Business Context and Reporting Period
OptimumBank Holdings, Inc. is a Florida one-bank holding company operating OptimumBank and real-estate subsidiaries that hold and dispose of foreclosed property. The Bank provides commercial banking services through three Broward County, Florida offices. This unaudited Form 10-Q covers the three and six months ended June 30, 2014, filed August 14, 2014.
Key Financial Metrics
| Metric | Q2 2014 / June 30, 2014 | Comparable period / December 31, 2013 |
|---|---|---|
| Net earnings | $1.343 million; $0.16 per share | Q2 2013 net loss of $2.259 million; $(0.29) per share |
| Six-month net earnings | $1.673 million; $0.21 per share | Six-month 2013 net loss of $4.416 million; $(0.56) per share |
| Net interest income | Q2: $1.581 million; six months: $2.571 million | Q2: $0.738 million; six months: $1.476 million |
| Net interest margin | Q2: 5.41%; six months: 4.40% | Q2: 2.44%; six months: 2.41% |
| Total assets | $128.364 million | $128.783 million at December 31, 2013 |
| Loans, net | $71.552 million | $79.249 million |
| Securities available for sale | $33.655 million | $22.990 million |
| Total deposits | $95.863 million | $98.692 million |
| FHLB advances | $22.740 million | $22.740 million |
| Junior subordinated debenture | $5.155 million | $5.155 million |
| Stockholders’ equity | $1.979 million | $(0.216) million |
| Cash and cash equivalents | $13.428 million | $13.881 million |
| Allowance for loan losses | $2.238 million, or 3.0% of loans | $2.211 million, or 2.73% of loans |
Cash Flow, Liquidity, and Capital
- Six-month operating cash flow was positive $1.537 million, compared with negative $0.637 million in 2013.
- Investing activities provided $0.519 million, including $6.850 million from the net decrease in loans and $3.966 million from foreclosed-real-estate sales, partly offset by $12.182 million of securities purchases.
- Financing activities used $2.509 million, primarily reflecting a $2.829 million decrease in deposits. Cash and cash equivalents declined $0.453 million during the six months.
- The Bank had $22.7 million of FHLB borrowings against $31.0 million of established capacity, an available Federal Reserve discount-window line of $1.8 million, a $2.5 million SunTrust line, and a $1.0 million Independent Bankers Bank line. Management stated that liquidity sources were adequate for operating needs.
- At June 30, 2014, the Bank’s leverage ratio was 5.69% versus the 8% Consent Order requirement, and its total risk-based capital ratio was 9.47% versus the 12% requirement. Management estimated that approximately $2.3 million of additional capital was needed to meet the 12% target.
Material Changes Versus Prior Comparable Period
- Profitability improved substantially: Q2 net earnings increased by $3.602 million year over year, and six-month results improved by $6.089 million.
- Net interest income increased 114% in Q2 and 74% for the six-month period, driven by higher loan and securities income and substantially lower funding costs.
- Interest expense declined to $0.235 million in Q2 from $0.528 million and to $0.480 million for six months from $1.093 million. The decline reflects lower deposit costs and the December 2013 replacement of higher-cost FHLB advances with lower-cost advances.
- No loan-loss provision was recorded in either 2014 period, compared with $0.822 million in Q2 2013 and $2.194 million in the first six months of 2013.
- Noninterest income rose primarily because of a $0.470 million loan-cost recovery related to two nonaccrual loans repaid by borrowers.
- Noninterest expense fell to $0.786 million in Q2 and $1.562 million for six months, compared with $2.057 million and $3.421 million, respectively, largely because of lower foreclosed-real-estate expenses. No securities other-than-temporary impairment was recorded in 2014, compared with $0.149 million in Q2 2013 and $0.353 million for the first six months of 2013.
- Loans declined $7.5 million from year-end, while securities increased $10.7 million and foreclosed real estate declined $2.8 million. Deposits declined $2.8 million.
Guidance, Outlook, Risks, and Unusual Items
- Management forecast profitability for 2014 unless unforeseen loan-loss provisions occur and concluded that the Company could continue as a going concern through at least June 30, 2015. The filing cautions that quarterly results are not necessarily indicative of full-year results.
- The Company remains subject to a 2010 Federal Reserve Written Agreement, and the Bank remains subject to an amended FDIC/OFR Consent Order effective February 28, 2014. Restrictions include capital requirements, limitations on dividends and certain payments, restrictions on brokered deposits and asset growth, and requirements addressing loan quality, commercial-real-estate concentration, liquidity, and risk management.
- The Bank was not compliant at quarter-end with the 8% Tier 1 leverage requirement, the 12% total risk-based capital requirement, or the requirement to reduce its commercial-real-estate concentration. There can be no assurance that planned capital raising will succeed.
- The Company sold 714,286 common shares for $0.800 million on July 1, 2014 and expected to raise an additional $3 million to $4 million from existing and new investors. The filing does not confirm completion of that broader financing.
- The Company had deferred interest on its junior subordinated debenture. Accrued and unpaid interest was $0.714 million at June 30, 2014 and was expected to become due in October 2014 after 20 consecutive quarterly deferrals, subject to regulatory approval.
- Deferred tax assets were fully subject to a valuation allowance because management determined realization was more likely than not unavailable at June 30, 2014. Management believed sufficient taxable income could permit reversal in 2015.
- Key risks include additional loan losses, commercial-real-estate exposure, foreclosed-property valuations and sales, deposit attrition caused by rate restrictions, regulatory actions, capital-raising failure, market and economic conditions, and dependence on management and key personnel.
Investor Verification Checklist
- Verify whether the July 1, 2014 $0.8 million equity issuance and the proposed $3 million to $4 million capital raise were completed and whether they restored compliance with the Consent Order.
- Monitor the Bank’s Tier 1 leverage and total risk-based capital ratios against the 8% and 12% requirements.
- Assess whether the reported improvement in earnings is sustainable without the $0.470 million loan-cost recovery, reduced foreclosed-real-estate costs, and zero loan-loss provision.
- Review nonaccrual, impaired, substandard, and special-mention loans, including $4.631 million of nonaccrual loans and $13.590 million of substandard loans at June 30, 2014.
- Confirm the source and timing of funds for the $0.714 million deferred debenture interest obligation and required regulatory approval.
- Evaluate deposit trends, available borrowing capacity, securities-market exposure, and the Bank’s progress in reducing commercial-real-estate concentration.