OptimumBank Holdings, Inc. — 2017 Q2 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 three offices in Broward County, Florida. The filing covers the three and six months ended June 30, 2017; financial statements are unaudited and amounts are in thousands except per-share data.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2017 | Six Months Ended June 30, 2017 |
|---|---|---|
| Net interest income | $801 | $1,713 |
| Net loss | $(168) | $(452) |
| Loss per share, basic and diluted | $(0.16) | $(0.41) |
| Net interest margin | 2.81% | 2.99% |
| Noninterest income | $8 | $16 |
| Noninterest expense | $977 | $2,181 |
| Provision for loan losses | $0 | $0 |
- Total assets were $112.8 million at June 30, 2017, down from $119.7 million at December 31, 2016.
- Loans, net, were $69.3 million, compared with $77.0 million at year-end 2016. The allowance for loan losses was $3.9 million, or 5.35% of loans.
- Total deposits were $81.7 million, down from $86.0 million at December 31, 2016. Federal Home Loan Bank advances were $20.5 million, and the junior subordinated debenture was $5.2 million.
- Cash and cash equivalents increased to $19.7 million from $17.6 million at year-end 2016.
- Stockholders’ equity was $2.7 million, or 2.37% of total assets, compared with $3.1 million, or 2.6%, at December 31, 2016.
- Six-month operating cash flow was $440,000; investing cash flow was $8.7 million, primarily reflecting a $7.6 million net decrease in loans; financing cash flow was $(7.1) million, primarily reflecting decreases in deposits and FHLB advances.
- The Bank reported a Tier 1 leverage ratio of 8.27%, Tier 1 risk-based capital ratio of 13.14%, and total risk-based capital ratio of 14.44% at June 30, 2017. These exceeded Consent Order requirements, although the Bank remains limited to an “adequately capitalized” classification while the Consent Order is in effect.
Material Changes Versus Prior Comparable Period
- Second-quarter net loss increased to $168,000 from $54,000; six-month net loss increased to $452,000 from $331,000.
- Six-month net interest income declined to $1.7 million from $1.8 million as interest income decreased to $2.3 million from $2.4 million. The decline primarily reflected lower interest-earning assets.
- Interest expense increased to $593,000 from $538,000 for the six months, partly because $15.5 million of FHLB advances were extended into longer, higher-rate fixed terms. The weighted-average rate on those advances increased from 0.49% to 1.19%.
- The six-month net interest margin decreased to 2.99% from 3.09%, and the second-quarter margin decreased to 2.81% from 3.05%.
- Noninterest income declined to $16,000 from $93,000 because the prior-year period included $45,000 of gains on securities sales and higher service charges and fees.
- Noninterest expense declined to $2.2 million from $2.3 million, but higher professional fees and other expenses contributed to the larger net loss.
- Total loans declined by $7.6 million from year-end 2016, including reductions in land and construction, commercial, and consumer loans. Classified loans shifted toward OLEM and away from substandard categories, while no loans were past due or nonaccrual at June 30, 2017.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- No quantitative earnings or revenue guidance was provided. Management stated that results for the interim periods are not necessarily indicative of full-year results.
- The Company is in default on its $5.155 million junior subordinated debenture after deferring interest for the maximum twenty consecutive quarterly payments. Accrued and unpaid interest was $1.256 million at June 30, 2017. The trustee or holders may accelerate the principal and accrued interest, although acceleration had not occurred by the filing date.
- A Company director offered to purchase the debenture and enter into a forbearance agreement, but related trustee litigation remained pending in the U.S. District Court for the Southern District of New York. Management also continued pursuing additional capital and other mechanisms to address accrued interest.
- Because of the debenture default and related uncertainties, management disclosed substantial uncertainty regarding going concern. No financial-statement adjustments were recorded for this uncertainty.
- The Bank remains subject to an FDIC and Florida Office of Financial Regulation Consent Order requiring improvements in management, board oversight, loan-loss allowance practices, liquidity, and Bank Secrecy Act compliance. The order prohibits Bank dividends and imposes capital and operating restrictions.
- The Bank cannot solicit brokered deposits. The FDIC determined that a significant portion of certificates of deposit were brokered deposits based on rates paid; approximately $27.9 million of such deposits mature over the following two years and cannot be renewed or rolled over under the stated restrictions. Management was pursuing local-deposit and other liquidity strategies.
- Management stated that liquidity sources were adequate, including $35.3 million of established FHLB borrowing capacity, of which $20.5 million was outstanding, a $643,700 Federal Reserve discount-window line, and other bank lines of credit. Availability remains subject to collateral, consent, and other conditions.
- The Bank accrued $180,000 for a required BSA lookback review, with estimated total cost of $250,000 to $300,000, subject to FDIC approval.
- The Company had $3.3 million of commitments to extend credit at June 30, 2017.
- Deferred tax assets were fully subject to a valuation allowance because management concluded they were not realizable based on earnings history and expected future earnings.
- The Company issued or allocated shares as director compensation, including 59,523 shares valued at $200,000 for the Bank’s Chairman and 4,550 shares valued at $14,333 for non-employee directors; related amounts were recorded as liabilities pending satisfaction of applicable conditions.
Most Important Facts for Investors to Verify
- Whether the junior subordinated debenture is purchased by the director, placed under forbearance, accelerated, or otherwise resolved, including the pending trustee litigation.
- Whether the Company can raise capital and whether the Bank can maintain the Consent Order’s 8% Tier 1 leverage and 12% total risk-based capital requirements.
- The amount, maturity profile, and replacement sources for the $27.9 million of deposits characterized as brokered by the FDIC.
- Whether liquidity remains adequate as deposits mature and FHLB advances are repaid or refinanced.
- Progress on the Consent Order, Written Agreement, BSA lookback review, and any related regulatory costs or restrictions.
- Whether declining loan balances, compressed margins, recurring operating losses, and minimal holding-company equity improve or deteriorate in subsequent filings.