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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 March 31, 2012

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		000-50755
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

2477 East Commercial Boulevard, Fort Lauderdale, FL 33308

(Address of principal executive offices)

954-776-2332

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

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 or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		Smaller reporting company		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: 26,549,897 shares of Common Stock, $.01 par value, issued and outstanding as of May 10, 2012

 

 

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

INDEX

 

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 2012 (unaudited) and December 31, 2011			2
Condensed Consolidated Statements of Operations - Three Months ended March  31, 2012 and 2011 (unaudited)			3
Condensed Consolidated Statements of Comprehensive Loss - Three Months ended March  31, 2012 and 2011 (unaudited)			4
Condensed Consolidated Statements of Stockholders’ Equity - Three Months ended March  31, 2012 and 2011 (unaudited)			5
Condensed Consolidated Statements of Cash Flows - Three Months ended March  31, 2012 and 2011 (unaudited)			6-7
Notes to Condensed Consolidated Financial Statements (unaudited)			8-27
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations			28-33
Item 4. Controls and Procedures			34
PART II. OTHER INFORMATION
Item 6. Exhibits			34
SIGNATURES			35

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets

(Dollars in thousands, except per share amounts)

 

		March 31, 2012				December 31, 2011
		(Unaudited)
Assets
Cash and due from banks		$	2,270			$	1,101
Interest-bearing deposits with banks			6,189				5,123
Federal funds sold			15,632				16,552
Total cash and cash equivalents			24,091				22,776
Securities held to maturity (fair value of $100)			100				100
Securities available for sale			26,946				28,907
Loans, net of allowance for loan losses of $1,975 and $2,349			88,254				89,217
Federal Home Loan Bank stock			2,159				2,159
Premises and equipment, net			2,673				2,691
Foreclosed real estate, net			7,643				7,646
Accrued interest receivable			495				499
Other assets			577				477
Total assets		$	152,938			$	154,472
Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing demand deposits			488				515
Savings, NOW and money-market deposits			34,688				35,538
Time deposits			70,357				71,842
Total deposits			105,533				107,895
Federal Home Loan Bank advances			31,700				31,700
Junior subordinated debenture			5,155				5,155
Advanced payment by borrowers for taxes and insurance			509				567
Official checks			457				1,113
Other liabilities			1,410				1,256
Total liabilities			144,764				147,686
Stockholders’ equity:
Preferred stock, no par value; 6,000,000 shares authorized, no shares issued or outstanding			0				0
Common stock, $.01 par value; 50,000,000 shares authorized, 26,487,397 and 22,411,108 shares issued and outstanding in 2012 and 2011			265				224
Additional paid-in capital			29,093				27,491
Accumulated deficit			(20,573	)			(19,991	)
Accumulated other comprehensive loss			(611	)			(938	)
Total stockholders’ equity			8,174				6,786
Total liabilities and stockholders’ equity		$	152,938			$	154,472

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except per share amounts)

 

		Three Months Ended March 31,
		2012				2011
Interest income:
Loans		$	995			$	1,289
Securities			298				529
Other			16				15
Total interest income			1,309				1,833
Interest expense:
Deposits			291				550
Borrowings			389				380
Total interest expense			680				930
Net interest income			629				903
Provision for loan losses			27				34
Net interest income after provision for loan losses			602				869
Noninterest income:
Service charges and fees			3				10
Other			1				6
Total noninterest income			4				16
Noninterest expenses:
Salaries and employee benefits			410				476
Professional fees			239				390
Occupancy and equipment			119				133
Data processing			50				52
Insurance			70				114
Foreclosed real estate expenses			68				391
Regulatory assessment			44				221
Other			188				265
Total noninterest expenses			1,188				2,042
Net loss		$	(582	)		$	(1,157	)
Net loss per share:
Basic		$	(.03	)		$	(1.41	)
Diluted		$	(.03	)		$	(1.41	)
Dividends per share		$	0			$	0

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Comprehensive Loss (Unaudited)

(In thousands)

 

		Three Months Ended March 31,
		2012				2011
Net loss		$	(582	)		$	(1,157	)
Other comprehensive loss-
Unrealized gains on securities available for sale-
Unrealized holding gains arising during period			327				0
Comprehensive loss		$	(255	)		$	(1,157	)

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Stockholders’ Equity

Three Months Ended March 31, 2012 and 2011

(Dollars in thousands)

 

		Common Stock								Additional Paid-In Capital				Accumulated Deficit				Accumulated Other Comprehensive Loss				Total Stockholders’ Equity
		Shares				Amount
Balance at December 31, 2010			819,358			$	8			$	19,071			$	(16,244	)		$	0			$	2,835
Net loss for the three months ended March 31, 2011 (unaudited)			0				0				0				(1,157	)			0				(1,157	)
Balance at March 31, 2011 (unaudited)			819,358			$	8			$	19,071			$	(17,401	)		$	0			$	1,678
Balance at December 31, 2011			22,411,108			$	224			$	27,491			$	(19,991	)		$	(938	)		$	6,786
Net loss for the three months ended March 31, 2012 (unaudited)			0				0				0				(582	)			0				(582	)
Net change in unrealized loss on securities available for sale (unaudited)			0				0				0				0				327				327
Proceeds from sale of common stock (unaudited)			4,076,289				41				1,602				0				0				1,643
Balance at March 31, 2012 (unaudited)			26,487,397			$	265			$	29,093			$	(20,573	)		$	(611	)		$	8,174

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

		Three Months Ended March 31,
		2012				2011
Cash flows from operating activities:
Net loss		$	(582	)		$	(1,157	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			26				33
Provision for loan losses			27				34
Net amortization of fees, premiums and discounts			9				(69	)
Decrease in accrued interest receivable			4				85
(Increase) decrease in other assets			(100	)			207
Loss on sale of foreclosed real estate			0				166
Write-down of foreclosed real estate			25				180
(Decrease) increase in official checks and other liabilities			(502	)			508
Net cash used in operating activities			(1,093	)			(13	)
Cash flows from investing activities:
Purchases of securities			0				(5,048	)
Principal repayments and calls of securities			2,286				3,405
Net decrease in loans			929				2,463
Purchases of premises and equipment			(8	)			(4	)
Proceeds from sale of foreclosed real estate, net			0				1,643
Capital improvements on foreclosed real estate			(22	)			0
Net cash provided by investing activities			3,185				2,459
Cash flows from financing activities:
Net decrease in deposits			(2,362	)			(5,940	)
Net (decrease) increase in advanced payments by borrowers for taxes and insurance			(58	)			85
Proceeds from sale of common stock			1,643				0
Net cash used in financing activities			(777	)			(5,855	)
Net increase (decrease) in cash and cash equivalents			1,315				(3,409	)
Cash and cash equivalents at beginning of the period			22,776				14,367
Cash and cash equivalents at end of the period		$	24,091			$	10,958

 

(continued)

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (Unaudited), Continued

(In thousands)

 

		Three Months Ended March 31,
		2012				2011
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	640			$	902
Income taxes		$	0			$	0
Noncash transactions:
Change in accumulated other comprehensive loss, net change in unrealized loss on securities available for sale		$	327			$	0
Loans transferred to foreclosed real estate		$	0			$	4,957

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited)

 

(1)

General. OptimumBank Holdings, Inc. (the “Holding Company”) is a one-bank holding company and owns 100% of OptimumBank (the “Bank”), a state (Florida)-chartered commercial bank. The Bank’s wholly-owned subsidiaries are OB Real Estate Management, LLC, OB Real Estate Holdings, LLC and OB Real Estate Holding 1503, LLC, all of which were formed in 2009, OB Real Estate Holdings 1695, OB Real Estate Holdings 1669, OB Real Estate Holdings 1645, OB Real Estate Holdings 1620 and OB Real Estate Holdings 1565, all formed in 2010, and OB Real Estate Holdings 1443 and OB Real Estate Holdings 1616, OB Real Estate Holdings 1617, OB Real Estate Holdings 1710, OB Real Estate Holdings 1596, OB Real Estate Holdings 1636 formed in 2011. The Holding Company’s only business is the operation of the Bank and its subsidiaries (collectively, the “Company”). 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. OB Real Estate Management, LLC is primarily engaged in managing foreclosed real estate. This subsidiary had no activity in 2012 and 2011. All other subsidiaries are primarily engaged in holding and disposing of foreclosed real estate.

In the opinion of the 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, 2012, and the results of operations and cash flows for the three-month periods ended March 31, 2012 and 2011. The results of operations for the three months ended March 31, 2012, are not necessarily indicative of the results to be expected for the full year.

Comprehensive Loss. Generally accepted accounting principles 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 securities, are reported as a separate component of the equity section of the consolidated balance sheet, such items along with net loss, are components of comprehensive loss. The only component of other comprehensive loss is the net change in the unrealized loss on the securities available for sale.

Income Taxes. During the year ended December 31, 2009, the Company assessed its earnings history and trend over the past year and its estimate of future earnings, and determined that it is more likely than not that the deferred tax asset will not be realized in the near term. Accordingly, a valuation allowance was recorded against the net deferred tax asset for the amount not expected to be realized in the future. Based on the available evidence at March 31, 2012, the Company determined that it is still more likely than not that the deferred tax asset will not be realized in the near term. Accordingly, the valuation allowance was increased in 2012 to offset the increase in the net deferred tax asset.

 

(continued)

 

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Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(1)	General, Continued.

 

Recent Pronouncements. In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-12 (“ASU 2011-12”), Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (“ASU 2011-05”). Stakeholders raised concerns that the new presentation requirements about reclassifications of items out of accumulated other comprehensive income would be difficult for preparers and may add unnecessary complexity to financial statements. In addition, it is difficult for some stakeholders to change systems in time to gather the information for the new presentation requirements by the effective date of Update 2011-05. All other requirements in ASU 2011-05 are not affected by this update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. The amendments in ASU 2011-12 are effective on a retrospective basis for public entities for annual periods beginning after December 15, 2011, and interim periods within those years. An entity should provide the disclosures required by ASU 2011-12 retrospectively for all comparative periods presented. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-11 (“ASU 2011-11”), Balance Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities. The objective of ASU 2011-11 is to enhance disclosures required by U.S. GAAP by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with Section 210-20-45 or Section 815-10-45. This information will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. The amendments in ASU 2011-11 are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by ASU 2011-11 retrospectively for all comparative periods presented. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

 

(continued)

 

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Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(1)	General, Continued.

 

Recent Pronouncements, Continued. In June 2011, the FASB issued ASU No. 2011-05 (“ASU 2011-05”), Comprehensive Income (Topic 220), Presentation of Comprehensive Income. The objective of ASU 2011-05 is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. To achieve this goal and to facilitate convergence of U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS), the FASB decided to eliminate the option to present components of other comprehensive income as part of the consolidated statement of changes in stockholders’ equity. The amendments in ASU 2011-05 require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The amendments in ASU 2011-05 should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04 (“ASU 2011-04”), Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The objective of ASU 2011-04 is to provide clarification of Topic 820 and, also, to ensure that fair value has the same meaning in U.S. generally accepted accounting principles (“GAAP”) and in international financial reporting standards (“IFRSs”) and that their respective fair value measurement and disclosure requirements are generally the same. Thus, this update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and IFRSs. The amendment is effective for interim and annual periods beginning after December 15, 2011 and is to be applied prospectively. Early application is not permitted. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

 

(continued)

 

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Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

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

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
At March 31, 2012:
Securities Available for Sale-
Mortgage-backed securities		$	27,557			$	216			$	(827	)		$	26,946
Security Held to Maturity-
State of Israel Bond		$	100			$	0			$	0			$	100
At December 31, 2011:
Securities Available for Sale-
Mortgage-backed securities		$	29,845			$	202			$	(1,140	)		$	28,907
Security Held to Maturity-
State of Israel Bond		$	100			$	0			$	0			$	100

In June 2011, the Company transferred securities with a book value of approximately $50.5 million from the held to maturity category to the available for sale category. The fair value of the securities was $49.8 million resulting in unrealized losses of approximately $0.7 million. The net unrealized loss was recorded in accumulated other comprehensive loss. Due to this transfer, the Company will be prohibited from classifying securities as held to maturity for a period of two years.

Securities with gross unrealized losses at March 31, 2012, aggregated by investment category and length of time that individual securities have been in a continuous loss position, is as follows (in thousands):

 

		Less Than Twelve Months								Over Twelve Months
		Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value
Securities Available for Sale-
Mortgage-backed securities		$	(14	)		$	535			$	(813	)		$	10,019

 

(continued)

 

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Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(2)

Securities, Continued. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. A security is impaired if the fair value is less than its carrying value at the financial statement date. When a security is impaired, the Company determines whether this impairment is temporary or other-than-temporary. In estimating other-than-temporary impairment (“OTTI”) losses, management assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized in operations. For securities that do not meet the aforementioned criteria, the amount of impairment recognized in operations is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive loss. Management utilizes cash flow models to segregate impairments to distinguish between impairment related to credit losses and impairment related to other factors. To assess for OTTI, management considers, among other things, (i) the severity and duration of the impairment; (ii) the ratings of the security; (iii) the overall transaction structure (the Company’s position within the structure, the aggregate, near-term financial performance of the underlying collateral, delinquencies, defaults, loss severities, recoveries, prepayments, cumulative loss projections, and discounted cash flows); and (iv) the timing and magnitude of a break in modeled cash flows.

In evaluating mortgage-backed securities with unrealized losses greater than twelve months, management utilizes various resources, including input from independent third party firms to perform an analysis of expected future cash flows. The process begins with an assessment of the underlying collateral backing the mortgage pools. Management develops specific assumptions using as much market data as possible and includes internal estimates as well as estimates published by rating agencies and other third-party sources. The data for the individual borrowers in the underlying mortgage pools are generally segregated by state, FICO score at issue, loan to value at issue and income documentation criteria. Mortgage pools are evaluated for current and expected levels of delinquencies and foreclosures, based on where they fall in the proscribed data set of FICO score, geographics, LTV and documentation type and a level of loss severity is assigned to each security based on its experience. The above-described historical data is used to develop current and expected measures of cumulative default rates as well as ultimate loss frequency and severity within the underlying mortgages. This reveals the expected future cash flows within the mortgage pool. The data described above is then input to an industry recognized model to assess the behavior of the particular security tranche owned by the Company. Significant inputs in this process include the structure of any subordination structures, if applicable, and are dictated by the structure of each particular security as laid out in the offering documents. The forecasted cash flows from the mortgage pools are input through the security structuring model to derive expected cash flows for the specific security owned by the Company to determine if the future cash flows are expected to exceed the book value of the security. The values for the significant inputs are updated on a regular basis.

 

(continued)

 

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Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(2)

Securities, Continued. The unrealized losses on nine investment securities were caused by market conditions. It is expected that the 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.

 

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

 

		At March 31, 2012				At December 31, 2011
Residential real estate		$	29,891			$	30,434
Multi-family real estate			4,059				4,109
Commercial real estate			41,025				41,307
Land and construction			11,397				11,783
Commercial			3,693				3,713
Consumer			125				175
Total loans			90,190				91,521
Add (deduct):
Net deferred loan fees, costs and premiums			39				45
Allowance for loan losses			(1,975	)			(2,349	)
Loans, net		$	88,254			$	89,217

 

(continued)

 

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Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)	Loans, Continued. An analysis of the change in the allowance for loan losses for the three-month periods ended March 31, 2012 and 2011 follows (in thousands):

 

		March 31, 2012
		Residential Real Estate				Multi-Family Real Estate				Commercial Real Estate				Land and Construction				Commercial				Consumer				Total
Beginning balance		$	549			$	247			$	1,190			$	187			$	161			$	15			$	2,349
Provision (credit) for loan losses			112				(33	)			(307	)			294				(44	)			5				27
Charge-offs			0				0				(69	)			(335	)			0				0				(404	)
Recoveries			0				0				0				0				0				3				3
Ending balance		$	661			$	214			$	814			$	146			$	117			$	23			$	1,975
Individually evaluated for impairment:
Recorded investment		$	8,006			$	0			$	15,438			$	6,877			$	0			$	0			$	30,321
Balance in allowance for loan losses		$	0			$	0			$	0			$	0			$	0			$	0			$	0
Collectively evaluated for impairment:
Recorded investment		$	21,885			$	4,059			$	25,587			$	4,520			$	3,693			$	125			$	59,869
Balance in allowance for loan losses		$	661			$	214			$	814			$	146			$	117			$	23			$	1,975

 

		March 31, 2011
		Residential Real Estate				Multi-Family Real Estate				Commercial Real Estate				Land and Construction				Consumer				Total
Beginning balance		$	1,285			$	282			$	1,542			$	514			$	80			$	3,703
Provision (credit) for loan losses			27				23				(97	)			90				(9	)			34
Charge-offs			0				0				0				(245	)			0				(245	)
Recoveries			2				0				0				23				3				28
Ending balance		$	1,314			$	305			$	1,445			$	382			$	74			$	3,520
Individually evaluated for impairment:
Recorded investment		$	12,047			$	0			$	19,488			$	9,052			$	229			$	40,816
Balance in allowance for loan losses		$	0			$	0			$	11			$	199			$	0			$	210
Collectively evaluated for impairment:
Recorded investment		$	25,650			$	4,186			$	33,678			$	5,006			$	108			$	68,628
Balance in allowance for loan losses		$	1,314			$	305			$	1,434			$	183			$	74			$	3,310

 

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Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)	Loans, Continued. The Company has divided the loan portfolio into six portfolio segments, each with different risk characteristics and methodologies for assessing risk. The portfolio segments identified by the Company are as follows:

Real Estate Mortgage Loans. Real estate mortgage loans are typically segmented into four categories: Residential real estate, Multi-family real estate, Commercial real estate, and Land and Construction. Residential real estate loans are underwritten in accordance with policies set forth and approved by the Board of Directors (the “Board”), including repayment capacity and source, value of the underlying property, credit history and stability. 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 Company’s Board. Such standards include, among other factors, loan to value limits, cash flow coverage and general creditworthiness of the obligors. Construction loans to borrowers are to 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, costs estimates and pre-construction sale information. The Company also makes loans on occasion for the purchase of land for future development by the borrower. Land loans are extended for the 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.

Consumer Loans. 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 and may be made on terms of up to ten years. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)	Loans, Continued.

 

Commercial Loans. Commercial loans 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. Further, the collateral securing these 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 our underwriting standards.

 

(continued)

 

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Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

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

 

		Pass				OLEM (Other Loans Especially Mentioned)				Substandard				Doubtful				Loss				Total
At March 31, 2012:
Residential real estate:
Closed-end first mortgages		$	18,737			$	2,919			$	5,087			$	0			$	0			$	26,743
Closed-end second mortgages			3,148				0				0				0				0				3,148
Total residential real estate			21,885				2,919				5,087				0				0				29,891
Multi-family real estate			4,059				0				0				0				0				4,059
Commercial real estate:
Owner-occupied			10,073				2,001				369				0				0				12,443
Non-owner-occupied			12,371				1,141				15,070				0				0				28,582
Total commercial real estate			22,444				3,142				15,439				0				0				41,025
Land and construction			4,471				49				6,877				0				0				11,397
Commercial			3,693				0				0				0				0				3,693
Consumer:
Non-real estate secured			0				68				0				0				0				68
Real estate secured			57				0				0				0				0				57
Total consumer			57				68				0				0				0				125
Total		$	56,609			$	6,178			$	27,403			$	0			$	0			$	90,190
At December 31, 2011:
Residential real estate:
Closed-end first mortgages		$	18,588			$	3,686			$	5,001			$	0			$	0			$	27,275
Closed-end second mortgages			3,159				0				0				0				0				3,159
Total residential real estate			21,747				3,686				5,001				0				0				30,434
Multi-family real estate			4,109				0				0				0				0				4,109
Commercial real estate:
Owner-occupied			10,132				2,012				369				0				0				12,513
Non-owner-occupied			10,822				2,764				15,208				0				0				28,794
Total commercial real estate			20,954				4,776				15,577				0				0				41,307
Land and construction			4,493				49				7,241				0				0				11,783
Commercial			3,713				0				0				0				0				3,713
Consumer:
Non-real estate secured			0				68				0				0				0				68
Real estate secured			107				0				0				0				0				107
Total consumer			107				68				0				0				0				175
Total		$	55,123			$	8,579			$	27,819			$	0			$	0			$	91,521

 

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Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)	Loans, Continued. 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 (Other Loans Especially Mentioned) – 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 sound 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. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful – a loan classified Doubtful has all the weaknesses inherent in one classified 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 fully charges off any loan classified as Doubtful.

Loss – a loan classified Loss is considered uncollectible and of such little value that continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. The Company fully charges off any loan classified as Loss.

 

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Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(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 March 31, 2012:
Residential real estate:
Closed-end first mortgages		$	0			$	41			$	0			$	41			$	21,615			$	5,087			$	26,743
Closed-end second mortgages			0				0				0				0				3,148				0				3,148
Subtotal			0				41				0				41				24,763				5,087				29,891
Multi-family real estate			0				0				0				0				4,059				0				4,059
Commercial real estate:
Owner-occupied			0				0				0				0				12,074				369				12,443
Non-owner-occupied			3,300				0				0				3,300				10,212				15,070				28,582
Subtotal			3,300				0				0				3,300				22,286				15,439				41,025
Land and construction			0				0				0				0				4,520				6,877				11,397
Commercial			0				0				0				0				3,693				0				3,693
Consumer:
Non-real estate secured			0				0				0				0				68				0				68
Real estate secured			0				0				0				0				57				0				57
Subtotal			0				0				0				0				125				0				125
Total		$	3,300			$	41			$	0			$	3,341			$	59,446			$	27,403			$	90,190
At December 31, 2011:
Residential real estate:
Closed-end first mortgages		$	0			$	768			$	0			$	768			$	21,506			$	5,001			$	27,275
Closed-end second mortgages			0				0				0				0				3,159				0				3,159
Subtotal			0				768				0				768				24,665				5,001				30,434
Multi-family real estate			0				0				0				0				4,109				0				4,109
Commercial real estate:
Owner-occupied			0				0				0				0				12,144				369				12,513
Non-owner-occupied			0				0				0				0				13,586				15,208				28,794
Subtotal			0				0				0				0				25,730				15,577				41,307
Land and construction			0				0				0				0				4,542				7,241				11,783
Commercial			0				0				0				0				3,713				0				3,713
Consumer:
Non-real estate secured			0				0				0				0				68				0				68
Real estate secured			0				0				0				0				107				0				107
Subtotal			0				0				0				0				175				0				175
Total		$	0			$	768			$	0			$	768			$	62,934			$	27,819			$	91,521

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)	Loans, Continued. The following summarizes the amount of impaired loans (in thousands):

 

		At March 31, 2012												At December 31, 2011
		Recorded Investment				Unpaid Principal Balance				Related Allowance				Recorded Investment				Unpaid Principal Balance				Related Allowance
With no related allowance recorded:
Residential real estate-
Closed-end first mortgages		$	8,006			$	8,551			$	0			$	7,919			$	8,465			$	0
Commercial real estate:
Owner-occupied			368				376				0				369				376				0
Non-owner-occupied			15,070				17,516				0				15,208				17,584				0
Land and construction			6,877				11,623				0				7,241				11,652				0
Consumer-
Non-real estate secured			0				0				0				68				68				0
With an allowance recorded:
Commercial real estate-
Non-owner-occupied			0				0				0				1,139				1,139				11
Total:
Residential real estate-
Closed-end first mortgages		$	8,006			$	8,551			$	0			$	7,919			$	8,465			$	0
Commercial real estate:
Owner-occupied		$	368			$	376			$	0			$	369			$	376			$	0
Non-owner-occupied		$	15,070			$	17,516			$	0			$	16,347			$	18,723			$	11
Land and construction		$	6,877			$	11,623			$	0			$	7,241			$	11,652			$	0
Consumer-
Non-real estate secured		$	0			$	0			$	0			$	68			$	68			$	0
Total		$	30,321			$	38,066			$	0			$	31,944			$	39,284			$	11

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

 

		For the Period Ended March 31,												For the Period Ended March 31,
		2012												2011
		Average Recorded Investment				Interest Income Recognized				Interest Income Received				Average Recorded Investment				Interest Income Recognized				Interest Income Received
Residential real estate-
Closed-end first mortgages		$	8,011			$	52			$	68			$	11,752			$	52			$	78
Commercial real estate:
Owner-occupied		$	369			$	0			$	0			$	751			$	0			$	1
Non-owner-occupied		$	15,199			$	0			$	51			$	19,465			$	53			$	117
Land and construction		$	7,123			$	0			$	29			$	8,080			$	21			$	56
Consumer-
Non-real estate secured		$	0			$	0			$	0			$	234			$	2			$	2
Total		$	30,702			$	52			$	148			$	40,282			$	128			$	254

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)	Loans, Continued. No loans have been determined to be troubled debt restructurings (“TDR’s”) during the three months ended March 31, 2012. In addition there were no defaults of TDR’s during the three months ended March 31, 2011 or 2012.

The allowance for loan losses on commercial and consumer loans that have been restructured and are considered TDR’s is included in the Company’s specific reserve. The specific reserve is determined on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral-dependent. TDR’s that have subsequently defaulted are considered collateral-dependent.

 

(4)	Regulatory Capital. The Bank is required to maintain certain minimum regulatory capital requirements. The following is a summary at March 31, 2012 of the regulatory capital requirements and the Bank’s capital on a percentage basis:

 

		Bank				Regulatory Requirement
Tier I capital to total average assets			9.16	%			8.00	%
Tier I capital to risk-weighted assets			11.94	%			4.00	%
Total capital to risk-weighted assets			13.20	%			12.00	%

 

(5)

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. Basic and diluted loss per share is the same due to the net loss incurred by the Company. Loss per common share has been computed based on the following:

 

		Three Months Ended March 31,
		2012				2011
Weighted-average number of common shares outstanding used to calculate basic and diluted loss per common share			22,509,296				819,358

 

(6)

Stock-Based Compensation. On December 27, 2011, the Company’s stockholders approved the 2011 Equity Incentive Plan (“2011 Plan”). A total of 2,200,000 shares of common stock are available to be issued under the 2011 Plan. Options, restricted stock, performance share awards and bonus share awards in lieu of obligations may be issued under the 2011 Plan. Both incentive stock options and nonqualified stock options can be granted under the 2011 Plan. The exercise price of the stock options cannot be less than the fair market value of the common stock on the date of grant. Effective January 1, 2012, the Company adopted a Non- Employee Director Compensation Plan under which bonus shares issuable under the 2011 Plan are issued as compensation to outside directors. As of March 31, 2012, 3,789 shares of stock have been issued under the 2011 Plan and Non-Employee Director Compensation Plan as compensation to outside directors.

 

(continued)

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(6)	Stock-Based Compensation, Continued. The Company’s prior stock option plan terminated on February 27, 2011. At March 30, 2012, no options were available for grant under this plan. Options must be exercised within ten years of the date of grant.

A summary of the activity in the prior plan is as follows:

 

		Number of Options				Weighted- Average Exercise Price				Weighted- Average Remaining Contractual Term				Aggregate Intrinsic Value
Outstanding at December 31, 2011			50,900			$	34.31
Options forfeited			(11,392	)			32.97
Outstanding and exercisable at March 31, 2012			39,508			$	34.70				2.8 years			$	0

 

(7)	Fair Value Measurements. Securities available for sale measured at fair value on a recurring basis are summarized below (in thousands):

 

		Fair Value Measurements at Reporting Date Using
		Fair Value				Quoted Prices In Active Markets for Identical Assets (Level  1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
As of March 31, 2012-
Mortgage-backed securities		$	26,946			$	0			$	26,946			$	0
As of December 31, 2011-
Mortgage-backed securities		$	28,907			$	0			$	28,907			$	0

 

(continued)

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(7)	Fair Value Measurements, Continued. There were no transfers of securities between levels of inputs for the three months ended March 31, 2012.

Impaired collateral-dependent loans are carried at fair value when the current collateral value less estimated selling costs is lower than the carrying value of the loan. Those impaired collateral-dependent loans which are measured at fair value on a nonrecurring basis are as follows (in thousands):

 

																						Losses Recorded in Operations For the Three
		At March 31, 2012																				Months Ended
		Fair Value				Level 1				Level 2				Level 3				Total Losses				March 31, 2012
Residential real estate-
Closed-end first mortgages		$	854			$	0			$	0			$	854			$	545			$	0
Commercial real estate:
Owner-occupied			291				0				0				291				8				0
Non-owner-occupied			10,061				0				0				10,061				2,781				69
Land and construction			6,699				0				0				6,699				1,525				335
		$	17,905			$	0			$	0			$	17,905			$	4,859			$	404

 

																						Losses Recorded in Operations For the
		At December 31, 2011																				Year Ended
		Fair Value				Level 1				Level 2				Level 3				Total Losses				December 31, 2011
Residential real estate-
Closed-end first mortgages		$	1,591			$	0			$	0			$	1,591			$	545			$	308
Commercial real estate:
Owner-occupied			291				0				0				291				8				8
Non-owner-occupied			6,540				0				0				6,540				2,652				150
Land and construction			6,793				0				0				6,793				1,511				834
		$	15,215			$	0			$	0			$	15,215			$	4,716			$	1,300

 

(continued)

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(7)	Fair Value Measurements, Continued. Foreclosed real estate is recorded at fair value less estimated costs to sell. 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 During the Period
At March 31, 2012		$	7,643			$	0			$	0			$	7,643			$	797			$	25
At December 31, 2011		$	7,646			$	0			$	0			$	7,646			$	772			$	772

The estimated fair values of the Company’s financial instruments were as follows (in thousands):

 

		At March 31, 2012								At December 31, 2011
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
Financial assets:
Cash and cash equivalents		$	24,091			$	24,091			$	22,776			$	22,776
Securities held to maturity			100				100				100				100
Securities available for sale			26,946				26,946				28,907				28,907
Loans			88,254				88,110				89,217				89,069
Federal Home Loan Bank stock			2,159				2,159				2,159				2,159
Accrued interest receivable			495				495				499				499
Financial liabilities:
Deposit liabilities			105,533				105,949				107,895				108,461
Federal Home Loan Bank advances			31,700				33,842				31,700				33,920
Junior subordinated debenture			5,155				4,790				5,155				4,734
Off-balance sheet financial instruments			0				0				0				0

Discussion regarding the assumptions used to compute the fair values of financial instruments can be found in Note 1 to the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2011.

 

(continued)

 

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Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(8)

Regulatory Matters - Company. The Company is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). On June 22, 2010, the Company entered into a written agreement with the Federal Reserve Bank of Atlanta (“Reserve Bank”) with respect to certain aspects of the operation and management of the Company (the “Written Agreement”).

The Written Agreement contains the following principal requirements:

 

•

The Board of the Company must take appropriate steps to fully utilize the Company’s financial and managerial resources to serve as a source of strength to the Bank, including, but not limited to, taking steps to ensure that the Bank complies with the Consent Order entered into with the OFR and the FDIC and any other supervisory action taken by the Bank’s state or federal regulator.

 

•

The Company may not declare or pay any dividends without prior Reserve Bank and Federal Reserve approval.

 

•

The Company may not, directly or indirectly, take dividends or any other form of payment representing a reduction in capital from the Bank without prior Reserve Bank approval.

 

•

The Company and its nonbank subsidiary, OptimumBank Holdings Capital Trust I, may not make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without the prior written approval of the Reserve Bank and the Federal Reserve.

 

•

The Company and its nonbank subsidiary, OptimumBank Holdings Capital Trust I, may not, directly or indirectly, incur, increase, or guarantee any debt or purchase or redeem any shares of its stock without the prior written approval of the Reserve Bank.

 

•

The Company must obtain prior written consent from the Reserve Bank before appointing any new director or senior executive officer, or changing the responsibilities of any senior executive officer so that the officer would assume a different senior executive officer position, and must comply with the regulations applicable to indemnification and severance payments.

 

•

The Company must provide quarterly progress reports to the Reserve Bank, along with parent company only financial statements.

Management believes the Company is in substantial compliance with the requirements of the Written Agreement.

 

(continued)

 

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Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(9)	Regulatory Matters - Bank. Effective April 16, 2010, the Bank consented to the issuance of a Consent Order by the FDIC and the OFR, also effective as of April 16, 2010.

The Consent Order represents an agreement among the Bank, the FDIC and the OFR as to areas of the Bank’s operations that warrant improvement and presents a plan for making those improvements. The Consent Order imposes no fines or penalties on the Bank. The Consent Order will remain in effect and enforceable until it is modified, terminated, suspended, or set aside by the FDIC and the OFR.

The Consent Order contains the following principal requirements:

 

•

The Board of the Bank is required to increase its participation in the affairs of the Bank and assume full responsibility for the approval of sound policies and objectives for the supervision of all of the Bank’s activities.

 

•

The Bank is required to have and retain qualified and appropriately experienced senior management, including a chief executive officer, a chief lending officer and a chief financial officer, who are given the authority to implement the provisions of the Consent Order.

 

•

Any proposed changes in the Bank’s Board of Directors or senior executive officers are subject to the prior consent of the FDIC and the OFR.

 

•

The Bank is required to maintain both a fully funded allowance for loan and lease losses satisfactory to the FDIC and the OFR and a minimum Tier 1 leverage capital ratio of 8% and a total risk-based capital ratio of 12% for as long as the Consent Order remains in effect.

 

•

The Bank must undertake over a two-year period a scheduled reduction of the balance of loans classified “substandard” and “doubtful” in its 2009 FDIC examination by at least 75%.

 

•

The Bank is required to reduce the volume of its adversely classified private label mortgage backed securities under a plan acceptable to the FDIC and OFR.

 

•

The Bank must submit to the FDIC and the OFR for their review and comment a written business/strategic plan covering the overall operation of the Bank.

 

•

The Bank must implement a plan to improve earnings, addressing goals and strategies for improving and sustaining earnings, major areas for improvement in the Bank’s operating performance, realistic and comprehensive budgets and a budget review process.

 

(continued)

 

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Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(9)	Regulatory Matters - Bank, Continued.

 

•

The Bank is required to revise, implement and incorporate recommendations of the FDIC and OFR with respect to the following policies or plans:

 

•

Lending and Collection Policies

 

•

Investment Policy

 

•

Liquidity, Contingency Funding and Funds Management Plan

 

•

Interest Rate Risk Management Policy

 

•

Internal Loan Review and Grading System;

 

•

Internal Control Policy; and

 

•

A plan to reduce concentration in commercial real estate loans;

 

•

The Bank’s Board of Directors must review the adequacy of the allowance for loan and lease losses and establish a comprehensive policy satisfactory to the FDIC and OFR for determining such adequacy at least quarterly thereafter.

 

•

The Bank may not pay any dividends or bonuses without the prior approval of the FDIC.

 

•

The Bank may not accept, renew or rollover any brokered deposits except with the prior approval of the FDIC.

 

•

The Bank is required to notify the FDIC and OFR prior to undertaking asset growth of 10% or more per annum while the Consent Order remains in effect.

 

•

The Bank is required to file quarterly progress reports with the FDIC and the OFR.

Management believes that the Bank is currently in substantial compliance with all the requirements of the Consent Order except for the following requirements:

 

•

Scheduled reductions by October 31, 2011, and April 30, 2012, of 60% and 75%, respectively, of loans classified as substandard and doubtful in the 2009 FDIC Examination;

 

•

Retention of a qualified chief executive officer and chief lending officer; and

 

•

Development of a plan to reduce Bank’s concentration in commercial real estate loans acceptable to the supervisory authorities.

The Bank has implemented comprehensive policies and plans to address all of the requirements of the Consent Order and has incorporated recommendations from the FDIC and OFR into these policies and plans.

 

(10)

Junior Subordinated Debenture. The terms of the debenture agreement allow the Company to defer payments of interest on the debenture by extending the interest payment period at any time during the term of the debenture for up to twenty consecution quarterly periods. The Company has elected its right to defer payment of interest on the debenture. Accrued and unpaid interest on the debenture totaled $367,000 at March 31, 2012.

 

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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 financial statements and footnotes for the year ended December 31, 2011 in the Annual Report on Form 10-K.

Regulatory Enforcement Actions

Bank Consent Order. On April 16, 2010, the Bank consented to the issuance of a Consent Order (“Consent Order”) by the FDIC and OFR. The Consent Order covers areas of the Bank’s operations that warrant improvement and imposes various requirements and restrictions designed to address these areas, including the requirement to maintain certain minimum capital ratios. A detailed discussion of the Consent Order is contained in Footnote 9 to the condensed consolidated financial statements contained in this report. Management believes that the Bank is currently in substantial compliance with all the requirements of the Consent Order except for the following requirements:

 

•

Scheduled reductions by October 31, 2011, and April 30, 2012, of 60% and 75%, respectively, of loans classified as substandard and doubtful in the 2009 FDIC Examination;

 

•

Retention of a qualified chief executive officer and chief lending officer; and

 

•

Development of a plan to reduce Bank’s concentration in commercial real estate loans acceptable to the supervisory authorities.

The Bank has implemented comprehensive policies and plans to address all of the requirements of the Consent Order and has incorporated recommendations from the FDIC and OFR into these policies and plans.

Company Written Agreement with Reserve Bank. On June 22, 2010, the Company and the Reserve Bank entered into a Written Agreement with respect to certain aspects of the operation and management of the Company, including, without the prior approval of the Reserve Bank, paying or declaring dividends, taking dividends or payments from the Bank, making any interest, principal or other distributions on trust preferred securities, incurring, increasing or guaranteeing any debt, purchasing or redeeming any shares of stock, or appointing any new director or senior executive officer. Management believes that the Company is currently in substantial compliance with the requirements of the Written Agreement. A detailed discussion of the Written Agreement is contained in Footnote 8 to the condensed consolidated financial statements contained in this report.

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

 

Capital Levels

The following table summarizes the capital measures of the Bank at March 31, 2012 and December 31, 2011:

 

										FDIC Guideline Requirements
		March 31, 2012				December 31, 2011				Adequately- Capitalized				Well- Capitalized				Consent Order
Tier I risk-based capital ratio			9.16				7.76				4.00				6.00				*
Total risk-based capital ratio			13.20				12.48				8.00				10.00				12.00
Leverage ratio			11.94				11.22				4.00				5.00				8.00

 

*	No additional requirement is established by the Consent Order

Financial Condition at March 31, 2012 and December 31, 2011

Overview

Our total assets declined by $1.5 million to $152.9 million at March 31, 2012, from $154.5 million at December 31, 2011, due to a $2.0 million reduction in securities primarily as a result of repayments and a $1.0 million reduction in net loans primarily as a result of loan payments, partially offset by a $1.3 million increase in cash and cash equivalents. Deposits decreased by $2.4 million to $105.5 million at March 31, 2012, from $107.9 million at December 31, 2011. Total stockholders’ equity increased by $1.4 million to $8.2 million at March 31, 2012 from $6.8 million at December 31, 2011, due to the receipt of $1.6 million in proceeds from the sale of common stock and a $.3 million decrease in accumulated other comprehensive loss from a reduction of unrealized losses on securities available for sale, partially offset by a $.6 million net loss for the quarter.

 

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

 

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

 

		Three Months Ended March 31, 2012				Year Ended December 31, 2011				Three Months Ended March 31, 2011
Average equity as a percentage of average assets			4.67	%			1.04	%			1.15	%
Equity to total assets at end of period			5.34	%			4.39	%			0.91	%
Return on average assets (1)			(1.54	)%			(2.11	)%			(2.44	)%
Return on average equity (1)			(33.07	)%			(203.97	)%			(212.49	)%
Noninterest expenses to average assets (1)			3.15	%			4.08	%			4.30	%

 

(1)	Annualized for the three months ended March 31, 2012 and 2011.

Despite the slowing decline of real estate values in South Florida, we continue to experience the adverse effects of the prolonged real estate devaluation resulting in significant levels of non-performing loans, foreclosed real estate and loan charge-offs. Management, however, is committed to minimizing further losses in the loan portfolio and reducing our nonperforming assets.

Liquidity and Sources of Funds

The Bank’s sources of funds include customer deposits, advances from the FHLB, principal repayments and sales of investment securities, loan repayments, foreclosed real estate sales, the use of Federal Funds markets, net income, if any, and loans taken out at the Federal Reserve discount window.

Deposits are our primary source of funds. Under the Consent Order, the interest rates that we pay on our market area deposits and our ability to accept brokered deposits is restricted. The restriction on brokered deposits is not expected to alter the Bank’s current deposit gathering activities since the Bank has not accepted, renewed or rolled over any brokered deposits since December 2009. With respect to the yield limitations, it is possible that the Bank could experience a decrease in deposit inflows, or the migration of current deposits to competitor institutions, if other institutions offer higher interest rates than those permitted to be offered by the Bank. Despite these yield limitations, we believe that we have to the ability to adjust rates on our deposits to attract or retain deposits as needed.

 

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

 

In addition to obtaining funds from depositors, we may borrow funds from other financial institutions. At March 31, 2012, the Bank had outstanding borrowings of $31.7 million, against its $31.7 million in established borrowing capacity with the FHLB. The Bank’s borrowing facility is subject to collateral and stock ownership requirements, as well as prior FHLB consent to each advance. The use of the Federal Fund line is subject to certain conditions. In 2010, the Bank obtained an available discount window credit line with the Reserve Bank, currently $1.1 million. The Reserve Bank line is subject to collateral requirements, must be repaid within 90 days, and each advance is subject to prior Reserve Bank consent. We measure and monitor our liquidity daily and believe our liquidity sources are adequate to meet our operating needs.

The Company, on an unconsolidated basis, typically relies on dividends from the Bank to fund its operating expenses, primarily expenses of being publicly held, and to make interest payments on its outstanding trust preferred securities. Under the Consent Order, the Bank is currently unable to pay dividends without prior regulatory approval. In addition, under the Written Agreement, we may not pay interest payments on the trust preferred securities or dividends on our common stock, incur any additional indebtedness at the holding company level, or redeem our common stock without the prior regulatory approval of the Reserve Bank. Since January 2010, we have deferred interest payments on our trust preferred securities.

Off-Balance Sheet Arrangements

The Company is a 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 and may involve, to varying degrees, elements of credit and interest-rate risk in excess of the amounts recognized in the condensed consolidated balance sheet. The contract amounts of these instruments reflect the extent of the Company’s involvement in these financial 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. Since many of the commitments are expected to expire without being drawn upon, the total committed amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis.

The amount of collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counter party. As of March 31, 2012, the Company has no commitments to extend credit.

 

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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) ratio of average interest-earning assets to average interest-bearing liabilities.

 

		Three Months Ended March 31,
		2012												2011
		Average Balance				Interest and Dividends				Average Yield/ Rate				Average and Balance				Interest and Dividends				Average Yield/ Rate
Interest-earning assets:
Loans		$	90,721				995				4.39	%		$	111,905				1,289				4.61	%
Securities			28,367				298				4.20				52,505				529				4.03
Other (1)			22,236				16				0.29				16,854				15				0.36
Total interest-earning assets/interest income			141,324				1,309				3.70				181,264				1,833				4.04
Cash and due from banks			421												581
Premises and equipment			2,685												2,787
Other			6,363												5,347
Total assets		$	150,793											$	189,979
Interest-bearing liabilities:
Savings, NOW and money-market deposits			34,831				55				0.63				36,166				77				0.85
Time deposits			69,275				236				1.36				111,576				473				1.70
Borrowings (2)			36,855				389				4.22				36,855				380				4.12
Total interest-bearing liabilities/interest expense			140,961				680				1.93				184,597				930				2.02
Noninterest-bearing demand deposits			545												481
Other liabilities			2,247												2,723
Stockholders’ equity			7,040												2,178
Total liabilities and stockholders’ equity		$	150,793											$	189,979
Net interest income						$	629											$	903
Interest rate spread (3)											1.77	%											2.02	%
Net interest margin (4)											1.78	%											1.99	%
Ratio of average interest-earning assets to average interest-bearing liabilities			1.00												0.98

 

(1)	Includes interest-earning deposits with banks, Federal funds sold and Federal Home Loan Bank stock dividends.

(2)	Includes Federal Home Loan Bank advances, other borrowings and junior subordinated debenture.

(3)	Interest rate spread represents the difference between 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.

 

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

 

Comparison of the Three-Month Periods Ended March 31, 2012 and 2011

General. Net loss for the three months ended March 31, 2012, was $.6 million or $(.03) per basic and diluted share compared to a net loss of $1.2 million or $(1.41) per basic and diluted share for the period ended March 31, 2011. This decrease in the Company’s net loss was primarily due to a $.9 million decrease in noninterest expenses, including foreclosure expenses, regulatory assessments, and professional fees associated with loan foreclosures and workouts.

Interest Income. Interest income decreased to $1.3 million for the three months ended March 31, 2012 from $1.8 million for the three months ended March 31, 2011. Interest income on loans decreased $.3 million due primarily to a decrease in the average loan portfolio balance for the three months ended March 31, 2012 compared to the same period in 2011. Interest on securities decreased by $.2 million to $.3 million due primarily to a decrease in the average balance of the securities portfolio.

Interest Expense. Interest expense on deposits decreased to $.3 million for the three months ended March 31, 2012 from $.6 million for the three months ended March 31, 2011. Interest expense decreased primarily because of a decrease in average deposits as well as a decrease in the average yield paid during 2012.

Provision for Loan Losses. The provision for the three months ended March 31, 2012, was $27,000 compared to $34,000 for the same period in 2011. The provision for loan losses is charged to operations as losses are estimated to have occurred 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 March 31, 2012. 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 $2.0 million or 2.19% of loans outstanding at March 31, 2012, compared to $2.3 million, or 2.57% of loans outstanding at December 31, 2011. The decrease in the allowance was due to the use of specific reserves for charge-offs of loans deemed uncollectible. Management believes the balance in the allowance for loan losses at March 31, 2012 is adequate.

Noninterest Income. Total noninterest income decreased to $4,000 for the three months ended March 31, 2012, from $16,000 for the three months ended March 31, 2011 primarily due to a decrease in service charges and fees.

Noninterest Expenses. Total noninterest expenses decreased to $1.2 million for the three months ended March 31, 2012 compared to $2.0 million for the three months ended March 31, 2011, primarily due to a decrease in foreclosure expenses, regulatory assessments, and professional fees.

 

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Item 4.

Controls and Procedures

Under the supervision and with the participation of our President and Chief Financial Officer (our principal executive officer and principal financial officer), we have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, and, based on this evaluation, the President and Chief Financial Officer concluded that these disclosure controls and procedures are effective.

There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 6.

Exhibits

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

 

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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:		May 11, 2012				By:		/s/ Richard L. Browdy
								Richard L. Browdy
								President and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)

 

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EXHIBIT INDEX

 

Exhibit No.		Description
3.1		Amended and Restated Articles of Incorporation (incorporated by reference from Annual Report on Form 10-K filed with the SEC on March 30, 2012)
4.1		Bylaws (incorporated by reference from Current Report on Form 8-K filed with the SEC on May 11, 2004)
4.2		Form of stock certificate (incorporated by reference from Quarterly Report on Form 10-QSB filed with the SEC on August 12, 2004)
4.3		Form of Registration Rights Agreement between OptimumBank Holdings, Inc. and Investors (incorporated by reference from Current Report on Form 8-K filed with the SEC on October 31, 2011)
4.4		The Company has outstanding certain long-term debt. None of such debt exceeds ten percent of the Company’s total assets; therefore, copies of the constituent instruments defining the rights of the holders of such debt are not included as exhibits. Copies of instruments with respect to such long-term debt will be furnished to the SEC upon request.
10.1		OptimumBank Holdings, Inc. Non-Employee Director Compensation Plan (incorporated by reference from Annual Report on Form 10-K filed with the SEC on March 30, 2012)
10.2		Amended and Restated Stock Purchase Agreement, dated as of December 5 2011, between OptimumBank Holdings, Inc. and Moishe Gubin (incorporated by reference from Annual Report on Form 10-K filed with the SEC on March 30, 2012)
31.1		Certification of Principal Executive and Principal Financial Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act
32.1		Certification of Principal Executive and Principal Financial Officer under 18 U.S.C. Section 1350
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document