OptimumBank Holdings, Inc. 2014 Form 10-K Summary
Business context and reporting period
OptimumBank Holdings, Inc. is a Florida one-bank holding company whose principal business is operating OptimumBank, a Florida state-chartered, FDIC-insured community bank. The Bank operates three offices in Broward County and primarily serves Broward, Miami-Dade and Palm Beach counties. It provides residential and commercial real estate, commercial and consumer lending, deposit, cash-management and online-banking services.
The filing covers the fiscal year ended December 31, 2014, filed March 31, 2015. Although the request identifies 2014 Q4, the filing is an annual report and does not provide a separate fourth-quarter income statement.
Key financial metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total assets | $124.5 million | $128.8 million | Down $4.3 million |
| Net loans | $75.8 million | $79.2 million | Down $3.4 million |
| Deposits | $91.6 million | $98.7 million | Down $7.1 million |
| Securities available for sale | $26.7 million | $23.0 million | Up $3.8 million |
| Stockholders’ equity | $3.0 million | $(0.2) million | Improved by $3.2 million |
| Net interest income | $4.5 million | $3.4 million | Up $1.1 million |
| Net earnings/(loss) | $1.6 million | $(7.1) million | Improved by $8.7 million |
| Basic and diluted EPS | $0.18 | $(0.89) | Improved |
| Net interest margin | 3.9% | 2.9% | Up approximately 1.0 percentage point |
Interest income increased to $5.4 million from $5.3 million, while interest expense declined to $0.9 million from $1.9 million. The provision for loan losses was zero versus $2.2 million in 2013. Noninterest income rose to $0.6 million from $0.1 million, and reported noninterest expense fell to approximately $3.4 million from $7.7 million. The improvement included lower foreclosed-real-estate costs, no loss on early extinguishment of debt, lower professional and other expenses, and a gain on sale of foreclosed real estate.
Operating activities provided $1.3 million of cash, compared with cash used of $3.0 million in 2013. Investing activities provided $2.8 million, including securities sales, loan payoffs and foreclosed-real-estate sales. Financing activities used $5.9 million, primarily because deposits declined $7.1 million. Cash and cash equivalents ended at $12.1 million, down from $13.9 million.
Total loans before the allowance were $77.9 million, with approximately 77.9% concentrated in real estate lending. The allowance for loan losses was $2.2 million, or 2.88% of total loans, compared with 2.73% in 2013. Impaired loans were approximately $10.1 million, and impaired loans plus foreclosed real estate represented approximately 12.1% of total assets.
Outstanding Federal Home Loan Bank advances were $22.7 million. The Company also reported a $5.2 million junior subordinated debenture and $0.8 million of accrued, unpaid interest on that debenture at year-end. The filing elsewhere states accrued interest of $793,000.
Material changes versus the prior comparable period
- The Company returned to profitability, reporting $1.6 million of net earnings after a $7.1 million loss in 2013.
- Net interest income increased principally because borrowing costs declined after higher-cost advances were replaced with lower-cost advances and deposit pricing costs fell.
- Credit-cost pressure eased: no loan-loss provision was recorded in 2014, compared with a $2.2 million provision in 2013, and no loan charge-offs were reported in 2014.
- Impaired loans declined from approximately $13.5 million to $10.1 million, nonaccrual loans declined from $8.8 million to $4.3 million, and foreclosed real estate declined from $7.6 million to $4.9 million.
- Deposits declined 7.2% to $91.6 million, while noninterest-bearing demand deposits increased to $9.2 million from $3.8 million. Time deposits remained the largest deposit category at 63.4% of total deposits.
- The Company sold common stock for approximately $1.3 million during 2014, contributing to the increase in stockholders’ equity.
Guidance, outlook, risks and unusual items
Management did not provide quantitative earnings or revenue guidance. Its stated strategy is to stabilize the loan portfolio, increase and diversify loan originations, reduce deposit costs, improve asset quality and raise capital. Management described South Florida economic conditions and asset quality as improving but remains exposed to local real estate values, borrower performance, interest rates, deposit competition and regulatory requirements.
The Bank remains subject to an amended Consent Order issued by the FDIC and Florida Office of Financial Regulation effective February 28, 2014. The order requires, among other matters, a Tier 1 leverage ratio of at least 8% and a total risk-based capital ratio of at least 12%, along with improvements in governance, loan administration, credit concentrations, liquidity, interest-rate risk and capital planning. The filing states that the Bank was not in compliance with these Consent Order ratios at December 31, 2014 and needed approximately $1.2 million of additional capital to meet the total risk-based capital requirement.
The Company also remains subject to a Federal Reserve Written Agreement that restricts dividends, payments on subordinated debt, additional debt, stock redemptions and certain management or director changes without regulatory approval. No cash dividends could be paid at December 31, 2014, and none were expected in the foreseeable future.
The Company was in technical default on its $5.155 million junior subordinated debenture after deferring interest payments for the maximum permitted twenty consecutive quarters. The holders could demand principal plus accrued interest. A director agreed to purchase the debenture and provide forbearance, but conflicting instructions to the trustee resulted in interpleader litigation filed in December 2014. The auditor’s report states that this uncertainty raises substantial doubt about the Company’s ability to continue as a going concern; the financial statements contain no related adjustments.
Management stated that it expected to raise additional equity through 2015 and thereafter, but had no third-party commitments at the filing date. The filing therefore identifies substantial uncertainty regarding the amount, timing, price and availability of additional capital.
The Company recorded $24,000 of other-than-temporary impairment on securities in 2014, compared with $362,000 in 2013. It also recorded a $320,000 tax liability related to an IRS examination; the IRS had identified a potential liability of approximately $869,000, and the Company was contesting the examination results.
Other key risks include concentration in South Florida real estate, high nonperforming and impaired assets, a negative cumulative interest-rate gap, dependence on deposits and FHLB funding, regulatory restrictions, competition, potential changes in banking regulation and the subjectivity of loan, foreclosed-real-estate and deferred-tax-asset valuations.
Most important facts for investors to verify
- Confirm the Bank’s actual regulatory capital ratios. The filing principally reports a 6.95% Tier 1 leverage ratio and a 10.67% total risk-based capital ratio, below the Consent Order requirements of 8% and 12%; another filing passage presents inconsistent 8.12% and 11.48% figures.
- Assess the probability and timing of required capital raising, including whether the approximately $1.2 million Consent Order shortfall has been cured.
- Review the status and potential acceleration of the $5.155 million debenture, accrued interest, trustee interpleader litigation and proposed director purchase.
- Evaluate whether the zero 2014 loan-loss provision is sustainable given $10.1 million of impaired loans, $4.3 million of nonaccrual loans and the real-estate concentration.
- Reconcile the reported improvement in earnings with the absence of loan-loss provisions and significant reductions in foreclosed-real-estate expenses.
- Monitor deposit attrition, the concentration of deposits in time deposits, scheduled FHLB maturities and available liquidity lines.
- Review the IRS examination, the accrued $320,000 tax liability and the possibility that the ultimate settlement could exceed the recorded amount.