OptimumBank Holdings, Inc. — 2020 Q3 Form 10-Q Summary
Business context and reporting period
OptimumBank Holdings, Inc. is a one-bank holding company whose wholly owned Florida-chartered subsidiary, OptimumBank, operates three community banking offices in Broward County, Florida. The filing covers the unaudited three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. The filing was signed November 12, 2020.
Financial condition and key metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total interest income | $1.8 million, up 40% | $4.9 million, up 33% |
| Net interest income | $1.4 million, up 92% | $3.5 million, up 59% |
| Provision for loan losses | $524,000 | $1.2 million |
| Net interest income after provision | $861,000 | $2.3 million |
| Noninterest income | $64,000 | $170,000 |
| Noninterest expense | $1.4 million, up 44% | $3.6 million, up 12% |
| Net loss | $496,000, or $0.17 per share | $1.2 million, or $0.39 per share |
| Net interest margin | 3.26%, versus 2.65% | 3.15%, versus 2.84% |
- Total assets were $208.6 million at September 30, 2020, compared with $126.7 million at December 31, 2019.
- Loans, net of the allowance, were $144.5 million, compared with $102.2 million at year-end 2019. Gross loans increased to $147.2 million, with commercial real estate loans of $67.1 million and commercial loans of $22.6 million.
- The allowance for loan losses was $2.1 million, equal to 1.46% of gross loans, versus $2.0 million, or 1.93%, at December 31, 2019. The loan portfolio included $3.97 million classified as OLEM and $2.22 million as substandard.
- Total deposits increased to $167.7 million from $101.4 million. Federal Home Loan Bank advances increased to $23.0 million from $13.0 million.
- Cash and cash equivalents increased to $45.3 million from $8.9 million. The company reported net cash used in operating activities of $2.0 million and net cash used in investing activities of $45.5 million, primarily reflecting $44.1 million of net loan growth. Financing activities provided $83.9 million.
- Stockholders’ equity increased to $13.7 million from $7.2 million, primarily reflecting $7.0 million of Series B preferred stock proceeds and $539,000 of common stock proceeds, partially offset by the net loss.
- The Bank’s reported Tier 1 capital to total assets ratio was 8.70% at September 30, 2020, above the 5.00% threshold for being well-capitalized under the applicable framework. The Bank elected to use the community bank leverage ratio framework.
Material changes versus prior comparable periods
- Loan growth drove higher interest income and net interest income, although the average yield on interest-earning assets declined to 4.16% in the third quarter from 4.62% in the prior-year quarter.
- Interest expense declined 28% in the third quarter and 7% year to date because of lower rates paid on deposits and borrowings, partly offset by higher funding volumes.
- Credit-loss provisions increased materially from $45,000 to $524,000 in the third quarter and to $1.2 million year to date, primarily reflecting loan growth and COVID-19-related economic conditions.
- Despite higher net interest income, the company remained unprofitable because of credit provisions and operating expenses. Management stated that excluding the provision, the company would have reported third-quarter earnings of $28,000 and nine-month earnings of $85,000.
- Noninterest expense increased, including a $200,000 stock-based compensation expense related to shares issuable to a director for services.
Guidance, outlook, risks and unusual items
- The filing provides no formal earnings or financial guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- COVID-19 materially affected economic conditions and may continue to affect operations, credit losses, liquidity, capital ratios and financial condition. The company granted 180-day forbearances on 60 loans totaling $43.8 million; $38.1 million remained under forbearance at September 30, representing 25.9% of gross loans.
- The Bank originated 204 SBA Paycheck Protection Program loans totaling $19.2 million. These loans are fully guaranteed by the SBA. No borrowings were outstanding under the Federal Reserve’s PPP Liquidity Facility at September 30.
- The company had $4.1 million of commitments to extend credit, $5.3 million of unused lines of credit and $4.6 million of standby letters of credit.
- The company had been in default on its $2.6 million junior subordinated debenture because of unpaid interest since 2015. In September 2020, it paid approximately $1.1 million of accrued interest; accrued interest was reported as zero at September 30, while the principal remained outstanding and the filing does not state that the underlying default status was formally amended or waived.
- The company issued 280 shares of Series B preferred stock to a related party for $7.0 million. The preferred stock is generally convertible into up to 2.8 million common shares, subject to stated conditions, and has preferential liquidation rights.
- Management identified risks including economic and market conditions, lending losses, competition, regulatory changes, technology changes, key-personnel risk and potential securities-law liabilities. No legal proceedings were reported.
Most important facts for investors to verify
- Whether the large loan-forbearance balance converts into higher delinquencies, nonaccrual loans, charge-offs or additional provisions as pandemic-related relief expires.
- The credit performance and collateral coverage of the commercial real estate and commercial loan portfolios, including the $2.2 million substandard balance and $4.0 million OLEM balance.
- Whether the $2.6 million junior subordinated debenture remains in default after the September interest payment and the terms governing future interest and principal obligations.
- The potential dilution, voting and liquidation effects of the Series B preferred stock and its possible conversion into common shares.
- Whether deposit growth and available borrowing capacity remain sufficient to support continued loan growth and liquidity needs.
- The sustainability of profitability excluding unusually high or pandemic-related credit provisions, particularly given the company’s continuing reported net losses and accumulated deficit of $32.8 million.