OptimumBank Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
OptimumBank Holdings, Inc. is a Florida one-bank holding company operating OptimumBank and foreclosed-real-estate subsidiaries through three Broward County banking offices. This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, with comparisons to September 30, 2010 and December 31, 2010.
Key financial metrics
| Metric | Three months ended September 30, 2011 | Nine months ended September 30, 2011 |
|---|---|---|
| Total interest income | $1.516 million | $5.060 million |
| Net interest income | $0.686 million | $2.418 million |
| Provision for loan losses | $(0.243) million credit | $0.652 million provision |
| Noninterest income | $0.010 million | $0.232 million |
| Noninterest expense | $1.502 million | $5.688 million |
| Net loss | $(0.563) million | $(3.690) million |
| Basic and diluted loss per share | $(0.69) | $(4.50) |
| Net interest margin | 1.69% | 1.87% |
- Total assets were $167.1 million at September 30, 2011, down from $190.3 million at December 31, 2010.
- Cash and cash equivalents increased to $20.7 million from $14.4 million.
- Loans, net, declined to $95.8 million from $113.5 million; gross loans were $98.8 million, with an allowance of $3.1 million.
- Foreclosed real estate increased to $7.2 million from $3.2 million. Loans totaling $8.6 million were transferred to foreclosed real estate during the first nine months.
- Deposits declined to $129.2 million from $148.2 million. Federal Home Loan Bank advances remained $31.7 million, and the junior subordinated debenture remained $5.2 million.
- Stockholders’ equity fell to a deficit of $1.7 million from equity of $2.8 million, reflecting the net loss and an $0.8 million unrealized securities loss.
- Nine-month operating cash flow was $(1.7) million, compared with $2.7 million provided in the prior-year period. Investing activities provided $26.6 million, while financing activities used $18.6 million.
- The loan portfolio was concentrated in commercial real estate ($49.1 million), residential real estate ($34.1 million), and land and construction ($11.1 million). Nonaccrual loans totaled $28.5 million, or approximately 28.9% of gross loans.
Material changes versus prior comparable periods
- Third-quarter net loss improved to $0.6 million from $1.5 million, primarily because the loan-loss provision changed from a $1.0 million expense to a $0.2 million credit. The credit primarily reflected a $449,000 recovery on a commercial real estate loan payoff.
- Nine-month net loss improved to $3.7 million from $6.8 million. The improvement was primarily attributable to the lower loan-loss provision and the absence of the $3.7 million loss on early extinguishment of debt recorded in 2010.
- Net interest income declined to $2.4 million from $3.1 million for the nine months as average loans and yields declined. Net interest margin was broadly stable at 1.87% versus 1.90%.
- Nine-month noninterest income fell to $0.2 million from $1.4 million because 2010 included $1.35 million of securities-sale gains.
- During June 2011, approximately $50.5 million of securities were transferred from held-to-maturity to available-for-sale, generating approximately $0.7 million of unrealized losses recorded in accumulated other comprehensive loss. The company may not classify securities as held to maturity for two years following the transfer.
- Noninterest expense declined to $5.7 million from $8.0 million, primarily because 2010 included the debt-extinguishment loss, partially offset by higher professional fees and foreclosed-real-estate costs.
Guidance, outlook, risks, contingencies and unusual items
- The Bank was not in compliance with the Consent Order’s required 8.00% Tier 1 leverage ratio and 12.00% total risk-based capital ratio. At September 30, 2011, reported ratios were 2.54% and 4.77%, respectively; management characterized the Bank as significantly undercapitalized under FDIC guidelines.
- The FDIC/OFR Consent Order remains in effect and requires, among other matters, capital restoration, reductions in adversely classified loans and private-label mortgage-backed securities, improved earnings, enhanced policies and quarterly progress reporting. The company is also subject to a Federal Reserve Written Agreement restricting dividends, debt, stock repurchases, distributions on trust-preferred securities and certain management changes without prior approval.
- After quarter-end, the company completed a private placement on October 27, 2011, raising $8.3 million net from 21,002,250 shares. On a pro forma basis, the Bank’s Tier 1 leverage and total risk-based capital ratios would have been 7.36% and 11.29%, still below Consent Order requirements.
- The company entered into an agreement for director Moishe Gubin to purchase 6,750,000 additional shares for $2.7 million, subject to Federal Reserve and OFR approval and other conditions. If completed, management estimated approximately $11 million of total new capital and pro forma ratios of 9.00% and 13.48%. The transaction could be terminated if not completed by February 28, 2012, subject to the agreement’s conditions.
- Management stated that liquidity sources were adequate. However, the Bank had $31.7 million of FHLB borrowings against $31.7 million of established borrowing capacity, and the holding company had deferred interest payments on its trust-preferred securities since January 2010.
- Liquidity and credit risks are heightened by the weak South Florida economy, declining real-estate values, substantial nonperforming loans, foreclosed real estate, loan charge-offs and regulatory restrictions on deposits and capital distributions.
- Management reported no other-than-temporary impairment charge on securities during 2010 or 2011 and stated that the allowance for loan losses was adequate. The filing notes that results for the interim periods are not necessarily indicative of full-year results.
- The filing reports effective disclosure controls and procedures and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Gubin stock purchase received regulatory approval and closed by the February 28, 2012 deadline.
- Whether the capital raises enabled the Bank to satisfy the 8% Tier 1 leverage and 12% total risk-based capital requirements.
- The status and continuing requirements of the FDIC/OFR Consent Order and Federal Reserve Written Agreement.
- Trends in nonaccrual loans, classified loans, troubled debt restructurings, foreclosed real estate and collateral values.
- The sustainability of liquidity given declining deposits, fully utilized FHLB borrowing capacity and restricted holding-company funding sources.
- The effect of the post-quarter-end equity issuance on ownership, dilution and the discrepancy between the 819,358 shares reflected in the September 30 financial statements and 21,821,608 shares outstanding reported as of November 9, 2011.