OPTIMUMBANK HOLDINGS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

Edgar Glimpses |

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




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



                                                                     (continued)



  24






                   OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY


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




Memorandum of Understanding. On , the Bank agreed to the issuance
of a Memorandum of Understanding (the "MOU"), with the FDIC and OFR which
required the Bank to take certain measures to improve its safety and soundness.
By agreeing to the MOU, the Bank was released from the Consent Order that became
effective in 2016, including the restrictions on the interest rates paid on
deposits.



Pursuant to the MOU, the Bank was required to take certain measures to maintain
qualified management, improve its strategic planning and budgeting process,
strengthen the interest rate management practices, limit its asset growth and
provide for the ongoing organization, monitoring and operational administration
of the Bank Secrecy Act Program. The MOU prohibited the payment of dividends by
the Bank.


During the recent examination, the examiners noted the Bank was in full compliance with the provisions of the MOU. In , the Bank was released from the MOU.

Company Written Agreement with Federal Reserve Bank of Atlanta ("FRB"). On , the Company and the FRB entered into a Written Agreement with respect
to certain aspects of the operation and management of the Company. The Written
Agreement prohibits, without the prior approval of the FRB, the payment of
dividends, taking dividends or payments from the Bank, making any interest,
principal or other distributions on account of the Debenture, 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 in substantial compliance with the requirements of
the Written Agreement.



Capital Levels


Quantitative measures established by regulation to ensure capital adequacy
require us to maintain minimum amounts and ratios of Total and Tier 1 capital to
risk-weighted assets and Tier 1 capital to average assets. As of ,
the Bank met the minimum applicable capital adequacy requirements.



Refer to Note 9 for the Bank's actual and required minimum capital ratios.


  25






                   OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY


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

Financial Condition at and



Overview



The Company's total assets increased by approximately $11.1 million to $111.3
million at , from $100.1 million at , primarily
due to an increase in total deposits offset by a decrease in Federal Home Loan
Bank advances. Total stockholders' equity decreased by approximately $300,000 to
$5.0 million at , from $5.3 million at , primarily
due to the net loss for the six month period ended , offset by
common stock issued as compensation to one director during 2019.



The following table shows selected information for the dates indicated:



                                                     Six Month Period
                                                          Ended                 Year Ended
                                                                
Average equity as a percentage of average assets                   4.8 %                    4.4 %

Equity to total assets at end of period                            4.5 %                    5.3 %

Return on average assets (1)                                      (1.1 )%                   0.9 %

Return on average equity (1)                                     (22.5 )%                  19.8 %

Noninterest expenses to average assets (1)                         4.3 %   
                4.4 %





(1) Annualized for the six month period ended .



  26






                   OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY


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

Liquidity and Sources of Funds

The Company's sources of funds include customer deposits, advances from the
Federal Home Loan Bank of Atlanta ("FHLB"), principal repayments and sales of
investment securities, loan repayments, foreclosed real estate sales, the use of
Federal Funds markets, net earnings, if any, and loans taken out at the Federal
Reserve Bank discount window.


Deposits are our primary source of funds. In order to increase its core deposits, the Company has priced its deposit rates competitively. The Company will adjust rates on its deposits to attract or retain deposits as needed.

The Bank increased deposits by $23.5 million during the six month period ended . The proceeds were used to paydown FHLB Advances and listing service Certificates of deposits.




In addition to obtaining funds from depositors, we may borrow funds from other
financial institutions. At , the Company had outstanding borrowings
of $13.0 million, against its $26.6 million in established borrowing capacity
with the FHLB. The Company's borrowing facility is subject to collateral and
stock ownership requirements, as well as prior FHLB consent to each advance. The
Bank has an available discount window credit line with the Federal Reserve Bank,
currently $430,000. The Federal Reserve Bank line is subject to collateral
requirements and must be repaid within 90 days; each advance is subject to prior
Federal Reserve Bank consent. At , the Company also had lines of
credit amounting to $8.4 million with three correspondent banks to purchase
federal funds. The Company had no outstanding federal funds purchased at  and $560,000 outstanding at . Disbursements on the
lines of credit are subject to the approval of the correspondent banks. We
measure and monitor our liquidity daily and believe our liquidity sources are
adequate to meet our operating needs.



Off-Balance Sheet Arrangements

Refer to Note 8 for Off-Balance Sheet Arrangements.

Junior Subordinated Debenture

Refer to Note 10 regarding the Junior Subordinated Debenture.



  27







                   OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY


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



Results of Operations



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



                                                             Three Months Ended June 30,
                                                    2019                                      2018
                                                  Interest       Average                    Interest       Average
                                    Average         and          Yield/       Average         and          Yield/
                                    Balance      Dividends       Rate(5)      Balance      Dividends       Rate(5)
Interest-earning assets:
Loans                              $  81,325     $    1,097          5.40 %   $ 72,602     $      938          5.17 %
Securities                            12,954             72          2.22       10,758             73          2.71
Other (1)                             10,199             77          3.02        4,552             32          2.81

Total interest-earning
assets/interest income               104,478          1,246          4.81       87,912          1,043          4.75

Cash and due from banks                2,149                                     1,356
Premises and equipment                 2,644                                     2,688
Other                                   (912 )                                  (2,152 )

Total assets                       $ 108,359                                  $ 89,804

Interest-bearing liabilities:
Savings, NOW and money-market
deposits                           $  43,329            199          1.84     $ 21,123             33          0.62
Time deposits                         28,956            161          2.22       19,693             62          1.26
Borrowings (2)                        18,155            133          2.93       30,577            190          2.49

Total interest-bearing
liabilities/interest expense          90,440            493          2.18  
    71,393            285          1.60

Noninterest-bearing demand
deposits                              10,860                                    12,510
Other liabilities                      2,017                                     2,388
Stockholders' equity                   5,042                                     3,513

Total liabilities and
stockholders' equity               $ 108,359                                  $ 89,804

Net interest income                              $      753                                $      758

Interest rate spread (3)                                             2.63 %                                    3.15 %

Net interest margin (4)                                              2.89 %                                    3.45 %

Ratio of average
interest-earning assets to
average interest-bearing
liabilities                             1.16 %                                    1.23 %




                                                              Six Months Ended June 30,
                                                    2019                                      2018
                                                  Interest       Average                    Interest       Average
                                    Average         and          Yield/       Average         and          Yield/
                                    Balance      Dividends       Rate(5)      Balance      Dividends       Rate(5)
Interest-earning assets:
Loans                              $  81,445     $    2,187          5.37 %   $ 72,102     $    1,854          5.14 %
Securities                            10,787            122          2.26       11,182            134          2.40
Other (1)                              9,824            125          2.54        5,666             67          2.36

Total interest-earning
assets/interest income               102,056          2,434          4.77       88,950          2,055          4.62

Cash and due from banks                2,239                                     1,409
Premises and equipment                 2,648                                     2,669
Other                                 (1,100 )                                  (2,941 )

Total assets                       $ 105,843                                  $ 90,087

Interest-bearing liabilities:
Savings, NOW and money-market
deposits                           $  39,274            289          1.47     $ 21,143             67          0.63
Time deposits                         28,174            360          2.56       22,820            140          1.23
Borrowings (2)                        19,855            283          2.85       28,335            338          2.39

Total interest-bearing
liabilities/interest expense          87,303            932          2.14  
    72,298            545          1.51

Noninterest-bearing demand
deposits                              11,352                                    12,389
Other liabilities                      2,059                                     2,337
Stockholders' equity                   5,129                                     3,063

Total liabilities and
stockholders' equity               $ 105,843                                  $ 90,087

Net interest income                              $    1,502                                $    1,510

Interest rate spread (3)                                             2.63 %                                    3.11 %

Net interest margin (4)                                              2.94 %                                    3.40 %

Ratio of average
interest-earning assets to
average interest-bearing
liabilities                             1.17 %                                    1.23 %



(1) Includes interest-earning deposits with banks and Federal Home Loan Bank

    stock dividends.
(2) Includes Federal Home Loan Bank advances, other borrowings and the Debenture.
(3) Interest-rate spread represents the difference between the average yield on

interest-earning assets and the average cost of interest-bearing liabilities. (4) Net interest margin is net interest income divided by average

    interest-earning assets.
(5) Annualized.




  28







                   OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY


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

Comparison of the Three-Month Periods Ended and 2018




General. Net loss for the three month period ended , was $(430,000)
or $(.23) per basic and diluted share compared to net earnings of $1,904,000 or
$1.35 per basic and diluted share for the three month period ended . The substantial earnings in 2018 were due to the $2.1 million reversal of
the Company's allowance for loan losses.



Interest Income.Interest income increased $203,000 to $1.2 million for the three
month period ended  compared to $1.0 million for the three month
period ended . The increase in interest income was caused primarily
by the increase in loans of $3.5 million.



Interest Expense.Interest expense on deposits and borrowings increased to $493,000 for the three month period ended from $285,000 for the three month period ended . The Bank continued to attract local deposits during 2019.




Provision for Loan Losses. There was no provision or credit for losses during
the three month period ended . The Bank reversed $2.1 million of
the allowance for loan losses into income during the second quarter of 2018. The
provision or credit 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  and 2018. Management's periodic evaluation of the
adequacy of the allowance is based upon historical experience, the volume and
type of lending conducted by us, adverse situations that may affect the
borrower's ability to repay, estimated value of the underlying collateral, loans
identified as impaired, general economic conditions, particularly as they relate
to our market areas, and other factors related to the estimated collectability
of our loan portfolio. The allowance for loan losses totaled $2.1 million or
2.47% of loans outstanding at , as compared to $2.2 million or
2.83% of loans outstanding at .



Noninterest Income. Total noninterest income increased to $87,000 for the three
month period ended , from $35,000 for the three month period ended
 due to loan related fees.



Noninterest Expenses.Total noninterest expenses increased $281,000 to $1,270,000 for the three month period ended compared to $989,000 for the three month period ended .

Comparison of the Six-Month Periods Ended and 2018




General. Net loss for the six month period ended , was $(576,000)
or $(.31) per basic and diluted share compared to net earnings of $1,619,000 or
$1.25 per basic and diluted share for the six month period ended .
The substantial earnings in 2018 were due to the $2.1 million reversal of the
Company's allowance for loan losses.



Interest Income. Interest income increased to $2,434,000 for the six month period ended from $2,055,000 for the six month period ended , primarily due to an increase in interest earning assets.




Interest Expense. Interest expense on deposits and borrowings increased $387,000
to $932,000 for the six month period ended  compared to the prior
period. The increase in interest expense was caused by the net effect of an
increase in deposits and a decrease in borrowings.



Provision for Loan Losses. There was no provision or credit for losses during
the six month period ended . The Bank reversed $2.1 million of the
allowance for loan losses into income during the second quarter of 2018. The
provision or credit 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  and 2018. Management's periodic evaluation of the
adequacy of the allowance is based upon historical experience, the volume and
type of lending conducted by us, adverse situations that may affect the
borrower's ability to repay, estimated value of the underlying collateral, loans
identified as impaired, general economic conditions, particularly as they relate
to our market areas, and other factors related to the estimated collectability
of our loan portfolio. The allowance for loan losses totaled $2.1 million or
2.47% of loans outstanding at , as compared to $2.2 million or
2.83% of loans outstanding at .



Noninterest Income.Total noninterest income increased by $75,000 for the six
month period ended , to $124,000 compared to $49,000 for the six
month period ended  due to increased loan related fees.



Noninterest Expenses.Total noninterest expenses increased $214,000 to $2.3 million for the six month period ended compared to $2.0 million for the six month period ended .



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                   OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

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