OptimumBank Holdings, Inc. — Q2 2023 Form 10-Q Summary
Business Context and Reporting Period
OptimumBank Holdings, Inc. is a one-bank holding company whose Florida-chartered subsidiary operates two community banking offices in Broward County and markets deposit and electronic funds transfer services nationally to merchant cash advance providers. The filing covers the quarter and six months ended June 30, 2023; financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | Comparable 2022 Period |
|---|---|---|---|
| Total interest income | $8.2 million | $15.7 million | $4.0 million / $7.5 million |
| Net interest income | $5.6 million | $10.7 million | $3.8 million / $7.0 million |
| Credit loss expense | $0.7 million | $1.5 million | $1.0 million / $1.4 million |
| Noninterest income | $0.8 million | $1.5 million | $0.8 million / $1.4 million |
| Noninterest expense | $3.9 million | $7.3 million | $2.3 million / $4.6 million |
| Net earnings | $1.3 million | $2.5 million | $0.9 million / $1.8 million |
| Basic and diluted EPS | $0.18 | $0.34 | $0.16 / $0.33 |
For the quarter, net earnings increased 39%, net interest income increased 49%, and net interest income after credit loss expense increased 77% year over year. For the first six months, net earnings increased 37% and net interest income increased 53%.
- Net interest margin was 3.73% for the quarter and 3.61% for the first six months, compared with 4.04% and 3.76%, respectively, in 2022.
- Average loan yield was 5.63% in the quarter and 5.49% year to date, compared with 5.06% and 5.00% in the comparable periods.
- Interest expense rose sharply to $2.6 million for the quarter and $5.0 million year to date, reflecting higher deposit rates and changes in deposit composition.
- Return on average assets was 0.8% and return on average equity was 7.6% for the six months, compared with 0.9% and 8.6% for 2022. Noninterest expenses to average assets increased to 2.4% from 2.1%.
Financial Position, Debt and Liquidity
| Balance Sheet Metric | June 30, 2023 | December 31, 2022 |
|---|---|---|
| Total assets | $632.5 million | $585.2 million |
| Loans, net | $518.8 million | $477.2 million |
| Total deposits | $551.6 million | $507.9 million |
| Cash and cash equivalents | $78.4 million | $71.8 million |
| Federal Home Loan Bank advances | $10.0 million | $10.0 million |
| Stockholders’ equity | $65.9 million | $62.6 million |
- Loan growth of approximately $41.6 million and deposit growth of approximately $43.7 million were the principal drivers of asset growth.
- The Bank had $155 million of established FHLB borrowing capacity, with $10 million outstanding, $25 million of correspondent-bank federal funds lines, and a $12 million Federal Reserve discount-window line, subject to collateral and approval requirements.
- Six-month operating cash flow was $5.3 million. Investing activities used $42.9 million, primarily for net loan growth, while financing activities provided $44.1 million, primarily from deposit growth. Cash increased $6.5 million to $78.4 million.
- The Bank reported a Tier 1 capital-to-total-assets ratio of 11.20%, above the 9.00% well-capitalized threshold under the Community Bank Leverage Ratio framework.
Credit Quality and Securities
- The allowance for credit losses was $6.6 million, or 1.26% of loans, versus $5.8 million, or 1.20%, at year-end 2022. Six-month net charge-offs were $0.7 million, primarily from consumer lending.
- Total loans were $526.3 million before deferred fees and the allowance. Commercial real estate represented $321.8 million, or approximately 61% of total loans, creating concentration exposure to commercial real estate conditions.
- Loans past due 30–89 days totaled $1.8 million; the filing reports no nonaccrual loans at June 30, 2023. One commercial real estate loan totaling approximately $1.2 million was classified substandard.
- Available-for-sale securities had a carrying value and fair value of $24.8 million and gross unrealized losses of $7.5 million. Management attributed the losses primarily to interest-rate changes, reported no expected credit loss, and stated it did not intend or expect to be required to sell the securities.
Material Changes Versus Prior Comparable Period
- Interest income more than doubled for the quarter and increased 110% for the first six months, driven by loan growth and higher yields.
- Interest expense increased 851% for the quarter and 893% year to date as deposit funding costs rose substantially.
- Noninterest expense increased 73% for the quarter and 59% year to date. The increase included higher salaries and benefits, data processing, regulatory assessments, other operating costs, and a $375,000 one-time foreclosure litigation settlement.
- Noninterest income was broadly stable for the quarter and increased 6% year to date, primarily from higher wire transfer and ACH fees.
- The Company adopted CECL on January 1, 2023. Adoption resulted in a $219,000 allowance for credit losses, a $23,000 liability for unfunded commitments, a $61,000 deferred tax asset, and a $181,000 reduction in retained earnings.
- The Company issued 72,221 common shares in a private placement to two accredited investors at $4.50 per share and issued equity-based compensation shares to a director and employees.
Guidance, Outlook, Risks and Unusual Items
- Management’s strategic plan emphasizes growth in earning assets, core deposits, treasury-management fee income, and additional business lines while maintaining credit oversight and underwriting standards.
- The Bank planned to begin offering SBA 7(a) loans in the third quarter of 2023 and hired two full-time SBA employees. The filing provides no quantitative earnings or revenue guidance.
- Management identified risks from economic, political and market conditions; higher interest rates; deposit pricing and funding costs; loan losses; commercial real estate and other lending concentrations; competition; regulatory changes; technology; and loss of key personnel.
- Off-balance-sheet exposure included $32.2 million of commitments to extend credit, $56.3 million of unused credit lines, and $4.3 million of standby letters of credit. A $236,000 liability for expected losses on unfunded commitments was recorded.
- Management stated that no pending claims were expected to have a material effect, but the quarter included the $375,000 foreclosure-litigation settlement.
- Management concluded that disclosure controls and procedures were effective and reported no material changes to internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Whether deposit pricing and funding costs continue to compress the net interest margin.
- Credit performance of the heavily weighted commercial real estate portfolio, including the $1.2 million substandard exposure and growth in the allowance for credit losses.
- The sustainability of loan and deposit growth and the extent to which growth requires higher-cost time deposits or wholesale funding.
- The potential earnings impact of the $7.5 million unrealized loss on available-for-sale securities if securities must be sold or credit conditions deteriorate.
- Execution, costs and credit performance of the planned SBA 7(a) lending initiative.
- Potential dilution and governance implications of the Series B preferred stock, which was convertible into up to 11.1 million common shares subject to stated conditions.