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. The bank provides commercial banking services and its subsidiaries manage and hold foreclosed real estate. This unaudited Form 10-Q covers the three and six months ended June 30, 2013, filed August 13, 2013.
Financial Performance and Condition
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net interest income | $738 thousand, versus $607 thousand | $1.476 million, versus $1.236 million |
| Provision for loan losses | $822 thousand, versus $154 thousand | $2.194 million, versus $181 thousand |
| Noninterest income | $31 thousand, versus $186 thousand | $76 thousand, versus $189 thousand |
| Noninterest expense | $2.057 million, versus $1.306 million | $3.421 million, versus $2.493 million |
| Other-than-temporary securities impairment | $149 thousand, versus $103 thousand | $353 thousand, versus $103 thousand |
| Net loss | $2.259 million, or $0.29 per share | $4.416 million, or $0.56 per share |
| Net interest margin | 2.44%, versus 1.70% | 2.41%, versus 1.74% |
At June 30, 2013, total assets were $135.9 million, compared with $143.7 million at December 31, 2012. Loans, net of the allowance, were $84.6 million, and the allowance for loan losses was $2.6 million, or 3.0% of loans. Foreclosed real estate declined to $7.8 million from $10.9 million.
Total deposits were $97.7 million, down from $101.6 million. Federal Home Loan Bank advances were $27.7 million, fully utilizing the bank's established FHLB borrowing capacity, and the junior subordinated debenture was $5.2 million. Cash and cash equivalents declined to $17.7 million from $23.6 million.
Stockholders' equity declined to $2.4 million from $6.9 million, primarily because of the six-month net loss. Equity represented 1.76% of total assets at June 30, 2013. Six-month operating cash flow was negative $637 thousand; investing cash flow was negative $1.659 million; financing cash flow was negative $3.650 million; and cash decreased by $5.946 million.
Material Changes Versus Prior Comparable Period
- Six-month net loss increased to $4.416 million from $1.352 million, driven principally by a $2.013 million increase in the loan-loss provision and a $928 thousand increase in noninterest expense.
- Second-quarter net loss increased to $2.259 million from $770 thousand. The provision for loan losses increased by $668 thousand, and foreclosed-real-estate expense increased by $621 thousand.
- Net interest income improved despite lower average earning assets, reflecting lower funding costs and a higher net interest margin.
- Noninterest income fell substantially, to $76 thousand for the six months from $189 thousand.
- Commercial real estate remained the largest loan category at $38.8 million. Total classified loans declined to $21.8 million from $24.7 million at December 31, 2012, while impaired loans declined to $16.3 million from $20.0 million.
- The company completed a one-for-four reverse stock split effective May 31, 2013. Shares outstanding were 7.9 million at June 30, 2013, versus 31.5 million before the split at December 31, 2012.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing provides no formal earnings or revenue guidance. Management states that prolonged South Florida real-estate weakness continues to cause nonperforming loans, foreclosed real estate, and charge-offs, although it remains focused on reducing nonperforming assets and further loan losses.
The bank remains subject to a 2010 FDIC/OFR Consent Order, and the holding company remains subject to a Federal Reserve Written Agreement. At June 30, 2013, the bank did not meet the Consent Order's 8.00% Tier I leverage and 12.00% total risk-based capital requirements: reported ratios were 5.70% and 8.36%, respectively. The bank was categorized as adequately capitalized under applicable regulatory guidelines, but not in compliance with the Consent Order.
Management reported 75.74% completion of the required reduction in loans classified as substandard and doubtful in the 2009 FDIC examination. Remaining issues include the capital requirements and an acceptable plan to reduce the commercial-real-estate concentration.
The company had a proposed approximately $2.2 million common-stock investment agreement with Chairman Moishe Gubin, subject to regulatory approval. The filing states that this amount would not be sufficient by itself to satisfy the required capital ratios, and there is no assurance that sufficient additional capital will be raised or that regulatory approval will be obtained.
The company had deferred interest payments on its junior subordinated debenture since 2010; accrued and unpaid interest was $561 thousand at June 30, 2013. Dividends, additional holding-company debt, stock repurchases, and distributions on subordinated or trust-preferred securities require regulatory approval. The bank's $1.9 million Federal Reserve discount-window line was available subject to collateral and prior approval, while $1.5 million of commitments to extend credit were outstanding.
Additional risks identified include credit losses, collateral-value declines, liquidity and deposit attrition, regulatory restrictions, competition, key-person risk, technology changes, and potential securities-law liabilities. Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the company obtains the proposed and additional capital needed to meet the Consent Order's capital ratios.
- Whether the FDIC/OFR Consent Order and Federal Reserve Written Agreement remain in effect and whether any further enforcement actions are imposed.
- The adequacy of the $2.6 million loan-loss allowance relative to $21.8 million of classified loans, $16.3 million of impaired loans, and continued real-estate exposure.
- Future losses or gains from foreclosed real estate and private-label mortgage-backed securities, including the $353 thousand of six-month impairment charges.
- Liquidity trends, including the $5.9 million decline in cash, the $3.9 million decline in deposits, and full utilization of the $27.7 million FHLB borrowing capacity.
- Whether continuing losses reduce stockholders' equity below levels needed to support the bank and holding company.