Optimumbank Holdings, Inc. annual report, FY2018

OptimumBank Holdings, Inc. — FY2018 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2018; the filing is an annual report rather than a quarterly Form 10-Q. OptimumBank Holdings is a Florida one-bank holding company operating OptimumBank, a Florida-chartered community bank with three Broward County offices.

Business Context

The Bank primarily provides commercial real estate, residential real estate, commercial, consumer and construction lending, together with deposit and community banking services. Its lending market is concentrated in Broward, Miami-Dade and Palm Beach counties, Florida. At year-end, 93.4% of the loan portfolio was secured by real estate.

Key Financial Metrics

Metric	2018	2017	Change
Total assets	$100.4 million	$95.9 million	+$4.5 million
Gross loans	$79.3 million	$71.9 million	+$7.4 million
Net loans	$77.2 million	$68.2 million	+$9.0 million
Deposits	$62.4 million	$65.3 million	-$2.9 million
Cash and cash equivalents	$8.0 million	$11.7 million	-$3.7 million
Stockholders’ equity	$5.3 million	$2.5 million	+$2.8 million
Net interest income	$3.0 million	$3.5 million	-$0.5 million
Net earnings (loss)	$796,000	$(589,000)	+$1.4 million
Basic and diluted EPS	$0.53	$(0.53)	Improved

Interest income: $4.3 million, down from $4.7 million, primarily due to lower average loan, securities and other interest-earning asset balances.
Interest expense: $1.25 million, compared with $1.20 million. Deposit interest expense declined to $510,000, while borrowing expense increased to $736,000.
Net interest margin: 3.39%, compared with 3.19% in 2017; interest-rate spread increased to 3.10% from 3.05%.
Credit provision: A $1.754 million credit for loan losses materially benefited earnings. This included a $2.1 million allowance reversal approved by the FDIC in June 2018, partly offset by a fourth-quarter provision of approximately $0.3 million.
Noninterest income and expense: Noninterest income was $84,000 versus $52,000; noninterest expense was $4.088 million versus $4.161 million.
Profitability: Return on average assets was 0.9%, return on average equity was 19.8%, and average equity to average assets was 4.4%.
Asset quality: Impaired loans increased to $6.743 million, or approximately 8.5% of gross loans, from $2.147 million in 2017. Nonaccrual loans totaled $1.380 million at year-end; none were reported in 2017. The allowance for loan losses declined to $2.243 million, or 2.83% of gross loans, from $3.991 million, or 5.55%.
Capital: The Bank remained “well capitalized” under FDIC prompt corrective action standards. Total risk-based capital was 15.86%, Tier 1 risk-based capital was 14.59%, common equity Tier 1 capital was 14.59%, and Tier 1 leverage was 11.68%.

Cash Flow, Debt and Liquidity

Operating activities provided $24,000 of cash, compared with $570,000 in 2017.
Investing activities used $6.018 million, primarily because loans increased by $7.351 million; investing activities provided $17.475 million in 2017.
Financing activities provided $2.312 million, including $4.1 million of net FHLB borrowings, $525,000 from common stock sales and $560,000 of federal funds purchased, partly offset by a $2.873 million deposit decline.
FHLB advances totaled $24.6 million, against a stated $26.6 million FHLB borrowing line; remaining FHLB availability was approximately $2.0 million subject to additional collateral.
The Bank also reported correspondent-bank federal funds lines totaling $8.4 million and a $0.4 million Federal Reserve line. Federal funds purchased outstanding at year-end were $560,000.
Total debt included $24.6 million of FHLB advances, $560,000 of federal funds purchased and a $5.155 million junior subordinated debenture.
Cash and cash equivalents declined to $8.0 million from $11.7 million. The filing does not provide a conventional corporate liquidity ratio.

Material Changes Versus 2017

The Company returned to profitability, reporting $796,000 of net income after a $589,000 loss in 2017; the improvement was primarily driven by the credit for loan losses.
Loans grew approximately 10%, while deposits declined approximately 4%. The deposit mix shifted toward interest-bearing demand and away from time deposits; time deposits declined to $26.1 million from $30.6 million.
Securities declined to $9.5 million from $11.4 million. In April 2018, $7.945 million of securities were transferred from available-for-sale to held-to-maturity, generating an unrealized loss reclassification of $432,000.
Equity increased to $5.3 million from $2.5 million through earnings, $525,000 of common stock sales, $615,000 of stock issued as director compensation and $905,000 of common stock issued in exchange for Trust Preferred Securities.
The Bank entered into a Memorandum of Understanding with the FDIC and Florida Office of Financial Regulation on August 28, 2018, replacing the prior Consent Order. The MOU continues to require improvements in management, strategic planning, interest-rate management, asset-growth controls and Bank Secrecy Act administration.

Guidance, Outlook, Risks and Unusual Items

Management’s strategy is to increase and diversify loan originations, reduce deposit costs by expanding lower-cost demand deposits and increase capital ratios. No quantitative earnings or revenue guidance is provided.
The Company remains subject to a 2010 Written Agreement with the Federal Reserve. It restricts dividends, payments on subordinated debt or trust preferred securities, additional debt, stock redemptions and certain management appointments without regulatory approval.
The Company is in default on the $5.155 million junior subordinated debenture after deferring interest payments totaling $1.686 million. The trustee and holders could accelerate principal and accrued interest. No acceleration had occurred through the filing, and a director-affiliated holder represented that it would not accelerate the remaining securities during the stated twelve-month period, although no formal bilateral agreement was executed.
Neither the Bank nor the Company could pay cash dividends at December 31, 2018, and the Company did not expect to pay dividends in the foreseeable future.
The Bank accrued $235,000 for a required Bank Secrecy Act lookback review; the work remained subject to FDIC review and approval.
Key operating risks include South Florida real estate concentration, deterioration in local credit quality, interest-rate and repricing risk, deposit competition, regulatory restrictions, capital requirements and broader economic conditions.
The Company had approximately $15.1 million of federal and Florida net operating loss carryforwards, subject in part to Internal Revenue Code Section 382 limitations. A substantial valuation allowance remained against deferred tax assets, and no income tax expense or benefit was recorded in 2018.
Off-balance-sheet commitments included $1.820 million of commitments to extend credit and $2.735 million of unused lines of credit; standby letters of credit were zero.

Investor Verification Checklist

Verify the sustainability of the $796,000 profit excluding the $1.754 million credit for loan losses and the underlying allowance methodology.
Review the increase in impaired and nonaccrual loans, collateral values and the adequacy of the reduced allowance.
Confirm the status and terms of the Federal Reserve Written Agreement and the FDIC/OFR MOU, including dividend and growth restrictions.
Assess the likelihood and potential timing of acceleration of the junior subordinated debenture and the sufficiency of available liquidity if acceleration occurs.
Reconcile loan growth with the decline in deposits and increased reliance on FHLB advances and other borrowings.
Evaluate the concentration of lending in South Florida real estate and sensitivity to interest-rate changes.
Review the BSA lookback review, related regulatory approval and the adequacy of the $235,000 accrual.
Consider dilution from 2018 equity issuances, including the 301,778 shares issued in exchange for Trust Preferred Securities.