OptimumBank Holdings, Inc. — Q3 2022 Form 10-Q Summary
Business context and reporting period
OptimumBank Holdings, Inc. is a one-bank holding company that owns 100% of OptimumBank, a Florida-chartered community bank serving individual and corporate customers through two Broward County offices. The filing covers the unaudited quarter and nine months ended September 30, 2022, with comparisons to September 30, 2021 and December 31, 2021. Dollar amounts are in thousands except per-share data.
Key financial metrics
| Metric | Three months ended September 30, 2022 | Nine months ended September 30, 2022 | Comparable period |
|---|---|---|---|
| Total interest income | $5,494 | $12,982 | $2,973 / $7,228 |
| Net interest income | $4,305 | $11,285 | $2,765 / $6,507 |
| Provision for loan losses | $1,374 | $2,757 | $582 / $955 |
| Noninterest income | $692 | $2,106 | $423 / $902 |
| Noninterest expense | $2,720 | $7,320 | $1,689 / $4,745 |
| Net earnings | $673 | $2,473 | $917 / $1,709 |
| Basic and diluted earnings per share | $0.11 | $0.44 | $0.21 / $0.47 |
| Net interest margin | 3.53% | 3.67% | 3.86% / 3.48% |
- Total assets were $544.8 million, up from $351.9 million at December 31, 2021.
- Net loans were $432.5 million, compared with $247.9 million at year-end 2021. Commercial real estate loans represented $294.7 million of gross loans.
- Total deposits were $422.2 million, compared with $292.5 million at year-end 2021. Time deposits increased to $124.3 million from $13.2 million.
- Federal Home Loan Bank advances increased to $68.0 million from $18.0 million.
- Cash and cash equivalents were $73.8 million, compared with $59.0 million at year-end 2021.
- Stockholders’ equity was $51.2 million, compared with $38.5 million at year-end 2021. The Bank reported a Tier 1 capital-to-total-assets ratio of 10.77%, above the 9.00% well-capitalized threshold under the CBLR framework.
- The allowance for loan losses was $5.2 million, or 1.19% of loans, compared with $3.1 million, or 1.22%, at December 31, 2021. No impaired or nonaccrual loans were reported at September 30, 2022.
Cash flow, liquidity and funding
- Operating activities provided $6.8 million of cash during the first nine months of 2022, compared with cash used of $25 thousand in the prior-year period.
- Investing activities used $186.7 million, primarily reflecting a $186.9 million net increase in loans.
- Financing activities provided $194.8 million, including $129.7 million of net deposit growth, $50.0 million of additional FHLB advances, $6.5 million from preferred stock issuance and $8.6 million from common stock issuance.
- Management stated that liquidity sources were adequate for operating needs. At September 30, 2022, the Company had $48.1 million of unused FHLB borrowing capacity and $24.5 million of available correspondent-bank federal funds lines, subject to applicable conditions and approvals.
Material changes versus prior comparable periods
- Third-quarter net earnings declined 27% to $673 thousand from $917 thousand. Higher net interest income and noninterest income were more than offset by higher loan-loss provision, operating expenses and income taxes.
- For the first nine months, net earnings increased 45% to $2.5 million from $1.7 million, although earnings per share declined to $0.44 from $0.47 because of the substantial increase in shares outstanding.
- Third-quarter net interest income increased 56%, while total interest income increased 85%. Interest expense increased 472%, primarily due to higher FHLB advances, higher interest-bearing deposit rates and changes in deposit composition.
- Net interest margin decreased to 3.53% from 3.86% in the third quarter but increased to 3.67% from 3.48% for the nine-month period.
- Noninterest income increased 64% in the quarter and 133% year to date, primarily from higher wire-transfer and ACH fees. Noninterest expense increased 61% in the quarter and 54% year to date, driven primarily by salaries and benefits, data processing and other operating costs.
- Accumulated other comprehensive loss increased to $5.8 million from $635 thousand at year-end 2021, primarily from unrealized losses on available-for-sale debt securities. Management attributed the losses to market conditions rather than credit deterioration and stated that it intended and was able to hold the securities until recovery or maturity.
Guidance, outlook, risks and unusual items
- The filing provides no formal earnings, revenue or balance-sheet guidance. Management emphasizes continued loan and deposit growth and states that reported interim results are not necessarily indicative of full-year results.
- Loan growth was concentrated in commercial real estate, increasing exposure to real-estate values, borrower cash flows, interest rates and local economic conditions. Management increased the loan-loss provision primarily because of loan-volume growth and related evaluation factors.
- Management identifies risks from adverse economic, political and market conditions; lending losses; rising interest rates; competition; regulatory changes; loss of key personnel; technology changes; and potential securities-law liabilities.
- The Company had $20.3 million of commitments to extend credit, $20.0 million of unused lines of credit and $4.3 million of standby letters of credit at September 30, 2022.
- The Company issued 674,222 common shares in a private placement at $4.50 per share during the third quarter, raising approximately $3.0 million. It also issued 67,182 shares to a director for services and recorded $275 thousand of compensation expense.
- In the first quarter, the Company issued 260 Series B-2 preferred shares for $6.5 million. The preferred stock is convertible subject to stated conditions and has preferential liquidation rights.
- The Company expects adoption of ASU 2016-13, the current expected credit loss standard, to have no material effect on its financial statements, although the filing notes that implementation involves significant estimation and judgment.
- Management reported effective disclosure controls and procedures and no material changes in internal control over financial reporting. It also stated that normal-course claims were not expected to have a material effect.
Important facts for investors to verify
- Verify the sustainability and credit quality of the rapid commercial real estate loan growth, including concentration, collateral values, borrower cash flows and future nonaccrual trends.
- Verify the adequacy of the $5.2 million loan-loss allowance and the potential effect of adopting the current expected credit loss standard.
- Monitor deposit pricing, the sharp increase in time deposits, FHLB borrowing costs and the effect of rising interest rates on net interest margin and liquidity.
- Assess the economic and capital impact if unrealized securities losses become realized or if securities must be sold before maturity.
- Review the terms, dilution potential and liquidation preferences of the Series B preferred stock and the effect of 2022 common-stock issuances on per-share earnings.
- Confirm available borrowing capacity, collateral requirements and the Bank’s continuing compliance with well-capitalized regulatory thresholds.