Optimumbank Holdings, Inc. annual report, FY2015

OptimumBank Holdings, Inc. — FY2015 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2015; filed March 18, 2016. The filing is an annual report, not a standalone fourth-quarter filing. The Company is a Florida bank holding company whose principal subsidiary, OptimumBank, operates three community banking offices in Broward County and serves the broader South Florida market.

Key Financial Metrics

Metric	2015	2014	Change
Total assets	$127.5 million	$124.5 million	+$3.0 million
Net loans	$82.6 million	$75.8 million	+$6.7 million
Total deposits	$97.6 million	$91.6 million	+$6.0 million
FHLB advances	$20.0 million	$22.7 million	-$2.7 million
Stockholders’ equity	$3.0 million	$3.0 million	Essentially unchanged
Net interest income	$3.65 million	$4.48 million	-$831,000
Net loss	$163,000	Net income of $1.61 million	-$1.77 million
Basic and diluted earnings per share	$(0.17)	$1.85	Declined to a loss
Net interest margin	3.37%	3.93%	Down 56 basis points
Return on average assets	(0.13%)	1.3%	Declined
Cash and cash equivalents	$10.4 million	$12.1 million	-$1.7 million

Revenue, Profitability, Cash Flow and Asset Quality

• Total interest income declined to $4.53 million from $5.39 million. Loan interest income fell by approximately $501,000 and securities interest income fell by approximately $362,000.
• Interest expense decreased modestly to $884,000 from $911,000. Net interest income therefore declined 18.5% to $3.65 million.
• No provision for loan losses was recorded in either 2015 or 2014. The allowance for loan losses increased to $2.30 million, or 2.71% of total loans, from $2.24 million, or 2.88%.
• Noninterest income declined to $412,000 from $572,000. Noninterest expense increased to $4.55 million from $3.45 million, primarily because 2014 included an approximately $809,000 gain on the sale of foreclosed real estate, while 2015 included $412,000 of foreclosed-real-estate expense.
• The 2015 income tax benefit was $320,000, including reversal of a reserve following closure of IRS examinations of the Bank’s 2009 and 2010 tax returns.
• Net cash provided by operating activities was $627,000, compared with $1.30 million in 2014. Investing activities used $5.70 million, primarily because of net loan growth and securities purchases. Financing activities provided $3.37 million, mainly from deposit growth.
• Impaired loans totaled approximately $5.3 million at year-end, compared with $10.1 million in 2014. Nonperforming loans and foreclosed assets were 6.5% of total assets, down from 12.1% in 2014. Impaired loans and foreclosed real estate together were approximately $9.4 million, or 7.4% of total assets.
• Gross loans increased to $84.7 million from $77.9 million. Commercial loans increased substantially to $27.7 million from $17.2 million, while residential real estate loans declined to $16.0 million from $21.3 million.

Liquidity, Debt and Capital

• Deposits increased 6.5% to $97.6 million. Time deposits represented 65.7% of deposits, and approximately $32.2 million of time deposits had denominations of at least $100,000.
• The Bank had $20.0 million of FHLB advances outstanding against a $31.7 million pre-arranged line of credit. Additional lines totaled $3.7 million with SunTrust, Servis First Bank and the Federal Reserve.
• The Company was in technical default on its $5.155 million junior subordinated debenture and had accrued $955,000 of unpaid interest. The holders could demand payment of principal and accrued interest, creating substantial doubt about the Company’s ability to continue as a going concern.
• The Bank’s Tier 1 leverage ratio was 7.59% and total risk-based capital ratio was 11.40% at December 31, 2015. These were below the Consent Order requirements of 8.0% and 12.0%, respectively. Management estimated that approximately $541,000 of additional capital was needed to meet the total risk-based capital requirement.
• The Company stated that it had no commitments from third parties to purchase additional shares, and the timing, pricing and terms of any future capital raise were uncertain.
• The Company and Bank could not pay cash dividends at year-end. Dividends, additional debt, stock redemptions and payments on subordinated debt were subject to regulatory restrictions or approvals.

Material Changes Versus 2014

• The Company moved from $1.61 million of net income to a $163,000 net loss, driven primarily by lower net interest income and higher noninterest expense.
• Net interest margin narrowed from 3.93% to 3.37%, reflecting lower loan and securities yields.
• Loans and deposits grew, while securities, cash and FHLB borrowings declined.
• Asset quality improved materially, with impaired loans declining by approximately $4.7 million and foreclosed real estate declining to $4.0 million from $4.9 million.
• The Bank remained below the higher capital levels required by its regulatory Consent Order, despite reporting capital ratios above ordinary regulatory minimums.
• On January 11, 2016, the Company effected a one-for-ten reverse stock split and reduced authorized common shares to 5 million. Reported per-share amounts were retroactively adjusted.

Guidance, Outlook, Risks and Unusual Items

• Management’s strategy emphasizes stabilizing the loan portfolio, increasing and diversifying loan originations, reducing deposit costs, improving capital ratios and returning to profitability.
• The FDIC and Florida Office of Financial Regulation Consent Order, amended February 28, 2014, remained in effect. It requires enhanced governance, management, asset-quality controls, liquidity and interest-rate-risk plans, restrictions on brokered deposits and distributions, and minimum capital ratios.
• A 2015 regulatory examination identified material weaknesses in the Bank’s Bank Secrecy Act and anti-money-laundering program. The Bank entered into a BSA Memorandum of Understanding on July 27, 2015; no fine was imposed.
• The independent auditor issued an unqualified opinion but emphasized substantial doubt about going-concern status because of the debenture default and potential demand for repayment. The financial statements contain no adjustments for this uncertainty.
• Management expected a director to continue efforts to acquire the debenture and provide forbearance, but litigation prevented the Trustee from completing the proposed sale as of August 31, 2015.
• Interest-rate risk is significant. The Bank reported a cumulative one-year repricing gap of negative $39.3 million, or negative 30.84% of total assets, indicating greater near-term rate-sensitive liabilities than assets.
• Loan concentrations in South Florida real estate expose the Bank to local economic conditions, collateral values, borrower performance and interest-rate changes. Commercial real estate represented 34.3% of gross loans, and total real estate-secured loans represented approximately 73.4%.
• On January 6, 2016, a sale of a judgment generated a $1.8 million recovery of previously charged-off amounts, increasing the allowance for loan losses to approximately $4.1 million. Management requested regulatory approval for a partial reversal; the filing did not report a final response.
• Commitments to extend credit totaled $4.3 million at December 31, 2015. Future operating lease payments totaled approximately $115,000.

Most Important Facts for Investors to Verify

• Whether the Bank and Company obtained sufficient capital to satisfy the Consent Order’s 8.0% leverage and 12.0% total risk-based capital requirements.
• The current status and enforceability of the $5.155 million debenture default, $955,000 accrued interest, Trustee litigation and proposed director purchase.
• Whether the auditor’s going-concern concern has been resolved and whether any repayment demand or restructuring occurred.
• Regulatory follow-up on the BSA/AML Memorandum of Understanding and the Bank’s compliance with the continuing Consent Order.
• The sustainability of deposit growth, particularly the high proportion of time deposits and large-denomination deposits.
• Subsequent changes in impaired loans, foreclosed real estate, charge-offs, recoveries and the allowance for loan losses.
• Whether the January 2016 $1.8 million loan-loss recovery was retained in regulatory capital or partially reversed following regulatory review.
• Future profitability given the lower net interest margin, negative near-term repricing gap, real-estate concentration and continuing regulatory restrictions.