Executive Summary / Key Takeaways

• The June 2025 acquisition of First of Long Island transforms ConnectOne into a $14 billion asset institution, with the integration completed in just two weeks and core deposit growth accelerating, suggesting the relationship banking model scales better than skeptics feared.
• Net interest margin expanded 44 basis points to 3.11% in Q3 2025, driven by a 70 basis point reduction in deposit costs, with management guiding to 3.25%+ in Q4 and a clear path to 3.40-3.50% by end of 2026 as $1 billion in loans reprice annually.
• Credit discipline remains intact despite rapid growth, with CRE concentration falling to 434% and nonperforming assets at just 0.28%, while the BoeFly fintech platform now represents 250+ franchise brands and is beginning to generate meaningful SBA lending revenue.
• Management targets 1.2% ROA and 15% ROTCE by 2026, supported by $55-56 million quarterly expense run rates and a 35% cost save target, implying the market's 0.92x book valuation underappreciates the earnings power of the combined franchise.
• The $200 million rent-regulated loan portfolio in NYC faces unique regulatory stress from 2019 rent laws, representing the primary credit risk to monitor as the company navigates its first full year above the $10 billion asset threshold.

Setting the Scene: The Making of a New York Metro Powerhouse

ConnectOne Bancorp, originally incorporated in 1982 as Center Bancorp, spent four decades building a community banking franchise in Northern New Jersey before recognizing that scale and technology would define the next era of regional banking. The company's evolution accelerated in 2014 when it rebranded to ConnectOne, signaling a shift toward connectivity and technology-enabled service delivery. The 2020 issuance of $75 million in subordinated notes provided growth capital, but the real inflection came with the strategic acquisition of BoeFly, a fintech platform connecting franchise borrowers with lenders, which now represents over 250 national franchise brands and serves as a proprietary origination channel for SBA loans.

The June 1, 2025 merger with First of Long Island Corporation (FLIC) represents the culmination of this strategic evolution, creating a $14 billion asset institution with 36 additional branches across Long Island and New York City boroughs. This transaction propels ConnectOne past the $10 billion asset threshold, a regulatory milestone that brings enhanced scrutiny but also opportunities for improved deposit gathering and lending scale. The market structure in the New York Metro area favors institutions with dense branch networks and deep local relationships, positioning ConnectOne against larger competitors like Valley National Bancorp (VLY) ($63 billion assets) and mid-tier players like Provident Financial Services (PFS) ($25 billion assets) and OceanFirst Financial (OCFC) ($13 billion assets). Unlike these peers, ConnectOne's relationship banking model emphasizes core deposit growth from commercial clients who bring their entire banking relationship, not just loans.

The banking industry's broader trends support ConnectOne's strategy. The apparent end of quantitative tightening suggests increased liquidity flowing into bank deposits, reducing competitive pressure on funding costs. A steepening yield curve benefits asset-sensitive banks like ConnectOne, where 85% of loans are fixed-rate but repricing opportunities emerge as $1 billion matures in 2026 and another $1 billion in 2027. Management's observation that "for the vast majority of our clients, we believe any effect of the tariff policy will be narrow in scope and not widespread" reflects confidence in the diversified New York Metro economy, where construction, healthcare, and professional services drive consistent loan demand.

Technology, Products, and Strategic Differentiation

ConnectOne's BoeFly subsidiary represents a genuine technology moat that distinguishes it from traditional regional banks. This fintech platform connects small business borrowers, particularly franchisees, with a network of lenders while capturing origination fees and cross-selling opportunities for ConnectOne's SBA lending platform. The platform's expansion to 250+ national franchise brands creates a proprietary deal flow that competitors cannot easily replicate, translating into net gains on loan sales that grew from $343,000 in Q3 2024 to $859,000 in Q3 2025. Management expects SBA lending to "add significantly to noninterest income in 2026," with the pipeline building heavily and "boots on the ground" lending efforts expanding.

The core banking operation delivers relationship-based services through a unified platform that integrates commercial lending, deposit gathering, and treasury management. ConnectOne's product suite includes specialized checking accounts for small businesses, remote deposit capture for professional services firms, and commercial real estate lending with conservative underwriting standards. This integration drives the core deposit growth that funded the 45.4% increase in total deposits to $11.37 billion post-merger, with noninterest-bearing deposits comprising 22.1% of the mix. The ability to attract and retain low-cost deposits determines a bank's net interest margin expansion potential, and ConnectOne's 70 basis point reduction in deposit costs year-over-year demonstrates the model's effectiveness.

Research and development investment focuses on digital banking enhancements and BoeFly platform improvements rather than traditional R&D spending. The company spent the past couple of years "building and perfecting the platform for BoeFly," which led to the significant increase in franchisor participation. This technology investment creates network effects: more franchisors attract more borrowers, generating more data to refine credit models and attract additional lenders. The strategic payoff emerges as SBA loan sales become a recurring revenue stream, with management targeting $7 million quarterly noninterest income run rate that could grow substantially in 2026.

Financial Performance & Segment Dynamics

The third quarter of 2025 marked ConnectOne's first full quarter operating as a combined entity, and the results validate the strategic rationale. Net income available to common stockholders surged to $39.47 million from $15.65 million in Q3 2024, driven by a $41.1 million increase in net interest income and $14.7 million in noninterest income growth. The 67.2% increase in fully taxable equivalent net interest income to $102.02 million reflected both a 44 basis point widening of net interest margin to 3.11% and a 43.1% increase in average interest-earning assets from the merger. This margin expansion occurred despite temporary compression from higher cash balances and subordinated debt that has since been redeemed, indicating underlying strength.

The loan portfolio composition reveals disciplined growth strategy. Gross loans reached $11.31 billion, up 36.6% from year-end 2024, with commercial real estate representing 68.3% of the total but CRE concentration falling to 434% of risk-based capital. Regulators scrutinize CRE concentrations above 300-400%, and ConnectOne's proactive reduction positions it favorably for future examinations. Commercial construction loans at 6.4% of the portfolio and residential real estate at 10.9% provide diversification, while the commercial loan book at 14.3% offers higher-yielding relationship-based opportunities. Net charge-offs of $5.14 million in Q3 represent a manageable 18 basis points of average loans, with management expecting charge-offs to remain in the "high teens to low 20s basis points range."

Deposit dynamics drive the margin expansion story. Total deposits grew 45.4% to $11.37 billion, with average noninterest-bearing demand deposits more than doubling to $2.49 billion. The loan-to-deposit ratio fell to 99% by quarter-end, down from pre-merger levels above 100%, providing flexibility for future loan growth. Management's strategy of "weeding out clients who did not deliver on promised depository relationships" while focusing on "high-quality relationship-type clients" explains the deposit mix improvement. This selectivity reduces funding costs and supports margin expansion even in a declining rate environment, as fixed-rate loans reprice while deposit costs fall faster.

Noninterest income performance includes one-time benefits but also underlying momentum. The $6.6 million Employee Retention Tax Credit and $3.5 million pension curtailment gain boosted Q3 results, but excluding these items, noninterest income still increased $4.6 million year-over-year. The $859,000 in net gains on loan sales represents early-stage SBA platform monetization, with management building a "healthy and diversified pipeline" for C&I, CRE, construction, and SBA lending. This diversification reduces reliance on spread income and creates fee-based revenue that performs well across rate cycles.

Outlook, Management Guidance, and Execution Risk

Management's guidance frames a clear path to enhanced profitability. CFO William Burns projects fourth quarter net interest margin "at 3.25% or even above," with the full-year 2026 margin "approaching 3.40% to 3.50%" assuming just one Fed rate cut in 2025. This expansion stems from deposit cost reductions, purchase accounting accretion, and the $1 billion in annual loan repricing opportunities. The company targets 1.2% return on assets and 15% return on tangible common equity by 2026, metrics that would place ConnectOne in the top quartile of regional banks. These targets appear achievable given the 50 basis point improvement in PPNR as a percentage of assets over the past year to 1.61%.

Loan growth expectations remain measured but positive. Management anticipates Q4 2025 average loans increasing "by more than 2% quarter-over-quarter," with 2026 growth "in the 5% plus range" dependent on economic conditions. This measured approach reflects a strategic shift away from "non-relationship business" toward clients who bring core deposits. The $465 million in Q3 loan originations demonstrates healthy production capacity, while the 5% growth target aligns with sustainable commercial banking expansion rather than aggressive balance sheet optimization. The disciplined approach reduces credit risk while supporting earnings growth through margin expansion rather than pure volume.

Expense management shows merger synergies materializing rapidly. The FLIC defined benefit pension plan freeze generated a $3.5 million curtailment gain and $1 million in annual cost savings, while quarterly operating expenses are tracking to the $55-56 million target. Total merger charges of $40 million have been recognized, with up to $10 million additional expected, remaining below the $52 million target. Management's willingness to "drag out" some cost savings to prioritize client satisfaction reflects a long-term relationship focus that may pressure near-term efficiency but builds franchise value. The tangible common equity ratio of 8.36% provides adequate capital cushion, though management acknowledges the goal of reaching 9% over time through retained earnings.

The regulatory environment above $10 billion assets brings both challenges and opportunities. ConnectOne proactively prepared for enhanced compliance requirements, and management anticipates "only modest expense growth while remaining well positioned to continue our growth trajectory." Many banks struggle with the $10 billion threshold's heightened capital, stress testing, and interchange fee requirements. ConnectOne's early preparation and existing infrastructure suggest smoother regulatory navigation than peers who crossed this threshold reactively.

Risks and Asymmetries

The $200.5 million rent-regulated loan portfolio within the acquired PCD loans represents a unique credit risk. The 2019 New York rent laws restricted rent increases while operating expenses escalated, creating stress for multifamily property owners. Management acknowledges "rent stabilized is here to stay" and notes "a constant struggle within that marketplace relative to the expense base versus the revenue stream." With approximately 50,000 rent-stabilized units currently vacant due to the law changes, collateral values could deteriorate if regulatory pressure intensifies. While this portfolio represents less than 2% of total loans, a 20% mark against the $400 million portion from First of Long Island suggests material downside if defaults accelerate. The risk is mitigated by ConnectOne's conservative underwriting on its $275 million legacy portfolio, which contains no value-add projects, but the acquired exposure remains a monitoring priority.

Integration execution risk persists despite the successful two-week systems conversion. The rapid integration, while operationally impressive, could mask cultural or client retention issues that emerge over quarters rather than months. Management's focus on client satisfaction over immediate cost savings is prudent but may delay realization of the 35% cost save target. If deposit attrition accelerates or loan pipelines disappoint, the projected 1.2% ROA and 15% ROTCE targets could prove optimistic. The company's history of successful integrations provides some confidence, but the FLIC merger's size relative to ConnectOne's pre-merger $10 billion asset base represents the largest transaction in its history.

Competitive pressure from larger regional banks threatens deposit market share. Valley National Bancorp's $63 billion asset base provides scale advantages in technology investment and deposit pricing power. Provident Financial Services' 1.05% ROA and 9.51% ROE demonstrate superior current profitability, while OceanFirst and Flushing Financial (FFIC) compete directly for commercial real estate lending in overlapping markets. ConnectOne's relationship model differentiates it, but if larger competitors use their scale to price deposits aggressively, ConnectOne's margin expansion could stall. The company's 22.1% noninterest-bearing deposit mix provides some insulation, but sustained competitive pressure could limit NIM improvement.

Interest rate risk remains asymmetric despite management's confidence in margin expansion. The projection of 3.40-3.50% NIM by end of 2026 assumes deposit costs fall faster than loan yields in a declining rate environment. If the Federal Reserve cuts rates more aggressively than anticipated, asset yields could compress faster than deposit costs, particularly given that 85% of loans are fixed-rate. Conversely, if rates remain higher for longer, the company's asset-sensitive position would benefit, but deposit competition could intensify. The $1 billion in annual loan repricing provides some protection, but the margin trajectory depends critically on the path of Fed policy and competitive deposit pricing.

Valuation Context

At $26.18 per share, ConnectOne trades at 0.92 times book value of $28.46 and 19.83 times trailing earnings, a valuation that appears conservative for a bank targeting 1.2% ROA and 15% ROTCE by 2026. Peer comparisons reveal a mixed picture: Valley National Bancorp trades at 0.88 times book but with a lower 13.12 P/E and superior 0.83% ROA, while Provident Financial Services commands a 0.95 P/B multiple with 1.05% ROA and 9.51% ROE. ConnectOne's 0.52% ROA and 4.41% ROE reflect merger integration costs and temporary margin compression, but the trajectory suggests convergence toward peer-leading metrics.

Cash flow-based multiples provide additional perspective. The price-to-operating cash flow ratio of 14.47 and price-to-free cash flow of 15.50 compare favorably to regional bank averages, particularly given the company's 56.71% operating margin. The 2.72% dividend yield, supported by a 54.55% payout ratio, offers income while investors await merger synergies. Management's indication that "we expect to have enough room in '26 for a common dividend increase and opportunistic share repurchase" suggests capital return will accelerate as earnings normalize.

The valuation disconnect appears most pronounced when considering the company's growth trajectory. Assets increased 41% year-over-year through the merger, while peers like OceanFirst and Flushing Financial show flat to modest growth. ConnectOne's margin expansion story, with NIM improving from 2.67% to 3.11% in one quarter and targeting 3.40-3.50%, stands out in an industry where many banks face margin pressure. The market's reluctance to assign a premium multiple likely reflects integration risk and the overhang of the rent-regulated portfolio, but successful execution of the 2026 targets would warrant valuation re-rating toward 1.2-1.3 times book value, implying meaningful upside.

Conclusion

ConnectOne Bancorp has executed a transformative merger that fundamentally improves its competitive position and earnings power in the New York Metro banking market. The rapid integration, core deposit growth, and margin expansion to 3.11% demonstrate that the relationship banking model scales effectively, while the BoeFly fintech platform provides a unique technology-driven revenue stream. Management's clear path to 1.2% ROA and 15% ROTCE by 2026, supported by $1 billion in annual loan repricing and disciplined expense control, suggests the market's 0.92x book valuation underestimates the franchise's improved prospects.

The primary variables determining investment success are execution of cost savings while maintaining client satisfaction, navigation of the rent-regulated loan portfolio's regulatory challenges, and realization of targeted margin expansion in a competitive deposit market. If ConnectOne delivers on its 2026 targets, the combination of scale, margin improvement, and unique fintech capabilities positions it for valuation re-rating toward premium regional bank multiples. The relationship banking moat, once viewed as a constraint on growth, has become the foundation for sustainable competitive advantage in an increasingly digital banking landscape.