Business Context and Reporting Period
OptimumBank Holdings, Inc. is a Florida one-bank holding company whose subsidiary, OptimumBank, provides community banking services through three Broward County, Florida offices. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods. The company is a smaller reporting company.
Financial Highlights
| Metric | Q3 2018 | Q3 2017 | Nine Months 2018 | Nine Months 2017 |
|---|---|---|---|---|
| Total interest income | $1.105 million | $1.133 million | $3.160 million | $3.439 million |
| Net interest income | $782,000 | $825,000 | $2.294 million | $2.537 million |
| Credit for loan losses | None | None | $2.100 million | None |
| Noninterest income | $21,000 | $54,000 | $69,000 | $71,000 |
| Noninterest expense | $1.005 million | $935,000 | $3.046 million | $3.118 million |
| Net earnings (loss) | $(202,000) | $(56,000) | $1.417 million | $(510,000) |
| Basic and diluted EPS | $(0.13) | $(0.05) | $1.03 | $(0.46) |
- At September 30, 2018, total assets were $98.1 million, compared with $95.9 million at December 31, 2017.
- Gross loans increased to $78.0 million from $71.9 million; net loans were $76.3 million versus $68.2 million.
- Total deposits declined to $58.0 million from $65.3 million, while Federal Home Loan Bank advances increased to $26.6 million from $20.5 million.
- Cash and cash equivalents declined to $6.0 million from $11.7 million.
- Stockholders’ equity increased to $5.8 million from $2.5 million, and equity-to-assets rose to 5.9% from 2.6%.
- For the nine months, net cash provided by operating activities was $395,000; investing activities used $5.266 million; financing activities used $747,000; and cash decreased by $5.618 million.
- Net interest margin increased to 3.42% for the nine months from 2.99% in the prior-year period and to 3.47% in the third quarter from 3.00%.
Material Changes Versus Prior Comparable Period
- The nine-month earnings improvement was principally caused by a $2.1 million reversal of the allowance for loan losses in the second quarter after FDIC approval of management’s request. The allowance declined to $1.9 million, or 2.44% of loans, from $3.9 million, or 5.37%, at September 30, 2017.
- Third-quarter net loss widened to $202,000 from $56,000. Net interest income declined $43,000, noninterest income declined $33,000, and noninterest expense increased $70,000, primarily reflecting higher legal costs and salaries.
- Nine-month interest income declined $279,000, primarily from lower average loan, securities, and interest-bearing deposit balances, while average asset yields increased to 4.71% from 4.05%.
- Securities available for sale declined to $2.6 million from $11.4 million. In April 2018, the bank transferred $7.945 million of securities to held-to-maturity, creating a $432,000 unrealized loss recorded in equity and amortized over the securities’ remaining terms.
- Common shares outstanding increased to 1,813,670 from 1,120,947, reflecting equity issuances, director compensation, exchanges of preferred and trust preferred interests, and other stock transactions.
Guidance, Outlook, Risks and Unusual Items
- No quantitative earnings or revenue guidance was provided. Management stated that most requirements of the new regulatory Memorandum of Understanding had been met during the third quarter and expected the remaining requirements to be met by year-end.
- On August 28, 2018, the bank entered into an MOU with the FDIC and Florida Office of Financial Regulation. The MOU requires improvements in management, strategic planning, budgeting, interest-rate risk management, asset-growth controls, and Bank Secrecy Act administration. It prohibits bank dividends. The MOU replaced a 2016 Consent Order and removed restrictions on deposit interest rates.
- The company remains in default on its $5.155 million junior subordinated debenture after deferring $1.601 million of interest payments. The trustee and holders may accelerate principal plus accrued interest; no acceleration had occurred at September 30, 2018. No definitive forbearance agreement had been executed.
- At September 30, 2018, FHLB borrowings were $26.55 million against $26.70 million of established capacity. The company also had a $468,784 Federal Reserve discount-window line and $10.9 million of correspondent-bank federal-funds lines, with no federal-funds borrowings outstanding.
- The company accrued $235,000 for a required BSA lookback review, subject to FDIC approval of the independent firm’s proposal.
- At September 30, 2018, the bank reported capital ratios above the “well capitalized” thresholds: total risk-based capital 16.11%, Tier 1 risk-based capital 14.84%, common equity Tier 1 14.84%, and Tier 1 leverage 12.50%.
- Key risks identified include credit losses, economic and market conditions, competition, regulatory changes and enforcement, loss of key personnel, technology changes, securities-law liabilities, liquidity constraints, and the potential acceleration of the debenture.
- Off-balance-sheet commitments included $2.1 million of commitments to extend credit and $501,000 of unused credit lines; standby letters of credit were reported as zero.
Most Important Facts for Investors to Verify
- Whether the junior subordinated debenture is accelerated or restructured and whether a definitive forbearance agreement is completed.
- Whether the bank completes all remaining MOU and BSA lookback requirements and whether regulatory restrictions continue to limit dividends, debt payments, or corporate funding.
- Whether the $2.1 million allowance reversal is sustainable and whether future credit deterioration requires renewed provisions or charge-offs.
- Deposit retention, FHLB borrowing capacity, cash levels, and the company’s ability to fund operations while deposits have declined and borrowing capacity is nearly utilized.
- The quality and concentration of the expanded loan portfolio, including $35.1 million of commercial real estate loans and $5.1 million of commercial loans, with $3.2 million classified as impaired.
- The effect of the substantial increase in shares outstanding on per-share results and shareholder dilution.
- The filing’s stated controls conclusion: management determined disclosure controls were effective and reported no material changes in internal control over financial reporting.