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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

 

or

 

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

 

For the transition period from __________ to _________

 

Commission File Number: 000-50755

 

OPTIMUMBANK HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

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

 

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

 

i

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

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

 

   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.

 

1
 

 

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.

 

2
 

 

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.

 

3
 

 

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

 

4
 

 

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)

 

5
 

 

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)

 

6
 

 

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)

 

7
 

 

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)

 

8
 

 

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)

 

9
 

 

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 

 

10
 

 

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)

 

11
 

 

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)

 

12
 

 

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)

 

13
 

 

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)

 

14
 

 

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)

 

15
 

 

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)

16
 

 

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

  

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

  

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)

 

17
 

 

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)

 

18
 

 

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)

 

19
 

 

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)

 

20
 

 

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.

 

21
 

 

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.

 

22
 

 

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.

 

23
 

 

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.

 

24
 

 

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.

 

25
 

 

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

 

26
 

 

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

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

EXHIBIT INDEX

 

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

 

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