OptimumBank Holdings, Inc. — 1Q 2019 Form 10-Q Summary
Business context and reporting period
OptimumBank Holdings, Inc. is a one-bank holding company for OptimumBank, a Florida-chartered community bank operating three offices in Broward County, Florida. The filing covers the unaudited three months ended March 31, 2019, with comparisons to the three months ended March 31, 2018 and December 31, 2018 balance-sheet data. The company had 1,858,020 common shares outstanding as of May 6, 2019.
Key financial metrics
| Metric | March 31, 2019 / 1Q 2019 | Comparable period or prior date |
|---|---|---|
| Total assets | $106.7 million | $100.4 million at December 31, 2018 |
| Total deposits | $80.8 million | $62.4 million at December 31, 2018 |
| Loans, net | $78.5 million | $77.2 million at December 31, 2018 |
| Stockholders’ equity | $5.2 million; 4.8% of total assets | $5.3 million; 5.3% at December 31, 2018 |
| Interest income | $1.202 million | $1.012 million in 1Q 2018 |
| Net interest income | $749,000 | $752,000 in 1Q 2018 |
| Net interest margin | 3.02% | 3.34% in 1Q 2018 |
| Noninterest income | $37,000 | $14,000 in 1Q 2018 |
| Noninterest expense | $984,000 | $1.051 million in 1Q 2018 |
| Net loss | $146,000, or $0.08 per share | $285,000, or $0.24 per share, in 1Q 2018 |
| Return on average assets | (0.56%) annualized | 0.9% for full-year 2018 |
| Return on average equity | (11.1%) annualized | 19.8% for full-year 2018 |
| Cash and cash equivalents | $13.6 million | $8.0 million at December 31, 2018; $4.1 million at March 31, 2018 |
Cash flow, debt, liquidity and capital
- Operating activities used $190,000 of cash; investing activities used $520,000; financing activities provided $6.286 million. Cash and cash equivalents increased $5.576 million during the quarter.
- Deposits increased $18.446 million in the quarter, while Federal Home Loan Bank advances decreased $11.6 million to $13.0 million. The company had no federal funds purchased outstanding at March 31, 2019.
- The company reported $26.6 million of established FHLB borrowing capacity, with $13.0 million outstanding, a $430,000 Federal Reserve discount-window line, and $8.4 million of correspondent-bank federal-funds lines. Management stated that liquidity sources were adequate for operating needs.
- The Bank exceeded its “well capitalized” thresholds at March 31, 2019: total risk-based capital was 15.52%, Tier 1 risk-based capital was 14.26%, common equity Tier 1 capital was 14.26%, and Tier 1 leverage capital was 10.86%.
- The allowance for loan losses was $2.047 million, or 2.55% of loans, versus $2.243 million, or 2.83%, at December 31, 2018. No provision for loan losses was recorded in either comparable quarter.
Material changes versus prior comparable period
- Interest income increased $190,000, primarily reflecting higher loan balances and yields; loan interest income increased to $1.090 million from $916,000.
- Interest expense increased $193,000 to $453,000, including a $177,000 increase in deposit interest expense, as deposit balances and deposit costs rose.
- Net interest income was essentially unchanged, while the net interest margin declined to 3.02% from 3.34% because funding costs increased faster than asset yields.
- Noninterest income increased $23,000 to $37,000, and noninterest expense decreased $67,000 to $984,000.
- The net loss improved by $139,000, aided by a $52,000 income tax benefit in 2019 and lower operating expenses. Basic and diluted loss per share improved to $0.08 from $0.24, partly reflecting the higher share count.
- Loans increased $1.1 million from year-end. Commercial real estate loans increased $6.3 million, while multi-family real estate loans declined $1.7 million and land and construction loans declined $2.0 million.
Guidance, outlook, risks and unusual items
- The filing provides no quantitative earnings or revenue guidance. Management’s discussion states that quarterly results are not necessarily indicative of full-year results.
- The company is in default on its $5.155 million junior subordinated debenture after deferring the maximum 20 consecutive quarterly interest payments. Accrued unpaid interest was $1.776 million at March 31, 2019. Holders and the trustee may accelerate principal plus accrued interest, although no acceleration had occurred as of the filing date.
- A holder affiliated with a company director represented that it would not accelerate the remaining 4,306 trust preferred securities for twelve months from May 14, 2019, but the company and holder had not executed a formal definitive bilateral agreement.
- An FDIC and Florida Office of Financial Regulation Memorandum of Understanding requires improvements in management, strategic planning, interest-rate management, asset growth controls and Bank Secrecy Act administration. It prohibits Bank dividends. A separate Federal Reserve Written Agreement restricts dividends, distributions, debt, share repurchases and certain management actions without prior approval.
- The Bank reported substantial compliance with both regulatory agreements and stated that its capital conservation buffer exceeded the 2.50% minimum. However, these agreements and the debenture default materially constrain financial flexibility.
- The company adopted the new lease accounting standard on January 1, 2019, increasing assets by $277,000 and liabilities by $281,000 at adoption. The March 31, 2019 right-of-use asset was $259,000 and lease liability was $264,000.
- Loan credit quality remained a key risk. Loans classified as substandard totaled $5.211 million at March 31, 2019, compared with $6.743 million at year-end 2018; all loans were reported as current and no loans were nonaccrual at March 31, 2019.
- Forward-looking risks identified by management include economic and market conditions, lending losses, competition, regulatory changes, technology changes, key-person risk and potential securities-law liabilities.
Most important facts for investors to verify
- Whether the junior subordinated debenture holders or trustee could accelerate the $5.155 million principal and $1.776 million accrued interest after the stated standstill period.
- The company’s ability to restore profitability while maintaining deposit growth and controlling rising funding costs.
- The adequacy of the $2.047 million loan-loss allowance, particularly for commercial real estate and commercial loans.
- Continued compliance with the FDIC/OFR MOU and Federal Reserve Written Agreement, including restrictions on dividends, debt and debenture payments.
- Future liquidity availability under FHLB, Federal Reserve and correspondent-bank facilities and the collateral or approval requirements attached to those facilities.
- The effect of the forthcoming expected-credit-loss standard on the allowance for loan losses and regulatory capital.