OptimumBank Holdings, Inc. — Q1 2020 Form 10-Q Summary
Business Context and Reporting Period
OptimumBank Holdings, Inc. is a one-bank holding company whose subsidiary, OptimumBank, operates three community banking offices in Broward County, Florida. The filing covers the unaudited quarter ended March 31, 2020, compared with the quarter ended March 31, 2019, and includes balance-sheet comparisons with December 31, 2019. The company had 2,951,353 common shares outstanding as of May 14, 2020.
Key Financial Metrics
| Metric | Q1 2020 / March 31, 2020 | Comparable / Prior Period |
|---|---|---|
| Total assets | $141.4 million | $126.7 million at December 31, 2019 |
| Total loans | $109.4 million gross; $107.2 million net | $104.2 million gross; $102.2 million net at December 31, 2019 |
| Total deposits | $105.8 million | $101.4 million at December 31, 2019 |
| Cash and cash equivalents | $18.9 million | $8.9 million at December 31, 2019 |
| Net interest income | $996,000 | $749,000 in Q1 2019 |
| Net interest margin | 3.08% | 3.02% in Q1 2019 |
| Provision for loan losses | $189,000 | None in Q1 2019 |
| Noninterest income | $73,000 | $37,000 in Q1 2019 |
| Noninterest expense | $1.188 million | $984,000 in Q1 2019 |
| Net loss | $308,000, or $0.11 per share | $146,000, or $0.08 per share, in Q1 2019 |
| Return on average assets | (0.9)% annualized | (1.0)% for full-year 2019 |
| Return on average equity | (17.0)% annualized | (21.3)% for full-year 2019 |
| Net cash used in operating activities | $32,000 | $190,000 in Q1 2019 |
| Net increase in cash and equivalents | $9.954 million | $5.576 million in Q1 2019 |
Material Changes Versus Prior Comparable Period
- Interest income increased $301,000 to $1.503 million, primarily reflecting loan growth. Average loans increased to $106.9 million from $82.4 million.
- Interest expense increased $54,000 to $507,000, primarily due to higher interest-bearing deposits, although the average cost of interest-bearing liabilities declined to 1.85% from 2.14%.
- Net interest income rose 33% to $996,000, and the net interest margin improved modestly to 3.08% from 3.02%.
- The company recorded a $189,000 loan-loss provision versus none in the prior-year quarter. The allowance increased to $2.198 million, or 2.01% of gross loans, from $2.009 million, or approximately 1.9%, at year-end 2019.
- Noninterest expense increased $204,000, primarily from salaries and benefits, professional fees, and occupancy and equipment costs. The higher provision and operating expenses more than offset revenue growth, resulting in a larger net loss.
- Loans increased $5.3 million during the quarter, while deposits increased $4.4 million. Federal Home Loan Bank advances increased $10 million to $23 million.
- Stockholders’ equity increased $284,000 to $7.491 million. The company issued 98,182 common shares for $539,000, more than offsetting the quarterly net loss.
Credit Quality, Debt, Liquidity, and Capital
- At March 31, 2020, $3.945 million of loans were individually evaluated for impairment, including $812,000 of commercial loans, $940,000 of residential real estate loans, and $2.193 million of commercial real estate loans. Nonaccrual loans totaled $812,000.
- Total past-due loans were $1.128 million, compared with $2.179 million at December 31, 2019. No troubled debt restructurings were reported during the quarter.
- Borrowings consisted principally of $23 million of FHLB advances, against an established FHLB borrowing capacity of $27 million, plus a $2.580 million junior subordinated debenture.
- The junior subordinated debenture has been in default since 2015 because required interest payments were not made. Accrued interest was $1.032 million at March 31, 2020. The holder represented that it did not intend to accelerate the principal or accrued interest during the twelve months following the filing date.
- Management stated that liquidity sources were adequate. Additional sources included a $430,000 Federal Reserve discount-window line and $9.5 million of correspondent-bank federal-funds lines, subject to collateral, consent, and other conditions.
- The Bank was considered well capitalized under prompt corrective action rules. At March 31, 2020, total risk-based capital was 11.77%, Tier 1 risk-based capital was 10.51%, common equity Tier 1 capital was 10.51%, and Tier 1 leverage capital was 8.24%.
Outlook, Commentary, Risks, and Unusual Items
- The filing provides no quantitative earnings or revenue guidance.
- Management identified COVID-19 as a significant subsequent-event risk. The potential effects were described as currently unquantifiable and could include more troubled assets, reduced loan-payment cash flow, and lower earnings due to reduced economic activity.
- Management expects to evaluate the loan portfolio and allowance for credit losses based on portfolio growth, borrower repayment capacity, collateral values, economic conditions, and other factors.
- The company expects to acquire additional trust preferred securities in exchange for common shares during 2020, but had not entered into an agreement or commitment as of the filing date.
- The company determined that its deferred tax asset was not realizable as of March 31, 2020 and maintained a valuation allowance; consequently, no income-tax benefit was recorded in Q1 2020, compared with a $52,000 benefit in Q1 2019.
- Off-balance-sheet commitments at March 31, 2020 included $4.537 million of commitments to extend credit, $4.033 million of unused lines of credit, and $1.550 million of standby letters of credit.
- Management reported effective disclosure controls and procedures and no material changes in internal control over financial reporting. No legal proceedings were reported.
Investor Verification Checklist
- Verify the magnitude and timing of COVID-19-related deterioration in loan performance, nonaccrual loans, troubled assets, and future loan-loss provisions.
- Monitor the company’s ability to fund loan growth through deposits and FHLB borrowings, including remaining borrowing capacity and collateral requirements.
- Assess the ongoing implications of the junior subordinated debenture default, accrued interest, and the holder’s non-acceleration representation.
- Review whether recurring noninterest expenses and continued net losses could pressure holding-company liquidity and regulatory capital.
- Track any proposed exchange of trust preferred securities for common shares and the resulting dilution.
- Confirm future accounting effects from the expected adoption of the current expected credit loss standard and any changes to the allowance methodology.