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 September 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 November 12, 2020.

 

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

INDEX

 

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements	1
Condensed Consolidated Balance Sheets - September 30, 2020 (unaudited) and December 31, 2019	1
Condensed Consolidated Statements of Operations – Three and Nine Months ended September 30, 2020 and 2019 (unaudited)	2
Condensed Consolidated Statements of Comprehensive Loss - Three and Nine Months ended September 30, 2020 and 2019 (unaudited)	3
Condensed Consolidated Statements of Stockholders’ Equity - Three and Nine Months ended September 30, 2020 and 2019 (unaudited)	4
Condensed Consolidated Statements of Cash Flows - Nine Months ended September 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	26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3. Defaults on Senior Securities	26
Item 4. Mine Safety Disclosures	26
Item 5. Other Information	26
Item 6. Exhibits	26
SIGNATURES	27

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

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

 

		30-Sep-20				31-Dec-19
		(Unaudited)
Assets:
Cash and due from banks		$	25,868			$	2,111
Interest-bearing deposits with banks			19,403				6,823
Total cash and cash equivalents			45,271				8,934
Debt securities available for sale			7,460				5,409
Debt securities held-to-maturity (fair value of $4,794 and $5,986)			4,571				5,806
Loans, net of allowance for loan losses of $2,145 and $2,009			144,532				102,233
Federal Home Loan Bank stock			1,092				642
Premises and equipment, net			1,423				1,389
Right-of-use operating lease assets			942				1,055
Accrued interest receivable			1,544				432
Foreclosed real estate			681				—
Other assets			1,088				848
Total assets		$	208,604			$	126,748
Liabilities and Stockholders’ Equity:
Liabilities:
Noninterest-bearing demand deposits		$	49,946			$	10,545
Savings, NOW and money-market deposits			89,501				55,475
Time deposits			28,269				35,352
Total deposits			167,716				101,372
Federal Home Loan Bank advances			23,000				13,000
Junior subordinated debenture			2,580				2,580
Official checks			143				208
Operating lease liabilities			958				1,061
Other liabilities			523				1,320
Total liabilities			194,920				119,541
Commitments and contingencies (Notes 8 and 11)
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, 280 shares issued and outstanding in 2020			—				—
Common stock, $.01 par value; 10,000,000 shares authorized, 2,951,353 shares issued and outstanding in 2020 and 2,853,171 shares issued and outstanding in 2019			29				28
Additional paid-in capital			46,532				38,994
Accumulated deficit			(32,761	)			(31,610	)
Accumulated other comprehensive loss			(116	)			(205	)
Total stockholders’ equity			13,684				7,207
Total liabilities and stockholders’ equity		$	208,604			$	126,748

 

See accompanying notes to condensed consolidated financial statements.

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

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

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2020				2019				2020				2019
Interest income:
Loans		$	1,723			$	1,140			$	4,697			$	3,328
Debt securities			41				63				136				184
Other			7				58				67				184
Total interest income			1,771				1,261				4,900				3,696
Interest expense:
Deposits			290				408				1,047				1,057
Borrowings			96				130				322				415
Total interest expense			386				538				1,369				1,472
Net interest income			1,385				723				3,531				2,224
Provision for loan losses			524				45				1,236				45
Net interest income after provision for loan losses			861				678				2,295				2,179
Noninterest income:
Service charges and fees			1				4				52				11
Other			63				25				118				142
Total noninterest income			64				29				170				153
Noninterest expenses:
Salaries and employee benefits			582				492				1,616				1,522
Professional fees			121				114				368				341
Occupancy and equipment			146				119				435				366
Data processing			132				141				381				394
Insurance			21				24				66				66
Regulatory assessment			59				18				129				40
Other			360				79				621				511
Total noninterest expenses			1,421				987				3,616				3,240
Net loss before income tax benefit			(496	)			(280	)			(1,151	)			(908	)
Income tax benefit			—				—				—				(52	)
Net loss		$	(496	)		$	(280	)		$	(1,151	)		$	(856	)
Net loss per share - Basic and diluted		$	(0.17	)		$	(.15	)		$	(0.39	)		$	(.45	)

 

See accompanying notes to condensed consolidated financial statements.

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

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

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2020				2019				2020				2019
Net loss		$	(496	)		$	(280	)		$	(1,151	)		$	(856	)
Other comprehensive income:
Change in unrealized gain on debt securities-
Unrealized (loss) gain arising during the year			(30	)			5				36				80
Amortization of unrealized loss on debt securities transferred to held-to-maturity			35				28				83				67
Other comprehensive income before income tax expense			5				33				119				147
Deferred income tax expense on above change			(2	)			(8	)			(30	)			(37	)
Total other comprehensive income			3				25				89				110
Comprehensive loss		$	(493	)		$	(255	)		$	(1,062	)		$	(746	)

 

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, 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 (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 (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
Common stock issued and reclassified from other liabilities (unaudited)			-				-				-				-				1,197				-				3				-				-				3
Net loss  (unaudited)			-				-				-				-				-				-				-				(280	)			-				(280	)
Net change in unrealized loss on securities available for sale, net of income taxes (unaudited)			-				-				-				-				-				-				-				-				4				4
Amortization of unrealized loss on securities transferred to held to maturity (unaudited)			-				-				-				-				-				-				-				-				21				21
Balance at September 30, 2019 (unaudited)			-				-				-				-				1,928,776			$	19			$	36,359			$	(31,366	)		$	(220	)		$	4,792
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 (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 (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
Proceeds from the sale of preferred stock (unaudited)			-				-				180				-				-				-				4,500				-				-				4,500
Net loss (unaudited)			-				-				-				-				-				-				-				(496	)			-				(496	)
Net change in unrealized gain on debt securities available for sale, net of income taxes (unaudited)			-				-				-				-				-				-				-				-				(23	)			(23	)
Amortization of unrealized loss on debt securities transferred to held-to-maturity, net of income taxes (unaudited)			-				-				-				-				-				-				-				-				26				26
Balance at September 30, 2020 (unaudited)			-			$	-				280			$	-				2,951,353			$	29			$	46,532			$	(32,761	)		$	(116	)		$	13,684

 

See accompanying notes to condensed consolidated financial statements

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

		Nine Months Ended September 30,
		2020				2019
Cash flows from operating activities:
Net loss		$	(1,151	)		$	(856	)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for loan losses			1,236				45
Depreciation and amortization			132				132
Stock-based compensation			200				201
Net amortization of fees, premiums and discounts			(27	)			153
Increase in accrued interest receivable			(1,112	)			(40	)
Amortization of right-of-use operating lease assets			113				52
Net decrease in operating lease liabilities			(103	)			(49	)
Increase in other assets			(270	)			(614	)
Decrease in official checks and other liabilities			(1,063	)			(117	)
Net cash used in operating activities			(2,045	)			(1,093	)
Cash flows from investing activities:
Purchase of debt securities available for sale			(3,638	)			(4,153	)
Principal repayments of debt securities available for sale			1,585				676
Principal repayments of debt securities held-to-maturity			1,276				977
Net increase in loans			(44,109	)			(14,990	)
Purchases of premises and equipment			(165	)			(217	)
(Purchase) redemption of FHLB stock			(450	)			490
Net cash used in investing activities			(45,501	)			(17,217	)
Cash flows from financing activities:
Net increase in deposits			66,344				30,887
Net decrease in federal funds purchased			—				(560	)
Net increase (decrease) in Federal Home Loan Bank advances			10,000				(11,600	)
Proceeds from sale of common stock			539				—
Proceeds from sale of preferred stock			7,000				—
Net cash provided by financing activities			83,883				18,727
Net increase in cash and cash equivalents			36,337				417
Cash and cash equivalents at beginning of the period			8,934				7,983
Cash and cash equivalents at end of the period		$	45,271			$	8,400
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	2,354			$	1,249
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		$	89			$	110
Amortization of unrealized loss on debt securities transferred to held-to-maturity		$	83			$	67
Common stock issued and reclassified from other liabilities		$	—			$	31
Right-of use lease assets obtained in exchange for operating lease liabilities		$	—			$	1,144
Transfer of loan to foreclosed real estate		$	681			$	—

 

See accompanying notes to condensed consolidated financial statements

 

(continued)

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(1)	General. OptimumBank Holdings, Inc. (the “Company”) is a one-bank holding company and owns 100% of OptimumBank (the “Bank”), a Florida-chartered commercial bank. The Company’s only business is the operation of the Bank. The Bank’s deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). The Bank offers a variety of community banking services to individual and corporate customers through its three banking offices located in Broward County, Florida.
	Basis of Presentation. In the opinion of management, the accompanying unaudited 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, 2020, the results of operations for the three and nine month periods ended September 30, 2020 and 2019, and the results of cash flows for the nine month periods ended September 30, 2020 and 2019. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and nine months ended September 30, 2020, are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on March 25, 2020.
	Subsequent Events. The Company has evaluated subsequent events through November 12, 2020, which is the date the condensed consolidated financial statements were issued, determining no additional events required disclosure.
	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.   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 and/or transferred 2,575 of the Trust Preferred Securities to unaffiliated third parties.   During 2019 and 2018, the Company issued 1,226,173 shares of the Company’s common stock in exchange for 2,575 Trust Preferred Securities. For accounting purposes, the Trust Preferred Securities acquired by the Company were deemed to be 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 September 30, 2020 and December 31, 2019, respectively. The Company has been in default under the Junior Subordinated Debenture due to the failure to pay interest since 2015. In September 2020, the Company paid approximately $1.1 million to the holders of the outstanding Trust Preferred Securities, which represented all accrued interest owed under the Junior Subordinated Debenture attributable to the Trust Preferred Securities that had not been cancelled. The accrued interest owed by the Company associated with the Junior Subordinated Debenture was $0 and $995,000 at September 30, 2020 and December 31, 2019 respectively. The accrued interest at December 31, 2019 is presented on the accompanying condensed consolidated balance sheet under the caption “Other liabilities”.
	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):

 

		September 30,				December 31,
		2020				2019
Unrealized gain on debt securities available for sale		$	47			$	11
Unamortized portion of unrealized loss related to debt securities available for sale transferred to securities held-to-maturity			(201	)			(284	)
Income tax benefit			38				68
		$	(116	)		$	(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 September 30, 2020. Accordingly, a valuation allowance was recorded against the net deferred tax asset.

 

(continued)

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(1)	General, Continued.

 

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

 

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

 

(continued)

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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

 

						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
At September 30, 2020:
Held-to-maturity:
Collateralized mortgage obligations		$	3,208			$	168			$	—			$	3,376
Mortgage-backed securities			1,363				55				—				1,418
Total		$	4,571			$	223			$	-			$	4,794
Available for sale:
SBA Pool Securities		$	1,364			$	—			$	(43	)		$	1,321
Collateralized mortgage obligations			582				35				—				617
Mortgage-backed securities			5,467				55				—				5,522
Total		$	7,413			$	90			$	(43	)		$	7,460
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 nine months ended September 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								Less Than Twelve
		Months								Months
		Gross								Gross
		Unrealized				Fair				Unrealized				Fair
		Losses				Value				Losses				Value
At September 30, 2020-
Available for Sale -
SBA Pool securities		$	43			$	1,321			$	—			$	—
At December 31, 2019-
Available for Sale -
SBA Pool Securities		$	52			$	1,682			$	—			$	—

 

(continued)

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(2)	Debt Securities Continued.   Management evaluates debt securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospectus of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.   At September 30, 2020 and December 31, 2019, the unrealized losses on six debt securities, were caused by market conditions. It is expected that the debt securities would not be settled at a price less than the book value of the investments. Because the decline in fair value is attributable to market conditions and not credit quality, and because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.
	(continued)

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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

 

		At				At
		September 30, 2020				December 31, 2019
Residential real estate		$	32,094			$	28,266
Multi-family real estate			16,052				8,396
Commercial real estate			67,060				55,652
Land and construction			4,332				2,496
Commercial			22,611				4,476
Consumer			5,080				4,903
Total loans			147,229				104,189
Net deferred (loan fees), costs and premiums			(552	)			53
Allowance for loan losses			(2,145	)			(2,009	)
Loans, net		$	144,532			$	102,233

 

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

 

		Residential Real				Multi- Family Real				Commercial				Land and
		Estate				Estate				Real Estate				Construction				Commercial				Consumer				Unallocated				Total
Three Months Ended September 30, 2020:
Beginning balance		$	717			$	153			$	888			$	50			$	620			$	236			$	—			$	2,664
Provision (credit) for loan losses			85				75				84				(5	)			292				(7	)			—				524
Charge-offs			(259	)			—				—				—				(775	)			(17	)			—				(1,051	)
Recoveries			1				—				—				6				—				1				—				8
Ending balance		$	544			$	228			$	972			$	51			$	137			$	213			$	—			$	2,145
Three Months Ended September 30, 2019:
Beginning balance		$	537			$	41			$	658			$	7			$	558			$	11			$	241			$	2,053
Provision (credit) for loan losses			(5	)			—				87				7				32				165				(241	)			45
Charge-offs			—				—				—				—				—				—				—				—
Recoveries			—				—				—				6				—				—				—				6
Ending balance		$	532			$	41			$	745			$	20			$	590			$	176			$	—			$	2,104
Nine Months Ended September 30, 2020:
Beginning balance		$	531			$	82			$	624			$	21			$	573			$	152			$	26			$	2,009
Provision (credit) for loan losses			264				146				348				12				339				153				(26	)			1,236
Charge-offs			(259	)			—				—				—				(775	)			(94	)			—				(1,128	)
Recoveries			8				—				—				18				—				2				—				28
Ending balance		$	544			$	228			$	972			$	51			$	137			$	213			$	-			$	2,145
Nine Months Ended September 30, 2019:
Beginning balance		$	544			$	88			$	545			$	37			$	850			$	25			$	154			$	2,243
(Credit) provision for loan losses			(12	)			(47	)			395				(35	)			(260	)			158				(154	)			45
Charge-offs			—				—				(195	)			—				—				(7	)			—				(202	)
Recoveries			—				—				—				18				—				—				—				18
Ending balance		$	532			$	41			$	745			$	20			$	590			$	176			$	—			$	2,104

 

 

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 September 30, 2020:
Individually evaluated for impairment:
Recorded investment		$	—			$	—			$	2,193			$	—			$	—			$	—			$	—			$	2,193
Balance in allowance for loan losses		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—
Collectively evaluated for impairment:
Recorded investment		$	32,094			$	16,052			$	64,867			$	4,332			$	22,611			$	5,080			$	—			$	145,036
Balance in allowance for loan losses		$	544			$	228			$	972			$	51			$	137			$	213			$	—			$	2,145
At December 31, 2019:
Individually evaluated for impairment:
Recorded investment		$	944			$	—			$	2,206			$	—			$	812			$	—			$	—			$	3,962
Balance in allowance for loan losses		$	258			$	—			$	—			$	—			$	531			$	—			$	—			$	789
Collectively evaluated for impairment:
Recorded investment		$	27,322			$	8,396			$	53,446			$	2,496			$	3,664			$	4,903			$	—			$	100,227
Balance in allowance for loan losses		$	273			$	82			$	624			$	21			$	42			$	152			$	26			$	1,220

 

(continued)

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(3)	Loans, Continued.   The Company has divided the loan portfolio into six portfolio segments, each with different risk characteristics and methodologies for assessing risk. All loans are underwritten based upon standards set forth in the policies approved by the Company’s Board of Directors (the “Board”). The Company identifies the portfolio segments as follows:   Residential Real Estate, Multi-Family Real Estate, Commercial Real Estate, Land and Construction. Residential real estate loans are underwritten based on repayment capacity and source, value of the underlying property, credit history and stability. The Company offers first and second one-to-four family mortgage loans; the collateral for these loans is generally the borrower’s 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 borrowing 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. Commercial loans also consist of Paycheck Protection Program (“PPP”) loans which are fully guaranteed by the federal government.
	Consumer. Consumer loans are extended for various purposes, including purchases of automobiles, recreational vehicles, and boats. Also offered are home improvement loans, lines of credit, personal loans, and deposit account collateralized loans. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Loans to consumers are extended after a credit evaluation, including the creditworthiness of the borrower(s), the purpose of the credit, and the secondary source of repayment. Consumer loans are made at fixed and variable interest rates. Risk is mitigated by the fact that the loans are of smaller individual amounts.

 

(continued)

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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

 

		Pass				OLEM (Other Loans Especially Mentioned)				Sub- standard				Doubtful				Loss				Total
At September 30, 2020:
Residential real estate		$	32,094			$	—			$	—			$	—			$	—			$	32,094
Multi-family real estate			16,052				—				—				—				—				16,052
Commercial real estate			63,055				1,812				2,193				—				—				67,060
Land and construction			2,716				1,616				—				—				—				4,332
Commercial			22,073				538				—				—				—				22,611
Consumer			5,053				—				27				—				—				5,080
Total		$	141,043			$	3,966			$	2,220			$	—			$	—			$	147,229
															—				—
At December 31, 2019:															—				—
Residential real estate		$	27,322			$	—			$	944			$	—			$	—			$	28,266
Multi-family real estate			8,396				—				—				—				—				8,396
Commercial real estate			53,011				435				2,206				—				—				55,652
Land and construction			1,261				1,235				—				—				—				2,496
Commercial			3,027				637				812				—				—				4,476
Consumer			4,903				—				—				—				—				4,903
Total		$	97,920			$	2,307			$	3,962			$	—			$	—			$	104,189

 

Internally assigned loan grades are defined as follows:

 

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

 

(continued)

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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

 

		Accruing Loans
		30-59 Days Past Due				60-89 Days Past Due				Greater Than 90 Days Past Due				Total Past Due				Current				Nonaccrual Loans				Total Loans
At September 30, 2020:
Residential real estate		$	—			$	—			$	—			$	—			$	32,094			$	—			$	32,094
Multi-family real estate			—				—				—				—				16,052				—				16,052
Commercial real estate			—				—				—				—				67,060				—				67,060
Land and construction			—				—				—				—				4,332				—				4,332
Commercial			—				—				—				—				22,611				—				22,611
Consumer			14				13				—				27				5,053				—				5,080
Total		$	14			$	13			$	—			$	27			$	147,202			$	—			$	147,229
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 September 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			—				—				—				944				944				258
Commercial			—				—				—				812				812				531
Total:
Residential real estate		$	—			$	—			$	—			$	944				944				258
Commercial real estate		$	2,193			$	2,193			$	—			$	2,206				2,206				—
Commercial		$	—			$	—			$	—			$	812			$	812			$	531
Total		$	2,193			$	2,193			$	—			$	3,962			$	3,962			$	789

 

(continued)

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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

 

		Three Months Ended September 30,
		2020												2019
		Average				Interest				Interest				Average				Interest				Interest
		Recorded				Income				Income				Recorded				Income				Income
		Investment				Recognized				Received				Investment				Recognized				Received
Residential real estate		$	626			$	—			$	—			$	950			$	19			$	19
Commercial real estate		$	2,193			$	26			$	—			$	2,280			$	27			$	27
Commercial		$	270			$	—			$	—			$	812			$	—			$	—
Total		$	3,089			$	26			$	—			$	4,042			$	46			$	46

 

		Nine Months Ended September 30,
		2020												2019
		Average				Interest				Interest				Average				Interest				Interest
		Recorded				Income				Income				Recorded				Income				Income
		Investment				Recognized				Received				Investment				Recognized				Received
Residential real estate		$	846			$	18			$	11			$	950			$	56			$	56
Commercial real estate		$	2,194			$	78			$	60			$	2,808			$	88			$	86
Commercial		$	649			$	—			$	18			$	1,327				43			$	39
Total		$	3,689			$	96			$	89			$	5,085			$	187			$	181

 

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

 

(continued)

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(4)

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

 

		Three Months Ended								Nine Months Ended
		September 30,								September 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				1,928,269				2,920,961				1,889,592

 

(continued)

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(5)	Stock-Based Compensation
	The Company is authorized to grant stock options, stock grants and other forms of equity-based compensation under its 2018 Equity Incentive Plan (the “2018 Plan”). The plan has been approved by the shareholders. The Company is currently authorized to issue up to 550,000 shares of common stock under the 2018 Plan, due to an amendment to increase the number of authorized shares from 250,000 to 550,000 that was approved by shareholders in August 2020. At September 30, 2020, 318,184 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.
	During the third quarter of 2020, the Company agreed to issue 74,626 shares to this director for services performed and recorded compensation expense of $200,000. The director has not yet taken delivery of the shares. As such, at September 30, 2020, the $200,000 is presented on the accompanying condensed consolidated balance sheet under the caption “other liabilities”.

 

(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. There were no impaired collateral-dependent loans at September 30, 2020. Those impaired collateral-dependent loans which are measured at fair value on a nonrecurring basis were as follows as December 31, 2019 (in thousands):

  

		Fair Value				Level 1				Level 2				Level 3				Total Losses				Losses Recorded in Operations For the year ended ended December 31, 2019
At December 31, 2019—
Residential real estate		$	686			$	—			$	—			$	686			$	258			$	—

 

Foreclosed real estate is recorded at fair value less selling costs. Foreclosed real estate which is measured at fair value on a nonrecurring basis is as follows (in thousands):

 

		Fair Value				Level 1				Level 2				Level 3				Total Losses				Losses Recorded in Operations For the Nine months ended September 30, 2020
At September 30, 2020—
Foreclosed real estate		$	681			$	—			$	—			$	681			$	—			$	—

 

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

 

		Fair Value Measurements Using
						Quoted Prices In Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
		Fair Value				(Level 1)				(Level 2)				(Level 3)
At September 30, 2020:
SBA Pool Securities		$	1,321			$	—			$	1,321			$	—
Collateralized mortgage obligations			617				—				617				—
Mortgage-backed securities			5,522				—				5,522				—
		$	7,460				—				7,460				—
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 nine month periods ended September 30, 2020 and 2019, no debt securities were transferred in or out of Levels 1, 2 or 3.

 

(continued)

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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

 

		At September 30, 2020												At December 31, 2019
		Carrying Amount				Fair Value				Level				Carrying Amount				Fair Value				Level
Financial assets:
Cash and cash equivalents		$	45,271			$	45,271				1			$	8,934			$	8,934				1
Debt securities available for sale			7,460				7,460				2				5,409				5,409				2
Debt securities held-to-maturity			4,571				4,794				2				5,806				5,986				2
Loans			144,532				144,641				3				102,233				102,060				3
Federal Home Loan Bank stock			1,092				1,092				3				642				642				3
Accrued interest receivable			1,544				1,544				3				432				432				3
Financial liabilities:
Deposit liabilities			167,716				168,003				3				101,372				101,256				3
Federal Home Loan Bank advances			23,000				23,311				3				13,000				13,137				3
Junior subordinated debenture			2,580				N/A	(1)			N/A				2,580				N/A	(1)			N/A
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 nonperformance 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, 2020 follows (in thousands):

 

Commitments to extend credit		$	4,091
Unused lines of credit		$	5,332
Standby letters of credit		$	4,550

 

(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 September 30, 2020, the Company has determined to opt in to adopting the new CBLR.

 

(continued)

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(9)	Regulatory Matters, Continued.   The following table shows the Bank’s capital amounts and ratios and regulatory thresholds at September 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 September 30, 2020—
Tier I Capital to Total Assets			16,175				8.70	%		$	7,434				4.00	%		$	9,292				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   During 2020, the Company issued 280 shares of Series B Participating Preferred Stock (the “Series B Preferred Stock”) to a related party at a cash price of $25,000 per share, or an aggregate of $7,000,000. The related party is a significant common stockholder. The Preferred Stock has no par value. Except in the case 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. The Preferred Stock is convertible into 2,800,000 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 by approved by the holders of a majority of the outstanding common stock of the Company; and (ii) such conversion shall not result in any holder of the Series B Preferred Stock and any persons with whom the holder may be acting in concert, becoming beneficial owners of more than 9.9% of the outstanding shares of the common stock. The number of shares issuable upon conversion is subject to adjustment based on the terms of the amended Certificate of Designation in the Amendment to the Company’s Articles of Incorporation filed on September 29, 2020 (the “Certificate of Designation”) The Preferred Stock has preferential liquidation rights over common stockholders and holders of junior securities. 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. The Preferred Stock generally has no voting rights except as provided in the Certificate of Designation.
(11)	Contingency
	The Coronavirus global pandemic (“COVID-19”) has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets and significantly increased unemployment levels. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, the duration of the pandemic, and actions taken by governmental authorities to slow the spread of the disease or to mitigate its effects.   The Company took action to prepare its employees, support its clients, and help its communities. The Company has supported small business owners by making loans through the Small Business Administration Paycheck Protection Program (“PPP”). As of September 30, 2020, the Bank had originated 204 PPP loans for a total dollar amount of $19.2 million. These loans are 100% guaranteed by the Small Business Administration (the “SBA”). The Company has the option to fund PPP loans through the Federal Reserve Bank’s Paycheck Protection Program Liquidity Facility (the “PPPLF”). Loans pledged to secure PPPLF advances will be excluded from the calculations of the Bank’s regulatory capital ratios. At September 30, 2020, there were no outstanding borrowings under the PPPLF.

 

 

(continued)

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

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

 

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto presented elsewhere in this report. For additional information, refer to the consolidated financial statements and footnotes for the year ended December 31, 2019 in the Annual Report on Form 10-K.

 

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

 

Capital Levels

 

As of September 30, 2020, the Bank is well capitalized under regulatory guidelines. The capital of the Bank was substantially increased in 2020 through capital contributions made by the Company to the Bank with the net proceeds from the sale of $7,000,000 in Series B Preferred Stock. See Note 10 to the financial statements.

 

See Note 9 to the financial statements for a discussion of regulatory matters and 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, 2020 and December 31, 2019

 

Overview

 

The Company’s total assets increased by approximately $81.8 million to $208.6 million at September 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, and FHLB advances. Total stockholders’ equity increased by approximately $6.5 million to $13.7 million at September 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 nine-month period ended September 30, 2020.

 

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

 

		Nine Month Period
		Ended				Year Ended
		September 30, 2020				December 31, 2019
Average equity as a percentage of average assets			5.2	%			4.6	%
Equity to total assets at end of period			6.6	%			5.7	%
Return on average assets (1)			(1.0	)%			(1.0	)%
Return on average equity (1)			(18.4	)%			(21.3	)%
Noninterest expenses to average assets (1)			3.02	%			4.0	%

 

 

(1) Annualized for the nine month period ended September 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 $66.3 million during the nine month period ended September 30, 2020. The proceeds were primarily used to originate new loans.

 

In addition to obtaining funds from depositors, the Company may borrow funds from other financial institutions. At September 30, 2020, the Company had outstanding borrowings of $23 million, against its $65 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. At September 30, 2020, the Company also had lines of credit amounting to $9.5 million with four correspondent banks and a discount window credit line with the Federal Reserve Bank amounting to $430.000. Disbursements on the lines of credit are subject to the approval of the correspondent banks. We measure and monitor our liquidity daily and believe our liquidity sources are adequate to meet our operating needs.

 

Off-Balance Sheet Arrangements

 

Refer to Note 8 for Off-Balance Sheet Financial Instruments.

 

Junior Subordinated Debenture

 

Please refer to Note 1 for discussion on this matter.

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

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

 

Results of 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,
		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		$	142,138			$	1,723				4.85	%		$	86,895			$	1,140				5.25	%
Securities			9,092				41				1.80	%			12,508				63				2.01	%
Other (1)			18,928				7				0.15	%			9,768				58				2.38	%
Total interest-earning assets/interest income			170,158				1,771				4.16	%			109,171				1,261				4.62	%
Cash and due from banks			14,480												2,106
Premises and equipment			1,439												2,927
Other			1,312												(411	)
Total assets		$	187,389											$	113,793
Interest-bearing liabilities:
Savings, NOW and money-market deposits		$	89,383				168				0.75	%		$	46,789				222				1.90	%
Time deposits			28,583				122				1.71	%			31,055				186				2.40	%
Borrowings (2)			26,758				96				1.44	%			18,155				130				2.86	%
Total interest-bearing liabilities/interest expense			144,724				386				1.07	%			95,999				538				2.24	%
Noninterest-bearing demand deposits			29,970												10,733
Other liabilities			2,367												2,149
Stockholders’ equity			10,328												4,912
Total liabilities and stockholders’ equity		$	187,389											$	113,793
Net interest income						$	1,385											$	723
Interest rate spread (3)											3.09	%											2.38	%
Net interest margin (4)											3.26	%											2.65	%
Ratio of average interest-earning assets to average interest-bearing liabilities			1.18	%											1.14	%

 

(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 junior subordinated debenture.
(3)	Interest-rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(4)	Net interest margin is net interest income divided by average interest-earning assets.
(5)	Annualized.

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

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

 

		Nine Months Ended September 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		$	125,090			$	4,697				5.01	%		$	83,271			$	3,328				5.33	%
Securities			10,016				136				1.81	%			11,384				184				2.16	%
Other (1)			14,526				67				0.61	%			9,835				184				2.49	%
Total interest-earning assets/interest income			149,632				4,900				4.37	%			104,490				3,696				4.72	%
Cash and due from banks			7,748												2,161
Premises and equipment			1,423												2,879
Other			1,043												(826	)
Total assets		$	159,846											$	108,704
Interest-bearing liabilities:
Savings, NOW and money-market deposits		$	72,348				607				1.12	%		$	41,826				567				1.81	%
Time deposits			30,466				440				1.93	%			29,144				490				2.24	%
Borrowings (2)			24,990				322				1.72	%			19,276				415				2.87	%
Total interest-bearing liabilities/interest expense			127,804				1,369				1.43	%			90,246				1,472				2.17	%
Noninterest-bearing demand deposits			21,255												11,155
Other liabilities			2,447												2,246
Stockholders’ equity			8,340												5,051
Total liabilities and stockholders’ equity		$	159,846											$	108,698
Net interest income						$	3,531											$	2,224
Interest rate spread (3)											2.94	%											2.55	%
Net interest margin (4)											3.15	%											2.84	%
Ratio of average interest-earning assets to average interest-bearing liabilities			1.17	%											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 junior subordinated debenture.
(3)	Interest-rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(4)	Net interest margin is net interest income divided by average interest-earning assets.
(5)	Annualized.

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

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

 

Comparison of the Three-Month Periods Ended September 30, 2020 and 2019:

 

		Three Months Ended								Increase /
		September 30,								(Decrease)
(dollars in thousands)		2020				2019				Amount				Percentage
Total interest income		$	1,771			$	1,261			$	510				40	%
Total interest expense			386				538				(152	)			(28	)%
Net interest income			1,385				723				662				92	%
Provision for loan losses			524				45				479				1064	%
Net interest income after provision for loan losses			861				678				183				27	%
Total noninterest income			64				29				35				121	%
Total noninterest expenses			1,421				987				434				44	%
Net loss before income tax benefit			(496	)			(280	)			(216	)			77	%
Income tax benefit			-				-				-				-
Net Loss		$	(496	)		$	(280	)			(216	)			77	%
Net loss per share - Basic and diluted		$	(0.17	)		$	(.15	)

 

Net Loss. The Company had a net loss of ($496,000) for the three month period ended September 30, 2020 compared to a net loss of ($280,000) for the three month period ended September 30, 2019. The Company recorded provision for loan losses amounting to $524,000 during the three month period ended September 30, 2020, which was largely due to the economic environment associated with the COVID-19 pandemic. The Company recorded provision for loan losses amounting to $45,000 during the three month period ended September 30, 2019. Excluding the provision for loan losses, the Company would have had net earnings of $28,000 for the three month period ended September 30, 2020 and a net loss of ($235,000) for the three month period ended September 30, 2019. Excluding the provision for loan losses, net loss decreased $263,000 for the three month period ended September 30, 2020 as compared to the three month period ended September 30, 2019.

 

Interest Income. Interest income increased $510,000 for the three month period ended September 30, 2020 compared to the three month period ended September 30, 2019 primarily due to growth in the loan portfolio.

 

Interest Expense. Interest expense decreased $152,000 to $386,000 for the three month period ended September 30, 2020 compared to the prior period. Decrease in interest expense is due to a reduction in the rates paid on deposits and borrowings offset by volume increases in deposits and borrowings.

 

Provision for Loan Losses. Provision for loan losses amounted to $524,000 for the three month period ended September 30, 2020. The Company recorded provision for losses amounting to $45,000 during the three month period ended September 30, 2019. 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 September 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 $2.1 million or 1.46% of loans outstanding at September 30, 2020, compared to $2.0 million or 1.93% of loans outstanding at December 31, 2019. The provision for loan losses during the third 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 increased to $64,000 for the three month period ended September 30, 2020, from $29,000 for the three month period ended September 30, 2019. The increase is primarily related to services charges and fees.

 

Noninterest Expenses. Total noninterest expenses increased to $1,421,000 for the three month period ended September 30, 2020 compared to $987,000 for the three month period ended September 30, 2019 primarily due to an increase in salaries and employee benefits and stock-based compensation to a director included in other noninterest expense.

 

 

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, 2020 and 2019:

 

		Nine Months Ended								Increase /
		September 30,								(Decrease)
(dollars in thousands)		2020				2019				Amount				Percentage
Total interest income		$	4,900			$	3,696			$	1,204				33	%
Total interest expense			1,369				1,472				(103	)			(7	)%
Net interest income			3,531				2,224				1,307				59	%
Provision for loan losses			1,236				45				1,191				2647	%
Net interest income after provision for loan losses			2,295				2,179				116				5	%
Total noninterest income			170				153				17				11	%
Total noninterest expenses			3,616				3,240				376				12	%
Net loss before income tax benefit			(1,151	)			(908	)			(243	)			27	%
Income tax benefit			-				(52	)			52				(100	)%
Net Loss		$	(1,151	)		$	(856	)			(295	)			34	%
Net loss per share - Basic and diluted		$	(0.39	)		$	(.45	)

 

Net Loss.  The Company had a net loss of $1.2 million for the nine month period ended September 30, 2020 compared to a net loss of ($856,000) for the nine month period ended September 30, 2019. The Company recorded provision for loan losses amounting to $1.2 million during the nine month period ended September 30, 2020, which was largely due to the economic environment associated with the COVID-19 pandemic. The Company recorded provision for loan losses amounting to $45,000 during the nine month period ended September 30, 2019. Excluding the provision for loan losses, the Company would have had net earnings of $85,000 for the nine month period ended September 30, 2020 and a net loss of ($811,000) for the nine month period ended September 30, 2019. Excluding the provision for loan losses, net loss decreased $896,000 for the nine month period ended September 30, 2020 compared to the nine month period ended September 30, 2019.

 

Interest Income. Interest income increased to $4.9 million for the nine month period ended September 30, 2020 from $3.7 million for the nine month period ended September 30, 2019, primarily due to an increase in loan volume.

 

Interest Expense. Interest expense on deposits and borrowings decreased $103,000 to $1,369,000 for the nine month period ended September 30, 2020 compared to the prior period. The decrease in interest expense was caused by a reduction in interest rates paid on deposits and borrowings offset by volume increases in deposits and borrowings.

 

Provision for Loan Losses. The provision for losses during the nine month period ended September 30, 2020 amounted to $1.2 million. 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 September 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 $2.1 million or 1.46% of loans outstanding at September 30, 2020, as compared to $2.0 million or 1.93% of loans outstanding at December 31, 2019.

 

Noninterest Income. Total noninterest income increased to $170,000 for the nine month period ended September 30, 2020, from $153,000 for the nine month period ended September 30, 2019. The increase is primarily related to services charges and fees.

 

Noninterest Expenses. Total noninterest expenses increased $376,000 to $3.6 million for the nine month period ended September 30, 2020 compared to $3.2 million for the nine month period ended September 30, 2019 primarily due to an increase in salaries and employee benefits, occupancy and equipment, and other.

 

COVID-19 Related Loan Data

 

Loan Forbearance. During the nine month period ended September 30, 2020 we granted 180-day forbearances on 60 loans totaling $43.8 million. At September 30, 2020, we had loans under forbearances amounting to $38.1 million, which represents 25.9% of our gross loan portfolio.

 

Paycheck Protection Program (“PPP”). We closed 204 PPP loans totaling $19.2 million during the nine month period ended September 30, 2020.

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Item 4. Controls and Procedures

 

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

 

There have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 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 first quarter of 2020, the Company issued 98,182 shares of common stock for an aggregate purchase price of $539,000. The issuance of the shares in this transaction were 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 pay for operating expenses.

 

During the second and third quarter of 2020, the Company issued 280 shares of preferred stock to a related party for an aggregate purchase price of $7,000,000. The related party is a significant common stockholder. The issuance of the shares in these transactions were exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933 as a transaction by an issuer not involving a public offering. The Company used the proceeds to augment the Bank’s regulatory capital ratios.

 

Item 3. Defaults on Senior Securities

 

Previously disclosed.

 

Item 4. Mine Safety Disclosures

 

None

 

Item 5. Other Information

 

None

 

Item 6. Exhibits

 

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

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	OPTIMUMBANK HOLDINGS, INC.
	(Registrant)
Date: November 12, 2020	By:	/s/ Moishe Gubin
		Moishe Gubin,
		Chairman of the Board
	By:	/s/ Joel Klein
		Joel Klein
		Principal Financial Officer

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

EXHIBIT INDEX

 

Exhibit No.		Description
31.1		Certification of Principal Executive Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act
31.2		Certification of Principal Financial Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act
32.1		Certification of Principal Executive Officer
32.2		Certification of Principal Financial Officer

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

EXHIBIT INDEX

 

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