OptimumBank Holdings, Inc. — 2020 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2020. OptimumBank Holdings, Inc. is a Florida bank holding company whose sole business is ownership of OptimumBank, a Florida-chartered community bank with three offices in Broward County. The Bank provides commercial, real estate, consumer lending, deposit, cash-management and online-banking services in the South Florida tri-county market.
The filing is an annual report, not a quarterly filing. The consolidated financial statements were audited and received an unqualified opinion. Management reported that disclosure controls and internal control over financial reporting were effective as of December 31, 2020; the auditor did not provide an internal-control attestation because the Company qualified for the applicable exemption.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total assets | $235.1 million | $126.7 million | +$108.3 million |
| Net loans | $152.5 million | $102.2 million | +$50.2 million |
| Total deposits | $190.8 million | $101.4 million | +$89.3 million |
| Stockholders’ equity | $17.8 million | $7.2 million | +$10.6 million |
| Total interest income | $6.7 million | $5.2 million | +30% |
| Net interest income | $5.0 million | $3.1 million | +60% |
| Net loss | $(782,000) | $(1.1 million) | Loss narrowed by $318,000 |
| Basic and diluted loss per share | $(0.27) | $(0.58) | Improved |
| Net interest margin | 3.14% | 2.89% | +25 basis points |
| Return on average assets | (0.5%) | (1.0%) | Improved |
| Return on average equity | (7.8%) | (21.3%) | Improved |
Interest expense declined 16% to $1.7 million, while noninterest income increased 62% to $294,000. Noninterest expense increased 11% to $5.0 million, primarily from higher salaries and benefits, occupancy and equipment costs. No income tax benefit was recorded in 2020 because the Company maintained a valuation allowance against its deferred tax assets.
Cash and cash equivalents increased to $54.6 million from $8.9 million. Net cash used in operating activities was $1.5 million, and net cash used in investing activities was $62.8 million, principally reflecting a $51.8 million net increase in loans and purchases of securities. Financing activities provided $109.9 million, including $89.4 million of deposit growth, $10.0 million of preferred-stock proceeds and $10.0 million of increased FHLB advances.
Material changes versus the prior comparable period
- Loan growth was substantial, with gross loans increasing to $154.9 million from $104.2 million. Increases were concentrated in multi-family real estate, commercial real estate and commercial loans.
- Deposits increased 88%, driven primarily by $47.7 million of additional noninterest-bearing demand deposits and $55.2 million of additional savings, NOW and money-market deposits. Time deposits declined $13.6 million.
- The loan portfolio remained concentrated in real estate: approximately 82% of loans were secured by real estate, and commercial real estate represented approximately 46% of gross loans.
- The allowance for loan losses increased through a $1.0 million provision but ended at $1.9 million, or 1.23% of total loans, compared with 1.93% at year-end 2019. Charge-offs were $1.2 million, partially offset by $61,000 of recoveries.
- Nonperforming loans and foreclosed assets were 0.9% of total assets, compared with 0.6% in 2019. Impaired loans totaled approximately $2.2 million at year-end 2020, compared with $4.0 million in 2019.
- The Company issued $10.0 million of Series B participating preferred stock to a related party to strengthen regulatory capital. It also issued $540,000 of common stock for cash, $219,000 of common stock as compensation and $514,000 of common stock in exchange for trust preferred securities.
- The Bank’s Tier 1 leverage ratio was 9.0% at December 31, 2020, above the 8.0% well-capitalized threshold under the elected community bank leverage ratio framework.
- The Company paid approximately $1.1 million in September 2020 toward accrued interest on its junior subordinated debenture, which had been in default for nonpayment of interest since 2015. Principal outstanding declined to $2.1 million from $2.6 million, and accrued interest declined to $30,000 from $995,000.
Guidance, outlook, commentary and risks
Management did not provide formal quantitative earnings or revenue guidance. Its stated objectives are to increase and diversify loan originations, reduce deposit costs by increasing demand deposits, obtain additional capital, grow the Bank and improve profitability.
COVID-19 materially affected the 2020 results and credit estimates. The Company recorded a $1.0 million loan-loss provision that management attributed largely to the pandemic and related charge-offs. The Bank granted 180-day forbearances on 60 loans totaling $43.8 million; all had exited forbearance and resumed scheduled payments by year-end. The Bank originated 204 Paycheck Protection Program loans totaling $19.2 million, with $18.4 million outstanding at December 31, 2020. The filing states that PPP loans are 100% guaranteed by the SBA.
Principal risks include deterioration in economic conditions, South Florida real estate concentration, COVID-19-related credit losses, interest-rate changes affecting margins, deposit and loan competition, regulatory requirements, capital adequacy, liquidity and the ability to realize deferred tax assets. The Bank had $23.0 million of FHLB advances, $29.1 million of remaining FHLB availability, $9.5 million of correspondent-bank lines and a $223,000 Federal Reserve line secured by $230,000 of securities.
Off-balance-sheet exposure at year-end included $5.8 million of commitments to extend credit, $9.6 million of unused lines of credit and $4.6 million of standby letters of credit. Management stated that pending litigation and other claims were not expected to have a material adverse effect.
The Company does not plan to pay dividends in the foreseeable future and expects to retain earnings to strengthen its financial position and support Bank growth. The junior subordinated debenture bears a floating rate of three-month LIBOR plus 2.45%, or 2.68% at December 31, 2020, and matures in 2034.
Important facts for investors to verify
- Whether the Bank can convert significant asset and deposit growth into sustained profitability after COVID-19-related provisions and operating expenses.
- The quality and performance of the expanded commercial real estate and commercial loan portfolios, including migration from pass to OLEM or substandard classifications.
- The adequacy of the $1.9 million allowance for loan losses under changing economic conditions and the future adoption of the current expected credit loss standard.
- The terms, economics, conversion features and related-party aspects of the $10.0 million Series B preferred-stock issuance.
- The status and future servicing requirements of the junior subordinated debenture, including any remaining default-related obligations.
- Liquidity coverage after continued loan growth, deposit fluctuations and the $23.0 million of FHLB advances.
- The concentration of deposits and loans in South Florida and the potential effect of local real estate or employment weakness.
- The realization prospects for approximately $16.9 million of federal and Florida net operating loss carryforwards, which are subject to expiration and Section 382 limitations.
- Any subsequent changes in COVID-19 loan performance, PPP loan forgiveness or SBA reimbursement status after December 31, 2020.