Edgar Filing: ConnectOne Bancorp, Inc.

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2014

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from _______________________ to _____________________

Commission file number 001-35812

CONNECTONE BANCORP, INC.

(Exact name of Registrant as Specified in Its Charter)

NEW JERSEY
(State or other jurisdiction of incorporation or organization)

26-1998619
(I.R.S. Employer Identification Number)

301 Sylvan Avenue
Englewood Cliffs, New Jersey 07632
(Address of Principal Executive Offices)

(201) 816-8900
(Issuer’s Telephone Number, including area code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation SD-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes S No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of large accelerated filer, accelerated filer and small reporting company in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer £

Accelerated filer £

Non-accelerated filer S

Smaller reporting company £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No S

As of May 12, 2014 there were 5,122,047 shares of common stock, no par value, outstanding.

ConnectOne Bancorp, Inc.
FORM 10-Q

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION	2

Item 1.	Financial Statements	2

	Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013	2

	Consolidated Statements of Income for the three months ended March 31, 2014 and 2013	4

	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2014 and 2013	5

	Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2014 and for the year ended December 31, 2013	6

	Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37

Item 4.	Controls and Procedures	38

PART II	OTHER INFORMATION	39

Item 1.	Legal Proceedings

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3.	Defaults Upon Senior Securities	39

Item 4.	Submission of Matters to a Vote of Security Holders	39

Item 5.	Other Information	39

Item 6.	Exhibits	39

SIGNATURES		40

CERTIFICATIONS

EXHIBIT 32

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

ConnectOne Bancorp, Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands)

	March 31, 2014			December 31, 2013
		(unaudited)
Assets
Cash and due from banks	$	3,005		$	2,907
Interest-bearing deposits with banks		42,325			31,459
Cash and cash equivalents		45,330			34,366

Securities available for sale		27,199			27,589
Securities held to maturity, fair value of $943 at 2014 and $1,077 at 2013		898			1,027
Loans held for sale		792			575

Loans receivable		1,245,363			1,151,904
Less: Allowance for loan losses		(17,035	)		(15,979	)
Net loans receivable		1,228,328			1,135,925

Investment in restricted stock, at cost		9,411			7,622
Bank premises and equipment, net		7,385			7,526
Accrued interest receivable		4,235			4,102
Other real estate owned		870			1,303
Goodwill		260			260
Bank-owned life insurance		15,334			15,191
Deferred taxes		7,539			7,614
Other assets		142			128
Total assets	$	1,347,723		$	1,243,228

(continued)

See accompanying notes to unaudited consolidated financial statements.

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ConnectOne Bancorp, Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	March 31, 2014		December 31, 2013
	(unaudited)
Liabilities
Deposits
Noninterest-bearing	$	236,872	$	216,804
Interest-bearing		790,884		749,003
Total deposits		1,027,756		965,807
FHLB Borrowings		177,301		137,558
Accrued interest payable		2,836		2,762
Capital lease obligation		3,081		3,107
Other liabilities		3,741		3,866
Total liabilities		1,214,715		1,113,100

Commitments and Contingencies

Stockholders’ Equity
Preferred stock (Series A), no par value; $20 liquidation value; authorized 125,000 shares; no shares issued and outstanding at March 31, 2014 and December 31, 2013		—		—
Preferred stock (Series B), no par value; $20 liquidation value; authorized 875,000 shares; no shares issued and outstanding at March 31, 2014 and December 31, 2013		—		—
Preferred stock (Series C), no par value; $1,000 liquidation value; authorized 7,500 shares; no shares issued and outstanding at March 31, 2014 and December 31, 2013		—		—
Common stock and surplus, no par value; authorized 10,000,000 shares at March 31, 2014 and December 31, 2013; issued and outstanding 5,122,047 at March 31, 2014 and 5,106,455 at December 31, 2013		99,466		99,315
Retained earnings		33,539		30,931
Accumulated other comprehensive income/(loss)		3		(118	)
Total stockholders’ equity		133,008		130,128
Total liabilities and stockholders’ equity	$	1,347,723	$	1,243,228

See accompanying notes to unaudited consolidated financial statements.

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ConnectOne Bancorp, Inc.

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(in thousands, except for share and per share data)

	Three Months Ended March 31,
	2014		2013
Interest income
Loans receivable, including fees	$	13,455	$	10,696
Securities		227		195
Other interest income		22		21
Total interest income		13,704		10,912
Interest expense
Deposits		1,401		1,146
FHLB borrowings		561		334
Capital lease		47		48
Total interest expense		2,009		1,528

Net interest income		11,695		9,384
Provision for loan losses		1,300		925
Net interest income after provision for loan losses		10,395		8,459

Non-interest income
Service fees		87		100
Gains on sales of loans		41		83
Income on bank owned life insurance		144		—
Other income		77		76
Total non-interest income		349		259

Non-interest expenses
Salaries and employee benefits		3,091		2,480
Occupancy and equipment		829		729
Professional fees		378		271
Advertising and promotion		99		103
Data processing		517		447
Merger related expenses		923		—
Other expenses		835		711
Total non-interest expenses		6,672		4,741

Income before income tax expense		4,072		3,977
Income tax expense		1,464		1,641
Net income	$	2,608	$	2,336

Earnings per common share:
Basic	$	0.52	$	0.58
Diluted		0.50		0.56
Weighted average common shares outstanding:
Basic		5,035,521		4,055,908
Diluted		5,216,599		4,178,214

See accompanying notes to unaudited consolidated financial statements.

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ConnectOne Bancorp, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(in thousands)

	Three Months Ended March 31,
	2014		2013
Net income	$	2,608	$	2,336
Unrealized holding (losses)/gains on securities available for sale arising during the period		202		(122	)
Tax effect		81		(49	)

Other comprehensive loss		121		(73	)

Comprehensive income	$	2,729	$	2,263

See accompanying notes to unaudited consolidated financial statements.

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ConnectOne Bancorp, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(dollars in thousands)

											Accumulated
			Preferred		Preferred		Preferred				Other
	Common Stock		Stock,		Stock,		Stock,		Retained		Comprehensive
	and Surplus		Series A		Series B		Series C		Earnings		Income			Total

Balance at January 1, 2013	$	51,205	$	—	$	—	$	—	$	20,661	$	496		$	72,362

Net income		—		—		—		—		10,270					10,270

Other comprehensive loss, net of taxes		—		—		—		—		—		(614	)		(614	)

Issuance of 1,840,000 shares, net of expenses		47,715		—		—		—		—		—			47,715

Grant of 100,238 restricted stock awards and performance units		—		—		—		—		—		—			—

Equity-based compensation		395		—		—		—		—		—			395

Balance at December 31, 2013		99,315		—		—		—		30,931		(118	)		130,128

Net income		—		—		—		—		2,608		—			2,608

Other comprehensive income, net of taxes		—		—		—		—		—		121			121

Grant of 15,592 restricted stock awards		—		—		—		—		—		—			—

Equity-based compensation		151		—		—		—		—		—			151

Balance at March 31, 2014 (unaudited)	$	99,466	$	—	$	—	$	—	$	33,539	$	3		$	133,008

See accompanying notes to unaudited consolidated financial statements.

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ConnectOne Bancorp, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)

	Three months ended March 31,
	2014			2013
Cash flows from operating activities
Net income	$	2,608		$	2,336
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,300			925
Depreciation and amortization		305			297
Net amortization of securities discounts and premiums		4			20
Equity-based compensation		151			99
Proceeds from sale of loans		2,246			4,352
Originations of loans held for sale		(2,422	)		(4,149	)
Gain on sales of loans		(41	)		(83	)
Increase in bank-owned life insurance		(144	)		—
Increase in accrued interest receivable		(133	)		(157	)
Increase (decrease) in accrued interest payable		74			(126	)
Increase (decrease) in other liabilities		(125	)		1,314
(Increase) decrease in other assets		(13	)		205
Net cash provided by operating activities		3,810			5,033

Cash flows from investing activities
Net increase in loans		(93,703	)		(52,978	)
Maturities, calls and principal repayments of securities held to maturity and available for sale		711			1,851
Proceeds from sale of other real estate owned		433			—
Net (increase) decrease in investments in restricted stock, at cost		(1,789	)		228
Purchases of bank premises and equipment		(164	)		(701	)
Net cash used in investing activities		(94,512	)		(51,600	)

Cash flows from financing activities
Net increase in deposits		61,949			29,760
Proceeds from FHLB borrowings		40,000			5,000
Repayment of FHLB borrowings		(257	)		(10,162	)
Net proceeds from initial public offering		—			47,715
Decrease in capital lease obligation		(26	)		(18	)
Net cash provided by financing activities		101,666			72,295

Net increase in cash and cash equivalents		10,964			25,728
Cash and cash equivalents - beginning		34,366			50,629
Cash and cash equivalents - ending	$	45,330		$	76,357

Supplementary cash flows information:
Interest paid	$	1,935		$	1,654
Income taxes paid	$	1,275		$	900

See accompanying notes to unaudited consolidated financial statements.

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ConnectOne Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Principles of Consolidation: The consolidated financial statements include ConnectOne Bancorp, Inc. (“The Parent Corporation”) and its wholly owned subsidiary, ConnectOne Bank (“the Bank” and, collectively with the Parent Corporation and the Parent Corporation’s other direct subsidiaries, “the Company.”)

The Company provides financial services through its offices in Bergen, Hudson, Monmouth, and Essex counties, New Jersey. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from business operations. There are no significant concentrations of loans to any one industry or customer. However, the customers’ ability to repay their loans is dependent on the cash flows, real estate and general economic conditions in the area.

The consolidated financial information included herein as of and for the periods ended March 31, 2014 and 2013 is unaudited. The accompanying unaudited consolidated financial statements included herein have been prepared by the Company in accordance with U.S. generally accepted accounting principles and pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments which, in the opinion of management, are considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. All adjustments made were of a normal and recurring nature. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ended December 31, 2014. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

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ConnectOne Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SECURITIES

The amortized cost, gross unrealized gains and losses and fair value of securities available for sale at March 31, 2014 and December 31, 2013, are as follows (dollars in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
March 31, 2014
Securities available for sale:
U.S. Treasury securities	$	1,937	$	—	$	(84	)	$	1,853
States and political subdivisions		4,412		2		(32	)		4,382
Asset-backed securities:
Residential mortgages		9,038		333		(87	)		9,284
Student loans		4,451		7		(11	)		4,447
Small business loans		1,356		—		(12	)		1,344
Equity securities		6,000		—		(111	)		5,889
	$	27,194	$	342	$	(337	)	$	27,199

December 31, 2013
Securities available for sale:
U.S. Treasury securities	$	1,935	$	—	$	(132	)	$	1,803
States and political subdivisions		4,415		—		(80	)		4,335
Asset-backed securities:
Residential mortgages		9,452		333		(128	)		9,657
Student loans		4,568		—		(20	)		4,548
Small business loans		1,414		—		(23	)		1,391
Equity securities		6,000		—		(145	)		5,855
	$	27,784	$	333	$	(528	)	$	27,589

The amortized cost, gross unrecognized gains and losses and fair value of securities held to maturity at March 31, 2014 and December 31, 2013, are as follows (dollars in thousands):

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
March 31, 2014
Securities held to maturity:
Asset-backed securities:
Residential mortgages	$	898	$	45	$	—	$	943

December 31, 2013
Securities held to maturity:
Asset-backed securities:
Residential mortgages	$	1,985	$	99	$	—	$	2,084

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ConnectOne Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SECURITIES

(continued)

The amortized cost and fair value of debt securities available for sale and held to maturity at March 31, 2014, by contractual maturity, are shown below (dollars in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset-backed securities do not have a specific maturity and are shown separately.

	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
March 31, 2014
Due in one year or less	$	1,001	$	1,002	$	—	$	—
Due after one year through five years		—		—		—		—
Due after five years through ten years		3,849		3,733		—		—
Due after ten years		1,499		1,500		—		—
Asset-backed securities:
Residential mortgages		9,038		9,284		898		943
Student loans		4,451		4,447		—		—
Small business loans		1,356		1,344		—		—
	$	21,194	$	21,310	$	898	$	943

There were no sales of available for sale securities for the quarters ended March 31, 2014 and 2013.

Securities with a carrying value of $204,000 and $215,000 at March 31, 2014 and December 31, 2013, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

The following table summarizes securities with unrealized losses at March 31, 2014 and December 31, 2013, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands).

	Less than 12 Months					12 Months or Longer				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2014
Securities available for sale:
U.S. Treasury securities	$	1,853	$	(84	)	$	—	$	—	$	1,853	$	(84	)
States and political subdivisions		1,880		(32	)		—		—		1,880		(32	)
Asset-backed securities:
Residential mortgages		2,275		(87	)		—		—		2,275		(87	)
Student loans		2,495		(11	)		—		—		2,495		(11	)
Small business loans		1,344		(12	)		—		—		1,344		(12	)
Equity securities		5,889		(111	)		—		—		5,889		(111	)
	$	15,736	$	(337	)	$	—	$	—	$	15,736	$	(337	)

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ConnectOne Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SECURITIES

(continued)

	Less than 12 Months					12 Months or Longer				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
December 31, 2013
Securities available for sale:
U. S. Treasury securities	$	1,803	$	(132	)	$	—	$	—	$	1,803	$	(132	)
States and political subdivisions		3,412		(80	)		—		—		3,412		(80	)
Asset-backed securities:
Residential mortgages		4,284		(128	)		—		—		4,284		(128	)
Student loans		4,548		(20	)		—		—		4,548		(20	)
Small business loans		1,391		(23	)		—		—		1,391		(23	)
Equity securities		5,855		(145	)		—		—		5,855		(145	)
	$	21,293	$	(528	)	$	—	$	—	$	21,293	$	(528	)

Unrealized losses on available for sale securities have not been recognized into income because the securities are of high credit quality, management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the securities approach maturity.

NOTE 3 – LOANS RECEIVABLE

The composition of loans receivable (which excludes loans held for sale) at March 31, 2014 and December 31, 2013 are as follows (dollars in thousands):

	March 31, 2014			December 31, 2013
Commercial	$	223,324		$	203,690
Commercial real estate		835,169			769,121
Commercial construction		69,420			59,877
Residential real estate		83,243			85,568
Home equity		32,665			32,504
Consumer		2,348			2,340
Gross loans		1,246,169			1,153,100
Unearned net origination fees and costs		(806	)		(1,196	)
Loans receivable		1,245,363			1,151,904
Less: Allowance for loan losses		(17,035	)		(15,979	)
Net loans receivable	$	1,228,328		$	1,135,925

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ConnectOne Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – LOANS RECEIVABLE

(continued)

The portfolio classes in the above table have unique risk characteristics with respect to credit quality:

	·	The repayment of commercial loans is generally dependent on the creditworthiness and cash flow of borrowers, and if applicable, guarantors, which may be negatively impacted by adverse economic conditions. While the majority of these loans are secured, collateral type, marketing, coverage, valuation and monitoring is not as uniform as in other portfolio classes and recovery from liquidation of such collateral may be subject to greater variability.

	·	Payment on commercial real estate loans is driven principally by operating results of the managed properties or underlying business and secondarily by the sale or refinance of such properties. Both primary and secondary sources of repayment, and value of the properties in liquidation, may be affected to a greater extent by adverse conditions in the real estate market or the economy in general.

	·	Properties underlying commercial construction loans often do not generate sufficient cash flows to service debt and thus repayment is subject to ability of the borrower and, if applicable, guarantors, to complete development or construction of the property and carry the project, often for extended periods of time until the property can be sold. As a result, the performance of these loans is contingent upon future events whose probability at the time of origination is uncertain.

	·	The ability of borrowers to service debt in the residential, home equity and consumer loan portfolios is generally subject to personal income which may be impacted by general economic conditions, such as increased unemployment levels. These loans are predominately collateralized by first and/or second liens on single family properties. If a borrower cannot maintain the loan, the Company’s ability to recover against the collateral in sufficient amount and in a timely manner may be significantly influenced by market, legal and regulatory conditions.

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ConnectOne Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – LOANS RECEIVABLE

(continued)

The following table represents the allocation of allowance for loan losses and the related loans by loan portfolio segment disaggregated based on the impairment methodology at March 31, 2014 and December 31, 2013 (dollars in thousands):

	Commercial		Commercial Real Estate		Commercial Construction		Residential Real Estate		Home Equity Lines of Credit		Consumer		Unallocated		Total

March 31, 2014
Allowance for loan losses:
Individually evaluated for impairment	$	1,456	$	80	$	—	$	—	$	—	$	—	$	—	$	1,536
Collectively evaluated for impairment		3,267		9,259		740		1,217		701		52		263		15,499

Total	$	4,723	$	9,339	$	740	$	1,217	$	701	$	52	$	263	$	17,035

Gross loans:
Individually evaluated for impairment	$	5,743	$	6,106	$	—	$	2,784	$	765	$	—	$	—	$	15,398
Collectively evaluated for impairment		217,581		829,063		69,420		80,459		31,900		2,348		—		1,230,771

Total	$	223,324	$	835,169	$	69,420	$	83,243	$	32,665	$	2,348	$	—	$	1,246,169

December 31, 2013
Allowance for loan losses:
Individually evaluated for impairment	$	1,440	$	122	$	—	$	—	$	—	$	—	$	—	$	1,562
Collectively evaluated for impairment		2,998		8,622		639		1,248		698		52		160		14,417

Total	$	4,438	$	8,744	$	639	$	1,248	$	698	$	52	$	160	$	15,979

Gross loans:
Individually evaluated for impairment	$	5,813	$	6,137	$	—	$	3,029	$	767	$	—	$	—	$	15,746
Collectively evaluated for impairment		197,877		762,984		59,877		82,539		31,737		2,340		—		1,137,354

Total	$	203,690	$	769,121	$	59,877	$	85,568	$	32,504	$	2,340	$	—	$	1,153,100

- 13 -

ConnectOne Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – LOANS RECEIVABLE

(continued)

The following tables present information related to impaired loans by class as of March 31, 2014, December 31, 2013 and March 31, 2013 and for the quarters ended March 31, 2014 and 2013 and for the year ended December 31, 2013 (dollars in thousands):

	Unpaid				Allowance for		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest
	Balance		Investment (1)		Allocated		Investment (1)		Recognized		Recognized
March 31, 2014
With no related allowance recorded:
Commercial	$	929	$	801		—	$	819	$	—	$	—
Commercial real estate		5,244		4,870		—		4,955		22		—
Commercial construction		—		—		—		—		—		—
Residential real estate		3,641		2,817		—		3,202		8		—
Home equity lines of credit		770		765		—		771		—		—
Consumer		—		—		—		—		—		—
		10,584		9,253		—		9,747		30		—

With an allowance recorded:
Commercial		5,018		4,949		1,456		5,077		17		—
Commercial real estate		1,394		1,403		80		1,447		21		—
Commercial construction		—		—		—		—		—		—
Residential real estate		—		—		—		—		—		—
Home equity lines of credit		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
		6,412		6,352		1,536		6,524		38		—

Total	$	16,996	$	15,605	$	1,536	$	16,271	$	68	$	—

December 31, 2013
With no related allowance recorded:
Commercial	$	934	$	809		—	$	830	$	15	$	—
Commercial real estate		4,712		4,348		—		4,479		63		—
Commercial construction		—		—		—		—		—		—
Residential real estate		3,643		3,055		—		3,510		36		—
Home equity lines of credit		771		768		—		567		7		—
Consumer		—		—		—		—		—		—
		10,060		8,980		—		9,386		121		—

With an allowance recorded:
Commercial		5,057		5,016		1,440		5,192		122		60
Commercial real estate		1,950		1,959		122		2,042		119		—
Commercial construction		—		—		—		—		—		—
Residential real estate		—		—		—		—		—		—
Home equity lines of credit		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
		7,007		6,975		1,562		7,234		241		60

Total	$	17,067	$	15,955	$	1,562	$	16,620	$	362	$	60

March 31, 2013
With no related allowance recorded:
Commercial	$	273	$	276		—	$	286	$	—	$	—
Commercial real estate		2,392		2,434		—		1,666		16		—
Commercial construction		—		—		—		—		—		—
Residential real estate		3,023		3,068		—		3,058		—		—
Home equity lines of credit		119		121		—		121		1		—
Consumer		—		—		—		—		—		—
		5,807		5,899		—		5,131		17		—

With an allowance recorded:
Commercial		2,862		2,862		648		2,895		32		32
Commercial real estate		3,274		3,326		612		3,442		35		—
Commercial construction		—		—		—		—		—		—
Residential real estate		639		647		45		660		8		—
Home equity lines of credit		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
		6,775		6,835		1,305		6,997		75		32

Total	$	12,582	$	12,734	$	1,305	$	12,128	$	92	$	32

(1)	The recorded investment in loans include accrued interest receivable and other capitalized costs such as real estate taxes paid on behalf of the borrower and loan origination fees, net.

- 14 -

ConnectOne Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – LOANS RECEIVABLE

(continued)

The following table presents nonaccrual loans and loans past due 90 days or greater and still accruing by class of loans (dollars in thousands):

	Nonaccrual Loans				Loans Past Due Over 90 Days Still Accruing
	March 31, 2014		December 31 2013		March 31, 2014		December 31 2013

Commercial	$	3,512	$	3,582	$	—	$	—
Commercial real estate		2,434		2,445		—		—
Commercial construction		—		—		—		—
Residential real estate		2,137		2,381		—		—
Home equity lines of credit		765		767		—		—
Consumer		—		—		—		—

Total	$	8,848	$	9,175	$	—	$	—

The following tables present past due and current loans by the loan portfolio class (dollars in thousands):

	30-59		60-89		90 Days						Total
	Days		Days		or Greater		Total				Gross
	Past Due		Past Due		Past Due		Past Due		Current		Loans
March 31, 2014
Commercial	$	—	$	—	$	628	$	628	$	222,696	$	223,324
Commercial real estate		1,928		—		1,394		3,322		831,847		835,169
Commercial construction		—		—		—		—		69,420		69,420
Residential real estate		647		321		1,524		2,492		80,751		83,243
Home equity lines of credit		—		—		651		651		32,014		32,665
Consumer		—		—		—		—		2,348		2,348

Total	$	2,575	$	321	$	4,197	$	7,093	$	1,239,076	$	1,246,169

December 31, 2013
Commercial	$	—	$	—	$	634	$	634	$	203,056	$	203,690
Commercial real estate		—		—		1,394		1,394		767,727		769,121
Commercial construction		—		—		—		—		59,877		59,877
Residential real estate		—		431		1,763		2,194		83,374		85,568
Home equity lines of credit		—		—		653		653		31,851		32,504
Consumer		—		19		—		19		2,321		2,340

Total	$	—	$	450	$	4,444	$	4,894	$	1,148,206	$	1,153,100

- 15 -

ConnectOne Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – LOANS RECEIVABLE

(continued)

There were no troubled debt restructurings that occurred during the quarters ended March 31, 2014 and 2013. There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the quarters ended March 31, 2014 and 2013. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

Credit Quality Indicators

The Bank categorizes loans into risk categories based on relevant information about the quality and realizable value of collateral, if any, and the ability of borrowers to service their debts such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Bank analyzes loans individually by classifying the loans as to credit risk. This analysis is performed whenever a credit is extended, renewed or modified, or when an observable event occurs indicating a potential decline in credit quality, and no less than annually for large balance loss. The Bank used the following definitions for risk ratings:

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the Bank’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the repayment and liquidation of the debt. They are characterized by distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Normal payment from the borrower is in jeopardy, although loss of principal, while still possible, is not imminent.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable.

The following table presents the risk category of loans by class of loans based on the most recent analysis performed as of March 31, 2014 and December 31, 2013 (dollars in thousands):

Credit Risk Profile by Internally Assigned Grades	Pass		Special Mention		Substandard		Doubtful		Total

March 31, 2014
Commercial	$	204,463	$	13,969	$	4,892	$	—	$	223,324
Commercial real estate		821,711		1,934		11,524		—		835,169
Commercial construction		69,420		—		—		—		69,420

Total	$	1,095,594	$	15,903	$	16,416	$	—	$	1,127,913

December 31, 2013
Commercial	$	184,340	$	14,377	$	4,973	$	—	$	203,690
Commercial real estate		755,533		1,947		11,641		—		769,121
Commercial construction		59,877		—		—		—		59,877

Total	$	999,750	$	16,324	$	16,614	$	—	$	1,032,688

- 16 -

ConnectOne Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – LOANS RECEIVABLE

(continued)

Residential real estate, home equity lines of credit, and consumer loans are not rated. The Company evaluates credit quality of those loans by aging status of the loan and by payment activity, which was previously presented.

The following table presents the activity in the Company’s allowance for loan losses by class of loans (dollars in thousands):

	Commercial		Commercial Real Estate			Commercial Construction			Residential Real Estate			Home Equity Lines of Credit			Consumer			Unallocated			Total

Allowance for loan losses:
Beginning balance at January 1, 2014	$	4,438	$	8,744		$	639		$	1,248		$	698		$	52		$	160		$	15,979
Charge-offs		—		—			—			(239	)		—			(5	)		—			(244	)
Recoveries		—		—			—			—			—			—			—			—
Provision for loan losses		285		595			101			208			3			5			103			1,300

Total ending balance at March 31, 2014	$	4,723	$	9,339		$	740		$	1,217		$	701		$	52		$	263		$	17,035

Allowance for loan losses:
Beginning balance at January 1, 2013	$	2,402	$	7,745		$	633		$	1,542		$	617		$	41		$	266		$	13,246
Charge-offs		—		(452	)		—			—			(79	)		(3	)		—			(534	)
Recoveries		—		—			—			—			—			—			—			—
Provision for loan losses		842		283			(290	)		22			87			(5	)		(14	)		925

Total ending balance at March 31, 2013	$	3,244	$	7,576		$	343		$	1,564		$	625		$	33		$	252		$	13,637

NOTE 4 - STOCK OPTION PLANS AND EQUITY COMPENSATION PLAN

At March 31, 2014, there were 91,393 shares available for awards under the Company’s equity plans. Awards may be in the form of options, restricted stock or other equity awards. A summary of the stock option activity in the Company’s equity plans for the three months ended March 31, 2014 are as follows:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercised		Contractural		Intrinsic
	Shares			Price		Term (Years)		Value

Outstanding at January 1, 2014		300,438		$	12.32
Granted		—			—
Exercised		—			—
Forfeited		(606	)		18.18
Expired		—			—

Outstanding at March 31, 2014		299,832		$	12.31	$	3.16	$	11,008,412
Fully vested and expected to vest		299,832		$	12.31	$	3.16	$	11,008,412
Exercisable at March 31, 2014		298,416		$	12.28	$	3.12	$	10,946,236

- 17 -

ConnectOne Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - STOCK OPTION PLANS AND EQUITY COMPENSATION PLAN

(continued)

As of March 31, 2014 and December 31, 2013, there were no material unrecognized compensation costs related to nonvested stock options granted under the Company’s plans. Aggregate intrinsic value is based on a fair value share price of $48.96, which is derived from the closing price of our common stock at March 31, 2014. There were no stock options granted during the first quarter of 2014.

In conjunction with the Company’s equity plans , the Company granted restricted shares to certain executive officers. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at issue date. The fair value of the stock granted was based on the closing market price of our common stock as of the grant date. Generally, grants of restricted shares vest one-third, each, on the first, second and third anniversaries of the grant date.

A summary of changes in the Company’s nonvested restricted shares for the quarter ended March 31, 2014 is as follows:

				Weighted-
				Average
				Grant-Date
Nonvested Shares	Shares			Fair Value

Nonvested at December 31, 2013		19,275		$	21.90
Awarded		15,592			38.81
Vested		(7,188	)		21.57
Expired		—			—

Nonvested at March 31, 2014		26,679		$	31.51

As of March 31, 2014, there was $811,000 of total unrecognized compensation cost related to nonvested shares granted under the plans. The cost is expected to be recognized over a weighted average period of 26.3 months. The total fair value of shares vested during the quarter ended March 31, 2014 was $321,000.

On August 7, 2013, the Company granted to various key employees performance unit awards, with each unit entitling the holder to one share of the Company’s common stock contingent upon the Company meeting or exceeding certain return on asset targets over the course of a three-year period commencing July 1, 2013. Under the agreement, and assuming the Company has met or exceeded the applicable targets, grants of performance unit awards will vest one-third, each, on the third, fourth and fifth anniversaries of the grant date or an earlier date, in the event of a change in control, as defined in the agreement. At March 31, 2014, the specific number of shares related to performance unit awards that were expected to vest was 85,313, determined by actual performance in consideration of the established range of the performance targets, which is consistent with the level of expense currently being recognized over the vesting period. Should this expectation change, additional compensation expense could be recorded in future periods or previously recognized expense could be reversed. The maximum amount of performance unit awards is 102,375.

- 18 -

ConnectOne Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - STOCK OPTION PLANS AND EQUITY COMPENSATION PLAN

(continued)

A summary of the status of unearned performance unit awards and the change during the period is presented in the table below:

	Shares		Weighted- Average Grant-Date Fair Value

Unearned at December 31, 2013		85,313	$	32.35
Awarded		—		—
Forfeited		—		—
Expired		—		—

Unearned at March 31, 2014		85,313	$	32.35

The company recognized $184,000 in stock-based compensation expenses for services rendered for the quarter ended March 31, 2014. At March 31, 2014, compensation cost of $2,323,000 related to nonvested awards not yet recognized is expected to be recognized over a weighted-average period of 3.2 years.

NOTE 5 - FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. The estimated fair value amounts have been measured as of March 31, 2014 and December 31, 2013, and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period end.

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

- 19 -

ConnectOne Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

(continued)

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company used the following methods and significant assumptions to estimate fair value:

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2014 and December 31, 2013 are as follows (dollars in thousands):

Assets and Liabilities Measured on a Recurring Basis

	Fair Value Measurements Using
	Quoted Prices		Significant
	in Active		Other		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)
March 31, 2014
Securities:
U.S. Treasury securities	$	1,853	$	—	$	—
States and political subdivisions		—		4,382		—
Asset-backed securities:
Residential mortgages		—		9,284		—
Student loans		—		4,447		—
Small business loans		—		1,344
Equity securities		—		5,889		—

December 31, 2013
Securities:
U.S. Treasury securities	$	1,803	$	—	$	—
States and political subdivisions		—		4,335		—
Asset-backed securities:
Residential mortgages		—		9,657		—
Student loans		—		4,548		—
Small business loans		—		1,391
Equity securities		—		5,855		—

- 20 -

ConnectOne Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

(continued)

Assets and Liabilities Measured on a Non-recurring Basis

Assets measured at fair value on a non-recurring basis are summarized below (dollars in thousands):

	Fair Value Measurements Using
	Quoted Prices		Significant
	in Active		Other		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)
March 31, 2014
Impaired loans:
Commercial real estate	$	—	$	—	$	1,828
Commercial		—		—		1,865

December 31, 2013
Impaired loans:
Commercial real estate	$	—	$	—	$	1,828
Commercial		—		—		1,865

As of March 31, 2014, impaired loans, which have a specific reserve and are measured for impairment using the fair value of the collateral, had an unpaid principal balance of $4,106,000 with a valuation allowance of $977,000, resulting in an additional provision for loan losses of $39,000 for the quarter ended March 31, 2014.

As of March 31, 2013, impaired loans, which have a specific reserve and are measured for impairment using the fair value of the collateral, had an unpaid principal balance of $3,913,000 with a valuation allowance of $657,000, resulting in an additional provision for loan losses of $76,000 for the quarter ended March 31, 2013.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2014 (dollars in thousands):

			Valuation		Discount			Weighted
	Fair Value		Technique(s)	Unobservable Input(s)	Range			Average
Impaired loans:

Commercial real estate	$	1,313	Sales comparison	Adjustments for differences between the comparable sales.		5% - 14	%		7	%

Commercial	$	1,816	Sales comparison	Adjustments for differences between the comparable sales.		39	%		39	%

- 21 -

ConnectOne Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

(continued)

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2013 (dollars in thousands):

			Valuation		Discount			Weighted
	Fair Value		Technique(s)	Unobservable Input(s)	Range			Average
Impaired loans:

Commercial real estate	$	1,828	Sales comparison	Adjustments for differences between the comparable sales.		5% - 15	%		8	%

			Income approach	Adjustments for differences in net operating income expectations.		4	%		4	%

Commercial	$	1,865	Sales comparison	Adjustments for differences between the comparable sales.		39	%		39	%

The carrying value and estimated fair value of financial instruments as of March 31, 2014 and December 31, 2013 are summarized below (dollars in thousands):

			Fair Value Measurements at March 31, 2014 Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Carrying Value		(Level 1)		(Level 2)		(Level 3)
Financial assets:
Cash and due from banks	$	3,005	$	3,005	$	—	$	—
Interest bearing deposits		42,325		42,325		—		—
Securities available for sale		27,199		1,853		25,346		—
Securities held to maturity		898		—		943		—
FHLB stock		9,411		n/a		n/a		n/a
Loans held for sale		792		—		792		—
Loans receivable		12,45,363		—		—		12,43,636
Accrued interest receivable		4,235		—		77		4,158

Financial liabilities:
Deposits
Demand, NOW, money market and savings	$	5,78,045	$	5,78,045	$	—	$	—
Certificates of deposit		4,49,711		—		4,52,129		—
FHLB Borrowings		1,77,301		—		1,81,851		—
Accrued interest payable		2,836		—		2,836		—

- 22 -

ConnectOne Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

(continued)

			Fair Value Measurements at December 31, 2013 Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Carrying Value		(Level 1)		(Level 2)		(Level 3)
Financial assets:
Cash and due from banks	$	2,907	$	2,907	$	—	$	—
Interest bearing deposits		31,459		31,459		—		—
Securities available for sale		27,589		1,803		25,786		—
Securities held to maturity		1,027		—		1,077		—
FHLB stock		4,744		n/a		n/a		n/a
Loans held for sale		575		—		583		—
Loans receivable, gross		11,51,904		—		—		11,51,870
Accrued interest receivable		4,102		—		99		4,003

Financial liabilities:
Deposits
Demand, NOW, money market and savings	$	5,50,096	$	5,50,096	$	—	$	—
Certificates of deposit		4,15,711		—		4,19,467		—
FHLB Borrowings		1,37,558		—		1,41,902		—
Accrued interest payable		2,762		—		2,762		—

The methods and assumptions, not previously presented, used to estimate fair values for the periods ended March 31, 2014 and December 31, 2013, are described as follows:

Cash and due from banks and interest bearing deposits: The carrying amounts of cash and short-term instruments approximate fair values and care classified as Level 1.

Loans: Fair value of loans, excluding loans held for sale, is estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously.

The methods utilized to estimate the fair value of loans do not necessarily represent an exit price. The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

FHLB Stock: It is not practical to determine the fair value of FHLB Stock due to restrictions placed on its transferrability.

Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date resulting in a Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

- 23 -

ConnectOne Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

(continued)

Long-term borrowings: Long-term borrowings consist of Federal Home Loan Bank of New York borrowings which are estimated using a discounted cash flow calculation that applies interest rates currently being offered to a schedule of aggregated expected monthly Federal Home Loan borrowings maturities.

Accrued interest receivable/payable: The carrying amounts of accrued interest approximate the fair value resulting in a Level 2 or Level 3 classification.

NOTE 6 – EARNINGS PER SHARE

The factors used in the earnings per share computation follow (in thousands, except per share data):

	Three Months Ended March 31,
	2014		2013
Basic
Net income available to common stockholders	$	2,608	$	2,336
Weighted average common shares outstanding		5,036		4,056

Basic earnings per common share	$	0.52	$	0.58

Diluted
Net income	$	2,608	$	2,336
Weighted average common shares outstanding for basic earnings per common share		5,036		4,056
Add: Dilutive effects of assumed exercises of stock options and stock awards		181		122
Average shares and dilutive potential common shares		5,217		4,178

Diluted earnings per common share	$	0.50	$	0.56

There were no stock options that resulted in anti-dilution for the periods presented.

NOTE 7 – PENDING MERGER

On January 20, 2014, the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Center Bancorp, Inc. (NASDAQ: “CNBC”) (“Center Bancorp”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, the Company will merge with and into Center Bancorp, with Center Bancorp continuing as the surviving entity (the “Merger”). The Merger Agreement also provides that, immediately following the consummation of the Merger, Union Center National Bank, a commercial bank chartered pursuant to the laws of the United States (“Union Center”) and a wholly-owned subsidiary of Center Bancorp, will merge with and into the Bank, with the Bank continuing as the surviving bank. Upon completion of the Merger, each share of common stock of the Company will be converted into and become the right to receive 2.6 shares of common stock, no par value per share, of Center Bancorp. Immediately after consummation of the transaction, the directors of the resulting corporation and the resulting bank shall consist of six individuals who previously served as Center Bancorp Directors and six Directors who previously served as Directors of the Company, each to hold office in accordance with the Amended and Restated Certificate of Incorporation and the by-laws of the surviving corporation until their respective successors are duly elected or appointed and qualified. The officers of the surviving corporation shall consist of (i) Frank S. Sorrentino III as Chairman, President and Chief Executive Officer; (ii) William S. Burns, Chief Financial Officer; and (iii) Anthony Weagley, current President and Chief Executive Officer of Center Bancorp, as Chief Operating Officer.

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ConnectOne Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 – PENDING MERGER

(continued)

Completion of the Merger is subject to various conditions, including, among others, (i) approval by shareholders of Center Bancorp and the Company of the Merger Agreement and the transactions contemplated thereby, (ii) the receipt of all necessary approvals and consents of governmental entities required to consummate the transactions contemplated by the Merger Agreement, (iii) the absence of any order or proceeding which prohibits the Merger or the Bank Merger and (iv) the receipt by each of Center Bancorp and ConnectOne Bancorp of an opinion to the effect that the Merger will be treated as a reorganization qualifying under Section 368(a) of the Internal Revenue Code of 1986, as amended. Each party’s obligation to consummate the Merger is also subject to certain customary conditions, including (i) subject to certain exceptions, the accuracy of the representations and warranties of the other party, (ii) performance in all material respects of its agreements, covenants and obligations and (iii) the delivery of certain certificates and other documents.

The Company expects the Merger to be completed in either the second or third quarter of 2014.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Some of the statements in this document discuss future expectations, contain projections or results of operations or financial conditions or state other “forward-looking” information. Those statements are subject to known and unknown risk, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. We based the forward-looking statements on various factors and using numerous assumptions. Important factors that may cause actual results to differ from those contemplated by forward-looking statements include those disclosed under Item 1A – Risk Factors included in the Company’s Annual Report Form 10K filed for the year ended December 31, 2013 and the following:

—

the success or failure of our efforts to implement our business strategy;

—

the effect of changing economic conditions and, in particular, changes in interest rates;

—

changes in government regulations, tax rates and similar matters;

—

our ability to attract and retain quality employees; and

—

other risks which may be described in our future filings with the SEC

We do not promise to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements.

Critical Accounting Policies and Estimates

“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to our audited consolidated financial statements included in our Annual Report on Form 10K contains a summary of our significant accounting policies. Management believes our policy with respect to the methodology for the determination of the allowance for loan losses involves a higher degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. This critical policy and its application are periodically reviewed with the Audit Committee and our Board of Directors.

The allowance for loan losses is based upon management’s evaluation of the adequacy of the allowance, including an assessment of known and probable incurred losses included in the portfolio, including giving consideration to the size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, detailed analysis of individual loans for which full collectability may not be assured, the existence and estimated net realizable value of any underlying collateral and guarantees securing the loans, and current economic and market conditions. Although management uses the best information available, the level of the allowance for loan losses remains an estimate which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to make additional provisions for loan losses based upon information available to them at the time of their examination. Furthermore, the majority of our loans are secured by real estate in the State of New Jersey. Accordingly, the collectability of a substantial portion of the carrying value of our loan portfolio is susceptible to changes in local market conditions and may be adversely affected by declines in real estate values, or if the Central or Northern areas of New Jersey experience an adverse economic shock. Future adjustments to the allowance for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond our control.

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Operating Results Overview

Net income for the first quarter of 2014 was $ $2.6 million, or $0.50 per diluted share, compared with net income of $2.3 million, or $0.56 per diluted share, for the prior year period. The first quarter 2014 results include $0.7 million in after-tax merger expenses related to the pending merger-of-equals with Center Bancorp, Inc., announced during the first quarter of 2014.

The increases in net income, excluding merger charges, were primarily attributable to significant increases in net interest income due to the Company’s rapid growth in loans and deposits, and in its customer base. Partially offsetting the revenue increases were higher noninterest expenses, largely staff-related, commensurate with the Company’s growing infrastructure. Credit costs have kept pace with both loan growth and a changing mix in the loan portfolio, while benefitting from overall sound credit quality.

Net Interest Income

Fully taxable equivalent (“FTE”) net interest income for the first quarter of 2014 totaled $11.7 million, an increase of $2.3 million, or 24.6%, from the year ago period. The increase in net interest income was primarily due to a 33.9% increase in average interest-earning assets, which grew to $1.3 billion in the first quarter of 2014. This was partially offset by a 28 basis points contraction in the net interest margin, from 4.01% in the first quarter of 2013 to 3.73% in the first quarter of 2014. Average total loans increased by 35.9% to $1.2 billion in the first quarter of 2014 from the prior year period. Prepayment fees contributed 10 basis points to the net interest margin for the first quarter of 2014, and 7 basis points to the net interest margin for the first quarter of 2013. Management expects net interest income to continue expanding as a result of solid loan growth, while margin compression is likely to moderate in future periods as the Company’s loan origination mix changes and the loan portfolio fully re-prices.

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Average Balance Sheets

The following table sets forth certain information relating to our average assets and liabilities for the three months ended March 31, 2014 and 2013, and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown.

	For the Three Months Ended
	March 31, 2014									March 31, 2013
	Average						Average			Average					Average
	Balance			Interest			Rate (7)			Balance			Interest		Rate (7)
Interest-earning assets:
Investment securities (1) (2)	$	37,122		$	233			2.55	%	$	25,216		$	195		3.14	%
Loans receivable (3) (4)		1,186,847			13,455			4.60	%		873,557			10,696		4.97	%
Federal funds sold and interest-bearing deposits with banks		48,463			22			0.18	%		51,431			21		0.17	%
Total interest-earning assets		1,272,432			13,710			4.37	%		950,204			10,912		4.66	%
Allowance for loan losses		(16,450	)								(13,545	)
Non-interest earning assets		37,977									19,364
Total assets	$	1,293,959								$	956,023

Interest-bearing liabilities:
Savings, NOW, Money Market, Interest Checking	$	340,125			225			0.27	%	$	329,906			259		0.32	%
Time deposits		436,820			1,176			1.09	%		277,882			887		1.29	%
Total interest-bearing deposits		776,945			1,401			0.73	%		607,788			1,146		0.76	%

Borrowings		166,226			561			1.37	%		76,019			334		1.78	%
Capital lease obligation		3,098			47			6.15	%		3,172			48		6.14	%
Total interest-bearing liabilities		946,269			2,009			0.86	%		686,979			1,528		0.90	%
Noninterest-bearing deposits		209,303									164,403
Other liabilities		5,897									7,706
Stockholders’ equity		132,490									96,935
Total liabilities and stockholders’ equity	$	1,293,959								$	956,023

Net interest income/interest rate spread (5)				$	11,701			3.51	%				$	9,384		3.76	%
Tax equivalent effect					(6	)								—
Net interest income as reported				$	11,695								$	9,384

Net interest margin (6)								3.73	%							4.01	%

(1)	Average balances are calculated on amortized cost.
(2)	Interest income is presented on a tax equivalent basis using 35 percent federal tax rate.
(3)	Includes loan fee income.
(4)	Loans receivable include non-accrual loans.
(5)	Represents difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.
(6)	Represents net interest income divided by average total interest-earning assets.
(7)	Rates are annualized.

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Provision for Loan Losses

In determining the provision for loan losses, management considers national and local economic trends and conditions; trends in the portfolio including orientation to specific loan types or industries; experience, ability and depth of lending management in relation to the complexity of the portfolio; effects of changes in lending policies, trends in volume and terms of loans; levels and trends in delinquencies, impaired loans and net charge-offs and the results of independent third party loan and lease review.

The provision for loan losses for the first quarter of 2014 was $1.3 million, an increase of $0.4 million, compared to the provision for loan losses of $0.9 million in the first quarter of 2013. A majority of the provision for loan losses in both periods was attributable to loan growth.

Non-Interest Income

Non-interest income represents a relatively small portion of the Bank’s total revenue as management has historically made a strategic decision to de-emphasize fee income, focusing instead on customer growth and retention. Non-interest income totaled $0.3 million in each of the first quarters of 2014 and 2013. Bank owned life insurance (“BOLI”) income in 2014 (there was no BOLI outstanding during the first quarter of 2013) was largely offset by declines in gains on sale of residential mortgage loans.

Non-Interest Expense

Non-interest expenses for the first quarter of 2014 increased by $1.9 million to $6.7 million, from $4.7 million in the prior year period. Non-interest expenses, excluding merger-related expenses, totaled $5.7 million, representing a $1.0 million or 21.3% increase from 2013, and was essentially flat from the linked fourth quarter of 2013. The primary factor contributing to the increases in total non-interest expenses from last year was salaries and employee benefits expense, which increased by $0.6 million to $3.1 million in the first quarter of 2014 from $2.5 million in the first quarter of 2013. The increase was primarily due an increase in the number of full-time equivalent employees and higher incentive-based compensation. Also contributing to higher non-interest expenses were increased costs associated with being a publicly-traded entity, higher professional fees, snow-removal costs and a general increase in other operating expenses related to a significantly increased volume of business. Management continues to focus on expense control, balancing its investment in infrastructure with prudent and sustainable growth.

Management continues to focus efforts on supporting growth primarily by adding to staff, investing in technology, and by enhancing risk controls. At the same time, management seeks to contain costs whenever prudent. Our success in this regard is evident in the recent improvements in our efficiency ratio, a widely-followed metric in the banking industry which measures operating expenses as a percentage of net revenue. The ratio is computed by dividing total noninterest expense by the sum of net interest income and noninterest income less securities gains/(losses). The Company’s efficiency ratio improved to 47.7% in the first quarter of 2014 from 49.2% in the first quarter of 2013. The Company uses this ratio because it believes that the ratio provides a good comparison of period-to-period performance and because the ratio is widely accepted in the banking industry.

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The following table shows the calculation of the efficiency ratio for the periods presented:

	Three Months Ended
	March 31,			March 31,
	2014			2013
Efficiency Rato
Non-interest expense	$	6,672		$	4,741
Less: merger related expenses		(923	)		—
Adjusted non-interest expense (numerator)	$	5,749		$	4,741

Net interest income		11,695			9,384
Non-interest income		349			259
Operating revenue (denominator)	$	12,044		$	9,643

Efficiency Ratio		47.7	%		49.2	%

Income Taxes

Income tax expense was $1.5 million for the first quarter of 2014 compared with $1.6 million for the first quarter of 2013. The effective tax rates were 36.0% and 41.3% for the first quarters of 2014 and 2013, respectively. The effective tax rate for 2014 reflects a reorganized operating structure effective October 1, 2013. The Company’s effective tax rate is projected to be approximately 36% in future periods, although it is likely to fluctuate depending upon future levels of taxable and non-taxable revenue.

Financial Condition Overview

At March 31, 2014, the Company’s total assets were $1.35 billion, a $104.5 million increase from December 31, 2013. The increase in total assets was primarily due to a $93.5 million increase, to $1.25 billion, in loans receivable, and $11.0 million increase, to $45.3 million, in cash and cash equivalents. The growth in assets was funded by a $61.9 million increase in deposits, a $39.7 million increase in Federal Home Loan Bank borrowings, and a $2.6 million increase in retained earnings.

Stockholders’ Equity

Stockholders’ equity totaled $133.0 million as of March 31, 2014, an increase of $2.9 million from $130.1 million as of December 31, 2013, primarily due to the retention of earnings. As of March 31, 2014, the tangible common equity ratio and tangible book value per share were 9.85% and $25.92, respectively. As of December 31, 2013, the Company’s tangible common equity ratio and tangible book value per share were 10.45% and $25.43, respectively. Tangible common equity ratio and tangible book value per share are non-GAAP financial measures. The following table shows the calculation of these ratios for the periods presented:

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	As of
	March 31, 2014			December 31, 2013

Tangible Common Equity and Tangible Common Equity/Tangible Assets
Common equity	$	133,008		$	130,128
Less: intangible assets		(260	)		(260	)
Tangible common equity	$	132,748		$	129,868

Total assets	$	1,347,723		$	1,243,228
Less: intangible assets		(260	)		(260	)
Tangible assets	$	1,347,463		$	1,242,968

Tangible Common Equity/Tangible Assets		9.85	%		10.45	%

Tangible Book Value per Common Share
Book value per common share	$	25.97		$	25.48
Less: effects of intangible assets		(0.05	)		(0.05	)
Tangible Book Value per Common Share	$	25.92		$	25.43

Capital

The following table summarizes the risk-based and leverage capital ratios for the Company and the Bank as well as the required minimum regulatory capital ratios for the following periods:

	March 31, 2014									December 31, 2013
	Actual Ratio			Minimum Requirement			Well Capitalized Requirement			Actual Ratio			Minimum Requirement			Well Capitalized Requirement
The Company:
Leverage ratio		10.25	%		4.00	%		n/a			10.74	%		4.00	%		n/a
Tier 1 Risk-based capitalization		10.94	%		4.00	%		n/a			11.68	%		4.00	%		n/a
Total Risk-based capitalization		12.20	%		8.00	%		n/a			12.91	%		8.00	%		n/a
The Bank:
Leverage ratio		10.25	%		4.00	%		5.00	%		10.71	%		4.00	%		5.00	%
Tier 1 Risk-based capitalization		10.95	%		4.00	%		6.00	%		11.65	%		4.00	%		6.00	%
Total Risk-based capitalization		12.19	%		8.00	%		10.00	%		12.88	%		8.00	%		10.00	%

The Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, adopted Basel III in September 2010, which constitutes a set of capital reform measures designed to strengthen the regulation, supervision and risk management of banking organizations worldwide. In order to implement Basel III and certain additional capital changes required by the Dodd-Frank Act, on July 9, 2013, the Federal banking agencies, including the FDIC the Federal Reserve and the Office of the Comptroller of the Currency, approved, as an interim final rule, the regulatory capital requirements for U.S. insured depository institutions and their holding companies.

The interim final rule includes new risk-based capital and leverage ratios that will be phased-in from 2015 to 2019. The rule includes a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets, which is in addition to the Tier 1 and Total risk-based capital requirements. The interim final rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and requires a minimum leverage ratio of 4.0%. The required minimum ratio of total capital to risk-weighted assets will remain 8.0%. The new risk-based capital requirements (except for the capital conservation buffer) will become effective on January 1, 2015. The capital conservation buffer will be phased in over four years beginning on

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January 1, 2016, with a maximum buffer of 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers.

The following chart compares the risk-based capital required under existing rules to those prescribed under the interim final rule under the phase-in period described above:

Common Equity Tier 1	Current Rules		Final Rules
Capital Conservation Buffer	—		2.5	%
Tier 2	4.0	%	2.0	%
Additional Tier 1	—		1.5	%
Tier 1	4.0	%	—
Common Equity Tier 1	—		4.5	%

The interim final rule also implements revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses and instruments that will no longer qualify as Tier 1 capital. The interim final rule also sets forth certain changes for the calculation of risk-weighted assets that we will be required to implement beginning January 1, 2015. Management is currently evaluating the provisions of the interim final rule and its expected impact. Based on our current capital composition and levels, management does not presently anticipate that the interim final rule presents a material risk to our financial condition or results of operations.

These provisions, as well as any other aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, may impact the profitability of our business activities and may change certain of our business practices, including the ability to offer new products, obtain financing, attract deposits, make loans, and achieve satisfactory interest spreads, and could expose us to additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and resources to make any necessary changes to operations in order to comply, and could therefore also materially and adversely affect our business, financial condition and results of operations.

Loan Portfolio

The Bank’s lending activities are generally oriented to small-to-medium sized businesses, high net worth individuals, professional practices and consumer and retail customers living and working in the Bank’s market area of Hudson, Bergen and Monmouth Counties, New Jersey. The Bank has not made loans to borrowers outside of the United States. The Bank believes that its strategy of high-quality customer service, competitive rate structures and selective marketing have enabled it to gain market entry.

Commercial loans are loans made for business purposes and are primarily secured by collateral such as cash balances with the Bank, marketable securities held by or under the control of the Bank, business assets including accounts receivable, taxi medallions, inventory and equipment and liens on commercial and residential real estate. Commercial construction loans are loans to finance the construction of commercial or residential properties secured by first liens on such properties. Commercial real estate loans include loans secured by first liens on completed commercial properties, including multi-family properties, to purchase or refinance such properties. Residential mortgages include loans secured by first liens on residential real estate, and are generally made to existing customers of the Bank to purchase or refinance primary and secondary residences. Home equity loans and lines of credit include loans secured by first or second liens on residential real estate for primary or secondary residences. Consumer loans are made to individuals who qualify for auto loans, cash reserve, credit cards and installment loans.

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The following table sets forth the classification of our gross loans held for investment by loan portfolio class as of the periods indicated:

	March 31, 2014					December 31, 2013
(dollars in thousands)	Amount		Percent of Total			Amount		Percent of Total
Commercial	$	223,324		17.9	%	$	147,455		17.4	%
Commercial real estate		835,169		67.0	%		549,218		64.7	%
Commercial construction		69,420		5.6	%		36,872		4.3	%
Residential real estate		83,243		6.7	%		82,962		9.8	%
Home equity		32,665		2.6	%		30,961		3.6	%
Consumer		2,348		0.2	%		1,801		0.2	%
Total gross loans	$	1,246,169		100.0	%	$	849,269		100.0	%

Asset Quality

Nonperforming assets, which includes nonaccrual loans and other real estate owned, totaled $9.7 million at March 31, 2014, down from $10.5 million at December 31, 2013 and up from $7.9 million at March 31, 2013. Nonperforming assets as a percent of total assets declined to 0.72% at March 31, 2014 from 0.84% at December 31, 2013 and from 0.79% at March 31, 2013. The allowance for loan losses was $17.0 million, representing 1.37% of loans receivable and 192.5% of nonaccrual loans at March 31, 2014. At December 31, 2013, the allowance was $16.0 million representing 1.39% of loans receivable and 174.2% of nonaccrual loans, and at March 31, 2013 the allowance was $13.6 million representing 1.51% of loans receivable and 181.9% of nonaccrual loans. The provision for loan losses was $1.3 million for the first quarter of 2014, $1.4 million for the fourth quarter of 2013, and $0.9 million for the first quarter 2013. The provision for loan losses has remained relatively constant, although the level is contingent upon many factors including, but not limited to, loan growth, the Company’s historical loss experience, macroeconomic conditions and reserves required for specific credits. The annualized rate of net loan charge-offs was 0.08% for the first quarter of 2014, 0.03% for the fourth quarter of 2013 and 0.25% for the first quarter of 2013.

The following table sets forth information concerning our non-performing assets, TDRs, and past-due accruing loans as of the periods indicated:

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(dollars in thousands)	March 31, 2014			December 31, 2013
Nonaccrual loans:
Commercial	$	3,512		$	3,582
Commercial real estate		2,434			2,445
Commercial construction		—			—
Residential real estate		2,137			2,381
Home equity		765			767
Consumer		—			—
Nonaccrual loans		8,848			9,175
Other real estate owned		870			1,303
Total non-performing assets	$	9,718		$	10,478
Loans past due 90 days and still accruing	$	—		$	—
Performing troubled debt restructured loans	$	2,925		$	2,934

Nonaccrual loans to loans receivable		0.71	%		0.80	%
Nonperforming assets to total assets		0.72	%		0.84	%
Allowance for loan losses to loans receivable		1.37	%		1.39	%
Allowance for loan losses to non-accrual loans		192.5	%		174.2	%
Net loan charge-offs to average loans		0.08	%		0.19	%

Allowance for Loan Losses

The following is a summary of the reconciliation of the allowance for loan losses for the periods indicated:

	Three Months Ended
(dollars in thousands)	March 31, 2014			March 31, 2013
Balance at beginning of period	$	15,979		$	13,246
Provision charged to operating expenses		1,300			925
Recoveries of loans previously charged-off:
Commercial		—			—
Consumer		—			—
Residential real estate		—			—
Total recoveries		—			—
Loans charged-off:
Commercial		—			(452	)
Consumer		(5	)		(82	)
Residential real estate		(239	)		—
Total charge-offs		(244	)		(534	)
Net charge-offs		(244	)		(534	)
Balance at end of period	$	17,035		$	13,637
Net charge-offs to average loans outstanding		0.08	%		0.25	%

Allowance for loan losses to loans receivable		1.37	%		1.51	%

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Liquidity

Liquidity is a measure of a bank’s ability to fund loans, withdrawals or maturities of deposits, and other cash outflows in a cost-effective manner. Our principal sources of funds are deposits, scheduled amortization and prepayments of loan principal, maturities of investment securities, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flow and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.

At March 31, 2014, the amount of liquid assets remained at a level management deemed adequate to ensure that, on a short and long-term basis, contractual liabilities, depositors’ withdrawal requirements, and other operational and customer credit needs could be satisfied. As of March 31, 2014, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $73.2 million, which represented 5.4% of total assets and 7.1% of total deposits and borrowings, compared to $65.7 million at December 31, 2013, which represented 5.3% of total assets and 6.8% of total deposits and borrowings on such date.

The Bank is a member of the Federal Home Loan Bank of New York and, based on available qualified collateral as of March 31, 2014, had the ability to borrow $524.5 million. In addition, at March 31, 2014, the Bank had in place additional borrowing capacity of $18.0 million through correspondent banks. The Bank also has a credit facility established with the Federal Reserve Bank of New York for direct discount window borrowings, although no collateral was pledged as of March 31, 2014. At March 31, 2014, the Bank had aggregate available and unused credit of $365.2 million, which represents the aforementioned facilities totaling $542.5 million net of $177.3 million in outstanding borrowings. At March 31, 2014, outstanding commitments for the Bank to extend credit were $271.4million.

Cash and cash equivalents totaled $45.3 million on March 31, 2014, increasing by $11.0 million or 31.9%, from $34.4 million at December 31, 2013. Operating activities provided $3.8 million in net cash. Investing activities used $94.5 million in net cash, primarily reflecting an increase in loans. Financing activities provided $101.7 million in net cash, primarily reflecting a net increase of $61.9 million in deposits and $40.0 million increase in FHLB borrowings.

Interest Rate Sensitivity Analysis

The principal objective of our asset and liability management function is to evaluate the interest-rate risk included in certain balance sheet accounts; determine the level of risk appropriate given our business focus, operating environment, and capital and liquidity requirements; establish prudent asset concentration guidelines; and manage the risk consistent with Board approved guidelines. We seek to reduce the vulnerability of our operations to changes in interest rates, and actions in this regard are taken under the guidance of the Bank’s Asset Liability Committee (the “ALCO”). The ALCO generally reviews our liquidity, cash flow needs, maturities of investments, deposits and borrowings, and current market conditions and interest rates.

We currently utilize net interest income simulation and economic value of portfolio equity (“EVPE”) models to measure the potential impact to the Bank of future changes in interest rates. As of March 31, 2014 and December 31, 2013 the results of the models were within guidelines prescribed by our Board of Directors. If model results were to fall outside prescribed ranges, action, including additional monitoring and reporting to the Board, would be required by the ALCO and Bank’s management.

The net interest income simulation model attempts to measure the change in net interest income over the next one-year period, and over the next three-year period on a cumulative basis, assuming certain changes in the general level of interest rates.

In our model, which was run as of March 31, 2014, we estimated that, over the next one-year period, a 200 basis-point increase in the general level of interest rates will decrease our net interest income by 3.1%, while a 100 basis-point decrease in interest rates will also decrease net interest income by 1.0%. As of December 31, 2013, we estimated that, over the next one-year period, a 200 basis-point increase in the general level of interest rates will decrease our net interest income by 3.5%, while a 100 basis-point decrease in the general level of interest rates will decrease our interest rates by 1.9%.

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In our model, which was run as of March 31, 2014, we estimated that, over the next three years on a cumulative basis, a 200 basis-point increase in the general level of interest rates will decrease our net interest income by 3.6%, while a 100 basis-point decrease in interest rates will decrease net interest income by 2.1%. As of December 31, 2013, we estimated that, over the next three years on a cumulative basis, a 200 basis-point increase in the general level of interest rates will decrease our net interest income by 4.2%, while a 100 basis-point decrease in interest rates will decrease net interest income by 1.9%.

An EVPE analysis is also used to dynamically model the present value of asset and liability cash flows with rate shocks of up 200 basis points and down 100 basis points. The economic value of equity is likely to be different as interest rates change. Our EVPE as of March 31, 2014, would decline by 19.43% with a rate shock of up 200 basis points, and increase by 12.07% with a rate shock of down 100 basis points. Our EVPE as of December 31, 2013, would decline by 20.62% with a rate shock of up 200 basis points, and increase by 12.84% with a rate shock of down 100 basis points.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk Management

Interest rate risk management is our primary market risk. See Item 2—“Management’s Discussion and Analysis—Interest Rate Sensitivity Analysis” herein for a discussion of our management of our interest rate risk.

Inflation Risk Management

Inflation has an important impact on the growth of total assets in the banking industry and causes a need to increase equity capital higher than normal levels in order to maintain an appropriate equity-to-assets ratio. We cope with the effects of inflation by managing our interest rate sensitivity position through our asset/liability management program, and by periodically adjusting our pricing of services and banking products to take into consideration current costs.

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Item 4. Controls and Procedures

	(a)	Evaluation of disclosure controls and procedures:

		The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period reported on in this report, the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

	(b)	Changes in internal controls:

		There has been no change in the Company’s internal controls over financial reporting during the quarter that has materially affected, or is reasonably likely to affect, the Company’s internal control over financial reporting

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The Company and the Bank are periodically involved in various legal proceedings as a normal incident to their businesses. In the opinion of management, no material loss is expected from any such pending lawsuit. As previously disclosed, in the first quarter of 2014, several complaints were filed against the Company and members of its Board of Directors in the Superior Court of New Jersey seeking class action status and asserting that the Company and the members of its Board violated their duties to the Company’s shareholders in connection with the proposed merger with Center Bancorp, Inc. On April 24^th, these complaints were voluntarily dismissed by the plaintiffs.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

Exhibits

Exhibit 31.1 – Certification of Frank Sorrentino III pursuant to SEC Rule 13a-14(a)

Exhibit 31.2 – Certification of William S. Burns pursuant to SEC Rule 13a-14(a)

Exhibit 32 - Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

The following materials from ConnectOne Bancorp, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2014, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements.

101.INS**	XBRL Instance Document

101.SCH**	XBRL Taxonomy Extension Schema

101.CAL**	XBRL Taxonomy Extension Calculation Linkbase

101.DEF**	XBRL Taxonomy Extension Definition Linkbase

101.LAB**	XBRL Taxonomy Extension Label Linkbase

101.PRE**	XBRL Taxonomy Extension Presentation Linkbase

** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CONNECTONE BANCORP, INC.

Date: May 12, 2014			By: /s/ William S. Burns

		William S. Burns
		Executive Vice President and
		Chief Financial Officer

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