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Can These Factors Give You An Edge For Investing In OptimumBank Holdings Inc (NASDAQ:OPHC)?

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OptimumBank Holdings Inc (NASDAQ:OPHC) is a small-cap bank with a market capitalisation of US$4.40M. The risk associated with investing in a small cap, accentuated by financial industry regulations, make OPHC a complex investment. Since banks make money by reinvesting its customers’ deposits in the form of loans, poor economic growth will reduce the level of savings deposits and demand for loans, directly impacting the cash flows of these banks. After the GFC, a set of reforms called Basel III was imposed in order to strengthen regulation, supervision and risk management in the banking sector. These reforms target banking regulation and aims to improve the banking sector’s ability to absorb shocks arising from economic stress which could expose financial institutions to vulnerabilities. Since a bank’s financial standing can quickly decline in the case of an adverse macro event such as political instability, it is important to understand how prudent it is at managing its risk levels. Poor liquidity and high leverage could place OptimumBank Holdings in a precarious position at the face of macro headwinds. We can gauge the bank’s risk-taking behaviour by analysing three metrics for leverage and liquidity which I will take you through now. Check out our latest analysis for OptimumBank Holdings

NasdaqCM:OPHC Historical Debt Mar 8th 18
NasdaqCM:OPHC Historical Debt Mar 8th 18

Why Does OPHC’s Leverage Matter?

High leverage may expose the bank to higher risks around its ability to repay its debtors. Its leverage may be thought of as the level of assets it owns compared to its own shareholders’ equity. While financial institutions are required to have a certain level of buffer to meet capital adequacy levels, OptimumBank Holdings leverage level of 41x is significantly below the appropriate ceiling of 20x. With assets 41 times equity, the banks has maintained a prudent level of its own fund relative to borrowed fund which places it in a strong position to pay back its debt in times of adverse events. If the bank needs to firm up its capital cushion, it has ample headroom to increase its debt level without deteriorating its financial position. The bank has very little headroom to increase its debt level as it may ratchet up interest cost and further deteriorate its financial position.

What Is OPHC’s Level of Liquidity?

Handing Money Transparent
Handing Money Transparent

As I eluded to above, loans are relatively illiquid. It’s helpful to understand how much of this illiquid asset makes up the bank’s total asset. Usually, they should not be higher than 70% of total assets, which is consistent with OptimumBank Holdings’s state given its ratio of 63.79%. This means slightly over half of the bank’s total assets are tied up in the form of illiquid loans, leading to a sensible balance between interest income and liquidity.

Does OPHC Have Liquidity Mismatch?

OPHC profits by lending out its customers’ deposits as loans and charge an interest on the principle. These loans may be fixed term and often cannot be readily realized, however, customer deposits are liabilities which must be repaid on-demand and in short notice. The disparity between the immediacy of deposits compared to the illiquid nature of loans puts pressure on the bank’s financial position if an adverse event requires the bank to repay its depositors. Relative to the prudent industry loan to deposit level of 90%, OptimumBank Holdings’s ratio of over 89.43%is appropriately lower, which places the bank in a relatively safe liquidity position given it has not excessively lent out its deposits and has maintained a suitable level for compliance.

Next Steps:

Even though the bank has upheld a high level of liquidity, its elevated level of debt compared to its equity may impact its ability to pay back its large group of debtors in times of adverse conditions. OptimumBank Holdings may be a riskier investment given its weak leverage management. Keep in mind that a stock investment requires research on more than just its operational side. Below, I’ve compiled three essential aspects you should further examine:

  1. Historical Performance: What has OPHC’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on OptimumBank Holdings’s board and the CEO’s back ground.

  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.