Loans Receivable - As of and prior to December 31, 2020, loans receivable was accounted for under the incurred loss model. As of January 1, 2021, portfolio loans are accounted for under the expected loss model. Accordingly, some of the information presented is not comparable from period to period. See Note 1b. “Authoritative Accounting Guidance - Adoption of New Accounting Standards” for additional information. The following table sets forth the composition of the Company’s loan portfolio segments, including net deferred fees, as of March 31, 2021 and December 31, 2020:

As of March 31, 2021 and December 31, 2020, loan balances of approximately $2.6 billion and $2.7 billion, respectively, were pledged to secure borrowings from the FHLB of New York.

Loans held-for-sale - The following table sets forth the composition of the Company’s loans held-for-sale portfolio as of March 31, 2021 and December 31, 2020:

Loans Receivable on Nonaccrual Status - The following tables present nonaccrual loans with an ACL as of March 31, 2021 and nonaccrual loans without an ACL as of March 31, 2021:

The following tables present total nonaccrual loans included in loans receivable by loan class as of December 31, 2020 (dollars in thousands):

Nonaccrual loans and loans 90 days or greater past due and still accruing 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

(unaudited)

Note 5. Loans and the Allowance for Credit 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.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

We evaluate whether a modification, extension or renewal of a loan is a current period origination in accordance with GAAP. Generally, loans up for renewal are subject to a full credit evaluation before the renewal is granted and such loans are considered current period originations for purpose of the table below. As of March 31, 2021, our loans based on year of origination and risk designation is as follows (dollars in thousands):

	Term loans amortized cost basis by origination year												Resolving Loans		Total Gross Loans
	2021		2020		2019		2018		2017		Prior		Resolving Loans		Total Gross Loans
Commercial
Pass	$	289,283	$	393,432	$	67,665	$	70,763	$	109,667	$	131,509	$	486,619	$	1,548,938
Special mention		-		-		225		258		292		15,646		12,948		29,369
Substandard		-		-		1,795		13,307		4,122		21,638		3,274		44,136
Doubtful		-		-		-		209		-		-		-		209
Total Commercial	$	289,283	$	393,432	$	69,685	$	84,537	$	114,081	$	168,793	$	502,841	$	1,622,652

Commercial Real Estate
Pass	$	241,516	$	608,263	$	477,620	$	570,798	$	592,738	$	1,097,118	$	120,252	$	3,708,305
Special mention		-		-		1,379		10,892		4,393		23,511		8,790		48,965
Substandard		1,996		-		836		1,288		3,394		32,460		-		39,974
Doubtful		-		-		-		-		-		-		-		-
Total Commercial Real Estate	$	243,512	$	608,263	$	479,835	$	582,978	$	600,525	$	1,153,089	$	129,042	$	3,797,244

Commercial Construction
Pass	$	1,405	$	7,506	$	39,832	$	8,730	$	3,981	$	490	$	478,478	$	540,422
Special mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		216		25,234		25,450
Doubtful		-		-		-		-		-		-		-		-
Total Commercial Construction	$	1,405	$	7,506	$	39,832	$	8,730	$	3,981	$	706	$	503,712	$	565,872

Residential Real Estate
Pass	$	3,680	$	35,193	$	29,698	$	34,362	$	46,531	$	93,376	$	50,046	$	292,886
Special mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		207		-		9,543		3,740		13,490
Doubtful		-		-		-		-		-		-		-		-
Total Residential Real Estate	$	3,680	$	35,193	$	29,698	$	34,569	$	46,531	$	102,919	$	53,786	$	306,376

Consumer
Pass	$	2	$	117	$	58	$	42	$	53	$	2,961	$	131	$	3,364
Special mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-
Total Consumer	$	2	$	117	$	58	$	42	$	53	$	2,961	$	131	$	3,364

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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:

	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

Collateral Dependent Loans: Loans which meet certain criteria are individually evaluated as part of the process of calculating the allowance for credit losses. The evaluation is determined on an individual basis using the fair value of the collateral as of the reporting date.

	March 31, 2021

	Real
	Estate		Other		Total
	(dollars in thousands)
Commercial	$	6,330	$	26,171	$	32,501
Commercial real estate		29,441		-		29,441
Commercial construction		19,402		-		19,402
Residential real estate		11,024		-		11,024
Consumer		-		-		-
Total (no related allowance)	$	66,197	$	26,171	$	92,368

Impaired loans - Impaired loans disclosures presented below as of December 31, 2020 and as of and for the three months ended March 31, 2020 represent requirements prior to the adoption of CECL on January 1, 2021.

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:

	December 31, 2020
			Unpaid
	Recorded		Principal		Recorded
	Investment		Balance		Allowance
No related allowance recorded	(dollars in thousands)
Commercial	$	11,325	$	11,835
Commercial real estate		13,105		13,449
Commercial construction		24,284		24,907
Residential real estate		5,378		5,723
Consumer		-		-
Total (no related allowance)	$	54,092	$	55,914

With an allowance recorded

Commercial	$	23,736	$	69,122	$	12,985
Commercial real estate		2,722		2,722		1,329
Total (with allowance)	$	26,458	$	71,844	$	14,314

Total
Commercial	$	35,061	$	80,957	$	12,985
Commercial real estate		15,827		16,171		1,329
Commercial construction		24,284		24,907		-
Residential real estate		5,378		5,723		-
Consumer		-		-		-
Total	$	80,550	$	127,758	$	14,314

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

The following table provides an analysis related to the average recorded investment and interest income recognized on impaired loans by class as of and for the three months ended March 31, 2020 (dollars in thousands):

	March 31,2020
	Average		Interest
	Recorded		Income
	Investment		Recognized
Impaired loans with no related allowance recorded

Commercial	$	36,442	$	94
Commercial real estate		15,238		84
Commercial construction		17,371		85
Residential real estate		3,827		-
Consumer		-		-
Total	$	72,878	$	263

Impaired loans with an allowance recorded

Commercial real estate	$	-	$	-
Commercial construction		6,463		-
Residential real estate		262		3
Total	$	6,725	$	3

Total impaired loans
Commercial	$	36,442	$	94
Commercial real estate		15,238		84
Commercial construction		23,834		85
Residential real estate		4,089		3
Consumer		-		-
Total	$	79,603	$	266

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 March 31, 2021 and December 31, 2020:

	March 31, 2021
	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		Gross Loans
	(dollars in thousands)
Commercial	$	1,293	$	-	$	4,475	$	31,105	$	36,873	$	1,585,779	$	1,622,652
Commercial real Estate		11,292		664		7,679		16,101		35,736		3,761,508		3,797,244
Commercial construction		4,400		-		-		8,951		13,351		552,521		565,872
Residential real Estate		202		-		4,238		4,783		9,223		297,153		306,376
Consumer		4		-		-		-		4		3,360		3,364
Total	$	17,191	$	664	$	16,392	$	60,940	$	95,187	$	6,200,321	$	6,295,508

	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 accrete income per the valuation at date of acquisition.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 5. Loans and the Allowance for Credit 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 credit losses that are allocated to each loan portfolio segment:

	March 31, 2021
			Commercial		Commercial		Residential
	Commercial		real estate		construction		real estate		Consumer		Total
	(dollars in thousands)
ACL
Individually evaluated for impairment	$	15,663	$	1,634	$	434	$	283	$	-	$	18,014
Collectively evaluated for impairment		8,496		39,486		5,087		4,267		11		57,347
Acquired with deteriorated credit quality individually analyzed		2,276		2,777		-		154		-		5,207
Total	$	26,435	$	43,897	$	5,521	$	4,704	$	11	$	80,568

Gross loans
Individually evaluated for impairment	$	33,330	$	21,762	$	19,402	$	6,786	$	-	$	81,280
Collectively evaluated for impairment		1,584,095		3,767,803		546,470		295,352		3,364		6,197,084
Acquired with deteriorated credit quality individually analyzed		5,227		7,679		-		4,238		-		17,144
Total	$	1,622,652	$	3,797,244	$	565,872	$	306,376	$	3,364	$	6,295,508

	December 31, 2020
			Commercial		Commercial		Residential
	Commercial		real estate		construction		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

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Activity in the Company’s ACL for loans for the three months ended March 31, 2021 is summarized in the table below. The CECL Day 1 row presents adjustments recorded through retained earnings to adopt the CECL standard and the increase to the ACL for loans associated with nonaccretable purchase accounting marks on loans that were classified as PCI as of December 31, 2020.

	Three Months Ended March 31, 2021
				Commercial			Commercial			Residential
	Commercial			real estate			construction			real estate			Consumer			Unallocated			Total
	(dollars in thousands)
Balance as of December 31, 2020	$	28,443		$	39,330		$	8,194		$	2,687		$	4		$	568		$	79,226

Day 1 effect of CECL		(4,225	)		9,605			(961	)		2,697			9			(568	)		6,557

Balance as of January 1, 2021 as adjusted for changes in accounting principle		24,218			48,935			7,233			5,384			13			-			85,783

Charge-offs		-			-			-			-			-			-			-

Recoveries		60			-			-			-			1			-			61

(Reversal of) provision for credit losses (loans)		2,157			(5,038	)		(1,712	)		(680	)		(3	)		-			(5,276	)

Balance as of March 31, 2021	$	26,435		$	43,897		$	5,521		$	4,704		$	11		$	-		$	80,568

On January 1, 2021, the Company adopted CECL, which replaced the incurred loss method we used in prior periods for determining the provision for credit losses and the ACL. Under CECL, we record an expected loss of all cash flows we do not expect to collect at the inception of the loan. The adoption of CECL resulted in an increase in our ACL for loans of $6.6 million, which did not impact our consolidated income statement. We recorded a reversal of credit losses for loans of $5.3 million during the three months ended March 31, 2021 utilizing the CECL methodology, which was the result of an improved macroeconomic environment from January 1, 2021, the day of adoption.

	Three Months Ended March 31, 2020
				Commercial		Commercial		Residential
	Commercial			real estate		construction		real estate			Consumer			Unallocated		Total
	(dollars in thousands)
Balance as of December 31, 2019	$	8,349		$	20,853	$	7,304	$	1,685		$	3		$	99	$	38,293


Charge-offs		(124	)		-		-		-			(3	)		-		(127	)

Recoveries		-			-		-		3			-			-		3

(Reversal of) provision for credit losses (loans)		833			1,183		515		(7	)		3			13,473		16,000

Balance as of March 31, 2020	$	9,058		$	22,036	$	7,819	$	1,681		$	3		$	13,572	$	54,169

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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 March 31, 2021, 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.

As of March 31, 2021, TDRs totaled $53.0 million, of which $27.5 million were on nonaccrual status and $25.5 million were performing under their restructured terms. 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. The Company has allocated $10.0 million and $47 thousand of specific allowance related to TDRs for the three months ended March 31, 2021 and March 31, 2020, respectively.

The following table presents loans by class modified as TDRs that occurred during the three months ended March 31, 2021:

			Pre-Modification Outstanding		Post-Modification Outstanding
	Number of Loans		Recorded Investment		Recorded Investment
Troubled debt restructurings:	(dollars in thousands)
Commercial real estate		1	$	1,658	$	1,658
Residential real estate		2		1,996		1,996
Total		3	$	3,654	$	3,654

The two residential real estate loans modified as TDRs during the three months ended March 31, 2021 were maturity extensions, while the one commercial real estate loan was a recast of a nonaccrual credit.

There were no loans modified as TDRs during the three months ended March 31, 2020. There were no TDRs for which there was a payment default within twelve months following the modification during the three months ended March 31, 2021 and March 31, 2020.

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 March 31, 2021, the Bank had 102 deferred loans totaling approximately $204.2 million, compared to 113 deferred loans totaling approximately $207.1 million as of December 31, 2020.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

The following table sets forth the composition of these loans by loan segments as of March 31, 2021:

			Unpaid
	Number of Loans		Principal Balance
	(dollars in thousands)
Commercial		32	$	103,653
Commercial real estate		68	$	97,400
Commercial construction		2		3,150
Total		102	$	204,203

As of March 31, 2021, there were no deferred loans that were delinquent or on nonaccrual status. As of March 31, 2021, $44.1 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 loan 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.

ACL for Unfunded Commitments

The Company has recorded an ACL for unfunded credit commitments, which was recorded in other liabilities. The provision is recorded within the (reversal of) provision for credit losses on the Company’s income statement. The following table presents the ACL for unfunded commitments for the three months ended March 31, 2021 (dollars in thousands):

	Three Months Ended
	March 31, 2021

Balance at beginning of period	$	-
Day 1 Effect of CECL		2,833
(Reversal of) provision for credit losses (unfunded commitments)		(490)
Balance at end of period	$	2,343

Components of (Reversal of) Provision for Credit Losses

The following table summarizes the (Reversal of) provision for credit losses as March 31, 2021 (dollars in thousands):

	March 31, 2021

(Reversal of) provision for credit losses (loans)	$	(5,276)
(Reversal of) provision for credit losses (unfunded commitments)		(490)
(Reversal of) provision for credit losses	$	(5,766)