OptimumBank Holdings, Inc. - Quarter Report: 2020 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, 2020

[ ]	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.)

2929 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)

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		NASDAQ Capital Market

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 (check one):

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. Yes [ ] No [X]

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: 2,951,353 shares of common stock, $.01 par value, issued and outstanding as of August 11, 2020.

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

INDEX

	Page

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements	1

Condensed Consolidated Balance Sheets - June 30, 2020 (unaudited) and December 31, 2019	1

Condensed Consolidated Statements of Operations – Three and Six Months ended June 30, 2020 and 2019 (unaudited)	2

Condensed Consolidated Statements of Comprehensive Loss - Three and Six Months ended June 30, 2020 and 2019 (unaudited)	3

Condensed Consolidated Statements of Stockholders’ Equity - Three and Six Months ended June 30, 2020 and 2019 (unaudited)	4

Condensed Consolidated Statements of Cash Flows - Six Months ended June 30, 2020 and 2019 (unaudited)	5

Notes to Condensed Consolidated Financial Statements (unaudited)	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 4. Controls and Procedures	25

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	25

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	25

Item 3. Defaults on Senior Securities	25

Item 4. Mine Safety Disclosures	25

Item 5. Other Information	25

Item 6. Exhibits	25

SIGNATURES	26

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, 2020			December 31, 2019
	(Unaudited)
Assets:
Cash and due from banks	$	2,334		$	2,111
Interest-bearing deposits with banks		27,614			6,823
Total cash and cash equivalents		29,948			8,934
Debt securities available for sale		4,409			5,409
Debt securities held-to-maturity (fair value of $5,337 and $5,986)		5,069			5,806
Loans, net of allowance for loan losses of $2,664 and $2,009		135,842			102,233
Federal Home Loan Bank stock		1,092			642
Premises and equipment, net		1,451			1,389
Right-of-use operating lease assets		980			1,055
Accrued interest receivable		958			432
Other assets		1,074			848

Total assets	$	180,823		$	126,748
Liabilities and Stockholders’ Equity:

Liabilities:
Noninterest-bearing demand deposits	$	29,785		$	10,545
Savings, NOW and money-market deposits		78,964			55,475
Time deposits		29,321			35,352

Total deposits		138,070			101,372

Federal Home Loan Bank advances		23,000			13,000
Junior subordinated debenture		2,580			2,580
Other borrowings		4,988			—
Official checks		102			208
Operating lease liabilities		993			1,061
Other liabilities		1,413			1,320

Total liabilities		171,146			119,541

Commitments and contingencies (Notes 1 and 8)
Stockholders’ equity:
Preferred stock, no par value; 6,000,000 shares authorized:
Designated Series A, no par value, no shares issued and outstanding		—			—
Designated Series B, no par value, 100 shares issued and outstanding in 2020		—			—
Common stock, $.01 par value; 10,000,000 shares authorized, 2,951,353 and 2,853,171 shares issued and outstanding		29			28
Additional paid-in capital		42,032			38,994
Accumulated deficit		(32,265	)		(31,610	)
Accumulated other comprehensive loss		(119	)		(205	)

Total stockholders’ equity		9,677			7,207
Total liabilities and stockholders’ equity	$	180,823		$	126,748

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,
	2020			2019			2020			2019
Interest income:
Loans	$	1,561		$	1,097		$	2,974		$	2,187
Debt securities		49			72			95			122
Other		16			77			60			125

Total interest income		1,626			1,246			3,129			2,434

Interest expense:
Deposits		355			360			757			649
Borrowings		121			133			226			283

Total interest expense		476			493			983			932

Net interest income		1,150			753			2,146			1,502

Provision for loan losses		523			—			712			—

Net interest income after provision for loan losses		627			753			1,434			1,502

Noninterest income:
Service charges and fees		2			68			51			90
Other		31			19			55			34

Total noninterest income		33			87			106			124

Noninterest expenses:
Salaries and employee benefits		486			529			1,034			1,030
Professional fees		76			128			247			227
Occupancy and equipment		141			134			289			247
Data processing		132			129			249			253
Insurance		21			18			45			42
Regulatory assessment		29			18			70			22
Other		122			314			261			433

Total noninterest expenses		1,007			1,270			2,195			2,254

Net loss before income tax benefit		(347	)		(430	)		(655	)		(628	)

Income tax benefit		—			—			—			(52	)

Net loss	$	(347	)	$	(430	)	$	(655	)	$	(576	)

Net loss per share - Basic and diluted	$	(0.12	)	$	(.23	)	$	(0.23	)	$	(.31	)

See accompanying notes to condensed consolidated financial statements.

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2020			2019			2020			2019

Net loss	$	(347	)	$	(430	)	$	(655	)	$	(576	)

Other comprehensive income:
Change in unrealized gain on debt securities:
Unrealized gain arising during the year		20			68			66			74

Amortization of unrealized loss on debt securities transferred to held-to-maturity		24			23			48			39

Other comprehensive income before income tax expense		44			91			114			113

Deferred income tax expense on above change		(11	)		(23	)		(28	)		(28	)

Total other comprehensive income		33			68			86			85

Comprehensive loss	$	(314	)	$	(362	)	$	(569	)	$	(491	)

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, 2020 and 2019

(Dollars in thousands)

	Preferred Stock												Additional					Accumulated Other
	Series A				Series B				Common Stock				Paid-In		Accumulated			Comprehensive			Stockholders’
	Shares		Amount		Shares		Amount		Shares		Amount		Capital		Deficit			Loss			Equity

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 debt securities transferred to held-to-maturity, net of income taxes (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 debt 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

Balance at December 31, 2019		-	$	-		—	$	—		2,853,171	$	28	$	38,994	$	(31,610	)	$	(205	)	$	7,207

Proceeds from the sale of common stock (unaudited)		-		-		—		—		98,182		1		538		—			—			539

Net loss for the three months ended March 31, 2020 (unaudited)		-		-		—		—		—		—		—		(308	)		—			(308	)

Net change in unrealized gain on debt securities available for sale, net of income taxes (unaudited)		-		-		—		—		—		—		—		—			35			35

Amortization of unrealized loss on debt securities transferred to held-to-maturity, net of income taxes (unaudited)		-		-		—		—		—		—		—		—			18			18

Balance at March 31, 2020 (unaudited)		-	$	-		—	$	—		2,951,353	$	29	$	39,532	$	(31,918	)	$	(152	)	$	7,491

Proceeds from the sale of preferred stock (unaudited)		-		-		100		—		—		—		2,500		—			—			2,500

Net loss for the three months ended June 30, 2020 (unaudited)		-		-		—		—		—		—		—		(347	)		—			(347	)

Net change in unrealized gain on debt securities available for sale, net of income taxes (unaudited)		-		-		—		—		—		—		—		—			15			15

Amortization of unrealized loss on debt securities transferred to held-to-maturity, net of income taxes (unaudited)		-		-		—		—		—		—		—		—			18			18

Balance at June 30, 2020 (unaudited)		-	$	-		100	$	—		2,951,353	$	29	$	42,032	$	(32,265	)	$	(119	)	$	9,677

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,
	2020			2019
Cash flows from operating activities:
Net loss	$	(655	)	$	(576	)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for loan losses		712			—
Depreciation and amortization		85			86
Common stock issued as compensation to directors		—			201
Net amortization of fees, premiums and discounts		25			94
Increase in accrued interest receivable		(526	)		(56	)
Amortization of right-of-use operating lease assets		75			—
Net decrease in operating lease liabilities		(68	)		—
Increase in other assets		(254	)		(237	)
(Decrease) increase in official checks and other liabilities		(13	)		52
Net cash used in operating activities		(619	)		(436	)

Cash flows from investing activities:
Purchase of debt securities available for sale		—			(4,153	)
Principal repayments of debt securities available for sale		1,033			339
Principal repayments of debt securities held-to-maturity		763			527
Net increase in loans		(34,291	)		(3,702	)
Purchases of premises and equipment		(147	)		(94	)
(Purchase) redemption of FHLB stock		(450	)		490

Net cash used in investing activities		(33,092	)		(6,593	)

Cash flows from financing activities:
Net increase in deposits		36,698			23,523
Net decrease in federal funds purchased		—			(560	)
Net increase (decrease) in Federal Home Loan Bank advances		10,000			(11,600	)
Increase in other borrowings		4,988			—
Proceeds from sale of common stock		539			—
Proceeds from sale of preferred stock		2,500			—

Net cash provided by financing activities		54,725			11,363

Net increase in cash and cash equivalents		21,014			4,334

Cash and cash equivalents at beginning of the period		8,934			7,983

Cash and cash equivalents at end of the period	$	29,948		$	12,317

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	921		$	776

Income taxes	$	—		$	—

Noncash transaction -
Change in accumulated other comprehensive loss, net change in unrealized gain on debt securities available for sale, net of income taxes	$	86		$	85

Amortization of unrealized loss on debt securities transferred to held-to-maturity	$	48		$	39

Common stock issued and reclassified from other liabilities	$	—		$	28

Right-of use lease assets obtained in exchange for operating lease liabilities	$	—		$	281

See accompanying notes to condensed consolidated financial statements

(continued)

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. 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, 2020, the results of operations for the three and six month periods ended June 30, 2020 and 2019, and the results of cash flows for the six month periods ended June 30, 2020 and 2019. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and six months ended June 30, 2020, are not necessarily indicative of the results to be expected for the full year.

	*Subsequent Events.* The Company has evaluated subsequent events through August 11, 2020, which is the date the condensed consolidated financial statements were issued, determining no additional events required disclosure except as follows:

	The Company is subject to risks related to the public health crisis associated with the Coronavirus global pandemic (“COVID-19”). Federal, state and local governments have taken measures to slow the spread of COVID-19. These measures have included limiting travel, temporarily closing businesses and issuing stay at home orders which has caused a steep decline in economic activity. The long-term effect of these measures cannot be determined. Management believes the measures may have a significant impact on the Company’s financial position and results of operations. The amount of the impact is currently unquantifiable but deemed to be significant by management as the Company may likely experience an increase in the level of troubled assets, a reduction of cash flow from loan payments and an overall reduction in earnings as a result of COVID-19.

	*Junior Subordinated Debenture.* In 2004, the Company formed OptimumBank Capital Trust I (the “Trust’’) for the purpose of raising capital through the sale of trust preferred securities. At that time, the Trust raised $5,155,000 through the sale of 5,000 trust preferred securities (the “Trust Preferred Securities”) to a third party investor and the issuance of 155 common trust securities to the Company. The Trust utilized the proceeds of $5,155,000 to purchase a junior subordinated debenture from the Company (the “Junior Subordinated Debenture”). Under the Junior Subordinated Debenture, the Company is required to make interest payments on a periodic basis and to pay the outstanding principal amount plus accrued interest on October 7, 2034. The Company has been in default under the Junior Subordinated Debenture since 2015 due to its failure to make required interest payments. To date, neither the trustee nor the holders of the Trust Preferred Securities have accelerated the outstanding balance of the Junior Subordinated Debenture. In May 2018, Preferred Shares, LLC (the “Purchaser”) acquired all 5,000 of the Trust Preferred Securities from a third party. The Purchaser is an affiliate of a director of the Company. The Purchaser has subsequently sold or transferred 2,575 of the Trust Preferred Securities to third parties. During 2019 and 2018, 2,575 Trust Preferred Securities were exchanged for 1,226,173 shares of the Company’s common stock. For accounting purposes, the Trust Preferred Securities acquired by the Company have been cancelled. As a result, the Company cancelled $2,575,000 in principal amount of the Trust Preferred Securities, together with accrued interest of $974,000, and increased its stockholders’ equity by the same amount. The remaining principal owed by the Company in connection with the Junior Subordinated Debenture was $2,580,000 at June 30, 2020 and December 31, 2019, respectively. The remaining accrued interest owed by the Company associated with the Junior Subordinated Debenture was $1,067,000 and $995,000 at June 30, 2020 and December 31, 2019 respectively. The accrued interest is presented on the accompanying condensed consolidated balance sheet under the caption “Other liabilities”. The outstanding 2,425 Trust Preferred Securities continue to be in default. However, the Purchaser, as the owner of all of the outstanding Trust Preferred Securities, has provided the Company with written representation that it has no intention to accelerate the principal and accrued interest amounts due under the Junior Subordinated Debenture during the next twelve months following the date this Quarterly Report is filed with the Securities and Exchange Commission. The Company currently intends to acquire additional Trust Preferred Securities in 2020 in exchange for shares of its common stock, although it has not yet entered into any agreement or commitment with respect to such an exchange.

	*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 debt securities, are reported as a separate component of the equity section of the condensed consolidated balance sheets, such items along with net loss, are components of comprehensive loss.

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

	June 30,			December 31,
	2020			2019

Unrealized gain on debt securities available for sale	$	77		$	11
Unamortized portion of unrealized loss related to debt securities available for sale transferred to securities held-to-maturity		(236	)		(284	)
Income tax benefit		40			68

	$	(119	)	$	(205	)

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, 2020. 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.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. The Company is in the process of determining the effect of the ASU on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). ASU 2018-13 removes, modifies, and adds certain disclosure requirements associated with fair value measurements. ASU 2018-13 is effective for fiscal years, and interim periods, within those fiscal years, beginning after December 15, 2019. The removed and modified disclosures will be adopted on a prospective basis. Early adoption was permitted upon issuance of this ASU. The implementation had no significant impact on the Company's condensed consolidated financial statements.

(continued)

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(2)

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value

At June 30, 2020:
Held-to-maturity:
Collateralized mortgage obligations	$	3,632	$	202	$	—		$	3,834
Mortgage-backed securities		1,437		66		—			1,503
Total	$	5,069	$	268	$	—		$	5,337
Available for sale:
SBA Pool Securities	$	1,412	$	—	$	(45	)	$	1,367
Collateralized mortgage obligations		724		41		—			765
Mortgage-backed securities		2,196		81		—			2,277
Total	$	4,332	$	122	$	(45	)	$	4,409

	Cost		Gains		Losses			Value

At December 31, 2019:
Held-to-maturity:
Collateralized mortgage obligations	$	4,218	$	129		—		$	4,347
Mortgage-backed securities		1,588		51		—			1,639
Total	$	5,806	$	180		—		$	5,986
Available for sale:
SBA Pool Securities	$	1,734	$	—	$	(52	)	$	1,682
Collateralized mortgage obligations		998		18		—			1,016
Mortgage-backed securities		2,666		45		—			2,711
Total	$	5,398	$	63	$	(52	)	$	5,409

There were no sales of debt securities during the three and six months ended June 30, 2020 and 2019.

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

	Over Twelve Months				Less Than Twelve Months
	Gross				Gross
	Unrealized		Fair		Unrealized		Fair
	Losses		Value		Losses		Value
At June 30, 2020-
Available for Sale -
SBA Pool securities	$	45	$	1,367	$	—	$	—

At December 31, 2019-
Available for Sale -
SBA Pool Securities	$	52	$	1,682	$	—	$	—

(continued)

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(2)

Debt Securities Continued.

Management evaluates debt 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, 2020 and December 31, 2019, the unrealized losses on six debt securities, were caused by market conditions. It is expected that the debt 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			At
	June 30, 2020			December 31, 2019

Residential real estate	$	33,752		$	28,266
Multi-family real estate		11,474			8,396
Commercial real estate		61,952			55,652
Land and construction		3,979			2,496
Commercial		23,094			4,476
Consumer		4,843			4,903

Total loans		139,094			104,189

Net deferred loan fees, costs and premiums		(588	)		53
Allowance for loan losses		(2,664	)		(2,009	)

Loans, net	$	135,842		$	102,233

An analysis of the change in the allowance for loan losses follows (in thousands):

	Residential			Multi-Family			Commercial			Land and
	Real Estate			Real Estate			Real Estate			Construction			Commercial			Consumer			Unallocated			Total
Three Months Ended June 30, 2020:

Beginning balance	$	582		$	123		$	729		$	50		$	578		$	136		$	—		$	2,198
Provision (credit) for loan losses		132			30			159			(6	)		42			166			—			523
Charge-offs		—			—			—			—			—			(67	)		—			(67	)
Recoveries		3			—			—			6			—			1			—			10

Ending balance	$	717		$	153		$	888		$	50		$	620		$	236		$	—		$	2,664

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

Six Months Ended June 30, 2020:

Beginning balance	$	531		$	82		$	624		$	21		$	573		$	152		$	26		$	2,009
Provision (Credit) for loan losses		179			71			264			17			47			160			(26	)		712
Charge-offs		—			—			—			—			—			(77	)		—			(77	)
Recoveries		7			—			—			12			—			1			—			20

Ending balance	$	717		$	153		$	888		$	50		$	620		$	236		$	—		$	2,664

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

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

	Residential Real Estate		Multi- Family Real Estate		Commercial Real Estate		Land and Construction		Commercial		Consumer		Unallocated		Total
At June 30, 2020:
Individually evaluated for impairment:
Recorded investment	$	940	$	—	$	2,193	$	—	$	811	$	—	$	—	$	3,944
Balance in allowance for loan losses	$	272	$	—	$	—	$	—	$	579	$	—	$	—	$	851

Collectively evaluated for impairment:
Recorded investment	$	32,812	$	11,474	$	59,759	$	3,979	$	22,283	$	4,843	$	—	$	135,150
Balance in allowance for loan losses	$	445	$	153	$	888	$	50	$	41	$	236	$	—	$	1,813

At December 31, 2019:
Individually evaluated for impairment:
Recorded investment	$	944	$	—	$	2,206	$	—	$	812	$	—	$	—	$	3,962
Balance in allowance for loan losses	$	258	$	—	$	—	$	—	$	531	$	—	$	—	$	789

Collectively evaluated for impairment:
Recorded investment	$	27,322	$	8,396	$	53,446	$	2,496	$	3,664	$	4,903	$	—	$	100,227
Balance in allowance for loan losses	$	273	$	82	$	624	$	21	$	42	$	152	$	26	$	1,220

(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, 2020:
Residential real estate	$	32,812	$	—	$	940	$	—	$	—	$	33,752
Multi-family real estate		11,474		—		—		—		—		11,474
Commercial real estate		59,759		—		2,193		—		—		61,952
Land and construction		3,979		—		—		—		—		3,979
Commercial		21,688		595		811		—		—		23,094
Consumer		4,843		—		—		—		—		4,843

Total	$	134,555	$	595	$	3,944	$	—	$	—	$	139,094
								—		—
At December 31, 2019:								—		—
Residential real estate	$	27,322	$	—	$	944	$	—	$	—	$	28,266
Multi-family real estate		8,396		—		—		—		—		8,396
Commercial real estate		53,011		435		2,206		—		—		55,652
Land and construction		1,261		1,235		—		—		—		2,496
Commercial		3,027		637		812		—		—		4,476
Consumer		4,903		—		—		—		—		4,903

Total	$	97,920	$	2,307	$	3,962	$	—	$	—	$	104,189

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 affected 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, 2020:
Residential real estate	$	—	$	—	$	—	$	—	$	32,812	$	940	$	33,752
Multi-family real estate		—		—		—		—		11,474		—		11,474
Commercial real estate		—		—		—		—		61,952		—		61,952
Land and construction		—		—		—		—		3,979		—		3,979
Commercial		—		—		—		—		22,283		811		23,094
Consumer		—		17		—		17		4,826		—		4,843

Total	$	—	$	17	$	—	$	17	$	137,326	$	1,751	$	139,094

	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, 2019:
Residential real estate	$	944	$	—	$	—	$	944	$	27,322	$	—	$	28,266
Multi-family real estate		—		—		—		—		8,396		—		8,396
Commercial real estate		—		—		—		—		55,652		—		55,652
Land and construction		1,235		—		—		1,235		1,261		—		2,496
Commercial		—		—		—		—		3,664		812		4,476
Consumer		—		—		—		—		4,903		—		4,903

Total	$	2,179	$	—	$	—	$	2,179	$	101,198	$	812	$	104,189

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

	At June 30, 2020						At December 31, 2019
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial real estate	$	2,193	$	2,193	$	—	$	2,206	$	2,206		—
With related allowance recorded:
Residential real estate		940		940		272		944		944		258
Commercial		811		811		579		812		812		531
Total:
Residential real estate	$	940	$	940	$	272	$	944		944		258
Commercial real estate	$	2,193	$	2,193	$	—	$	2,206		2,206		—
Commercial	$	811	$	811	$	579	$	812	$	812	$	531
Total	$	3,944	$	3,944	$	851	$	3,962	$	3,962	$	789

(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,
	2020						2019
	Average		Interest		Interest		Average		Interest		Interest
	Recorded		Income		Income		Recorded		Income		Income
	Investment		Recognized		Received		Investment		Recognized		Received

Residential real estate	$	940	$	—	$	—	$	954	$	19	$	19
Commercial real estate	$	2,193	$	26	$	30	$	2,461	$	31	$	21
Commercial	$	811	$	—	$	—	$	1,302	$	20	$	11
Total	$	3,944	$	26	$	30	$	4,714	$	70	$	51

	Six Months Ended June 30,
	2020						2019
	Average		Interest		Interest		Average		Interest		Interest
	Recorded		Income		Income		Recorded		Income		Income
	Investment		Recognized		Received		Investment		Recognized		Received

Residential real estate	$	940	$	18	$	11	$	952	$	37	$	37
Commercial real estate	$	2,194	$	52	$	60	$	3,059	$	61	$	59
Commercial	$	811	$	—	$	18	$	1,548		43	$	39
Total	$	3,945	$	70	$	89	$	5,559	$	141	$	135

No loans have been determined to be troubled debt restructurings (TDR’s) during the three and six month periods ended June 30, 2020 or 2019. At June 30, 2020 and 2019, 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, 2020 or 2019.

(continued)

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(4)

Loss Per Share. Basic loss per share has been computed on the basis of the weighted-average number of shares of common stock outstanding during the period. In 2020 and 2019, basic and diluted loss per share are the same due to the net loss incurred by the Company. Loss per common share have been computed based on the following:

Three Months Ended

June 30,

Six Months Ended

June 30,

2020

2019

2020

2019

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

2,951,353

1,881,759

2,905,599

1,869,933

(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 2018 Equity Incentive Plan (the “2018 Plan”). The plan has been approved by the shareholders. The Company is authorized to issue 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.

	During the second quarter of 2019, the Company recorded compensation expense of $201,000 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 months ended

June 30, 2020

At June 30, 2020—

Residential real estate

668

—

668

272

—

Fair

Value

Level 1

Level 2

Level 3

Total

Losses

Recorded in

Operations For the six months ended

June 30, 2019

At December 31, 2019—

Residential real estate

686

—

686

258

—

Debt securities available for sale 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, 2020:
SBA Pool Securities	$	1,367	$	—	$	1,367	$	—
Collateralized mortgage obligations		765		—		765		—
Mortgage-backed securities		2,277		—		2,277		—
	$	4,409		—		4,409		—

At December 31, 2019:
SBA Pool Securities	$	1,682	$	—	$	1,682	$	—
Collateralized mortgage obligations		1,016		—		1,016		—
Mortgage-backed securities		2,711		—		2,711		—
Total	$	5,409		—	$	5,409	$	—

During the three and six month periods ended June 30, 2020 and 2019, no debt 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, 2020							At December 31, 2019
	Carrying Amount		Fair Value			Level		Carrying Amount		Fair Value			Level
Financial assets:
Cash and cash equivalents	$	29,948	$	29,948			1	$	8,934	$	8,934			1
Debt securities available for sale		4,409		4,409			2		5,409		5,409			2
Debt securities held-to-maturity		5,069		5,337			2		5,806		5,986			2
Loans		135,842		135,906			3		102,233		102,060			3
Federal Home Loan Bank stock		1,092		1,092			3		642		642			3
Accrued interest receivable		958		958			3		432		432			3

Financial liabilities:
Deposit liabilities		138,070		138,328			3		101,372		101,256			3
Federal Home Loan Bank advances		23,000		22,607			3		13,000		13,137			3
Junior subordinated debenture		2,580		N/A	(1)		N/A		2,580		N/A	(1)		N/A
Other borrowings		4,988		4,988					-		-
Off-balance sheet financial instruments		—		—			3		—		—			3

(1)	The Company is unable to determine value based on significant unobservable inputs required in the calculation. Refer to Note 1 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, 2020 follows (in thousands):

Commitments to extend credit	$	5,902

Unused lines of credit	$	5,569

Standby letters of credit	$	1,550

(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 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.

	Regulatory banking agencies issued final rules on October 29, 2019 that provide simplified capital measures, including a simplified measure of capital adequacy for qualifying community banking organizations consistent with section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. Qualifying community banking organizations with less than $10 billion of assets that comply with, and elect to use, the community bank leverage ratio (“CBLR”) and that maintain a CBLR greater than 8% in 2020 would be considered to be “well-capitalized” and would no longer be subject to the other generally applicable capital rules. The CBLR would be used and applied for purposes of compliance with the Federal Banking Agencies ‘prompt corrective action rules, and Federal Reserve Regulation O and W compliance, as well as in calculating FDIC deposit insurance assessments. The CBLR, among other proposals, reflects the regulatory banking agencies’ focus on appropriately tailoring capital requirements to an institution’s size, complexity and risk profile. The CBLR was first available for banking organizations to use in their March 31, 2020 Call Report. Non-advanced approaches banking organizations will also be able to take advantage of simpler regulatory capital requirements for mortgage servicing assets, certain deferred tax assets arising from temporary differences and investments in unconsolidated financial institutions. As of June 30, 2020, the Company has determined to opt in adopting the new CBLR.

(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, 2020 and December 31, 2019 (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, 2020—
Tier I Capital to Total Assets	$	13,153		8.51	%	$	6,181		4.00	%	$	7,726		5.00	%

As of December 31, 2019:
Total Capital to Risk-Weighted Assets	$	12,212		12.03	%	$	8,124		8.00	%	$	10,154		10.00	%
Tier I Capital to Risk-Weighted Assets		10,934		10.77			6,093		6.00	%		8,124		8.00	%
Common equity Tier I capital to Risk-Weighted Assets		10,934		10.77			4,569		4.50	%		6,600		6.50	%
Tier I Capital to Total Assets		10,934		8.73			5,010		4.00	%		6,263		5.00	%

(10)

Preferred Stock

The company issued 100 shares of Series B Participating Preferred Stock (the “Preferred Stock”) to a related party at $25,000 per share. The related party is a significant common stockholder. The Preferred Stock has no preferential rate of return. The Preferred Stock has no par value and is convertible into 1,000,000 shares of common stock, at the option of the Company. The conversion is subject to adjustment based on the terms of the Certificate of Designation in the Amendment to the Company’s Articles of Incorporation filed on June 23, 2020 (the “Certificate of Designation”) The Preferred Stock has preferential liquidation rights over common stockholders. The Preferred Stock generally has no voting rights except as provided in the Certificate of Designation. The liquidation price is the greater of $25,000 per share of preferred stock or such amount per share of preferred stock that would have been payable had all shares of the preferred stock been converted into common stock per the terms of the Certificate of Designation immediately prior to a liquidation.

(continued)

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, 2019 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.

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, 2020, the Bank is well capitalized under the regulatory framework for prompt corrective action.

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

(continued)

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, 2020 and December 31, 2019

Overview

The Company’s total assets increased by approximately $54.1 million to $180.8 million at June 30, 2020, from $126.8 million at December 31, 2019, primarily due to an increase in loans, and cash and cash equivalents corresponding to an increase in deposits, FHLB advances, and other borrowings. Total stockholders’ equity increased by approximately $2.5 million to $9.7 million at June 30, 2020, from $7.2 million at December 31, 2019, primarily due to proceeds from the sale of preferred and common stock which more than offset the net loss for the six month period ended June 30, 2020.

The following table shows selected information for the periods ended or at the dates indicated:

	Six Month Period Ended June 30, 2020			Year Ended December 31, 2019

Average equity as a percentage of average assets		5.1	%		4.6	%

Equity to total assets at end of period		5.4	%		5.6	%

Return on average assets (1)		(0.9	)%		(1.0	)%

Return on average equity (1)		(17.7	)%		(21.3	)%

Noninterest expenses to average assets (1)		3.0	%		4.0	%

(1) Annualized for the six month period ended June 30, 2020.

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, 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 Company increased deposits by $36.7 million during the six month period ended June 30, 2020. The proceeds were used to originate new loans.

In addition to obtaining funds from depositors, the Company may borrow funds from other financial institutions. At June 30, 2020, the Company had outstanding borrowings of $23 million, against its $45 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. In 2010, the Company obtained 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, 2020, the Company also had lines of credit amounting to $9.5 million with four correspondent banks. Also at June 30, 2020, the Company had outstanding borrowings of $5.0 million against an available paycheck protection program liquidity facility with the Federal Reserve Bank, to purchase federal funds. 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 Financial Instruments.

Junior Subordinated Debenture

Please refer to Note 1 for discussion on this matter.

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

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

Results of Operationss

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,
	2020								2019
				Interest		Average						Interest		Average
	Average			and		Yield/			Average			and		Yield/
(dollars in thousands)	Balance			Dividends		Rate⁽⁵⁾			Balance			Dividends		Rate⁽⁵⁾
Interest-earning assets:
Loans	$	126,385		$	1,561		4.94	%	$	81,325		$	1,097		5.4	%
Securities		10,053			49		1.95	%		12,954			72		2.22
Other (1)		13,204			16		0.48	%		10,199			77		3.02

Total interest-earning assets/interest income		149,642			1,626		4.35	%		104,478			1,246		4.81

Cash and due from banks		5,970								2,149
Premises and equipment		1,470								2,644
Other		1,173								(912	)

Total assets	$	158,255							$	108,359

Interest-bearing liabilities:
Savings, NOW and money-market deposits	$	70,402			213		1.21	%	$	43,329			199		1.84
Time deposits		29,521			142		1.92	%		28,956			161		2.22
Borrowings (2)		29,068			121		1.67	%		18,155			133		2.93

Total interest-bearing liabilities/interest expense		128,991			476		1.48	%		90,440			493		2.18

Noninterest-bearing demand deposits		19,234								10,860
Other liabilities		2,506								2,017
Stockholders’ equity		7,524								5,042

Total liabilities and stockholders’ equity	$	158,255							$	108,359

Net interest income				$	1,150							$	753

Interest rate spread (3)							2.87	%							2.63	%

Net interest margin (4)							3.07	%							2.89	%

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

(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)

	Six Months Ended June 30,
	2020								2019
				Interest		Average						Interest		Average
	Average			and		Yield/			Average			and		Yield/
(dollars in thousands)	Balance			Dividends		Rate⁽⁵⁾			Balance			Dividends		Rate⁽⁵⁾
Interest-earning assets:
Loans	$	116,565		$	2,974		5.10	%	$	81,445		$	2,187		5.37	%
Securities		10,478			95		1.81	%		10,787			122		2.26
Other (1)		12,326			60		0.97	%		9,824			125		2.54

Total interest-earning assets/interest income		139,369			3,129		4.49	%		102,056			2,434		4.77

Cash and due from banks		4,382								2,239
Premises and equipment		1,466								2,648
Other		911								(1,100	)

Total assets	$	146,128							$	105,843

Interest-bearing liabilities:
Savings, NOW and money-market deposits	$	63,831			439		1.38	%	$	39,274			289		1.47
Time deposits		31,407			318		2.03	%		28,174			360		2.56
Borrowings (2)		24,106			226		1.88	%		19,855			283		2.85

Total interest-bearing liabilities/interest expense		119,344			983		1.65	%		87,303			932		2.14

Noninterest-bearing demand deposits		16,899								11,352
Other liabilities		2,489								2,059
Stockholders’ equity		7,396								5,129

Total liabilities and stockholders’ equity	$	146,128							$	105,843

Net interest income				$	2,146							$	1,502

Interest rate spread (3)							2.84	%							2.63	%

Net interest margin (4)							3.08	%							2.94	%

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

(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, 2020 and 2019 (dollars in thousands):

	Three Months Ended						Increase /
	June 30,						(Decrease)
(dollars in thousands)	2020			2019			Amount			Percentage
Total interest income	$	1,626		$	1,246		$	380			30	%
Total interest expense		476			493			(17	)		(3	)
Net interest income		1,150			753			397			53
Provision for loan losses		523			-			523			100
Net interest income after provision for loan losses		627			753			(126	)		(17	)
Total noninterest income		33			87			(54	)		(62	)
Total noninterest expenses		1,007			1,270			(263	)		(21	)
Net loss before income tax benefit		(347	)		(430	)		83			19
Income tax benefit		-			-			-			-
Net Loss	$	(347	)	$	(430	)		83			19
Net loss per share - Basic and diluted	$	(0.12	)	$	(0.23	)

Net Loss. The Company had a net loss of $347,000 for the three month period ended June 30, 2020 compared to $430,000 for the three month period ended June 30, 2019. The Company recorded provision for loan losses amounting to $523,000 during the three month period ended June 30, 2020, which was largely due to the economic environment associated with the COVID-19 pandemic. No provision for loan losses was recorded during the three month period ended June 30, 2019. Excluding the provision for loan losses, the Company would have had net earnings of $176,000 for the three month period ended June 30, 2020 and a net loss of $430,000 for the three month period ended June 30, 2019. Excluding the provision for loan losses, net earnings increased $606,000 for the three month period ended June 30, 2020 as compared to the three month period ended June 30, 2019.

Interest Income. Interest income increased $380,000 for the three month period ended June 30, 2020 compared to the three month period ended June 30, 2019 primarily due to growth in the loan portfolio.

Interest Expense. Interest expense decreased $17,000 to $476,000 for the three month period ended June 30, 2020 compared to the prior period. This decrease in interest expense is due to a 70-basis point reduction in the average rate paid on deposits and borrowings offset by volume increase in deposits and borrowings.

Provision for Loan Losses. Provision for loan losses amounted to $523,000 for the three month period ended June 30, 2020. There was no provision for losses during the 2019 period. The provision for loan losses is charged to operations 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, 2020 and 2019. 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 $2.6 million or 1.92% of loans outstanding at June 30, 2020, compared to $2.0 million or 1.93% of loans outstanding at December 31, 2019. The provision for loan losses during the second quarter of 2020 was primarily due to the increase in the loan portfolio, and an evaluation of the other factors noted above.

Noninterest Income. Total noninterest income decreased to $33,000 for the three month period ended June 30, 2020, from $87,000 for the three month period ended June 30, 2019 due to decreased loan related fees.

Noninterest Expenses. Total noninterest expenses decreased to $1,007,000 for the three month period ended June 30, 2020 compared to $1,270,000 for the three month period ended June 30, 2019 primarily due to a decrease in salaries and employee benefits, professional fees, and other.

Comparison of the Six-Month Periods Ended June 30, 2020 and 2019 (dollars in thousands):

	Six Months Ended						Increase /
	June 30,						(Decrease)
(dollars in thousands)	2020			2019			Amount			Percentage
Total interest income	$	3,129		$	2,434		$	695			29	%
Total interest expense		983			932			51			5
Net interest income		2,146			1,502			644			43
Provision for loan losses		712			-			712			100
Net interest income after provision for loan losses		1,434			1,502			(68	)		(5	)
Total noninterest income		106			124			(18	)		(15	)
Total noninterest expenses		2,195			2,254			(59	)		(3	)
Net loss before income tax benefit		(655	)		(628	)		(27	)		4
Income tax benefit		-			(52	)		-			-
Net Loss	$	(655	)	$	(576	)		(79	)		14
Net loss per share - Basic and diluted	$	(0.23	)	$	(0.31	)

Net Loss. The Company had a net loss of $655,000 for the six month period ended June 30, 2020 compared to $576,000 for the six month period ended June 30, 2019. The Company recorded provision for loan losses amounting to $712,000 during the six month period ended June 30, 2020, which was largely due to the economic environment associated with the COVID-19 pandemic. No provision for loan losses was recorded during the six month period ended June 30, 2019. Excluding the provision for loan losses, the Company would have had net earnings of $57,000 for the six month period ended June 30, 2020 and a net loss of $576,000 for the six month period ended June 30, 2019. Excluding the provision for loan losses, net earnings increased $633,000 for the six month period ended June 30, 2020 as compared to the six month period ended June 30, 2019.

Interest Income. Interest income increased to $3,129,000 for the six month period ended June 30, 2020 from $2,434,000 for the six month period ended June 30, 2019, primarily due to an increase in loan volume.

Interest Expense. Interest expense on deposits and borrowings increased $51,000 to $983,000 for the six month period ended June 30, 2020 compared to the prior period. The increase in interest expense was caused by an increase in volume of deposits and in borrowings, partially offset by reduction in interest rates.

Provision for Loan Losses. The provision for losses during the six month period ended June 30, 2020 amounted to $712,000. The provision or credit for loan losses is charged to operations 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, 2020 and 2019. 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 $2.6 million or 1.92% of loans outstanding at June 30, 2020, as compared to $2.0 million or 1.93% of loans outstanding at December 31, 2019.

Noninterest Income. Total noninterest income decreased by $18,000 for the six month period ended June 30, 2020, to $106,000 compared to $124,000 for the six month period ended June 30, 2019 due to decreased loan related fees.

Noninterest Expenses. Total noninterest expenses decreased $59,000 to $2.2 million for the six month period ended June 30, 2020 compared to $2.3 million for the six month period ended June 30, 2019.

COVID-19 related loan data

Loan Forbearance. During 2020 we granted 180-day forbearances on 60 loans totaling $43.8 million, which accounted for 31.5% of our gross loan portfolio.

Paycheck Protection Program (“PPP”). We closed 181 PPP loans totaling $18.8 million during the six month period ending June 30, 2020.

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, 2020, 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 second quarter of 2020, the Company issued 100 shares of preferred stock to a related party for an aggregate purchase price of $2,500,000. The related party is a significant common stockholder. The issuance of the shares in this transaction was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933 as a transaction by an issuer not involving a public offering. The Company used the proceeds to augment the Bank’s regulatory capital ratios.

Item 3. Defaults on Senior Securities

Previously disclosed.

Item 4. Mine Safety Disclosures

None

Item 5. Other Information

None

Item 6. Exhibits

The exhibits listed 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 11, 2020	By:	/s/ Timothy Terry
		Timothy Terry,
		Principal Executive Officer

	By:	/s/ Joel Klein
		Joel Klein
		Principal Financial Officer

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

EXHIBIT INDEX

Exhibit No.		Description

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