OptimumBank Holdings, Inc. — 2018 Q1 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, 2018, with comparisons to March 31, 2017 and December 31, 2017. Amounts are in thousands except per-share data.
Key Financial Metrics
| Metric | Q1 2018 / Mar. 31, 2018 | Comparable / Dec. 31, 2017 |
|---|---|---|
| Total assets | $88,844 | $95,866 |
| Loans, net | $69,100 | $68,220 |
| Total deposits | $55,097 | $65,251 |
| Total stockholders’ equity | $2,873 | $2,545 |
| Net interest income | $752 | $913 in Q1 2017 |
| Net loss | $(285) | $(283) in Q1 2017 |
| Basic and diluted loss per share | $(0.24) | $(0.26) in Q1 2017 |
| Net cash used in operating activities | $(6) | $80 provided in Q1 2017 |
| Cash and cash equivalents | $4,144 | $11,665 at Dec. 31, 2017 |
- Total interest income was $1,012, down from $1,193 in Q1 2017. Interest expense declined to $260 from $280, producing net interest income of $752.
- Net interest margin increased to 3.34% from 3.16%, while the interest-rate spread increased to 3.08% from 3.05%.
- Noninterest income increased to $14 from $9. Noninterest expense declined to $1,051 from $1,205, primarily because professional fees decreased by $152, largely reflecting BSA lookback costs accrued in 2017.
- No provision for loan losses was recorded in either comparable period. The allowance for loan losses was $3,993, or 5.35% of loans, versus $3,991, or 5.42%, at December 31, 2017.
- Loans increased $938 from year-end, led by residential real estate, multifamily real estate, land and construction, and commercial lending. Total loans were $72,867 before deferred fees and the allowance.
- All loans were reported as current and accruing at March 31, 2018; however, loans classified as OLEM or substandard totaled $5,976, including $3,576 of individually evaluated impaired loans.
- Borrowings included $21,000 of FHLB advances, $2,767 of federal funds purchased, and a $5,155 junior subordinated debenture. FHLB borrowing capacity was $28,700, and correspondent-bank federal funds lines totaled $8,750.
- The Bank’s March 31, 2018 regulatory ratios exceeded Consent Order requirements: Tier 1 leverage was 10.62% versus 8.00%, and total risk-based capital was 14.74% versus 12.00%. The Bank was described as well-capitalized based on ratios but could not be categorized above “adequately capitalized” while the Consent Order remained in effect.
Material Changes Versus Prior Period
- Net loss was broadly unchanged at $(285) versus $(283) in Q1 2017, although the per-share loss improved because the weighted-average share count increased to 1,173,018 from 1,103,447.
- Interest income fell $181, primarily because average loans and securities declined substantially from the prior year. Lower deposit interest expense and lower noninterest expense substantially offset the decline.
- Total assets declined approximately $7.1 million from year-end, primarily because deposits decreased $10.2 million. Cash and cash equivalents fell $7.5 million during the quarter.
- Equity increased $328 to $2,873, primarily from common-stock issuances and stock issued or reclassified as director compensation, partially offset by the quarterly loss and a $47 decrease in accumulated other comprehensive income.
- On March 30, 2018, the Company sold 20,814 common shares for $46 to the Bank’s Chairman to fund operating expenses. It also recognized $614 of common stock issued as director compensation, including $200 accrued for 36,101 shares during the quarter.
Guidance, Outlook, Risks and Unusual Items
- The filing provides no quantitative earnings or revenue guidance. Management states that first-quarter results are not necessarily indicative of full-year results.
- The Company was in default on its $5,155 junior subordinated debenture because it had deferred interest payments totaling $1,440 at March 31, 2018, the maximum permitted 20 consecutive quarterly deferrals. The holder could accelerate the principal plus accrued interest, and the filing identifies substantial doubt related to this uncertainty.
- In May 2018, a Company director purchased the debenture and agreed or offered to enter into a forbearance agreement. Terms remained under negotiation as of the filing date; the trustee had not accelerated the debt.
- The Bank remained subject to a 2016 FDIC and Florida OFR Consent Order and a 2010 Federal Reserve Written Agreement. These restrict dividends, certain debt and capital transactions, payments on the debenture, and other activities without regulatory approval. The Bank also cannot solicit brokered deposits.
- The Bank accrued $238 for an anticipated BSA lookback review estimated to cost $250 to $300. The independent firm’s engagement remained subject to FDIC approval.
- As of March 31, 2018, brokered deposits totaled $344 and were scheduled to mature in April 2018.
- Management had requested a partial reversal of approximately $1.8 million previously added to the allowance for loan losses following a 2016 recovery; no positive FDIC response had been received by March 31, 2018.
- The Company recorded a valuation allowance against its deferred tax asset because management concluded that realization was not sufficiently supportable.
- Available-for-sale securities had a fair value of $10,990 and gross unrealized losses of $398. Management attributed the losses to market conditions rather than credit quality and did not consider them other-than-temporary.
- Off-balance-sheet commitments included $1,494 of commitments to extend credit and $1,313 of unused lines of credit. No standby letters of credit were reported.
- Management identified economic, market, lending, liquidity, regulatory, competition, technology, personnel, and legal or compliance risks that could cause actual results to differ materially from forward-looking statements.
Investor Verification Priorities
- Verify whether the director’s purchase of the debenture resulted in a signed forbearance agreement and whether acceleration rights were waived or modified.
- Assess the Company’s ability to maintain liquidity after the $10.2 million quarterly deposit decline and the reduction of cash to $4.1 million.
- Review compliance progress and any further requirements under the Consent Order, Written Agreement, BSA lookback review, and brokered-deposit restrictions.
- Monitor impaired, OLEM, and substandard loans, particularly commercial and commercial real estate exposures, and test whether the $4.0 million allowance remains adequate.
- Reconcile share counts: the balance sheet reported 1,286,503 common shares outstanding at March 31, while the cover page reported 1,365,689 shares outstanding as of May 11, 2018, reflecting subsequent issuances.
- Confirm the April 2018 conversion of seven Series A preferred shares into 79,186 common shares and its effect on capitalization and dilution.