OptimumBank Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. The company is a Florida one-bank holding company operating OptimumBank through three Broward County offices. The financial statements are unaudited.
Financial Performance and Condition
| Metric | Three months ended September 30, 2014 | Three months ended September 30, 2013 | Nine months ended September 30, 2014 | Nine months ended September 30, 2013 |
|---|---|---|---|---|
| Total interest income | $1.227 million | $1.286 million | $4.278 million | $3.854 million |
| Net interest income | $1.010 million | $0.854 million | $3.581 million | $2.329 million |
| Provision for loan losses | $0 | $0 | $0 | $2.194 million |
| Noninterest income | $20 thousand | $6 thousand | $214 thousand | $82 thousand |
| Noninterest expense | $1.109 million | $1.176 million | $2.201 million | $4.596 million |
| Net earnings (loss) | $(79) thousand | $(325) thousand | $1.594 million | $(4.741) million |
| Basic and diluted EPS | $(0.01) | $(0.05) | $0.19 | $(0.60) |
- Margins: Nine-month net interest margin increased to 4.12% from 2.59%; the interest-rate spread increased to 4.16% from 2.67%. For the third quarter, net interest margin was 3.55% versus 2.98%.
- Assets: Total assets were $122.833 million, down from $128.783 million at December 31, 2013. Securities available for sale increased to $28.488 million from $22.990 million.
- Loans: Total loans were $77.738 million, compared with $81.080 million at year-end 2013; net loans were $75.725 million. The allowance for loan losses was $2.241 million, or 2.88% of loans, versus 2.73% at year-end.
- Credit quality: Loans classified as substandard totaled $12.701 million and loans classified as especially mentioned totaled $2.560 million. Nonaccrual loans totaled $4.381 million.
- Foreclosed real estate: Balance declined to $4.970 million from $7.553 million, supported by $3.966 million of proceeds from sales during the first nine months.
- Deposits and debt: Deposits declined to $89.123 million from $98.692 million. Federal Home Loan Bank advances were $22.740 million and the junior subordinated debenture was $5.155 million.
- Liquidity: Cash and cash equivalents were $8.769 million, down from $13.881 million. The Bank had $22.7 million of FHLB borrowings outstanding against $31.0 million of established capacity, an $1.8 million Federal Reserve discount-window line, and additional lines of credit totaling $3.5 million.
- Cash flow: Nine-month operating cash flow was $1.442 million, investing cash flow was $1.212 million, and financing cash flow was $(7.766) million. Cash and cash equivalents decreased by $5.112 million.
- Capital: Consolidated stockholders’ equity improved to $3.074 million from a deficit of $216 thousand, primarily from $1.594 million of earnings and $1.269 million of common-stock proceeds.
Material Changes Versus Prior Comparable Period
- The company generated nine-month net earnings of $1.594 million versus a $4.741 million loss in 2013.
- Improvement was driven primarily by the absence of the $2.194 million loan-loss provision, a $1.7 million reduction in noninterest expense largely related to foreclosed real estate, and lower borrowing costs.
- Interest expense fell to $697 thousand from $1.525 million. Management attributed the reduction partly to replacing higher-cost, longer-term FHLB advances with lower-cost, shorter-term advances in December 2013.
- Interest income increased to $4.278 million from $3.854 million, including income recognized from loan recaptures.
- Deposits decreased $9.569 million, while cash and cash equivalents decreased $5.112 million.
- The company issued 1,092,719 common shares for approximately $1.269 million and issued 192,176 shares valued at approximately $233 thousand as director compensation.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management forecast the company to be profitable for 2014 unless it incurs unforeseen loan-loss provisions. Management stated that it expects the company to meet its obligations and continue operating as a going concern through at least September 30, 2015.
- Capital shortfall: The Bank’s total risk-based capital ratio was 10.46% versus the 12% requirement under its Consent Order, and its Tier 1 leverage ratio was 6.65% versus the required 8%. Management estimated that approximately $1.4 million of additional capital was needed to meet the 12% total risk-based capital requirement.
- Capital raising: Management was seeking an additional $3 million to $4 million in common equity, but stated that there could be no assurance the effort would succeed.
- Regulatory actions: The Bank remains subject to an amended FDIC/OFR Consent Order and the holding company remains subject to a Federal Reserve Written Agreement. Restrictions include limitations on dividends, debt, stock repurchases, executive appointments, brokered deposits, and certain payments.
- Junior subordinated debenture: The company deferred interest for the maximum 20 consecutive quarterly periods. Accrued and unpaid interest was $753 thousand, and regulatory approval to pay it was denied. The debenture holder could accelerate the $5.155 million principal balance due to the technical default; management had not received a default notice as of the filing date.
- Going-concern risk: Continued operations depend on profitability, liquidity, regulatory compliance, and successful capital raising. The filing identifies the capital deficiency and deferred debenture interest as material uncertainties.
- Credit and concentration risk: The Bank was not in compliance with the Consent Order requirement to reduce its commercial real estate concentration. Future loan losses could adversely affect earnings and capital.
- Other unusual items: Foreclosed real estate activity included a $2.6 million decline in the balance and a $809 thousand gain on sales for the nine-month period. No other-than-temporary impairment was recorded in 2014, compared with $362 thousand in 2013.
- Deferred tax asset: A valuation allowance remained against the net deferred tax asset because management determined it was not realizable at September 30, 2014, although reversal may be possible in 2015.
Important Facts for Investors to Verify
- Whether the company successfully raised the planned $3 million to $4 million of additional capital and whether the Bank achieved the Consent Order’s 8% leverage and 12% total risk-based capital requirements.
- Whether the junior subordinated debenture holder accelerated the $5.155 million principal after the 20-quarter interest deferral and whether regulatory approval for accrued interest was obtained.
- Trends in deposits, available liquidity, borrowing capacity, and the ability to fund holding-company obligations without dividends from the Bank.
- Changes in nonaccrual, impaired, substandard, and especially mentioned loans, particularly within commercial real estate.
- Whether the absence of loan-loss provisions and the 2014 profit are sustainable, given management’s warning regarding unforeseen credit losses.
- Progress toward reducing commercial real estate concentration and satisfying the amended Consent Order and Federal Reserve Written Agreement.