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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 March 31, 2023

 

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 ☒ 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: 7,250,218 shares of common stock, $.01 par value, issued and outstanding as of May 10, 2023.

 

 

 

 

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

INDEX

 

  Page
   
PART I. FINANCIAL INFORMATION  
   
Item 1. Financial Statements 1
   
Condensed Consolidated Balance Sheets - March 31, 2023 (unaudited) and December 31, 2022 1
   
Condensed Consolidated Statements of Earnings - Three Months ended March 31, 2023 and 2022 (unaudited) 2
   
Condensed Consolidated Statements of Comprehensive Income (Loss) - Three Months ended March 31, 2023 and 2022 (unaudited) 3
   
Condensed Consolidated Statements of Stockholders’ Equity - Three Months ended March 31, 2023 and 2022 (unaudited) 4
   
Condensed Consolidated Statements of Cash Flows - Three Months ended March 31, 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 29
   
PART II. OTHER INFORMATION  
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
   
Item 6. Exhibits 29
   
SIGNATURES 30

 

i

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Condensed Consolidated Balance Sheets

(Dollars in thousands, except share amounts)

 

   March 31,   December 31, 
   2023   2022 
   (Unaudited)     
Assets:          
Cash and due from banks  $20,692   $19,788 
Interest-bearing deposits with banks   65,966    52,048 
Total cash and cash equivalents   86,658    71,836 
Debt securities available for sale   25,554    25,102 
Debt securities held-to-maturity (fair value of $468 and $504)   498    540 
Loans, net of allowance for credit losses of $6,353 and $5,793   495,556    477,218 
Federal Home Loan Bank stock   1,354    600 
Premises and equipment, net   1,117    934 
Right-of-use lease assets   2,369    2,119 
Accrued interest receivable   1,427    1,444 
Deferred tax asset   3,323    3,836 
Other assets   4,180    1,590 
           
Total assets  $622,036   $585,219 
Liabilities and Stockholders’ Equity:          
           
Liabilities:          
Noninterest-bearing demand deposits  $159,784   $159,193 
Savings, NOW and money-market deposits   134,020    108,726 
Time deposits   233,583    239,980 
           
Total deposits   527,387    507,899 
           
Federal Home Loan Bank advances   25,000    10,000 
           
Official checks   981    110 
Operating lease liabilities   2,431    2,172 
Other liabilities   1,332    2,458 
           
Total liabilities   557,131    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   —    — 
Common stock, $.01 par value; 10,000,000 shares authorized, 7,250,218 and 7,058,897 shares issued and outstanding   72    71 
Additional paid-in capital   91,221    90,408 
Accumulated deficit   (21,101)   (22,073)
Accumulated other comprehensive loss   (5,287)   (5,826)
           
Total stockholders’ equity   64,905    62,580 
Total liabilities and stockholders’ equity  $622,036   $585,219 

 

See accompanying notes to condensed consolidated financial statements.

 

1

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

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

 

   2023   2022 
   Three Months Ended 
   March 31, 
   2023   2022 
Interest income:          
Loans  $6,589   $3,263 
Debt securities   178    163 
Other   749    37 
           
Total interest income   7,516    3,463 
           
Interest expense:          
Deposits   2,432    175 
Borrowings   25    61 
           
Total interest expense   2,457    236 
           
Net interest income   5,059    3,227 
           
Credit loss expense   820    392 
           
Net interest income after credit loss expense   4,239    2,835 
           
Noninterest income:          
Service charges and fees   719    589 
Other   10    61 
           
Total noninterest income   729    650 
           
Noninterest expenses:          
Salaries and employee benefits   1,966    1,335 
Professional fees   197    147 
Occupancy and equipment   189    167 
Data processing   366    277 
Regulatory assessment   209    77 
Other   495    337 
           
Total noninterest expenses   3,422    2,340 
           
Net earnings before income taxes   1,546    1,145 
           
Income taxes   393    290 
           
Net earnings  $1,153   $855 
           
Net earnings per share - Basic and diluted  $.16   $.17 

 

See accompanying notes to condensed consolidated financial statements.

 

2

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

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

 

   2023   2022 
   Three Months Ended 
   March 31, 
   2023   2022 
         
Net earnings  $1,153   $855 
           
Other comprehensive income (loss):          
Change in unrealized loss on debt securities:          
Unrealized gain (loss) arising during the period   715    (2,781)
           
Amortization of unrealized loss on debt securities transferred to held-to-maturity   1    7 
           
Other comprehensive income (loss) before income taxes   716    (2,774)
           
Deferred income taxes (benefit)   177    (703)
           
Total other comprehensive income (loss)   539    (2,071)
           
Comprehensive income (loss)  $1,692   $(1,216)

 

See accompanying notes to condensed consolidated financial statements.

 

3

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Condensed Consolidated Statements of Stockholders’ Equity

Three Months Ended March 31, 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   —   $     —    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 for three months ended March 31, 2022 (unaudited)   —    —    —    —    —    —    —    855    —    855 
                                                   
Balance at March 31, 2022 (unaudited)   —   $—    1,020   $—    6,002,612   $60   $77,204   $(25,241)  $(2,706)  $49,317 
                                                   
Balance at December 31, 2022   —   $—    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 for three months ended March 31, 2023 (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 

 

See accompanying notes to condensed consolidated financial statements.

 

4

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

   2023   2022 
   Three Months Ended 
   March 31, 
   2023   2022 
Cash flows from operating activities:          
Net earnings  $1,153   $855 
Adjustments to reconcile net earnings to net cash provided by operating activities:          
Credit loss expense   820    392 
Depreciation and amortization   57    56 
Deferred income taxes   397    290 
Net accretion of fees, premiums and discounts   8    (62)
Stock-based compensation expense   490    96 
Decrease in accrued interest receivable   17    44 
Amortization of right of use asset   65    156 
Net decrease in operating lease liabilities   (56)   (155)
(Increase) decrease in other assets   (2,590)   291 
Decrease in official checks and other liabilities   (332)   (317)
Net cash provided by operating activities   29    1,646 
           
Cash flows from investing activities:          
Principal repayments of debt securities available for sale   232    617 
Principal repayments of debt securities held-to-maturity   42    236 
Net increase in loans   (19,299)   (26,061)
Purchases of premises and equipment   (240)   (47)
Purchase of FHLB stock   (754)   (57)
           
Net cash used in investing activities   (20,019)   (25,312)
           
Cash flows from financing activities:          
Net increase in deposits   19,488    24,865 
Net increase in FHLB Advances   15,000    — 
Proceeds from sale of preferred stock   —    6,500 
Proceeds from sale of common stock   324    5,523 
           
Net cash provided by financing activities   34,812    36,888 
           
Net increase in cash and cash equivalents   14,822    13,222 
           
Cash and cash equivalents at beginning of the period   71,836    58,970 
           
Cash and cash equivalents at end of the period  $86,658   $72,192 
           
Supplemental disclosure of cash flow information:          
Cash paid during the period for:          
Interest  $2,327   $237 
           
Income taxes  $—   $— 
           
Noncash transactions:          
Change in accumulated other comprehensive loss, net change in unrealized loss on debt securities available for sale, net of income taxes  $538   $(2,078)
           
Amortization of unrealized loss on debt securities transferred to held-to-maturity  $1   $7 
           
Reduction of stockholder’s equity due to adoption of topic 326, net  $(181)   — 
Right-of use lease assets obtained in exchange for operating lease liabilities  $315   $— 
Increase in other liabilities for stock-based compensation  $—   $96 

 

See accompanying notes to condensed consolidated financial statements.

 

5

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(1) General. OptimumBank Holdings, Inc. (the “Company”) is a one-bank holding company and owns 100% of OptimumBank (the “Bank”), a Florida-chartered 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.

 

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 March 31, 2023, and the results of operations and cash flows for the three month periods ended March 31, 2023 and 2022. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three months ended March 31, 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):

 

   March 31,   December 31, 
   2023   2022 
         
Unrealized loss on debt securities available for sale  $(7,072)  $(7,786)
Unamortized portion of unrealized loss related to debt securities available for sale transferred to securities held-to-maturity   (17)   (18)
Income tax benefit   1,802    1,978 
           
Accumulated other comprehensive loss  $(5,287)  $(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.

 

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 $219,000 allowance for credit losses, $23,000 of liability for unfunded commitments, a deferred income tax asset of $61,000 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.

(continued)

 

6

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(1) General, Continued.

 

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 (reversal). 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 March 31, 2023, the accrued interest receivable for debt securities available for sale recognized in accrued interest receivable was $140,000.

 

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.

 

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.

 

(continued)

 

7

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(1) General, Continued.

 

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.

 

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.

 

(continued)

 

8

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(1) General, Continued.

 

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 March 31, 2023, the accrued interest receivable for loans recorded in accrued interest receivable was $1,277,000.

 

Also, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for credit losses. Such agencies may require the Company to recognize additions to the allowance for credit losses based on their judgments of information available to them at the time of their examination.

 

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, 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 determinate 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 March 31, 2023, the liability recorded for expected credit losses on unfunded commitments was $77,000 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.

 

(continued)

 

9

 

 

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 March 31, 2023:                    
Available for sale:                    
SBA Pool Securities  $802   $1   $(18)  $785 
Collateralized mortgage obligations   142    —    (12)   130 
Taxable municipal securities   16,719    —    (4,550)   12,169 
Mortgage-backed securities   14,962    —    (2,492)   12,470 
Total  $32,625   $1   $(7,072)  $25,554 
                     
Held-to-maturity:                         
Collateralized mortgage obligations  $449   $—   $(29)  $420 
Mortgage-backed securities   49    —    (1)   48 
Total  $498   $—   $(30)  $468 
                 
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 

 

There were no sales of debt securities during the three months ended March 31, 2023, and 2022.

 

(continued)

 

10

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(2) Debt Securities, Continued.

 

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 March 31, 2023:                
Available for Sale:                    
SBA Pool Securities  $18   $629   $—   $— 
Collateralized mortgage obligation   12    130    —    — 
Taxable municipal securities   4,550    12,169    —    — 
Mortgage-backed securities   2,492    12,227    —    — 
Total  $7,072   $25,155   $—   $— 
                     
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)

 

11

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(2) Debt Securities, Continued.

 

At March 31, 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 March 31, 2023 and December 31, 2022 all municipal securities were rated as investment grade. All debt securities in an unrealized loss position as of March 31, 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 not 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.

 

(continued)

 

12

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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

  

   March 31,   December 31, 
   2023   2022 
         
Residential real estate  $52,087   $50,354 
Multi-family real estate   68,126    69,555 
Commercial real estate   319,446    310,695 
Land and construction   19,629    17,286 
Commercial   3,720    5,165 
Consumer   39,527    30,323 
           
Total loans   502,535    483,378 
           
Deduct:          
Net deferred loan fees, and costs   (626)   (367)
Allowance for credit losses   (6,353)   (5,793)
           
Loans, net  $495,556   $477,218 

 

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

 

   Residential Real Estate   Multi-Family Real Estate   Commercial Real Estate  

Land and

Construction

   Commercial   Consumer   Total 
Three Months Ended March 31, 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    2,896    451    15    774    6,011 
Credit loss expense   (59)   2    135    82    37    568    765 
Charge-offs   —    —    —    —    (26)   (437)   (463)
Recoveries   —    —    —    —    -    40    40 
                                    
Ending balance (March 31, 2023)  $742   $1,077   $3,030   $533   $26   $945   $6,353 
                                    
Three Months Ended March 31, 2022:                                   
Beginning balance Dec. 31, 2021  $482   $535   $1,535   $32   $74   $417   $3,075 
Provision (credit) for loan losses   93    14    72    47    (6)   172    392 
Charge-offs   —    —    —    —    —    (73)   (73)
Recoveries   —    —    —    —    —    14    14 
                                    
Ending balance (March 31, 2022)  $575   $549   $1,607   $79   $68   $530   $3,408 

 

(continued)

 

13

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(3) Loans, Continued.

 

                                           
    Residential Real Estate    

Multi-Family

Real Estate

    

 

Commercial Real Estate

     Land and Construction     Commercial     Consumer     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)

 

14

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(3) Loans, Continued. The Company has divided the loan portfolio into six portfolio segments, each with different risk characteristics and methodologies for assessing risk. All loans are underwritten based upon standards set forth in the policies approved by the Company’s Board of Directors (the “Board”). The Company identifies the portfolio segments as follows:

 

Residential Real Estate, Multi-Family Real Estate, Commercial Real Estate, Land and Construction. Residential real estate loans are underwritten based on repayment capacity and source, value of the underlying property, credit history and stability. The Company offers first and second one-to-four family mortgage loans; the collateral for these loans is generally the clients’ owner-occupied residences. Although these types of loans present lower levels of risk than commercial real estate loans, risks do still exist because of possible fluctuations in the value of the real estate collateral securing the loan, as well as changes in the borrowers’ financial condition. Multi-family and commercial real estate loans are secured by the subject property. 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 in the Company’s market area. Commercial loans are generally used for working capital purposes or for acquiring equipment, inventory or furniture. Primarily all of the Company’s commercial loans are secured loans, along with a small amount of unsecured loans. The Company’s underwriting analysis consists of a review of the financial statements of the borrower, the lending history of the borrower, the debt service capabilities of the borrower, the projected cash flows of the business, the value of the collateral, if any, and whether the loan is guaranteed by the principals of the borrower. These loans are generally secured by accounts receivable, inventory and equipment. Commercial loans are typically made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business, which makes them of higher risk than residential loans and the collateral securing loans may be difficult to appraise and may fluctuate in value based on the success of the business. The Company seeks to minimize these risks through its underwriting standards.

 

Consumer. Consumer loans are extended for various purposes, including purchases of automobiles, recreational vehicles, and boats. Also offered are home improvement loans, lines of credit, personal loans, and deposit account collateralized loans. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Loans to consumers are extended after a credit evaluation, including the creditworthiness of the borrower(s), the purpose of the credit, and the secondary source of repayment. Consumer loans are made at fixed and variable interest rates. Risk is mitigated by the fact that the loans are of smaller individual amounts.

 

(continued)

 

15

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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

 

                         
       OLEM                 
       (Other Loans Especially   Sub-             
   Pass   Mentioned)   Standard   Doubtful   Loss   Total 
                         
At March 31, 2023:                              
Residential real estate  $52,087   $—   $—   $—   $—   $52,087 
Multi-family real estate   68,126    —    —    —    —    68,126 
Commercial real estate   318,216    —    1,230    —    —    319,446 
Land and construction   19,629    —    —    —    —    19,629 
Commercial   3,720    —    —    —    —    3,720 
Consumer   39,527    —    —    —    —    39,527 
                               
Total  $501,305   $      —   $1,230   $      —   $—   $502,535 
                               
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 effected in the future. The Company fully charges off any loan classified as Loss.

 

(continued)

 

16

 

 

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         
           Greater                 
  

30-59

Days

  

60-89

Days

   Than 90 Days   Total             
   Past   Past   Past   Past       Nonaccrual   Total 
   Due   Due   Due   Due    Current   Loans   Loans 
                             
At March 31, 2023:                                   
Residential real estate  $—   $—   $—   $—   $52,087   $—   $52,087 
Multi-family real estate   —    —    —    —    68,126    —    68,126 
Commercial real estate   —    —    —    —    319,446    —    319,446 
Land and construction   —    —    —    —    19,629    —    19,629 
Commercial   —    —    —    —    3,720    —    3,720 
Consumer   197    49    —    246    39,281    —    39,527 
                                    
Total  $197   $49   $—   $246   $502,289   $—   $502,535 
                                    
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 

 

(continued)

 

 17 

 

 

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(3) Loans, Continued.

 

  The Company has not made any modifications of loans to borrowers experiencing financial difficulties during the three months ended March 31, 2023.
  No loans have been determined to be troubled debt restructurings (TDR’s) during the three-month period ended March 31, 2022. At March 31, 2023 and 2022, there were no loans modified and entered into as TDR’s within the past twelve months, that subsequently defaulted during the three-month periods ended March 31, 2023 and 2022.

 

The Company’s loans to customers as of March 31, 2023, based on year of origination within each credit quality indicator are as follows (in thousands):

 

Term Loans

Amortized Cost Basis by Origination Year

 

Construction and land real estate  2023   2022   2021   2020   2019   Prior   Revolving Loans (Amortized Cost Basis)   Revolving Loans Converted to Term Loans (Amortized Cost Basis)   Total 
Pass  $808   $15,223   $2,079   $1,519   $-   $-   $-   $-   $19,629 
OLEM (Other Loans Especially Mentioned)   -    -    -    -    -    -    -    -    - 
Substandard   -    -    -    -    -    -    -    -    - 
Doubtful   -    -    -    -    -    -    -    -    - 
Loss   -    -    -    -    -