Executive Summary / Key Takeaways

• Strategic Transformation through FLIC Merger: ConnectOne Bancorp has successfully completed its transformative merger with The First of Long Island Corporation (FLIC), significantly expanding its scale to nearly $14 billion in assets and establishing it as a top-tier community bank in the lucrative New York Metro market, particularly on Long Island.
• Robust Financial Momentum: Despite initial merger-related expenses, the combined entity is demonstrating strong core deposit growth, an improving loan-to-deposit ratio (now below 100%), and expanding net interest margins, with projections for NIM to reach approximately 3.25% by year-end 2025.
• Differentiated Technology & Relationship Banking: CNOB leverages its fintech subsidiary, BoeFly, to drive specialized SBA lending and enhance noninterest income, complementing its client-first, relationship-based banking model that fosters strong client retention and organic growth.
• Clear Path to Enhanced Profitability: Management anticipates achieving a return on assets exceeding 1.2% and a return on tangible common equity of approximately 15% by 2026, supported by significant cost synergies and a liability-sensitive balance sheet poised to benefit from potential rate cuts.
• Compelling Valuation Amidst Market Opportunities: With its expanded footprint, strengthened balance sheet, and accelerating performance metrics, CNOB presents a compelling investment opportunity, trading at a discount to its peer group averages despite its enhanced franchise value and strategic positioning.

A New Chapter: Forging a Premier New York Metro Bank

ConnectOne Bancorp, Inc. (NASDAQ:CNOB) stands at a pivotal juncture, having successfully executed a transformative merger that has fundamentally reshaped its scale, market reach, and financial trajectory. Founded in 2005 as a community-based, full-service New Jersey-chartered commercial bank, CNOB has consistently prioritized a client-first culture and relationship banking model. This strategy, coupled with disciplined execution, has enabled the company to navigate dynamic market conditions and strategically position itself for accelerated growth. The recent acquisition of The First of Long Island Corporation on June 1, 2025, marks the culmination of years of strategic development, propelling CNOB into a new league within the competitive New York Metro banking landscape.

The banking industry, particularly in the vibrant New York Metro market, is characterized by intense competition from both larger national players and nimble regional institutions. CNOB has historically carved out its niche by focusing on small and mid-sized businesses, local professionals, and individuals, offering tailored services that foster deep client relationships. This approach has allowed CNOB to compete effectively against larger rivals like Valley National Bancorp (VLY) and Citizens Financial Group (CFG), which often adopt more standardized approaches. While VLY and CFG may boast broader geographic footprints and higher revenue growth due to their scale and acquisitive strategies, CNOB's strength lies in its localized expertise, efficient client onboarding, and personalized service delivery, which can translate into superior customer loyalty and pricing power in specific regional markets.

CNOB's strategic response to competitive pressures and evolving market demands includes a clear focus on technological differentiation. Its wholly-owned fintech subsidiary, BoeFly, Inc., serves as a specialized marketplace connecting borrowers in the franchise space with funding solutions through a network of partner banks. This core technology provides tangible benefits by streamlining the lending process for a specific niche, potentially offering faster loan processing and specialized market access that traditional banks might struggle to replicate. The platform has already demonstrated its value, with management noting an "increasing source of gains on sale" and a "decent uptick recently in the last quarter or so on franchisors that are utilizing the platform for BoeFly." This technological edge enhances CNOB's noninterest income and expands its reach in SBA lending, creating a competitive moat against rivals who may lack such specialized digital tools.

The FLIC merger significantly amplifies CNOB's competitive standing. It adds 36 branch offices across Nassau and Suffolk Counties on Long Island and in New York City, immediately establishing ConnectOne as "one of the top 5 community banks on Long Island in terms of deposit market share." This expanded physical presence, combined with CNOB's digital capabilities, strengthens its ability to attract and retain clients, particularly against competitors like Provident Financial Services (PFS) that also pursue acquisitive growth. The merger is expected to unlock substantial revenue synergies through cross-selling opportunities in residential mortgage origination, SBA lending, and enhanced treasury solutions for FLIC's "extremely deep client base." This strategic move not only enhances CNOB's market share but also reinforces its relationship-based model with a broader, more diversified client base.

Financial Performance and Strategic Momentum

The second quarter of 2025 marked a period of significant transition and initial integration following the FLIC merger, with the financial results reflecting both the immediate impacts of the acquisition and the underlying strength of ConnectOne's core operations. The company reported a net loss available to common stockholders of $21.80 million for the three months ended June 30, 2025, primarily due to a $36.10 million increase in noninterest expenses and a $33.20 million increase in provision for credit losses. These increases were largely attributable to the FLIC merger, including $30.70 million in merger expenses for the quarter and an initial provision for credit losses of $27.40 million.

Despite these merger-related costs, the underlying financial trends are robust. Net interest income saw a healthy $17.40 million increase, driven by the merger's contribution. The fully taxable equivalent net interest margin (NIM) expanded by 34 basis points to 3.06% for Q2 2025, primarily benefiting from a 56 basis-point decrease in the average cost of total funds. This organic widening, independent of loss trades or restructuring transactions, underscores the effectiveness of CNOB's liability-sensitive positioning.

The balance sheet reflects the immediate scale benefits of the merger. Gross loans surged by $2.90 billion, a 34.9% increase, to $11.20 billion as of June 30, 2025, with growth across all loan segments. Total deposits increased by $3.50 billion, or 44.2%, from December 31, 2024, to $11.28 billion, driven by significant increases in both interest-bearing and noninterest-bearing demand deposits. Notably, noninterest-bearing demand deposits now exceed 21% of total deposits, up from 18% at year-end 2024, reflecting strong client retention and the success of relationship banking. The loan-to-deposit ratio, a key liquidity metric, improved from 106% pre-merger to below 100% post-merger, with management targeting operation at approximately this 100% threshold going forward.

Liquidity remains strong, with liquid assets totaling $1.00 billion as of June 30, 2025, representing 7.5% of total assets. The bank maintains substantial unutilized borrowing capacity, including approximately $2.20 billion at FHLB and $1.70 billion at the Federal Reserve Bank of New York, totaling approximately $4.20 billion in aggregate available and unused credit. This robust liquidity profile provides ample flexibility to support future loan growth and manage market fluctuations.

Credit quality metrics, while impacted by the merger's accounting, remain sound. The Allowance for Credit Losses (ACL) significantly increased to $156.20 million, primarily due to the merger's initial provision for credit losses and the nonaccretable mark on purchased credit-deteriorated (PCD) loans. The nonperforming asset ratio improved dramatically to 0.28% from 0.51% a year ago, reflecting the merger's portfolio mix and proactive credit management. Management views the Q2 2025 provision as largely a "onetime adjustment" due to CECL modeling impacts from the acquired longer-duration loan portfolio, expecting lower quarterly provisions for the remainder of 2025.

Outlook and Strategic Trajectory

ConnectOne Bancorp's outlook is firmly anchored in the strategic advantages gained from the FLIC merger and its ongoing commitment to disciplined growth. Management projects continued net interest margin expansion, with an anticipated increase of approximately 10 basis points for each of the third and fourth quarters of 2025, bringing the NIM to around 3.25% by year-end 2025. This projection assumes just one Fed rate cut in 2025, with each 25 basis point cut expected to add approximately 5 basis points to the NIM. Further margin expansion is anticipated through 2026, driven by the repricing of CDs at lower rates and the upward repricing of adjustable-rate commercial loans.

Expense management is a key focus, with 2025 quarterly expenses projected in the $55 million range for the combined company, rising slightly to $56 million-$57 million in 2026. These figures are consistent with achieving the previously announced 35% cost savings target from the merger. Noninterest income is also expected to increase, reaching approximately $6.7 million per quarter post-merger, fueled by the continued build-out of SBA business in the Long Island market and increasing gains from BoeFly.

The strategic benefits of the merger are expected to translate into enhanced profitability, with management reiterating targets of a return on assets exceeding 1.2% and a return on tangible common equity of approximately 15% as the company enters 2026. The Bancorp's tangible common equity ratio, currently above 8.1%, is expected to trend upwards due to strong retained earnings, while the bank's CET ratio remains robust at over 12%. The planned issuance of $200 million in subordinated debt prior to the merger's closing further strengthens the capital base, with favorable market conditions observed for such debt.

Loan growth is anticipated to be in the low to mid-single digits for the next six months, influenced by elevated payoffs and a temporary pause in certain project expansions. However, a robust pipeline, coupled with the expanded market opportunities from the FLIC merger, is expected to drive a return to mid-to-high single-digit growth beyond the near term. The Commercial Real Estate (CRE) concentration ratio, which ticked up slightly to 438% post-merger, is projected to fall below 400% by the end of 2025, reflecting the merger's portfolio mix and higher earnings.

Risks and Competitive Dynamics

While the outlook for ConnectOne Bancorp is compelling, investors should consider several key risks. The integration of FLIC, while successful thus far, involves inherent complexities. The preliminary nature of acquired asset and liability valuations, as well as current and deferred taxes, introduces a degree of uncertainty. Furthermore, a pool of $208.20 million in rent-regulated loans within the PCD portfolio is subject to unique stressors from New York rent laws, which could impact credit quality if not managed effectively. The ongoing $11.10 million lawsuit against FLIC regarding suspicious wire transfer activity also presents a contingent liability, though CNOB intends to vigorously defend these claims.

The broader economic environment, including potential changes in interest rates, competitive pressures, and regulatory shifts, remains a factor. CNOB actively manages interest rate risk through derivative instruments, but model limitations mean that actual yields and costs may respond differently to market changes than anticipated. Competition in the New York Metro market is fierce, with larger banks like CFG investing heavily in digital capabilities that could attract customers seeking easier access. CNOB's smaller scale, even post-merger, could lead to higher operating costs per customer compared to larger rivals, potentially impacting profitability. However, CNOB's strategic response of leveraging its local expertise and relationship-based model, combined with its fintech subsidiary BoeFly, helps mitigate these competitive disadvantages.

Conclusion

ConnectOne Bancorp has embarked on a transformative journey, leveraging its client-first culture, disciplined execution, and strategic M&A to redefine its market position. The successful integration of FLIC has created a significantly scaled institution with a strengthened balance sheet, robust deposit base, and clear pathways to enhanced profitability. The company's commitment to relationship banking, supported by its modern infrastructure and specialized fintech offering through BoeFly, provides a durable competitive advantage in a dynamic industry.

Despite initial merger-related expenses, CNOB's financial momentum is undeniable, with expanding net interest margins, improving credit metrics, and a solid outlook for growth and returns. The company's strategic positioning as a premier community bank in the New York Metro market, coupled with its ability to capitalize on organic opportunities and manage risks effectively, makes CNOB a compelling investment proposition. As the company continues to realize the full synergies of the FLIC merger and execute on its strategic roadmap, it is well-positioned to drive sustainable long-term value for its shareholders.