ConnectOne Bancorp(CNOB) - 2025 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION This section provides the unaudited consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures for the company Financial Statements This section presents ConnectOne Bancorp's unaudited consolidated financial statements, reflecting significant asset and liability growth from the FLIC acquisition and a net loss driven by merger expenses and increased credit loss provisions Consolidated Statements of Condition Total assets grew to $13.92 billion from $9.88 billion due to the FLIC acquisition, significantly increasing net loans, deposits, and stockholders' equity Consolidated Balance Sheet Highlights (Unaudited, in thousands) | (in thousands) | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Total Assets | $13,915,738 | $9,879,600 | | Cash and cash equivalents | $596,533 | $356,488 | | Net loans receivable | $11,008,287 | $8,192,125 | | Goodwill | $215,611 | $208,372 | | Total Liabilities | $12,419,307 | $8,637,896 | | Total deposits | $11,278,487 | $7,820,114 | | Borrowings | $783,859 | $688,064 | | Total Stockholders' Equity | $1,496,431 | $1,241,704 | Consolidated Statements of (Loss) Income The company reported a net loss of ($20.3) million for Q2 2025, primarily due to $30.7 million in merger expenses and a $35.7 million provision for credit losses Key Income Statement Data (Unaudited, in thousands, except per share data) | (in thousands, except per share data) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $78,883 | $61,439 | $144,639 | $121,739 | | Provision for credit losses | $35,700 | $2,500 | $39,200 | $6,500 | | Noninterest Expenses | $73,649 | $37,594 | $112,954 | $74,659 | | including Merger expenses | $30,745 | $ - | $32,065 | $ - | | Net (Loss) Income | ($20,293) | $19,056 | ($51) | $36,261 | | Diluted EPS | ($0.52) | $0.46 | ($0.08) | $0.86 | Consolidated Statements of Comprehensive (Loss) Income For Q2 2025, the company reported a total comprehensive loss of ($19.6) million, primarily due to the net loss, contrasting with prior-year comprehensive income Comprehensive (Loss) Income Summary (Unaudited, in thousands) | (in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | Net (Loss) Income | ($20,293) | $19,056 | ($51) | $36,261 | | Total other comprehensive income (loss), net of tax | $685 | ($4,112) | $441 | ($7,135) | | Total Comprehensive (Loss) Income | ($19,608) | $14,944 | $390 | $29,126 | Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity increased to $1.50 billion from $1.24 billion primarily due to $270.8 million in common stock issued for the FLIC merger, partially offset by net loss and dividends - The company issued 11,790,116 shares of common stock valued at $270.8 million to complete the FLIC merger during the second quarter of 2025[13][15] - Cash dividends paid on common stock totaled $13.8 million ($0.36 per share) for the six months ended June 30, 2025[15] Consolidated Statements of Cash Flows Cash and cash equivalents increased by $240.0 million for the six months ended June 30, 2025, driven by operating, investing (including FLIC cash), and financing activities Six Months Ended June 30 Cash Flow Summary (Unaudited, in thousands) | (in thousands) | 2025 | 2024 | | :--- | :--- | :--- | | Net cash provided by operating activities | $21,348 | $42,819 | | Net cash provided by investing activities | $99,048 | $169,165 | | Net cash provided by (used in) financing activities | $119,649 | ($161,185) | | Net change in cash and cash equivalents | $240,045 | $50,799 | - The company acquired $54.9 million in cash, net of cash consideration paid, from the FLIC acquisition[17] - Financing activities included $200 million in proceeds from the issuance of subordinated debt and a net increase in deposits of $207.0 million, offset by net repayments of FHLB borrowings of $264.6 million[17] Notes to Consolidated Financial Statements The notes detail accounting policies and financial components, highlighting the $270.8 million FLIC acquisition's impact on the balance sheet and income statement, along with specifics on loan portfolios, credit losses, and regulatory capital - On June 1, 2025, the Company completed its acquisition of The First of Long Island Corporation ("FLIC"), with former FLIC shareholders receiving 0.5175 shares of the Company's common stock for each share of FLIC common stock[22][40][41] FLIC Acquisition Purchase Price Consideration (June 1, 2025, in thousands) | (in thousands) | Value | | :--- | :--- | | Total fair value of stock consideration issued | $270,819 | | Cash consideration paid | $9 | | Total purchase price consideration | $270,828 | | Fair Value of Net Assets Acquired | $263,589 | | Goodwill recorded in acquisition | $7,239 | - For purchased credit deteriorated (PCD) loans from the FLIC merger, an initial allowance for credit losses of $43.3 million was established by grossing-up the amortized cost of the loans[51][54] - The allowance for credit losses (ACL) for loans increased to $156.2 million at June 30, 2025, from $82.7 million at year-end 2024, including a $43.3 million nonaccretable credit mark on PCD loans and a $27.3 million initial provision related to the acquisition[115][118] - On May 15, 2025, the Company issued $200 million in fixed-to-floating rate subordinated notes with an initial interest rate of 8.125%[200] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the Q2 2025 net loss to merger expenses and increased credit loss provisions, while net interest income and margin improved, and the balance sheet expanded significantly due to the FLIC merger Operating Results Overview The company reported a net loss of ($21.8) million for Q2 2025, primarily due to $30.7 million in merger costs and a $33.2 million increase in credit loss provisions, partially offset by increased net interest income Q2 2025 vs Q2 2024 Performance (in millions, except per share data) | Metric | Q2 2025 | Q2 2024 | Change | | :--- | :--- | :--- | :--- | | Net (Loss) Income to Common Stockholders | ($21.8M) | $17.5M | ($39.3M) | | Diluted EPS | ($0.52) | $0.46 | ($0.98) | | Merger Expenses | $30.7M | $0 | +$30.7M | | Provision for Credit Losses | $35.7M | $2.5M | +$33.2M | Net Interest Income and Margin For Q2 2025, fully taxable equivalent net interest income increased by 28.2% to $79.8 million, with the net interest margin expanding 34 basis points to 3.06% Net Interest Margin Analysis (in millions, except percentages) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | | :--- | :--- | :--- | | Net Interest Income (Tax-Equivalent) | $79.8M | $62.3M | | Net Interest Margin | 3.06% | 2.72% | | Average Yield on Earning Assets | 5.63% | 5.71% | | Average Cost of Interest-Bearing Liabilities | 3.36% | 3.84% | Financial Condition As of June 30, 2025, the FLIC merger significantly altered the company's financial condition, increasing gross loans to $11.2 billion and deposits to $11.3 billion, while improving asset quality and maintaining strong capital ratios - Gross loans totaled $11.2 billion as of June 30, 2025, a 34.9% increase from December 31, 2024, primarily due to the FLIC merger[229] - The allowance for credit losses (ACL) increased to $156.2 million, or 1.40% of loans receivable, up from $82.7 million (1.01%) at year-end, driven by a $43.3 million mark for purchased credit-deteriorated (PCD) loans and a $27.4 million initial provision related to the FLIC merger[236][242] - Nonperforming assets decreased to $39.2 million (0.28% of total assets) at June 30, 2025, from $57.3 million (0.58% of total assets) at December 31, 2024[246] - Total deposits increased by $3.5 billion (44.2%) to $11.3 billion compared to year-end 2024, also due to the FLIC merger[286] - The company and the bank both satisfy all capital adequacy requirements to be considered well-capitalized as of June 30, 2025[301][302] Qualitative and Quantitative Disclosures about Market Risks The company manages interest rate risk using NII and EVE models, with a +200 bps rate shock estimated to decrease one-year NII by 4.94% and EVE by 5.89% Interest Rate Sensitivity Analysis (as of June 30, 2025, in percentages) | Rate Shock (bps) | Estimated Change in EVE (%) | Estimated Change in 1-Year NII (%) | | :--- | :--- | :--- | | +200 | -5.89% | -4.94% | | +100 | -1.22% | -1.91% | | -100 | -0.40% | +1.72% | Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures are effective, with no material changes to internal controls over financial reporting during the quarter - The CEO and CFO concluded that the Company's disclosure controls and procedures are effective[304] - No material changes to internal controls over financial reporting occurred during the last fiscal quarter[305] PART II – OTHER INFORMATION This section covers legal proceedings, risk factors, unregistered sales of equity securities, and a list of exhibits filed with the report Legal Proceedings The company faces an $11.1 million lawsuit as FLIC's successor regarding unauthorized wire transfers, which it intends to vigorously defend - A customer filed a lawsuit against the company (as successor to FLIC) for approximately $11.1 million in damages related to unauthorized wire transfers[308] - The company states it will vigorously defend against the claims[308] Risk Factors No material changes to the company's risk factors were reported since the Annual Report on Form 10-K for the year ended December 31, 2024 - No material changes to risk factors were reported since the last Annual Report on Form 10-K[309] Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase shares in Q2 2025, with 641,118 shares remaining available under the authorized repurchase program - No shares were repurchased in Q2 2025[310] - As of June 30, 2025, 641,118 shares are remaining for repurchase under the authorized program[310] Exhibits This section lists exhibits filed with the 10-Q report, including the supplemental indenture for subordinated notes and required CEO/CFO certifications - Key exhibits include the Third Supplemental Indenture for the 8.125% Fixed-to-Floating Rate Subordinated Notes due 2035 and required CEO/CFO certifications[312] Signatures This section contains the official signatures of the company's Chairman, Chief Executive Officer, and Chief Financial Officer, certifying the report - The report was signed on August 11, 2025, by Frank Sorrentino III, Chairman and Chief Executive Officer, and William S. Burns, Senior Executive Vice President and Chief Financial Officer[316]