Business Context and Reporting Period
OptimumBank Holdings, Inc. is a Florida bank holding company whose principal business is operating OptimumBank, a Florida-chartered community bank with three Broward County offices. The Bank provides commercial, real estate and consumer lending, deposit and related banking services. This Form 10-K covers the fiscal year ended December 31, 2016, with audited comparisons for 2015. The filing was signed March 20, 2017.
Key Financial Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total assets | $119.7 million | $127.5 million | Down $7.8 million |
| Net loans | $77.0 million | $82.6 million | Down $5.6 million |
| Total deposits | $86.0 million | $97.6 million | Down $11.6 million |
| Stockholders’ equity | $3.1 million | $3.0 million | Up $0.1 million |
| Total interest income | $4.8 million | $4.5 million | Up $0.2 million |
| Net interest income | $3.7 million | $3.7 million | Up $35,000 |
| Net interest margin | 3.12% | 3.37% | Down 25 basis points |
| Noninterest income | $(0.1) million | $0.4 million | Down $0.6 million |
| Noninterest expenses | $3.9 million | $4.5 million | Down $0.6 million |
| Net loss | $396,000 | $163,000 | Loss increased $233,000 |
| Basic and diluted loss per share | $(0.38) | $(0.17) | More unfavorable |
| Cash and cash equivalents | $17.6 million | $10.4 million | Up $7.3 million |
Cash flow from operations was $551,000, compared with $627,000 in 2015. Investing activities provided $14.4 million, primarily from securities sales, loan reductions and proceeds from foreclosed real estate. Financing activities used $7.6 million, principally reflecting the $11.6 million deposit decline. Cash increased by $7.3 million during 2016.
Federal Home Loan Bank advances totaled $23.5 million at year-end, supported by a $30.4 million pre-arranged FHLB line. The Bank also had credit lines of $2.5 million with SunTrust, $2.5 million with Alostar Bank, $750,000 with Servis First Bank and $780,000 with the Federal Reserve.
Material Changes Versus the Prior Comparable Period
- Total assets declined 6.1%, loans net declined 6.7% and deposits declined 11.9% from 2015.
- Interest income increased because loan average yields and average loan balances improved; securities income declined because both average balances and yields were lower.
- Interest expense increased from $884,000 to $1.079 million, including higher deposit and borrowing costs.
- The net interest margin declined from 3.37% to 3.12%, and the interest-rate spread declined from 3.31% to 3.03%.
- Noninterest income moved from $412,000 of income to $144,000 of expense, primarily because of a $186,000 loss on securities sales compared with a $60,000 gain in 2015.
- Noninterest expenses declined by $608,000, partly because of a $147,000 nonrecurring gain on foreclosed real estate and lower foreclosed-real-estate costs.
- The allowance for loan losses increased from $2.3 million, or 2.71% of total loans, to $3.9 million, or 4.87%. No provision for loan losses was recorded in either year. A January 2016 sale of a judgment generated a $1.8 million recovery of previously charged-off amounts.
- Impaired loans declined from $5.6 million at year-end 2015 to $1.4 million at year-end 2016. Nonperforming loans and foreclosed assets declined to 0.3% of total assets from 7.5%.
- The Bank issued $375,000 of common stock and $75,000 of preferred stock during 2016. Book value per share declined to $2.79 from $3.08, and a one-for-ten reverse stock split became effective January 11, 2016.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management’s stated priorities are to stabilize and diversify the loan portfolio, reduce deposit costs, increase capital ratios, improve liquidity and comply with regulatory requirements.
On November 7, 2016, the Bank entered into a new Consent Order with the FDIC and the Florida Office of Financial Regulation. It supersedes the 2010 order and requires improvements in management oversight, credit administration, allowance adequacy, liquidity, interest-rate risk management, internal controls and Bank Secrecy Act/anti-money-laundering compliance. The order requires a minimum Tier 1 leverage ratio of 8% and total risk-based capital ratio of 12%. At December 31, 2016, the Bank reported 8.06% and 12.79%, respectively, meeting those requirements, but it was classified as adequately capitalized rather than well capitalized because it remained subject to a written capital order.
The Consent Order prohibits the Bank from paying dividends without regulatory approval and prohibits it from accepting, renewing or rolling over brokered deposits. The Company’s 2010 Written Agreement with the Federal Reserve separately restricts dividends, payments on subordinated debt, new debt, stock redemptions and certain management changes.
The Company was in technical default on its $5.155 million junior subordinated debenture after deferring interest payments totaling $1.148 million at December 31, 2016. Holders could accelerate the principal and accrued interest. The trustee had not accelerated the debt as of filing, but related litigation was pending in the U.S. District Court for the Southern District of New York. The auditor stated that this matter raised substantial doubt about the Company’s ability to continue as a going concern; the financial statements included no related adjustments. Management proposed a director’s purchase of the debenture and a related forbearance agreement, while continuing to seek capital and other means to pay accrued interest.
In March 2017, the FDIC notified the Bank that it considered a significant portion of the Bank’s certificates of deposit to be brokered deposits because of the rates paid, even though no brokers were used. The Bank requested a waiver. If denied, the Bank could be unable to accept, renew or roll over affected certificates of deposit, which management indicated could materially adversely affect liquidity.
Management estimated that implementing the Bank Secrecy Act components of the Consent Order would increase 2017 expenses by approximately $190,000. The Company also stated that it may need additional common equity through 2017 and beyond, but had no commitments for such financing at the filing date.
Principal ongoing risks include concentrated exposure to South Florida real estate, deposit attrition and repricing, interest-rate changes, strong competition, regulatory restrictions, capital needs, compliance costs, credit losses and the unresolved debenture default. Commitments to extend credit totaled $7.1 million at year-end.
Most Important Facts for Investors to Verify
- Whether the Bank maintains the 8% Tier 1 leverage and 12% total risk-based capital requirements under the Consent Order.
- Whether additional equity capital is raised and on what terms, including potential dilution.
- The resolution of the $5.155 million debenture default, accrued interest, trustee litigation and proposed forbearance arrangement.
- Whether the FDIC grants the brokered-deposit waiver and the resulting effect on certificate-of-deposit renewals and liquidity.
- Whether the $3.9 million allowance for loan losses remains adequate and whether regulators approve any requested partial reversal.
- Progress under the Consent Order, including BSA/AML remediation, management and board requirements, internal controls and liquidity plans.
- Trends in deposits, net interest margin, loan quality, real-estate collateral values and noninterest income.
- The company’s ability to generate sustainable earnings after the estimated 2017 compliance-cost increase.