OptimumBank Holdings, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013. The company is a Florida bank holding company whose principal subsidiary, OptimumBank, operates three community banking offices in Broward County and serves the South Florida tri-county market.
Business Context
The Bank provides commercial, residential and commercial real estate, consumer and small-business lending, deposit products, online banking and related community banking services. Its loan portfolio remains concentrated in South Florida real estate, creating sensitivity to local property values and economic conditions.
Key Financial Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total assets | $128.8 million | $143.7 million | Down $14.9 million |
| Net loans | $79.2 million | $85.2 million | Down $6.0 million |
| Total deposits | $98.7 million | $101.6 million | Down $2.9 million |
| Cash and cash equivalents | $13.9 million | $23.6 million | Down $9.7 million |
| Net interest income | $3.4 million | $2.6 million | Up $0.8 million |
| Provision for loan losses | $2.2 million | $1.7 million | Up $0.5 million |
| Net loss | $7.1 million | $4.7 million | Loss increased $2.4 million |
| Net loss per diluted share | $0.89 | $0.69 | Loss increased |
| Stockholders’ equity | $(0.2) million | $6.9 million | Declined $7.1 million |
| Net interest margin | 2.9% | 1.9% | Up approximately 100 basis points |
| Nonperforming loans and foreclosed assets / assets | 12.7% | 19.5% | Improved |
Asset quality: Total loans were $81.1 million before the allowance for loan losses. Impaired loans were approximately $13.6 million, or 17.1% of net loans, while impaired loans and foreclosed real estate totaled approximately $21.2 million, or 16.4% of assets. Nonaccrual loans declined to $8.8 million from $17.1 million.
Liquidity and debt: Operating activities used $3.0 million of cash, investing activities provided $1.1 million, and financing activities used $7.9 million. Year-end FHLB advances were $22.7 million, and the junior subordinated debenture was $5.2 million. The Bank reported available lines of credit of $2.5 million with SunTrust, $1.0 million with Independent Bankers Bank and $1.8 million with the Federal Reserve.
Capital: At December 31, 2013, the Bank’s Tier 1 leverage ratio was 4.21%, Tier 1 risk-based capital ratio was 5.29%, and total risk-based capital ratio was 6.55%. These levels were below the Consent Order requirements of 8.0% and 12.0%, respectively. The company estimated that approximately $5.5 million of additional capital was needed to meet the total risk-based capital requirement. Consolidated stockholders’ equity was negative $216,000.
Material Changes Versus 2012
- Net loss increased from $4.7 million to $7.1 million, principally because of a $1.5 million loss on early extinguishment of FHLB debt, higher foreclosed real estate expenses and a larger loan-loss provision.
- Net interest income improved to $3.4 million as interest expense declined faster than interest income, despite lower average earning-asset balances.
- Noninterest expenses increased to $7.7 million from $5.5 million. Foreclosed real estate expenses increased to $1.3 million from $0.6 million.
- Loans declined approximately 7.4%, deposits declined approximately 2.9%, and total assets declined approximately 10.4% as management downsized to preserve capital.
- The allowance for loan losses declined to $2.2 million, or 2.73% of loans, from $2.5 million, or 2.81%, after charge-offs.
- The company completed a one-for-four reverse stock split in 2013 and issued approximately 104,166 shares for $124,000. Shares outstanding at year-end were 8.0 million.
- The company replaced approximately $20 million of higher-cost FHLB advances with lower-rate advances, recognizing a $1.548 million early-extinguishment loss but expecting approximately $1.1 million of annual interest savings through maturity.
Guidance, Outlook, Risks and Unusual Items
Management forecast the company to be profitable in 2014 unless it incurs unforeseen loan-loss provisions. Management also planned an initial capital raise of approximately $3 million to $4 million through common and preferred shares, followed by additional capital and organic capital generation. No third-party commitments had been obtained as of the filing, and management stated that the ability to raise sufficient capital was uncertain.
The company disclosed substantial doubt-related factors affecting its going-concern assessment, including recurring losses, high noninterest expenses, negative stockholders’ equity and regulatory capital deficiencies. Management nevertheless believed the company could meet its obligations and continue operating through at least December 31, 2014.
The Bank remained subject to an FDIC and Florida OFR Consent Order, amended effective February 28, 2014, and the holding company remained subject to a Federal Reserve Written Agreement. These arrangements restrict dividends, debt, share redemptions, management changes, brokered deposits, asset growth and other activities, and require capital restoration, asset-quality improvement, liquidity planning and enhanced oversight.
Other notable items include $362,000 of other-than-temporary impairment on securities, a $320,000 accrued tax liability related to an IRS examination, deferred interest of $638,000 on the junior subordinated debenture, and $3.748 million of commitments to extend credit. The company stated that ordinary-course litigation was not expected to have a material adverse effect.
Principal risks include additional losses from South Florida real estate exposure, changes in interest rates, a materially negative interest-rate gap within one year, deposit attrition, inability to raise capital, regulatory intervention, increased compliance costs and possible further valuation reductions for impaired loans and foreclosed real estate.
Important Facts Investors Should Verify
- Whether the company successfully completed the planned capital raises and achieved the Consent Order’s 8% Tier 1 leverage and 12% total risk-based capital requirements.
- Whether the February 28, 2014 amended Consent Order or Federal Reserve Written Agreement has been modified, terminated or resulted in additional restrictions.
- The trend in impaired loans, nonaccrual loans, charge-offs, foreclosed real estate and the adequacy of the $2.2 million allowance.
- Whether management achieved its 2014 profitability forecast after excluding or including unusual debt-extinguishment savings.
- The status and ultimate liability from the IRS examination, for which approximately $869,000 of additional tax was identified and $320,000 was accrued.
- Whether NASDAQ’s notice concerning failure to maintain minimum stockholders’ equity of $2.5 million resulted in delisting or other trading restrictions.
- The maturity and refinancing risk associated with $48.9 million of time deposits due in 2014 and $12.7 million of FHLB advances due in 2014.