OptimumBank Holdings, Inc. - Quarter Report: 2023 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2023

☐	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 ☒ 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 ☒ No ☐

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

Large accelerated filer ☐		Accelerated filer ☐
Non-accelerated filer ☒		Smaller reporting company ☒
		Emerging growth company ☐

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 7,250,219 shares of common stock, $.01 par value, issued and outstanding as of November 9, 2023.

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

INDEX

	Page

PART I. FINANCIAL INFORMATION	1

Item 1. Financial Statements	1

Condensed Consolidated Balance Sheets - September 30, 2023 (unaudited) and December 31, 2022 (audited)	1

Condensed Consolidated Statements of Earnings – Three and Nine Months ended September 30, 2023 and 2022 (unaudited)	2

Condensed Consolidated Statements of Comprehensive Income (Loss) – Three and Nine Months ended September 30, 2023 and 2022 (unaudited)	3

Condensed Consolidated Statements of Stockholders’ Equity – Three and Nine Months ended September 30, 2023 and 2022 (unaudited)	4

Condensed Consolidated Statements of Cash Flows - Nine Months ended September 30, 2023 and 2022 (unaudited)	5

Notes to Condensed Consolidated Financial Statements (unaudited)	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 4. Controls and Procedures	30

PART II. OTHER INFORMATION	31

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 5. Other Information	31

Item 6. Exhibits	31

SIGNATURES	32

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets

(Dollars in thousands, except share amounts)

	September 30, 2023			December 31, 2022
	(Unaudited)
Assets:
Cash and due from banks	$	9,558		$	19,788
Interest-bearing deposits with banks		94,440			52,048
Total cash and cash equivalents		103,998			71,836
Debt securities available for sale		23,084			25,102
Debt securities held-to-maturity (fair value of $348 and $504)		393			540
Loans, net of allowance for credit losses of $7,200 and $5,793		573,586			477,218
Federal Home Loan Bank stock		884			600
Premises and equipment, net		1,251			934
Right-of-use lease assets		2,231			2,119
Accrued interest receivable		1,782			1,444
Deferred tax asset		3,288			3,836
Other assets		2,738			1,590

Total assets	$	713,235		$	585,219
Liabilities and Stockholders’ Equity:

Liabilities:
Noninterest-bearing demand deposits	$	211,695		$	159,193
Savings, NOW and money-market deposits		253,334			108,726
Time deposits		153,345			239,980

Total deposits		618,374			507,899

Federal Home Loan Bank advances		10,000			10,000
Federal Reserve Bank advances		13,600			—
Operating lease liabilities		2,310			2,172
Other liabilities		2,701			2,568

Total liabilities		646,985			522,639

Commitments and contingencies (Notes 8 and 11)		-			-
Stockholders’ equity:
Preferred stock, no par value; 6,000,000 shares authorized:		—			—
Series A Preferred, no par value, no shares issued and outstanding		—			—
Series B Convertible Preferred, no par value, 1,520 shares authorized, 1,360 shares issued and outstanding		—			—
Preferred stock, value		—			—
Common stock, $.01 par value; 30,000,000 and 10,000,000 shares authorized, 7,250,219 and 7,058,897 shares issued and outstanding		72			71
Additional paid-in capital		91,221			90,408
Accumulated deficit		(18,520	)		(22,073	)
Accumulated other comprehensive loss		(6,523	)		(5,826	)

Total stockholders’ equity		66,250			62,580
Total liabilities and stockholders’ equity	$	713,235		$	585,219

See accompanying notes to condensed consolidated financial statements.

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Earnings (Unaudited)

(in thousands, except per share amounts)

	2023		2022		2023		2022
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Interest income:
Loans	$	7,996	$	5,000	$	21,837	$	12,027
Debt securities		167		153		517		475
Other		739		341		2,243		480

Total interest income		8,902		5,494		24,597		12,982

Interest expense:
Deposits		2,841		803		7,829		1,148
Borrowings		147		386		203		549

Total interest expense		2,988		1,189		8,032		1,697

Net interest income		5,914		4,305		16,565		11,285

Credit loss expense		1,446		1,374		2,970		2,757

Net interest income after credit loss expense		4,468		2,931		13,595		8,528

Noninterest income:
Service charges and fees		881		637		2,359		1,906
Other		30		55		53		200

Total noninterest income		911		692		2,412		2,106

Noninterest expenses:
Salaries and employee benefits		2,141		1,421		6,148		4,063
Professional fees		161		129		529		418
Occupancy and equipment		204		185		581		527
Data processing		455		324		1,206		886
Regulatory assessment		89		46		522		146
Litigation Settlement		—		—		375		—
Other		601		615		1,614		1,280

Total noninterest expenses		3,651		2,720		10,975		7,320

Net earnings before income taxes		1,728		903		5,032		3,314

Income taxes		459		230		1,298		841

Net earnings	$	1,269	$	673	$	3,734	$	2,473

Net earnings per share - Basic and diluted	$	0.18	$	0.11	$	0.52	$	0.44
Net earnings per share - Basic	$	0.18	$	0.11	$	0.52	$	0.44

See accompanying notes to condensed consolidated financial statements.

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

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

(In thousands)

	2023			2022			2023			2022
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2023			2022			2023			2022

Net earnings	$	1,269		$	673		$	3,734		$	2,473

Other comprehensive loss:
Change in unrealized loss on debt securities:
Unrealized loss arising during the period		(1,271	)		(1,084	)		(937	)		(6,989	)

Amortization of unrealized loss on debt securities transferred to held-to-maturity		2			1			4			12

Other comprehensive loss before income taxes		(1,269	)		(1,083	)		(933	)		(6,977	)

Deferred income taxes benefit		321			276			236			1,771

Total other comprehensive loss		(948	)		(807	)		(697	)		(5,206	)

Comprehensive income (loss)	$	321		$	(134	)	$	3,037		$	(2,733	)

See accompanying notes to condensed consolidated financial statements.

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Stockholders’ Equity

Three and Nine Months Ended September 30, 2023 and 2022

(Dollars in thousands)

	Shares		Amount		Shares		Amount		Shares		Amount		Capital		Deficit			Loss			Equity
	Preferred Stock												Additional					Accumulated
	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, 2021 (audited)		—		—		760		—		4,775,281	$	48		65,193		(26,096	)		(635	)	$	38,510

Proceeds from the sale of preferred stock (unaudited)		—		—		260		—		—		—		6,500		—			—			6,500

Proceeds from the sale of common stock (unaudited)		—		—		—		—		1,227,331		12		5,511		—			—			5,523

Net change in unrealized loss on debt securities available for sale (unaudited)		—		—		—		—		—		—		—		—			(2,078	)		(2,078	)

Amortization of unrealized loss on debt securities transferred to held-to-maturity (unaudited)		—		—		—		—		—		—		—		—			7			7

Net earnings (unaudited)		—		—		—		—		—		—		—		855			—			855

Balance at March 31, 2022 (unaudited)		—		—		1,020		—		6,002,612	$	60		77,204		(25,241	)		(2,706	)		49,317

Stock-based Compensation (unaudited)		—		—		—		—		24,493		—		96		—			—			96

Net change in unrealized loss on debt securities available for sale (unaudited)		—		—		—		—		—		—		—		—			(2,332	)		(2,332	)

Amortization of unrealized loss on debt securities transferred to held-to-maturity (unaudited)		—		—		—		—		—		—		—		—			4			4

Net earnings (unaudited)		—		—		—		—		—		—		—		945			—			945

Balance at June 30, 2022 (unaudited)		—	$	—		1,020	$	—		6,027,105	$	60	$	77,300	$	(24,296	)	$	(5,034	)	$	48,030

Stock-based Compensation (unaudited)		—		—		—		—		67,182		1		274		—			—			275

Proceeds from the sale of common stock (unaudited)		—		—		—		—		674,222		7		3,027		—			—			3,034

Net change in unrealized loss on debt securities available for sale (unaudited)		—		—		—		—		—		—		—		—			(808	)		(808	)

Amortization of unrealized loss on debt securities transferred to held-to-maturity (unaudited)		—		—		—		—		—		—		—		—			1			1

Net earnings (unaudited)		—		—		—		—		—		—		—		673			—			673

Balance at September 30, 2022 (unaudited)		—	$	—		1,020	$	—		6,768,509	$	68	$	80,601	$	(23,623	)	$	(5,841	)	$	51,205

Balance at December 31, 2022 (audited)		—	$	—		1,360	$	—		7,058,897	$	71	$	90,408	$	(22,073	)	$	(5,826	)	$	62,580

Additional allowance recognized due to adoption of Topic 326		—		—		—		—		—		—		—		(181	)		—			(181	)

Proceeds from the sale of common stock (unaudited)		—		—		—		—		72,221		—		324		—			—			324

Stock-based Compensation (unaudited)		—		—		—		—		119,101		1		489		—			—			490

Net change in unrealized loss on debt securities available for sale (unaudited)		—		—		—		—		—		—		—		—			538			538

Amortization of unrealized loss on debt securities transferred to held-to-maturity (unaudited)		—		—		—		—		—		—		—		—			1			1

Net earnings (unaudited)		—		—		—		—		—		—		—		1,153			—			1,153

Balance at March 31, 2023 (unaudited)		—	$	—		1,360	$	—		7,250,219	$	72	$	91,221	$	(21,101	)	$	(5,287	)	$	64,905

Net change in unrealized loss on debt securities available for sale (unaudited)		—		—		—		—		—		—		—		—			(289	)		(289	)

Amortization of unrealized loss on debt securities transferred to held-to-maturity (unaudited)		—		—		—		—		—		—		—		—			1			1

Net earnings (unaudited)		—		—		—		—		—		—		—		1,312			—			1,312

Balance at June 30, 2023 (unaudited)		—	$	—		1,360	$	—		7,250,219	$	72	$	91,221	$	(19,789	)	$	(5,575	)	$	65,929
Balance		—	$	—		1,360	$	—		7,250,219	$	72	$	91,221	$	(19,789	)	$	(5,575	)	$	65,929

Net change in unrealized loss on debt securities available for sale (unaudited)		—		—		—		—		—		—		—		—			(950	)		(950	)

Amortization of unrealized loss on debt securities transferred to held-to-maturity (unaudited)		—		—		—		—		—		—		—		—			2			2

Net earnings (unaudited)		—		—		—		—		—		—		—		1,269			—			1,269

Balance at September 30, 2023 (unaudited)		—	$	—		1,360	$	—		7,250,219	$	72	$	91,221	$	(18,520	)	$	(6,523	)	$	66,250
Balance		—	$	—		1,360	$	—		7,250,219	$	72	$	91,221	$	(18,520	)	$	(6,523	)	$	66,250

See accompanying notes to condensed consolidated financial statements.

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	2023			2022
	Nine Months Ended
	September 30,
	2023			2022
Cash flows from operating activities:
Net earnings	$	3,734		$	2,473
Adjustments to reconcile net earnings to net cash provided by operating activities:
Credit loss expense		2,970			2,757
Depreciation and amortization		172			172
Deferred income taxes		857			845
Net accretion of fees, premiums and discounts		6			(283	)
Stock-based compensation expense		490			371
Decrease in accrued interest receivable		(338	)		(231	)
Amortization of right of use asset		203			278
Net decrease in operating lease liabilities		(177	)		(268	)
Increase in other assets		(1,148	)		(138	)
(Decrease) increase in other liabilities		(226	)		775
Net cash provided by operating activities		6,543			6,751

Cash flows from investing activities:

Principal repayments of debt securities available for sale		976			1,814
Principal repayments of debt securities held-to-maturity		151			469
Net increase in loans		(99,134	)		(186,880	)
Purchases of premises and equipment		(489	)		(201	)
Purchase of FHLB stock		(284	)		(1,932	)

Net cash used in investing activities		(98,780	)		(186,730	)

Cash flows from financing activities:
Net increase in deposits		110,475			129,745
Net increase in FHLB Advances		—			50,000
Net increase in FRB Advances		13,600			—
Proceeds from sale of preferred stock		—			6,500
Proceeds from sale of common stock		324			8,557

Net cash provided by financing activities		124,399			194,802

Net increase in cash and cash equivalents		32,162			14,823

Cash and cash equivalents at beginning of the period		71,836			58,970

Cash and cash equivalents at end of the period	$	103,998		$	73,793

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	7,888		$	1,640

Income taxes	$	457		$	—

Noncash transactions:
Change in accumulated other comprehensive loss, net change in unrealized loss on debt securities available for sale, net of income taxes	$	(697	)	$	(5,206	)

Amortization of unrealized loss on debt securities transferred to held-to-maturity	$	4		$	12
Reduction stockholders’ equity due to adoption of Topic 326, net		(181	)		—
Right-of use lease assets obtained in exchange for operating lease liabilities	$	315		$	—

See accompanying notes to condensed consolidated financial statements.

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(1) General. OptimumBank Holdings, Inc. (the “Company”) is a one-bank holding company and owns 100% of OptimumBank (the “Bank”), a Florida-chartered community 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 two banking offices located in Broward County, Florida. The Bank also markets its deposit and electronic funds transfer services on a national basis to merchant cash advance providers.

Basis of Presentation. In the opinion of management, the accompanying condensed consolidated financial statements of the Company contain all adjustments (consisting principally of normal recurring accruals) necessary to present fairly the financial position at September 30, 2023, and the results of operations and cash flows for the three and nine month periods ended September 30, 2023 and 2022. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and nine months ended September 30, 2023, are not necessarily indicative of the results to be expected for the full year.

Comprehensive Income (Loss). Generally Accepted Accounting Principles generally require that recognized revenue, expenses, gains and losses be included in net earnings. 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 earnings, are components of comprehensive income (loss).

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

	September 30, 2023			December 31, 2022

Unrealized loss on debt securities available for sale	$	(8,723	)	$	(7,786	)
Unamortized portion of unrealized loss related to debt securities available for sale transferred to securities held-to-maturity		(14	)		(18	)
Income tax benefit		2,214			1,978

Accumulated other comprehensive loss	$	(6,523	)	$	(5,826	)

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

Adoption of New Accounting Standards. The Company adopted Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and the related amendments (collectively, Accounting Standards Codification 326), effective January 1, 2023. The guidance replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to certain off-balance sheet credit exposures not accounted for as insurance, including loan commitments, standby letters of credits, financial guarantees, and other similar instruments. In addition, Accounting Standards Codification 326 (“ASC 326”) made changes to the accounting for debt securities available for sale. One such change is to require credit losses to be presented as an allowance rather than as a write-down on debt securities available for sale that management does not intend to sell or believes that it is more likely than not, they will not be required to sell. ASC 326 also changed the accounting for purchased financial assets with credit deterioration.

(continued)

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(1)

General, Continued.

The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The adoption of CECL resulted in the recognition of $218,000 allowance for credit losses, $23,000 of liability for unfunded commitments, a deferred income tax asset of $60,000 and a reduction in retained earnings of $181,000. With this transition method, the Company did not have to restate comparative prior periods presented in the consolidated financial statements related to ASC 326 but will present comparative prior periods disclosures using the previous accounting guidance for the allowance for loan losses. The Company adopted ASC 326 using the prospective transition approach for debt securities available for sale. As of January 1, 2023, the Company did not have any allowance for credit losses on debt securities.

Allowance for Credit Losses (“ACL”). The following is a summary of the Company’s significant accounting policies with respect to ASC 326:

ACL - Debt Securities Available for Sale. Management uses a systematic methodology to determine its ACL for debt securities available for sale. Each quarter management evaluates impairment where there has been a decline in fair value below the amortized cost basis to determine whether there is a credit loss associated with the decline in fair value. The Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either one of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which the fair value is less than the amortized cost basis, among various other factors, including the nature of the collateral, potential future changes in collateral values, default rates, delinquency rates, third-party guarantees, credit ratings, interest rate changes since purchase, volatility of the security’s fair value and historical loss information for financial assets secured with similar collateral among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis. If the present value of cash flows expected to be collected is less than the amortized cost basis, an ACL is recorded, which is limited by the amount that the fair value is less than the amortized cost basis. Credit losses are calculated individually, rather than collectively. Any impairment that has not been recorded through an ACL is recognized in other comprehensive loss.

Changes in the ACL are recorded as credit loss expense. Losses are charged against the ACL when management believes the collectability of the debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Management excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on the debt securities available for sale and does not record an ACL on accrued interest receivable. As of September 30, 2023, the accrued interest receivable for debt securities available for sale recognized in accrued interest receivable was $139,000.

ACL – Debt Securities Held to Maturity. The Company measures expected credit losses on debt securities held to maturity on a collective basis by major security type. U.S. Government agency securities, Mortgage-backed securities and collateralized mortgage obligations are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. Taxable municipal securities are highly rated by major credit agencies.

(continued)

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(1)

General, Continued.

ACL - Loans. The ACL reflects management’s estimate of losses that will result from the inability of our borrowers to make required loan payments. The Company records loans charged-off against the ACL when management believes the uncollectability of a loan balance is confirmed and subsequent recoveries, if any, increase the ACL when they are recognized.

Management uses systematic methodologies to determine its ACL for loans and certain off- balance sheet credit exposures. The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio. Management estimates the ACL using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of the expected credit losses. Adjustments to historical loss information are made for the differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors.

The Company’s estimate of its ACL involves a high degree of judgment; therefore, management’s process for determining expected credit losses may result in a range of expected credit losses.

The Company’s ACL recorded in the balance sheet reflects management’s best estimate of expected credit losses. The Company recognizes in earnings the amount needed to adjust the ACL for management’s current estimate of expected credit losses. The Company’s ACL is calculated using collectively evaluated and individually evaluated loans.

The ACL is measured on a collective pool basis when similar risk characteristics exist. Loans with similar risk characteristics are grouped into homogenous segments for analysis. The Company’s ACL is measured based on FDIC call report codes as these types of loans exhibit similar risk characteristics. The loan portfolio is further segmented by loan product type, collateral codes, occupancy codes, property code or lien position and are representative of the manner in which the Company lends.

The ACL for each segment is measured through the use of the average charge-off method. In accordance with the average charge-off method, an annual loss rate is applied to the amortized cost of an asset or pool of assets over the remaining expected life. The annual loss rate consists of historical and forecasted loss components. The forecasted component is applied using loss rates from historical periods that management believes are representative of economic conditions over a full economic cycle. For certain loan segments with limited credit loss histories, management determined the loss experience of peer banks provides the best basis for its assessment of expected credit losses. Other loan segments with more established loss histories utilize historical loss experience of the Company. Management determined that the appropriate historical loss period will begin in the first quarter of 2001 and continue through the most recent quarter, which represents a full peak to peak economic cycle. Additionally, management has determined that the Company’s reasonable and supportable forecast period is one year.

Included in its systematic methodology to determine its ACL, management considers the need to qualitatively adjust model results for risk factors that are not considered within the Company’s loss estimation process but are nonetheless relevant in assessing the expected credit losses within our loan pools.

(continued)

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(1)

General, Continued.

These qualitative factors (“Q-Factors”) may increase or decrease management’s estimate of expected credit losses by a calculated percentage based upon the estimated level of risk. The various risks that may be considered in making Q-Factor adjustments include, among other things, the impact of 1) changes in lending policies and procedures, including changes in underwriting standards; 2) changes in international, national, regional and local economic conditions; 3) changes in the volume and severity of past due and nonaccrual status; 4) the effect of any concentrations of credit and changes in the levels of such concentrations; 5) changes in the experience, depth, and ability of lending management; 6) changes in nature and volume of the portfolio; 7) trends in underlying collateral values; 8) changes in the quality of the loan review system and 9) the effect of other external factors (i.e., competition, legal and regulatory requirements) on the level of estimated credit losses.

The annual loss rates, as defined above, adjusted for Q-Factors, are applied to the amortized loan balances over each subsequent period and aggregated to arrive at the General ACL. The amortized loan balances are adjusted based on management’s estimate of loan repayments in future periods.

When a loan no longer shares similar risk characteristics with its segment, the asset is assessed to determine whether it should be included in another segment or should be individually evaluated. Under ASC 326, the Company has adopted the collateral maintenance practical expedient to measure the ACL based on the fair value of collateral. Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining ACL. A Specific ACL is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral, which is adjusted for selling costs, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required. Financial assets that have been individually evaluated can be returned to a pool for purposes of estimating the expected credit loss to the extent their credit profile improves and that the repayment terms were not considered to be unique to the asset.

Management measures expected credit losses over the contractual term of a loan. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies:

	●	Management has a reasonable expectation at the reporting date that a loan modification will be executed with an individual borrower.

	●	The extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

The Company follows its nonaccrual policy by reversing contractual interest income in the consolidated statements of income when the Company places a loan on nonaccrual status. Therefore, management excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on the portfolio and does not record an ACL on accrued interest receivable. As of September 30, 2023, the accrued interest receivable for loans was $1,625,000.

(continued)

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(1)

General, Continued.

Prior to the adoption of ASC 326, the allowance for loan losses represented management’s best estimate of inherent losses that had been incurred within the existing portfolio of loans. The allowance for loan losses included allowance allocations calculated in accordance with ASC 310, “Receivables” and allowance allocations calculated in accordance with ASC 450, “Contingencies.”

ACL - Off -Balance Sheet Credit Exposures. The Company has a variety of assets that have a component that qualifies as an off-balance sheet exposure. These primarily include commitments to extend credit, construction loans, standby letters of credit, and unfunded commitments under revolving lines of credit. The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. Management has determined that a majority of the Company’s off-balance-sheet credit exposures are not unconditionally cancellable.

The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their expected lives. Management used its judgement to determine funding rates. Management applied the funding rates, along with the loss factor rate determined for each pooled loan segment, to unfunded loan commitments, excluding unconditionally cancellable exposures and letters of credit, to arrive at the reserve for unfunded loan commitments.

As of September 30, 2023, the liability recorded for expected credit losses on unfunded commitments was $359,000 and is included in “other liabilities” on the accompanying condensed consolidated balance sheets. The current adjustment to the ACL for unfunded commitments is recognized through credit loss expense in the condensed consolidated statements of earnings.

(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 September 30, 2023:
Available for sale:
SBA Pool Securities	$	742	$	—	$	16	$	726
Collateralized mortgage obligations		138		—		20		118
Taxable municipal securities		16,701		—		5,509		11,192
Mortgage-backed securities		14,226		—		3,178		11,048
Total	$	31,807	$	—	$	8,723	$	23,084

Held-to-maturity:
Collateralized mortgage obligations	$	380	$	—		45	$	335
Mortgage-backed securities		13		—		—		13
Total	$	393	$	—		45	$	348

(continued)

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(2)

Debt Securities, Continued.

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
At December 31, 2022:
Available for sale:
SBA Pool Securities	$	834	$	1	$	18	$	817
Collateralized mortgage obligations		145		—		15		130
Taxable municipal securities		16,729		—		5,109		11,620
Mortgage-backed securities		15,180		—		2,645		12,535
Total	$	32,888	$	1	$	7,787	$	25,102

Held-to-maturity:
Collateralized mortgage obligations	$	475	$	—		35	$	440
Mortgage-backed securities		65		—		1		64
Total	$	540	$	—		36	$	504

As of September 30, 2023, debt securities with a fair value of $11.2 million were pledged as collateral to the Federal Reserve. There were no sales of debt securities during the nine months ended September 30, 2023, and 2022.

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 September 30, 2023:*
Available for Sale:
SBA Pool Securities		16		725		—		—
Collateralized mortgage obligation		20		119		—		—
Taxable municipal securities		5,509		11,192		—		—
Mortgage-backed securities		3,178		11,048		—		—
Total	$	8,723	$	23,084	$	—	$	—

	Over Twelve Months				Less Than Twelve Months
	Gross				Gross
	Unrealized		Fair		Unrealized		Fair
	Losses		Value		Losses		Value
At December 31, 2022:
Available for Sale :
SBA Pool Securities		18		657		—		—
Collateralized mortgage obligation		—		—		15		130
Taxable municipal securities		5,109		11,620		—		—
Mortgage-backed securities		2,621		12,292		24		243
Total	$	7,748	$	24,569	$	39	$	373

(continued)

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(2)

Debt Securities, Continued.

At September 30, 2023 and December 31, 2022, the unrealized losses on forty-two and forty investment debt securities, respectively, were caused by interest-rate changes.

Management evaluates debt securities for impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the financial condition and near-term prospects of the issuer including looking at default and delinquency rates, (2) the outlook for receiving the contractual cash flows of the investments, (3) the length of time and the extent to which the fair value has been less than cost, (4) the intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that the Company will be required to sell the debt security prior to recovering its fair value, (5) the anticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third party guarantees, and (8) collateral values. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer’s financial condition, and the issuer’s anticipated ability to pay the contractual cash flows of the investments.

The Company performed an analysis that determined that the mortgage-backed securities, collateralized mortgage obligations, and U.S. government securities, have a zero expected credit loss as they have the full faith and credit backing of the U.S. government or one of its agencies. Municipal bonds that do not have a zero expected credit loss are evaluated at least quarterly to determine whether there is a credit loss associated with a decline in fair value. At September 30, 2023 and December 31, 2022 all municipal securities were rated as investment grade. All debt securities in an unrealized loss position as of September 30, 2023 continue to perform as scheduled and the Company does not believe that there is a credit loss or that credit loss expense is necessary. Also, as part of our evaluation of our intent and ability to hold investments for a period of time sufficient to allow for any anticipated recovery in the market, the Company considers our investment strategy, cash flow needs, liquidity position, capital adequacy and interest rate risk position. The Company does not currently intend to sell the investments within the portfolio, and it is not more-likely-than-not that a sale will be required.

Management continues to monitor all of our investments with a high degree of scrutiny. There can be no assurance that in a future period, conditions may exist at that time indicating that some or all of the Company’s securities may be sold that would require a charge to earnings as credit loss expense in such period.

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

Schedule of Components of Loans

	September 30, 2023			December 31, 2022

Residential real estate	$	58,285		$	50,354
Multi-family real estate		68,000			69,555
Commercial real estate		358,404			310,695
Land and construction		28,913			17,286
Commercial		26,997			5,165
Consumer		41,217			30,323

Total loans		581,816			483,378

Deduct:
Net deferred loan fees, and costs		(1,030	)		(367	)
Allowance for credit losses		(7,200	)		(5,793	)

Loans, net	$	573,586		$	477,218

(continued)

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(3) Loans, Continued.

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

	Residential			Multi-Family		Commercial			Land and
	Real Estate			Real Estate		Real Estate			Construction			Commercial			Consumer			Total
Three Months Ended September 30, 2023:

Balance June 30, 2023	$	883		$	1,037	$	2,802		$	680		$	135		$	1,108		$	6,645
Credit loss expense		(113	)		184		620			194			102			337			1,324
Charge-offs		—			—		—			—			(10	)		(872	)		(882	)
Recoveries		—			—		—			—			—			113			113

Ending balance (September 30, 2023)	$	770		$	1,221	$	3,422		$	874		$	227		$	686		$	7,200

Three Months Ended September 30, 2022:
Beginning balance	$	514		$	619	$	2,340		$	71		$	67		$	632		$	4,243
(Credit) provision for loan losses		34			129		754			(1	)		(2	)		460			1,374
Charge-offs		—			—		—			—			—			(446	)		(446	)
Recoveries		—			—		—			—			—			41			41

Ending balance (September 30, 2022)	$	548		$	748	$	3,094		$	70		$	65		$	687		$	5,212

Nine Months Ended September 30, 2023:

Beginning balance Dec 31, 2022	$	768		$	748	$	3,262		$	173		$	277		$	565		$	5,793
Additional allowance recognized due to adoption of Topic 326		33			327		(367	)		278			(262	)		209			218
Balance January 1, 2023	$	801		$	1,075	$	2,895		$	451		$	15		$	774		$	6,011
Credit loss expense		(31	)		146		527			423			177			1,393			2,635
Charge-offs		—			—		—			—			(52	)		(1,676	)		(1,728	)
Recoveries		—			—		—			—			87			195			282

Ending balance (September 30, 2023)	$	770		$	1,221	$	3,422		$	874		$	227		$	686		$	7,200

Nine Months Ended September 30, 2022:

Beginning balance	$	482		$	535	$	1,535		$	32		$	74		$	417		$	3,075
Provision for loan losses		66			213		1,559			38			25			856			2,757
Charge-offs		—			—		—			—			(90	)		(655	)		(745	)
Recoveries		—			—		—			—			56			69			125

Ending balance (September 30, 2022)	$	548		$	748	$	3,094		$	70		$	65		$	687		$	5,212
Ending balance	$	548		$	748	$	3,094		$	70		$	65		$	687		$	5,212

(continued)

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(3) Loans, Continued.

	Residential		Multi-Family		Commercial
	Real Estate		Real Estate		Real Estate		Land and Construction		Commercial		Consumer		Total

At December 31, 2022:
Individually evaluated for impairment:
Recorded investment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Balance in allowance for loan losses	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Collectively evaluated for impairment:
Recorded investment	$	50,354	$	69,555	$	310,695	$	17,286	$	5,165	$	30,323	$	483,378
Balance in allowance for loan losses	$	768	$	748	$	3,262	$	173	$	277	$	565	$	5,793

(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 Bank’s Board of Directors. 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. Underwriting standards include, among other factors, loan to value limits, cash flow coverage and general creditworthiness of the obligors. Construction loans to borrowers finance the construction of owner occupied and leased properties. These loans are categorized as construction loans during the construction period, later converting to commercial or residential real estate loans after the construction is complete and amortization of the loan begins. Real estate development and construction loans are approved based on an analysis of the borrower and guarantor, the viability of the project and an acceptable percentage of the appraised value of the property securing the loan. Real estate development and construction loan funds are disbursed periodically based on the percentage of construction completed. The Company carefully monitors these loans with on-site inspections and requires the receipt of lien waivers on funds advanced. Development and construction loans are typically secured by the properties under development or construction, and personal guarantees are typically obtained. Further, to assure that reliance is not placed solely on the value of the underlying property, the Company considers the market conditions and feasibility of proposed projects, the financial condition and reputation of the borrower and guarantors, the amount of the borrower’s equity in the project, independent appraisals, cost estimates and pre-construction sales information. The Company also makes loans on occasion for the purchase of land for future development by the borrower. Land loans are extended for future development for either commercial or residential use by the borrower. The Company carefully analyzes the intended use of the property and the viability thereof.

Commercial. Commercial business loans and lines of credit consist of loans to small- and medium-sized companies. 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 mitigates 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):

Schedule of Loans by Credit Quality

	Pass		Mentioned)		Standard		Doubtful		Loss		Total
			OLEM (Other Loans Especially		Sub-
	Pass		Mentioned)		Standard		Doubtful		Loss		Total

At September 30, 2023:
Residential real estate	$	58,285	$	—	$	—	$	—	$	—	$	58,285
Multi-family real estate		68,000		—		—		—		—		68,000
Commercial real estate		357,190		—		1,214		—		—		358,404
Land and construction		28,913		—		—		—		—		28,913
Commercial		26,997		—		—		—		—		26,997
Consumer		40,192		—		1,025		—		—		41,217

Total	$	579,577	$	—	$	2,239	$	—	$	—	$	581,816

At December 31, 2022:
Residential real estate	$	50,354	$	—	$	—	$	—	$	—	$	50,354
Multi-family real estate		69,555		—		—		—		—		69,555
Commercial real estate		309,458		—		1,237		—		—		310,695
Land and construction		17,286		—		—		—		—		17,286
Commercial		5,165		—		—		—		—		5,165
Consumer		30,323		—		—		—		—		30,323

Total	$	482,141	$	—	$	1,237	$	—	$	—	$	483,378

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 affected 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 Past		Total Past Due		Current		Nonaccrual Loans		Total Loans
At September 30, 2023:
Residential real estate	$	—	$	—	$	—	$	—	$	58,285	$	—	$	58,285
Multi-family real estate		—		—		—		—		68,000		—		68,000
Commercial real estate		—		—		—		—		358,404		—		358,404
Land and construction		—		—		—		—		28,913		—		28,913
Commercial		—		—		—		—		26,997		—		26,997
Consumer		376		209		—		585		39,607		1,025		41,217

Total	$	376	$	209	$	—	$	585	$	580,206	$	—	$	581,816

At December 31, 2022:
Residential real estate	$	—	$	—	$	—	$	—	$	50,354	$	—	$	50,354
Multi-family real estate		—		—		—		—		69,555		—		69,555
Commercial real estate		—		—		—		—		310,695		—		310,695
Land and construction		—		—		—		—		17,286		—		17,286
Commercial		—		—		—		—		5,165		—		5,165
Consumer		150		27		—		177		30,146		—		30,323

Total	$	150	$	27	$	—	$	177	$	483,201	$	—	$	483,378

	The Company has not made any modifications of loans to borrowers experiencing financial difficulties during the nine months ended September 30, 2023.

	No loans have been determined to be troubled debt restructurings (TDR’s) during the nine-month period ended September 30, 2022. At September 2022, there were no loans modified and entered into as TDR’s within the past twelve months, that subsequently defaulted during the nine-month periods ended September 30, 2022.

(continued)

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(3) Loans, Continued.

Term Loans

Amortized Cost Basis by Origination Year

Schedule of Amortized Cost Basis

															Revolving Loans
	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Converted to Term Loans
Construction and land real estate	September 30, 2023		2022		2021		2020		2019		Prior		(Amortized Cost Basis)		(Amortized Cost Basis)		Total
Pass	$	8,272	$	15,048	$	2,461	$	1,498	$	1,634	$	-	$	—	$	—	$	28,913
OLEM (Other Loans Especially Mentioned)		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—		—
Subtotal loans	$	8,272	$	15,048	$	2,461	$	1,498	$	1,634	$	—	$	—	$	—	$	28,913
Current period Gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate
Pass	$	7,350	$	26,438	$	9,804	$	4,875	$	4,072	$	4,999	$	747	$	—	$	58,285
OLEM (Other Loans Especially Mentioned)		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—		—
Subtotal loans	$	7,350	$	26,438	$	9,804	$	4,875	$	4,072	$	4,999	$	747	$	—	$	58,285
Current period Gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

(continued)

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(3) Loans, Continued.

Term Loans

Amortized Cost Basis by Origination Year

																				Revolving Loans
	Term Loans Amortized Cost Basis by Origination Year																	Revolving Loans		Converted to Term Loans
Construction and land real estate	September 30, 2023			2022			2021			2020			2019		Prior			(Amortized Cost Basis)		(Amortized Cost Basis)		Total
Multi-family real estate
Pass	$	998		$	29,296		$	28,227		$	6,136		$	2,078	$	1,265		$	—	$	—	$	68,000
OLEM (Other Loans Especially Mentioned)		—			—			—			—			—		—			—		—		—
Substandard		—			—			—			—			—		—			—		—		—
Doubtful		—			—			—			—			—		—			—		—		—
Loss		—			—			—			—			—		—			—		—		—
Subtotal loans	$	998		$	29,296		$	28,227		$	6,136		$	2,078	$	1,265		$	—	$	—	$	68,000
Current period Gross write-offs	$	—		$	—		$	—		$	—		$	—	$	—		$	—	$	—	$	—
Commercial real estate (CRE)
Pass	$	60,424		$	200,281		$	54,637		$	15,503		$	12,710	$	13,635		$	—	$	—	$	357,190
OLEM (Other Loans Especially Mentioned)		—			—			—			—			—		—			—		—		—
Substandard		—			—			—			—			1,214		—			—		—		1,214
Doubtful		—			—			—			—			—		—			—		—		—
Loss		—			—			—			—			—		—			—		—		—
Subtotal loans	$	60,424		$	200,281		$	54,637		$	15,503		$	13,924	$	13,635		$	—	$	—	$	358,404
Current period Gross write-offs	$	—		$	—		$	—		$	—		$	—	$	—		$	—	$	—	$	—
Commercial business loans
Pass	$	23,149		$	1,781		$	1,371		$	645		$	51	$	—		$	—	$	—	$	26,997
OLEM (Other Loans Especially Mentioned)		—			—			—			—			—		—			—		—		—
Substandard		—			—			—			—			—		—			—		—		—
Doubtful		—			—			—			—			—		—			—		—		—
Loss		—			—			—			—			—		—			—		—		—
Subtotal loans	$	23,149		$	1,781		$	1,371		$	645		$	51	$	—		$	—	$	—	$	26,997
Current period Gross write-offs	$	(26	)	$	—		$	—		$	—		$	—	$	(26	)	$	—	$	—	$	(52	)
Consumer
Pass	$	9,357		$	8,048		$	4,291		$	191		$	162	$	—		$	18,143	$	—	$	40,192
OLEM (Other Loans Especially Mentioned)		—			—			—			—			—		—			—		—		—
Substandard		—			—			—			—			—		—			1,025		—		1,025
Doubtful		—			—			—			—			—		—			—		—		—
Loss		—			—			—			—			—		—			—		—		—
Subtotal loans	$	9,357		$	8,048		$	4,291		$	191		$	162	$	—		$	19,168	$	—	$	41,217
Current period Gross write-offs	$	(164	)	$	(770	)	$	(739	)	$	(3	)	$	—	$	—		$	—	$	—	$	(1,676	)

(continued)

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(4) Earnings Per Share. Basic earnings per share have been computed on the basis of the weighted-average number of shares of common stock outstanding during the periods. During the three- and nine-months periods ended September 30, 2023 and 2022, basic and diluted earnings per share is the same as there were no outstanding potentially dilutive securities. Earnings per common share have been computed based on the following:

	2023		2022		2023		2022
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Weighted-average number of common shares outstanding used to calculate basic and diluted earnings per common share	$	7,250,218	$	6,065,648	$	7,234,793	$	5,661,056

(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 currently authorized to issue up to 1,050,000 shares of common stock under the 2018 Plan, due to an amendment to increase the number of authorized shares from 500,000 to 1,050,000 that was approved by shareholders in June 2023. At September 30, 2023, 539,320 shares remain available for grant.

During the nine-month period ended September 30, 2023, the Company issued 66,479 shares to a director for services performed and recorded compensation expense of $274,000.

During the nine-month period ended September 30, 2023, the Company issued 52,622 shares to employees for services performed and recorded compensation expense of $216,000.

During the nine-month period ended September 30, 2022, the Company recorded compensation expense of $275,000 with respect to 67,183 shares issued to a director and an executive officer for services performed.

During the nine-month period ended September 30, 2022, the Company recorded compensation expense of $96,000 with respect to 24,493 shares issued to certain employees for services performed.

(continued)

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(6) Fair Value Measurements.

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

	Fair Value		(Level 1)		(Level 2)		(Level 3)
	Fair Value Measurements Using
			Quoted Prices		Significant		Significant
			In Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
At September 30, 2023:
SBA Pool Securities	$	726	$	—	$	726		—
Collateralized mortgage obligations		118		—		118		—
Taxable municipal securities		11,192		—		11,192		—
Mortgage-backed securities		11,048		—		11,048		—
Total	$	23,084		—	$	23,084		—

At December 31, 2022:
SBA Pool Securities	$	817	$	—	$	817		—
Collateralized mortgage obligations		130		—		130		—
Taxable municipal securities		11,620		—		11,620		—
Mortgage-backed securities		12,535		—		12,535		—
Total	$	25,102		—	$	25,102		—

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

	At September 30, 2023						At December 31, 2022
	Carrying Amount		Fair Value		Level		Carrying Amount		Fair Value		Level

Financial assets:
Cash and cash equivalents	$	103,998	$	103,998		1	$	71,836	$	71,836		1
Debt securities available for sale		23,084		23,084		2		25,102		25,102		2
Debt securities held-to-maturity		393		348		2		540		504		2
Loans		573,586		526,269		3		477,218		476,566		3
Federal Home Loan Bank stock		884		884		3		600		600		3
Accrued interest receivable		1,782		1,782		3		1,444		1,444		3

Financial liabilities:
Deposit liabilities		618,374		621,865		3		507,899		512,357		3
Federal Home Loan Bank advances		10,000		9,482		3		10,000		9,450		3
Federal Reserve Bank advances		13,600		13,590		3		—		—		3
Off-balance sheet financial instruments		—		—		3		—		—		3

(continued)

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(8) Off- Balance Sheet Financial Instruments. The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are commitments to extend credit, unused lines of credit, and standby letters of credit and may involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the condensed consolidated balance sheet. The contract amounts of these instruments reflect the extent of involvement the Company has in these financial instruments.

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

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

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

Commitments to extend credit, unused lines of credit, and standby letters of credit typically result in loans with a market interest rate when funded. A summary of the contractual amounts of the Company’s financial instruments with off-balance-sheet risk at September 30, 2023 follows (in thousands):


Commitments to extend credit	$	11,480

Unused lines of credit	$	78,219

Standby letters of credit	$	4,301

(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.

(continued)

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(9) Regulatory Matters, Continued.

As of September 30, 2023 and December 31, 2022, the Bank meets all capital adequacy requirements to which it is subject. The Bank’s actual capital amounts and percentages are presented in the table ($ in thousands):

	Actual					To Be Well Capitalized Under Prompt Corrective Action Regulations (CBLR Framework)
	Amount		%			Amount		%
As of September 30, 2023:
Tier 1 Capital to Total Assets		70,762		10.98	%		58,000		9.00	%

As of December 31, 2022:
Tier 1 Capital to Total Assets		66,291		11.29	%		52,865		9.00	%

(10) Series B Preferred Stock

Except in the event of liquidation, if the Company declares or pays a dividend or distribution on the common stock, the Company shall simultaneously declare and pay a dividend on the Series B Preferred Stock on a pro rata basis with the common stock determined on an as-converted basis assuming all shares of Series B Preferred Stock had been converted immediately prior to the record date of the applicable dividend. As of September 30, 2023 the Series B Preferred Stock is convertible into 11,113,889 shares of common stock, at the option of the Company, subject to the prior fulfilment of the following conditions: (i) such conversion shall have been approved by the holders of a majority of the outstanding common stock of the Company; and (ii) such conversion must not result in any holder of the Series B Preferred Stock and any persons with whom the holder may be acting in concert, becoming the beneficial owners of more than 9.9% of the outstanding shares of the Company’s common stock, unless the issuance, shall have been approved by all banking regulatory authorities whose approval is required for the acquisition of such shares. The number of shares issuable upon conversion is subject to adjustment based on the terms of the Series B Preferred Stock. The Series B Preferred has preferential liquidation rights over common stockholders. The liquidation price is the greater of $25,000 per share of Series B Preferred or such amount per share of Series B Preferred that would have been payable had all shares of the Series B Preferred been converted into common stock pursuant to the terms of the Series B Preferred Stock’s Certificate of Designation immediately prior to a liquidation. The Series B Preferred generally has no voting rights except as provided in the Certificate of Designation.

The Series B Preferred Stock are subdivided into three categories. The Company is authorized to issue 760 shares of Series B-1; 260 shares of Series B-2; and 500 shares of Series B-3.

Each series has substantially the same rights, preferences, powers, restrictions and limitations, except that the initial conversion price of the Series B-1 is $2.50 per share; the initial conversion price for Series B-2 is $4.00 per share, and the initial conversion price for Series B-3 is $4.50 per share.

During the Annual Meeting of Shareholders held on June 27, 2023, the Company’s shareholders approved the issuance of up to 11,113,889 shares of common stock upon conversion of the Series B preferred stock previously issued by the Company. Any such conversion is also subject to receipt of any required regulatory approvals by appropriate state and federal bank regulatory agencies.

(11) Contingencies. Various claims arise from time to time in the normal course of business. In the opinion of management, none have occurred that will have a material effect on the Company’s condensed consolidated financial statements.

During the nine-months ended September 30, 2023 the Company incurred a one-time expense related to the settlement of foreclosure litigation in the amount of $375,000.

(continued)

(12) Borrowings.

The maturities and interest rates on the Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) advances were as follows (dollars in thousands)

At September 30, 2023:

Maturity

Year Ending

Interest

Rate

September 30,

2023

December 31,

2022

FRB

2024

5.46

13,600

FHLB

2025

1.01

10,000

At September 30, 2023, FHLB Advances are is structured as advances with potential calls on a quarterly basis.

FHLB advances are collateralized by a blanket lien requiring the Company to maintain certain first mortgage loans as pledged collateral. At September 30, 2023, the Company had remaining credit availability of $148 million. At September 30, 2023, the Company had loans pledged with a carrying value of $157 million as collateral for FHLB advances.

In addition, the Bank has a line of credit with the Federal Reserve Bank which is secured by investment securities with fair value of $11.2 million as of September 30, 2023. FRB borrowings bear interest at variable rates based on the Federal Open Market Committee’s target range for the federal funds rate. Based on this collateral, the Company borrowed $13.6 million from the FRB at September 30, 2023.

(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, 2022, in the Annual Report on Form 10-K.

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, increases in interest rates, 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.

Strategic Plan

Our key strategic initiatives are designed to generate continued growth in earning assets, core transaction and savings deposits, treasury management fee income, and lower costs. Continued emphasis on expansion of our footprint and exploring additional lines of business are also part of our plans.

On the loan side, we intend to continue our focus on increasing our multi-family, non-owner occupied, commercial real estate, and skilled nursing facility loan portfolios. As to deposits, we are focused on identifying deposit growth opportunities among our existing customer base and prospects throughout Florida and the United States. With respect to treasury management, our focus will remain on merchant cash advance providers and the related electronic funds transfer line of business. For this revenue source to increase further in a meaningful way, automation will be necessary in order to further improve efficiency. We are currently investing in the necessary technology to achieve this end.

Going forward, our strategic plan will continue to emphasize and build upon initiatives focused on strengthening credit oversight and credit administrative processes and procedures. Moreover, management continues to identify loan growth opportunities that are designed to improve overall profitability without sacrificing credit quality and underwriting standards. This growth oriented strategic direction is expected to be facilitated by maintaining credit administration objectives including a risk-based and comprehensive credit culture and a credit administrative infrastructure that reinforces appropriate risk management practices.

During the third quarter of 2023, the Bank commenced offering U.S. Small Business Administration (“SBA”) SBA 7A loans. SBA 7A loans are generally used to establish a new business or assist in the acquisition, operation, or expansion of an existing business. With SBA loan programs, there are set eligibility requirements and underwriting standards outlined by SBA that can change as the government alters its fiscal policy. These loans are generally secured by accounts receivable, inventory, equipment, and real estate. The Bank hired two full-time SBA staff. At September 30, 2023, SBA 7A loans amounted to $300,000.

Additionally, management has implemented initiatives that have enabled us to grow our loan portfolio primarily with locally generated relationships in the non-owner occupied, multi-family and commercial real estate sectors. However, out-of-area loans and loan pool purchases will be considered as deemed appropriate and subject to proper due diligence to further increase interest income and for portfolio diversification purposes.

Capital Levels

As of September 30, 2023, the Bank is well capitalized under regulatory guidelines.

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 September 30, 2023 and December 31, 2022

Overview

The Company’s total assets increased by approximately $128 million to $713 million at September 30, 2023, from $585 million at December 31, 2022, primarily due to increases in loans, and cash and cash equivalents. The growth in assets was attributable to the success of the Company’s efforts to increase loans and deposits from new customers. Net loans grew by $96 million to $574 million at September 30, 2023, from $477 million at December 2022. Deposits grew by approximately $110 million to $618 million at September 30, 2023, from $508 million at December 31, 2022. Total stockholders’ equity increased by approximately $3.7 million to $66.3 million at September 30, 2023, from $62.6 million at December 31, 2022, primarily due to net earnings and proceeds from common stock sales, partially offset by changes in unrealized loss on debt securities available for sale.

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

	Nine Months Ended			Year Ended
	September 30, 2023			December 31, 2022

Average equity as a percentage of average assets		10.5	%		9.9	%

Equity to total assets at end of period		9.3	%		10.7	%

Return on average assets (1)		0.8	%		0.9	%

Return on average equity (1)		7.7	%		8.6	%

Noninterest expenses to average assets (1)		2.4	%		2.1	%

(1) Annualized for the nine months ended September 30, 2023.

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 debt securities, loan repayments, the use of Federal Funds markets, net earnings, and loans taken out at the Federal Reserve Bank discount window.

Our liquidity is derived primarily from our deposit base, scheduled amortization and prepayments of loans and investment securities, funds provided by operations, and capital. Additionally, as a commercial bank, we are expected to maintain an adequate liquidity position. The liquidity position may consist of cash on hand, cash on demand deposit with correspondent banks, federal funds sold, and unpledged marketable securities such as United States government treasury and agency securities, municipal securities, U.S. agency mortgage-backed securities, and asset-backed securities. Some of our securities are pledged to the Federal Reserve Bank. The market value of securities pledged to the Federal Reserve Bank, Term Funding Program was $11.2 million at September 30, 2023.

The Company increased deposits by approximately $110 million during the nine-month period ended September 30, 2023. The proceeds were used to originate new loans.

(continued)

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

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

In addition to obtaining funds from depositors, the Company may borrow funds from other financial institutions. At September 30, 2023, the Company had outstanding borrowings of $10 million, against its $158 million in established borrowing capacity with the FHLB. The Company’s borrowing facility is subject to collateral and stock ownership requirements, as well as prior FHLB consent to each advance. The Company also has a $13.6 million advance with the Federal Reserve that matures in August 2024. At September 30, 2023, the Company also had available lines of credit amounting to $25 million with six correspondent banks 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 in the condensed consolidated financial statements for Off-Balance Sheet Arrangements.

Results of Operations

The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest and dividend income of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest-rate spread; (v) net interest margin; and (vi) the ratio of average interest-earning assets to average interest-bearing liabilities.

	Three Months Ended September 30,
	2023							2022
			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	$	544,540	$	7,996		5.87	%	$	398,914	$	5,000		5.01	%
Securities		24,732		167		2.70	%		27,862		153		2.20	%
Other ⁽¹⁾		55,140		739		5.36	%		60,600		341		2.25	%

Total interest-earning assets/interest income		624,412		8,902		5.70	%		487,376		5,494		4.51	%

Cash and due from banks		11,523							15,944
Premises and equipment		1,180							860
Other		1,701							4,434

Total assets	$	638,816						$	508,614

Interest-bearing liabilities:
Savings, NOW and money-market deposits	$	179,776		1,102		2.45	%	$	147,259		138		0.37	%
Time deposits		168,428		1,739		4.13	%		97,638		665		2.72	%
Borrowings ⁽²⁾		18,878		147		3.11	%		71,804		386		2.15	%

Total interest-bearing liabilities/interest expense		367,082		2,988		2.06	%		316,701		1,189		1.50	%

Noninterest-bearing demand deposits		200,516							140,282
Other liabilities		5,043							2,989
Stockholders’ equity		66,175							48,642

Total liabilities and stockholders’ equity	$	638,816						$	508,614

Net interest income			$	5,914						$	4,305

Interest rate spread ⁽³⁾						3.64	%						3.01	%

Net interest margin ⁽⁴⁾						3.79	%						3.53	%

Ratio of average interest-earning assets to average interest-bearing liabilities		1.70							1.54

(1)	Includes interest-earning deposits with banks and Federal Home Loan Bank stock dividends.
(2)	Includes Federal Home Loan Bank advances and Federal Reserve Bank advances.
(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.

(continued)

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

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

	Nine Months Ended September 30,
	2023							2022
			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	$	517,513	$	21,837		5.63	%	$	320,276	$	12,027		5.01	%
Securities		25,421		517		2.71	%		30,638		475		2.07	%
Other ⁽¹⁾		58,247		2,243		5.13	%		58,822		480		1.09	%

Total interest-earning assets/interest income		601,181		24,597		5.46	%		409,736		12,982		4.22	%

Cash and due from banks		14,141							15,499
Premises and equipment		1,108							861
Other		4,367							4,711

Total assets	$	620,797						$	430,807

Interest-bearing liabilities:
Savings, NOW and money-market deposits	$	143,815		1,768		1.64	%	$	161,405		424		0.35	%
Time deposits		212,114		6,061		3.81	%		41,944		724		2.30	%
Borrowings ⁽²⁾		13,124		203		2.06	%		38,151		549		1.92	%

Total interest-bearing liabilities/interest expense		369,053		8,032		2.90	%		241,500		1,697		0.94	%

Noninterest-bearing demand deposits		181,890							141,379
Other liabilities		4,850							2,727
Stockholders’ equity		65,004							45,201

Total liabilities and stockholders’ equity	$	620,797						$	430,807

Net interest income			$	16,565						$	11,285

Interest rate spread ⁽³⁾						2.56	%						3.29	%

Net interest margin ⁽⁴⁾						3.67	%						3.67	%

Ratio of average interest-earning assets to average interest-bearing liabilities		1.63							1.70

(1)	Includes interest-earning deposits with banks and Federal Home Loan Bank stock dividends.
(2)	Includes Federal Home Loan Bank advances and Federal Reserve Bank advances.
(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.

(continued)

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

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

Comparison of the Three-Month Periods Ended September 30, 2023, and 2022

	Three Months Ended				Increase /
	September 30,				(Decrease)
(dollars in thousands)	2023		2022		Amount		Percentage
Total interest income	$	8,902	$	5,494	$	3,408		62	%
Total interest expense		2,988		1,189		1,799		151	%
Net interest income		5,914		4,305		1,609		37	%
Credit loss expense		1,446		1,374		72		5	%
Net interest income after provision for loan losses		4,468		2,931		1,537		52	%
Total noninterest income		911		692		219		32	%
Total noninterest expenses		3,651		2,720		931		34	%
Net earnings before income taxes		1,728		903		825		91	%
Income taxes		459		230		229		100	%
Net earnings	$	1,269	$	673		596		89	%
Net earnings per share - Basic and diluted	$	0.18	$	0.11

Net earnings. Net earnings for the three months ended September 30, 2023, were $1.3 million or $.18 per basic and diluted share compared to net earnings of $673,000 or $.11 per basic and diluted share for the three months ended September 30, 2022. The increase in net earnings during the three months ended September 30, 2023 compared to three months ended September 30, 2022 is primarily attributed to an increase in net interest income and non-interest income, partially offset by the increase in non-interest expense.

Interest income. Interest income increased $3.4 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 due primarily to growth in the loan portfolio and increases in yields on interest earning assets.

Interest expense. Interest expense increased $1.8 million to $3.0 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due to an increase in interest bearing deposit rates and changes in the composition of deposits.

Credit loss expense. Expected credit loss expense was $1.4 million for the three months ended September 30, 2023, and September 30, 2022, respectively. The expected credit loss expense is charged to earnings as losses are expected to have occurred in order to bring the total allowance for credit losses to a level deemed appropriate by management to absorb losses expected. Management’s periodic evaluation of the adequacy of the allowance for credit losses is based upon historical experience, the volume and type of lending conducted by the Company, adverse situations that may affect the borrower’s ability to repay, estimated value of the underlying collateral, 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 credit losses totaled $7.2 million or 1.24% of loans outstanding at September 30, 2023, compared to $5.8 million or 1.20% of loans outstanding at December 31, 2022. The increase in the credit loss expense during the third quarter of 2023 was primarily due to loan volume growth and the evaluation of the other factors noted above. During the three-months ended September 30, 2023, the net charge off amounting to $769,000 resulted from consumer lending.

Noninterest income. Total noninterest income increased to $911,000 for the three months ended September 30, 2023, from $692,000 for the three months ended September 30, 2022, due to increased wire transfer and ACH fees during third quarter of 2023.

Noninterest expenses. Total noninterest expenses increased to $3.7 million for the three months ended September 30, 2023, compared to $2.7 million for the three months ended September 30, 2022, primarily due to employee compensation and benefits, and data processing.

(continued)

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

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

Comparison of the Nine-Month Periods Ended September 30, 2023 and 2022

	Nine Months Ended				Increase /
	September 30,				(Decrease)
(dollars in thousands)	2023		2022		Amount		Percentage
Total interest income	$	24,597	$	12,982	$	11,615		89	%
Total interest expense		8,032		1,697		6,335		373	%
Net interest income		16,565		11,285		5,280		47	%
Credit loss expense		2,970		2,757		213		8	%
Net interest income after provision for loan losses		13,595		8,528		5,067		59	%
Total noninterest income		2,412		2,106		306		15	%
Total noninterest expenses		10,975		7,320		3,655		50	%
Net earnings before income taxes		5,032		3,314		1,718		52	%
Income taxes		1,298		841		457		54	%
Net earnings	$	3,734	$	2,473		1,261		51	%
Net earnings per share - Basic and diluted	$	0.52	$	0.44

Net earnings. Net earnings for the nine months ended September 30, 2023, were $3.7 million or $.52 per basic and diluted share compared to net earnings of $2.5 million or $0.44 per basic and diluted share for the nine months ended September 30, 2022. The increase in net earnings during the nine months ended September 30, 2023 compared to nine months ended September 30, 2022 is primarily attributed to an increase in net interest income, partially offset by the increase in noninterest expense.

Interest Income. Interest income increased $11.6 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 due primarily to growth in the loan portfolio and increase in loan and fed funds yields.

Interest Expense. Interest expense increased $6.3 million to $8.0 million for the nine months ended September 30, 2023 compared to the nine-months ended September 30, 2022 as a result of an increase in deposits and rates.

Credit loss expense. Expected credit loss expense was $3.0 million for the nine months ended September 30, 2023, compared to $2.8 million for the nine months ended September 30, 2022. The allowance for credit losses totaled $7.2 million or 1.24% of loans outstanding at September 30, 2023, compared to $5.8 million or 1.20% of loans outstanding at December 31, 2022. The increase in the credit loss expense during the nine months ended September 30, 2023 was primarily due to loan volume growth and the evaluation of the other factors noted above. During the nine-months ended September 30, 2023, the net charge off amounting to $1.4 million primarily resulted from consumer lending.

Noninterest Income. Total noninterest income increased to $2.4 million for the nine months ended September 30, 2023, from $2.1 million for the nine months ended September 30, 2022 due to increased wire transfer and ACH fees related to an increase in business checking accounts during the nine-month period ended September 30, 2023.

Noninterest Expenses. Total noninterest expenses increased to $11.0 million for the nine months ended September 30, 2023 compared to $7.3 million for the nine months ended September 30, 2022 primarily due to one-time litigation settlement, increase in salaries and employee benefits, data processing, and other operating costs.

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 significant changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

PART II. OTHER INFORMATION

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

During the first nine months of 2023, the Company issued 72,221 shares of its common stock in a private placement transaction to two accredited investors at a price of $4.50 per share. None of these investors was an officer, director or affiliate of the Company. The Company issued these shares in reliance on Section 4(a)(2) of the Securities Act as a transaction by an issuer not involving a public offering.

Item 5. Other Information

The disclosure contained under Part II, Item 2 is incorporated herein by reference.

Item 6. Exhibits

The exhibits listed in the Exhibit Index following the signature page are filed or furnished 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: November XX, 2023	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

101.INS		Inline XBRL Instance Document

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

104		Cover Page Interactive Data File (embedded within the Inline XBRL document)