Business Context and Reporting Period
OptimumBank Holdings, Inc. is a Florida one-bank holding company whose subsidiary, OptimumBank, operates three community banking offices in Broward County, Florida. The company provides commercial banking services and manages foreclosed real estate. This unaudited Form 10-Q covers the three and nine months ended September 30, 2016, filed November 14, 2016.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Interest income | $1.223 million | $1.142 million | $3.598 million | $3.341 million |
| Net interest income | $951 thousand | $920 thousand | $2.788 million | $2.686 million |
| Noninterest income | $31 thousand | $172 thousand | $125 thousand | $372 thousand |
| Noninterest expense | $960 thousand | $1.366 million | $3.221 million | $3.508 million |
| Net earnings (loss) | $22 thousand | $46 thousand | $(308) thousand | $(130) thousand |
| Basic and diluted EPS | $0.02 | $0.05 | $(0.30) | $(0.12) |
| Net interest margin | 3.20% | 3.40% | 3.12% | 3.26% |
At September 30, 2016, total assets were $121.7 million, including $81.3 million of net loans, $21.9 million of available-for-sale securities and $11.4 million of cash and cash equivalents. Total deposits were $90.3 million, Federal Home Loan Bank advances were $20.5 million, and stockholders’ equity was $3.3 million, or 2.73% of total assets.
The allowance for loan losses was $4.2 million, or 4.91% of loans. Total loans were $85.0 million before the allowance, compared with $84.7 million at December 31, 2015. Loans classified as OLEM or substandard totaled $8.2 million, and nonaccrual loans totaled $1.5 million.
For the nine months, operating activities provided $337 thousand of cash, investing activities provided $6.620 million, and financing activities used $5.882 million. Cash and cash equivalents increased $1.075 million to $11.440 million. The bank had $20.5 million of FHLB borrowings against $31.7 million of established borrowing capacity.
Material Changes Versus Prior Comparable Period
- Quarterly net income declined to $22 thousand from $46 thousand, while the nine-month loss increased to $308 thousand from $130 thousand.
- Interest income increased, primarily from higher interest-earning assets and loan yields. However, interest expense rose to $810 thousand for the nine months from $655 thousand, reflecting higher deposit and borrowing costs.
- Noninterest income declined substantially, mainly because of nonrecurring loan fees recognized in 2015.
- Noninterest expense decreased, primarily because foreclosed-real-estate expenses fell to $42 thousand for the nine months from $404 thousand.
- Deposits declined $7.3 million from year-end 2015, driven mainly by a $6.4 million reduction in time deposits. Securities declined $3.8 million, while cash increased $1.1 million.
- The allowance for loan losses increased from $2.3 million at December 31, 2015 to $4.2 million at September 30, 2016. A January 2016 sale of a judgment generated a $1.8 million recovery of previously charged-off amounts; management requested regulatory approval for a partial allowance reversal, but no response had been received.
- Stockholders’ equity increased $350 thousand to $3.317 million, supported by $450 thousand of common and preferred stock sales, stock issued for services and director compensation, and a $48 thousand accumulated other comprehensive income gain, partly offset by the nine-month loss.
- Effective January 11, 2016, the company completed a one-for-ten reverse common stock split. Shares outstanding were 1,099,826 at November 14, 2016.
Guidance, Outlook, Risks and Unusual Items
- Going concern and debenture default: The company is in default on its $5.155 million junior subordinated debenture after deferring the maximum twenty consecutive quarterly interest payments. Accrued and unpaid interest was $1.096 million at September 30, 2016. The holder may accelerate the principal and accrued interest; the filing states that acceleration could lead to legal proceedings and potentially efforts to sell the bank to satisfy the obligation.
- Litigation and proposed forbearance: A director has sought to purchase the debenture and provide forbearance, but conflicting directions to the trustee have resulted in federal court proceedings. The matter was transferred to the Southern District of New York in October 2016, with no scheduling order entered as of the filing.
- Regulatory restrictions: The bank remains subject to an FDIC/OFR Consent Order and the holding company remains subject to a Federal Reserve Written Agreement. Restrictions include limitations on dividends, debt, distributions on trust-preferred securities, stock repurchases and certain management or director appointments.
- New Consent Order: On November 2, 2016, the bank agreed to the entry of a new Consent Order addressing board and management composition, asset quality, lending, allowance methodology, asset growth and Bank Secrecy Act compliance. It will continue to restrict dividends and becomes effective when issued by the regulators.
- Capital: At September 30, 2016, total risk-based capital was 12.37%, above the 12.0% Consent Order requirement, while Tier 1 leverage was 7.78%, below the 8.0% Consent Order requirement. The filing states that the bank met minimum capital adequacy requirements for total risk-based capital but did not meet the Tier 1 capital-to-total-assets Consent Order requirement. Despite regulatory ratios, the bank cannot be classified above “adequately capitalized” while the Consent Order remains in effect.
- Liquidity: Deposits are the primary funding source, but deposit pricing is restricted by the Consent Order. The company states that liquidity sources are adequate, although deposit outflows, borrowing availability, collateral requirements and regulatory approvals remain important risks.
- Credit and market risks: The loan portfolio is concentrated in real estate and commercial lending. Commercial and real estate borrowers may be affected by collateral values, economic conditions and repayment capacity. Eight securities had unrealized losses totaling $220 thousand; management concluded the losses were market-related and did not record other-than-temporary impairment.
- Tax and accounting items: No income tax benefit was recorded in 2016 because management determined that the deferred tax asset was not realizable and maintained a valuation allowance. The 2015 quarterly and nine-month results included a $320 thousand income tax benefit from an IRS dispute settlement.
- The filing provides no formal earnings or revenue guidance. Management states that results for the nine months are not necessarily indicative of full-year results and identifies economic, market, regulatory, liquidity, credit, personnel, competition, technology and legal risks.
Most Important Facts for Investors to Verify
- Whether the new Consent Order has become effective and whether the bank satisfies all revised capital, asset-quality, governance and compliance requirements.
- Whether the junior subordinated debenture is accelerated, acquired by the director, or placed under a binding forbearance agreement, and the eventual treatment of $1.096 million of accrued interest.
- The company’s ability to raise additional capital while operating with approximately $3.3 million of equity and a 2.73% equity-to-assets ratio.
- Deposit stability, available borrowing capacity and compliance with collateral and regulatory conditions governing liquidity sources.
- Trends in nonaccrual loans, classified loans, real estate concentrations and the adequacy of the $4.2 million allowance for loan losses.
- Whether reported profitability can improve without nonrecurring recoveries, tax benefits or foreclosed-real-estate gains, given the nine-month 2016 loss and declining net interest margin.