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Loans and the Allowance for Credit Losses | 6 Months Ended
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Jun. 30, 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 were 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 June 30, 2021 and December 31, 2020:
|  | June 30, |  | December 31,
|  | 2021 |  | 2020
|  | (dollars in thousands)
Commercial (1) |  | $ | 1,402,697 |  |  | $ | 1,521,967 |
Commercial real estate |  |  | 4,138,518 |  |  |  | 3,783,550 |
Commercial construction |  |  | 587,121 |  |  |  | 617,747 |
Residential real estate |  |  | 286,907 |  |  |  | 322,564 |
Consumer |  |  | 6,355 |  |  |  | 1,853 |
Gross loans |  |  | 6,421,598 |  |  |  | 6,247,681 |
Net deferred loan fees |  |  | (13,694 | ) |  |  | (11,374 | )
Total loans receivable |  | $ | 6,407,904 |  |  | $ | 6,236,307 |
(1) | Included in commercial loans as of June 30, 2021 and December 31, 2020 were PPP loans of $326.8 million and $397.5 million, respectively.
As of June 30, 2021 and December 31, 2020, loan balances of approximately $2.7, 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 June 30, 2021 and December 31, 2020:
|  | June 30, |  | December 31,
|  | 2021 |  | 2020
|  | (dollars in thousands)
Commercial real estate |  | $ | 5,298 |  | $ | 1,990
Residential real estate |  |  | 861 |  |  | 2,720
Total carrying amount |  | $ | 6,159 |  | $ | 4,710
Loans Receivable on Nonaccrual Status - The following tables present nonaccrual loans with an ACL as of June 30, 2021 and nonaccrual loans without an ACL as of June 30, 2021:
|  | Nonaccrual Loans with an ACL |  | Nonaccrual loans without an ACL |  | Total
|  | (dollars in thousands) |  |  |
Commercial |  | $ | 28,009 |  | $ | 3,074 |  | $ | 31,083
Commercial real estate |  |  | 2,722 |  |  | 13,283 |  |  | 16,005
Commercial construction |  |  | 2,934 |  |  | 1,831 |  |  | 4,765
Residential real estate |  |  | - |  |  | 4,360 |  |  | 4,360
Consumer |  |  | - |  |  | - |  |  |
Total |  | $ | 33,665 |  | $ | 22,548 |  | $ | 56,213
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 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. 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. 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) 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 June 30, 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 |  |  | Total Gross |
|  | 2021 |  |  | 2020 |  |  | 2019 |  |  | 2018 |  |  | 2017 |  |  | Prior | Loans | Loans |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 324,543 |  |  | $ | 185,027 |  |  | $ | 64,057 |  |  | $ | 69,430 |  |  | $ | 99,833 |  |  | $ | 123,799 |  |  | $ | 466,262 |  |  | $ | 1,332,951 |
Special mention |  |  | - |  |  |  | - |  |  |  | 225 |  |  |  | 258 |  |  |  | 5,655 |  |  |  | 4,235 |  |  |  | 15,653 |  |  |  | 26,026 |
Substandard |  |  | 182 |  |  |  | - |  |  |  | 1,791 |  |  |  | 13,072 |  |  |  | 4,111 |  |  |  | 21,255 |  |  |  | 3,250 |  |  |  | 43,661 |
Doubtful |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 59 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 59 |
Total Commercial |  | $ | 324,725 |  |  | $ | 185,027 |  |  | $ | 66,073 |  |  | $ | 82,819 |  |  | $ | 109,599 |  |  | $ | 149,289 |  |  | $ | 485,165 |  |  | $ | 1,402,697 |
Commercial Real Estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 741,267 |  |  | $ | 601,375 |  |  | $ | 460,081 |  |  | $ | 529,053 |  |  | $ | 541,823 |  |  | $ | 1,012,888 |  |  | $ | 141,776 |  |  | $ | 4,028,263 |
Special mention |  |  | - |  |  |  | - |  |  |  | 3,375 |  |  |  | 19,360 |  |  |  | 4,364 |  |  |  | 29,160 |  |  |  | 15,454 |  |  |  | 71,713 |
Substandard |  |  | 1,969 |  |  |  | - |  |  |  | 659 |  |  |  | 1,473 |  |  |  | 2,722 |  |  |  | 31,719 |  |  |  | - |  |  |  | 38,542 |
Doubtful |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total Commercial Real Estate |  | $ | 743,236 |  |  | $ | 601,375 |  |  | $ | 464,115 |  |  | $ | 549,886 |  |  | $ | 548,909 |  |  | $ | 1,073,767 |  |  | $ | 157,230 |  |  | $ | 4,138,518 |
Commercial Construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 1,405 |  |  | $ | 7,506 |  |  | $ | 37,715 |  |  | $ | 3,678 |  |  | $ | 3,981 |  |  | $ | 490 |  |  | $ | 510,227 |  |  | $ | 565,002 |
Special mention |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Substandard |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 22,119 |  |  |  | 22,119 |
Doubtful |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total Commercial Construction |  | $ | 1,405 |  |  | $ | 7,506 |  |  | $ | 37,715 |  |  | $ | 3,678 |  |  | $ | 3,981 |  |  | $ | 490 |  |  | $ | 532,346 |  |  | $ | 587,121 |
Residential Real Estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 10,420 |  |  | $ | 34,493 |  |  | $ | 27,090 |  |  | $ | 32,888 |  |  | $ | 37,296 |  |  | $ | 83,096 |  |  | $ | 48,515 |  |  | $ | 273,798 |
Special mention |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Substandard |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 203 |  |  |  | - |  |  |  | 9,101 |  |  |  | 3,805 |  |  |  | 13,109 |
Doubtful |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total Residential Real Estate |  | $ | 10,420 |  |  | $ | 34,493 |  |  | $ | 27,090 |  |  | $ | 33,091 |  |  | $ | 37,296 |  |  | $ | 92,197 |  |  | $ | 52,320 |  |  | $ | 286,907 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | - |  |  | $ | 107 |  |  | $ | 54 |  |  | $ | 32 |  |  | $ | 41 |  |  | $ | 5,989 |  |  | $ | 132 |  |  | $ | 6,355 |
Special mention |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Substandard |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Doubtful |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total Consumer |  | $ | - |  |  | $ | 107 |  |  | $ | 54 |  |  | $ | 32 |  |  | $ | 41 |  |  | $ | 5,989 |  |  | $ | 132 |  |  | $ | 6,355 |
Total |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 1,077,635 |  |  | $ | 828,508 |  |  | $ | 588,997 |  |  | $ | 635,081 |  |  | $ | 682,974 |  |  | $ | 1,226,262 |  |  | $ | 1,166,912 |  |  | $ | 6,206,369 |
Special mention |  |  | - |  |  |  | - |  |  |  | 3,600 |  |  |  | 19,618 |  |  |  | 10,019 |  |  |  | 33,395 |  |  |  | 31,107 |  |  |  | 97,739 |
Substandard |  |  | 2,151 |  |  |  | - |  |  |  | 2,450 |  |  |  | 14,748 |  |  |  | 6,833 |  |  |  | 62,075 |  |  |  | 29,174 |  |  |  | 117,431 |
Doubtful |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 59 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 59 |
Grand Total |  | $ | 1,079,786 |  |  | $ | 828,508 |  |  | $ | 595,047 |  |  | $ | 669,506 |  |  | $ | 699,826 |  |  | $ | 1,321,732 |  |  | $ | 1,227,193 |  |  | $ | 6,421,598 |
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 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. The following table presents collateral dependent loans individually evaluated for impairment as of June 30, 2021:
|  | June 30, 2021
|  | Real |  |  |  |  |
|  | Estate |  | Other |  | Total |
|  | (dollars in thousands) |
Commercial |  | $ | 6,598 |  | $ | 26,166 |  | $ | 32,764 |
Commercial real estate |  |  | 35,802 |  |  | - |  |  | 35,802 |
Commercial construction |  |  | 16,389 |  |  | - |  |  | 16,389 |
Residential real estate |  |  | 10,647 |  |  | - |  |  | 10,647 |
Consumer |  |  | - |  |  | - |  |  | - |
Total |  | $ | 69,436 |  | $ | 26,166 |  | $ | 95,602 |
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) Impaired loans - Impaired loans disclosures presented below as of December 31, 2020 and as of and for the three and six months ended June 30, 2020 represent requirements prior to the adoption of CECL on January 1, 2021. The following table provides an analysis of the impaired loans by class as of the year ended December 31, 2020:
|  | December 31, 2020
|  |  |  | Unpaid |  |  |
|  | Recorded |  | Principal |  | Related |
|  | 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 |
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) 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 and six months ended June 30, 2020 (dollars in thousands):
| Three Months Ended June 30, |  | Six Months Ended June 30,
|  | 2020 |  | 2020
|  | Average Recorded Investment |  | Interest Income Recognized |  | Average Recorded Investment |  | Interest Income Recognized
Impaired loans (no allowance) |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  | $ | 35,813 |  | $ | 91 |  | $ | 36,127 |  | $ | 185
Commercial real estate |  |  | 15,415 |  |  | 82 |  |  | 15,352 |  |  | 155
Commercial construction |  |  | 17,719 |  |  | 87 |  |  | 17,545 |  |  | 171
Residential real estate |  |  | 3,500 |  |  | - |  |  | 3,308 |  |  | -
Total |  | $ | 72,447 |  | $ | 260 |  | $ | 72,332 |  | $ | 511
Impaired loans (allowance): |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  | $ | - |  | $ | - |  | $ | - |  | $ | -
Commercial construction |  |  | 6,463 |  |  | - |  |  | 6,463 |  |  | -
Residential real estate |  |  | 262 |  |  | 1 |  |  | 262 |  |  | 3
Total |  | $ | 6,725 |  | $ | 1 |  | $ | 6,725 |  | $ | 3
Total impaired loans: |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  | $ | 35,813 |  | $ | 91 |  | $ | 36,127 |  | $ | 185
Commercial real estate |  |  | 15,415 |  |  | 82 |  |  | 15,352 |  |  | 155
Commercial construction |  |  | 24,182 |  |  | 87 |  |  | 24,008 |  |  | 171
Residential real estate |  |  | 3,762 |  |  | 1 |  |  | 3,570 |  |  | 3
Total |  | $ | 79,172 |  | $ | 261 |  | $ | 79,057 |  | $ | 514
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) 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 June 30, 2021 and December 31, 2020 (dollars in thousands):
|  | June 30, 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
Commercial |  | $ | 297 |  | $ | - |  | $ | 4,588 |  | $ | 31,083 |  | $ | 35,968 |  | $ | 1,366,729 |  | $ | 1,402,697
Commercial real Estate |  |  | - |  |  | - |  |  | 7,607 |  |  | 16,005 |  |  | 23,612 |  |  | 4,114,906 |  |  | 4,138,518
Commercial construction |  |  | - |  |  | - |  |  | 3,221 |  |  | 4,765 |  |  | 7,986 |  |  | 579,135 |  |  | 587,121
Residential real Estate |  |  | 210 |  |  | 99 |  |  | 4,238 |  |  | 4,360 |  |  | 8,907 |  |  | 278,000 |  |  | 286,907
Consumer |  |  | 2 |  |  | - |  |  | - |  |  | - |  |  | 2 |  |  | 6,353 |  |  | 6,355
Total |  | $ | 509 |  | $ | 99 |  | $ | 19,654 |  | $ | 56,213 |  | $ | 76,475 |  | $ | 6,345,123 |  | $ | 6,421,598
Included in the 90 days or greater past due and still accruing category as of June 30, 2021 were $16.4 million in purchased credit-deteriorated loans, net of fair value marks, which accrete income per the valuation at date of acquisition.
|  | 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
The 90 days or greater past due and still accruing category as of December 31, 2020 were purchased credit-impaired loans, net of fair value marks, which accrete income per the valuation at date of acquisition. 27 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 ACL that are allocated to each loan portfolio segment:
|  | June 30, 2021
|  |  |  | Commercial |  | Commercial |  | Residential |  |  |  |  |  |  |  |  |
|  | Commercial |  | real estate |  | construction |  | real estate |  | Consumer |  |  |  | Total
|  | (dollars in thousands)
ACL |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 15,618 |  | $ | 1,485 |  | $ | 434 |  | $ | 349 |  | $ | - |  |  |  |  | $ | 17,886
Collectively evaluated for impairment |  |  | 7,673 |  |  | 39,553 |  |  | 4,493 |  |  | 3,863 |  |  | 9 |  |  |  |  |  | 55,591
Acquired with deteriorated credit quality individually analyzed |  |  | 2,276 |  |  | 2,777 |  |  | - |  |  | 154 |  |  | - |  |  |  |  |  | 5,207
Total |  | $ | 25,567 |  | $ | 43,815 |  | $ | 4,927 |  | $ | 4,366 |  | $ | 9 |  |  |  |  | $ | 78,684
Gross loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 33,473 |  | $ | 28,197 |  | $ | 16,389 |  | $ | 6,408 |  | $ | - |  |  |  |  | $ | 84,467
Collectively evaluated for impairment |  |  | 1,364,019 |  |  | 4,102,715 |  |  | 570,732 |  |  | 276,260 |  |  | 6,355 |  |  |  |  |  | 6,320,081
Acquired with deteriorated credit quality individually analyzed |  |  | 5,205 |  |  | 7,606 |  |  | - |  |  | 4,239 |  |  | - |  |  |  |  |  | 17,050
Total |  | $ | 1,402,697 |  | $ | 4,138,518 |  | $ | 587,121 |  | $ | 286,907 |  | $ | 6,355 |  |  |  |  | $ | 6,421,598
|  | 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
28 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 and six months ended June 30, 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 June 30, 2021
|  |  |  |  |  | Commercial |  | Commercial |  | Residential |  |  |  |  |  |  |  |  |  |  |
|  | Commercial |  | real estate |  | construction |  | real estate |  | Consumer |  | Unallocated |  | Total
|  | (dollars in thousands)
Balance as of March 31, 2021 |  | $ | 26,435 |  |  | $ | 43,897 |  |  | $ | 5,521 |  | $ | 4,704 |  |  | $ | 11 |  |  | $ | - |  | $ | 80,568 |
Charge-offs |  |  | (50 | ) |  |  | (155 | ) |  |  | - |  |  | (7 | ) |  |  | - |  |  |  | - |  |  | (212 | )
Recoveries |  |  | 13 |  |  |  | - |  |  |  | - |  |  | - |  |  |  | 1 |  |  |  | - |  |  | 14 |
(Reversal of) provision for credit losses - loans |  |  | (831 | ) |  |  | 73 |  |  |  | (594 | ) |  | (331 | ) |  |  | (3 | ) |  |  | - |  |  | (1,686 | )
Balance as of June 30, 2021 |  | $ | 25,567 |  |  | $ | 43,815 |  |  | $ | 4,927 |  | $ | 4,366 |  |  | $ | 9 |  |  | $ | - |  | $ | 78,684 |
|  | Six Months Ended June 30, 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 |  |  | (50 | ) |  |  | (155 | ) |  |  | - |  |  | (7 | ) |  |  | - |  |  |  | - |  |  | (212 | )
Recoveries |  |  | 73 |  |  |  | - |  |  |  | - |  |  | - |  |  |  | 2 |  |  |  | - |  |  | 75 |
Provision for (reversal of) credit losses - loans |  |  | 1,326 |  |  |  | (4,965 | ) |  |  | (2,306 | ) |  | (1,011 | ) |  |  | (6 | ) |  |  | - |  |  | (6,962 | )
Balance as of June 30, 2021 |  | $ | 25,567 |  |  | $ | 43,815 |  |  | $ | 4,927 |  | $ | 4,366 |  |  | $ | 9 |  |  | $ | - |  | $ | 78,684 |
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 $1.7 million and $7.0 million during the three and six months ended June 30, 2021, respectively, utilizing the CECL methodology, which was the result of an improved macroeconomic environment from January 1, 2021, the day of adoption. 29 Table of Contents
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 5. Loans and the Allowance for Credit Losses – (continued)
|  | Three Months Ended June 30, 2020
|  |  |  |  |  | Commercial |  | Commercial |  | Residential |  |  |  |  |  |  |  |  |  |  |
|  | Commercial |  | real estate |  | construction |  | real estate |  | Consumer |  | Unallocated |  | Total
|  | (dollars in thousands)
Balance as of 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 credit losses - loans |  |  | 665 |  |  |  | 617 |  |  |  | 207 |  |  | 78 |  |  |  | 2 |  |  |  | 13,431 |  |  | 15,000 |
Balance as of June 30, 2020 |  | $ | 9,345 |  |  | $ | 22,655 |  |  | $ | 8,026 |  | $ | 1,690 |  |  | $ | 5 |  |  | $ | 27,003 |  | $ | 68,724 |
|  | Six Months Ended June 30, 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 |  |  | (504 | ) |  |  | - |  |  |  | - |  |  | (69 | ) |  |  | (3 | ) |  |  | - |  |  | (576 | )
Recoveries |  |  | 2 |  |  |  | 2 |  |  |  | - |  |  | 3 |  |  |  | - |  |  |  | - |  |  | 7 |
Provision |  |  | 1,498 |  |  |  | 1,800 |  |  |  | 722 |  |  | 71 |  |  |  | 5 |  |  |  | 26,904 |  |  | 31,000 |
Balance as of June 30, 2020 |  | $ | 9,345 |  |  | $ | 22,655 |  |  | $ | 8,026 |  | $ | 1,690 |  |  | $ | 5 |  |  | $ | 27,003 |  | $ | 68,724 |
30 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 June 30, 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 June 30, 2021, TDRs totaled $62.4 million, of which $29.4 million were on nonaccrual status and $33.0 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 $9.2 million and $47 thousand of specific allowance related to TDRs for the six months ended June 30, 2021 and June 30, 2020, respectively. The following table presents loans by class modified as TDRs that occurred during the six months ended June 30, 2021:
|  |  |  | Pre-Modification Outstanding |  | Post-Modification Outstanding
|  | Number of Loans |  | Recorded Investment |  | Recorded Investment
Troubled debt restructurings: |  | (dollars in thousands)
Commercial |  |  | 3 |  | $ | 631 |  | $ | 631
Commercial real estate |  |  | 3 |  |  | 8,603 |  |  | 8,603
Commercial construction |  |  | 1 |  |  | 1,641 |  |  | 1,641
Residential real estate |  |  | 3 |  |  | 1,758 |  |  | 1,758
Total |  |  | 10 |  | $ | 12,633 |  | $ | 12,633
The ten loans modified as TDRs during the six months ended June 30, 2021 included nine (9) maturity extensions and, one commercial real estate loan which was a recast of a nonaccrual credit. There were no loans modified as TDRs during the six months ended June 30, 2020. There were no TDRs for which there was a payment default within twelve months following the modification during the three months ended and six months ended June 30, 2021 and June 30, 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. Additionally, the statement allows for the Company to extend deferrals for an additional term at the option of the Company. 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 June 30, 2021, the Bank had 79 deferred loans totaling approximately $100 million, compared to 113 deferred loans totaling approximately $207 million as of December 31, 2020. 31 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 June 30, 2021:
|  |  |  | Unpaid
|  | Number of Loans |  | Principal Balance
|  | (dollars in thousands)
Commercial |  |  | 59 |  | $ | 17,260
Commercial real estate |  |  | 20 |  |  | 82,760
Total |  |  | 79 |  | $ | 100,020
As of June 30, 2021, there were no deferred loans that were delinquent or on nonaccrual status. As of June 30, 2021, $62.0 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 and six months ended June 30, 2021 (dollars in thousands):
|  | Three Months Ended
|  | June 30, 2021
Balance as of beginning of period |  | $ | 2,343
Provision for credit losses - unfunded commitments |  |  | 37
Balance as of end of period |  | $ | 2,380
|  | Six Months Ended
|  | June 30, 2021
Balance as of beginning of period |  | $ | -
Day 1 Effect of CECL |  |  | 2,833
Reversal of credit losses - unfunded commitments |  |  | (453)
Balance as of end of period |  | $ | 2,380
Components of (Reversal of) Provision for Credit Losses The following table summarizes the (reversal of) provision for credit losses for the three and six months ended June 30, 2021 (dollars in thousands):
|  | Three Months Ended June 30, 2021 |  | Six Months Ended June 30, 2021
(Reversal of) provision for credit losses - loans |  | $ | (1,686) |  | $ | (6,962)
(Reversal of) provision for credit losses - unfunded commitments |  |  | 37 |  |  | (453)
(Reversal of) provision for credit losses |  | $ | (1,649) |  | $ | (7,415)

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