A Strategy For Enhanced Growth And Profitability

Key Takeaways

• ConnectOne's expansion and new market entries aim to grow its client base and deposits, enhancing lending and interest income for revenue growth.
  
• Strategic focus on non-interest income sources and maintaining a low dividend payout ratio to improve profitability and shareholder value through capital return initiatives.
  
• Strategies encompassing relationship-based business focus, adjusting loan-to-deposit ratios, and expanding into new markets carry inherent risks that could affect profitability.

Catalysts

Operates as the bank holding company for ConnectOne Bank that provides commercial banking products and services for small and mid-sized businesses, local professionals, and individuals in the New York Metropolitan area and South Florida market.

• ConnectOne's emphasis on expanding its relationship banking model and entering new markets is anticipated to foster client base growth, which, in turn, is expected to boost deposit growth, directly impacting revenue growth through enhanced lending capabilities and interest income.
  
• The strategic reduction of non-relationship loans is aimed at improving the loan-to-deposit ratio and enhancing the loan mix, which could lead to better interest margins and thus positively affect net income as the bank continues to optimize its assets.
  
• Planned continued net interest margin expansion, driven by a combination of lower short-term rates, market liquidity improvement, and cyclical rotation into regional banking, should positively impact future earnings by potentially lowering funding costs while maintaining or increasing yields on assets.
  
• Investments in noninterest income sources, such as BoeFly and the SBA platform, highlight an operational strategy to diversify revenue streams, which could reduce dependence on traditional interest income and enhance overall profitability through fee income.
  
• The declaration of a quarterly cash dividend alongside a common dividend payout ratio below 40% suggests a strong capital position and operational efficiency, providing room for future capital return initiatives that could increase shareholder value through dividends and share repurchases, enhancing earnings per share.

Assumptions

• Analysts are assuming ConnectOne Bancorp's revenue will grow by 25.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 28.1% today to 26.5% in 3 years time.
• Analysts expect earnings to reach $130.3 million (and earnings per share of $3.08) by about October 2027, up from $70.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.1x on those 2027 earnings, down from 13.1x today. This future PE is lower than the current PE for the US Banks industry at 11.4x.
• Analysts expect the number of shares outstanding to decline by 1.43% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.29%, as per the Simply Wall St company report.

Risks

• The reliance on relationship-based business and the exit from non-relationship business could impact the company's ability to maintain and grow revenue, especially if the anticipated benefits from strengthening and expanding client base do not materialize as expected.
  
• A decrease in loan portfolio due to higher-than-usual pay-downs and payoffs might affect future interest income and earnings, especially if new loan originations do not offset these reductions adequately.
  
• Any failure to continue reducing brokered deposits or to grow customer deposits as expected could pressure funding costs and net interest margins, impacting net income.
  
• Investments in new markets and platforms (like BoeFly and SBA lending) carry execution risk and may not yield the expected increase in noninterest income, potentially affecting overall profitability.
  
• The approach to actively manage loan-to-deposit ratios and CRE (Commercial Real Estate) concentration involves risks related to market conditions and loan demand, which could impact net interest margin and earnings if the adjustments do not align with market trends or if unexpected adverse developments occur in the commercial real estate sector.

Valuation

• The analysts have a consensus price target of $27.5 for ConnectOne Bancorp based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $491.6 million, earnings will come to $130.3 million, and it would be trading on a PE ratio of 9.1x, assuming you use a discount rate of 6.3%.
• Given the current share price of $24.23, the analyst's price target of $27.5 is 11.9% higher.
• 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.