Business Context and Reporting Period
OptimumBank Holdings, Inc. is a Florida bank holding company whose primary business is operating OptimumBank, a Florida state-chartered, FDIC-insured community bank. The Bank operates three offices in Broward County and serves the Broward, Miami-Dade and Palm Beach County market. This Form 10-K covers the fiscal year ended December 31, 2011.
At year-end, the Company reported approximately $154.5 million of assets, $89.2 million of net loans, $107.9 million of deposits and $6.8 million of stockholders’ equity. The filing contains an apparent MD&A inconsistency, which states total assets of $155.5 million for the same date.
Key Financial Metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total assets | $154.5 million | $190.3 million | Down $35.8 million |
| Net loans | $89.2 million | $113.5 million | Down $24.3 million |
| Deposits | $107.9 million | $148.2 million | Down $40.3 million |
| Stockholders’ equity | $6.8 million | $2.8 million | Up $4.0 million |
| Net interest income | $3.0 million | $3.9 million | Down $0.9 million |
| Net loss | $3.7 million | $8.5 million | Loss reduced by $4.7 million |
| Basic and diluted loss per share | $(0.82) | $(10.32) | Improved |
| Net interest margin | 1.77% | 1.88% | Down 11 basis points |
| Return on average assets | (2.11)% | (3.84)% | Improved |
| Return on average equity | (203.97)% | (127.59)% | Lower due to low average equity |
Interest income declined to $6.4 million from $8.8 million, reflecting lower average loan and securities balances and lower yields. Interest expense declined to $3.4 million from $4.9 million, primarily because of lower deposit and borrowing balances and rates.
The 2011 provision for loan losses was a $149,000 credit, compared with a $3.6 million provision in 2010. The allowance for loan losses was $2.3 million, or 2.57% of total loans, versus $3.7 million, or 3.16%, at year-end 2010.
Liquidity sources during 2011 included $15.3 million of securities principal repayments, $11.0 million of securities sales, $15.3 million of net loan repayments and $8.6 million of stock offering proceeds. Major uses included $5.0 million for securities purchases and $40.3 million for deposit repayments. The Bank had $31.7 million of Federal Home Loan Bank advances outstanding and a stated $31.7 million borrowing line.
Material Changes Versus the Prior Comparable Period
- The Company downsized its balance sheet to preserve regulatory capital, reducing loans, securities, deposits and borrowings.
- Loans declined from $117.1 million to $91.5 million before allowance and other adjustments; net loans declined 21.4%.
- Deposits declined 27.2%, with time deposits falling from $111.3 million to $71.8 million. Brokered deposits declined from $1.7 million to $0.4 million.
- In June 2011, approximately $50.5 million of securities were transferred from held-to-maturity to available-for-sale. The transfer generated an approximately $0.7 million unrealized loss recorded in accumulated other comprehensive loss and prevents new held-to-maturity classifications for two years.
- During the fourth quarter, the Company sold 21.6 million common shares in a private placement and received approximately $8.6 million of net proceeds, all downstreamed to the Bank.
- Net loss improved primarily because the loan-loss provision decreased by approximately $3.8 million and 2010 included a $3.7 million loss on early extinguishment of debt.
- Asset quality remained weak despite lower reported nonperforming balances. Impaired loans were $31.9 million, or 35.76% of net loans, and impaired loans plus foreclosed real estate were approximately $39.6 million, or 25.6% of total assets.
Guidance, Outlook, Risks and Unusual Items
Management’s stated priorities are to stabilize and work out problem loans, diversify loan originations, reduce deposit costs, increase capital ratios and return to profitability. Lending restrictions that limited activity primarily to loan restructurings and loans to purchasers of foreclosed real estate from October 2009 through September 2011 were lifted after the late-2011 capital raise.
The Bank remained subject to an FDIC and Florida Office of Financial Regulation Consent Order issued in 2010. At December 31, 2011, its Tier 1 leverage ratio was 7.76%, below the Consent Order’s 8.0% requirement; management estimated that approximately $0.4 million of additional capital was needed for compliance. Total risk-based capital was 12.48%, above the Consent Order’s 12.0% requirement. The Bank was classified as adequately capitalized, but not well capitalized.
The Company agreed to sell 6.75 million shares to Chairman Moishe Gubin for $2.7 million, subject to Federal Reserve and OFR approval and expected to close by June 30, 2012. Management expects this transaction to support compliance with the Consent Order at closing, but also expects additional capital will be needed to support growth and the business plan.
The Consent Order and Federal Reserve Written Agreement restrict dividends, debt payments, additional debt, stock redemptions, certain management and director changes, brokered deposits and other activities. No cash dividends could be paid at year-end, and the Company did not expect to pay dividends in the foreseeable future.
Additional risks include heavy concentration in South Florida real estate, continued deterioration in collateral values, impaired loans and foreclosed real estate, interest-rate sensitivity, deposit competition, regulatory restrictions, potential future capital needs and implementation of Dodd-Frank requirements. The Company had a negative cumulative interest-rate gap and no outstanding commitments to originate real estate loans at year-end.
NASDAQ notified the Company in January 2012 that its six-member board lacked a majority of independent directors. The Company had until the earlier of its next annual meeting or the applicable 2012 deadline to cure the deficiency; failure to do so could result in delisting from the NASDAQ Capital Market.
Investor Verification Priorities
- Verify the reported year-end total assets, given the difference between the $154.5 million balance-sheet figure and the $155.5 million amount stated in MD&A.
- Confirm completion and regulatory approval of the proposed $2.7 million Gubin share purchase and whether it restored compliance with the 8.0% Tier 1 leverage requirement.
- Monitor compliance with all remaining Consent Order and Federal Reserve Written Agreement requirements, including management, problem-asset reduction and commercial real estate concentration plans.
- Assess the collectability and collateral values of the $31.9 million impaired loan balance and $39.6 million of impaired loans plus foreclosed real estate.
- Evaluate the adequacy of the $2.3 million allowance for loan losses relative to the concentrated real estate portfolio and potential further South Florida market deterioration.
- Review liquidity and refinancing capacity for $31.7 million of Federal Home Loan Bank advances and the significant volume of time deposits.
- Confirm that the board independence deficiency was cured before the NASDAQ deadline and that the common stock remained listed.
- Determine the Company’s future capital requirements, ability to resume sustainable profitability and timing, if any, of dividend reinstatement.