Business Context and Reporting Period
OptimumBank Holdings, Inc. is a Florida one-bank holding company whose principal subsidiary, OptimumBank, provides commercial banking services through three Broward County, Florida offices. Its subsidiaries also hold and dispose of foreclosed real estate. This unaudited Form 10-Q covers the three months ended March 31, 2014, with comparisons to March 31, 2013 and December 31, 2013. Unless otherwise stated, amounts are in thousands.
Key Financial Metrics
| Metric | March 31, 2014 | Comparable period |
|---|---|---|
| Total assets | $132,779 | $128,783 at December 31, 2013 |
| Loans, net | $77,439 | $79,249 at December 31, 2013 |
| Securities available for sale | $31,340 | $22,990 at December 31, 2013 |
| Total deposits | $101,820 | $98,692 at December 31, 2013 |
| Federal Home Loan Bank advances | $22,740 | Unchanged from December 31, 2013 |
| Stockholders’ equity | $449 | $(216) at December 31, 2013 |
| Net earnings (loss) | $330 | $(2,157) for Q1 2013 |
| Basic and diluted earnings (loss) per share | $0.04 | $(0.27) for Q1 2013 |
| Net interest income | $989 | $737 for Q1 2013 |
| Net interest margin | 3.39% | 2.39% for Q1 2013 |
| Net cash provided by operating activities | $201 | $(619) for Q1 2013 |
| Cash and cash equivalents | $11,579 | $13,881 at December 31, 2013 |
Material Changes Versus the Prior Comparable Period
- Net earnings improved to $330,000 from a $2.2 million loss, primarily because the provision for loan losses declined by $1.4 million to zero and foreclosed real estate expense improved by approximately $724,000.
- Net interest income increased $252,000 despite a $66,000 decline in interest income. Interest expense fell $318,000, principally following the December 2013 replacement of higher-cost FHLB advances with lower-cost advances.
- Average borrowing cost declined to 0.87% from 4.08%, while the interest-rate spread increased to 3.44% from 2.44%.
- Total noninterest expenses declined to $776,000 from $1.364 million. Foreclosed real estate expense was a net benefit of $439,000 in Q1 2014, compared with $285,000 of expense in Q1 2013, reflecting a $449,000 gain on the sale of foreclosed real estate partially offset by a $150,000 write-down.
- Loans declined $1.8 million from year-end, while securities increased $8.4 million to $31.3 million. Deposits increased $3.1 million.
- The allowance for loan losses was $2.215 million, or 2.79% of loans, compared with $2.211 million, or 2.73%, at December 31, 2013. Nonaccrual loans declined to $8.127 million from $8.817 million.
- Other comprehensive income was $125,000, compared with a $31,000 loss in Q1 2013, primarily from unrealized gains on available-for-sale securities.
Liquidity, Debt, Capital and Regulatory Matters
- At March 31, 2014, the Bank had $22.7 million of FHLB borrowings against $31.7 million of established FHLB borrowing capacity. It also reported an available $1.8 million Federal Reserve discount-window line, a $2.5 million SunTrust line and a $1 million Independent Bankers Bank line, subject to applicable collateral, consent and repayment requirements.
- Liquidity sources include deposits, FHLB advances, securities and loan repayments, foreclosed real estate sales, federal funds, earnings and potential Federal Reserve borrowings. Management stated that liquidity sources were adequate for operating needs, although deposit pricing is restricted under the Consent Order.
- The Bank remained under-capitalized and failed to meet the amended Consent Order requirements of an 8% Tier 1 leverage ratio and a 12% total risk-based capital ratio. Reported ratios were 4.62% and 7.36%, respectively; management estimated that approximately $4.7 million of additional capital was needed to meet the 12% total risk-based requirement.
- The Company was pursuing a capital raise of approximately $3 million to $4 million in common shares, followed by additional capital and organic capital generation. The filing states that success was not assured.
- The Company cannot pay common dividends, certain subordinated debt or trust-preferred interest, incur certain debt, or redeem shares without required regulatory approvals. No dividends were paid in Q1 2014.
- The Company had deferred interest on its junior subordinated debenture. Accrued and unpaid interest was $676,000 at March 31, 2014, and the filing states that 20 consecutive quarterly deferrals would be completed in October 2014, when the accrued interest would become due subject to regulatory approval.
Guidance, Outlook, Risks and Unusual Items
- Management forecast the Company to be profitable for 2014 unless it incurs unforeseen loan loss provisions and believed it could meet financial obligations and continue as a going concern through at least March 31, 2015.
- Management identified expected annual savings of approximately $1.1 million from the FHLB refinancing and approximately $130,000 from replacing the directors’ and officers’ insurance policy. Additional savings from core-system processing and branch and operating efficiencies were under review.
- The going-concern assessment is subject to substantial uncertainty because of continuing regulatory restrictions, inadequate capital, the need for additional capital, commercial real estate concentration, credit losses and the Company’s history of operating losses.
- The Bank was not in compliance with the Consent Order’s capital requirements and commercial real estate concentration requirement as of March 31, 2014. The Consent Order also restricts asset growth, brokered deposits, dividends, bonuses and certain lending activities.
- Credit risk remained significant: $13.948 million of loans were classified Substandard and $8.127 million were nonaccrual at March 31, 2014. Commercial real estate and residential real estate represented the largest loan exposures.
- Available-for-sale securities had $245,000 of gross unrealized losses, which management attributed to market conditions rather than credit deterioration and did not consider other-than-temporary impairment. No securities impairment was recognized in Q1 2014, compared with $204,000 in Q1 2013.
- Management identified disclosure controls and procedures as effective and reported no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether the planned $3 million to $4 million equity offering was completed and whether additional capital was raised to satisfy the Consent Order.
- Whether the Bank achieved the required 8% Tier 1 leverage and 12% total risk-based capital ratios and reduced its commercial real estate concentration.
- Subsequent trends in nonaccrual, impaired, Substandard and commercial real estate loans, together with the adequacy of the $2.215 million allowance.
- Whether the reported cost savings and 2014 profitability forecast were realized without material additional loan loss provisions.
- Available liquidity after the decline in cash and cash equivalents and the terms, maturities and regulatory conditions of outstanding borrowings.
- Resolution and payment status of the $676,000 accrued junior subordinated debenture interest expected to become due in October 2014.
- The effect of regulatory restrictions on dividends, debt, trust-preferred payments, asset growth and the Company’s ability to fund holding-company obligations.