Business Context and Reporting Period
OptimumBank Holdings, Inc. is a Florida one-bank holding company whose wholly owned subsidiary, OptimumBank, operates three community banking offices in Broward County, Florida. The company also manages and disposes of foreclosed real estate through subsidiaries. This unaudited Form 10-Q covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods and December 31, 2011 balance-sheet amounts.
Financial Condition and Key Metrics
| Metric | September 30, 2012 / Q3 2012 | Comparable Period or December 31, 2011 |
|---|---|---|
| Total assets | $150.0 million | $154.5 million at December 31, 2011 |
| Cash and cash equivalents | $27.4 million | $22.8 million at December 31, 2011 |
| Securities available for sale | $21.6 million | $28.9 million at December 31, 2011 |
| Loans, net | $85.5 million | $89.2 million at December 31, 2011 |
| Foreclosed real estate | $10.4 million | $7.6 million at December 31, 2011 |
| Total deposits | $105.5 million | $107.9 million at December 31, 2011 |
| FHLB advances | $27.7 million | $31.7 million at December 31, 2011 |
| Stockholders’ equity | $8.9 million | $6.8 million at December 31, 2011 |
| Net loss, three months | $1.0 million, or $(0.04) per share | $0.6 million loss, or $(0.69) per share |
| Net loss, nine months | $2.4 million, or $(0.09) per share | $3.7 million loss, or $(4.50) per share |
| Net interest income, three months | $0.7 million | $0.7 million |
| Net interest income, nine months | $1.9 million | $2.4 million |
| Net interest margin | 1.81% for Q3; 1.79% for nine months | 1.69% for Q3; 1.87% for nine months |
| Allowance for loan losses | $1.9 million, or 2.2% of loans | $2.3 million, or 2.6% at December 31, 2011 |
Revenue, Profitability and Expenses
- Interest income declined to $1.3 million in Q3 2012 from $1.5 million and to $3.9 million for the nine months from $5.1 million, primarily because average loan and securities balances decreased.
- Interest expense declined to $0.6 million in Q3 from $0.8 million and to $2.0 million for the nine months from $2.6 million, mainly due to lower deposit balances and rates.
- The Q3 provision for loan losses was $197,000, compared with a $243,000 credit in Q3 2011. The nine-month provision was $378,000, compared with $652,000 in 2011.
- Noninterest income was $10,000 in Q3 and $198,000 for the nine months, compared with $10,000 and $232,000, respectively, in 2011.
- Noninterest expense was $1.4 million in Q3 and $3.9 million for the nine months, compared with $1.5 million and $5.7 million, respectively. Nine-month savings primarily reflected lower foreclosed-real-estate expense, professional fees and regulatory assessments.
- The company recorded other-than-temporary impairment charges on securities of $101,000 in Q3 and $204,000 for the nine months; no such charges were recorded in the comparable 2011 periods.
Cash Flow, Debt and Liquidity
- Nine-month operating cash flow was negative $2.0 million, compared with negative $1.7 million in 2011.
- Investing activities provided $9.1 million, primarily from securities repayments and maturities, compared with $26.6 million in 2011.
- Financing activities used $2.5 million, including a $4.0 million repayment of FHLB advances, partly offset by $3.4 million from common-stock sales.
- Cash and cash equivalents increased by $4.6 million to $27.4 million.
- At September 30, 2012, FHLB borrowings of $27.7 million utilized the company’s stated $27.7 million FHLB borrowing capacity. The company also had a $1.9 million Reserve Bank discount-window line, subject to collateral and prior approval.
- The company had $6.9 million of commitments to extend credit. The filing states that management believed available liquidity sources were adequate for operating needs.
- The company had deferred interest payments on its junior subordinated debenture and trust preferred securities. Accrued and unpaid interest on the junior subordinated debenture was $446,629 at September 30, 2012.
Material Changes Versus Prior Period
- Total assets decreased $4.5 million from year-end 2011, primarily from lower securities and net loans, partly offset by higher cash.
- Loans, net decreased $3.8 million, while foreclosed real estate increased $2.8 million to $10.4 million. Loans transferred to foreclosed real estate totaled $3.2 million during the first nine months.
- Deposits declined $2.4 million, principally because of lower time deposits; FHLB advances declined $4.0 million.
- Equity increased $2.1 million, primarily due to $3.4 million of common-stock proceeds and a $1.0 million improvement in accumulated other comprehensive income, partly offset by the nine-month net loss.
- The company issued 8.45 million common shares for $3.4 million in the first nine months, increasing shares outstanding to 30.9 million from 22.4 million at year-end 2011. It also issued 42,225 shares as director compensation.
- Credit quality remained a significant issue. At September 30, 2012, $19.5 million of loans were classified as substandard, compared with $27.8 million at December 31, 2011, and $19.5 million was nonaccrual. No loans were identified as new troubled debt restructurings during the nine months.
Outlook, Risks, Contingencies and Unusual Items
- The filing provides no formal earnings or financial guidance. Management stated that results for the nine months are not necessarily indicative of full-year results.
- The Bank remains subject to an FDIC and Florida Office of Financial Regulation Consent Order entered in 2010, and the holding company remains subject to a Federal Reserve Written Agreement. These arrangements restrict dividends, brokered deposits, debt issuance, stock redemptions, executive appointments and other activities without regulatory approval.
- The Bank reported regulatory capital ratios above Consent Order requirements: Tier 1 leverage of 9.21%, Tier 1 risk-based capital of 12.64% and total risk-based capital of 13.90%. However, the Bank remains categorized as “adequately capitalized” until the Consent Order is lifted.
- Management disclosed that the Bank was not in compliance with certain Consent Order requirements, including scheduled reductions in adversely classified loans, retention of qualified senior personnel and an acceptable plan to reduce commercial real estate concentration. The MD&A states that the scheduled reduction of the relevant 2009 classified loans was 59.44% as of September 30, 2012.
- Management cited continuing risks from South Florida real-estate conditions, nonperforming loans, foreclosed assets and charge-offs. Commercial real estate concentration, collateral values, liquidity restrictions, competition, regulatory changes and potential loss of key personnel were identified as material risks.
- The company had an amended agreement under which Chairman Moishe Gubin could purchase up to 6.75 million additional shares at $0.40 per share, potentially generating $2.7 million. The outside closing date was extended to January 31, 2013, and the transaction remained subject to regulatory and other conditions.
- The company stated that its disclosure controls and procedures were effective and that no material changes to internal control over financial reporting occurred during the quarter.
Investor Verification Items
- Verify the status and enforcement consequences of the FDIC/OFR Consent Order and Federal Reserve Written Agreement, including the unresolved classified-loan reduction, executive staffing and commercial-real-estate concentration requirements.
- Assess the sustainability of liquidity because FHLB capacity was fully utilized and the company continued to report operating cash outflows and deferred subordinated-debt interest.
- Review nonaccrual, impaired and classified loans, foreclosed-real-estate valuations and whether the $1.9 million allowance remains adequate amid continuing real-estate exposure.
- Confirm the terms, regulatory approvals and closing status of the proposed 6.75 million-share purchase by Mr. Gubin.
- Evaluate dilution from the 2012 equity issuances and the effect of continued net losses on capital and shareholder value.
- Monitor additional securities impairment charges and changes in the fair value of the mortgage-backed securities portfolio.