Loans Receivable: The following table sets forth the composition of the Company’s loan portfolio segments, including net deferred fees, as of December 31, 2020 and December 31, 2019:

As of December 31, 2020, and 2019, loan balances of approximately $2.7 billion and $2.5 billion, respectively, were pledged to secure borrowings from the Federal Home Loan Bank.

The loan segments 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 mortgages 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 construction, land and land development 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. 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 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.

Loans Held-For-Sale: The following table presents loans held-for-sale by loan segment as of December 31, 2020 and December 31, 2019:

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 – Loans and the Allowance for Loan Losses – (continued)

Purchased Credit-Impaired Loans: The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans is as follows as of December 31, 2020 and December 31, 2019.

	2020		2019
	(dollars in thousands)
Commercial	$	3,878	$	5,452
Commercial real estate		5,555		1,101
Residential real estate		4,084		-
Total carrying amount	$	13,517	$	6,553

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses for the years ended December 31, 2020 and 2019. No allowances for loan losses were reversed during 2020 and 2019.

The accretable yield, or income expected to be collected, on the purchased credit-impaired loans above is as follows for the years presented:

	2020		2019		2018
	(dollars in thousands)
Balance as of January 1,	$	1,301	$	1,134	$	1,387
New loans purchased		605		1,286		-
Accretion of income		(796)		(1,119)		(253)
Balance as of December 31,	$	1,110	$	1,301	$	1,134

Loans Receivable on Nonaccrual Status: The following tables present nonaccrual loans included in loans receivable by loan class as of December 31, 2020 and December 31, 2019:

	2020		2019
	(dollars in thousands)
Commercial	$	33,019	$	31,455
Commercial real estate		10,111		8,338
Commercial construction		14,015		6,773
Residential real estate		4,551		2,915
Consumer		-		-
Total loans receivable on nonaccrual status	$	61,696	$	49,481

Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and loans individually evaluated for impairment.

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 – Loans and the Allowance for Loan Losses – (continued)

Credit Quality Indicators - The Company continuously monitors the credit quality of its loans receivable. In addition to its internal monitoring, the Company utilizes the services of a third-party loan review firm to periodically validate the credit quality of its loans receivable on a sample basis. Credit quality is monitored by reviewing certain credit quality indicators. Assets classified “Pass” are deemed to possess average to superior credit quality, requiring no more than normal attention. Assets classified as “Special Mention” have generally acceptable credit quality yet possess higher risk characteristics/circumstances than satisfactory assets. Such conditions include strained liquidity, slow pay, stale financial statements, or other conditions that require more stringent attention from the lending staff. These conditions, if not corrected, may weaken the loan quality or inadequately protect the Company’s credit position at some future date. Assets are classified “Substandard” if the asset has a well-defined weakness that requires management’s attention to a greater degree than for loans classified special mention. Such weakness, if left uncorrected, could possibly result in the compromised ability of the loan to perform to contractual requirements. An asset is classified as “Doubtful” if it is inadequately protected by the net worth and/or paying capacity of the obligor or of the collateral, if any, that secures the obligation. Assets classified as doubtful include assets for which there is a “distinct possibility” that a degree of loss will occur if the inadequacies are not corrected. All loans past due 90 days or greater and all impaired loans are included in the appropriate category below.

The following table presents information about the loan credit quality by loan class of gross loans (which exclude net deferred fees) as of December 31, 2020 and December 31, 2019:

	December 31, 2020
	Pass		Special Mention		Substandard		Doubtful		Total
	(dollars in thousands)
Commercial	$	1,447,097	$	30,725	$	43,930	$	215	$	1,521,967
Commercial real estate		3,700,498		49,143		33,909		-		3,783,550
Commercial construction		587,266		-		30,481		-		617,747
Residential real estate		311,174		-		11,390		-		322,564
Consumer		1,853		-		-		-		1,853
Gross loans	$	6,047,888	$	79,868	$	119,710	$	215	$	6,247,681

	December 31, 2019
	Pass		Special Mention		Substandard		Doubtful		Total
	(dollars in thousands)
Commercial	$	1,059,852	$	22,159	$	47,650	$	-	$	1,129,661
Commercial real estate		3,014,956		10,301		16,702		-		3,041,959
Commercial construction		604,298		4,609		14,419		-		623,326
Residential real estate		316,476		-		3,544		-		320,020
Consumer		3,328		-		-		-		3,328
Gross loans	$	4,998,910	$	37,069	$	82,315	$	-	$	5,118,294

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 – Loans and the Allowance for Loan Losses – (continued)

The following table provides an analysis of the impaired loans by class as of and for the years ended December 31, 2020, 2019 and 2018.

	December 31, 2020
No Related Allowance Recorded	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
Commercial	$	11,325	$	11,835			$	11,627	$	203
Commercial real estate		13,105		13,449				13,215		287
Commercial construction		24,284		24,907				21,279		377
Residential real estate		5,378		5,723				4,733		104
Consumer		-		-				-		-
Total	$	54,092	$	55,914			$	50,854	$	971

With An Allowance Recorded
Commercial	$	23,736	$	69,122	$	12,985	$	23,625	$	-
Commercial real estate		2,722		2,722		1,329		2,722		-
Total	$	26,458	$	71,844	$	14,314	$	26,347	$	-

Total
Commercial	$	35,061	$	80,957	$	12,985	$	35,252	$	203
Commercial real estate		15,827		16,171		1,329		15,937		287
Commercial construction		24,284		24,907		-		21,279		377
Residential real estate		5,378		5,723		-		4,733		104
Consumer		-		-		-		-		-
Total (including related allowance)	$	80,550	$	127,758	$	14,314	$	77,201	$	971

	December 31, 2019
No Related Allowance Recorded	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
Commercial	$	37,984	$	83,225			$	39,801	$	815
Commercial real estate		15,249		15,467				15,421		428
Commercial construction		8,649		8,649				8,394		332
Residential real estate		1,311		1,463				1,311		-
Consumer		-		-				-		-
Total	$	63,193	$	108,804			$	64,927	$	1,575

With An Allowance Recorded
Commercial construction	$	3,530	$	3,530	$	1,244	$	3,530	$	91
Residential real estate		263		263		23		257		11
Total	$	3,793	$	3,793	$	1,267	$	3,787	$	102

Total
Commercial	$	37,984	$	83,225	$	-	$	39,801	$	815
Commercial real estate		15,249		15,467		-		15,421		428
Commercial construction		12,179		12,179		1,244		11,924		423
Residential real estate		1,574		1,726		23		1,568		11
Consumer		-		-		-		-		-
Total (including related allowance)	$	66,986	$	112,597	$	1,267	$	68,714	$	1,677

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 – Loans and the Allowance for Loan Losses – (continued)

	December 31, 2018
No Related Allowance Recorded	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
Commercial	$	29,896	$	83,596			$	31,721	$	66
Commercial real estate		16,839		17,935				17,676		149
Commercial construction		9,240		9,240				11,215		493
Residential real estate		2,209		2,521				2,284		-
Consumer		-		-				-		-
Total	$	58,184	$	113,292			$	62,896	$	708

With An Allowance Recorded
Commercial real estate	$	1,488	$	1,488	$	7	$	1,511	$	46
Residential real estate		260		266		29		265		-
Total	$	1,748	$	1,754	$	36	$	1,776	$	46

Total
Commercial	$	29,896	$	83,596	$	-	$	31,721	$	66
Commercial real estate		18,327		19,423		7		19,187		195
Commercial construction		9,240		9,240		-		11,215		493
Residential real estate		2,469		2,787		29		2,549		-
Consumer		-		-		-		-		-
Total (including related allowance)	$	59,932	$	115,046	$	36	$	64,672	$	754

Included in impaired loans as of December 31, 2020 and December 31, 2019 are loans that are deemed troubled debt restructurings. Cash basis interest and interest income recognized on accrual basis approximate each other.

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 – Loans and the Allowance for Loan Losses – (continued)

Aging Analysis: The following table provides an analysis of the aging of the loans by class, excluding net deferred fees, that are past due as of December 31, 2020 and December 31, 2019 (dollars in thousands):

	December 31, 2020
	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due and Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Current		Total Loans Receivable
Commercial	$	1,445	$	558	$	3,182	$	33,019	$	38,204	$	1,483,763	$	1,521,967
Commercial real estate		13,258		4,140		5,555		10,111		33,064		3,750,486		3,783,550
Commercial construction		2,472		-		-		14,015		16,487		601,260		617,747
Residential real estate		1,367		241		4,084		4,551		10,243		312,321		322,564
Consumer		2		-		-		-		2		1,851		1,853
Total	$	18,544	$	4,939	$	12,821	$	61,696	$	98,000	$	6,149,681	$	6,247,681

Included in the 90 days or greater past due and still accruing category as of December 31, 2020 are purchased credit-impaired loans, net of fair value marks, which accretes income per the valuation at date of acquisition.

	December 31, 2019
	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due and Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Current		Total Loans Receivable
Commercial	$	239	$	-	$	3,107	$	31,455	$	34,801	$	1,094,860	$	1,129,661
Commercial real estate		1,980		490		-		8,338		10,808		3,031,151		3,041,959
Commercial construction		-		-		-		6,773		6,773		616,553		623,326
Residential real estate		3,357		143		-		2,915		6,415		313,605		320,020
Consumer		-		-		-		-		-		3,328		3,328
Total	$	5,576	$	633	$	3,107	$	49,481	$	58,797	$	5,059,497	$	5,118,294

Included in the 90 days or greater past due and still accruing category as of December 31, 2019 are purchased credit-impaired loans, net of fair value marks, which accretes income per the valuation at date of acquisition.

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 – Loans and the Allowance for Loan Losses – (continued)

The following tables detail, at the period-end presented, the amount of gross loans (excluding loans held-for-sale) that are evaluated individually, and collectively, for impairment, those acquired with deteriorated quality, and the related portion of the allowance for loan losses that are allocated to each loan portfolio segment:

	December 31, 2020
	Commercial		Commercial real estate		Commercial construction		Residential real estate		Consumer		Unallocated		Total
	(dollars in thousands)
Allowance for loan losses
Individually evaluated for impairment	$	12,985	$	1,329	$	-	$	-	$	-	$	-	$	14,314
Collectively evaluated for impairment		15,412		33,373		7,787		1,928		4		568		59,072
Acquired portfolio		46		4,628		407		759		-		-		5,840
Acquired with deteriorated credit quality		-		-		-		-		-		-		-
Total	$	28,443	$	39,330	$	8,194	$	2,687	$	4	$	568	$	79,226

Gross loans
Individually evaluated for impairment	$	35,061	$	15,827	$	24,284	$	5,378	$	-			$	80,550
Collectively evaluated for impairment		1,414,626		2,959,978		574,118		241,925		1,627				5,192,274
Acquired portfolio		68,402		802,190		19,345		71,177		226				961,340
Acquired with deteriorated credit quality		3,878		5,555		-		4,084		-				13,517
Total	$	1,521,967	$	3,783,550	$	617,747	$	322,564	$	1,853			$	6,247,681

Included in the commercial loans collectively evaluated for impaired are PPP loans of $397.5 million as of December 31, 2020. PPP loans receivable are guaranteed by the Federal government and have no allocation of the allowance for loan losses.

	December 31, 2019
	Commercial		Commercial real estate		Commercial construction		Residential real estate		Consumer		Unallocated		Total
	(dollars in thousands)
Allowance for loan losses
Individually evaluated for impairment	$	-	$	-	$	1,244	$	23	$	-	$	-	$	1,267
Collectively evaluated for impairment		8,309		19,967		5,744		1,662		3		99		35,784
Acquired portfolio		40		886		316		-		-		-		1,242
Acquired with deteriorated credit quality		-		-		-		-		-		-		-
Total	$	8,349	$	20,853	$	7,304	$	1,685	$	3	$	99	$	38,293

Gross loans
Individually evaluated for impairment	$	37,984	$	15,249	$	12,179	$	1,574	$	-			$	66,986
Collectively evaluated for impairment		1,011,708		2,669,999		578,620		276,177		3,064				4,539,568
Acquired portfolio		74,517		355,610		32,527		42,269		264				505,187
Acquired with deteriorated credit quality		5,452		1,101		-		-		-				6,553
Total	$	1,129,661	$	3,041,959	$	623,326	$	320,020	$	3,328			$	5,118,294

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 – Loans and the Allowance for Loan Losses – (continued)

The Company’s allowance for loan losses is analyzed quarterly. Many factors are considered, including growth in the portfolio, delinquencies, nonaccrual loan levels, and other factors inherent in the extension of credit.

A summary of the activity in the allowance for loan losses by loan segment is as follows:

	Commercial		Commercial real estate		Commercial construction		Residential real estate		Consumer		Unallocated		Total
	(dollars in thousands)
Balance as of January 1, 2020	$	8,349	$	20,853	$	7,304	$	1,685	$	3	$	99	$	38,293
Loan charge-offs		(552)		-		-		(341)		(7)		-		(900)
Recoveries		4		802		-		23		4		-		833

Provision for loan losses		20,642		17,675		890		1,320		4		469		41,000
Balance as of December 31, 2020	$	28,443	$	39,330	$	8,194	$	2,687	$	4	$	568	$	79,226

	Commercial		Commercial real estate		Commercial construction		Residential real estate		Consumer		Unallocated		Total
	(dollars in thousands)
Balance as of January 1, 2019	$	9,875	$	18,847	$	4,519	$	1,266	$	2	$	445	$	34,954
Loan charge-offs		(1,029)		(3,470)		-		(557)		(20)		-		(5,076)
Recoveries		265		30		-		3		17		-		315

Provision for loan losses		(762)		5,446		2,785		973		4		(346)		8,100
Balance as of December 31, 2019	$	8,349	$	20,853	$	7,304	$	1,685	$	3	$	99	$	38,293

	Commercial		Commercial real estate		Commercial construction		Residential real estate		Consumer		Unallocated		Total
	(dollars in thousands)
Balance as of January 1, 2018	$	8,233	$	17,112	$	4,747	$	1,050	$	1	$	605	$	31,748
Loan charge-offs		(17,066)		(915)		-		(23)		(7)		-		(18,011)
Recoveries		109		-		-		2		6		-		117

Provision for loan losses		18,599		2,650		(228)		237		2		(160)		21,100
Balance as of December 31, 2018	$	9,875	$	18,847	$	4,519	$	1,266	$	2	$	445	$	34,954

For the year ended December 31, 2018, the loan charge-offs within the commercial loan segment were primarily made up of $17.0 million in charge-offs related to the taxi medallion portfolio.

Troubled Debt Restructurings

Loans are considered to have been modified in a troubled debt restructuring (“TDRs”) when, except as discussed below, due to a borrower’s financial difficulties, the Company makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a nonaccrual loan that has been modified in a troubled debt restructuring remains on nonaccrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on nonaccrual status.

As of December 31, 2020, there were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status or were contractually past due 90 days or greater and still accruing interest, or whose terms have been modified in troubled debt restructurings.

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 – Loans and the Allowance for Loan Losses – (continued)

As of December 31, 2020, TDRs totaled $49.4 million, of which $25.7 million were on nonaccrual status and $23.7 million were performing under their restructured terms. As of December 31, 2019, TDRs totaled $52.0 million, of which $30.6 million were on nonaccrual status and $21.4 million were performing under their restructured terms. The Company has allocated $-0- and $1.3 million of specific allowance as of December 31, 2020 and December 31, 2019, respectively. There were no charge-offs in connection with a loan modification at the time of modification during the year ended December 31, 2020, 2019 and 2018. There were no TDRs for which there was a payment default within twelve months following the modification during the year ended December 31, 2020, 2019 and 2018.

The following table presents loans by class modified as TDRs that occurred during year ended December 31, 2020:

	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(dollars in thousands)
Troubled debt restructurings:
Commercial		1	$	188	$	188
Commercial real estate		1		93		93
Commercial construction		1		4,021		4,021
Residential real estate		2		2,184		2,184

Total		5	$	6,486	$	6,486

The five loan modifications during the year ended December 31, 2020 were maturity extensions.

The following table presents loans by class modified as TDRs that occurred during the year ended December 31, 2019

	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(dollars in thousands)
Troubled debt restructurings:
Commercial		11	$	14,558	$	14,558
Commercial real estate		3		5,863		5,863
Commercial construction		3		5,630		5,630

Total		17	$	26,051	$	26,051

Included in the commercial loan segment of the troubled debt restructurings is one taxi medallion loan totaling $0.3 million. This taxi medallion loan was on nonaccrual status prior to modification and will remain on nonaccrual status post-modification. All loan modifications during the year ended December 31, 2019 included interest rate reductions and/or maturity extensions.

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 – Loans and the Allowance for Loan Losses – (continued)

The following table presents loans by class modified as TDRs that occurred during the year ended December 31, 2018:

	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(dollars in thousands)
TDRs
Commercial		32	$	16,017	$	16,017
Commercial real estate		3		1,422		1,422
Commercial construction		3		4,773		4,773
Residential real estate		2		454		454

Total		40	$	22,666	$	22,666

Included in the commercial loan segment of the troubled debt restructurings are 27 taxi medallion loans totaling $11.2 million. All 27 taxi medallion loans included above were on nonaccrual status prior to modification and remain on nonaccrual status post-modification. All loan modifications during the year ended December 31, 2018 included interest rate reductions and/or maturity extensions.

In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., three to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Provisions of the CARES Act largely mirrored the provisions of the interagency statement, providing that modified loans would not be considered TDR’s if they were performing at year-end 2019, and the other conditions set forth in the interagency statement were met. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented or at year-end 2019. As of December 31, 2020, the Bank had 113 deferred loans totaling approximately $207.1 million. The majority of these loans were deferred between 90 and 120 days.

The following table sets forth the composition of these loans by loan segments as of December 31, 2020:

	Number of Loans		Unpaid Principal Balance
	(dollars in thousands)
Commercial		49	$	17,637
Commercial real estate		63		188,778
Residential real estate		1		666

Total		113	$	207,081

As of December 31, 2020, there were no deferred loans that were delinquent or on nonaccrual status. As of December 31, 2020, $40.3 million of deferred loans were risk rated “special mention” or worse. The Company evaluates its deferred loans after the initial deferral period and will either return the deferred loans to its original loan terms or the loan will be reassessed at that time to determine if a further deferment should be granted and if a downgrade in risk rating is appropriate.