Merger With First National Bank Of Long Island Will Expand Market Reach And Strengthen Future Prospects

Key Takeaways

• The merger and operational efficiencies are expected to boost revenue growth, enhance net margins, and drive improved earnings.
  
• Strong loan demand and deposit growth indicate potential improvement in funding costs, net interest margins, and future net income.
  
• Execution risks in the First National Bank merger, increased financial obligations, and credit quality concerns could negatively impact ConnectOne Bancorp's financial stability and growth.

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.

• The upcoming merger with First National Bank of Long Island is expected to enhance ConnectOne Bancorp's financial performance by increasing revenue synergies through market expansion and client relationship extension, positively impacting future revenue growth.
  
• The merger is projected to enhance net interest margins by about 10 basis points upon closing, with further improvement anticipated, which is likely to boost future earnings.
  
• ConnectOne's strong performance in increasing noninterest-bearing deposits and core deposits suggests an improvement in funding costs and a positive impact on net interest margins and future net income.
  
• The company's disciplined loan growth strategy and strong loan demand, alongside a widening net interest margin, indicate that future revenue and earnings are likely to improve as average loan balances increase.
  
• Operational efficiencies achieved through the merger, alongside a reduction in expenses and a strategic approach to cost savings, are expected to enhance net margins and drive improved earnings.

ConnectOne Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ConnectOne Bancorp's revenue will grow by 34.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 27.0% today to 40.6% in 3 years time.
• Analysts expect earnings to reach $245.5 million (and earnings per share of $4.4) by about March 2028, up from $67.6 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 5.6x on those 2028 earnings, down from 13.0x 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 0.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.8%, as per the Simply Wall St company report.

ConnectOne Bancorp Future Earnings Per Share Growth

Risks

• The merger with First National Bank of Long Island, while seen as a positive strategic move, involves inherent execution risks, integration challenges, and potential unanticipated costs that could impact ConnectOne Bancorp's revenue and net margins.
  
• The pending capital raise, including the issuance of subordinated debt, adds financial obligations that may increase interest expenses and pressure net earnings.
  
• An increase in criticized and classified loans from 2.2% to 2.7% may signal potential credit quality concerns, impacting the overall financial stability and future earnings.
  
• The bank's performance is highly sensitive to interest rate changes, with a potential adverse impact from rate volatility on net interest income and earnings, especially given its liability-sensitive positioning.
  
• The economic conditions and regulatory environment remain uncertain, which could affect the bank's projected growth in deposits and loans, thereby impacting overall revenue growth.

Valuation

• The analysts have a consensus price target of $29.6 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 $31.0, 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 2028, revenues will be $605.5 million, earnings will come to $245.5 million, and it would be trading on a PE ratio of 5.6x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $22.97, the analyst price target of $29.6 is 22.4% 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.