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 commercial bank operating three offices in Broward County, Florida. Its subsidiaries primarily hold and dispose of foreclosed real estate. This unaudited filing covers the three and nine months ended September 30, 2015, compared with the respective 2014 periods, and the balance sheet is compared with December 31, 2014.
Key financial metrics
| Metric | Three months ended September 30, 2015 | Three months ended September 30, 2014 | Nine months ended September 30, 2015 | Nine months ended September 30, 2014 |
|---|---|---|---|---|
| Interest income | $1.142 million | $1.227 million | $3.341 million | $4.278 million |
| Net interest income | $920 thousand | $1.010 million | $2.686 million | $3.581 million |
| Provision for loan losses | $0 | $0 | $0 | $0 |
| Noninterest income | $172 thousand | $20 thousand | $372 thousand | $214 thousand |
| Noninterest expense | $1.366 million | $1.109 million | $3.508 million | $2.201 million |
| Net earnings (loss) | $46 thousand | $(79) thousand | $(130) thousand | $1.594 million |
| Basic and diluted earnings (loss) per share | $0.01 | $(0.01) | $(0.01) | $0.19 |
| Net interest margin | 3.40% | 3.55% | 3.26% | 4.12% |
At September 30, 2015, total assets were $119.607 million, down from $124.530 million at December 31, 2014. Cash and cash equivalents were $8.280 million, compared with $12.074 million at year-end. Net loans were $77.050 million, securities available for sale were $25.654 million, and foreclosed real estate was $3.990 million.
Total deposits increased to $92.804 million from $91.603 million. Federal Home Loan Bank advances declined to $16.000 million from $22.740 million. The junior subordinated debenture remained $5.155 million, excluding $913 thousand of deferred interest. Stockholders’ equity increased to $3.179 million from $2.979 million, representing 2.66% of total assets at period-end.
Gross loans totaled $78.891 million, with an allowance for loan losses of $1.987 million, or 2.5% of gross loans, versus $2.244 million, or 2.9%, at December 31, 2014. Nonaccrual loans were $5.820 million, and impaired loans totaled $7.204 million at September 30, 2015.
For the first nine months, operating activities provided $836 thousand of cash and investing activities provided $389 thousand. Financing activities used $5.019 million, primarily reflecting $6.740 million of FHLB advance repayments. Cash and cash equivalents decreased by $3.794 million to $8.280 million.
Material changes versus prior comparable periods
- Third-quarter net income improved to $46 thousand from a $79 thousand loss, primarily including a $320 thousand income tax benefit related to a favorable IRS dispute resolution.
- Nine-month results deteriorated to a $130 thousand loss from $1.594 million of earnings. Management attributed the change primarily to a $895 thousand decline in net interest income and a $1.307 million increase in noninterest expense.
- Interest income declined because two previously nonaccrual loans had been repaid during 2014. The nine-month average yield on interest-earning assets decreased to 4.06% from 4.93%, and the net interest margin fell to 3.26% from 4.12%.
- Noninterest income increased to $372 thousand from $214 thousand for the nine months, reflecting loan extension fees and securities gains.
- Noninterest expense increased to $3.508 million from $2.201 million. Foreclosed real estate expense was $404 thousand versus a $752 thousand benefit in 2014, and the company recorded a $280 thousand write-down of foreclosed real estate in 2015.
- Loans increased modestly from $77.887 million gross at year-end to $78.891 million, while the allowance declined by $257 thousand. No loan-loss provision was recorded in either comparable nine-month period.
Guidance, outlook, risks, contingencies, and unusual items
- The filing provides no formal earnings or revenue guidance. Management states that quarterly results are not necessarily indicative of full-year results.
- The company is in technical default on its $5.155 million junior subordinated debenture after deferring interest for the maximum 20 consecutive quarters. Deferred interest was $913 thousand at September 30, 2015, and the holder could demand principal plus accrued interest. Management believes the trustee will not call a default at this time, but cannot determine when or whether a proposed purchase of the debenture will close.
- A director’s proposed purchase of the debenture was rejected by a court on August 31, 2015 because trust-indenture conditions had not been satisfied. A second purchase offer made during the third quarter was awaiting a trustee response at the filing date.
- The Bank remained subject to an amended FDIC/OFR Consent Order and was not in compliance with its required 8% Tier 1 leverage ratio and 12% total risk-based capital ratio. Actual ratios were 7.26% and 11.35%, respectively. Management intends to seek additional investor capital, but there is no assurance that sufficient capital will be raised.
- The Bank’s total capital ratio was 11.35%, above the 10% prompt-corrective-action threshold but below the 12% Consent Order requirement. The Bank was described as adequately capitalized under applicable regulatory standards, but not compliant with the stricter Consent Order requirements.
- The Bank entered into a July 27, 2015 BSA/Anti-Money Laundering Memorandum of Understanding after regulators identified material program weaknesses. No fine was imposed.
- Liquidity sources include deposits, FHLB advances, securities sales and maturities, loan repayments, foreclosed real estate sales, and borrowing facilities. At September 30, 2015, FHLB borrowings were $16.0 million against $31.7 million of established capacity. The filing states that management believes liquidity is adequate, but deposit pricing is restricted by the Consent Order and the company depends on investors because bank dividends require regulatory approval.
- The company had $2.6 million of commitments to extend credit. The filing identifies risks from loan losses, nonperforming and impaired assets, foreclosed real estate values, capital shortfalls, regulatory restrictions, deposit outflows, interest-rate and market conditions, and the company’s technical debt default.
- The company recorded a valuation allowance against its deferred tax asset because management determined that realization was not probable as of September 30, 2015.
Most important facts for investors to verify
- Whether the company can raise sufficient capital to satisfy the Consent Order’s 8% Tier 1 leverage and 12% total risk-based capital requirements.
- Whether the junior subordinated debenture is purchased, refinanced, placed under forbearance, or accelerated, and how the $913 thousand deferred interest is resolved.
- Trends in nonaccrual, impaired, past-due, and substandard loans, particularly the $5.820 million of nonaccrual loans and $7.204 million of impaired loans reported at quarter-end.
- The adequacy of the $1.987 million allowance for loan losses given the absence of loan-loss provisions and the concentration in real estate-related lending.
- Liquidity and deposit stability, including access to FHLB and other borrowing facilities and the effect of regulatory restrictions on deposit pricing and bank dividends.
- Progress under the FDIC/OFR Consent Order, the Federal Reserve Written Agreement, and the BSA/AML Memorandum of Understanding.
- Whether foreclosed real estate write-downs, securities gains, tax benefits, and other unusual items recur in future periods.