10-Q: ConnectOne Bancorp Reports Q2 Loss Amid FLIC Merger Costs

ConnectOne Bancorp, Inc. reported a net loss for Q2 2025 and the first half of 2025, primarily driven by significant merger expenses and increased credit loss provisions related to its acquisition of The First of Long Island Corporation.

Summary

• ConnectOne Bancorp, Inc. completed its acquisition of The First of Long Island Corporation (FLIC) on June 1, 2025, acquiring 36 branch offices and significantly expanding its asset base.
• The acquisition involved the issuance of 11,790,116 shares of common stock, valued at approximately $270.8 million.
• Net loss available to common stockholders for the three months ended June 30, 2025, was $(21.8) million, a decrease from $17.5 million net income in the comparable 2024 period.
• Diluted earnings per common share for Q2 2025 were $(0.52), down from $0.46 in Q2 2024.
• For the six months ended June 30, 2025, net loss available to common stockholders was $(3.1) million, compared to $33.2 million net income in the prior year period.
• Diluted earnings per common share for the first half of 2025 were $(0.08), down from $0.86 in the first half of 2024.
• Merger expenses totaled $30.7 million for Q2 2025 and $32.1 million for the six months ended June 30, 2025.
• Provision for credit losses increased significantly to $35.7 million for Q2 2025 and $39.2 million for the six months ended June 30, 2025, largely due to a $27.4 million initial provision related to the FLIC merger.
• Total assets increased by $4.036 billion to $13.915 billion as of June 30, 2025, from $9.879 billion at December 31, 2024, primarily due to the FLIC merger.
• Gross loans increased by $2.889 billion to $11.169 billion as of June 30, 2025, from $8.280 billion at December 31, 2024.
• Total deposits increased by $3.458 billion to $11.278 billion as of June 30, 2025, from $7.820 billion at December 31, 2024.
• The allowance for credit losses on loans increased to $156.190 million at June 30, 2025, from $82.685 million at December 31, 2024, including a $43.3 million non-accretable credit mark on purchased credit-deteriorated (PCD) loans.
• Net interest income increased by $17.4 million to $78.883 million for Q2 2025 and by $22.9 million to $144.639 million for the first half of 2025, primarily due to the FLIC merger.
• Net interest margin widened to 3.06% for Q2 2025 and 3.00% for the first half of 2025, driven by a decrease in the average cost of total funds.
• Issued $200 million in fixed-to-floating rate subordinated notes on May 15, 2025, with an initial interest rate of 8.125%.

Sentiment

Score: 3

Explanation: The sentiment is negative due to the reported net loss, significant increase in noninterest expenses (driven by merger costs), and a substantial rise in the provision for credit losses. While the merger expanded assets and net interest income, the immediate financial impact on profitability and shareholder value (diluted EPS, tangible book value) is adverse. The legal proceeding and specific loan portfolio risks also contribute to a cautious outlook.

Positives

• Net interest income increased by $17.4 million for the three months and $22.9 million for the six months ended June 30, 2025, primarily due to the FLIC merger.
• Net interest margin widened to 3.06% in Q2 2025 from 2.72% in Q2 2024, and to 3.00% for the six months ended June 30, 2025, from 2.68% in the prior year, driven by a decrease in the average cost of total funds.
• Total assets grew significantly by $4.036 billion to $13.915 billion, and gross loans increased by $2.889 billion to $11.169 billion, reflecting successful integration of the FLIC acquisition.
• Total deposits increased by $3.458 billion to $11.278 billion, enhancing the funding base.
• Nonaccrual loans decreased to $39.228 million at June 30, 2025, from $57.310 million at December 31, 2024.
• Net unrealized losses on available-for-sale securities decreased to $(60.3) million at June 30, 2025, from $(69.6) million at December 31, 2024, due to changes in market conditions and interest rates.
• The company maintains strong regulatory capital ratios, with both the Company and Bank satisfying capital conservation buffer requirements.

Negatives

• Reported a net loss available to common stockholders of $(21.8) million for Q2 2025 and $(3.1) million for the six months ended June 30, 2025, a significant decline from net income in comparable prior periods.
• Diluted earnings per common share decreased to $(0.52) for Q2 2025 and $(0.08) for the six months ended June 30, 2025.
• Noninterest expenses increased substantially by $36.1 million in Q2 2025 and $38.3 million for the six months ended June 30, 2025, primarily due to $30.7 million and $32.1 million in merger expenses, respectively.
• Provision for credit losses increased significantly to $35.7 million for Q2 2025 and $39.2 million for the six months ended June 30, 2025, largely due to a $27.4 million initial provision related to the FLIC merger.
• Tangible common equity ratio decreased to 8.09% at June 30, 2025, from 9.49% at December 31, 2024.
• Tangible book value per common share decreased to $21.95 at June 30, 2025, from $23.92 at December 31, 2024.

Risks

• Competitive pressures among depository institutions may increase significantly.
• Changes in the interest rate environment may reduce interest margins.
• Prepayment speeds, loan origination and sale volumes, charge-offs, and credit loss provisions may vary substantially from period to period.
• General economic conditions may be less favorable than expected or may be adversely affected by policy uncertainties, including regarding the impact of tariffs.
• Political developments, sovereign debt problems, wars or other hostilities (e.g., Ukraine and Russia, Middle East instability) may disrupt or increase volatility in securities markets or other economic conditions.
• Legislative or regulatory changes or actions may adversely affect the businesses.
• Changes and trends in the securities markets may adversely impact the company.
• A delayed or incomplete resolution of regulatory issues could adversely impact planning.
• The impact on reputation risk created by adverse developments on matters such as business generation and retention, funding, and liquidity could be significant.
• The outcome of regulatory and legal investigations and proceedings may not be anticipated, including a $11.1 million lawsuit against the acquired FLIC subsidiary related to suspicious wire transfer activity.
• The impact of health emergencies or natural disasters on employees and operations, and those of customers.
• A pool of rent-regulated loans amounting to $208.2 million within the purchased credit-deteriorated (PCD) portfolio is subject to unique stressors due to the 2019 New York rent laws, which restricted rent increases while operating in an environment of escalating expenses.
• Interest rate sensitivity models indicate that a 200 basis-point instantaneous and parallel increase in interest rates could decrease net interest income by 4.94% over the next year and decrease economic value of equity (EVE) by 5.89%.
• A 100 basis-point instantaneous and parallel decrease in interest rates could decrease EVE by 0.40% over the next year.

Future Outlook

The company utilizes net interest income simulation and economic value of equity (EVE) models to measure the potential impact of future changes in interest rates. As of June 30, 2025, a 200 basis-point instantaneous and parallel increase in interest rates is estimated to decrease net interest income by 4.94% over the next one-year period and decrease EVE by 5.89%. A 100 basis-point instantaneous and parallel decrease in interest rates is estimated to increase net interest income by 1.72% over the next one-year period but decrease EVE by 0.40%. The company expects its cash flow hedges to remain fully effective during the remaining term of the swaps. Management believes the allowance for credit losses is adequate to cover inherent credit losses.

Management Comments

• Frank Sorrentino III, Chairman and Chief Executive Officer, and William S. Burns, Senior Executive Vice President and Chief Financial Officer, certified that the report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made not misleading.
• They also certified that the financial statements and other financial information fairly present in all material respects the financial condition, results of operations, and cash flows.
• Management believes that the level of the Allowance for Credit Losses (ACL) as of June 30, 2025, is adequate to cover credit losses inherent in the loan portfolio.

Industry Context

The banking industry continues to navigate a dynamic interest rate environment and evolving economic conditions. ConnectOne Bancorp's acquisition of FLIC represents a strategic move to expand its geographic footprint and asset base, particularly in the New York market. While such mergers typically incur significant upfront costs, they are often aimed at achieving long-term synergies, economies of scale, and diversified revenue streams. The increase in net interest income, despite higher interest expenses, reflects the broader trend of banks benefiting from higher rates on earning assets, though the cost of funds remains a challenge. The rise in provision for credit losses, partly due to the acquired portfolio, highlights ongoing credit risk management in a potentially uncertain economic climate, especially concerning specific loan segments like rent-regulated properties.

Comparison to Industry Standards

• NA

Corporate Governance

Legal Proceedings

• A customer filed a lawsuit on January 22, 2025, against The First of Long Island Corporation (FLIC) and The First National Bank of Long Island (now part of ConnectOne Bank), claiming damages of approximately $11.1 million related to suspicious wire transfer activity in July 2024. The company intends to vigorously defend these claims.

Stakeholder Impact

• Shareholders: Experienced a net loss and a decrease in diluted EPS and tangible book value per share due to merger-related costs, indicating short-term dilution and reduced profitability. However, the merger is intended to provide long-term strategic benefits.
• Employees: The acquired FLIC pension plan will be frozen, impacting future benefit accruals for existing participants, though current benefits are preserved.
• Customers: The merger expanded the company's branch network and service offerings, particularly in Nassau and Suffolk Counties of Long Island and New York City boroughs, potentially offering more convenience and services.
• Creditors: The issuance of $200 million in subordinated notes increases the company's debt obligations but also strengthens its capital base, potentially enhancing financial stability.

Next Steps

• Continue to integrate the operations of The First of Long Island Corporation (FLIC) and The First National Bank of Long Island.
• Monitor and manage the acquired FLIC pension plan, which is approved to be frozen effective September 30, 2025.
• Vigorously defend against the $11.1 million lawsuit related to suspicious wire transfer activity involving the acquired FLIC subsidiary.
• Manage interest rate risk using net interest income simulation and economic value of equity (EVE) models, consistent with Board-approved guidelines.
• Continue to monitor the performance and rolloff of the purchased credit-deteriorated (PCD) loan portfolio, particularly the rent-regulated loans subject to unique stressors.

Key Dates

Recommendation

The company reported a net loss for the quarter and year-to-date periods, primarily due to significant merger expenses and increased credit loss provisions related to the FLIC acquisition. While the merger has substantially increased assets, loans, and deposits, and improved net interest income, the immediate financial impact on profitability and tangible book value per share is negative. The company is absorbing significant integration costs and initial credit provisions. However, the underlying business shows growth in interest-earning assets and a widening net interest margin, suggesting operational improvements post-merger. The legal proceeding and specific loan portfolio risks warrant caution. A 'hold' recommendation is appropriate as the market will likely wait to see if the strategic benefits of the merger materialize into sustained profitability and improved shareholder metrics in future quarters, offsetting the current transitional costs.

Keywords

ConnectOne Bancorp, CNOB, SEC Filing, 10-Q, Quarterly Report, Financial Results, Bank Holding Company, FLIC Merger, Acquisition, Net Loss, Earnings Per Share, Net Interest Income, Credit Losses, Merger Expenses, Loan Portfolio, Deposits, Asset Quality, Interest Rate Risk, Subordinated Debt, Capital Adequacy, Commercial Real Estate, New Jersey Banking, New York Banking