Merger With First Of Long Island Will Unlock Geographic Synergies And Boost Capital Efficiency

Key Takeaways

• The merger with First of Long Island is expected to generate synergies, enhance market reach, and improve revenue growth and net margins.
  
• Expanding into new regions and leveraging geographical synergies and SBA lending opportunities can boost capital efficiency and revenue streams.
  
• Slow loan growth and rising credit risk, coupled with high-cost debt reliance, could pressure ConnectOne Bancorp's revenue and earnings growth expectations.

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 announced merger with First of Long Island Corporation is expected to create meaningful synergies, enhanced market reach, and increased assets and deposits, likely impacting revenue growth positively.
  
• The merger places ConnectOne in a higher valuation peer group and leverages economic and market tailwinds, which could improve net margins through enhanced asset and liability management.
  
• Ongoing growth in core deposits paired with repricing benefits from lower short-term rates should contribute to a widening net interest margin, impacting earnings positively.
  
• The expansion into Long Island and leveraging geographical synergies with Southeast Florida provide new opportunities for both spread and fee-based business, potentially boosting revenue.
  
• Restructuring opportunities with First of Long Island’s balance sheet and potential for increased SBA lending through BoeFly can enhance capital efficiency and revenue streams post-merger.

ConnectOne Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ConnectOne Bancorp's revenue will grow by 30.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.7% today to 33.2% in 3 years time.
• Analysts expect earnings to reach $182.9 million (and earnings per share of $3.26) by about January 2028, up from $66.5 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 10.9x on those 2028 earnings, down from 13.6x today. This future PE is lower than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 13.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.73%, as per the Simply Wall St company report.

ConnectOne Bancorp Future Earnings Per Share Growth

Risks

• The slow loan growth forecasted due to economic conditions and internal efforts to reduce nonrelationship loans could negatively impact future revenue growth for ConnectOne Bancorp.
  
• Rising levels of criticized and classified loans suggest potential credit risk, which could hurt net margins if provisions for loan losses need to be increased.
  
• The reliance on high-cost subordinated debt issuance to bolster capital may increase interest expenses and pressure earnings as sub debt rates are currently high.
  
• The potential need for restructuring FLIC's securities post-merger brings execution risk, which could affect future financial stability if not handled prudently.
  
• Flat or modestly expanding net interest margins, despite favorable conditions, may indicate challenges in maximizing profitability, which could affect earnings growth expectations.

Valuation

• The analysts have a consensus price target of $29.25 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 $550.5 million, earnings will come to $182.9 million, and it would be trading on a PE ratio of 10.9x, assuming you use a discount rate of 6.7%.
• Given the current share price of $23.71, the analyst's price target of $29.25 is 18.9% 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.