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Note 2 - Business Combination
 9 Months Ended
Sep. 30, 2025
Notes to Financial Statements  
Business Combination [Text Block]

Note 2. Business Combination 

 

On June 1, 2025 (the “Acquisition Date”), the Company completed the acquisition of FLIC, the parent company for the FNBLI, in accordance with the definitive Agreement and Plan of Merger dated as of September 4, 2024 (the “Merger Agreement”). Pursuant to the Merger Agreement, on the Acquisition Date, FLIC merged with and into the Company, with the Company continuing as the surviving corporation, and FNBLI merged with and into the Bank, with the Bank as the surviving bank (collectively, the “merger”). As part of this merger, the Company acquired 36 branch offices located in Nassau and Suffolk Counties of Long Island, and the boroughs of New York City.

 

In connection with the completion of the merger, former FLIC shareholders received 0.5175 shares of the Company’s common stock for each share of FLIC common stock they held. The value of the total transaction consideration was approximately $270.8 million. The consideration included the issuance of 11,790,116 shares of the Company’s common stock, valued at $22.97 per share, which was the closing price of the Company’s common stock on May 30, 2025, the last trading day prior to the consummation of the merger. Also included in the total consideration was cash in lieu of any fractional shares, which was effectively settled upon closing.

 

The acquisition of FLIC was accounted for as a business combination using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid were recorded at estimated fair values on the Acquisition Date. The excess consideration paid over the estimated fair value of the net assets acquired has been reported as goodwill in the Company’s consolidated statements of financial condition. The $7.2 million of goodwill created from the merger is not amortizable or deductible for tax purposes. The amount of goodwill represents an asset attributed to the future economic benefits arising from other assets acquired in a business combination. Future economic benefits consist largely of the synergies and economies of scale expected from combining the operations of FLIC and the Company.

 

The Company considers its valuations of acquired loans and other assets to be preliminary, as management continues to identify and assess information regarding the nature of these assets acquired and liabilities assumed, including extended information gathering, management review procedures, and any new information that may arise as a result of integration activities. Accordingly, the amounts recorded for current and deferred taxes are also considered preliminary, as the Company continues to evaluate the federal, state and local combined statutory tax rate for the merged entity and the nature and extent of permanent and temporary differences between the book and tax bases of these other assets acquired and other liabilities assumed.

 

In connection with the acquisition, the consideration paid, and the fair value of identifiable assets acquired and liabilities assumed as of the Acquisition Date are summarized in the following tables:

 

  

As of

 
  

June 1, 2025

 

(dollars in thousands, except for per share data)

    

Purchase Price Consideration

    

FLIC common shares settled for stock

  22,783,572 

Exchange Ratio

  0.5175 

ConnectOne shares entitlement

  11,790,499 

Fractional shares subject to cash in lieu

  (383)

ConnectOne whole shares issued

  11,790,116 

Price per share of ConnectOne common stock on June 1, 2025

 $22.97 

Total fair value of stock consideration issued

 $270,819 

Cash consideration paid

  9 

Total purchase price consideration

 $270,828 

 

 

As of

 
  

June 1, 2025

 
  

(in thousands)

 
     

Total purchase price consideration

 $270,828 
     

Fair Value of Assets Acquired:

    

Cash and cash equivalents

  54,869 

Securities available-for-sale

  596,702 

Loans receivables, net

  2,882,951 

Restricted stock, at cost

  24,276 

Premises and equipment, net

  45,895 

Bank-owned life insurance

  118,098 

Pension plan assets

  11,617 

Core deposit intangible

  63,206 

Other assets

  107,480 

Total assets acquired

 $3,905,094 
     

Fair Value of Liabilities Assumed:

    

Deposits

  3,251,147 

Borrowings

  360,405 

Other liabilities

  29,953 

Total liabilities assumed

 $3,641,505 
     

Net assets acquired

 $263,589 
     

Goodwill recorded in acquisition

 $7,239 

 

The following is a description of the valuation methodologies used to estimate the fair values of significant assets and liabilities presented above.

 

Cash and cash equivalents – The carrying amount of these items is a reasonable estimate of their fair value based on the short-term nature of these assets.

 

Investment securities – Fair values for investment securities available-for-sale were based on quoted market prices, where available. If quoted market prices were not available, fair value estimates are based on observable inputs, including quoted market prices for similar instruments. Fair value estimates also reflect an adjustment related to certain securities that were sold shortly after closing and were determined by the current market price. Additional information is included in Note 4 - Investments. 

 

Loans – The fair value of the loan portfolio was calculated on a pooled loan basis using discounted cash flow analysis for accruing loans and on an individual basis for nonaccrual loans. This analysis took into consideration the contractual terms of the loans and assumptions related to the credit risk, expected lifetime losses, qualitative factors, collateral values, discount rates, and other liquidity considerations to estimate projected cash flows. The assumptions used in determining the fair value of the loan portfolio were considered reasonable from a market-participant viewpoint.

 

Acquired loans are classified into two categories: purchased credit deteriorated (“PCD”) and non-PCD loans. PCD loans are defined as a loan or group of loans that have experienced more-than-insignificant credit deterioration since origination. The Company considers various factors in connection with the identification of more-than-insignificant deterioration in credit, including but not limited to nonperforming status, delinquency, risk ratings, and other qualitative factors that indicate deterioration in credit quality since origination. Non-PCD loans will have an allowance established subsequent to the Acquisition Date, which is recognized as an expense through the provision for credit losses. For PCD loans, the loans were recorded at their amortized cost, less an allowance for credit losses ("ACL") of $43.3 million on the Acquisition Date. There is no provision for credit loss expense recognized on PCD loans because the initial allowance is established by grossing-up the amortized cost of the PCD loans. The remaining difference between the net of the amortized cost basis and the ACL and the fair value allocated to the loans on the date of acquisition is recognized as a non-credit-related discount that will be accreted into interest income over the life of the loans.

 

The following table provides details related to the fair value of PCD loans that were acquired on June 1, 2025.

 

          

Gross-up for PCD

     
  

Unpaid Principal

  

Total Discount at

  

Allowance for Credit

  

Fair Value of PCD

 

(dollars in thousands)

 

Balance

  

Acquisition

  

Losses at Acquisition

  

Loans at Acquisition

 

Total PCD Loans

 $271,904  $(34,394) $(43,336) $194,174 

 

 

Premises and equipment – The estimated fair value of premises was measured based upon appraisals from independent third parties. The estimated fair value of equipment was determined to approximate the carrying amount of these assets.

 

Deferred Tax Benefit – The Company recorded a net deferred income tax benefit of $51.1 million related to tax attributes of FLIC, along with the effects of fair value adjustments resulting from applying the purchase method of accounting.

 

Deposits – The fair values used for the demand and savings deposits equal the amount payable on demand at the Acquisition Date. The fair value of time deposits is estimated by discounting the estimated future cash flows using current rates offered for deposits with similar remaining maturities.

 

Borrowings – The fair value of Federal Home Loan Bank ("FHLB") advances were estimated by discounting the estimated future cash flows using rates currently available to the Company for debt with similar remaining maturities.

 

As a result of the integration of operations of FLIC, the Company recognized net interest income and net income of $35.5 million and $25.6 million, respectively, from the Acquisition Date through and including September 30, 2025 and is included in the Company’s Consolidated Statements of Income.

 

Costs related to the acquisition totaled $34.0 million for the nine months ended September 30, 2025. These amounts were expensed as incurred and are recorded as merger expenses in the Company’s Consolidated Statements of Income.

 

The following table presents unaudited supplemental pro forma information as if the merger had occurred on January 1, 2024. The unaudited pro forma information includes adjustments for (i) accreting and amortizing the discounts and premiums associated with the estimated fair value adjustments to acquired loans, investment securities, deposits, and borrowings, (ii) the amortization of recognized intangible assets arising from the merger, (iii) depreciation expense on premises and equipment, and (iv) the related estimated income tax effects. The pro forma amounts below do not reflect the Company's expectations as of the date of the pro forma information of further operating cost savings and other business synergies expected to be achieved, including revenue growth as a result of the merger. As a result, actual amounts differed from the unaudited pro forma information presented.

 

  

Nine Months Ended September 30,

 

(in thousands)

 

2025

  

2024

 

Net interest income

 $300,771  $262,608 

Net income

 $104,766  $58,690