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Loans and the Allowance for Credit Losses | 3 Months Ended
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Mar. 31, 2021
Receivables [Abstract] |
Loans and the Allowance for Credit Losses | Note 5. Loans and the Allowance for Credit Losses 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:
|  | March 31, |  | December 31,
|  | 2021 |  | 2020
|  | (dollars in thousands)
Commercial (1) |  | $ | 1,622,652 |  |  | $ | 1,521,967 |
Commercial real estate |  |  | 3,797,244 |  |  |  | 3,783,550 |
Commercial construction |  |  | 565,872 |  |  |  | 617,747 |
Residential real estate |  |  | 306,376 |  |  |  | 322,564 |
Consumer |  |  | 3,364 |  |  |  | 1,853 |
Gross loans |  |  | 6,295,508 |  |  |  | 6,247,681 |
Net deferred loan fees |  |  | (18,317 | ) |  |  | (11,374 | )
Total loans receivable |  | $ | 6,277,191 |  |  | $ | 6,236,307 |
(1) | Included in commercial loans as of March 31, 2021 and December 31, 2020 are PPP loans of $522.3 million and $397.5 million, respectively.
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:
|  | March 31, |  | December 31,
|  | 2021 |  | 2020
|  | (dollars in thousands)
Commercial real estate |  | $ | 1,981 |  | $ | 1,990
Residential real estate |  |  | 4,919 |  |  | 2,720
Total carrying amount |  | $ | 6,900 |  | $ | 4,710
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:
|  | Nonaccrual Loans with an ACL |  | Nonaccrual loans without an ACL
|  | (dollars in thousands)
Commercial |  | $ | 28,136 |  | $ | 2,969
Commercial real estate |  |  | 3,225 |  |  | 12,876
Commercial construction |  |  | 2,934 |  |  | 6,017
Residential real estate |  |  | - |  |  | 4,783
Consumer |  |  | - |  |  | -
Total nonaccrual loans |  | $ | 34,295 |  | $ | 26,645
The following tables present total nonaccrual loans included in loans receivable by loan class as of December 31, 2020 (dollars in thousands):
|  |  |  | December 31,
|  |  |  | 2020
Commercial |  |  |  |  | $ | 33,019
Commercial real estate |  |  |  |  |  | 10,111
Commercial construction |  |  |  |  |  | 14,015
Residential real estate |  |  |  |  |  | 4,551
Consumer |  |  |  |  |  | -
Total nonaccrual loans |  |  |  |  | $ | 61,696
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. 19 Table of Contents
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. 20 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 |
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 |
21 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 |
22 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. 23 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
24 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 |
25 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. 26 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)

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