10-Q 1 ophc-10q_093012.htm QUARTERLY REPORT



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
(Mark One)
 
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2012
or
 
o  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 o
 
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 o
 
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  o                                                                                                    Accelerated filer o
Non-accelerated filer    o          (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 o No x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 30,900,833 shares of Common Stock, $.01 par value, issued and outstanding as of November 13, 2012
 
 

 

 
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARIES
 
INDEX
     
   
     
 
Page
     
    2
 
 
 
    3
   
 
    4
 
 
 
    5
 
 
 
    6-7
 
 
 
 
8-28
     
    29-37
 
 
 
 
38
     
   
     
 
38
     
 
39
     
 
40
 
1
 

 

 
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARIES
 
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
 
   
September 30,
   
December 31,
 
Assets
 
2012
   
2011
 
   
(Unaudited)
       
 
           
Cash and due from banks
  $ 1,959     $ 1,101  
Interest-bearing deposits with banks
    3,688       5,123  
Federal funds sold
    21,720       16,552  
                 
Total cash and cash equivalents
    27,367       22,776  
                 
Securities available for sale
    21,588       28,907  
Loans, net of allowance for loan losses of $1,936 and $2,349
    85,451       89,217  
Federal Home Loan Bank stock
    1,478       2,159  
Premises and equipment, net
    2,859       2,691  
Foreclosed real estate, net
    10,444       7,646  
Accrued interest receivable
    477       499  
Other assets
    330       577  
                 
Total assets
  $ 149,994     $ 154,472  
                 
Liabilities and Stockholders’ Equity
               
                 
Liabilities:
               
Noninterest-bearing demand deposits
    1,309       515  
Savings, NOW and money-market deposits
    34,573       35,538  
Time deposits
    69,644       71,842  
                 
Total deposits
    105,526       107,895  
                 
Federal Home Loan Bank advances
    27,700       31,700  
Junior subordinated debenture
    5,155       5,155  
Advanced payment by borrowers for taxes and insurance
    1,029       567  
Official checks
    320       1,113  
Other liabilities
    1,397       1,256  
                 
Total liabilities
    141,127       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, 30,900,833 and 22,411,108 shares issued and outstanding in 2012 and 2011
    309       224  
Additional paid-in capital
    30,823       27,491  
Accumulated deficit
    (22,368 )     (19,991 )
Accumulated other comprehensive income (loss)
    103       (938 )
                 
Total stockholders’ equity
    8,867       6,786  
                 
Total liabilities and stockholders’ equity
  $ 149,994     $ 154,472  
 
See Accompanying Notes to Condensed Consolidated Financial Statements.
 
2
 

 

 
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARIES
 
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except per share amounts)
                         
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Interest income:
                       
Loans
  $ 1,025     $ 1,121     $ 3,002     $ 3,607  
Securities
    245       378       819       1,407  
Other
    22       17       60       46  
                                 
Total interest income
    1,292       1,516       3,881       5,060  
                                 
Interest expense:
                               
Deposits
    272       441       848       1,489  
Borrowings
    359       389       1,136       1,153  
                                 
Total interest expense
    631       830       1,984       2,642  
                                 
Net interest income
    661       686       1,897       2,418  
                                 
Provision (credit) for loan losses
    197       (243 )     378       652  
                                 
Net interest income after provision (credit) for loan losses
    464       929       1,519       1,766  
                                 
Noninterest income:
                               
Service charges and fees
    9       9       19       26  
Gain on sale of securities
    0       0       0       153  
Other
    1       1       179       53  
                                 
Total noninterest income
    10       10       198       232  
                                 
Noninterest expenses:
                               
Salaries and employee benefits
    465       444       1,301       1,380  
Occupancy and equipment
    133       132       376       399  
Data processing
    47       45       161       147  
Professional fees
    283       417       810       1,267  
Insurance
    68       99       208       326  
Foreclosed real estate
    192       81       329       1,063  
Regulatory assessment
    92       163       215       545  
Other
    118       121       490       561  
                                 
Total noninterest expenses
    1,398       1,502       3,890       5,688  
                                 
Other-than-temporary impairment on securities:
                               
Total other-than-temporary impairment losses
    101       0       204       0  
Portion of losses recognized in other comprehensive income
    0       0       0       0  
                                 
Net impairment loss
    101       0       204       0  
                                 
Net loss
  $ (1,025 )   $ (563 )   $ (2,377 )   $ (3,690 )
                                 
Net loss per share:
                               
Basic
  $ (.04 )   $ (.69 )   $ (.09 )   $ (4.50 )
                                 
Diluted
  $ (.04 )   $ (.69 )   $ (.09 )   $ (4.50 )
                                 
Dividends per share
  $ 0     $ 0     $ 0     $ 0  
 
See Accompanying Notes to Condensed Consolidated Financial Statements.
 
3
 

 

 
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Loss (Unaudited)
(In thousands)
                         
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                                 
Net loss
  $ (1,025 )   $ (563 )   $ (2,377 )   $ (3,690 )
                                 
Other comprehensive loss-
                               
    Unrealized gains (loss) on securities available for sale-                                
Unrealized holding gains (losses) arising during period
    603       21       1,041       (854 )
                                 
Comprehensive loss
  $ (422 )   $ (542 )   $ (1,336 )   $ (4,544 )
 
See Accompanying Notes to Condensed Consolidated Financial Statements.
 
4
 

 

 
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARIES
 
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
 
Nine Months Ended September 30, 2012 and 2011
(Dollars in thousands)
                                 
                         
Accumulated
     
                         
Other
 
Total
 
               
Additional
       
Compre-
 
Stockholders’
 
     
Common Stock
 
Paid-In
 
Accumulated
 
hensive
 
Equity
 
     
Shares
 
Amount
 
Capital
 
Deficit
 
Loss
 
(Deficit)
 
                                 
Balance at December 31, 2010
   
819,358
 
$
8
 
19,071
   
(16,244
)
0
 
2,835
 
                                 
Net loss for the nine months ended September 30, 2011 (unaudited)
   
0
   
0
 
0
   
(3,690
)
0
 
(3,690
                                 
Net change in unrealized loss on securities available for sale (unaudited)
   
0
   
0
 
0
   
0
 
(854
)
(854
                                 
Balance at September 30, 2011 (unaudited)
   
819,358
 
$
8
 
19,071
   
(19,934
)
(854
)
(1,709
                                 
                                 
Balance at December 31, 2011
   
22,411,108
 
$
224
 
27,491
   
(19,991
)
(938
)
6,786
 
                                 
Proceeds from sale of common stock (unaudited)
   
8,447,500
   
85
 
3,290
   
0
 
0
 
3,375
 
                                 
Common stock issued as compensation to directors (unaudited)
   
42,225
   
0
 
42
   
0
 
0
 
42
 
                                 
Net loss for the nine months ended September 30, 2012 (unaudited)
   
0
   
0
 
0
   
(2,377
)
0
 
(2,377
                                 
Net change in unrealized loss on securities available for sale (unaudited)
   
0
   
0
 
0
   
0
 
1,041
 
1,041
 
                                 
Balance at September 30, 2012 (unaudited)
   
30,900,833
 
$
309
 
30,823
   
(22,368
)
103
 
8,867
 
 
See Accompanying Notes to Condensed Consolidated Financial Statements.
 
5
 

 


OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARIES
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
             
   
Nine Months Ended September 30,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net loss
  $ (2,377 )   $ (3,690 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    87       94  
Provision for loan losses
    378       652  
Gain on sale of securities
    0       (153 )
Common stock issued as compensation to directors
    42       0  
Net amortization of fees, premiums and discounts
    0       93  
Decrease in other assets
    247       373  
Loss on sale of foreclosed real estate
    28       186  
Write-down of foreclosed real estate
    70       704  
Decrease in accrued interest receivable
    22       101  
Decrease in official checks and other liabilities
    (652 )     (79 )
Other-than-temporary impairment of securities available for sale
    204       0  
                 
Net cash used in operating activities
    (1,951 )     (1,719 )
                 
Cash flows from investing activities:
               
Purchases of securities held to maturity
    0       (5,048 )
Principal repayments and maturity of securities available for sale
    8,156       7,688  
Proceeds from sale of security available for sale
    0       11,028  
Net decrease in loans
    232       8,492  
Purchase of premises and equipment
    (255 )     (5 )
Proceeds from sale of foreclosed real estate
    317       3,703  
Capital improvements on foreclosed real estate
    (57 )     0  
Redemption of Federal Home Loan Bank stock
    681       747  
                 
Net cash provided by investing activities
    9,074       26,605  
                 
Cash flows from financing activities:
               
Net decrease in deposits
    (2,369 )     (19,014 )
Increase in advance payments by borrowers for taxes and insurance
    462       459  
Repayment of Federal Home Loan Bank advances
    (4,000 )     0  
Proceeds from sale of common stock
    3,375       0  
                 
Net cash used in financing activities
    (2,532 )     (18,555 )
                 
Net increase in cash and cash equivalents
    4,591       6,331  
                 
Cash and cash equivalents at beginning of the period
    22,776       14,367  
                 
Cash and cash equivalents at end of the period
  $ 27,367     $ 20,698  
 
(continued)
 
6
 

 

 
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARIES
 
Condensed Consolidated Statements of Cash Flows (Unaudited), Continued
(In thousands)
               
   
Nine Months Ended September 30,
 
   
2012
 
2011
 
Supplemental disclosure of cash flow information:
             
Cash paid during the period for:
             
Interest
 
$
1,898
 
$
2,535
 
               
Income taxes
 
$
0
 
$
0
 
               
Noncash investing and financing activities:
             
Change in accumulated other comprehensive loss, net change in unrealized loss on security available for sale
 
$
1,041
 
$
21
 
               
Transfer of securities held to maturity to available for sale
 
$
0
 
$
50,534
 
               
Loans transferred to foreclosed real estate
 
$
3,156
 
$
8,596
 
 
See Accompanying Notes to Condensed Consolidated Financial Statements.
 
7
 

 


OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARIES

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 Holdings 1503, LLC, all of which were formed in 2009, OB Real Estate Holdings 1695, LLC, OB Real Estate Holdings 1669, LLC, OB Real Estate Holdings 1645, LLC, OB Real Estate Holdings 1620, LLC,  and OB Real Estate Holdings 1565, LLC, all formed in 2010, and OB Real Estate Holdings 1443, LLC, and OB Real Estate Holdings 1596, LLC, OB Real Estate Holdings 1636, LLC, and OB Real Estate Holdings Northwood, LLC, formed in 2011, OB Real Estate Holdings Sillato, LLC, OB Real Estate Holdings 1655, LLC, OB Real Estate Holdings 1704, LLC and OB Real Estate Holdings Rosemary, LLC, formed in 2012. 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 September 30, 2012, and the results of operations for the three- and nine-month periods ended September 30, 2012 and 2011, and cash flows for the nine-months periods ended September 30, 2012 and 2011.  The results of operations for the three- and nine-months ended September 30, 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 September 30, 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.
 
(continued)
 
8
 

 

 
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARIES

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 condensed 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 condensed consolidated financial statements.

 
(continued)

9
 

 


OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARIES

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 condensed 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 condensed consolidated financial statements.

 
(continued)
 
10
 

 

 
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARIES

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):
 
           
Gross
   
Gross
       
     
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
     
Cost
   
Gains
   
Losses
   
Value
 
 
At September 30, 2012:
                       
 
Securities Available for Sale-
                       
 
Mortgage-backed securities
  $ 21,485     $ 375     $ (272 )   $ 21,588  
                                   
 
At December 31, 2011:
                               
 
Securities Available for Sale-
                               
 
Mortgage-backed securities
  $ 29,845     $ 202     $ (1,140 )   $ 28,907  

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 September 30, 2012, aggregated by investment category and length of time that individual securities have been in a continuous loss position, is as follows (in thousands):
 
     
Over Twelve Months
 
     
Gross
Unrealized
Losses
   
Fair
Value
 
 
Securities Available for Sale-
           
 
Mortgage-backed securities
  $ 272     $ 5,132  
 
 (continued)
 
11
 

 


OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARIES

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.  During the three and nine months ended September 30, 2012, the Company recorded other-than-temporary impairment charges totaling $101,000 and $204,000, respectively.

(continued)
 
12
 

 

 
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(2)
Securities, Continued.  The unrealized losses on four 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 September 30,
   
At December 31,
 
     
2012
   
2011
 
               
 
Residential real estate
  $ 32,430     $ 30,434  
 
Multi-family real estate
    4,182       4,109  
 
Commercial real estate
    39,221       41,307  
 
Land and construction
    7,323       11,783  
 
Commercial
    3,959       3,713  
 
Consumer
    123       175  
                   
 
Total loans
    87,238       91,521  
                   
 
Add (deduct):
               
 
Net deferred loan fees, costs and premiums
    149       45  
 
Allowance for loan losses
    (1,936 )     (2,349 )
                   
 
Loans, net
  $ 85,451     $ 89,217  
 
An analysis of the change in the allowance for loan losses follows (in thousands):
 
     
Residential
   
Multi-Family
   
Commercial
   
Land
                   
     
Real
   
Real
   
Real
   
and
                   
     
Estate
   
Estate
   
Estate
   
Construction
   
Commercial
   
Consumer
   
Total
 
 
Three Months Ended September 30, 2012:
                                         
 
Beginning balance
  $ 703     $ 245     $ 799     $ 215     $ 115     $ 25     $ 2,102  
 
Provision (credit) for loan losses
    (231 )     15       364       36       12       0       196  
 
Charge-offs
    0       (1 )     (346 )     (53 )     0       0       (400 )
 
Recoveries
    17       0       0       17       0       4       38  
                                                           
 
Ending balance
  $ 489     $ 259     $ 817     $ 215     $ 127     $ 29     $ 1,936  
                                                           
 
Nine Months Ended September 30, 2012:
                                                       
 
Beginning balance
  $ 549     $ 247     $ 1,190     $ 187     $ 161     $ 15     $ 2,349  
 
Provision (credit) for loan losses
    70       12       154       170       (33 )     5       378  
 
Charge-offs
    (146 )     0       (557 )     (388 )     (1 )     0       (1,092 )
 
Recoveries
    16       0       30       246       0       9       301  
                                                           
 
Ending balance
  $ 489     $ 259     $ 817     $ 215     $ 127     $ 29     $ 1,936  
                                                           
 
(continued)
 
13
 

 


OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(3)
Loans, Continued.
 
     
Residential
Real
Estate
   
Multi-Family
Real
Estate
   
Commercial
Real
Estate
   
Land
and
Construction
   
Consumer
   
Total
 
 
Three Months Ended September 30, 2011:
                                   
 
Beginning balance
  $ 1,093     $ 308     $ 1,400     $ 197     $ 77     $ 3,075  
 
Provision for loan losses
    (644 )     135       374       (117 )     9       (243 )
 
Charge-offs
    0       0       (150 )     0       0       (150 )
 
Recoveries
    328       2       0       121       4       455  
                                                   
 
Ending balance
  $ 777     $ 445     $ 1,624     $ 201     $ 90     $ 3,137  
                                                   
 
Nine Months Ended September 30, 2011:
                                               
 
Beginning balance
  $ 1,285     $ 282     $ 1,542     $ 514     $ 80     $ 3,703  
 
Provision (credit) for loan losses
    (562 )     158       284       772       0       652  
 
Charge-offs
    (308 )     0       (202 )     (1,230 )     0       (1,740 )
 
Recoveries
    362       5       0       145       10       522  
                                                   
 
Ending balance
  $ 777     $ 445     $ 1,624     $ 201     $ 90     $ 3,137  

                                             
      At September 30, 2012  
     
Residential
Real
Estate
   
Multi-Family
Real
Estate
   
Commercial
Real
Estate
   
Land
and
Construction
   
Commercial
   
Consumer
   
Total
 
 
 
                                         
 
Individually evaluated for
impairment:
                                         
 
Recorded investment
  $ 7,628     $ 0     $ 13,933     $ 905     $ 0     $ 0     $ 22,466  
 
Balance in allowance
for loan losses
  $ 0     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0  
                                                           
 
Collectively evaluated for
impairment:
                                                       
 
Recorded investment
  $ 24,802     $ 4,182     $ 25,288     $ 6,418     $ 3,959     $ 123     $ 64,772  
 
Balance in allowance
for loan losses
  $ 489     $ 259     $ 817     $ 215     $ 127     $ 29     $ 1,936  

     
At December 31, 2011
 
     
Residential
Real
Estate
   
Multi-Family
Real
Estate
   
Commercial
Real
Estate
     Land
and Construction
   
Consumer
   
Total
 
 
 
                                   
 
Individually evaluated for
impairment:
                                   
 
Recorded investment
  $ 7,919     $ 0     $ 16,716     $ 7,241     $ 68     $ 31,944  
 
Balance in allowance
for loan losses
  $ 0     $ 0     $ 11     $ 0     $ 0     $ 11  
                                                   
 
Collectively evaluated for
impairment:
                                               
 
Recorded investment
  $ 23,223     $ 4,109     $ 27,596     $ 4,542     $ 107     $ 59,577  
 
Balance in allowance
for loan losses
  $ 566     $ 247     $ 1,323     $ 187     $ 15     $ 2,338  
 
(continued)
 
14
 

 


OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARIES

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 real estate 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. Land and 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.
 
 
(continued)
 
15
 

 


OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(3)
Loans, Continued.
 
        Commercial Loans. Commercial loans are primarily underwritten on the basis of the borrowers’ ability to service such debt from income. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. As a general practice, the Company takes as collateral a security interest in any available real estate, equipment, or other chattel, although loans may also be made on an unsecured basis. Collateralized working capital loans typically are secured by short-term assets whereas long-term loans are primarily secured by long-term assets.  These loans are also affected by adverse economic conditions should they prevail within the Company’s local market.
 
       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.
 
 
(continued)
 
16
 

 

 
OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

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

         
OLEM
                         
         
(Other Loans
                         
         
Especially
                         
   
Pass
   
Mentioned)
   
Substandard
   
Doubtful
   
Loss
   
Total
 
At September 30, 2012:
                                   
Residential real estate:
                                   
Closed-end first mortgages
  $ 21,678     $ 2,919     $ 4,709     $ 0     $ 0     $ 29,306  
Closed-end second mortgages
    3,124       0       0       0       0       3,124  
                                                 
Total residential real estate
    24,802       2,919       4,709       0       0       32,430  
                                                 
Multi-family real estate
    4,182       0       0       0       0       4,182  
                                                 
Commercial real estate:
                                               
Owner-occupied
    9,949       1,979       78       0       0       12,006  
Non-owner-occupied
    12,235       1,125       13,855       0       0       27,215  
                                                 
Total commercial real estate
    22,184       3,104       13,933       0       0       39,221  
                                                 
Land and construction
    6,369       49       905       0       0       7,323  
                                                 
Commercial
    3,959       0       0       0       0       3,959  
                                                 
Consumer
    123       0       0       0       0       123  
                                                 
Total
  $ 61,619     $ 6,072     $ 19,547     $ 0     $ 0     $ 87,238  
                                                 
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
    107       68       0       0       0       175  
                                                 
Total
  $ 55,123     $ 8,579     $ 27,819     $ 0     $ 0     $ 91,521  
 
(continued)
 
17
 

 


OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARIES

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.
 
(continued)
 
18
 

 


OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited), Continued
 
(3)
Loans, Continued.  Age analysis of past-due loans is as follows (in thousands):
 
   
Accruing Loans
             
               
Greater
                         
    30-59     60-89    
Than 90
   
Total
                   
   
Days
   
Days
   
Days
   
Past
         
Nonaccrual
   
Total
 
   
Past Due
   
Past Due
   
Past Due
   
Due
   
Current
   
Loans
   
Loans
 
At September 30, 2012: