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 related real estate subsidiaries. The Bank provides community banking services through three Broward County, Florida offices. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, with comparisons to June 30, 2017 and December 31, 2017. The filing was submitted August 14, 2018.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2018 | Comparable Period |
|---|---|---|---|
| Net interest income | $758,000 | $1.510 million | $801,000 and $1.713 million |
| Credit for loan losses | $2.100 million | $2.100 million | No credit or provision in 2017 |
| Noninterest income | $35,000 | $49,000 | $8,000 and $16,000 |
| Noninterest expense | $989,000 | $2.040 million | $977,000 and $2.181 million |
| Net earnings (loss) | $1.904 million | $1.619 million | $(168,000) and $(452,000) |
| Basic and diluted EPS | $1.35 | $1.25 | $(0.15) and $(0.41) |
| Net interest margin | 3.45% | 3.40% | 2.81% and 2.99% |
At June 30, 2018, total assets were $90.764 million, down from $95.866 million at December 31, 2017. Loans, net, were $71.060 million, compared with $68.220 million at year-end. Total loans before the allowance were $72.740 million. The allowance for loan losses was $1.899 million, or 2.60% of loans, versus $3.991 million, or 5.55%, at December 31, 2017.
Total deposits declined to $51.559 million from $65.251 million at year-end, while Federal Home Loan Bank advances increased to $26.550 million from $20.500 million. The junior subordinated debenture remained $5.155 million. Stockholders’ equity increased to $5.077 million from $2.545 million, supported by earnings and common-stock issuances.
Cash and cash equivalents were $4.330 million at June 30, 2018, down from $11.665 million at December 31, 2017. Operating activities provided $314,000 of cash, investing activities used $411,000, and financing activities used $7.238 million. The resulting decrease in cash and cash equivalents was $7.335 million.
Material Changes Versus Prior Period
- The Company shifted from losses to profitability, primarily because of a $2.1 million reversal of the allowance for loan losses and improved net interest margin.
- Net interest income declined despite the higher margin because average interest-earning assets decreased.
- Interest expense declined to $545,000 for the first six months from $593,000, while noninterest expense declined to $2.040 million from $2.181 million, primarily because professional fees related to the BSA lookback were substantially accrued in 2017.
- In April 2018, the Bank transferred $7.945 million of securities from available-for-sale to held-to-maturity at fair value, recording a $432,000 unrealized loss in accumulated other comprehensive loss. Held-to-maturity securities totaled $7.765 million at June 30, 2018.
- Common shares outstanding increased to 1,508,892 at June 30, 2018 from 1,120,947 at December 31, 2017. Issuances included shares sold for cash, director compensation, and the exchange of all seven Series A preferred shares for 79,186 common shares.
- Loan credit quality improved in several categories. At June 30, 2018, no loans were past due more than 30 days and no loans were on nonaccrual; impaired loans totaled $3.453 million, compared with $2.147 million at year-end.
Guidance, Outlook, Risks, and Unusual Items
Management stated that it expected to be released from restrictions on deposit pricing in the third quarter of 2018 and believed available liquidity sources were adequate for operating needs. No formal earnings or financial guidance was provided.
The Bank remains subject to a 2016 FDIC and Florida Office of Financial Regulation Consent Order requiring improvements in management, board oversight, loan-loss allowance practices, liquidity, and Bank Secrecy Act and anti-money-laundering compliance. The order prohibits Bank dividends and limits the Bank’s regulatory classification to “adequately capitalized,” despite capital ratios otherwise meeting well-capitalized thresholds. At June 30, 2018, the Bank reported a Tier 1 leverage ratio of 13.05% and total risk-based capital ratio of 17.29%, compared with Consent Order requirements of 8.00% and 12.00%, respectively.
The Company is also subject to a Federal Reserve Written Agreement that restricts dividends, payments from the Bank, payments on the debenture, additional debt, stock redemptions, and certain management appointments without prior regulatory approval. Management reported substantial compliance.
The Company is in default on its $5.155 million junior subordinated debenture after deferring interest payments since 2010. Deferred interest totaled $1.521 million at June 30, 2018, and the maximum twenty consecutive quarterly deferral period had been used. The trustee and beneficial owners may accelerate the principal plus accrued interest; no acceleration had occurred as of the filing date. A company affiliated with a director purchased the trust preferred securities in May 2018, and the Company discussed a possible forbearance agreement and potential stock issuance, but no definitive agreement had been reached.
Liquidity is concentrated in deposits and FHLB funding. At June 30, 2018, the Company had $26.6 million of FHLB advances against $26.6 million of established borrowing capacity. It also had a $511,200 Federal Reserve discount-window line and $8 million of correspondent-bank federal-funds lines, with no federal funds outstanding.
The Bank accrued $235,000 for a required BSA lookback review, pending FDIC approval of the independent firm’s proposal. Off-balance-sheet commitments included $1.018 million of commitments to extend credit and $1.204 million of unused lines of credit; no standby letters of credit were outstanding.
Forward-looking risks identified by management include adverse economic, political, and market conditions; lending losses; competition; loss of key personnel; regulatory changes; potential securities-law liabilities; and technology changes in banking. The filing states that quarterly results are not necessarily indicative of full-year results.
Important Facts for Investors to Verify
- Debenture default and going-concern risk: Verify whether the trustee or holders accelerate the $5.155 million principal and $1.521 million accrued interest, and whether a forbearance or equity-exchange transaction is completed.
- Quality of reported earnings: Separate the recurring banking results from the unusual $2.1 million allowance reversal.
- Liquidity: Monitor the substantial deposit decline, the use of essentially all established FHLB borrowing capacity, and the low $4.330 million cash balance.
- Regulatory restrictions: Confirm progress toward satisfying the Consent Order and Written Agreement, including liquidity, BSA compliance, and restrictions on dividends and debt payments.
- Capital and dilution: Assess the effect of additional common-stock issuances and potential future equity issued in connection with the debenture.
- Credit exposure: Review the $3.453 million of impaired loans, especially commercial and residential real estate exposures, and the adequacy of the reduced allowance.
- Deposit pricing outlook: Verify whether the expected third-quarter 2018 removal of deposit-rate restrictions occurred and whether deposit retention improved.