Business Context and Reporting Period
OptimumBank Holdings, Inc. is a Florida one-bank holding company operating OptimumBank and related foreclosed-real-estate subsidiaries. The Bank provides commercial banking services through three Broward County, Florida offices. This unaudited Form 10-Q covers the three and six months ended June 30, 2015, with comparisons to the corresponding 2014 periods and December 31, 2014 balance-sheet data.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Interest income | $1.132 million, versus $1.816 million | $2.199 million, versus $3.051 million |
| Net interest income | $911,000, versus $1.581 million | $1.767 million, versus $2.571 million |
| Net interest margin | 3.25%, versus 5.41% | 3.20%, versus 4.40% |
| Noninterest income | $100,000, versus $548,000 | $200,000, versus $664,000 |
| Noninterest expense | $1.005 million, versus $786,000 | $2.143 million, versus $1.562 million |
| Net earnings (loss) | $6,000, versus $1.343 million | $(176,000), versus $1.673 million |
| Basic and diluted earnings (loss) per share | $0.00, versus $0.16 | $(0.02), versus $0.21 |
- Total assets were $132.7 million at June 30, 2015, up from $124.5 million at December 31, 2014.
- Loans, net, were $82.7 million, up from $75.8 million; gross loans increased to $84.7 million from $77.9 million.
- Deposits were $98.7 million, up from $91.6 million. Cash and cash equivalents were $15.1 million, compared with $12.1 million.
- The allowance for loan losses was $2.179 million, or 2.6% of loans, versus $2.244 million, or 2.9%, at December 31, 2014. No loan-loss provision was recorded in either 2015 comparison period.
- Stockholders’ equity was $3.0 million, or 2.23% of total assets. No dividends were declared.
- Six-month operating cash flow was $580,000, compared with $1.537 million in 2014. Investing activities used $5.140 million, while financing activities provided $7.550 million, producing a $2.990 million increase in cash.
- Borrowings included $22.740 million of Federal Home Loan Bank advances and a $5.155 million junior subordinated debenture.
Material Changes Versus Prior Comparable Period
- Quarterly net income declined by $1.337 million and six-month results shifted to a $176,000 loss from $1.673 million of earnings.
- Interest income fell primarily because two nonaccrual loans that generated interest income in 2014 were repaid. The six-month average yield on interest-earning assets declined to 3.98% from 5.23%.
- Net interest margin decreased to 3.20% for the six months from 4.40%, despite lower interest expense.
- Noninterest income declined largely because 2014 included a $470,000 loan-cost recovery and significant foreclosed-real-estate-related gains.
- Noninterest expense increased to $2.143 million for the first six months from $1.562 million, reflecting the absence of favorable 2014 foreclosed-real-estate items and normalization of expenses.
- Loan growth was concentrated in multi-family real estate, commercial real estate, commercial loans and consumer loans. Nonaccrual loans increased to $6.457 million from $4.317 million at December 31, 2014, while impaired loans increased to $10.958 million from $10.085 million.
Guidance, Outlook, Risks and Unusual Items
- The filing provides no formal earnings or revenue guidance. Management states that liquidity sources are adequate for operating needs and that it intends to seek additional capital, but there is no assurance sufficient capital will be raised.
- The Bank was subject to an FDIC and Florida Office of Financial Regulation Consent Order. At June 30, 2015, it did not meet the Consent Order requirements of an 8% Tier 1 leverage ratio and a 12% total risk-based capital ratio. Actual ratios were 6.89% and 10.35%, respectively.
- The Bank remained classified as adequately capitalized under applicable regulatory standards, but the Consent Order and related restrictions remain material. The Bank cannot pay dividends, make certain payments, materially grow assets or change asset and liability composition without required regulatory approvals.
- The Company was in technical default on the $5.155 million junior subordinated debenture after deferring the maximum 20 consecutive quarterly interest payments. Accrued unpaid interest was $872,000 at June 30, 2015, and the holder could demand principal plus accrued interest.
- A director agreed to purchase the debenture and provide forbearance, but conflicting instructions to the trustee resulted in federal interpleader litigation. Management could not determine when or whether the purchase would close and continued pursuing regulatory approval and other payment mechanisms.
- On July 27, 2015, the Bank entered into a regulatory Bank Secrecy Act and Anti-Money Laundering Memorandum of Understanding after material weaknesses were identified. No fine was imposed.
- The Company had $2.2 million of commitments to extend credit and maintained borrowing capacity with the FHLB, subject to collateral and consent requirements. It also reported a $0.6 million Federal Reserve discount-window line and lines of credit totaling $3.1 million with two banks.
- Management recorded a valuation allowance against the net deferred tax asset because it determined realization was not sufficiently probable.
- Forward-looking results are exposed to credit losses, real-estate values, deposit competition, interest-rate and market changes, regulatory requirements, liquidity constraints, technology changes and loss of key personnel.
Most Important Facts for Investors to Verify
- Whether the Bank raises sufficient capital to cure the Consent Order capital-ratio deficiencies.
- The status and potential acceleration risk of the junior subordinated debenture, accrued interest and interpleader litigation.
- Progress under the BSA/AML Memorandum of Understanding and any further regulatory actions.
- Trends in nonaccrual, impaired and adversely classified loans, particularly commercial and commercial-real-estate exposures, and whether the $2.179 million allowance remains adequate.
- Deposit retention, liquidity availability and continued access to FHLB, Federal Reserve and other borrowing facilities.
- Whether earnings can recover without the nonrecurring 2014 loan-cost recovery and foreclosed-real-estate gains.