Expanding Horizons Through Strategic Merger Despite Challenges Ahead

Key Takeaways

• The merger with First of Long Island Corporation offers significant synergies and positions ConnectOne for enhanced growth and improved market valuation.
  
• Strategic focus on geographic synergies and core deposit growth could drive revenue and improve net interest margins by reducing funding costs.
  
• Integration risks from the First of Long Island merger and increased interest expenses could disrupt operations, posing challenges to profitability and asset quality.

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.

• The merger with First of Long Island Corporation is expected to create meaningful synergies and enhance ConnectOne's platform for continued growth, which may impact revenue positively by expanding market reach and offering new products and services.
  
• The merger will position ConnectOne in a higher valuation peer group with a pro forma market cap of $1.3 billion, potentially improving earnings and valuation metrics due to enhanced market presence and financial discipline.
  
• The anticipated increase in core deposits and a declining reliance on brokered deposits could aid net interest margins by reducing funding costs, enhancing profitability.
  
• The strategic focus on geographic and client synergies, including opportunities in residential mortgage origination and SBA lending, is likely to drive future revenue growth.
  
• Expected margin expansion driven by the Fed's interest rate cuts and lower deposit costs, alongside repricing assets, could improve net interest margins and enhance earnings going forward.

ConnectOne Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ConnectOne Bancorp's revenue will grow by 30.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.7% today to 33.1% in 3 years time.
• Analysts expect earnings to reach $183.7 million (and earnings per share of $3.28) by about October 2027, up from $66.4 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 10.3x on those 2027 earnings, down from 14.1x today. This future PE is lower than the current PE for the US Banks industry at 11.8x.
• Analysts expect the number of shares outstanding to grow by 13.56% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.39%, as per the Simply Wall St company report.

ConnectOne Bancorp Future Earnings Per Share Growth

Risks

• The loan growth is expected to be muted for another quarter or two, possibly leading to stagnation in revenue and impacting future earnings.
  
• A large criticized loan led to a noticeable increase in non-accrual loans, which poses a risk to asset quality and net margins.
  
• The upcoming merger with First of Long Island involves significant integration risks, which could disrupt operations and negatively affect profitability or net margins.
  
• The anticipated issuance of sub-debt at potentially high rates (8.50% to 8.75%) could increase interest expenses, impacting net interest margins and overall earnings.
  
• There is uncertainty around the Federal Reserve's rate cuts and competitive pressures, which could affect deposit betas and thus constrain net interest margin improvements.

Valuation

• The analysts have a consensus price target of $28.0 for ConnectOne Bancorp based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $30.0, and the most bearish reporting a price target of just $25.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $554.0 million, earnings will come to $183.7 million, and it would be trading on a PE ratio of 10.3x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $24.56, the analyst's price target of $28.0 is 12.3% 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.