OptimumBank Holdings, Inc. — Q3 2023 Form 10-Q Summary
Business Context and Reporting Period
OptimumBank Holdings, Inc. is a one-bank holding company for OptimumBank, a Florida-chartered community bank operating two Broward County offices and marketing deposit and electronic funds transfer services nationally to merchant cash advance providers. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods; balance-sheet comparisons are to December 31, 2022.
Financial Highlights
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total interest income | $8.9 million | $5.5 million | $24.6 million | $13.0 million |
| Net interest income | $5.9 million | $4.3 million | $16.6 million | $11.3 million |
| Credit loss expense | $1.4 million | $1.4 million | $3.0 million | $2.8 million |
| Noninterest income | $0.9 million | $0.7 million | $2.4 million | $2.1 million |
| Noninterest expense | $3.7 million | $2.7 million | $11.0 million | $7.3 million |
| Net earnings | $1.3 million | $0.7 million | $3.7 million | $2.5 million |
| Basic and diluted EPS | $0.18 | $0.11 | $0.52 | $0.44 |
| Net interest margin | 3.79% | 3.53% | 3.67% | 3.67% |
- Q3 net earnings increased 89%, while nine-month net earnings increased 51%. Nine-month net earnings included a $375,000 one-time foreclosure litigation settlement expense.
- Q3 interest income increased 62% and net interest income increased 37%; higher loan balances and yields were partly offset by a 151% increase in interest expense.
- Q3 noninterest income increased 32%, primarily from higher wire transfer and ACH fees. Nine-month noninterest income increased 15%.
- Annualized nine-month return on average assets was 0.8%, return on average equity was 7.7%, and noninterest expense to average assets was 2.4%.
Balance Sheet, Cash Flow, Debt and Liquidity
- Total assets increased to $713.2 million at September 30, 2023 from $585.2 million at year-end 2022. Net loans increased to $573.6 million from $477.2 million, while total deposits increased to $618.4 million from $507.9 million.
- Gross loans were $581.8 million, with commercial real estate loans of $358.4 million, or approximately 62% of gross loans. The allowance for credit losses was $7.2 million, equal to 1.24% of loans, versus $5.8 million, or 1.20%, at year-end 2022.
- Cash and cash equivalents were $104.0 million, compared with $71.8 million at December 31, 2022. Nine-month operating cash flow was $6.5 million; investing activities used $98.8 million, primarily for net loan growth; financing activities provided $124.4 million, primarily from deposit growth and $13.6 million of Federal Reserve advances.
- Borrowings at September 30, 2023 consisted of $10.0 million of FHLB advances and $13.6 million of Federal Reserve advances. FHLB borrowing capacity was approximately $158 million, with $148 million of remaining availability; the company also reported $25 million of correspondent-bank lines of credit.
- Stockholders’ equity increased to $66.3 million from $62.6 million. Equity-to-assets was 9.3%. The Bank reported a Tier 1 capital-to-assets ratio of 10.98%, above the 9.00% well-capitalized threshold.
Material Changes, Outlook and Risks
- Management’s strategic plan emphasizes growth in earning assets, core deposits, treasury-management fee income and additional business lines, while maintaining credit oversight and underwriting standards.
- The Bank began offering SBA 7(a) loans in Q3 2023, hired two SBA employees and had $300,000 of SBA 7(a) loans outstanding at September 30, 2023.
- Management plans continued expansion in multifamily, non-owner-occupied and commercial real estate lending, including potential out-of-area loans and loan-pool purchases subject to due diligence.
- Deposit pricing and interest-rate conditions are significant risks: average interest-bearing liability cost rose to 2.90% for the first nine months from 0.94% in the prior-year period, while nine-month interest-rate spread narrowed to 2.56% from 3.29%.
- Credit risk remains concentrated in commercial real estate. Net charge-offs were $1.4 million for the first nine months, primarily from consumer lending, and $769,000 in Q3. Past-due loans totaled $585,000, all in consumer loans; no loans were reported as nonaccrual at September 30, 2023.
- Available-for-sale securities had $8.7 million of unrealized losses and a $23.1 million fair value. Management attributed the losses primarily to interest-rate changes, did not expect credit losses and did not intend to sell the securities; future market conditions could nevertheless require earnings charges.
- Off-balance-sheet exposures included $11.5 million of commitments to extend credit, $78.2 million of unused lines and $4.3 million of standby letters of credit. The liability for expected losses on unfunded commitments was $359,000.
- The company adopted CECL on January 1, 2023, recognizing a $218,000 allowance for credit losses, a $23,000 unfunded-commitment liability, a $60,000 deferred tax asset and a $181,000 reduction in retained earnings.
- Management stated that other ordinary-course claims are not expected to be material. Forward-looking risks include economic and market conditions, higher interest rates, lending losses, competition, regulation, technology changes, key-person risk and potential securities-law liabilities.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes in internal control over financial reporting.
Investor Verification Items
- Verify the sustainability of loan and deposit growth, particularly the concentration in commercial real estate and the effect of deposit repricing on net interest margin.
- Review allowance adequacy under CECL, consumer-loan charge-offs, unfunded commitments and any subsequent changes in delinquency or nonaccrual levels.
- Assess liquidity under deposit outflow scenarios, including reliance on Federal Reserve and FHLB funding and the collateralization of securities and loans.
- Monitor the $8.7 million accumulated unrealized loss on available-for-sale securities and potential future earnings impact if securities must be sold.
- Evaluate execution and risk controls for the SBA 7(a) initiative, treasury-management expansion and planned out-of-area or loan-pool lending.
- Review the terms and potential dilution of Series B convertible preferred stock, which was convertible into up to 11,113,889 common shares subject to stated approvals and regulatory conditions.