OptimumBank Holdings, Inc. — Fiscal 2021 Form 10-K Summary
Business context and reporting period
OptimumBank Holdings, Inc. is a Florida bank holding company that owns OptimumBank, a Florida-chartered, FDIC-insured community bank serving individuals and businesses through two Broward County offices. The filing covers the year ended December 31, 2021; it is an annual filing rather than a quarterly Q4 filing. The Company had 38 full-time employees at year-end.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total assets | $351.9 million | $235.1 million | +$116.7 million |
| Total loans, gross | $251.4 million | $154.9 million | +$96.5 million |
| Loans, net | $247.9 million | $152.5 million | +$95.4 million |
| Total deposits | $292.5 million | $190.8 million | +$101.7 million |
| Stockholders’ equity | $38.5 million | $17.8 million | +$20.6 million |
| Total interest income | $10.4 million | $6.7 million | +55% |
| Net interest income | $9.4 million | $5.0 million | +88% |
| Net interest margin | 3.56% | 3.14% | +42 basis points |
| Net income (loss) | $6.3 million | $(0.8) million | +$7.1 million |
| Basic and diluted earnings per share | $1.61 | $(0.27) | Improved |
Net income included a $3.2 million income tax benefit resulting primarily from the reversal of a previously recorded $4.0 million valuation allowance on deferred tax assets. The Company also recorded a $340,000 gain on the sale of its Plantation branch. Excluding these unusual items, the filing does not provide a separately stated adjusted net income measure.
Cash flow, liquidity, debt, and capital
- Cash and cash equivalents ended the year at $59.0 million, compared with $54.6 million at December 31, 2020.
- Operating activities provided $3.8 million of cash, while investing activities used $108.8 million, primarily reflecting $95.6 million of net loan growth and purchases of available-for-sale securities. Financing activities provided $109.3 million, principally from deposit growth and capital issuances.
- Federal Home Loan Bank advances were $18.0 million at year-end, down from $23.0 million. Remaining FHLB borrowing availability was $65.7 million. The Bank also had $19.5 million of correspondent-bank lines and a $116,000 Federal Reserve line, which was undrawn.
- The Bank’s Tier 1 leverage ratio was 10.64%, above the 8.5% community bank leverage ratio requirement for 2021 and above the 9% requirement applicable for 2022 and later years under the cited framework.
- The Company issued $9.0 million of Series B preferred stock and approximately $3.6 million of common stock for cash during 2021. It does not plan to pay cash dividends in the foreseeable future.
Material changes versus the prior comparable period
- Loan growth was substantial, led by increases of $55.1 million in commercial real estate, $29.4 million in multifamily real estate, and $17.1 million in consumer loans. Approximately 85% of the loan portfolio was secured by real estate, and approximately 51% was secured by commercial real estate.
- Deposits increased $101.7 million, including a $65.8 million increase in noninterest-bearing demand deposits and a $44.4 million increase in savings, NOW, and money-market deposits. Time deposits declined $8.5 million.
- The allowance for loan losses increased to $3.1 million from $1.9 million, although it declined slightly as a percentage of gross loans to 1.22% from 1.23%. The provision for loan losses increased to $1.2 million from $1.0 million.
- Impaired loans declined to zero at December 31, 2021 from $2.2 million at the prior year-end. Past-due loans were $267,000, compared with $983,000 in 2020, and there were no nonaccrual loans reported at year-end.
- Noninterest income increased to $1.8 million from $294,000, primarily due to higher deposit service charges and the $340,000 branch-sale gain. Noninterest expense increased 37% to $6.9 million, driven mainly by salaries, employee benefits, and data processing.
- The Company exchanged all outstanding trust preferred securities and accrued interest for 700,614 common shares, eliminating the $2.1 million junior subordinated debenture outstanding at year-end 2020.
- Available-for-sale and held-to-maturity debt securities increased to approximately $35.4 million from $22.3 million. Accumulated other comprehensive loss increased to $635,000 from $69,000, primarily reflecting unrealized losses on available-for-sale securities.
- The Bank sold its Plantation branch in November 2021 for $1.081 million and recorded a $340,000 gain.
Outlook, management commentary, risks, and unusual items
- Management’s strategy is to increase and diversify loan originations, lower deposit costs by emphasizing noninterest-bearing deposits, and increase capital to support growth and profitability.
- The principal risks include concentration of lending in South Florida real estate, particularly commercial real estate; deterioration in local or national economic conditions; changes in interest rates that could compress margins; deposit and loan competition; regulatory changes; inflation; and COVID-19-related effects on borrowers, liquidity, capital, and credit quality.
- The Bank had originated 502 Paycheck Protection Program loans totaling $37.4 million; approximately $10 million remained outstanding at December 31, 2021 and was 100% guaranteed by the SBA.
- The loan portfolio was heavily weighted toward variable-rate loans, with $184.7 million of variable-rate loans versus $66.7 million of fixed-rate loans. The filing states that a rapid or substantial rate increase could adversely affect earnings if assets and liabilities reprice at different speeds.
- Off-balance-sheet exposures included $11.9 million of commitments to extend credit, $11.8 million of unused credit lines, and $4.6 million of standby letters of credit.
- The auditor issued an unqualified opinion on the consolidated financial statements. The critical audit matter involved the qualitative adjustments used in estimating the general reserve portion of the allowance for loan losses. The auditor did not provide an opinion on internal control effectiveness because the Company qualified for the smaller reporting company exemption from auditor attestation; management concluded its internal controls were effective.
- Management reported no pending litigation or other contingencies expected to have a material adverse effect. The filing provides no specific forward earnings or revenue guidance.
Important facts for investors to verify
- Whether rapid loan growth, especially in commercial real estate and multifamily lending, is supported by sustained underwriting quality and adequate allowance coverage.
- The sensitivity of net interest income and capital to rising interest rates, deposit repricing, deposit runoff, and changes in the yield curve.
- The sustainability of reported net income after excluding the $3.2 million deferred tax benefit and $340,000 branch-sale gain.
- Future credit performance of the South Florida real estate portfolio, including migration from pass or OLEM classifications and changes in collateral values.
- The effect of the planned 2022 North Miami Beach location and related lease obligations on operating expenses and branch expansion.
- The future impact of the expected adoption of the current expected credit loss standard, which the Company stated would apply beginning after December 15, 2022 and had not yet quantified.
- The terms, conversion features, and liquidation preferences of the Series B preferred stock, including its potential conversion into common shares.