OptimumBank Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended March 31, 2017. OptimumBank Holdings is a one-bank holding company for OptimumBank, a Florida-chartered community bank operating three offices in Broward County, Florida. The Bank provides banking services to individual and corporate customers, with lending concentrated in residential, multifamily and commercial real estate, land and construction, commercial, and consumer loans.
The financial statements are unaudited. The Company reported 1,103,447 common shares outstanding as of May 12, 2017.
Financial condition and key metrics
| Metric | March 31, 2017 | Comparable period or prior date |
|---|---|---|
| Total assets | $117.9 million | $119.7 million at December 31, 2016 |
| Total loans, gross | $79.0 million | $80.5 million at December 31, 2016 |
| Loans, net | $75.5 million | $77.0 million at December 31, 2016 |
| Allowance for loan losses | $3.9 million, or 4.95% of loans | $3.9 million, or 4.87%, at December 31, 2016 |
| Securities available for sale | $19.8 million | $20.2 million at December 31, 2016 |
| Cash and cash equivalents | $17.8 million | $17.6 million at December 31, 2016 |
| Total deposits | $87.0 million | $86.0 million at December 31, 2016 |
| FHLB advances | $20.5 million | $23.5 million at December 31, 2016 |
| Stockholders’ equity | $2.8 million | $3.1 million at December 31, 2016 |
| Net loss | $283,000, or $0.26 per share | $276,000, or $0.29 per share, in Q1 2016 |
Interest income was $1.193 million, interest expense was $280,000, and net interest income was $913,000 in both the 2017 and 2016 first quarters. The net interest margin increased to 3.16% from 3.12%, while the interest-rate spread increased slightly to 3.05% from 3.04%.
Noninterest income declined to $9,000 from $47,000, primarily because the prior-year period included a $28,000 gain on securities sales and higher service charges. Noninterest expense decreased modestly to $1.205 million from $1.236 million. There was no provision for loan losses in either period.
Cash provided by operating activities was $80,000, compared with $99,000 in Q1 2016. Investing activities provided $2.0 million, principally from loan reductions and securities repayments. Financing activities used $1.9 million, including a $3.0 million reduction in FHLB advances, partly offset by a $984,000 increase in deposits. Cash and cash equivalents increased $141,000 during the quarter.
Material changes versus the prior comparable period
- Net loss increased slightly to $283,000 from $276,000, although per-share loss improved because the weighted-average share count increased.
- Interest income increased $24,000, while interest expense increased $24,000 overall, reflecting higher borrowing expense despite a $2,000 decline in deposit interest expense.
- Noninterest income fell $38,000 because Q1 2017 had no securities-sale gain and lower fee income.
- Gross loans declined $1.4 million from year-end 2016. Commercial real estate and multifamily balances increased, while land and construction, commercial, residential real estate, and consumer balances declined.
- Loan credit classifications changed materially: OLEM loans increased to $8.625 million from $2.852 million, while substandard loans declined to $1.393 million from $4.238 million.
- Past-due loans increased to $2.178 million from $6,000 at December 31, 2016; the filing reports no nonaccrual loans at March 31, 2017.
- Total deposits increased $984,000, while FHLB advances declined $3.0 million.
- Other comprehensive income was $16,000, compared with $158,000 in Q1 2016, resulting in comprehensive loss of $267,000 versus $118,000.
Guidance, outlook, management commentary, risks and unusual items
The filing does not provide quantitative earnings or revenue guidance. Management states that quarterly results are not necessarily indicative of full-year results and intends to continue addressing the requirements of the Bank’s Consent Order and the Company’s Written Agreement.
The Bank remains subject to a November 2016 Consent Order issued by the FDIC and Florida Office of Financial Regulation. The order requires improvements in management, board oversight, loan-loss allowance practices, liquidity, and Bank Secrecy Act and anti-money-laundering compliance. It prohibits Bank dividends and requires minimum Tier 1 leverage and total risk-based capital ratios of 8% and 12%, respectively. At March 31, 2017, the ratios were 8.18% and 13.58%. Although the Bank was described as well-capitalized based on certain ratios, the Consent Order prevents it from being categorized above “adequately capitalized.”
The Company is in default on its $5.155 million junior subordinated debenture after deferring $1.200 million of interest. The debenture holder may accelerate the principal and accrued interest. A director has offered to purchase the debenture and enter into a forbearance agreement, but the transaction had not been consummated as of the filing. Related litigation concerning trustee directions was pending in the U.S. District Court for the Southern District of New York. Management identifies this uncertainty as raising substantial going-concern concerns; no financial-statement adjustments were recorded.
The Company’s Written Agreement with the Federal Reserve restricts dividends, payments on the debenture, additional debt, stock redemptions, and certain management appointments without prior approval. Regulatory approval to pay the accrued debenture interest had been denied.
The FDIC determined that approximately $30.8 million of certificates of deposit maturing over the next two years may constitute brokered deposits because of the rates paid. The Bank requested a waiver. If the waiver is denied, the Bank may be unable to accept, renew, or roll over those deposits, which management states could adversely affect liquidity.
The Bank had $20.5 million of FHLB borrowings against $29.9 million of established capacity, a $694,600 Federal Reserve discount-window line, and additional lines of credit totaling $5.75 million. Management stated that liquidity sources were adequate for operating needs, but deposit-rate restrictions and brokered-deposit limitations remain important risks.
The Bank accrued $160,000 for a required BSA lookback review, with estimated total costs of $250,000 to $300,000 subject to FDIC approval. The Company also recorded a $200,000 liability for shares allocated to the Bank’s chairman that had not yet been delivered, and a $13,583 liability for director shares subject to continued board service.
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.
Most important facts for investors to verify
- Whether the proposed purchase and forbearance arrangement for the $5.155 million debenture was completed and whether the trustee or holders accelerated the debt.
- The status and outcome of the pending trustee litigation and any potential effect on the Bank or holding company.
- Whether the FDIC granted the requested brokered-deposit waiver and how the $30.8 million of affected certificates of deposit were managed.
- Compliance with the Consent Order, including the 8% Tier 1 leverage and 12% total risk-based capital requirements and the required BSA review.
- The sustainability of liquidity given deposit-rate restrictions, possible brokered-deposit run-off, FHLB borrowing levels, and the prohibition on Bank dividends.
- Changes in OLEM and substandard loans, past-due loans, impaired loans, and the adequacy of the $3.9 million allowance.
- Whether additional capital can be raised despite the debenture default and regulatory restrictions.