of the change in the allowance for loan losses follows (in thousands):

 

    Residential
Real Estate
    Multi-Family
Real Estate
    Commercial
Real Estate
    Land and
Construction
    Commercial     Consumer     Unallocated     Total  
Three Months Ended September 30, 2019:                                                                
                                                                 
Beginning balance   $ 537     $ 41     $ 658     $ 7     $ 558     $ 11     $ 241     $ 2,053  
(Credit) provision for loan losses     (5           87       7       32       165       (241     45  
Charge-offs                                              
Recoveries                     6      —    —         6
                                                                 
Ending balance   $ 532     $ 41     $ 745     $ 20     $ 590     $ 176     $     $ 2,104  
                                                                 
Three Months Ended September 30, 2018:                                                                
Beginning balance   $ 665     $ 53     $ 706     $ 59     $ 266     $ 42     $ 108     $ 1,899  
(Credit) provision for loan losses     (118 )     36       (208 )     (34 )     (4 )     (12 )     340        
Charge-offs                                                
Recoveries                       6                         6  
                                                                 
Ending balance   $ 547     $ 89     $ 498     $ 31     $ 262     $ 30     $ 448     $ 1,905  
                                                 
Nine Months Ended September 30, 2019:                                                
                                                 
Beginning balance   $ 544     $ 88     $ 545     $ 37     $ 850     $ 25     $ 154     $ 2,243  
(Credit) provision for loan losses     (12     (47     395       (35     (260     158       (154     45  
Charge-offs                 (195                 (7 )           (202 )
Recoveries                       18                         18  
                                                                 
Ending balance   $ 532     $ 41     $ 745     $ 20     $ 590     $ 176     $     $ 2,104  
                                                                 
Nine Months Ended September 30, 2018:                                                                
Beginning balance   $ 641     $ 59     $ 725     $ 56     $ 55     $ 86     $ 2,369     $ 3,991  
(Credit) provision for loan losses     (94)       30     (227 )     (43 )     207       (52 )     (1,921 )     (2,100 )
Charge-offs                                   (12 )           (12 )
Recoveries                       18             8             26  
                                                                 
Ending balance   $ 547     $ 89     $ 498     $ 31     $ 262     $ 30     $ 448     $ 1,905  

 

(continued)

 

12

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(3) Loans, Continued.

 

    Residential Real Estate     Multi-
Family Real Estate
    Commercial Real Estate     Land and Construction     Commercial     Consumer     Unallocated     Total  
At September 30, 2019:                                                                
Individually evaluated for impairment:                                                                
Recorded investment   $ 948     $     $ 2,219     $     $ 812     $     $     $ 3,979  
Balance in allowance for loan losses   $ 262     $     $     $     $ 556     $     $     $ 818  
                                                                 
Collectively evaluated for impairment:                                                                
Recorded investment   $ 25,735     $ 4,172     $ 49,778     $ 2,077     $ 3,862     $ 4,548     $     $ 90,172  
Balance in allowance for loan losses   $ 270     $ 41     $ 745     $ 20     $ 34     $ 176     $     $ 1,286  
                                                                 
At December 31, 2018:                                                                
Individually evaluated for impairment:                                                                
Recorded investment   $ 954     $     $ 3,861     $     $ 1,928     $     $     $ 6,743  
Balance in allowance for loan losses   $ 268     $     $ 162     $     $ 814     $     $     $ 1,244  
                                                                 
Collectively evaluated for impairment:                                                                
Recorded investment   $ 26,250     $ 8,195     $ 31,110     $ 3,661     $ 3,069     $ 260     $     $ 72,545  
Balance in allowance for loan losses   $ 276     $ 88     $ 386     $ 36     $ 36     $ 25     $ 152     $ 999  

 

(continued)

 

13

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(3)

Loans, Continued.

 

The Company has divided the loan portfolio into six portfolio segments, each with different risk characteristics and methodologies for assessing risk. All loans are underwritten based upon standards set forth in the policies approved by the Company’s Board of Directors (the “Board”). The Company identifies the portfolio segments as follows:

 

Residential Real Estate, Multi-Family Real Estate, Commercial Real Estate, Land and Construction. Residential real estate loans are underwritten based on repayment capacity and source, value of the underlying property, credit history and stability. The Company offers first and second one-to-four family mortgage loans; the collateral for these loans is generally the clients’ owner-occupied residences. Although these types of loans present lower levels of risk than commercial real estate loans, risks do still exist because of possible fluctuations in the value of the real estate collateral securing the loan, as well as changes in the borrowers’ financial condition. Multi-family and commercial real estate loans are secured by the subject property and are underwritten based upon standards set forth in the policies approved by the Board. Such standards include, among other factors, loan to value limits, cash flow coverage and general creditworthiness of the obligors. Construction loans to borrowers finance the construction of owner occupied and leased properties. These loans are categorized as construction loans during the construction period, later converting to commercial or residential real estate loans after the construction is complete and amortization of the loan begins. Real estate development and construction loans are approved based on an analysis of the borrower and guarantor, the viability of the project and an acceptable percentage of the appraised value of the property securing the loan. Real estate development and construction loan funds are disbursed periodically based on the percentage of construction completed. The Company carefully monitors these loans with on-site inspections and requires the receipt of lien waivers on funds advanced. Development and construction loans are typically secured by the properties under development or construction, and personal guarantees are typically obtained. Further, to assure that reliance is not placed solely on the value of the underlying property, the Company considers the market conditions and feasibility of proposed projects, the financial condition and reputation of the borrower and guarantors, the amount of the borrower’s equity in the project, independent appraisals, cost estimates and pre-construction sales information. The Company also makes loans on occasion for the purchase of land for future development by the borrower. Land loans are extended for future development for either commercial or residential use by the borrower. The Company carefully analyzes the intended use of the property and the viability thereof.

   
  Commercial. Commercial business loans and lines of credit consist of loans to small- and medium-sized companies in the Company’s market area. Commercial loans are generally used for working capital purposes or for acquiring equipment, inventory or furniture. Primarily all of the Company’s commercial loans are secured loans, along with a small amount of unsecured loans. The Company’s underwriting analysis consists of a review of the financial statements of the borrower, the lending history of the borrower, the debt service capabilities of the borrower, the projected cash flows of the business, the value of the collateral, if any, and whether the loan is guaranteed by the principals of the borrower. These loans are generally secured by accounts receivable, inventory and equipment. Commercial loans are typically made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business, which makes them of higher risk than residential loans and the collateral securing loans may be difficult to appraise and may fluctuate in value based on the success of the business. The Company seeks to minimize these risks through its underwriting standards.
   
  Consumer. Consumer loans are extended for various purposes, including purchases of automobiles, recreational vehicles, and boats. Also offered are home improvement loans, lines of credit, personal loans, and deposit account collateralized loans. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Loans to consumers are extended after a credit evaluation, including the creditworthiness of the borrower(s), the purpose of the credit, and the secondary source of repayment. Consumer loans are made at fixed and variable interest rates. Risk is mitigated by the fact that the loans are of smaller individual amounts.

 

(continued)

 

14

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(3) Loans, Continued. The following summarizes the loan credit quality (in thousands):

 

    Pass     OLEM
(Other
Loans
Especially Mentioned)
    Sub-
standard
    Doubtful     Loss     Total  
At September 30, 2019:                                                
Residential real estate   $ 25,735     $     $ 948     $     $     $ 26,683  
Multi-family real estate     4,172                               4,172  
Commercial real estate     49,334       444       2,219                   51,997  
Land and construction     823       1,254                         2,077  
Commercial     3,042       820       812                   4,674  
Consumer     4,548                               4,548  
                                                 
Total   $ 87,654     $ 2,518     $ 3,979     $     $     $ 94,151  
                                                 
At December 31, 2018:                                                
Residential real estate   $ 26,250     $     $ 954     $     $     $ 27,204  
Multi-family real estate     8,195                               8,195  
Commercial real estate     30,697       413       3,861                   34,971  
Land and construction     2,351       1,310                         3,661  
Commercial     2,362       707       1,928                   4,997  
Consumer     260                               260  
                                                 
Total   $ 70,115     $ 2,430     $ 6,743     $     $     $ 79,288  

 

Internally assigned loan grades are defined as follows:

 

  Pass – a Pass loan’s primary source of loan repayment is satisfactory, with secondary sources very likely to be realized if necessary. These are loans that conform in all aspects to bank policy and regulatory requirements, and no repayment risk has been identified.
   
  OLEM – an Other Loan Especially Mentioned has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company’s credit position at some future date.
   
  Substandard – a Substandard loan is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Included in this category are loans that are current on their payments, but the Bank is unable to document the source of repayment. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
   
  Doubtful – a loan classified as Doubtful has all the weaknesses inherent in one classified as Substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future. The Company charges off any loan classified as Doubtful.
   
  Loss – a loan classified as Loss is considered uncollectible and of such little value that continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. The Company fully charges off any loan classified as Loss.

 

(continued)

 

15

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(3) Loans, Continued. Age analysis of past-due loans is as follows (in thousands):

 

    Accruing Loans              
    30-59
Days
Past Due
    60-89
Days
Past Due
    Greater
Than 90
Days
Past Due
    Total
Past
Due
    Current     Nonaccrual
Loans
    Total
Loans
 
At September 30, 2019:                                                        
Residential real estate   $     $     $     $     $ 26,683     $     $ 26,683  
Multi-family real estate                             4,172             4,172  
Commercial real estate                             51,997             51,997  
Land and construction                             2,077             2,077  
Commercial                             3,862       812       4,674  
Consumer                           4,548             4,548  
                                                         
Total   $     $     $     $     $ 93,339     $ 812     $ 94,151  

 

  Accruing Loans              
    30-59
Days
Past Due
    60-89
Days
Past Due
    Greater
Than 90
Days
Past Due
    Total
Past
Due
    Current     Nonaccrual
Loans
    Total
Loans
 
At December 31, 2018:                                                        
Residential real estate   $     $     $  —     $  —     $ 27,204     $  —     $ 27,204  
Multi-family real estate                        —       8,195        —       8,195  
Commercial real estate                        —       33,591       1,380       34,971  
Land and construction                        —       3,661        —       3,661  
Commercial                        —       4,997        —       4,997  
Consumer                        —       260        —       260  
                                                         
Total   $  —     $  —     $     $  —     $ 77,908     $ 1,380     $ 79,288  

 

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

 

    At September 30, 2019     At December 31, 2018  
    Recorded
Investment
    Unpaid
Principal
Balance
    Related
Allowance
    Recorded
Investment
    Unpaid
Principal
Balance
    Related
Allowance
 
With no related allowance recorded:                                                
Commercial real estate   $ 2,219     $ 2,219     $     $ 2,259     $ 2,259     $  
Commercial                       1,114       1,114        
With related allowance recorded:                                          
Residential real estate     948       948       262       954       954       268  
Commercial real estate                       1,602       1,602       162  
Commercial     812       812       556       814       814       814  
Total:                                                
Residential real estate   $ 948     $ 948     $ 262     $ 954     $ 954     $ 268  
Commercial real estate   $ 2,219     $ 2,219     $     $ 3,861     $ 3,861     $ 162  
Commercial   $ 812     $ 812     $ 556     $ 1,928     $ 1,928     $ 814  
Total   $ 3,979     $ 3,979     $ 818     $ 6,743     $ 6,743     $ 1,244  

 

(continued)

 

16

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(3) Loans, Continued. The average net investment in impaired loans and interest income recognized and received on impaired loans are as follows (in thousands):

 

    Three Months Ended September 30,  
    2019     2018  
    Average     Interest     Interest     Average     Interest     Interest  
    Recorded     Income     Income     Recorded     Income     Income  
    Investment     Recognized     Received     Investment     Recognized     Received  
                                     
Residential real estate   $ 950     $ 19     $ 19     $ 962     $ 19     $ 19  
Commercial real estate   $ 2,280     $ 27     $ 27     $ 223     $ 3     $ 3  
Commercial   $ 812     $     $     $ 2,058     $  26     $  15  
Total   $ 4,042     $ 46     $ 46     $ 3,243     $ 48     $ 37  

 

    Nine Months Ended September 30,  
    2019     2018  
    Average     Interest     Interest     Average     Interest     Interest  
    Recorded     Income     Income     Recorded     Income     Income  
    Investment     Recognized     Received     Investment     Recognized     Received  
                                     
Residential real estate   $ 950     $ 56     $ 56     $ 988     $ 57     $ 57  
Commercial real estate   $ 2,808     $ 88     $ 86     $ 449     $ 18     $ 18  
Commercial   $ 1,327       43     $ 39     $ 1,541       60     $ 60  
Total   $ 5,085     $ 187     $ 181     $ 2,978     $ 135     $ 135  

 

The restructuring of a loan constitutes a troubled debt restructuring (“TDR”) if the creditor grants a concession to the debtor that it would not otherwise consider in the normal course of business. A concession may include an extension of repayment terms which would not normally be granted, a reduction in interest rate or the forgiveness of principal and/or accrued interest. All TDRs are evaluated individually for impairment on a quarterly basis as part of the allowance for loan losses calculation. The Company entered into two new TDRs during the three and nine months ended September 30, 2019.

 

   Three Months Ended September 30, 
   2019   2018 
       Pre-   Post-   Current       Pre-   Post-   Current 
       Modification   Modification   Modification       Modification   Modification   Modification 
   Number   Outstanding   Outstanding   Outstanding   Number   Outstanding   Outstanding   Outstanding 
   of   Recorded   Recorded   Recorded   of   Recorded   Recorded   Recorded 
   Contracts   Investment   Investment   Investment   Contracts   Investment   Investment   Investment 
( dollars in thousands)                                        
Troubled Debt Restructurings -                                        
Modified principal                                        
Commercial real estate   -   $-   $-   $-    -   $-   $-   $- 
Residential and home equity     -    -    -    -       -       -       -       - 
Commercial   2    812    812    812    -    -    -    - 
Total   2   $812   $812   $812    -   $-   $-   $- 

 

   Nine Months Ended September 30, 
   2019   2018 
       Pre-   Post-   Current       Pre-   Post-   Current 
       Modification   Modification   Modification       Modification   Modification   Modification 
   Number   Outstanding   Outstanding   Outstanding   Number   Outstanding   Outstanding   Outstanding 
   of   Recorded   Recorded   Recorded   of   Recorded   Recorded   Recorded 
   Contracts   Investment   Investment   Investment   Contracts   Investment   Investment   Investment 
( dollars in thousands)                                        
Troubled Debt Restructurings -                                        
Modified principal                                        
Commercial real estate   -   $-   $-   $-    -   $-   $-   $- 
Residential and home equity      -    -    -       -       -       -       -       - 
Commercial   2    812    812    812    -    -    -    - 
Total   2   $812   $812   $812    -   $-   $-   $- 

 

At September 30, 2019, the Company has $812,000 in loans identified as TDRs. The TDRs entered into during the past 12 months did not subsequently default during the three and nine month periods ended September 30, 2019 and 2018.

 

(continued)

 

17

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(4) (Loss) Earnings Per Share. Basic (loss) earnings per share have been computed on the basis of the weighted-average number of shares of common stock outstanding during the period. During the three and nine month periods ended September 30, 2019, and the three month period ended September 30, 2018, basic and diluted loss per share is the same due to the net loss incurred by the Company. During the nine month period ended September 30, 2018, basic and diluted earnings per share is the same as there were no outstanding potentially dilutive securities. (Loss) earnings per common share have been computed based on the following:

 

Following is the computation of basic and diluted loss per share for the three and nine month periods ended September 30, 2019 and 2018:

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2019     2018     2019     2018  
Basic and Diluted LPS Computation                        
Numerator:          
Loss available to common stockholders   $ (280 )   $ (202 )   $ (856 )   $ 1,417  
                                 
Denominator:                                
Weighted average number of common shares outstanding     1,928,269       1,559,722       1,889,592       1,381,473  
                                 
Basic and diluted LPS   $ (.15 )   $ (.13 )   $ (.45 )   $ (1.03 )

 

(continued)

 

18

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(5) Stock-Based Compensation. The Company is authorized to grant stock options, stock grants and other forms of equity-based compensation under its 2011 Equity Incentive Plan as amended (the “2011 Plan”) and its 2018 Equity Incentive Plan (the “2018 Plan”). Both plans have been approved by shareholders. The Company is authorized to issue up to 210,000 shares of common stock under the 2011 Plan of which all have been issued, and up to 250,000 shares of common stock under the 2018 Plan, of which 157,190 have been issued, and 92,810 shares remain available for grant.
   
  The Company’s only grants under the 2011 Plan have been the issuance of shares of common stock to directors for director’s fees and compensation for services rendered. As of April 1, 2017, the Company discontinued the issuance of common stock as a method of payment of director’s fees.
   
  During 2018, the sale of 20,814 shares of common stock to a director of the Company, and the issuance of 79,186 shares of common stock in exchange for 7 shares of the Company’s preferred stock held by a director in April 2018, were treated as grants under the 2018 Plan. Please refer to the Company’s Forms 8-K filed with the Securities and Exchange Commission on November 16, 2018 and January 10, 2019 for further details.
   
  During the year ended December 31, 2017, the Company accrued compensation expense of $8,858 with respect to 2,821 shares to be issued to directors at a value of $3.14 per share on account of director’s fees accrued during the first quarter of 2017. These shares were issued in 2018.
   
  During the year ended December 31, 2018, the Company accrued compensation expense of $200,000 with respect to 36,101 shares issued to a director for services performed in 2018. The Company had previously accrued compensation expense of $200,000 in 2016 and 2017 for services performed. The Company had previously agreed to issue 105,820 shares to this director for services performed in 2016 and 2017. All shares were issued in 2018.
   
  During the nine month period ended September 30, 2019, the Company recorded compensation expense of $200,000 with respect to 58,309 shares issued to a director for services performed.

 

(6) Fair Value Measurements. Impaired collateral-dependent loans are carried at fair value when the current collateral value is lower than the carrying value of the loan. Those impaired collateral-dependent loans which are measured at fair value on a nonrecurring basis are as follows (in thousands):

 

   

Fair

Value

    Level 1     Level 2     Level 3    

Total

Losses

   

Losses

Recorded in

Operations For the Nine Month period ended

September 30, 2019

 
At September 30, 2019:                                                
Residential real estate   $ 686     $     $     $ 686     $ 262     $  

 

   

Fair

Value

    Level 1     Level 2     Level 3    

Total

Losses

   

Losses

Recorded in

Operations For the year ended

December 31, 2018

 
At December 31, 2018:                                                
Residential real estate   $ 686     $  —     $     $ 686     $ 268     $  —  
Commercial real estate     1,312                   1,312       71        
    $ 1,998     $     $     $ 1,998     $ 339     $  

 

Available-for-sale securities measured at fair value on a recurring basis are summarized below (in thousands):

 

    Fair Value Measurements Using  
   

Fair

Value

   

Quoted Prices

In Active Markets for Identical Assets

(Level 1)

   

Significant Other Observable Inputs

(Level 2)

   

Significant

Unobservable

Inputs

(Level 3)

 
                                 
At September 30, 2019:                                
SBA Pool Securities   $ 1,851     $     $ 1,851     $  
Collateralized mortgage obligations     1.168             1,168        
Mortgage-backed Securities     2,842             2,842        
    $ 5,861     $     $ 5,861     $  
                                 
At December 31, 2018:                                
SBA Pool Securities   $ 2,359     $     $ 2,359     $  

 

During the three and nine month periods ended September 30, 2019 and 2018, no securities were transferred in or out of Levels 1, 2 or 3.

 

(continued)

 

19

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(7) Fair Value of Financial Instruments. The estimated fair values and fair value measurement method with respect to the Company’s financial instruments were as follows (in thousands):

 

    At September 30, 2019   At December 31, 2018
   

Carrying

Amount

   

Fair

Value

    Level  

Carrying

Amount

   

Fair

Value

    Level
Financial assets:                                        
Cash and cash equivalents   $ 8,400     $ 8,400     1   $ 7,983     $ 7,983     1
Securities available for sale     5,861       5,861     2     2,359       2,359     2
Securities held-to-maturity     6,195       6,421     2     7,139       7,175     2
Loans     92,081       91,974     3     77,200       77,062     3
Federal Home Loan Bank stock     642       642     3     1,132       1,132     3
Accrued interest receivable     354       354     3     314       314     3
                                         
Financial liabilities:                                        
Deposit liabilities     93,265       93,342     3     62,378       62,243     3
Federal Home Loan Bank advances     13,000       12,886     3     24,600       24,437     3
Junior subordinated debenture     5,155       N/A (1)   3     5,155       N/A (1)   3
Federal funds purchased               N/A     560       560     3
Off-balance sheet financial instruments               N/A               N/A

 

(1) The Company is unable to determine value based on significant unobservable inputs required in the calculation. Refer to Note 10 for further information.
   
(8) Off- Balance Sheet Financial Instruments. The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are commitments to extend credit, unused lines of credit, and standby letters of credit and may involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the condensed consolidated balance sheet. The contract amounts of these instruments reflect the extent of involvement the Company has in these financial instruments.

 

The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments.

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit, is based on management’s credit evaluation of the counterparty.

 

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit to customers is essentially the same as that involved in extending loan facilities to customers. The Bank generally holds collateral supporting those commitments. Standby letters of credit generally have expiration dates within one year.

 

Commitments to extend credit, unused lines of credit, and standby letters of credit typically result in loans with a market interest rate when funded. A summary of the contractual amounts of the Company’s financial instruments with off-balance-sheet risk at September 30, 2019 follows (in thousands):

 

Commitments to extend credit   $ 2,665  
         
Unused lines of credit   $ 4,864  
         
Standby letters of credit   $  

 

(9) Regulatory Matters. The Bank is subject to various regulatory capital requirements administered by the bank regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
   
  The Bank is subject to the Basel III capital level threshold requirements under the Prompt Corrective Action regulations with full compliance phased in over a multi-year schedule. These new regulations were designed to ensure that banks maintain strong capital positions even in the event of severe economic downturns or unforeseen losses.
   
  The Bank is subject to the capital conservation buffer rules which place limitations on distributions, including dividend payments, and certain discretionary bonus payments to executive officers. In order to avoid these limitations, an institution must hold a capital conservation buffer above its minimum risk-based capital requirements. As of September 30, 2019, the Bank’s capital conservation buffer exceeds the minimum requirements of 2.50%.

 

(continued)

 

20

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(9)

Regulatory Matters, Continued.

 

The following table shows the Bank’s capital amounts and ratios and regulatory thresholds at September 30, 2019 and December 31, 2018 (dollars in thousands):

 

    Actual    

For Capital

Adequacy Purposes

   

Minimum

To Be Well

Capitalized Under

Prompt Corrective

Action Provisions

 
    Amount     %     Amount     %     Amount     %  
As of September 30, 2019:                                                
Total Capital to Risk-Weighted Assets   $ 12,243       12.70 %   $ 7,713       8.00 %   $ 9,641       10.00 %
Tier I Capital to Risk-Weighted Assets     11,027       11.44       5,785       6.00       7,713       8.00  
Common equity Tier I capital to Risk-Weighted Assets     11,027       11.44       4,339       4.50       6,267       6.50  
Tier I Capital to Total Assets     11,027       9.76       4,518       4.00       5,467       5.00  
                                                 
As of December 31, 2018:                                                
Total Capital to Risk-Weighted Assets   $ 12,155       15.86 %   $ 6,132       8.00 %   $ 7,665       10.00 %
Tier I Capital to Risk-Weighted Assets     11,181       14.59       4,599       6.00       6,132       8.00  
Common equity Tier I capital to Risk-Weighted Assets     11,181       14.59       3,449       4.50       4,983       6.50  
Tier I Capital to Total Assets     11,181       11.68       3,828       4.00       4,785       5.00  

 

(continued)

 

21

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(9) Regulatory Matters, Continued.
   
 

Company Written Agreement with Federal Reserve Bank of Atlanta (“FRB”). On June 22, 2010, the Company and the FRB entered into a Written Agreement with respect to certain aspects of the operation and management of the Company. The Written Agreement prohibits, without the prior approval of the FRB, the payment of cash dividends, taking dividends or payments from the Bank, making any interest, principal or other distributions on account of the Debenture, incurring, increasing or guaranteeing any debt, purchasing or redeeming any shares of stock, or appointing any new director or senior executive officer.

 

On September 11, 2019, the FRB notified the Company that the Written Agreement was terminated based upon the improvements noted at the June 7, 2019 off-site review.

 

(10) Junior Subordinated Debenture. On September 30, 2004, the Company issued a $5,155,000 Junior Subordinated Debenture (the “Debenture”) to Optimum Bank Holdings Capital Trust I, a Delaware statutory trust formed by the Company for the purpose of issuing and selling certain securities (the “Trust Preferred Securities”) representing undivided beneficial interests in the Debenture. The trust issued a total of 5,000 Trust Preferred Securities. The Debenture has a term of thirty years. The interest rate was fixed at 6.40% for the first five years, and thereafter, the coupon rate floats quarterly at the three-month LIBOR rate plus 2.45% (4.48% at September 30, 2019). The Debenture is redeemable in certain circumstances. The terms of the Debenture allow the Company to defer payments of interest on the Debenture by extending the interest payment period at any time during the term of the Debenture for up to twenty consecutive quarterly periods.
   
  Beginning in 2010, the Company exercised its right to defer payment of interest on the Debenture. Interest payments deferred as of September 30, 2019 totaled $1,947,000. The Company has deferred interest payments with respect to the Debenture for the maximum allowable twenty consecutive quarterly payments. The Company is in default under the Debenture due to its failure to make required interest payments. The Trustee for the Debenture and the beneficial owners of the Debenture can accelerate the $5,155,000 principal balance plus accrued and unpaid interest, as a result of this default. To date, neither the Trustee nor the holders have accelerated the outstanding balance of the Debenture. No adjustments to the accompanying condensed consolidated financial statements have been made as a result of this uncertainty.
   
  In May 2018, a company affiliated with a director of the Company (the “New Holder”) purchased all 5,000 Trust Preferred Securities from a third party. During the third quarter of 2018, the New Holder sold its rights in 694 of the Trust Preferred Securities to several unaffiliated third parties, who subsequently exchanged these Trust Preferred Securities for 301,778 shares of the Company’s common stock. The transaction was recorded as an increase in the Company’s equity interest in the unconsolidated subsidiary trust, presented in “Other Assets” in the accompanying condensed consolidated balance sheets.
   
  Although the Company and the New Holder have not executed a formal, definitive bilateral agreement, the New Holder has provided the Company with written representations that the New Holder will not accelerate and demand payment of any of the remaining 4,306 Trust Preferred Securities principal or accrued interest within twelve months from November 14, 2019, the date the Company’s Form 10-Q as of and for the period ended September 30, 2019, was filed with the Securities and Exchange Commission.
   
(11) Branch Relocation. In June 2019, the Company entered into a sales contract to sell one of its branch locations. Also in June 2019, the Company entered into an operating lease agreement for the purpose of relocating the aforementioned branch. The Company has received regulatory approval for the branch relocation. The lease for the new location commenced during September 2019.
   
 

The sale was completed in November 2019 for $1,400,000. The Company financed $1,050,000 of the total sales price. In connection with the sale, the Company recorded a loss in the consolidated statement of operations of $215,000 in November 2019.

 

22

 

 

(12) Lease. We adopted ASU 2016-02, Leases on January 1, 2019, which initially resulted in the recognition of one operating lease on the condensed consolidated balance sheet in 2019 and forward. See Note 1 – Recent Pronouncements for more information on the adoption of the ASU. We determine if a contract contains a lease at inception and recognize operating lease right-of-use assets and operating lease liabilities based on the present value of the future minimum lease payments at the adoption date. During September 2019, the lessor of the new branch location made the location available to the Company for use. Accordingly, the Company recognized an additional operating lease right-of-use asset and operating lease liability that amounted to $863,000. As our leases do not provide implicit rates, we use our incremental borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease agreements that have lease and non-lease components, are accounted for as a single lease component. Lease expense is recognized on a straight-line basis over the lease term.
   
  The Company’s operating lease obligation is for two of the Company’s branch locations. Our leases have a weighted-average remaining lease term of approximately 8.6 years and do not offer options to extend the leases. The components of lease expense and other lease information are as follows (dollars in thousands):

 

    Three Month
Period Ended
September 30, 2019
    Nine Month
Period Ended
September 30, 2019
 
             
Operating Lease Cost   $ 19     $ 57  
Cash paid for amounts included in measurement of lease liabilities   $ 18     $ 54  

 

    Three Month
Period Ended
September 30, 2018
    Nine Month
Period Ended
September 30, 2018
 
             
Operating Lease Expense Recognized   $ 22     $ 67  
Cash paid for amounts included in measurement of lease liabilities   $ N/A     $ N/A  

 

N/A – Not applicable during 2018. The Company adopted ASU 2016-02 Leases on January 1, 2019.

 

    At September 30, 2019  
       
Operating lease right-of-use assets   $     1,092  
Operating lease liabilities   $ 1,095  
Weighted-average remaining lease term     8.6 years  
Weighted-average discount rate     2.1 %

 

Future minimum lease payments under non-cancellable leases, reconciled to our discounted operating lease liabilities are as follows (in thousands):

 

    At September 30, 2019  
Remainder of 2019   $ 40  
2020   $ 158  
2021   $ 163  
2022   $ 161  
2023   $ 92  
Thereafter   $ 583  
Total future minimum lease payments   $ 1,197  
Less imputed interest   $ (102 ) 
Total operating lease liability   $ 1,095  

 

(13) Subsequent Event
   
  On October 23, 2019, the Company filed an Amendment to its Articles of Incorporation to increase the aggregate number of shares of stock of all classes that the corporation shall have authority to issue is 16,000,000 shares, of which 10,000,000 shares shall be common stock, $.01 par value per share, and of which 6,000,000 shares shall be preferred stock, no par value.

 

23

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto presented elsewhere in this report. For additional information, refer to the consolidated financial statements and footnotes for the year ended December 31, 2018 in the Annual Report on Form 10-K.

 

The following discussion and analysis should also be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this report. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements involve known and unknown risks and uncertainties, many of which are beyond the control of the Company, including adverse changes in economic, political and market conditions, losses from the Company’s lending activities and changes in market conditions, the possible loss of key personnel, the impact of increasing competition, the impact of changes in government regulation, the possibility of liabilities arising from violations of federal and state securities laws and the impact of changes in technology in the banking industry. Although the Company believes that its forward-looking statements are based upon reasonable assumptions regarding its business and future market conditions, there can be no assurances that the Company’s actual results will not differ materially from any results expressed or implied by the Company’s forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned that any forward-looking statements are not guarantees of future performance.

 

(continued)

 

24

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Regulatory Matters

 

Company Written Agreement with Federal Reserve Bank of Atlanta (“FRB”). On June 22, 2010, the Company and the FRB entered into a Written Agreement with respect to certain aspects of the operation and management of the Company. The Written Agreement prohibited, without the prior approval of the FRB, the payment of dividends, taking dividends or payments from the Bank, making any interest, principal or other distributions on account of the Debenture, incurring, increasing or guaranteeing any debt, purchasing or redeeming any shares of stock, or appointing any new director or senior executive officer.

 

On September 11, 2019, The FRB notified the Company that the Written Agreement was terminated based upon the improvements noted at the June 7, 2019 off-site review.

 

Expansion of Holding Company Activities

 

On October 9, 2019, the Company filed with the FRB a declaration to become a financial holding company. The declaration was reviewed by the FRB and became effective as of October 31, 2019. As a financial holding company, the Company can engage in activities that are financial in nature or incidental to a financial activity. The change in status will allow the Company to engage in activities including but not limited to residential mortgage leading, operating a finance or leasing company and insurance premium financing.

 

Capital Levels

 

Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios of Total and Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets. As of September 30, 2019, the Bank met the minimum applicable capital adequacy requirements.

 

Refer to Note 9 for the Bank’s actual and required minimum capital ratios.

 

25

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Financial Condition at September 30, 2019 and December 31, 2018

 

Overview

 

The Company’s total assets increased by approximately $19.2 million to $119.3 million at September 30, 2019, from $100.1 million at December 31, 2018, primarily due to an increase in total deposits offset by a decrease in Federal Home Loan Bank advances. Total stockholders’ equity decreased by approximately $514,000 to $4.8 million at September 30, 2019, from $5.3 million at December 31, 2018, primarily due to the net loss for the nine month period ended September 30, 2019, offset by common stock issued as compensation to one director during 2019.

 

The following table shows selected information for the dates indicated:

 

   

Nine Month
Period Ended

September 30, 2019

   

Year Ended

December 31, 2018

 
             
Average equity as a percentage of average assets     4.6 %     4.4 %
                 
Equity to total assets at end of period     4.0 %     5.3 %
                 
Return on average assets (1)     (1.0) %     0.9 %
                 
Return on average equity (1)     (22.6) %     19.8 %
                 
Noninterest expenses to average assets (1)     4.0 %     4.4 %

 

(1) Annualized for the nine month period ended September 30, 2019.

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Liquidity and Sources of Funds

 

The Company’s sources of funds include customer deposits, advances from the Federal Home Loan Bank of Atlanta (“FHLB”), principal repayments and sales of investment securities, loan repayments, foreclosed real estate sales, the use of Federal Funds markets, net earnings, if any, and loans taken out at the Federal Reserve Bank discount window.

 

Deposits are our primary source of funds. In order to increase its core deposits, the Company has priced its deposit rates competitively. The Company will adjust rates on its deposits to attract or retain deposits as needed.

 

The Bank increased deposits by $30.9 million during the nine month period ended September 30, 2019. The proceeds were used to paydown FHLB Advances and listing service Certificates of deposits, and originate new loans.

 

In addition to obtaining funds from depositors, we may borrow funds from other financial institutions. At September 30, 2019, the Company had outstanding borrowings of $13.0 million, against its $27.6 million in established borrowing capacity with the FHLB. The Company’s borrowing facility is subject to collateral and stock ownership requirements, as well as prior FHLB consent to each advance. The Bank has an available discount window credit line with the Federal Reserve Bank, currently $373,000. The Federal Reserve Bank line is subject to collateral requirements and must be repaid within 90 days; each advance is subject to prior Federal Reserve Bank consent. At September 30, 2019, the Company also had lines of credit amounting to $8.4 million with four correspondent banks to purchase federal funds. The Company had no outstanding federal funds purchased at September 30, 2019 and $560,000 outstanding at December 31, 2018. Disbursements on the lines of credit are subject to the approval of the correspondent banks. We measure and monitor our liquidity daily and believe our liquidity sources are adequate to meet our operating needs.

 

Off-Balance Sheet Arrangements

 

Refer to Note 8 for Off-Balance Sheet Arrangements.

 

Junior Subordinated Debenture

 

Refer to Note 10 regarding the Junior Subordinated Debenture.

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Results of Operations

 

The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest and dividend income of the Company from interest-earning assets and the resultant average yields; (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; (v) net interest margin; and (vi) the ratio of average interest-earning assets to average interest-bearing liabilities (Dollars in thousands).

 

    Three Months Ended September 30,  
    2019     2018  
          Interest     Average           Interest     Average  
    Average     and     Yield/     Average     and     Yield/  
    Balance     Dividends     Rate(5)     Balance     Dividends     Rate(5)  
Interest-earning assets:                                                
Loans   $ 86,895   $ 1,140       5.25 %   $ 76,174     $ 1,015       5.33 %
Securities     12,508       63       2.01       10,285       54       2.10  
Other (1)     9,768       58     2.38       3,833       36       3.76  
                                                 
Total interest-earning assets/interest income     109,171       1,261       4.62       90,292       1,105       4.90  
                                                 
Cash and due from banks     2,106                       1,751                  
Premises and equipment     2,927                       2,677                  
Other     (411                     (359 )                
                                                 
Total assets   $ 113,793                     $ 94,361                  
                                                 
Interest-bearing liabilities:                                                
Savings, NOW and money-market deposits   $ 46,789       222       1.90   $ 20,975       39       0.74
Time deposits     31,055       186       2.40       19,441       68       1.40  
Borrowings (2)     18,155       130       2.86       34,524       216       2.50  
                                                 
Total interest-bearing liabilities/interest expense     95,999       538       2.24       74,940       323       1.72  
                                                 
Noninterest-bearing demand deposits     10,733                       11,994                  
Other liabilities     2,149                       2,154                  
Stockholders’ equity     4,912                       5,273                  
                                                 
Total liabilities and stockholders’ equity   $ 113,793                     $ 94,361                  
                                                 
Net interest income           $ 723                     $ 782          
                                                 
Interest rate spread (3)                     2.38 %                     3.19 %
                                                 
Net interest margin (4)                     2.65 %                     3.47 %
                                                 
Ratio of average interest-earning assets to average interest-bearing liabilities     1.14                       1.20                  

 

    Nine Months Ended September 30,  
    2019     2018  
          Interest     Average           Interest     Average  
    Average     and     Yield/     Average     and     Yield/  
    Balance     Dividends     Rate(5)     Balance     Dividends     Rate(5)  
Interest-earning assets:                                                
Loans   $ 83,271     $ 3,328       5.33 %   $ 73,459     $ 2,870       5.21 %
Securities     11,384       184       2.16       10,883       187       2.29  
Other (1)     9,835       184       2.49       5,055       103       2.72  
                                                 
Total interest-earning assets/interest income     104,490       3,696       4.72       89,397       3,160       4.71 %
                                                 
Cash and due from banks     2,161                       1,523                  
Premises and equipment     2,879                       2,621                  
Other     (826 )                      (2,080 )                
                                                 
Total assets   $ 108,704                     $ 91,511                  
                                                 
Interest-bearing liabilities:                                                
Savings, NOW and money-market deposits   $ 41,826       567       1.81     $ 21,087       106       0.67  
Time deposits     29,144       490       2.24       21,693       206       1.27  
Borrowings (2)     19,276       415       2.87       30,398       554       2.43  
                                                 
Total interest-bearing liabilities/interest expense     90,246       1,472       2.17       73,178       866       1.58  
                                                 
Noninterest-bearing demand deposits     11,155                       12,257                  
Other liabilities     2,246                       2,276                  
Stockholders’ equity     5,051                       3,800                  
                                                 
Total liabilities and stockholders’ equity   $ 108,698                     $ 91,511                  
                                                 
Net interest income           $ 2,224                     $ 2,294          
                                                 
Interest rate spread (3)                     2.55 %                     3.13 %
                                                 
Net interest margin (4)                     2.84 %                     3.42 %
                                                 
Ratio of average interest-earning assets to average interest-bearing liabilities     1.16 %                     1.22                  

 

(1) Includes interest-earning deposits with banks and Federal Home Loan Bank stock dividends.
(2) Includes Federal Home Loan Bank advances, other borrowings and the Debenture.
(3) Interest-rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(4) Net interest margin is net interest income divided by average interest-earning assets.
(5) Annualized.

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Comparison of the Three-Month Periods Ended September 30, 2019 and 2018

 

General. Net loss for the three month period ended September 30, 2019, was ($280,000) or $(.15) per basic and diluted share compared to net loss of $(202,000) or $(.13) per basic and diluted share for the three month period ended September 30, 2018.

 

Interest Income. Interest income increased $156,000 to $1.3 million for the three month period ended September 30, 2019 compared to $1.1 million for the three month period ended September 30, 2018. The increase in interest income was caused primarily by an increase in loans.

 

Interest Expense. Interest expense on deposits and borrowings increased to $538,000 for the three month period ended September 30, 2019 from $323,000 for the three month period ended September 30, 2018. The Bank continued to attract local deposits during 2019.

 

Provision for Loan Losses. There was a $45,000 provision or credit for losses during the three month period ended September 30, 2019. The provision or credit for loan losses is charged to operations as losses are estimated to have occurred in order to bring the total allowance for loan losses to a level deemed appropriate by management to absorb losses inherent in the portfolio at September 30, 2019 and 2018. Management’s periodic evaluation of the adequacy of the allowance is based upon historical experience, the volume and type of lending conducted by us, adverse situations that may affect the borrower’s ability to repay, estimated value of the underlying collateral, loans identified as impaired, general economic conditions, particularly as they relate to our market areas, and other factors related to the estimated collectability of our loan portfolio. The allowance for loan losses totaled $2.1 million or 2.23% of loans outstanding at September 30, 2019, as compared to $2.2 million or 2.83% of loans outstanding at December 31, 2018.

 

Noninterest Income. Total noninterest income increased to $29,000 for the three month period ended September 30, 2019, from $21,000 for the three month period ended September 30, 2018 due to loan related fees.

 

Noninterest Expenses. Total noninterest expenses decreased $18,000 to $987,000 for the three month period ended September 30, 2019 compared to $1,005,000 for the three month period ended September 30, 2018.

 

Comparison of the Nine-Month Periods Ended September 30, 2019 and 2018

 

General. Net loss for the nine month period ended September 30, 2019, was ($856,000) or ($.45) per basic and diluted share compared to net earnings of $1,417,000 or $1.03 per basic and diluted share for the nine month period ended September 30, 2018. The substantial earnings in 2018 were due to the $2.1 million reversal of the Company’s allowance for loan losses.

 

Interest Income. Interest income increased to $3.7 million for the nine month period ended September 30, 2019 from $3.2 million for the nine month period ended September 30, 2018, primarily due to an increase in interest earning assets.

 

Interest Expense. Interest expense on deposits and borrowings increased $606,000 to $1.5 million for the nine month period ended September 30, 2019 compared to the prior period. The increase in interest expense was caused by the net effect of an increase in deposits and a decrease in borrowings.

 

Provision for Loan Losses. There was a $45,000 provision or credit for losses during the nine month period ended September 30, 2019. The Bank reversed $2.1 million of the allowance for loan losses into income during the second quarter of 2018. The provision or credit for loan losses is charged to operations as losses are estimated to have occurred in order to bring the total allowance for loan losses to a level deemed appropriate by management to absorb losses inherent in the portfolio at September 30, 2019 and 2018. Management’s periodic evaluation of the adequacy of the allowance is based upon historical experience, the volume and type of lending conducted by us, adverse situations that may affect the borrower’s ability to repay, estimated value of the underlying collateral, loans identified as impaired, general economic conditions, particularly as they relate to our market areas, and other factors related to the estimated collectability of our loan portfolio. The allowance for loan losses totaled $2.1 million or 2.23% of loans outstanding at September 30, 2019, as compared to $2.2 million or 2.83% of loans outstanding at December 31, 2018.

 

Noninterest Income. Total noninterest income increased by $84,000 for the nine month period ended September 30, 2019, to $153,000 compared to $69,000 for the nine month period ended September 30, 2018 due to increased loan related fees.

 

Noninterest Expenses. Total noninterest expenses increased $194,000 to $3.2 million for the nine month period ended September 30, 2019 compared to $3.0 million for the nine month period ended September 30, 2018.

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Item 4. Controls and Procedures

 

The Company’s management evaluated the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report, and, based on this evaluation, the Principal Executive Officer and Principal Financial Officer concluded that these disclosure controls and procedures are effective.

 

There have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

During the nine month period ended September 30, 2019, the Company recorded compensation expense of $200,000 with respect to 58,309 shares of common stock issued to a director for services performed.

 

Item 3. Defaults Upon Senior Securities

 

Previously disclosed.

 

Item 4. Mine Safety Disclosures

 

None

 

Item 5. Other Information

 

None

 

Item 6. Exhibits

 

The exhibits contained in the Exhibit Index following the signature page are filed with or incorporated by reference into this report.

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

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.

 

  OPTIMUMBANK HOLDINGS, INC.
  (Registrant)
     
Date: November 14, 2019 By: /s/ Timothy Terry
    Timothy Terry,
    Principal Executive Officer
     
  By: /s/ David L. Edgar
    David L. Edgar,
    Principal Financial Officer

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

EXHIBIT INDEX

 

Exhibit
No.
  Description
     
3.2   Articles of Amendment to the Articles of Incorporation of Optimum Bank Holdings, Inc.
     
31.1   Certification of Principal Executive Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act
     
31.2   Certification of Principal Financial Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act
     
32.1   Certification of Principal Executive Officer
     
32.2   Certification of Principal Financial Officer

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

EXHIBIT INDEX

 

Exhibit
No.
  Description
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document

 

33