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

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]

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

For the quarterly period ended June 30, 2019

[ ]	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)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [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, $.01 par value, issued and outstanding as of August 14, 2019.

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

INDEX

	Page

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements	1

Condensed Consolidated Balance Sheets - June 30, 2019 (unaudited) and December 31, 2018	1

Condensed Consolidated Statements of Operations – Three and Six Months ended June 30, 2019 and 2018 (unaudited)	2

Condensed Consolidated Statements of Comprehensive (Loss) Income - Three and Six Months ended June 30, 2019 and 2018 (unaudited)	3

Condensed Consolidated Statements of Stockholders’ Equity - Three and Six Months ended June 30, 2019 and 2018 (unaudited)	4

Condensed Consolidated Statements of Cash Flows - Six Months ended June 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

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

	June 30, 2019			December 31, 2018
	(Unaudited)
Assets:
Cash and due from banks	$	1,853		$	1,934
Interest-bearing deposits with banks		10,464			6,049
Total cash and cash equivalents		12,317			7,983
Securities available for sale		6,213			2,359
Securities held-to-maturity (fair value of $6,874 and $7,175)		6,632			7,139
Loans, net of allowance for loan losses of $2,053 and $2,243		80,861			77,200
Federal Home Loan Bank stock		642			1,132
Premises and equipment, net		2,676			2,668
Accrued interest receivable		370			314
Other assets		1,559			1,350

Total assets	$	111,270		$	100,145

Liabilities and Stockholders’ Equity:

Liabilities:
Noninterest-bearing demand deposits		10,925			9,638
Savings, NOW and money-market deposits		45,588			26,682
Time deposits		29,388			26,058

Total deposits		85,901			62,378

Federal Home Loan Bank advances		13,000			24,600
Federal funds purchased		—			560
Junior subordinated debenture		5,155			5,155
Official checks		142			274
Other liabilities		2,028			1,872

Total liabilities		106,226			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, 1,927,579 shares issued and outstanding in 2019 and 1,858,020 shares issued and outstanding in 2018		19			18
Additional paid-in capital		36,356			36,128
Accumulated deficit		(31,086	)		(30,510	)
Accumulated other comprehensive loss		(245	)		(330	)

Total stockholders’ equity		5,044			5,306
Total liabilities and stockholders’ equity	$	111,270		$	100,145

See accompanying notes to condensed consolidated financial statements.

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

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

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2019			2018		2019			2018
Interest income:
Loans	$	1,097		$	938	$	2,187		$	1,854
Securities		72			73		122			134
Other		77			32		125			67

Total interest income		1,246			1,043		2,434			2,055

Interest expense:
Deposits		360			95		649			207
Borrowings		133			190		283			338

Total interest expense		493			285		932			545

Net interest income		753			758		1,502			1,510

Credit for loan losses		—			2,100		—			2,100

Net interest income after credit for loan losses		753			2,858		1,502			3,610

Noninterest income:
Service charges and fees		68			—		90			9
Other		19			35		34			40

Total noninterest income		87			35		124			49

Noninterest expenses:
Salaries and employee benefits		529			460		1,030			898
Professional fees		128			158		227			223
Occupancy and equipment		134			102		247			206
Data processing		129			99		253			176
Insurance		18			26		42			50
Regulatory assessment		18			39		22			78
Other		314			105		433			409

Total noninterest expenses		1,270			989		2,254			2,040

Net (loss) earnings before income tax benefit		(430	)		1,904		(628	)		1,619

Income tax benefit		—			—		(52	)		—

Net (loss) earnings	$	(430	)	$	1,904	$	(576	)	$	1,619

Net (loss) earnings per share - Basic and diluted	$	(.23	)	$	1.35	$	(.31	)	$	1.25

See accompanying notes to condensed consolidated financial statements.

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018

Net (loss) earnings	$	(430	)	$	1,904		$	(576	)	$	1,619

Other comprehensive income (loss):
Change in unrealized gain (loss) on securities:
Unrealized gain arising during the period		68			346			74			282

Amortization of unrealized loss on securities transferred to held-to-maturity		23			6			39			6
Reclassification adjustment for unrealized loss on securities transferred to held-to-maturity		-			(432	)		-			(432	)

Other comprehensive income (loss) before income tax (expense) benefit		91			(80	)		113			(144	)

Deferred income tax (expense) benefit on above change		(23	)		20			(28	)		38

Total other comprehensive income (loss)		68			(60	)		85			(106	)

Comprehensive (loss) income	$	(362	)	$	1,844		$	(491	)	$	1,513

See accompanying notes to condensed consolidated financial statements.

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Stockholders’ Equity

Three and Six Months Ended June 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

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

See accompanying notes to condensed consolidated financial statements

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	Six Months Ended June 30,
	2019			2018
Cash flows from operating activities:
Net (loss) earnings	$	(576	)	$	1,619
Adjustments to reconcile net (loss) earnings to net cash (used in) provided by operating activities:
Depreciation and amortization		86			71
Credit for loan losses		—			(2,100	)
Common stock issued as compensation to directors		201			—
Net amortization of fees, premiums and discounts		94			116
Increase in accrued interest receivable		(56	)		(12	)
Increase in other assets		(237	)		(3	)
Increase in official checks and other liabilities		52			623
Net cash (used in) provided by operating activities		(436	)		314

Cash flows from investing activities:
Purchase of securities available for sale		(4,153	)		—
Principal repayments of securities available for sale		339			558
Principal repayments of securities held-to-maturity		527			186
Net increase in loans		(3,702	)		(814	)
Purchases of premises and equipment		(94	)		(105	)
Redemption (purchase) of FHLB stock		490			(236	)

Net cash used in investing activities		(6,593	)		(411	)

Cash flows from financing activities:
Net increase (decrease) in deposits		23,523			(13,692	)
Net decrease in federal funds purchased		(560	)		—
Net (decrease) increase in FHLB Advances		(11,600	)		6,050
Proceeds from sale of common stock		—			404

Net cash provided by (used in) financing activities		11,363			(7,238	)

Net increase (decrease) in cash and cash equivalents		4,334			(7,335	)

Cash and cash equivalents at beginning of the period		7,983			11,665

Cash and cash equivalents at end of the period	$	12,317		$	4,330

See accompanying notes to condensed consolidated financial statements

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (Unaudited), Continued

(In thousands)

	Six Months Ended June 30,
	2019		2018
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	776	$	392

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	$	85	$	(106	)

Transfer of securities from available for sale to held-to-maturity		—		7,945

Amortization of unrealized loss on securities transferred to held-to-maturity	$	39	$	6

Reclassification of stock compensation issued as compensation to directors from other liabilities to common stock	$	—	$	615

Common stock issued and reclassified from other liabilities		28		—

See accompanying notes to condensed consolidated financial statements

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 and its subsidiaries (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 June 30, 2019, and the results of operations and cash flows for the three and six month periods ended June 30, 2019 and 2018. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and six month periods ended June 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 $1,864,000 at June 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. Under the Written Agreement with the Federal Reserve Bank of Atlanta the exchange of Trust Preferred Securities for the Company’s common stock cannot reduce the principal amount of the Debenture collateralizing the Trust Preferred Securities. Accordingly 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 August 13, 2019, the date the Company’s Form 10-Q as of and for the period ended June 30, 2019, was filed with the Securities and Exchange Commission. See Note 10.

	Comprehensive Loss. GAAP generally requires that recognized revenue, expenses, gains and losses be included in net loss. 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.

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

	June 30,			December 31,
	2019			2018

Unrealized gain (loss) on securities available for sale	$	10		$	(64	)
Unamortized portion of unrealized loss related to securities available for sale transferred to securities held-to-maturity		(338	)		(377	)
Income tax benefit		83			111

	$	(245	)	$	(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 June 30, 2019. Accordingly, a valuation allowance was recorded against the net deferred tax asset.

	(continued)

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(1)

General, Continued.

Reclassifications. Certains 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. With respect to the lease recognized on the condensed consolidated balance sheet as of June 30, 2019, the right of use asset of $246,000 and lease liability of $248,000 are included in the caption “other assets” and “other liabilities”, respectively, in the accompanying condensed consolidated balance sheet. The discount rate used in this calculation was 2.6%.

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 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, 2019. Early adoption is permitted. The Company is in the process of determining the effect of the ASU on its condensed consolidated financial statements. In July 2019, the FASB board voted to ask its staff to prepare an exposure draft proposing the new effective dates for ASU NO 2016-13. If approved, the new effective date for the Company would be January 1, 2023.

(continued)

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 June 30, 2019:
Held-to-Maturity:
Collateralized mortgage obligations	$	4,818	$	181	$	—		$	4,999
Mortgage-backed securities		1,814		61		—			1,875
Total		6,632		242		—			6,874
Available for Sale:
SBA Pool Securities	$	2,112	$	—	$	(54	)	$	2,058
Collateralized mortgage obligations		1,190		22		—			1,212
Mortgage-backed securities		2,901		42		—			2,943
Total	$	6,203	$	64	$	(54	)	$	6,213

	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 securities of $7,945,000 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 June 30, 2019 and December 31, 2018, $94,000 and $55,000, respectively, has been amortized.

There were no sales of securities during the three and six month periods ended June 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 June 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	$	54	$	2,058	$	—	$	—

	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)

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 June 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)

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(3)

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

	At June 30, 2019			At December 31, 2018

Residential real estate	$	26,588		$	27,204
Multi-family real estate		4,200			8,195
Commercial real estate		46,985			36,634
Land and construction		157			1,998
Commercial		4,779			4,997
Consumer		122			260

Total loans		82,831			79,288

Add (deduct):
Net deferred loan fees, costs and premiums		83			155
Allowance for loan losses		(2,053	)		(2,243	)

Loans, net	$	80,861		$	77,200

(continued)

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 June 30, 2019:*

Beginning balance	$	532		$	65		$	628		$	—		$	553		$	19		$	250		$	2,047
Provision (credit) for loan losses		5			(24	)		50			(5	)		5			(8	)		(23	)		—
Charge-offs		—			—			—			—			—			—			—			—
Recoveries		—			—			—			6			—			—			—			6

Ending balance	$	537		$	41		$	678		$	1		$	558		$	11		$	227		$	2,053

*Three Months Ended June 30, 2018:*
Beginning balance	$	647		$	67		$	712		$	28		$	279		$	59		$	2,201		$	3,993
Provision (credit) for loan losses		18			(14	)		27			(8	)		(13	)		(17	)		(2,093	)		(2,100	)
Charge-offs		—			—			—			—			—			(3	)		—			(3	)
Recoveries		—			—			—			6			—			3			—			9

Ending balance	$	665		$	53		$	739		$	26		$	266		$	42		$	108		$	1,899

*Six Months Ended June 30, 2019:*

Beginning balance	$	544		$	88		$	567		$	19		$	850		$	25		$	150		$	2,243
(Credit) provision for loan losses		(7	)		(47	)		306			(30	)		(292	)		(7	)		77			—
Charge-offs		—			—			(195	)		—			—			(7	)		—			(202	)
Recoveries		—			—			—			12			—			—			—			12

Ending balance	$	537		$	41		$	678		$	1		$	558		$	11		$	227		$	2,053

*Six Months Ended June 30, 2018:*
Beginning balance	$	641		$	59		$	759		$	22		$	55		$	86		$	2,369		$	3,991
Provision (credit) for loan losses		24			(6	)		(20	)		(8	)		211			(40	)		(2,261	)		(2,100	)
Charge-offs		—			—			—			—			—			(12	)		—			(12	)
Recoveries		—			—			—			12			—			8			—			20

Ending balance	$	665		$	53		$	739		$	26		$	266		$	42		$	108		$	1,899

(continued)

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 June 30, 2019:*
Individually evaluated for impairment:
Recorded investment	$	954	$	—	$	2,445	$	—	$	812	$	—	$	—	$	4,211
Balance in allowance for loan losses	$	268	$	—	$	—	$	—	$	523	$	—	$	—	$	791

Collectively evaluated for impairment:
Recorded investment	$	25,634	$	4,200	$	44,540	$	157	$	3,967	$	122	$	—	$	78,620
Balance in allowance for loan losses	$	269	$	41	$	678	$	1	$	35	$	11	$	227	$	1,262

*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	$	32,773	$	1,998	$	3,069	$	260	$	—	$	72,545
Balance in allowance for loan losses	$	276	$	88	$	405	$	19	$	36	$	25	$	150	$	999

(continued)

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 on 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)

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 June 30, 2019:*
Residential real estate	$	25,634	$	—	$	954	$	—	$	—	$	26,588
Multi-family real estate		4,200		—		—		—		—		4,200
Commercial real estate		42,814		1,726		2,445		—		—		46,985
Land and construction		157		—		—		—		—		157
Commercial		3,967		—		812		—		—		4,779
Consumer		122		—		—		—		—		122

Total	$	76,894	$	1,726	$	4,211	$	—	$	—	$	82,831

*At December 31, 2018:*
Residential real estate	$	26,250	$	—	$	954	$	—	$	—	$	27,204
Multi-family real estate		8,195		—		—		—		—		8,195
Commercial real estate		31,050		1,723		3,861		—		—		36,634
Land and construction		1,998		—		—		—		—		1,998
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 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 effected in the future. The Company fully charges off any loan classified as Loss.

(continued)

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 June 30, 2019:*
Residential real estate	$	—	$	—	$	—	$	—	$	26,588	$	—	$	26,588
Multi-family real estate		—		—		—		—		4,200		—		4,200
Commercial real estate		—		—		—		—		46,985		—		46,985
Land and construction		—		—		—		—		157		—		157
Commercial		—		—		—		—		4,779		—		4,779
Consumer		—		—		—		—		122		—		122

Total	$	—	$	—	$	—	$	—	$	82,831	$	—	$	82,831

	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			—		—		—		—		35,254		1,380		36,634
Land and construction			—		—		—		—		1,998		—		1,998
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 June 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	$	2,445	$	2,445	$	—	$	2,259	$	2,259	$	—
Commercial		—		—		—		1,114		1,114		—
With related allowance recorded:
Residential real estate		954		954		268		954		954		268
Commercial real estate		—		—		—		1,602		1,602		162
Commercial		812		812		523		814		814		814
Total:
Residential real estate	$	954	$	954	$	268	$	954	$	954	$	268
Commercial real estate	$	2,445	$	2,445	$	—	$	3,861	$	3,861	$	162
Commercial	$	812	$	812	$	523	$	1,928	$	1,928	$	814
Total	$	4,211	$	4,211	$	791	$	6,743	$	6,743	$	1,244

(continued)

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 June 30,
	2019						2018
	Average		Interest		Interest		Average		Interest		Interest
	Recorded		Income		Income		Recorded		Income		Income
	Investment		Recognized		Received		Investment		Recognized		Received

Residential real estate	$	954	$	19	$	19	$	968	$	19	$	19
Commercial real estate	$	2,461	$	31	$	21	$	226	$	3	$	3
Commercial	$	1,302	$	20	$	11	$	2,287	$	28	$	28
Total	$	4,714	$	70	$	51	$	3,481	$	50	$	50

	Six Months Ended June 30,
	2019						2018
	Average		Interest		Interest		Average		Interest		Interest
	Recorded		Income		Income		Recorded		Income		Income
	Investment		Recognized		Received		Investment		Recognized		Received

Residential real estate	$	952	$	37	$	37	$	1,000	$	38	$	38
Commercial real estate	$	3,059	$	61	$	59	$	546	$	15	$	15
Commercial	$	1,548		43	$	39	$	1,319		45	$	45
Total	$	5,559	$	141	$	135	$	2,865	$	98	$	98

No loans have been determined to be troubled debt restructurings (TDR’s) during the three and six month periods ended June 30, 2019 or 2018. At June 30, 2019 and 2018, there were no loans modified and entered into TDR’s within the past twelve months, that subsequently defaulted during the three and six month periods ended June 30, 2019 or 2018.

(continued)

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(4)

(Loss) Earnings Per Share. Basic (loss) earnings per share has been computed on the basis of the weighted-average number of shares of common stock outstanding during the period. During the three and six month periods ended June 30, 2019, basic and diluted loss per share is the same due to the net loss incurred by the Company. During the three and six month periods ended June 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:

Three Months Ended
June 30,

Six Months Ended
June 30,

2019

2018

2019

2018

Weighted-average number of common shares outstanding used to calculate basic and diluted loss per common share

1,881,759

1,409,904

1,869,933

1,292,381

(continued)

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 three month period ended June 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

Recorded in

Operations For the Six Month period ended

June 30, 2019

At June 30, 2019 —

Residential real estate

686

—

686

268

—

	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 June 30, 2019:*
SBA Pool Securities	$	2,058	$	—	$	2,058	$	—
Collateralized mortgage obligations		1,212		—		1,212		—
Mortgage-backed Securities		2,943		—		2,943		—
	$	6,213	$	—	$	6,213	$	—

*At December 31, 2018:*
SBA Pool Securities	$	2,359	$	—	$	2,359	$	—

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

(continued)

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 June 30, 2019						At December 31, 2018
	Carrying Amount		Fair Value			Level	Carrying Amount		Fair Value			Level
Financial assets:
Cash and cash equivalents	$	12,317	$	12,317		1	$	7,983	$	7,983		1
Securities available for sale		6,213		6,213		2		2,359		2,359		2
Securities held-to-maturity		6,632		6,874		2		7,139		7,175		2
Loans		80,861		80,544		3		77,200		77,062		3
Federal Home Loan Bank stock		642		642		3		1,132		1,132		3
Accrued interest receivable		370		370		3		314		314		3

Financial liabilities:
Deposit liabilities		85,901		85,847		3		62,378		62,243		3
Federal Home Loan Bank advances		13,000		12,807		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 June 30, 2019 follows (in thousands):

Commitments to extend credit	$	3,894

Unused lines of credit	$	2,962

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 June 30, 2019, the Bank’s capital conservation buffer exceeds the minimum requirements of 2.50%.

(continued)

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 June 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 June 30, 2019:
Total Capital to Risk-Weighted Assets	$	12,193		14.61	%	$	6,676		8.00	%	$	8,344		10.00	%
Tier I Capital to Risk-Weighted Assets		11,138		13.35			5,007		6.00			6,626		8.00
Common equity Tier I capital to Risk-Weighted Assets		11,138		13.35			3,755		4.50			5,424		6.50
Tier I Capital to Total Assets		11,138		10.31			4,323		4.00			5,404		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)

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

Memorandum of Understanding. On August 28, 2018, the Bank agreed to the issuance of a Memorandum of Understanding (the “MOU”), with the FDIC and Florida Office of Financial Regulation which required the Bank to take certain measures to improve its safety and soundness. By agreeing to the MOU, the Bank was released from the Consent Order that became effective in 2016, including the restrictions on the interest rates paid on deposits.

Pursuant to the MOU, the Bank was required to take certain measures to maintain qualified management, improve its strategic planning and budgeting process, strengthen the interest rate management practices, limit its asset growth and provide for the ongoing organization, monitoring and operational administration of the Bank Secrecy Act Program. The MOU prohibited the payment of dividends by the Bank.

During the recent examinations, the examiners noted the Bank was in full compliance with the provisions of the MOU. In June 2019, the Bank was released from the MOU.

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. Management believes that the Company is in substantial compliance with the requirements of the Written Agreement.

(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% (4.77% at June 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 June 30, 2019 totaled $1,864,000. 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. Under the Written Agreement, the Company is not able to make any interest or principal payments without the prior approval of the FRB.

	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. Under the Written Agreement the exchange of Trust Preferred Securities for the Company’s common stock cannot reduce the principal amount of the Debenture collateralizing the Trust Preferred Securities. Accordingly, 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 August 13, 2019, the date the Company’s Form 10-Q as of and for the period ended June 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 for $1,400,000. The Company will finance $1,050,000 of the total sales price. Also in June 2019, the Company entered into a lease agreement for the purpose of relocating the aforementioned branch.

	The Company has requested regulatory approval for the branch relocation. The lease commencement date shall occur upon receiving approval from the regulators, but will start no later than 120 days from the date the lease agreement was executed in June 2019. The sale closing will occur within two weeks of Company vacating the building.

(12)	*Lease.* We adopted ASU 2016-02, Leases on January 1, 2019, which 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. The right-of-use asset and lease liability is disclosed below and are included in the caption “Other assets” and “Other liabilities”, respectively, in the accompanying condensed consolidated balance sheet. As our lease does not provide an implicit rate, 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 one of the Company’s branch locations. Our lease has a remaining lease term of approximately 3.4 years and does not offer an option to extend the lease. The components of lease expense and other lease information are as follows (in thousands):

	Three Month Period Ended June 30, 2019		Six Month Period Ended June 30, 2019

Operating Lease Cost	$	19	$	38
Cash paid for amounts included in measurement of lease liabilities	$	18	$	36

	At June 30, 2019

Operating lease right-of-use asset	$	246
Operating lease liability	$	248
Weighted-average remaining lease term		3.4 years
Weighted-average discount rate		2.6	%

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

	At June 30, 2019
Remainder of 2019	$	36
2020	$	75
2021	$	77
2022	$	72
Total future minimum lease payments	$	260
Less imputed interest	$	(12	)
Total operating lease liability		248

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)

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

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

Memorandum of Understanding. On August 28, 2018, the Bank agreed to the issuance of a Memorandum of Understanding (the “MOU”), with the FDIC and OFR which required the Bank to take certain measures to improve its safety and soundness. By agreeing to the MOU, the Bank was released from the Consent Order that became effective in 2016, including the restrictions on the interest rates paid on deposits.

During the recent examination, the examiners noted the Bank was in full compliance with the provisions of the MOU. In June 2019, the Bank was released from the MOU.

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 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. Management believes that the Company is in substantial compliance with the requirements of the Written Agreement.

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 June 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.

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

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

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

Overview

The Company’s total assets increased by approximately $11.1 million to $111.3 million at June 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 $300,000 to $5.0 million at June 30, 2019, from $5.3 million at December 31, 2018, primarily due to the net loss for the six month period ended June 30, 2019, offset by common stock issued as compensation to one director during 2019.

The following table shows selected information for the dates indicated:

	Six Month Period Ended June 30, 2019			Year Ended December 31, 2018

Average equity as a percentage of average assets		4.8	%		4.4	%

Equity to total assets at end of period		4.5	%		5.3	%

Return on average assets (1)		(1.1	)%		0.9	%

Return on average equity (1)		(22.5	)%		19.8	%

Noninterest expenses to average assets (1)		4.3	%		4.4	%

(1) Annualized for the six month period ended June 30, 2019.

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 $23.5 million during the six month period ended June 30, 2019. The proceeds were used to paydown FHLB Advances and listing service Certificates of deposits.

In addition to obtaining funds from depositors, we may borrow funds from other financial institutions. At June 30, 2019, the Company had outstanding borrowings of $13.0 million, against its $26.6 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 $430,000. 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 June 30, 2019, the Company also had lines of credit amounting to $8.4 million with three correspondent banks to purchase federal funds. The Company had no outstanding federal funds purchased at June 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.

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.

	Three Months Ended June 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	$	81,325		$	1,097		5.40	%	$	72,602		$	938		5.17	%
Securities		12,954			72		2.22			10,758			73		2.71
Other (1)		10,199			77		3.02			4,552			32		2.81

Total interest-earning assets/interest income		104,478			1,246		4.81			87,912			1,043		4.75

Cash and due from banks		2,149								1,356
Premises and equipment		2,644								2,688
Other		(912	)							(2,152	)

Total assets	$	108,359							$	89,804

Interest-bearing liabilities:
Savings, NOW and money-market deposits	$	43,329			199		1.84		$	21,123			33		0.62
Time deposits		28,956			161		2.22			19,693			62		1.26
Borrowings (2)		18,155			133		2.93			30,577			190		2.49

Total interest-bearing liabilities/interest expense		90,440			493		2.18			71,393			285		1.60

Noninterest-bearing demand deposits		10,860								12,510
Other liabilities		2,017								2,388
Stockholders’ equity		5,042								3,513

Total liabilities and stockholders’ equity	$	108,359							$	89,804

Net interest income				$	753							$	758

Interest rate spread (3)							2.63	%							3.15	%

Net interest margin (4)							2.89	%							3.45	%

Ratio of average interest-earning assets to average interest-bearing liabilities		1.16	%							1.23	%

	Six Months Ended June 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	$	81,445		$	2,187		5.37	%	$	72,102		$	1,854		5.14	%
Securities		10,787			122		2.26			11,182			134		2.40
Other (1)		9,824			125		2.54			5,666			67		2.36

Total interest-earning assets/interest income		102,056			2,434		4.77			88,950			2,055		4.62

Cash and due from banks		2,239								1,409
Premises and equipment		2,648								2,669
Other		(1,100	)							(2,941	)

Total assets	$	105,843							$	90,087

Interest-bearing liabilities:
Savings, NOW and money-market deposits	$	39,274			289		1.47		$	21,143			67		0.63
Time deposits		28,174			360		2.56			22,820			140		1.23
Borrowings (2)		19,855			283		2.85			28,335			338		2.39

Total interest-bearing liabilities/interest expense		87,303			932		2.14			72,298			545		1.51

Noninterest-bearing demand deposits		11,352								12,389
Other liabilities		2,059								2,337
Stockholders’ equity		5,129								3,063

Total liabilities and stockholders’ equity	$	105,843							$	90,087

Net interest income				$	1,502							$	1,510

Interest rate spread (3)							2.63	%							3.11	%

Net interest margin (4)							2.94	%							3.40	%

Ratio of average interest-earning assets to average interest-bearing liabilities		1.17	%							1.23	%

(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.

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 June 30, 2019 and 2018

General. Net loss for the three month period ended June 30, 2019, was $(430,000) or $(.23) per basic and diluted share compared to net earnings of $1,904,000 or $1.35 per basic and diluted share for the three month period ended June 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 $203,000 to $1.2 million for the three month period ended June 30, 2019 compared to $1.0 million for the three month period ended June 30, 2018. The increase in interest income was caused primarily by the increase in loans of $3.5 million.

Interest Expense. Interest expense on deposits and borrowings increased to $493,000 for the three month period ended June 30, 2019 from $285,000 for the three month period ended June 30, 2018. The Bank continued to attract local deposits during 2019.

Provision for Loan Losses. There was no provision or credit for losses during the three month period ended June 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 June 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 2.47% of loans outstanding at June 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 $87,000 for the three month period ended June 30, 2019, from $35,000 for the three month period ended June 30, 2018 due to loan related fees.

Noninterest Expenses. Total noninterest expenses increased $281,000 to $1,270,000 for the three month period ended June 30, 2019 compared to $989,000 for the three month period ended June 30, 2018.

Comparison of the Six-Month Periods Ended June 30, 2019 and 2018

General. Net loss for the six month period ended June 30, 2019, was $(576,000) or $(.31) per basic and diluted share compared to net earnings of $1,619,000 or $1.25 per basic and diluted share for the six month period ended June 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 $2,434,000 for the six month period ended June 30, 2019 from $2,055,000 for the six month period ended June 30, 2018, primarily due to an increase in interest earning assets.

Interest Expense. Interest expense on deposits and borrowings increased $387,000 to $932,000 for the six month period ended June 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 no provision or credit for losses during the six month period ended June 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 June 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 2.47% of loans outstanding at June 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 $75,000 for the six month period ended June 30, 2019, to $124,000 compared to $49,000 for the six month period ended June 30, 2018 due to increased loan related fees.

Noninterest Expenses. Total noninterest expenses increased $214,000 to $2.3 million for the six month period ended June 30, 2019 compared to $2.0 million for the six month period ended June 30, 2018.

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 June 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 three month period ended June 30, 2019, the Company recorded compensation expense of $200,000 with respect to 58,309 shares 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.

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: August 14, 2019	By:	/s/ Timothy Terry
		Timothy Terry,
		Principal Executive Officer

	By:	/s/ David L. Edgar
		David L. Edgar,
		Principal Financial Officer

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

EXHIBIT INDEX

Exhibit No.		Description

3		Articles of Incorporation, as amended.

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

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