OptimumBank Holdings, Inc. — Form 10-Q Summary
Business Context and Reporting Period
OptimumBank Holdings, Inc. is a one-bank holding company for OptimumBank, a Florida-chartered community bank operating three offices in Broward County. The filing covers the unaudited three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. The company had 1,928,776 common shares outstanding as of November 14, 2019.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Interest income | $1.261 million, versus $1.105 million | $3.696 million, versus $3.160 million |
| Net interest income | $723,000, versus $782,000 | $2.224 million, versus $2.294 million |
| Provision for loan losses | $45,000, versus none | $45,000, versus a $2.100 million credit |
| Noninterest income | $29,000, versus $21,000 | $153,000, versus $69,000 |
| Noninterest expense | $987,000, versus $1.005 million | $3.240 million, versus $3.046 million |
| Net earnings (loss) | $(280,000), versus $(202,000) | $(856,000), versus $1.417 million |
| Basic and diluted EPS | $(0.15), versus $(0.13) | $(0.45), versus $1.03 |
| Net interest margin | 2.65%, versus 3.47% | 2.84%, versus 3.42% |
At September 30, 2019, total assets were $119.305 million, compared with $100.145 million at December 31, 2018. Loans, net, were $92.081 million versus $77.200 million, and total deposits were $93.265 million versus $62.378 million. Cash and cash equivalents were $8.400 million.
The allowance for loan losses was $2.104 million, or 2.23% of total loans, compared with $2.243 million, or 2.83%, at year-end 2018. Total loans were $94.151 million before the allowance. Nonaccrual loans were $812,000, and loans identified as troubled debt restructurings totaled $812,000.
Total stockholders’ equity declined to $4.792 million from $5.306 million, and equity represented approximately 4.0% of total assets at September 30, 2019. The Bank remained above applicable regulatory minimum capital requirements and was classified as well capitalized under prompt corrective action standards. Its total risk-based capital ratio was 12.70%, Tier 1 risk-based capital ratio was 11.44%, common equity Tier 1 ratio was 11.44%, and Tier 1 leverage ratio was 9.76%.
Cash Flow, Debt, and Liquidity
- Operating activities used $1.093 million during the first nine months of 2019, compared with $395,000 provided in 2018.
- Investing activities used $17.217 million, including a $14.990 million net increase in loans and $4.153 million of purchases of available-for-sale securities.
- Financing activities provided $18.727 million, driven primarily by a $30.887 million increase in deposits, partly offset by an $11.600 million reduction in Federal Home Loan Bank advances.
- Federal Home Loan Bank advances were $13.000 million at September 30, 2019, versus $24.600 million at year-end 2018. The company reported $27.6 million of established FHLB borrowing capacity, with $14.6 million available, subject to collateral and other requirements.
- The Federal Reserve discount-window credit line was $373,000, and correspondent-bank federal-funds lines totaled $8.4 million. No federal funds were outstanding at September 30, 2019.
Material Changes Versus Prior Comparable Period
- Interest income increased because of growth in interest-earning assets and loans, but higher deposit costs caused interest expense to rise to $1.472 million for the nine-month period from $866,000.
- The nine-month comparison moved from $1.417 million of earnings in 2018 to an $856,000 loss in 2019. Management stated that the 2018 result was materially benefited by a $2.1 million reversal of the allowance for loan losses.
- Loans increased approximately 18.8% from year-end 2018, led by commercial real estate loans, while deposits increased approximately 49.5%.
- Net interest margin declined to 2.84% for the nine-month period from 3.42%, reflecting increased funding costs and a lower interest-rate spread.
- Available-for-sale securities increased to $5.861 million from $2.359 million. The company purchased $4.153 million of these securities during the first nine months.
- The company adopted the lease accounting standard on January 1, 2019 and recognized operating lease right-of-use assets of $1.092 million and lease liabilities of $1.095 million at September 30, 2019.
Outlook, Commentary, Risks, and Unusual Items
The filing does not provide quantitative earnings or revenue guidance. Management stated that liquidity sources were adequate for operating needs and that deposit pricing would be adjusted as necessary to attract or retain deposits. The company is evaluating the future effect of the expected-credit-loss standard, which was not yet effective for the company.
The most significant uncertainty is the $5.155 million junior subordinated debenture. The company is in default after deferring required interest payments, with $1.947 million of accrued and unpaid interest at September 30, 2019. The trustee and beneficial owners could accelerate the principal and accrued interest. No acceleration had occurred as of filing, and the holder provided written representations that it would not demand payment of the remaining securities within twelve months after November 14, 2019; however, no formal definitive bilateral agreement had been executed. No financial-statement adjustment was recorded for this uncertainty.
The Federal Reserve terminated the company’s 2010 Written Agreement on September 11, 2019, based on improvements noted in a June 2019 review. The company’s declaration to become a financial holding company became effective October 31, 2019, potentially permitting activities such as residential mortgage lending, finance or leasing operations, and insurance premium financing.
The company sold a branch location in November 2019 for $1.4 million, financed $1.05 million of the sale price, and recorded a $215,000 loss. A replacement branch lease commenced in September 2019. Forward-looking statements identify risks including economic and market conditions, lending losses, competition, regulatory changes, technology changes, key-person risk, and potential securities-law liabilities.
Management reported no legal proceedings and concluded that disclosure controls and procedures were effective, with no material changes in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the status and enforceability of the junior subordinated debenture default, accrued interest, holder representations, and any potential acceleration.
- Assess whether deposit growth and loan growth can continue without further compression of the net interest margin or deterioration in credit quality.
- Review the composition and credit quality of the expanded commercial real estate portfolio, including $2.518 million of OLEM loans and $3.979 million of substandard loans.
- Evaluate the effect of continued losses on the company’s relatively low equity-to-assets ratio and holding-company liquidity.
- Confirm the financial and operating effects of the branch relocation, November 2019 branch sale, and $215,000 subsequent loss.
- Monitor the implications of the new financial holding company status and any resulting changes in business activities or regulatory requirements.