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Loans and the Allowance for Loan Losses | 6 Months Ended
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Jun. 30, 2020
Receivables [Abstract] |
Loans and the Allowance for Loan Losses | Note 6. Loans and the Allowance for Loan Losses Loans Receivable - The following table sets forth the composition of the Company’s loan portfolio segments, including net deferred fees, as of June 30, 2020 and December 31, 2019:
|  | June 30, |  | December 31,
|  | 2020 |  | 2019
|  | (dollars in thousands)
Commercial(1) |  | $ | 1,659,935 |  |  | $ | 1,129,661 |
Commercial real estate |  |  | 3,676,057 |  |  |  | 3,041,959 |
Commercial construction |  |  | 673,893 |  |  |  | 623,326 |
Residential real estate |  |  | 366,315 |  |  |  | 320,020 |
Consumer |  |  | 2,001 |  |  |  | 3,328 |
Gross loans |  |  | 6,378,201 |  |  |  | 5,118,294 |
Net deferred loan fees |  |  | (14,934 | ) |  |  | (4,767 | )
Total loans receivable |  | $ | 6,363,267 |  |  | $ | 5,113,527 |
| (1) | Includes Paycheck Protection Program ("PPP") loans of $474 million as of June 30, 2020.
At June 30, 2020 and December 31, 2019, loan balances of approximately $2.8 billion and $2.5 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 at June 30, 2020 and December 31, 2019:
|  | June 30, |  | December 31,
|  | 2020 |  | 2019
|  | (dollars in thousands)
Commercial |  | $ | - |  | $ | 2,285
Commercial real estate |  |  | 10,867 |  |  | 30,965
Residential real estate |  |  | 345 |  |  | -
Total carrying amount |  | $ | 11,212 |  | $ | 33,250
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 recorded investment of those loans is as follows at June 30, 2020 and December 31, 2019.
|  | June 30, |  | December 31,
|  | 2020 |  | 2019
|  | (dollars in thousands)
Commercial |  | $ | 3,881 |  | $ | 5,452
Commercial real estate |  |  | 5,487 |  |  | 1,101
Commercial construction |  |  | 4,160 |  |  | -
|  | $ | 13,528 |  | $ | 6,553
For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during either the three months and six months ended June 30, 2020 or June 30, 2019. There were no reversals from the allowance for loan losses during the three and six months ended June 30, 2020 or June 30, 2019. 20
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. Loans and the Allowance for Loan Losses – (continued) The following table presents the accretable yield, or income expected to be collected, on the purchased credit-impaired loans for the three and six months ended June 30, 2020 and June 30, 2019:
|  | Three Months |  | Three Months
|  | Ended |  | Ended
|  | June 30, |  | June 30,
|  | 2020 |  | 2019
|  | (dollars in thousands)
Balance at March 31 |  | $ | 1,678 |  |  | $ | 2,213 |
Accretion of income |  |  | (353 | ) |  |  | (575 | )
Balance at June 30 |  | $ | 1,325 |  |  | $ | 1,638 |
|  | Six Months |  | Six Months
|  | Ended |  | Ended
|  | June 30, |  | June 30,
|  | 2020 |  | 2019
|  | (dollars in thousands)
Balance at December 31 |  | $ | 1,301 |  |  | $ | 1,134 |
New loans acquired |  |  | 605 |  |  |  | 1,286 |
Accretion of income |  |  | (581 | ) |  |  | (782 | )
Balance at June 30 |  | $ | 1,325 |  |  | $ | 1,638 |
Loans Receivable on Nonaccrual Status - The following tables present nonaccrual loans included in loans receivable by loan class as of June 30, 2020 and December 31, 2019:
|  | June 30, |  | December 31,
|  | 2020 |  | 2019
|  | (dollars in thousands)
Commercial |  | $ | 30,584 |  | $ | 31,455
Commercial real estate |  |  | 9,739 |  |  | 8,338
Commercial construction |  |  | 18,205 |  |  | 6,773
Residential real estate |  |  | 6,050 |  |  | 2,915
Consumer |  |  | 2 |  |  | -
Total nonaccrual loans |  | $ | 64,580 |  | $ | 49,481
Nonaccrual loans and loans 90 days or greater past due and still accruing included both smaller balance homogeneous loans that are collectively evaluated for impairment and loans individually evaluated for impairment. 21
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. 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) at June 30, 2020 and December 31, 2019:
|  | June 30, 2020
|  |  |  |  | Special |  |  |  |  |  |  |  |  |
|  | Pass |  | Mention |  | Substandard |  | Doubtful |  | Total
|  | (dollars in thousands)
Commercial |  | $ | 1,594,144 |  | $ | 20,977 |  | $ | 44,814 |  | $ | - |  | $ | 1,659,935
Commercial real estate |  |  | 3,639,674 |  |  | 14,469 |  |  | 21,914 |  |  | - |  |  | 3,676,057
Commercial construction |  |  | 643,456 |  |  | - |  |  | 30,437 |  |  | - |  |  | 673,893
Residential real estate |  |  | 355,196 |  |  | - |  |  | 11,119 |  |  | - |  |  | 366,315
Consumer |  |  | 1,999 |  |  | - |  |  | 2 |  |  | - |  |  | 2,001
Gross loans |  | $ | 6,234,469 |  | $ | 35,446 |  | $ | 108,286 |  | $ | - |  | $ | 6,378,201
|  | December 31, 2019
|  |  |  |  | Special |  |  |  |  |  |  |  |  |
|  | Pass |  | 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
22
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. Loans and the Allowance for Loan Losses – (continued) The following table provides an analysis of the impaired loans by class as of June 30, 2020 and December 31, 2019.
|  | June 30, 2020
|  |  |  |  | Unpaid |  |  |
|  | Recorded |  | Principal |  | Related
|  | Investment |  | Balance |  | Allowance
No related allowance recorded |  | (dollars in thousands)
Commercial |  | $ | 35,727 |  | $ | 81,377 |  |  |
Commercial real estate |  |  | 15,464 |  |  | 15,733 |  |  |
Commercial construction |  |  | 17,899 |  |  | 17,899 |  |  |
Residential real estate |  |  | 3,699 |  |  | 4,020 |  |  |
Total (no related allowance) |  | $ | 72,789 |  | $ | 119,029 |  |  |
With an allowance recorded |  |  |  |  |  |  |  |  |
Commercial construction |  |  | 6,463 |  |  | 6,463 |  | $ | 1,806
Residential real estate |  |  | 261 |  |  | 261 |  |  | 47
Total (with allowance) |  | $ | 6,724 |  | $ | 6,724 |  | $ | 1,853
Total |  |  |  |  |  |  |  |  |
Commercial |  | $ | 35,727 |  | $ | 81,377 |  | $ | -
Commercial real estate |  |  | 15,464 |  |  | 15,733 |  |  | -
Commercial construction |  |  | 24,362 |  |  | 24,362 |  |  | 1,806
Residential real estate |  |  | 3,960 |  |  | 4,281 |  |  | 47
Total |  | $ | 79,513 |  | $ | 125,753 |  | $ | 1,853
|  | December 31, 2019
|  |  |  |  | Unpaid |  |  |
|  | Recorded |  | Principal |  | Related
|  | Investment |  | Balance |  | Allowance
No related allowance recorded |  | (dollars in thousands)
Commercial |  | $ | 37,984 |  | $ | 83,225 |  |  |
Commercial real estate |  |  | 15,249 |  |  | 15,467 |  |  |
Commercial construction |  |  | 8,649 |  |  | 8,649 |  |  |
Residential real estate |  |  | 1,311 |  |  | 1,463 |  |  |
Consumer |  |  | - |  |  | - |  |  |
Total (no related allowance) |  | $ | 63,193 |  | $ | 108,804 |  |  |
With an allowance recorded |  |  |  |  |  |  |  |  |
Commercial construction |  | $ | 3,530 |  | $ | 3,530 |  | $ | 1,244
Residential real estate |  |  | 263 |  |  | 263 |  |  | 23
Total (with allowance) |  | $ | 3,793 |  | $ | 3,793 |  | $ | 1,267
Total |  |  |  |  |  |  |  |  |
Commercial |  | $ | 37,984 |  | $ | 83,225 |  | $ | -
Commercial real estate |  |  | 15,249 |  |  | 15,467 |  |  | -
Commercial construction |  |  | 12,179 |  |  | 12,179 |  |  | 1,244
Residential real estate |  |  | 1,574 |  |  | 1,726 |  |  | 23
Consumer |  |  | - |  |  | - |  |  | -
Total |  | $ | 66,986 |  | $ | 112,597 |  | $ | 1,267
23
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. Loans and the Allowance for Loan Losses – (continued) The following table provides an analysis related to the average recorded investment and interest income recognized on impaired loans by segment as of and for the three and six months ended June 30, 2020 and 2019:
| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2020 |  | 2019 |  | 2020 |  | 2019
| Average Recorded Investment |  | Interest Income Recognized |  | Average Recorded Investment |  | Interest Income Recognized |  | Average Recorded Investment |  | Interest Income Recognized |  | Average Recorded Investment |  | Interest Income Recognized
|  | (dollars in thousands)
Impaired loans (no allowance) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial | $ | 35,813 |  | $ | 91 |  | $ | 33,663 |  | $ | 82 |  | $ | 36,127 |  | $ | 185 |  | $ | 33,066 |  | $ | 164
Commercial real estate |  | 15,415 |  |  | 82 |  |  | 17,205 |  |  | 68 |  |  | 15,352 |  |  | 155 |  |  | 17,170 |  |  | 143
Commercial construction |  | 17,719 |  |  | 87 |  |  | 6,048 |  |  | 25 |  |  | 17,545 |  |  | 171 |  |  | 6,049 |  |  | 80
Residential real estate |  | 3,500 |  |  | - |  |  | 3,198 |  |  | - |  |  | 3,308 |  |  | - |  |  | 3,195 |  |  | -
Total | $ | 72,447 |  | $ | 260 |  | $ | 60,114 |  | $ | 175 |  | $ | 72,332 |  | $ | 511 |  | $ | 59,480 |  | $ | 387
Impaired loans (allowance): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate | $ | - |  | $ | - |  | $ | 393 |  | $ | - |  | $ | - |  | $ | - |  | $ | 393 |  | $ | -
Commercial construction |  | 6,463 |  |  | - |  |  | 2,850 |  |  | 42 |  |  | 6,463 |  |  | - |  |  | 2,818 |  |  | 85
Residential real estate |  | 262 |  |  | 1 |  |  | 255 |  |  | - |  |  | 262 |  |  | 3 |  |  | 256 |  |  | -
Total | $ | 6,725 |  | $ | 1 |  | $ | 3,498 |  | $ | 42 |  | $ | 6,725 |  | $ | 3 |  | $ | 3,467 |  | $ | 85
Total impaired loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial | $ | 35,813 |  | $ | 91 |  | $ | 33,663 |  | $ | 82 |  | $ | 36,127 |  | $ | 185 |  | $ | 33,066 |  | $ | 164
Commercial real estate |  | 15,415 |  |  | 82 |  |  | 17,598 |  |  | 68 |  |  | 15,352 |  |  | 155 |  |  | 17,563 |  |  | 143
Commercial construction |  | 24,182 |  |  | 87 |  |  | 8,898 |  |  | 67 |  |  | 24,008 |  |  | 171 |  |  | 8,867 |  |  | 165
Residential real estate |  | 3,762 |  |  | 1 |  |  | 3,453 |  |  | - |  |  | 3,570 |  |  | 3 |  |  | 3,451 |  |  | -
Total | $ | 79,172 |  | $ | 261 |  | $ | 63,612 |  | $ | 217 |  | $ | 79,057 |  | $ | 514 |  | $ | 62,947 |  | $ | 472
Included in impaired loans at June 30, 2020 and December 31, 2019 are loans that are deemed troubled debt restructurings. 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, when applicable. Cash basis interest and interest income recognized on accrual basis approximate each other. 24
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. 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 at June 30, 2020 and December 31, 2019:
|  | June 30, 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 |  | Gross Loans
|  | (dollars in thousands)
Commercial |  | $ | 1,124 |  | $ | 6,679 |  | $ | 2,658 |  | $ | 30,584 |  | $ | 41,045 |  | $ | 1,618,890 |  | $ | 1,659,935
Commercial real estate |  |  | - |  |  | 4,267 |  |  | 1,331 |  |  | 9,739 |  |  | 15,337 |  |  | 3,660,720 |  |  | 3,676,057
Commercial construction |  |  | - |  |  | 3,055 |  |  | - |  |  | 18,205 |  |  | 21,260 |  |  | 652,633 |  |  | 673,893
Residential real estate |  |  | 301 |  |  | 346 |  |  | 1,982 |  |  | 6,050 |  |  | 8,679 |  |  | 357,636 |  |  | 366,315
Consumer |  |  | - |  |  | - |  |  | - |  |  | 2 |  |  | 2 |  |  | 1,999 |  |  | 2,001
Total |  | $ | 1,425 |  | $ | 14,347 |  | $ | 5,971 |  | $ | 64,580 |  | $ | 86,323 |  | $ | 6,291,878 |  | $ | 6,378,201
Included in the 90 days or greater past due and still accruing category as of June 30, 2020 are purchased credit-impaired loans, net of fair value marks, which accrete 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 accrete income per the valuation at date of acquisition. 25
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. 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:
|  | June 30, 2020
|  |  |  | Commercial |  | Commercial |  | Residential |  |  |  |  |  |  |  |  |
|  | Commercial |  | real estate |  | construction |  | real estate |  | Consumer |  | Unallocated |  | Total
|  | (dollars in thousands)
ALLL |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | - |  | $ | - |  | $ | 1,806 |  | $ | 47 |  | $ | - |  |  |  |  | $ | 1,853
Collectively evaluated for impairment |  |  | 9,305 |  |  | 21,284 |  |  | 5,904 |  |  | 1,643 |  |  | 5 |  |  |  |  |  | 38,141
Acquired portfolio |  |  | 40 |  |  | 1,371 |  |  | 316 |  |  | - |  |  | - |  |  |  |  |  | 1,727
Acquired with deteriorated credit quality |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  |  |  |  | -
Unallocated |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  |  |  |  | 27,003
Total |  | $ | 9,345 |  | $ | 22,655 |  | $ | 8,026 |  | $ | 1,690 |  | $ | 5 |  | $ | 27,003 |  | $ | 68,724
Gross loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 35,727 |  | $ | 15,464 |  | $ | 24,362 |  | $ | 3,960 |  | $ | - |  |  |  |  | $ | 79,513
Collectively evaluated for impairment |  |  | 1,529,703 |  |  | 2,762,767 |  |  | 596,699 |  |  | 266,155 |  |  | 1,710 |  |  |  |  |  | 5,157,034
Acquired portfolio |  |  | 90,624 |  |  | 892,339 |  |  | 52,832 |  |  | 92,040 |  |  | 291 |  |  |  |  |  | 1,128,126
Acquired with deteriorated credit quality |  |  | 3,881 |  |  | 5,487 |  |  | - |  |  | 4,160 |  |  | - |  |  |  |  |  | 13,528
Total |  | $ | 1,659,935 |  | $ | 3,676,057 |  | $ | 673,893 |  | $ | 366,315 |  | $ | 2,001 |  |  |  |  | $ | 6,378,201
|  | December 31, 2019
|  |  |  | Commercial |  | Commercial |  | Residential |  |  |  |  |  |  |  |  |
|  | Commercial |  | real estate |  | construction |  | 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 |  |  |  |  |  | 35,685
Acquired portfolio |  |  | 40 |  |  | 886 |  |  | 316 |  |  | - |  |  | - |  |  |  |  |  | 1,242
Acquired with deteriorated credit quality |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  |  |  |  | -
Unallocated |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  |  |  |  | 99
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
|  | $ | 1,129,661 |  | $ | 3,041,959 |  | $ | 623,326 |  | $ | 320,020 |  | $ | 3,328 |  |  |  |  | $ | 5,118,294
Total |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in the unallocated amount as of June 30, 2020 is a $27.0 million provision recorded during the six months ended June 30, 2020 associated with impacts of the COVID-19 pandemic. Management anticipates this amount will be allocated in future periods as more information regarding the individual loan and portfolio segment-specific impacts of the pandemic becomes available. 26
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. 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:
|  | Three Months Ended June 30, 2020
|  |  |  |  |  | Commercial |  | Commercial |  | Residential |  |  |  |  |  |  |  |  |  |  |
|  | Commercial |  | real estate |  | construction |  | real estate |  | Consumer |  | Unallocated |  | Total
|  | (dollars in thousands)
Balance at March 31, 2020 |  | $ | 9,058 |  |  | $ | 22,036 |  |  | $ | 7,819 |  | $ | 1,681 |  |  | $ | 3 |  |  | $ | 13,572 |  | $ | 54,169 |
Charge-offs |  |  | (380 | ) |  |  | - |  |  |  | - |  |  | (69 | ) |  |  | - |  |  |  | - |  |  | (449 | )
Recoveries |  |  | 2 |  |  |  | 2 |  |  |  | - |  |  | - |  |  |  | - |  |  |  | - |  |  | 4 |
Provision for loan losses |  |  | 665 |  |  |  | 617 |  |  |  | 207 |  |  | 78 |  |  |  | 2 |  |  |  | 13,431 |  |  | 15,000 |
Balance at June 30, 2020 |  | $ | 9,345 |  |  | $ | 22,655 |  |  | $ | 8,026 |  | $ | 1,690 |  |  | $ | 5 |  |  | $ | 27,003 |  | $ | 68,724 |
|  | Three Months Ended June 30, 2019
|  |  |  |  |  | Commercial |  | Commercial |  | Residential |  |  |  |  |  |  |  |  |  |  |
|  | Commercial |  | real estate |  | construction |  | real estate |  | Consumer |  | Unallocated |  | Total
|  | (dollars in thousands)
Balance at March 31, 2019 |  | $ | 8,660 |  |  | $ | 21,561 |  |  | $ | 4,982 |  | $ | 1,166 |  |  | $ | 1 |  |  | $ | 488 |  | $ | 36,858 |
Charge-offs |  |  | - |  |  |  | (406 | ) |  |  | - |  |  | - |  |  |  | - |  |  |  | - |  |  | (406 | )
Recoveries |  |  | 115 |  |  |  | 30 |  |  |  | - |  |  | 1 |  |  |  | - |  |  |  | - |  |  | 146 |
Provision |  |  | (54 | ) |  |  | 300 |  |  |  | 560 |  |  | 41 |  |  |  | 1 |  |  |  | 252 |  |  | 1,100 |
Balance at June 30, 2019 |  | $ | 8,721 |  |  | $ | 21,485 |  |  | $ | 5,542 |  | $ | 1,208 |  |  | $ | 2 |  |  | $ | 740 |  | $ | 37,698 |
27
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. Loans and the Allowance for Loan Losses – (continued)
|  | Six Months Ended June 30, 2020
|  |  |  |  |  | Commercial |  | Commercial |  | Residential |  |  |  |  |  |  |  |  |  |  |
|  | Commercial |  | real estate |  | construction |  | real estate |  | Consumer |  | Unallocated |  | Total
|  | (dollars in thousands)
Balance at December 31, 2019 |  | $ | 8,349 |  |  | $ | 20,853 |  |  | $ | 7,304 |  | $ | 1,685 |  |  | $ | 3 |  |  | $ | 99 |  | $ | 38,293 |
Charge-offs |  |  | (504 | ) |  |  | - |  |  |  | - |  |  | (69 | ) |  |  | (3 | ) |  |  | - |  |  | (576 | )
Recoveries |  |  | 2 |  |  |  | 2 |  |  |  | - |  |  | 3 |  |  |  | - |  |  |  | - |  |  | 7 |
Provision |  |  | 1,498 |  |  |  | 1,800 |  |  |  | 722 |  |  | 71 |  |  |  | 5 |  |  |  | 26,904 |  |  | 31,000 |
Balance at June 30, 2020 |  | $ | 9,345 |  |  | $ | 22,655 |  |  | $ | 8,026 |  | $ | 1,690 |  |  | $ | 5 |  |  | $ | 27,003 |  | $ | 68,724 |
|  | Six Months Ended June 30, 2019
|  |  |  |  |  | Commercial |  | Commercial |  | Residential |  |  |  |  |  |  |  |  |  |  |
|  | Commercial |  | real estate |  | construction |  | real estate |  | Consumer |  | Unallocated |  | Total
|  | (dollars in thousands)
Balance at December 31, 2018 |  | $ | 9,875 |  |  | $ | 18,847 |  |  | $ | 4,519 |  | $ | 1,266 |  |  | $ | 2 |  |  | $ | 445 |  | $ | 34,954 |
Charge-offs |  |  | - |  |  |  | (3,082 | ) |  |  | - |  |  | - |  |  |  | - |  |  |  | - |  |  | (3,082 | )
Recoveries |  |  | 186 |  |  |  | 30 |  |  |  | - |  |  | 3 |  |  |  | 7 |  |  |  | - |  |  | 226 |
Provision |  |  | (1,340 | ) |  |  | 5,690 |  |  |  | 1,023 |  |  | (61 | ) |  |  | (7 | ) |  |  | 295 |  |  | 5,600 |
Balance at June 30, 2019 |  | $ | 8,721 |  |  | $ | 21,485 |  |  | $ | 5,542 |  | $ | 1,208 |  |  | $ | 2 |  |  | $ | 740 |  | $ | 37,698 |
28
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. Loans and the Allowance for Loan 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. At June 30, 2020 and June 30, 2019, 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 June 30, 2020, TDRs totaled $50.9 million, of which $30.5 million were on nonaccrual status and $20.4 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 $47 thousand and $-0- of specific allowance for the three and six months ended June 30, 2020 and June 30, 2019, respectively. There were no loans modified as TDRs during the three and six months ended June 30, 2020 and June 30, 2019. There were no TDRs for which there was a payment default within twelve months following the modification during the three and six months ended June 30, 2020 and June 30, 2019. 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 were not be considered TDR if they were performing at year-end and the other considerations set forth in the interagency statements 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. As of June 30, 2020, the Bank had 575 deferred loans totaling approximately $937 million. The majority of these loans were initially deferred between 90 and 120 days. The following table sets forth the composition of these loans by loan segments as of June 30, 2020:
|  | Number of Loans |  | Unpaid Principal Balance
|  | (dollars in thousands)
Commercial |  |  | 331 |  |  | $ | 123,031 |
Commercial real estate |  |  | 126 |  |  |  | 688,336 |
Commercial construction |  |  | 15 |  |  |  | 73,670 |
Residential real estate |  |  | 101 |  |  |  | 52,312 |
Consumer |  |  | 2 |  |  |  | 23 |
Total |  |  | 575 |  |  | $ | 937,372 |

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- Definition The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses. + References Reference 1: http://www.xbrl.org/2009/role/commonPracticeRef -Publisher FASB -Name Accounting Standards Codification -Topic 310 -SubTopic 10 -URI http://asc.fasb.org/subtopic&trid=2196772 + Details
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