Florida Migration And Higher Yielding Loans Will Support Long Term Community Bank Expansion

Catalysts

About OptimumBank Holdings

OptimumBank Holdings is a fast growing South Florida community bank focused on relationship driven commercial and retail banking services.

What are the underlying business or industry changes driving this perspective?

• Sustained migration of businesses and households into Florida is expanding the addressable market for relationship based community banking, supporting loan and deposit growth that may lift revenue and earnings over time.
• Repricing of the loan book into higher yielding commercial real estate and commercial credits, while older lower rate loans run off, is widening net interest margin and supporting net income.
• Strategic emphasis on low cost noninterest bearing demand deposits, which already compose roughly one third of funding, provides a funding advantage as rates normalize and may support both margin stability and pretax earnings.
• Ongoing build out of the franchise, including new branches and workforce growth, positions the bank to seek operating leverage as assets scale, which may support further improvement in the efficiency ratio and net margins.
• Capital levels and a simplified capital stack provide flexibility to pursue potential M&A and continued organic balance sheet expansion, which may support book value per share and earnings power over the long term.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming OptimumBank Holdings's revenue will grow by 530.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 35.9% today to 0.3% in 3 years time.
• Analysts expect earnings to reach $28.0 million (and earnings per share of $0.46) by about December 2028, up from $15.7 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 2.4x on those 2028 earnings, down from 3.2x today. This future PE is lower than the current PE for the US Banks industry at 11.9x.
• Analysts expect the number of shares outstanding to decline by 1.85% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.96%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Concentrated exposure to commercial real estate and multifamily lending in a single, rapidly growing region like South Florida leaves the bank vulnerable if local property values or rental demand weaken, which could pressure loan growth, increase credit losses and reduce net earnings.
• The strategy of prioritizing relationship driven, higher rate lending over being the lowest cost provider may be challenged if depositors and borrowers become more rate sensitive in a lower growth or higher rate environment, which could slow balance sheet expansion, compress net interest margin and weigh on revenue.
• Rapid historical loan and deposit compounded annual growth rates above 35% may be difficult to sustain as the franchise scales beyond the $1 billion asset mark. Any normalization in growth could lower operating leverage, raise the efficiency ratio and dampen earnings growth.
• Plans to pursue mergers and acquisitions and potentially expand into new geographies such as New York or Illinois introduce integration, cultural and credit underwriting risks that could disrupt the community bank model, increase noninterest expenses and impair profitability.
• Although current credit metrics and capital ratios exceed national peers, a turn in the broader economic or interest rate cycle could drive higher nonperforming assets and loan losses, forcing higher provisions that would dilute return on equity and reduce net income.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $5.0 for OptimumBank Holdings based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $11.0 billion, earnings will come to $28.0 million, and it would be trading on a PE ratio of 2.4x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $4.33, the analyst price target of $5.0 is 13.4% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.