OptimumBank Holdings, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a quarterly filing; separate fourth-quarter results are not clearly provided.
Business context
OptimumBank Holdings, Inc. is a Florida bank holding company whose sole business is ownership of OptimumBank, a Florida-chartered, FDIC-insured community bank. The Bank operates three offices in Broward County and primarily serves Broward, Miami-Dade and Palm Beach counties. Its lending is concentrated in real estate, commercial and consumer loans.
Key financial metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Total assets | $126.7 million | $99.5 million |
| Net loans | $102.2 million | $77.2 million |
| Total deposits | $101.4 million | $62.4 million |
| Stockholders’ equity | $7.2 million | $5.3 million |
| Total interest income | $5.2 million | $4.3 million |
| Net interest income | $3.1 million | $3.0 million |
| Net income/(loss) | $(1.1) million | $796,000 |
| Basic and diluted EPS | $(0.58) | $0.53 |
| Net interest margin | 2.89% | 3.39% |
| Return on average assets | (1.0)% | 0.9% |
| Return on average equity | (21.3)% | 19.8% |
| Cash and cash equivalents | $8.9 million | $8.0 million |
Net cash used in operating activities was $558,000, compared with $24,000 of cash provided in 2018. Investing activities used $25.3 million, primarily due to a $24.0 million net increase in loans and $4.2 million of available-for-sale securities purchases. Financing activities provided $26.8 million, principally from a $39.0 million increase in deposits, partially offset by $11.6 million of FHLB advance repayments.
Interest expense increased to $2.0 million from $1.2 million, driven by deposit costs of $1.5 million versus $510,000 in 2018. Noninterest expenses increased to $4.5 million from $4.1 million, including a $215,000 loss on the sale of a branch facility.
Material changes versus 2018
- Total assets increased $27.3 million, or approximately 27%, primarily reflecting loan growth.
- Gross loans increased from $79.3 million to $104.2 million; commercial real estate loans rose from $35.0 million to $55.7 million.
- Deposits increased $39.0 million. Money-market deposits increased substantially, while the deposit mix shifted toward lower-cost transaction accounts and away from some higher-cost time deposits.
- The allowance for loan losses declined from $2.2 million, or 2.83% of loans, to $2.0 million, or 1.93%. The Bank recorded a $79,000 credit for loan losses in 2019, compared with a $1.754 million credit in 2018.
- Impaired loans declined from $6.7 million to $4.0 million, while nonperforming loans and foreclosed assets declined to 0.6% of total assets from 1.4%.
- Net interest income increased modestly, but the net interest margin declined 50 basis points because funding costs rose faster than asset yields.
- The Company issued 924,395 common shares in December 2019 in exchange for 1,881 trust preferred securities, reducing the remaining junior subordinated debenture principal from $4.461 million to $2.580 million and increasing equity by the related principal and accrued interest reduction.
- The Bank relocated a Commercial Boulevard branch to a leased facility and sold the prior facility for $1.4 million, financing $1.05 million of the sale and recording a $215,000 loss.
- The Federal Reserve terminated the Company’s Written Agreement in September 2019, and the FDIC and Florida Office of Financial Regulation terminated the Bank’s MOU in June 2019.
Debt, liquidity and capital
- FHLB advances were $13.0 million at year-end, down from $24.6 million, with approximately $16.6 million of remaining FHLB borrowing availability subject to additional collateral.
- The Company had $9.5 million of correspondent-bank lines and a $350,000 Federal Reserve line secured by $360,000 of securities. No federal funds were purchased at year-end.
- The Bank’s regulatory ratios were 12.03% total risk-based capital, 10.77% Tier 1 risk-based capital, 10.77% CET1 and 8.73% Tier 1 leverage. The Bank met the regulatory definition of “well capitalized.”
- The Company’s junior subordinated debenture remains in default because required interest payments have not been made since 2015. Accrued interest was $995,000 at December 31, 2019. The holder has represented that it will not accelerate the balance during the following twelve months, but the obligation remains a material contingency.
Outlook, commentary and risks
Management’s strategy is to grow loan originations, diversify toward commercial and consumer lending, reduce deposit costs, increase capital ratios and improve profitability. The Company stated that it plans to acquire additional trust preferred securities in 2020 in exchange for common stock, but had not entered into an agreement or commitment at filing.
- Results are sensitive to interest rates, deposit pricing, competition, local economic conditions and regulatory requirements.
- Approximately 91% of the loan portfolio was secured by real estate, creating concentration exposure to South Florida property values and local economic conditions.
- Commercial real estate represented approximately 53% of gross loans. Management’s allowance estimate depends on collateral values, borrower cash flows, economic conditions and other subjective factors.
- The Company had $812,000 of troubled debt restructurings and $812,000 of nonaccrual loans at year-end.
- Interest-rate sensitivity was materially negative within one year, with a one-year repricing gap of $(58.1) million, indicating exposure to changes in funding costs and deposit repricing.
- Off-balance-sheet exposures included $2.2 million of commitments to extend credit, $2.0 million of unused credit lines and $1.6 million of standby letters of credit.
- The Company maintained a valuation allowance against most deferred tax assets because management determined realization was not more likely than not. Federal and Florida net operating loss carryforwards were approximately $16.6 million, subject to limitations.
- The Company does not plan to pay dividends in the foreseeable future and intends to retain income to strengthen its financial position and support Bank growth.
Most important facts for investors to verify
- Whether the junior subordinated debenture default is resolved, whether additional trust preferred securities are acquired, and whether any acceleration risk changes.
- Deposit stability, deposit pricing and the sustainability of the substantial 2019 deposit increase.
- Future credit performance of the heavily concentrated South Florida real estate portfolio, including impaired loans, TDRs, nonaccrual loans and collateral values.
- Whether loan growth can produce sufficient revenue to offset higher funding costs, the lower net interest margin and elevated operating expenses.
- The adequacy of the $2.0 million allowance for loan losses under changing economic conditions and the transition to expected-credit-loss accounting.
- Future capital needs, dilution from potential stock-for-debt exchanges and the Bank’s ability to remain well capitalized.
- Completion and terms of the proposed sale of another branch facility and the related-party nature of certain transactions.