10-K: ConnectOne Bancorp Reports Strong 2025 Growth Post-FLIC Merger

ConnectOne Bancorp, Inc. reported a significant increase in net income and total assets for 2025, primarily driven by the acquisition of The First of Long Island Corporation, despite a decrease in diluted EPS.

Summary

• Net income available to common stockholders increased by 9.8% to $74.4 million in 2025, up from $67.8 million in 2024.
• Diluted earnings per share decreased by 7.4% to $1.63 in 2025, compared to $1.76 in 2024, primarily due to share issuance from the FLIC merger.
• Total assets grew by $4.1 billion to $14.0 billion as of December 31, 2025, from $9.9 billion in 2024.
• Total loans increased by $3.2 billion to $11.5 billion as of December 31, 2025.
• Deposits increased by $3.4 billion to $11.2 billion as of December 31, 2025.
• Net interest income increased by $105.9 million, with the net interest margin expanding by 39 basis points to 3.11% in 2025 from 2.72% in 2024.
• Noninterest expenses increased by $76.8 million, largely due to $32.9 million in merger-related expenses and a $21.4 million increase in salaries and employee benefits.
• Provision for credit losses increased by $33.2 million, including an initial $27.4 million provision associated with the FLIC merger.
• Noninterest income increased by $18.3 million, boosted by a $6.6 million one-time Employee Retention Tax Credit and a $3.5 million gain from the curtailment of the FLIC defined benefit pension plan.
• The acquisition of The First of Long Island Corporation (FLIC) on June 1, 2025, significantly contributed to asset and deposit growth, adding 36 branch offices.
• Approximately $2.4 billion of the loan portfolio, primarily originated in 2021 and 2022, is scheduled to reprice during 2026 and 2027, which is anticipated to favorably impact net interest income and earnings per share.
• The allowance for credit losses for loans increased by $71.6 million to $154.3 million as of December 31, 2025, primarily due to the FLIC merger.

Sentiment

Score: 6

Explanation: StockSavvy.ai views this as a moderately positive report, reflecting significant strategic growth through the FLIC merger and improved net interest margin, but tempered by increased expenses, a decline in diluted EPS due to share dilution, and elevated credit loss provisions associated with the acquisition.

Positives

• Significant growth in total assets ($4.1 billion increase to $14.0 billion) and deposits ($3.4 billion increase to $11.2 billion) driven by the FLIC merger.
• Net income available to common stockholders increased by 9.8% to $74.4 million in 2025.
• Net interest income increased by $105.9 million, and net interest margin expanded by 39 basis points to 3.11% in 2025.
• Anticipated favorable impact on net interest income, net interest margin, and earnings per share from $2.4 billion of loans repricing in 2026 and 2027.
• Strong noninterest income growth of $18.3 million, including a $6.6 million Employee Retention Tax Credit and a $3.5 million pension plan curtailment gain.
• Net unrealized losses on available-for-sale securities decreased to $40.7 million from $69.6 million, primarily due to changes in market conditions and interest rates.
• Maintained 'well capitalized' status for both the Bank and the Parent Corporation under regulatory frameworks.
• Successful integration of 206 FLIC employees, increasing the employee base by approximately 28%.
• 96 employees were promoted into new roles in 2025, indicating internal growth and development.

Negatives

• Diluted earnings per share decreased by 7.4% to $1.63 in 2025, primarily due to share dilution from the FLIC merger.
• Noninterest expenses increased substantially by $76.8 million, driven by $32.9 million in merger-related expenses and a $21.4 million increase in salaries and employee benefits.
• Provision for credit losses increased significantly by $33.2 million, largely due to the initial provision associated with the FLIC merger.
• Substandard loans increased to $156.2 million (1.4% of loans receivable) from $72.4 million (0.9%) in 2024, partly due to the addition of purchased credit-deteriorated (PCD) loans from the FLIC merger and other loans migrating to nonaccrual status.
• The increase in interest rates applicable to a significant portion of the loan portfolio ($2.4 billion repricing in 2026-2027) may place financial pressure on certain borrowers and potentially lead to elevated levels of stress, late payments, or defaults.
• The company's Economic Value of Equity (EVE) is estimated to decrease by 7.12% with a 200 basis-point instantaneous increase in interest rates, indicating interest rate sensitivity risk.
• A client filed a lawsuit against FLIC and FNBLI (predecessor companies) claiming damages of approximately $11.1 million related to suspicious wire transfer activity.

Risks

• The growth-oriented business strategy could be adversely affected if the company is unable to attract and retain skilled employees or if senior management is lost.
• The company may need to raise additional capital to execute its growth strategy, and there is no assurance that such capital will be available on beneficial terms for existing security holders.
• A significant concentration in commercial real estate loans ($8.1 billion, 70.3% of loans receivable; 434% of the Bank's Tier 1 capital plus allowance for credit losses) exposes the company to higher credit risk, especially with potential volatility in the metropolitan New York area commercial real estate market due to remote work trends, inflation, and regulatory changes.
• If the company is limited in its ability to originate commercial real estate loans, it may incur greater risk by increasing commercial and industrial loans, including unsecured loans, which generally involve a higher degree of loss risk.
• A significant portion of the loan portfolio ($2.4 billion) will reprice in 2026 and 2027, and applicable increases in interest rates could harm borrowers' abilities to repay their loans, potentially leading to increased late payments or defaults.
• The small to medium-sized businesses that the Bank lends to may have fewer resources to weather an economic downturn, impairing their ability to repay loans.
• Economic downturns and other events negatively impacting the company's market areas (New York Metropolitan area and Florida) could cause substantial credit losses.
• The development and use of artificial intelligence (AI) present risks such as incorrect output, release of private/confidential information, biases, discriminatory output, intellectual property infringement, and increased compliance costs due to evolving legal and regulatory environments.
• The company's ability to maintain its reputation is critical, and negative impacts could materially adversely affect performance.
• Anti-takeover provisions in corporate documents and New Jersey law may make it difficult and expensive to remove current management.
• Intense competition in originating loans and attracting deposits from other banks, fintech companies, and non-bank financial service providers may adversely affect profitability by reducing margins and market share.
• External factors, such as market disruptions or adverse regulatory actions, could impair access to funding sources, impacting liquidity and the ability to originate loans or meet obligations.
• Declines in the value of the investment securities portfolio may adversely impact results, potentially requiring impairment charges and affecting dividends or regulatory capital ratios.
• The Bank's ability to pay dividends is subject to regulatory limitations, which could affect the Parent Corporation's ability to honor its obligations and pay dividends.
• The company may incur impairment to goodwill, requiring a non-cash charge to earnings.
• Challenges in effectively integrating the operations and retaining clients of acquired institutions, such as FLIC, could adversely affect results of operations.
• Hurricanes or other adverse weather or health-related events could negatively affect local economies or disrupt operations, leading to declines in property values and increased delinquencies.
• Changes in interest rates, as well as other actions by the Federal Reserve, may adversely affect earnings and financial condition.
• The banking business is subject to significant government regulations, which are subject to change and may increase costs or adversely affect operations.
• The laws regulating operations are designed for the protection of depositors and the public, not shareholders, and future changes could adversely affect the business.
• Increased use of technology may expose the company to service interruptions or breaches in security, leading to claims and reputational damage.

Future Outlook

The company anticipates a favorable impact on net interest income, net interest margin, and earnings per share from approximately $2.4 billion of its loan portfolio repricing during 2026 and 2027. It plans to continue selectively incorporating AI technology in business processes, fraud detection, services, and products. The company expects to recognize approximately $0.6 million and $1.1 million of net actuarial loss as a component of net periodic pension expense during 2026 for the Legacy CNOB and Legacy FLIC plans, respectively, and the Bank does not expect to make a contribution to either pension plan in 2026.

Management Comments

• We believe that the Bank's continued growth and profitability demonstrate the need for and success of our brand of banking.
• Management believes the allowance for credit losses is maintained at a level which is reasonable and supportable to cover current expected credit losses at each reporting date.
• Management believes that, as of December 31, 2025, the Bank and the Parent Corporation meet all capital adequacy requirements to which they are subject.
• Management believes related party transactions were conducted on terms and conditions similar to those that would be available from unrelated third parties.

Industry Context

StockSavvy.ai notes that ConnectOne Bancorp's significant growth through the FLIC merger aligns with a broader trend of consolidation within the regional banking sector, as institutions seek economies of scale and expanded market reach. The company's emphasis on a 'branch-lite' model and investment in fintech (BoeFly) positions it within the evolving digital banking landscape, aiming for efficiency and broader client engagement, a strategy increasingly adopted by forward-thinking financial institutions to compete with larger national banks and emerging fintech players. The substantial concentration in commercial real estate loans, while a core business, is a common characteristic of regional banks but also a point of regulatory scrutiny, especially given current economic uncertainties and shifts in commercial property utilization.

Comparison to Industry Standards

• ConnectOne Bancorp's commercial real estate loan concentration of 434% of the Bank's Tier 1 capital plus allowance for credit losses on loans (as of December 31, 2025) is significantly higher than the regulatory guidance threshold of 300% for heightened risk management practices, indicating a higher-than-average exposure to this asset class compared to many industry peers.
• The company's net interest margin of 3.11% in 2025, while an improvement, should be evaluated against the average net interest margins of regional banks, which fluctuate based on interest rate environments and funding costs.
• The decrease in diluted EPS by 7.4% in 2025, despite net income growth, suggests dilution from the FLIC merger, a common outcome in stock-based acquisitions, which should be evaluated against the long-term strategic benefits of the merger.

Management Changes

Corporate Governance

Legal Proceedings

• On January 22, 2025, a client filed a lawsuit against FLIC and FNBLI (predecessor companies by merger) claiming damages of approximately $11.1 million related to suspicious wire transfer activity in July 2024. The Company and the Bank vehemently disagree with the allegations and intend to vigorously defend these claims. The case is currently in the discovery stage.

Related Party Transactions

• Loans to related parties (executive officers, directors, principal stockholders, their immediate families, and affiliated companies) totaled $30.8 million as of December 31, 2025, up from $23.4 million in 2024. These loans were made on substantially the same terms as those with unrelated persons.
• Deposits from related parties totaled $70.2 million as of December 31, 2025, up from $51.9 million in 2024, also on substantially the same terms as with unrelated persons.
• Rent expense paid to entities affiliated with certain related parties for banking offices totaled $0.8 million for both 2025 and 2024.
• Fees paid to an advertising and public relations agency where one of the company's directors serves as President, CEO, and principal owner totaled $0.4 million in 2025 and $0.3 million in 2024.

Stakeholder Impact

• Shareholders: Experience diluted EPS in the short term due to merger-related share issuance, but potential for long-term value creation from expanded operations and synergies. Dividend payments are subject to regulatory limitations and preferred stock dividend priority.
• Employees: Integration of 206 FLIC employees, increasing the employee base by 28%, with a focus on internal promotions, training, and comprehensive benefits, fostering professional growth and retention.
• Customers: Benefit from an expanded branch network (36 new offices from FLIC merger) and enhanced digital banking services, but some borrowers may face increased financial pressure from repricing loans in a rising interest rate environment.
• Regulators: The company maintains compliance with extensive banking regulations, including capital adequacy and anti-money laundering, but its high commercial real estate concentration remains an area of regulatory scrutiny.
• Creditors: The issuance of subordinated debentures provides additional capital, while holders of Series A Preferred Stock maintain senior dividend and liquidation rights over common stockholders.

Next Steps

• Continue the integration of acquired FLIC operations and client bases.
• Manage the approximately $2.4 billion loan portfolio scheduled to reprice in 2026 and 2027 to optimize net interest income and mitigate potential borrower stress.
• Continue selective incorporation of AI technology in business processes, fraud detection, services, and products.
• Maintain ongoing monitoring and management of cybersecurity risks through the IT Committee and Enterprise Risk Management Committee.
• Vigorously defend against the $11.1 million client lawsuit inherited from FLIC.
• Evaluate the impact of revised Community Reinvestment Act (CRA) regulations as they become effective over the next several years.
• Complete the assessment of the fair value of net assets acquired in the FLIC merger during the measurement period, which ends June 1, 2026.

Key Dates

Recommendation

The company demonstrates strong strategic growth through the FLIC merger, expanding its asset base and market presence. However, the immediate impact on diluted EPS, the significant increase in noninterest expenses due to merger-related costs, and the elevated commercial real estate concentration warrant a cautious 'hold' recommendation. The anticipated favorable impact from loan repricing in 2026-2027 is a positive, but potential borrower stress from higher rates and ongoing legal proceedings introduce uncertainty. Investors should monitor integration success, asset quality trends, and the realization of merger synergies.

Keywords

Banking, Financial Services, Commercial Banking, Community Bank, SEC Filing, 10-K, ConnectOne Bancorp, CNOB, Bank Holding Company, Mergers and Acquisitions, FLIC, Loans, Deposits, Net Interest Income, Credit Risk, Cybersecurity, Regulatory Compliance, Capital Ratios, Preferred Stock, Common Stock, Dividends, New Jersey, New York, Florida, Fintech, BoeFly, AI Risk