Form 10-Q
Table of Contents

 

 

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, 2008

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 000-50755

 

 

OPTIMUMBANK HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Florida   55-0865043

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

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 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 registrant’s classes of common stock, as of the latest practicable date: 3,120,992 shares of Common Stock, $.01 par value, issued and outstanding as of November 12, 2008

 

 

 


Table of Contents

OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

INDEX

 

     Page

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

Condensed Consolidated Balance Sheets - September 30, 2008 (unaudited) and December 31, 2007

   2

Condensed Consolidated Statements of Earnings - Three and Nine Months ended September 30, 2008 and 2007 (unaudited)

   3

Condensed Consolidated Statements of Stockholders’ Equity - Nine Months ended September  30, 2008 and 2007 (unaudited)

   4

Condensed Consolidated Statements of Cash Flows - Nine Months ended September 30, 2008 and 2007 (unaudited)

   5

Notes to Condensed Consolidated Financial Statements (unaudited)

   6-12

Review by Independent Registered Public Accounting Firm

   13

Report of Independent Registered Public Accounting Firm

   14

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

   15-20

Item 4T. Controls and Procedures

   21

PART II. OTHER INFORMATION

  

Item 6. Exhibits

   22

SIGNATURES

   23

 

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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)

 

     September 30,
2008
    December 31,
2007
 
     (unaudited)        

Assets

    

Cash and due from banks

   $ 1,511     $ 475  

Federal funds sold

     394       226  
                

Total cash and cash equivalents

     1,905       701  

Securities held to maturity (fair value of $82,531 and $58,117)

     85,259       58,471  

Security available for sale

     240       244  

Loans, net of allowance for loan losses of $732 and $692

     162,779       173,323  

Federal Home Loan Bank stock

     3,706       2,965  

Premises and equipment, net

     3,137       3,249  

Foreclosed assets

     95       79  

Accrued interest receivable

     1,343       1,448  

Other assets

     1,102       1,067  
                

Total assets

   $ 259,566     $ 241,547  
                

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Noninterest-bearing demand deposits

   $ 112     $ 1,304  

Savings, NOW and money-market deposits

     33,239       28,202  

Time deposits

     79,215       95,528  
                

Total deposits

     112,566       125,034  

Federal Home Loan Bank advances

     72,700       56,850  

Other borrowings

     41,800       28,900  

Junior subordinated debenture

     5,155       5,155  

Official checks

     3,338       2,251  

Other liabilities

     744       1,110  
                

Total liabilities

     236,303       219,300  
                

Stockholders’ equity:

    

Common stock, $.01 par value; 6,000,000 shares authorized, 3,120,992 and 2,972,507 shares issued and outstanding

     31       30  

Additional paid-in capital

     18,494       17,308  

Retained earnings

     4,743       4,913  

Accumulated other comprehensive loss

     (5 )     (4 )
                

Total stockholders’ equity

     23,263       22,247  
                

Total liabilities and stockholders’ equity

   $ 259,566     $ 241,547  
                

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Earnings (Unaudited)

(Dollars in thousands, except per share amounts)

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2008    2007    2008    2007

Interest income:

           

Loans

   $ 2,749    $ 3,240    $ 8,731    $ 9,801

Securities

     1,116      824      3,030      1,978

Other

     35      66      144      183
                           

Total interest income

     3,900      4,130      11,905      11,962
                           

Interest expense:

           

Deposits

     1,046      1,443      3,501      4,361

Borrowings

     1,237      1,056      3,450      2,808
                           

Total interest expense

     2,283      2,499      6,951      7,169
                           

Net interest income

     1,617      1,631      4,954      4,793

Provision for loan losses

     47      16      161      536
                           

Net interest income after provision for loan losses

     1,570      1,615      4,793      4,257
                           

Noninterest income:

           

Service charges and fees

     46      30      119      56

Loan prepayment fees

     30      15      35      225

Litigation settlement

     —        —        —        155

Other

     2      2      4      4
                           

Total noninterest income

     78      47      158      440
                           

Noninterest expenses:

           

Salaries and employee benefits

     540      532      1,631      1,509

Occupancy and equipment

     168      166      537      494

Data processing

     42      43      125      127

Professional fees

     54      82      195      208

Insurance

     36      15      64      45

Stationary and supplies

     11      8      24      30

Loss on sale of foreclosed assets

     293      —        293      —  

Provision for losses on foreclosed assets

     11      —        74      —  

Other

     170      113      374      344
                           

Total noninterest expenses

     1,325      959      3,317      2,757
                           

Earnings before income taxes

     323      703      1,634      1,940

Income taxes

     122      265      615      700
                           

Net earnings

   $ 201    $ 438    $ 1,019    $ 1,240
                           

Net earnings per share:

           

Basic

   $ .06    $ .14    $ .33    $ .40
                           

Diluted

   $ .06    $ .14    $ .32    $ .39
                           

Dividends per share

   $ —      $ —      $ —      $ —  
                           

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Stockholders’ Equity

Nine Months Ended September 30, 2008 and 2007

(Dollars in thousands)

 

     Common Stock    Additional
Paid-In
Capital
   Retained
Earnings
    Accumulated
Other
Comprehensive
    Total
Stockholders’
Equity
 
     Shares    Amount         Loss    

Balance at December 31, 2006

   2,820,280    $ 28    15,930    4,474     (9 )   20,423  
                   

Comprehensive income:

               

Net earnings for the nine months ended September 30, 2007 (unaudited)

   —        —      —      1,240     —       1,240  

Net change in unrealized loss on security available for sale (unaudited)

   —        —      —      —       (1 )   (1 )
                   

Comprehensive income (unaudited)

                1,239  
                   

Proceeds from exercise of common stock options (unaudited)

   7,166      —      41    —       —       41  

5% stock dividend (fractional shares paid-in cash) (unaudited)

   140,889      2    1,300    (1,303 )   —       (1 )
                                   

Balance at September 30, 2007 (unaudited)

   2,968,335    $ 30    17,271    4,411     (10 )   21,702  
                                   

Balance at December 31, 2007

   2,972,507    $ 30    17,308    4,913     (4 )   22,247  
                   

Comprehensive income:

               

Net earnings for the nine months ended September 30, 2008 (unaudited)

   —        —      —      1,019     —       1,019  

Net change in unrealized loss on security available for sale, net of tax (unaudited)

   —        —      —      —       (1 )   (1 )
                   

Comprehensive income (unaudited)

                1,018  
                   

5% stock dividend (fractional shares paid-in cash) (unaudited)

   148,485      1    1,186    (1,189 )   —       (2 )
                                   

Balance at September 30, 2008 (unaudited)

   3,120,992    $ 31    18,494    4,743     (5 )   23,263  
                                   

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)

 

     Nine Months Ended
September 30,
 
     2008     2007  

Cash flows from operating activities:

    

Net earnings

   $ 1,019     $ 1,240  

Adjustments to reconcile net earnings to net cash provided by operating activities:

    

Depreciation and amortization

     153       172  

Provision for loan losses

     161       536  

Net amortization of fees, premiums and discounts

     804       280  

Decrease (increase) in accrued interest receivable

     105       (182 )

Decrease (increase) in other assets

     118       (1,001 )

Loss on sale of foreclosed assets

     293       —    

Provision for losses on foreclosed assets

     74       —    

Increase in official checks and other liabilities

     721       1,971  
                

Net cash provided by operating activities

     3,448       3,016  
                

Cash flows from investing activities:

    

Purchases of securities held to maturity

     (35,603 )     (32,517 )

Principal repayments of securities held to maturity

     8,323       7,649  

Net decrease in loans

     9,281       2,913  

(Purchase) sale of premises and equipment

     (41 )     531  

Proceeds from sale of foreclosed assets

     257       —    

Purchase of Federal Home Loan Bank stock

     (741 )     (121 )
                

Net cash used in investing activities

     (18,524 )     (21,545 )
                

Cash flows from financing activities:

    

Net decrease in deposits

     (12,468 )     (5,691 )

Net increase in other borrowings

     12,900       21,210  

Proceeds from exercise of common stock options

     —         41  

Net increase in Federal Home Loan Bank advances

     15,850       1,700  

Fractional shares of stock dividend paid-in cash

     (2 )     (1 )
                

Net cash provided by financing activities

     16,280       17,259  
                

Net increase (decrease) in cash and cash equivalents

     1,204       (1,270 )

Cash and cash equivalents at beginning of the period

     701       1,604  
                

Cash and cash equivalents at end of the period

   $ 1,905     $ 334  
                

Supplemental disclosure of cash flow information:

    

Cash paid during the period for:

    

Interest

   $ 6,907     $ 7,234  
                

Income taxes

   $ 889     $ 832  
                

Noncash investing and financing activities:

    

Change in accumulated other comprehensive loss, net change in unrealized loss on security available for sale, net of tax

   $ (1 )   $ (1 )
                

Common stock dividend

   $ 1,187     $ 1,302  
                

Loans transferred to foreclosed assets

   $ 2,390     $ —    
                

Loan made in connection with sale of foreclosed asset

   $ 1,600     $ —    
                

Foreclosed assets reclassified to other assets

   $ 150     $ —    
                

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 (collectively, the “Company”). The Holding Company’s only business is the operation of the Bank. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation. The Bank offers a variety of community banking services to individual and corporate customers through its three banking offices located in Broward County, Florida.

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, 2008, and the results of operations for the three- and nine-month periods ended September 30, 2008 and 2007, and cash flows for the nine-months periods ended September 30, 2008 and 2007. The results of operations for the three and nine months ended September 30, 2008, are not necessarily indicative of the results to be expected for the full year.

 

(2) Loan Impairment and Credit Losses. The activity in the allowance for loan losses was as follows (in thousands):

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
     2008     2007    2008     2007  

Balance at beginning of period

   $ 694     $ 736    $ 692     $ 974  

Charge-offs

     (9 )     —        (121 )     (758 )

Provision for loan losses

     47       16      161       536  
                               

Balance at end of period

   $ 732     $ 752    $ 732     $ 752  
                               

 

     There were no impaired loans at December 31, 2007. The following summarizes the impaired loans at September 30, 2008, which were collateral dependent (in thousands):

 

     At September 30,
2008

Loans identified as impaired-

  

Gross loans with no related allowance for losses recorded

   $ 5,070
      

(continued)

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

 

(2) Loan Impairment and Credit Losses, Continued. The average net investment in impaired loans and interest income recognized and received on impaired loans is as follows (in thousands):

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2008    2007    2008    2007

Average net investment in impaired loans

   $ 4,729    $ —      $ 2,675    $ 2,114
                           

Interest income recognized on impaired loans

   $ —      $ —      $ —      $ 39
                           

Interest income received on impaired loans

   $ —      $ —      $ —      $ 39
                           

 

     At September 30, 2008 and 2007, the Company had no loans over ninety days past due still accruing interest. Nonaccrual loans were as follows (in thousands):

 

     At September 30,
     2008    2007

Nonaccrual loans

   $ 4,564    $ 108
             

 

(3) Regulatory Capital. The Bank is required to maintain certain minimum regulatory capital requirements. The following is a summary at September 30, 2008 of the regulatory capital requirements and the Bank’s capital on a percentage basis:

 

     Bank     Regulatory
Requirement
 

Tier I capital to total average assets

   10.97 %   4.00 %

Tier I capital to risk-weighted assets

   18.33 %   4.00 %

Total capital to risk-weighted assets

   18.81 %   8.00 %

(continued)

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(4) Earnings Per Share. Basic earnings per share has been computed on the basis of the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share were computed based on the weighted-average number of shares outstanding plus the effect of outstanding stock options, computed using the treasury stock method. All amounts reflect the 5% stock dividends declared in May, 2008 and 2007. Earnings per common share have been computed based on the following:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2008    2007    2008    2007

Weighted-average number of common shares outstanding used to calculate basic earnings per common share

   3,120,992    3,112,990    3,120,992    3,110,596

Effect of dilutive stock options

   41,283    67,571    54,458    75,342
                   

Weighted-average number of common shares outstanding used to calculate diluted earnings per common share

   3,162,275    3,180,561    3,175,450    3,185,938
                   

The following options were excluded from the calculation of earnings per share due to the exercise price being above the average market price:

 

     Number
Outstanding
   Exercise
Price
   Expire

For the three and nine months ended September 30, 2008-

        

Options

   278,987    $ 7.81-11.90    2014-2015

For the three and nine months ended September 30, 2007-

        

Options

   267,412    $ 9.52-11.90    2014-2015

 

(5) Stock-Based Compensation. The Company follows the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (“SFAS 123(R)”), using the modified-prospective-transition method. Under that transition method, compensation cost to be recognized includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value calculated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). As of December 31, 2006, all stock options were fully vested and no options were granted in 2007 or 2008; therefore, no stock-based compensation has been recognized in 2007 or 2008.

(continued)

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(5) Stock-Based Compensation, Continued. The Company established an Incentive Stock Option Plan (the “Plan”) for officers, directors and employees of the Company and reserved 600,686 (amended) shares of common stock for the plan. Both incentive stock options and nonqualified stock options may be granted under the plan. The exercise price of the stock options is determined by the board of directors at the time of grant, but cannot be less than the fair market value of the common stock on the date of grant. The options vest over three and five years. The options must be exercised within ten years from the date of grant. At September 30, 2008, 14,239 options were available for grant.

A summary of the activity in the Company’s stock option plan is as follows. All amounts reflect the 5% stock dividend declared on May 29, 2008 (dollars in thousands, except per share amounts):

 

     Number of
Options
   Weighted-
Average
Exercise
Price
   Weighted-
Average
Remaining
Contractual
Term
   Aggregate
Intrinsic
Value

Outstanding and exercisable at December 31, 2007 and September 30, 2008

   503,587    $ 7.68    4.9 years    $ 92
                       

The total intrinsic value of options exercised during the three and nine months ended September 30, 2007 was $16,675. There was no tax benefit recognized in connection with the exercised stock options. No stock options were exercised in 2008.

 

(6) Common Stock Dividend. On May 29, 2008, the Company’s board of directors declared a 5% stock dividend to shareholders of record on June 12, 2008 and paid on July 14, 2008.

 

(7) Fair Value Measurements. On January 1, 2008, the Company adopted SFAS 157, “Fair Value Measurements.” SFAS 157, among other things, defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. The adoption of this statement had no effect on the Company’s financial statements.

The following disclosures, which include certain disclosures that are generally not required in interim period financial statements, are included herein as a result of the adoption of SFAS 157.

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Currently, the Company has securities available for sale that are recorded at fair value on a recurring basis. Also from time to time the Company may be required to record at fair value other assets or liabilities on a non-recurring basis, such as impaired loans. These non-recurring fair value adjustments involve the application of lower-of-cost-or-market accounting or write-downs of individual assets.

(continued)

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(7) Fair Value Measurements, Continued. In accordance with SFAS 157, the Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

   

Level 1 – Valuation is based upon quoted prices for identical instruments in active markets.

 

   

Level 2 – Valuation is based upon quoted prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.

 

   

Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability.

The Company bases its fair value on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The following describes valuation methodologies used for assets measured at fair value on a recurring and non-recurring basis.

Securities Available for Sale. These securities are valued based upon open-market quotes obtained from reputable third-party brokers which is considered a Level I fair value measurement. Level I fair value measurements are quoted prices in active markets. For identical assets market pricing is based upon CUSIP identification for each individual security. Changes in fair value are recorded in other comprehensive income.

(continued)

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(7) Fair Value Measurements, Continued.

Impaired Loans. A loan is considered impaired when, based upon current information and events, it is probable that we will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan agreement. The Company’s impaired loans are normally collateral dependent and, as such, are carried at the lower of the Company’s net recorded investment in the loan or the estimated fair value of the collateral less estimated selling costs. Adjustments to the recorded investment are made through specific valuation allowances that are recorded as part of the overall allowances for loan losses. Estimates of fair value is determined based on a variety of information, including the use of available appraisals, estimates of market value by licensed appraisers or local real estate brokers and the knowledge and experience of the Company’s officers related to values of properties in the Company’s market areas. These officers take into consideration the type, location and occupancy of the property as well as current economic conditions in the area the property is located in assessing estimates of fair value. Accordingly, fair value estimates for impaired loans is classified as Level 3.

The following table provides the level of valuation assumptions used to determine the carrying value of our assets measured at fair value on a recurring and non-recurring basis at September 30, 2008 (in thousands).

 

                         Total Losses (1)
     Net carrying value at September 30, 2008    Three-Months Ended    Nine-Months Ended
     Total    Level 1    Level 2    Level 3    September 30, 2008    September 30, 2008

Securities available for sale

   $ 240    240    —      —      —      1

Impaired loans

     5,070    —      —      5,070    —      —  

 

(1)

For securities available for sale, unrealized losses are recorded in accumulated other comprehensive loss.

(continued)

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(7) Fair Value Measurements, Continued. Also effective January 1, 2008, the Company adopted SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. Most of the provisions of this statement apply only to entities that elect the fair value option. However, the amendment to SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. Management determined that this Statement had no material effect on the Company’s consolidated financial statements.

 

(8) Stock Purchase Plan. On September 25, 2008, the Company adopted a stock purchase plan (the “Plan”). The Plan allows the Company to purchase up to 5% of the common stock outstanding (approximately 156,050 shares).

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Review by Independent Registered Public Accounting Firm

Hacker, Johnson & Smith PA, the Company’s independent registered public accounting firm, have made a limited review of the interim financial data as of September 30, 2008, and for the three- and nine-month periods ended September 30, 2008 and 2007, presented in this document, in accordance with standards established by the Public Company Accounting Oversight Board.

Their report furnished pursuant to Article 10 of Regulation S-X is included herein.

 

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Report of Independent Registered Public Accounting Firm

OptimumBank Holdings, Inc.

Fort Lauderdale, Florida:

We have reviewed the accompanying condensed consolidated balance sheet of OptimumBank Holdings, Inc. and Subsidiary (the “Company”) as of September 30, 2008, and the condensed consolidated statements of earnings for the three- and nine-month periods ended September 30, 2008 and 2007 and the related condensed consolidated statements of stockholders’ equity and cash flows for the nine-month periods ended September 30, 2008 and 2007. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim condensed consolidated financial statements for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board, the consolidated balance sheet as of December 31, 2007, and the related consolidated statements of earnings, stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated March 21, 2008, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2007, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Hacker, Johnson & Smith PA

HACKER, JOHNSON & SMITH PA

Fort Lauderdale, Florida

October 20, 2008

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Item 2. Management’s Discussion and Analysis

of Financial Condition and Results of Operations

Recent Events

The Company has filed an application under the Troubled Asset Relief Program Capital Purchase Program with the U. S. Department of Treasury seeking approval to sell $4.578 million in preferred stock to the Treasury. The Company’s participation in the Capital Purchase Program will remain subject to various contingencies, including, but not limited to, acceptance by the Treasury of its application and approval by the shareholders of an amendment to the Company’s articles of incorporation authorizing the issuance of preferred stock. If the Company ultimately elects to participate in the Capital Purchase Program, the Company anticipates using the proceeds to increase its overall capital levels and provide funds for additional lending.

Comparison of September 30, 2008 and December 31, 2007

Liquidity and Capital Resources

The Company’s primary sources of cash during the nine months ended September 30, 2008 were from an increase in other borrowings of approximately $12.9 million, an increase in Federal Home Loan Bank advances of approximately $15.9 million, principal repayments of securities held to maturity of approximately $8.3 million, net loan repayments of approximately $9.3 million and cash provided from operating activities of approximately $3.4 million. Cash was used primarily for purchases of securities of approximately $35.6 million and to fund deposit withdrawals of approximately $12.5 million. At September 30, 2008, the Company had time deposits of approximately $66.3 million that mature in one year or less. At September 30, 2008, the Company exceeded its regulatory liquidity requirements. Management believes that, if so desired, it can adjust the rates on time deposits to retain or attract deposits in a changing interest-rate environment.

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

 

     Nine Months Ended
September 30,

2008
    Year Ended
December 31,
2007
    Nine Months Ended
September 30,

2007
 

Average equity as a percentage of average assets

   9.19 %   8.96 %   8.94 %

Equity to total assets at end of period

   8.96 %   9.21 %   8.82 %

Return on average assets (1)

   0.55 %   0.73 %   0.70 %

Return on average equity (1)

   5.94 %   8.91 %   7.83 %

Noninterest expenses to average assets (1)

   1.78 %   1.57 %   1.56 %

 

(1) Annualized for the nine months ended September 30, 2008 and 2007.

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Item 2. Management’s Discussion and Analysis

of Financial Condition and Results of Operations, Continued

 

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 include commitments to extend credit. These instruments 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 or notional amounts of those instruments reflect the extent of the Company’s involvement in particular classes of financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. 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.

A summary of the amounts of the Company’s financial instruments, with off-balance sheet risk at September 30, 2008, follows (in thousands):

 

     Contract
Amount

Commitments to extend credit

   $ 5,165
      

Management believes that the Company has adequate resources to fund all of its commitments and that substantially all its existing commitments will be funded in the next twelve months.

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

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 September 30,  
     2008     2007  
     Average
Balance
   Interest
and
Dividends
   Average
Yield/
Rate
    Average
Balance
   Interest
and
Dividends
   Average
Yield/
Rate
 
     ($ in thousands)  

Interest-earning assets:

                

Loans

   $ 159,844      2,749    6.88 %   $ 172,935      3,240    7.49 %

Securities

     82,681      1,116    5.40       58,349      824    5.65  

Other (1)

     5,267      35    2.66       4,601      66    5.74  
                                

Total interest-earning assets/interest income

     247,792      3,900    6.30       235,885      4,130    7.00  
                        

Cash and due from banks

     486           403      

Premises and equipment

     3,164           3,316      

Other

     3,696           2,980      
                        

Total assets

   $ 255,138         $ 242,584      
                        

Interest-bearing liabilities:

                

Savings, NOW and money-market deposits

     34,449      264    3.07       26,379      308    4.67  

Time deposits

     76,924      782    4.07       93,963      1,135    4.83  

Borrowings (2)

     116,525      1,237    4.25       89,045      1,056    4.74  
                                

Total interest-bearing liabilities/ interest expense

     227,898      2,283    4.01       209,387      2,499    4.77  
                        

Noninterest-bearing demand deposits

     487           1,867      

Other liabilities

     3,591           9,794      

Stockholders’ equity

     23,162           21,536      
                        

Total liabilities and stockholders’ equity

   $ 255,138         $ 242,584      
                        

Net interest income

      $ 1,617         $ 1,631   
                        

Interest-rate spread (3)

         2.29 %         2.23 %
                        

Net interest margin (4)

         2.61 %         2.77 %
                        

Ratio of average interest-earning assets to average interest-bearing liabilities

     1.09           1.13      
                        

 

(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 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.

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

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.

 

     Nine Months Ended September 30,  
     2008     2007  
     Average
Balance
   Interest
and
Dividends
   Average
Yield/

Rate
    Average
Balance
   Interest
and
Dividends
   Average
Yield/
Rate
 
     ($ in thousands)  

Interest-earning assets:

                

Loans

   $ 162,846      8,731    7.15 %   $ 177,116      9,801    7.38 %

Securities

     74,315      3,030    5.44       48,441      1,978    5.44  

Other (1)

     4,549      144    4.22       4,222      183    5.78  
                                

Total interest-earning assets/interest income

     241,710      11,905    6.57       229,779      11,962    6.94  
                        

Cash and due from banks

     478           343      

Premises and equipment

     3,200           3,486      

Other

     3,653           2,596      
                        

Total assets

   $ 249,041         $ 236,204      
                        

Interest-bearing liabilities:

                

Savings, NOW and money-market deposits

     32,361      804    3.31       26,550      890    4.47  

Time deposits

     81,843      2,697    4.39       97,536      3,471    4.74  

Borrowings (2)

     107,649      3,450    4.27       83,694      2,808    4.47  
                                

Total interest-bearing liabilities/interest expense

     221,853      6,951    4.18       207,780      7,169    4.60  
                        

Noninterest-bearing demand deposits

     827           1,741      

Other liabilities

     3,477           5,577      

Stockholders’ equity

     22,884           21,106      
                        

Total liabilities and stockholders’ equity

   $ 249,041         $ 236,204      
                        

Net interest income

      $ 4,954         $ 4,793   
                        

Interest-rate spread (3)

         2.39 %         2.34 %
                        

Net interest margin (4)

         2.73 %         2.78 %
                        

Ratio of average interest-earning assets to average interest-bearing liabilities

     1.09           1.11      
                        

 

(1) Includes interest-bearing deposits in 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 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.

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Comparison of the Three-Month Periods Ended September 30, 2008 and 2007

General. Net earnings for the three months ended September 30, 2008, were $201,000 or $.06 per basic and diluted share compared to net earnings of $438,000 or $.14 per basic and diluted share for the period ended September 30, 2007. This decrease in the Company’s net earnings was primarily due to an increase in noninterest expenses.

Interest Income. Interest income decreased to $3.9 million for the three months ended September 30, 2008 from $4.1 million for the three months ended September 30, 2007. Interest income on loans decreased due primarily to a decrease in the average loan portfolio balance and a decrease in the average yield earned for the three months ended September 30, 2008. Interest on securities increased to $1.1 million due primarily to an increase in the average balance of the securities portfolio.

Interest Expense. Interest expense on deposits decreased to $1.0 million for the three months ended September 30, 2008 from $1.4 million for the three months ended September 30, 2007. Interest expense decreased primarily because of a decrease in the average balance of deposits and rates paid during 2008. Interest expense on borrowings increased to $1.2 million for the three months ended September 30, 2008 from $1.1 million for the three months ended September 30, 2007 due primarily to an increase in the average balance of borrowings.

Provision for Loan Losses. 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 collectibility of our loan portfolio. The allowance for loan losses totaled $732,000 or .45% of loans outstanding at September 30, 2008, compared to $752,000, or .42% of loans outstanding at September 30, 2007. Management believes the balance in the allowance for loan losses at September 30, 2008 is adequate. The provision for the three months ended September 30, 2008, was $47,000 compared to $16,000 for the same period in 2007. The provision for loan losses is charged to earnings as losses are estimated to have occurred in order to bring the total allowance to a level deemed appropriate by management.

Noninterest Income. Total noninterest income increased to $78,000 for the three months ended September 30, 2008, from $47,000 for the three months ended September 30, 2007, primarily due to an increase in loan prepayment fees collected.

Noninterest Expenses. Total noninterest expenses increased to $1.3 million for the three months ended September 30, 2008 from $959,000 for the three months ended September 30, 2007, primarily due to losses relating to foreclosed assets.

Income Taxes. Income taxes for the three months ended September 30, 2008, were $122,000 (an effective rate of 37.8%) compared to income taxes of $265,000 (an effective rate of 37.7%) for the three months ended September 30, 2007.

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

Comparison of the Nine-Month Periods Ended September 30, 2008 and 2007

General. Net earnings for the nine months ended September 30, 2008, were $1,019,000 or $.33 per basic and $.32 per diluted share compared to net earnings of $1,240,000 or $.40 per basic and $.39 per diluted share for the period ended September 30, 2007. This decrease in the Company’s net earnings was primarily due to an increase in noninterest expenses.

Interest Income. Interest income decreased to $11.9 million for the nine months ended September 30, 2008 compared to $12.0 million for the nine months ended September 30, 2007. Interest income on loans decreased to $8.7 million due primarily to a decrease in the average loan portfolio balance and a decrease in the average yield earned in 2008. Interest on securities increased by $1.1 million due primarily to an increase in the average balance of the securities portfolio in 2008.

Interest Expense. Interest expense on deposit accounts decreased to $3.5 million for the nine months ended September 30, 2008, from $4.4 million for the nine months ended September 30, 2007. Interest expense on deposits decreased primarily because of a decrease in the average balance of deposits and rates paid in 2008. Interest expense on borrowings increased to $3.5 million for the nine months ended September 30, 2008 from $2.8 million for the nine months ended September 30, 2007 due primarily to an increase in the average balance of borrowings.

Provision for Loan Losses. The provision for the nine months ended September 30, 2008, was $161,000 compared to $536,000 for the same period in 2007. In 2007, the provision was primarily to reflect the impairment in value of a collateral dependent single-family residential construction loan, which was paid off in June 2007, through the sale of the underlying property. The provision for loan losses is charged to earnings as losses are estimated to have occurred in order to bring the total allowance for loan losses to a level deemed appropriate by management. 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 collectibility of our loan portfolio. The allowance for loan losses totaled $732,000 or .45% of loans outstanding at September 30, 2008, compared to $752,000, or .42% of loans outstanding at September 30, 2007. Management believes the balance in the allowance for loan losses at September 30, 2008 is adequate.

Noninterest Income. Total noninterest income decreased to $158,000 for the nine months ended September 30, 2008, from $440,000 for the nine months ended September 30, 2007 primarily as a result of a litigation settlement of $155,000 in 2007 and a decrease in loan prepayment fees.

Noninterest Expenses. Total noninterest expenses increased to $3.3 million for the nine months ended September 30, 2008 from $2.8 million for the nine months ended September 30, 2007, primarily due to losses relating to foreclosed assets.

Income Taxes. Income taxes for the nine months ended September 30, 2008, were $615,000 (an effective rate of 37.6%) compared to income taxes of $700,000 (an effective rate of 36.1%) for the nine months ended September 30, 2007.

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

 

Item 4T. Controls and Procedures

 

a. Evaluation of Disclosure Controls and Procedures. We maintain controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon management’s evaluation of those controls and procedures performed within the 90 days preceding the filing of this Report, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2008, the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934) were effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 was recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms.

 

b. Changes in Internal Controls. We have made no significant changes in our internal controls over financial reporting during the quarter ended September 30, 2008, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

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OPTIMUMBANK HOLDINGS, INC. AND SUBSIDIARY

PART II. OTHER INFORMATION

 

Item 6. Exhibits

The following exhibits are filed with or incorporated by reference into this report. The exhibits denominated by (i) an asterisk (*) were previously filed as a part of a Registration Statement on Form 10-SB under the Exchange Act, filed with the Federal Deposit Insurance Corporation on March 28, 2003; (ii) a double asterisk (**) were previously filed as part of a current report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on May 11, 2004; and (iv) a triple asterisk (***) were previously filed as part of a Quarterly Report on Form 10-QSB filed with the SEC on August 12, 2004; (v) a quadruple asterisk (****) were previously filed as part of an Annual Report on Form 10-KSB filed with the SEC on March 31, 2006; and (vi) a quintuple asterisk (*****) were previously filed as part of an Annual Report on Form 10-KSB filed with the SEC on March 31, 2008.

 

Exhibit No.

  

Description

**

    3.1   

Articles of Incorporation

**

    3.3   

Bylaws

***

    4.1   

Form of stock certificate

****

  10.1   

Amended and Restated Stock Option Plan

*

  10.3   

Agreement between OptimumBank, Albert J. Finch and Richard L. Browdy dated June 14, 2002

*****

  14.1   

Code of Ethics for Chief Executive Officer and Senior Financial Officers

  31.1   

Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act

  31.2   

Certification of Chief Financial Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act

  32.1   

Certification of Chief Executive Officer under §906 of the Sarbanes-Oxley Act of 2002

  32.2   

Certification of Chief Financial Officer under §906 of the Sarbanes-Oxley Act of 2002

 

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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: November 12, 2008     By:  

/s/ Albert J. Finch

      Albert J. Finch, Chief Executive Officer
Date: November 12, 2008     By:  

/s/ Richard L. Browdy

      Richard L. Browdy, Chief Financial Officer

 

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