OptimumBank Holdings, Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
OptimumBank Holdings, Inc. is a one-bank holding company whose subsidiary, OptimumBank, operates three community banking offices in Broward County, Florida. The filing covers the unaudited three months ended March 31, 2021, compared with the three months ended March 31, 2020, and balance-sheet changes from December 31, 2020.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 / Dec. 31, 2020 |
|---|---|---|
| Total assets | $252.6 million | $235.1 million at Dec. 31, 2020 |
| Total loans, gross | $171.3 million | $154.9 million at Dec. 31, 2020 |
| Loans, net | $168.3 million | $152.5 million at Dec. 31, 2020 |
| Total deposits | $209.5 million | $190.8 million at Dec. 31, 2020 |
| Cash and cash equivalents | $53.7 million | $54.6 million at Dec. 31, 2020 |
| Federal Home Loan Bank advances | $18.0 million | $23.0 million at Dec. 31, 2020 |
| Net interest income | $1.686 million | $996 thousand in Q1 2020 |
| Net interest margin | 3.12% | 3.08% in Q1 2020 |
| Noninterest income | $176 thousand | $73 thousand in Q1 2020 |
| Noninterest expense | $1.538 million | $1.188 million in Q1 2020 |
| Net earnings | $348 thousand | $(308) thousand in Q1 2020 |
| Basic and diluted earnings per share | $0.11 | $(0.11) in Q1 2020 |
| Stockholders’ equity | $21.3 million | $17.8 million at Dec. 31, 2020 |
Total interest income increased 31% to $1.965 million, while interest expense declined 45% to $279 thousand. The interest-rate spread was 2.93%, compared with 2.80% in the prior-year quarter. Return on average assets was 0.6% and return on average equity was 7.7%, both annualized.
Operating activities generated $250 thousand of cash, compared with cash used of $32 thousand in Q1 2020. Investing activities used $18.9 million, primarily reflecting a $15.7 million net increase in loans and $5.2 million of purchases of available-for-sale debt securities. Financing activities provided $17.8 million, including $18.8 million of deposit growth and $4.0 million from preferred-stock issuance, partially offset by a $5.0 million reduction in FHLB advances. Cash and cash equivalents declined $935 thousand during the quarter.
Material changes versus the prior comparable period
- The company returned to profitability, reporting $348 thousand of net earnings versus a $308 thousand net loss in Q1 2020.
- Net interest income increased $690 thousand, primarily because of loan growth and lower deposit funding costs.
- The loan-loss provision changed from a $189 thousand expense to a $24 thousand credit. The allowance was $1.9 million, or 1.10% of gross loans, versus 1.23% at December 31, 2020.
- Noninterest income increased $103 thousand, primarily from higher wire-transfer-related fees.
- Noninterest expense increased $350 thousand, mainly from salaries and employee benefits, data processing, and other expenses.
- Gross loans increased $16.4 million from year-end 2020, led by commercial and consumer loans. Deposits increased $18.8 million.
- Accumulated other comprehensive loss widened from $69 thousand at year-end to $969 thousand, primarily because of unrealized losses on available-for-sale debt securities.
- The company issued 160 shares of Series B preferred stock to a related party for $4.0 million, increasing capital. It also issued 11,042 common shares to settle approximately $41 thousand of accrued junior subordinated debenture interest.
Guidance, outlook, risks, contingencies, and unusual items
- No formal earnings or financial guidance was provided. Management stated that Q1 results are not necessarily indicative of full-year results.
- Management believes liquidity sources are adequate. At March 31, 2021, the company had $58.7 million of established FHLB borrowing capacity, $430 thousand of Federal Reserve discount-window availability, and $9.5 million of correspondent-bank federal-funds lines, subject to collateral, approval, and other conditions.
- The Bank reported a community bank leverage ratio of 9.66%, above the 8.5% well-capitalized threshold applicable under the filing’s 2021 framework. Management stated that the Bank met all applicable capital requirements.
- PPP lending was material: 407 loans totaling $34.9 million had been originated, with approximately $32.7 million outstanding at March 31, 2021; these loans are 100% guaranteed by the SBA.
- The company remained obligated on a $2.068 million junior subordinated debenture bearing interest at three-month LIBOR plus 2.45%, or 2.67% at March 31, 2021. The company had previously been in default for unpaid interest, although accrued interest was paid or settled through the period described. Management intended to acquire the remaining trust preferred securities for common stock in Q2 2021, but had not entered into an agreement or commitment.
- COVID-19 may adversely affect economic conditions, loan quality, regulatory capital, liquidity, and future results. Other disclosed risks include credit losses, interest-rate and market conditions, competition, regulation, technology, key personnel, and potential legal or securities-law liabilities.
- At March 31, 2021, the company reported $9.2 million of commitments to extend credit, $10.7 million of unused lines of credit, and $4.6 million of standby letters of credit.
- There were no impaired loans at March 31, 2021, no troubled debt restructurings during the quarter, and no material legal proceedings identified by management. Available-for-sale securities had $933 thousand of gross unrealized losses, which management attributed to market conditions rather than credit deterioration.
Important facts for investors to verify
- Whether rapid loan and deposit growth, including PPP-related balances, is sustainable after government-supported lending programs and as economic conditions normalize.
- The quality and concentration of the expanded loan portfolio, particularly commercial real estate, commercial, and consumer loans.
- Whether the $1.9 million allowance for loan losses remains adequate as COVID-19 effects and borrower performance develop.
- The effect of unrealized securities losses and interest-rate movements on accumulated other comprehensive income and capital.
- The terms, timing, and dilution implications of the proposed exchange of remaining trust preferred securities for common stock.
- The impact of the $4.0 million related-party preferred-stock issuance, including conversion terms, liquidation preferences, and potential common-stock dilution.
- Compliance with the community bank leverage ratio as the required threshold increases to 9.0% in 2022 and beyond.
- The company’s ability to manage its junior subordinated debenture obligations and other funding requirements.