OptimumBank Holdings, Inc. — Q2 2020 Form 10-Q Summary
Business Context and Reporting Period
OptimumBank Holdings, Inc. is a one-bank holding company owning 100% of OptimumBank, a Florida-chartered community bank operating three offices in Broward County. The filing covers the three and six months ended June 30, 2020; financial statements are unaudited. The filing was issued August 11, 2020.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Total interest income | $1.626 million | $1.246 million | $3.129 million | $2.434 million |
| Net interest income | $1.150 million | $0.753 million | $2.146 million | $1.502 million |
| Provision for loan losses | $0.523 million | None | $0.712 million | None |
| Noninterest income | $0.033 million | $0.087 million | $0.106 million | $0.124 million |
| Noninterest expenses | $1.007 million | $1.270 million | $2.195 million | $2.254 million |
| Net loss | $0.347 million | $0.430 million | $0.655 million | $0.576 million |
| Basic and diluted loss per share | $0.12 loss | $0.23 loss | $0.23 loss | $0.31 loss |
| Net interest margin | 3.07% | 2.89% | 3.08% | 2.94% |
At June 30, 2020, total assets were $180.8 million versus $126.7 million at December 31, 2019. Gross loans were $139.1 million, up from $104.2 million, and loans net of the allowance were $135.8 million. The allowance for loan losses was $2.664 million, or 1.92% of gross loans, compared with $2.009 million, or 1.93%, at year-end 2019.
Total deposits increased to $138.1 million from $101.4 million. Cash and cash equivalents increased to $29.9 million from $8.9 million. Federal Home Loan Bank advances increased to $23.0 million from $13.0 million, and other borrowings were $5.0 million compared with none at year-end. Stockholders’ equity increased to $9.7 million from $7.2 million, primarily from new preferred and common stock proceeds.
Six-month operating cash flow was negative $0.619 million, compared with negative $0.436 million in the prior-year period. Investing cash outflow was $33.1 million, primarily reflecting a $34.3 million net increase in loans. Financing cash inflow was $54.7 million, driven by deposit growth, FHLB advances, other borrowings, and equity issuances.
Material Changes Versus Prior Comparable Period
- Q2 net interest income increased 53% to $1.150 million, primarily from loan growth; six-month net interest income increased 43%.
- The provision for loan losses was $523,000 in Q2 and $712,000 for the six-month period, largely reflecting the COVID-19 economic environment and portfolio growth.
- Despite stronger net interest income and lower operating expenses, the company remained loss-making. Q2 net loss improved from $430,000 to $347,000, while the six-month net loss increased from $576,000 to $655,000 because of the loan-loss provision and the prior period’s $52,000 tax benefit.
- Noninterest income declined 62% in Q2 and 15% for the six-month period, primarily because of lower loan-related fees.
- Average loan balances increased substantially, while the average yield on loans declined to 4.94% in Q2 2020 from 5.40% in Q2 2019. Lower funding costs helped increase the net interest margin.
- The company closed 181 Paycheck Protection Program loans totaling $18.8 million during the six months ended June 30, 2020.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management provided no quantitative earnings or revenue guidance. It stated that COVID-19 could significantly affect financial position and results, including higher troubled assets, reduced loan-payment cash flows, and lower earnings; the amount of the impact was considered unquantifiable at filing.
- The company granted 180-day forbearances on 60 loans totaling $43.8 million, representing 31.5% of the gross loan portfolio. No loans were identified as troubled debt restructurings during the reported periods.
- At June 30, 2020, loans included $1.751 million of nonaccrual loans and $17,000 of loans 60–89 days past due. Substandard loans totaled $3.944 million and OLEM loans totaled $595,000.
- The Bank reported that it was well capitalized. It elected to adopt the community bank leverage ratio framework; the reported Tier 1 capital-to-total-assets ratio was 8.51%, above the 5.00% well-capitalized threshold shown in the filing.
- Liquidity sources included $29.9 million of cash and cash equivalents, $22.0 million of unused FHLB borrowing capacity based on a $45 million facility, a $430,000 Federal Reserve discount-window line, $9.5 million of correspondent-bank lines, and a $5.0 million Paycheck Protection Program liquidity facility. Management stated that liquidity sources were adequate for operating needs.
- The $2.580 million junior subordinated debenture has been in default since 2015 because required interest payments were not made. Accrued interest was $1.067 million at June 30, 2020. The holder represented that it did not intend to accelerate the debt during the twelve months following the filing, but the obligation remains in default.
- In Q2, the company issued 100 shares of Series B participating preferred stock to a related party for $2.5 million. The preferred stock has preferential liquidation rights and is convertible, at the company’s option, into 1 million common shares, subject to adjustment provisions.
- Off-balance-sheet exposures included $5.902 million of commitments to extend credit, $5.569 million of unused lines of credit, and $1.550 million of standby letters of credit.
- Management identified general economic, credit, competition, regulatory, personnel, technology, securities-law, and COVID-19 risks. The filing states that forward-looking statements are not guarantees of future performance.
Most Important Facts for Investors to Verify
- Whether COVID-19 forbearances and PPP-related exposures result in additional delinquencies, nonaccrual loans, charge-offs, or higher provisions.
- Whether the $2.664 million allowance remains adequate relative to the rapidly expanded and predominantly real-estate-focused loan portfolio.
- The terms, payment status, and potential acceleration risk of the $2.580 million subordinated debenture and $1.067 million accrued interest.
- The sustainability of deposit growth, FHLB and other borrowings, and available liquidity facilities as loan funding needs continue.
- The effect of the related-party preferred stock issuance, including its liquidation preference and potential conversion into common shares.
- Future regulatory capital ratios and continued qualification under the community bank leverage ratio framework.
- Whether the company can return to profitability after absorbing credit costs, given its accumulated deficit of $32.265 million and continuing operating losses.