OptimumBank Holdings, Inc. — 2019 Q2 Form 10-Q Summary
Business Context and Reporting Period
OptimumBank Holdings, Inc. is a one-bank holding company whose Florida-chartered subsidiary operates three community banking offices in Broward County, Florida. The filing covers the three and six months ended June 30, 2019; financial statements are unaudited and presented in thousands, except per-share amounts.
Key Financial Metrics
| Metric | Q2 2019 | Q2 2018 | Six Months 2019 | Six Months 2018 |
|---|---|---|---|---|
| Interest income | $1.246 million | $1.043 million | $2.434 million | $2.055 million |
| Net interest income | $753 thousand | $758 thousand | $1.502 million | $1.510 million |
| Net interest margin | 2.89% | 3.45% | 2.94% | 3.40% |
| Noninterest income | $87 thousand | $35 thousand | $124 thousand | $49 thousand |
| Noninterest expense | $1.270 million | $989 thousand | $2.254 million | $2.040 million |
| Net income (loss) | $(430) thousand | $1.904 million | $(576) thousand | $1.619 million |
| Basic and diluted EPS | $(0.23) | $1.35 | $(0.31) | $1.25 |
At June 30, 2019, total assets were $111.3 million, up from $100.1 million at December 31, 2018. Loans, net, were $80.9 million versus $77.2 million; total deposits were $85.9 million versus $62.4 million; and stockholders’ equity was $5.0 million versus $5.3 million. The allowance for loan losses was $2.1 million, or 2.47% of loans, compared with $2.2 million, or 2.83%, at year-end 2018.
Six-month operating cash flow was $(436) thousand, investing cash flow was $(6.593) million, and financing cash flow was $11.363 million. Cash and cash equivalents increased to $12.317 million from $7.983 million at December 31, 2018. FHLB advances declined to $13.0 million from $24.6 million, while federal funds purchased declined to zero from $560 thousand. The Bank reported $26.6 million of FHLB borrowing capacity, a $430 thousand Federal Reserve discount-window line, and $8.4 million of correspondent-bank federal-funds lines.
At June 30, 2019, the Bank exceeded the “well capitalized” thresholds, including total capital to risk-weighted assets of 14.61%, common equity Tier 1 capital of 13.35%, and Tier 1 capital to total assets of 10.31%. The capital conservation buffer exceeded the required 2.50%.
Material Changes Versus Prior Comparable Period
- Net loss replaced the prior-year profit primarily because Q2 2018 included a $2.1 million reversal of the allowance for loan losses; no provision or credit was recorded in Q2 2019.
- Interest income increased as average loans and other interest-earning assets grew, but higher deposit costs reduced net interest income slightly and compressed the net interest margin from 3.45% to 2.89%.
- Interest expense increased to $493 thousand from $285 thousand for the quarter and to $932 thousand from $545 thousand for the six-month period, principally reflecting higher deposit balances and costs.
- Noninterest income increased because of higher loan-related fees, while noninterest expense rose $281 thousand for the quarter and $214 thousand year to date.
- Deposits increased $23.5 million during the first six months and were used primarily to repay FHLB advances and listing-service certificates of deposit.
- Loan balances increased, led by commercial real estate loans, while multi-family real estate and land and construction balances declined.
- The Bank was released from its August 2018 regulatory Memorandum of Understanding in June 2019 after examiners noted full compliance.
- The Company issued 58,309 common shares to a director for services and recorded $200 thousand of compensation expense during Q2 2019.
Guidance, Outlook, Risks, Contingencies and Unusual Items
The filing provides no quantitative earnings or revenue guidance. Management states that liquidity sources are adequate for operating needs and that the Bank met applicable capital requirements. Forward-looking results remain subject to economic, market, lending, competitive, regulatory, technology and personnel risks.
- Junior subordinated debenture default: The Company is in default on its $5.155 million debenture after deferring the maximum 20 consecutive quarterly interest payments. Accrued unpaid interest was $1.864 million at June 30, 2019. The trustee and holders may accelerate principal and accrued interest, although no acceleration had occurred. A holder represented that it would not accelerate its remaining position within twelve months from the filing date; no formal bilateral agreement had been executed.
- Regulatory restrictions: The longstanding Federal Reserve Written Agreement requires prior approval for dividends, payments on the debenture, additional debt, stock repurchases, and certain director or executive appointments. Management believes the Company is substantially compliant.
- Branch relocation and sale: The Company agreed to sell a branch for $1.4 million, finance $1.05 million of the sale price, and relocate under a new lease, subject to regulatory approval and specified timing conditions.
- Credit risk: Commercial real estate represented $47.0 million of loans. Loans rated OLEM or substandard totaled $5.9 million, and impaired loans totaled $4.2 million at June 30, 2019. No loans were in nonaccrual status or past due according to the filing.
- Tax position: Management determined that the deferred tax asset was not realizable and maintained a valuation allowance.
- Accounting changes: Adoption of the new lease standard increased assets and liabilities by $281 thousand at adoption; the June 30, 2019 right-of-use asset was $246 thousand and lease liability was $248 thousand. The Company was evaluating the effect of the forthcoming expected-credit-loss standard.
Most Important Facts for Investors to Verify
- Whether the junior subordinated debenture holder or trustee accelerates the $5.155 million principal plus $1.864 million accrued interest, and whether required regulatory approvals can be obtained.
- Whether deposit growth can continue without further increasing funding costs and compressing the net interest margin.
- The quality and concentration of the commercial real estate portfolio, including the $5.9 million of OLEM and substandard loans and the $4.2 million of impaired loans.
- The sustainability of operations absent the unusual $2.1 million allowance reversal recognized in the prior-year quarter.
- Completion, regulatory approval, financing and accounting effects of the branch sale and relocation.
- Future effects of the expected-credit-loss standard, the deferred tax asset valuation allowance, and the Federal Reserve Written Agreement.