Merger And Regional Expansion Will Boost Future Opportunities

Key Takeaways

• The merger with First of Long Island is expected to enhance revenues and margins, with significant geographic expansion opportunities.
  
• Strong loan growth and anticipated cost savings will bolster revenue and profitability, ensuring improved earnings and stable credit quality.
  
• Economic uncertainty, loan contraction, declining demand deposits, merger risks, and competitive pressures pose challenges to ConnectOne's revenue, funding, and profitability outlook.

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 United States.

• ConnectOne Bancorp is finalizing a merger with First of Long Island, which is expected to enhance revenue and provide synergies, benefiting margins and earnings. The merger will expand the client base and provide geographic expansion opportunities, particularly in Long Island and Florida.
  
• An anticipated continuation of net interest margin expansion due to both core improvements and merging synergies is expected to positively impact earnings. The margin is projected to reach 3% in the second quarter and could improve further post-merger, driven by accretion and balance sheet positioning.
  
• A robust loan pipeline pointing to at least 2.5% loan growth for the second quarter and mid to high single-digit growth for the year suggests increasing future revenue. There is expectation for the strength in loan yields and demand from the current client base.
  
• Expansion into new markets and verticals, combined with a client-first relationship banking model, is directed towards increasing revenue and maintaining stable credit quality, thereby enhancing profitability.
  
• Integration and anticipated cost savings of about $24 million from the merger are expected to improve net margins and earnings. Although the full phase-in of cost savings may extend up to a year post-merger, the company maintains strong projections for improving return on assets and return on equity.

ConnectOne Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ConnectOne Bancorp's revenue will grow by 37.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 27.5% today to 32.2% in 3 years time.
• Analysts expect earnings to reach $212.5 million (and earnings per share of $3.49) by about May 2028, up from $70.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.5x on those 2028 earnings, down from 12.4x today. This future PE is lower than the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to grow by 0.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.41%, as per the Simply Wall St company report.

ConnectOne Bancorp Future Earnings Per Share Growth

Risks

• The economic uncertainty and potential impact of tariff policies could affect ConnectOne's clients, which may result in changes to cost structures or pricing that could lower loan demand and impact future revenues.
  
• The loan portfolio experienced contraction due to elevated payoff activity within the Commercial Real Estate segment, which could indicate future challenges in sustaining loan growth and achieving projected revenue targets.
  
• While the deposit growth appears strong sequentially, the decline in demand deposit balances since year-end could signal potential issues in maintaining stable funding sources, impacting net interest income.
  
• There is risk associated with the planned merger with First of Long Island, including integration challenges that could defer realizing expected cost savings and synergies, impacting net margins and earnings.
  
• A slowdown in the commercial loan growth rate, along with competitive pressures, could lead to tighter loan spreads and potentially compress net interest margins, impacting overall profitability.

Valuation

• The analysts have a consensus price target of $30.0 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 2028, revenues will be $660.0 million, earnings will come to $212.5 million, and it would be trading on a PE ratio of 6.5x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $22.74, the analyst price target of $30.0 is 24.2% 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.