Business Context and Reporting Period
OptimumBank Holdings, Inc. is a Florida one-bank holding company operating OptimumBank and related foreclosed-real-estate subsidiaries. The Bank provides community banking services through three Broward County, Florida offices. This unaudited Form 10-Q covers the three and six months ended June 30, 2016, compared with the comparable 2015 periods.
Key Financial Metrics
| Metric | Q2 2016 | Q2 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Interest income | $1.205 million | $1.132 million | $2.375 million | $2.199 million |
| Net interest income | $924,000 | $911,000 | $1.837 million | $1.767 million |
| Noninterest income | $46,000 | $100,000 | $93,000 | $200,000 |
| Noninterest expense | $1.024 million | $1.005 million | $2.261 million | $2.143 million |
| Net earnings (loss) | $(54,000) | $6,000 | $(331,000) | $(176,000) |
| Basic and diluted EPS | $(0.05) | $0.01 | $(0.33) | $(0.19) |
| Net interest margin | 3.05% | 3.25% | 3.09% | 3.20% |
- Provision for loan losses was zero in both 2016 comparison periods. The allowance for loan losses was $4.240 million, or 5.11% of loans, at June 30, 2016, compared with $2.179 million, or 2.71%, at June 30, 2015.
- Total assets were $123.648 million at June 30, 2016, versus $127.478 million at December 31, 2015. Net loans were $79.410 million versus $82.573 million, and deposits were $92.141 million versus $97.571 million.
- Cash and cash equivalents increased to $13.664 million from $10.365 million at year-end 2015. Six-month operating cash flow was $105,000, compared with $580,000 in 2015; investing activities provided $7.367 million, while financing activities used $4.173 million.
- Federal Home Loan Bank advances were $20.500 million, compared with $20.000 million at December 31, 2015. The Bank reported $31.7 million of established FHLB borrowing capacity, with $20.5 million outstanding.
- Stockholders’ equity was $3.660 million, or 2.96% of assets, compared with $2.967 million, or 2.33%, at year-end 2015. The improvement reflected capital issuances, stock-based compensation and accumulated other comprehensive income, partially offset by the net loss.
- At June 30, 2016, the Bank’s total risk-based capital ratio was 12.14%, Tier 1 risk-based capital ratio was 10.84%, and Tier 1 leverage ratio was 7.54%.
Material Changes Versus Prior Comparable Period
- Second-quarter net results declined from earnings of $6,000 to a loss of $54,000. Higher net interest income was more than offset by lower noninterest income and higher professional and other expenses.
- Six-month net loss increased to $331,000 from $176,000. Net interest income rose $70,000, but noninterest income fell $107,000 and noninterest expense increased $118,000, primarily because of lower nonrecurring loan fees and higher professional fees.
- Interest income increased because of higher interest-earning assets and loan yields; interest expense increased because of higher deposit and borrowing costs. The six-month net interest margin declined to 3.09% from 3.20%.
- Gross loans decreased modestly to $83.060 million from $84.714 million at December 31, 2015, but residential real estate loans increased while commercial and land-and-construction loans declined.
- Nonaccrual loans declined to $2.154 million from $4.303 million at year-end 2015. Impaired loans declined to $3.418 million from $5.592 million.
- A January 2016 sale of a judgment on a defaulted credit generated a $1.8 million recovery of previously charged-off amounts, increasing the allowance to approximately $4.2 million. Management requested permission from the FDIC to partially reverse the allowance; no response had been received at the filing date.
- The Company completed a 1-for-10 reverse common-stock split effective January 11, 2016. It also issued common and preferred stock for $450,000 in aggregate proceeds, issued shares as director compensation, and issued shares for legal services.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Going-concern uncertainty: The Company is in default on its $5.155 million junior subordinated debenture after deferring $1.048 million of interest. The holder may accelerate the principal and accrued interest. The Trustee had not accelerated the debt as of June 30, 2016.
- A director has pursued purchasing the debenture and entering into a forbearance agreement, but a related court proceeding prevented the Trustee from completing the sale under the conditions then applicable. Management continues to seek capital and other mechanisms to address the accrued interest.
- If accelerated, the debenture holder could pursue a judgment and potentially seek a sale of the Bank to satisfy amounts due. The financial statements contain no adjustments for this uncertainty.
- Regulatory actions: The Bank remains subject to an FDIC and Florida Office of Financial Regulation Consent Order and a Federal Reserve Written Agreement. The Consent Order requires, among other matters, an 8% Tier 1 leverage ratio and 12% total risk-based capital ratio.
- The Bank met the 12% total risk-based capital requirement but did not meet the 8% Tier 1 leverage requirement, reporting 7.54%. Although described as well-capitalized based on certain ratios, the Consent Order limits its regulatory classification to no higher than adequately capitalized.
- During the second quarter, regulators notified the Bank that it had not complied with certain Consent Order terms and cited weaknesses in capital, loan quality, earnings, liquidity, market-risk sensitivity, risk management, loan concentrations, due diligence, insider conflicts and regulatory compliance. Regulators indicated that they intend to pursue a new consent order.
- The Written Agreement restricts dividends, payments from the Bank, debenture payments, additional debt, stock repurchases and certain appointments without regulatory approval. No dividends were declared or paid.
- Liquidity is dependent primarily on deposits, FHLB advances, investment-security and loan repayments, foreclosed-real-estate sales and other borrowing sources. Deposit pricing is restricted by the Consent Order, which may impair deposit retention or growth.
- Management states that liquidity sources are adequate for operating needs, but the filing identifies continuing risks from operating deficits, regulatory restrictions, capital-raising difficulties, credit losses, loan concentrations, interest-rate conditions, competition and broader economic conditions.
- At June 30, 2016, the Company had $2.2 million of commitments to extend credit. The filing states that the quarterly results are not necessarily indicative of full-year results.
Investor Verification Priorities
- Verify whether the debenture is accelerated, whether the proposed director purchase or forbearance agreement is completed, and how the $1.048 million accrued interest will be funded.
- Monitor the proposed new consent order, compliance with the existing Consent Order and Written Agreement, and the Bank’s Tier 1 leverage ratio relative to the required 8%.
- Assess the sustainability of liquidity after the $5.430 million decline in deposits and the Bank’s remaining borrowing capacity.
- Review allowance adequacy, impaired and nonaccrual loans, commercial real-estate concentrations, and the FDIC’s response to the requested allowance reversal.
- Determine whether recurring revenue and expense trends can support profitability without nonrecurring recoveries, securities gains or equity issuances.
- Confirm the effects of the reverse stock split and subsequent equity, director-compensation and service-related share issuances on ownership and per-share values.