OptimumBank Holdings, Inc. — 2017 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2017. OptimumBank Holdings, Inc. is a Florida one-bank holding company whose principal subsidiary, OptimumBank, operates three community banking offices in Broward County and serves customers primarily in Broward, Miami-Dade, and Palm Beach Counties. The Bank provides commercial real estate, residential real estate, commercial, consumer, deposit, and related community banking services.
At December 31, 2017, the Company reported total assets of $95.9 million, net loans of $68.2 million, deposits of $65.3 million, and stockholders’ equity of $2.5 million. The independent auditor issued an unqualified opinion but included an emphasis regarding substantial doubt about the Company’s ability to continue as a going concern.
Financial condition and results
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total assets | $95.9 million | $119.7 million | Down $23.8 million |
| Net loans | $68.2 million | $77.0 million | Down $8.8 million |
| Deposits | $65.3 million | $86.1 million | Down $20.8 million |
| FHLB advances | $20.5 million | $23.5 million | Down $3.0 million |
| Stockholders’ equity | $2.5 million | $3.1 million | Down $0.5 million |
| Net interest income | $3.5 million | $3.7 million | Down $0.2 million |
| Net loss | $(589,000) | $(396,000) | Loss increased $193,000 |
| Basic and diluted loss per share | $(0.53) | $(0.38) | More negative |
| Net interest margin | 3.19% | 3.12% | Up 7 basis points |
| Return on average assets | (0.5%) | (0.3%) | Lower |
| Return on average equity | (21.3%) | (12.5%) | Lower |
Total interest income declined modestly to $4.7 million from $4.8 million. Loan and securities interest income decreased, partly offset by higher income from overnight funds. Interest expense increased to $1.2 million from $1.1 million, as lower deposit expense was more than offset by higher borrowing costs. Noninterest income improved to $52,000 from a $144,000 loss in 2016, while noninterest expense rose to $4.2 million from $3.9 million, primarily because of costs associated with the Bank Secrecy Act look-back project.
No provision for loan losses was recorded in either 2017 or 2016. The allowance for loan losses increased to $4.0 million, or 5.55% of total loans, from $3.9 million, or 4.87%. Management stated that the allowance may be significantly overfunded and requested regulatory approval for a partial reversal; no response had been received by the filing date.
Asset quality improved materially. At December 31, 2017, there were no loans more than 30 days past due and no nonaccrual loans. Impaired loans were approximately $2.2 million, compared with $1.4 million in 2016, and the filing reported no foreclosed real estate outstanding at year-end.
Cash flow, liquidity, debt, and capital
- Net cash provided by operating activities was $570,000, compared with $551,000 in 2016.
- Investing activities provided $17.5 million, primarily from securities sales and repayments and a net decrease in loans.
- Financing activities used $24.0 million, primarily reflecting a $20.8 million reduction in deposits and a $3.0 million repayment of FHLB advances.
- Cash and cash equivalents declined to $11.7 million from $17.6 million.
- The Bank had a $32.5 million FHLB borrowing capacity, with $20.5 million outstanding at year-end, plus additional lines of credit totaling approximately $6.3 million.
- The Bank’s Tier 1 leverage ratio was 8.89% and total risk-based capital ratio was 15.08%, exceeding the Consent Order requirements of 8.0% and 12.0%, respectively.
- Despite ratios above the Consent Order thresholds, the Bank was classified as adequately capitalized, not well capitalized, because it remains subject to regulatory Consent Orders.
Material changes versus 2016
- Total assets contracted by approximately 20%, driven by lower deposits, loans, and securities.
- Deposits fell 24%, although the deposit mix improved: noninterest-bearing demand deposits increased to $12.6 million from $7.2 million, while time deposits declined to $30.6 million from $56.7 million.
- Net loans declined 11%; commercial and consumer balances fell substantially, while multi-family and commercial real estate balances increased.
- The securities portfolio declined to $11.4 million from $20.2 million.
- Net interest margin increased to 3.19% from 3.12%, but net interest income declined because average earning-asset balances were lower.
- Noninterest expense increased by $224,000, principally due to BSA compliance and look-back costs.
- The Company sold $30,000 of common stock in 2017 and issued shares for services. Management indicated that additional capital may be required through 2018 and later periods, but no third-party commitments had been obtained.
Guidance, outlook, management commentary, risks, and unusual items
- Management’s strategy is to increase and diversify loan originations, reduce deposit costs by emphasizing demand deposits, improve capital ratios, and maintain a controlled community-banking footprint.
- The Bank remains subject to a November 2016 FDIC/OFR Consent Order requiring improvements in governance, management, credit administration, liquidity, interest-rate risk management, internal controls, BSA/AML compliance, and capital maintenance. The order prohibits brokered deposits and dividends without regulatory approval.
- In March 2017, the FDIC determined that a significant portion of certain high-rate certificates of deposit constituted brokered deposits. The remaining brokered deposits were expected to mature by April 5, 2018.
- The Company remains subject to a 2010 Federal Reserve Written Agreement restricting dividends, debt payments, new debt, stock redemptions, and certain management or board changes without prior approval.
- The Company is in default on its $5.155 million junior subordinated debenture after deferring approximately $1.375 million of interest. The holders or trustee may accelerate the principal and accrued interest. A director proposed purchasing the debenture and entering into a forbearance agreement, but related litigation over authority to sell the debenture remained pending.
- The auditor stated that the debenture default and potential acceleration raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements contain no adjustments for this uncertainty.
- The Company estimates BSA-related Consent Order compliance costs of $250,000 to $420,000 and accrued approximately $305,000 in 2017, compared with $60,000 in 2016.
- Key operating risks include South Florida real estate concentration, local economic conditions, interest-rate changes, deposit attrition, competitive pressure, regulatory restrictions, capital-raising uncertainty, and the effectiveness and cost of BSA/AML remediation.
- The filing provides no formal earnings or revenue guidance. Management’s outlook is focused on controlled growth, improved asset quality, lower funding costs, and raising additional capital.
Important facts investors should verify
- Whether the junior subordinated debenture is purchased by the director, placed under forbearance, or accelerated, and the effect on the Company’s going-concern status.
- Whether the Company can raise sufficient additional capital to maintain regulatory capital and support its business plan.
- Whether regulators approve any reduction of the $4.0 million loan-loss allowance and how such approval would affect earnings and capital.
- Whether the Bank remains in full compliance with the Consent Order, BSA/AML requirements, liquidity provisions, and brokered-deposit restrictions.
- Whether the sharp decline in deposits and assets stabilizes without further contraction in loans or liquidity.
- The sustainability of reported asset-quality improvements given the concentration in South Florida real estate and the $2.2 million of impaired loans.
- The timing and outcome of the pending debenture-related litigation and any potential claims against the Company or Bank.
- The Company’s ability to return to profitability, rebuild equity, and pay dividends; the filing states that cash dividends were prohibited at December 31, 2017 and are not expected in the foreseeable future.