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Loans and the Allowance for Credit Losses | 9 Months Ended
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Sep. 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 September 30, 2021 and December 31, 2020:
|  | September 30, |  | December 31,
|  | 2021 |  | 2020
|  | (dollars in thousands)
Commercial (1) |  | $ | 1,325,488 |  |  | $ | 1,521,967 |
Commercial real estate |  |  | 4,436,626 |  |  |  | 3,783,550 |
Commercial construction |  |  | 552,896 |  |  |  | 617,747 |
Residential real estate |  |  | 270,793 |  |  |  | 322,564 |
Consumer |  |  | 2,093 |  |  |  | 1,853 |
Gross loans |  |  | 6,587,896 |  |  |  | 6,247,681 |
Net deferred loan fees |  |  | (11,457 | ) |  |  | (11,374 | )
Total loans receivable |  | $ | 6,576,439 |  |  | $ | 6,236,307 |
(1) | Included in commercial loans as of September 30, 2021 and December 31, 2020 were PPP loans of $177.8 million and $397.5 million, respectively.
As of each of September 30, 2021 and December 31, 2020, loan balances of approximately $2.6 billion, 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 September 30, 2021 and December 31, 2020:
|  | September 30, |  | December 31,
|  | 2021 |  | 2020
|  | (dollars in thousands)
Commercial real estate |  | $ | 4,876 |  | $ | 1,990
Residential real estate |  |  | 720 |  |  | 2,720
Total carrying amount |  | $ | 5,596 |  | $ | 4,710
Loans Receivable on Nonaccrual Status - The following tables present nonaccrual loans with an ACL as of September 30, 2021 and nonaccrual loans without an ACL as of September 30, 2021:
|  | September 30, 2021
|  | Nonaccrual loans with ACL |  | Nonaccrual loans without ACL |  | Total Nonaccrual loans
|  | (dollars in thousands) |  |  |
Commercial |  | $ | 27,993 |  | $ | 2,486 |  | $ | 30,479
Commercial real estate |  |  | 11,668 |  |  | 16,910 |  |  | 28,578
Commercial construction |  |  | - |  |  | 3,336 |  |  | 3,336
Residential real estate |  |  | - |  |  | 3,566 |  |  | 3,566
Consumer |  |  | - |  |  | - |  |  | -
Total |  | $ | 39,661 |  | $ | 26,298 |  | $ | 65,959
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 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 as “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 as “Substandard” if the asset has a well-defined weakness that requires management’s attention to a greater degree than for loans classified as 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 September 30, 2021, our loans based on year of origination and risk designation are as follows (dollars in thousands):
|  | Term loans amortized cost basis by origination year |  |  | Revolving |  |  | Total Gross |
|  | 2021 |  |  | 2020 |  |  | 2019 |  |  | 2018 |  |  | 2017 |  |  | Prior | Loans | Loans |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 362,839 |  |  | $ | 78,941 |  |  | $ | 73,202 |  |  | $ | 60,881 |  |  | $ | 98,178 |  |  | $ | 118,326 |  |  | $ | 465,494 |  |  | $ | 1,257,861 |
Special mention |  |  | - |  |  |  | - |  |  |  | 225 |  |  |  | 904 |  |  |  | 5,653 |  |  |  | 4,198 |  |  |  | 13,787 |  |  |  | 24,767 |
Substandard |  |  | 176 |  |  |  | - |  |  |  | 1,619 |  |  |  | 12,779 |  |  |  | 4,101 |  |  |  | 21,147 |  |  |  | 3,038 |  |  |  | 42,860 |
Doubtful |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total Commercial |  | $ | 363,015 |  |  | $ | 78,941 |  |  | $ | 75,046 |  |  | $ | 74,564 |  |  | $ | 107,932 |  |  | $ | 143,671 |  |  | $ | 482,319 |  |  | $ | 1,325,488 |
Commercial Real Estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 1,178,056 |  |  | $ | 587,923 |  |  | $ | 446,299 |  |  | $ | 479,741 |  |  | $ | 514,973 |  |  | $ | 944,052 |  |  | $ | 171,963 |  |  | $ | 4,323,007 |
Special mention |  |  | - |  |  |  | - |  |  |  | 3,364 |  |  |  | 1,875 |  |  |  | 4,335 |  |  |  | 26,550 |  |  |  | 6,633 |  |  |  | 42,757 |
Substandard |  |  | 1,942 |  |  |  | 4,500 |  |  |  | 657 |  |  |  | 18,861 |  |  |  | - |  |  |  | 36,112 |  |  |  | 8,790 |  |  |  | 70,862 |
Doubtful |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total Commercial Real Estate |  | $ | 1,179,998 |  |  | $ | 592,423 |  |  | $ | 450,320 |  |  | $ | 500,477 |  |  | $ | 519,308 |  |  | $ | 1,006,714 |  |  | $ | 187,386 |  |  | $ | 4,436,626 |
Commercial Construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 1,405 |  |  | $ | 7,370 |  |  | $ | 37,492 |  |  | $ | 2,600 |  |  | $ | 2,247 |  |  | $ | 490 |  |  | $ | 486,404 |  |  | $ | 538,008 |
Special mention |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Substandard |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 14,888 |  |  |  | 14,888 |
Doubtful |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total Commercial Construction |  | $ | 1,405 |  |  | $ | 7,370 |  |  | $ | 37,492 |  |  | $ | 2,600 |  |  | $ | 2,247 |  |  | $ | 490 |  |  | $ | 501,292 |  |  | $ | 552,896 |
Residential Real Estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 18,387 |  |  | $ | 30,704 |  |  | $ | 25,544 |  |  | $ | 29,503 |  |  | $ | 30,577 |  |  | $ | 77,427 |  |  | $ | 46,227 |  |  | $ | 258,369 |
Special mention |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Substandard |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 199 |  |  |  | - |  |  |  | 8,492 |  |  |  | 3,733 |  |  |  | 12,424 |
Doubtful |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total Residential Real Estate |  | $ | 18,387 |  |  | $ | 30,704 |  |  | $ | 25,544 |  |  | $ | 29,702 |  |  | $ | 30,577 |  |  | $ | 85,919 |  |  | $ | 49,960 |  |  | $ | 270,793 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | - |  |  | $ | 96 |  |  | $ | 50 |  |  | $ | 26 |  |  | $ | 35 |  |  | $ | 1,761 |  |  | $ | 125 |  |  | $ | 2,093 |
Special mention |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Substandard |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Doubtful |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total Consumer |  | $ | - |  |  | $ | 96 |  |  | $ | 50 |  |  | $ | 26 |  |  | $ | 35 |  |  | $ | 1,761 |  |  | $ | 125 |  |  | $ | 2,093 |
Total |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 1,560,687 |  |  | $ | 705,034 |  |  | $ | 582,587 |  |  | $ | 572,751 |  |  | $ | 646,010 |  |  | $ | 1,142,056 |  |  | $ | 1,170,213 |  |  | $ | 6,379,338 |
Special mention |  |  | - |  |  |  | - |  |  |  | 3,589 |  |  |  | 2,779 |  |  |  | 9,988 |  |  |  | 30,748 |  |  |  | 20,420 |  |  |  | 67,524 |
Substandard |  |  | 2,118 |  |  |  | 4,500 |  |  |  | 2,276 |  |  |  | 31,839 |  |  |  | 4,101 |  |  |  | 65,751 |  |  |  | 30,449 |  |  |  | 141,034 |
Doubtful |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Grand Total |  | $ | 1,562,805 |  |  | $ | 709,534 |  |  | $ | 588,452 |  |  | $ | 607,369 |  |  | $ | 660,099 |  |  | $ | 1,238,555 |  |  | $ | 1,221,082 |  |  | $ | 6,587,896 |
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 that were individually evaluated for impairment as of September 30, 2021:
|  | September 30, 2021
|  | Real |  |  |  |  |
|  | Estate |  | Other |  | Total |
|  | (dollars in thousands) |
Commercial |  | $ | 6,778 |  | $ | 26,175 |  | $ | 32,953 |
Commercial real estate |  |  | 56,622 |  |  | - |  |  | 56,622 |
Commercial construction |  |  | 12,582 |  |  | - |  |  | 12,582 |
Residential real estate |  |  | 10,258 |  |  | - |  |  | 10,258 |
Consumer |  |  | - |  |  | - |  |  | - |
Total |  | $ | 86,240 |  | $ | 26,175 |  | $ | 112,415 |
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 nine months ended September 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 nine months ended September 30, 2020 (dollars in thousands):
| Three Months Ended September 30, |  | Nine Months Ended September 30, |
|  | 2020 |  | 2020 |
|  | Average Recorded Investment |  | Interest Income Recognized |  | Average Recorded Investment |  | Interest Income Recognized |
Impaired loans (no allowance) |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  | $ | 12,266 |  | $ | 50 |  | $ | 12,100 |  | $ | 150 |
Commercial real estate |  |  | 12,460 |  |  | 74 |  |  | 12,415 |  |  | 229 |
Commercial construction |  |  | 21,297 |  |  | 91 |  |  | 21,149 |  |  | 262 |
Residential real estate |  |  | 4,011 |  |  | 16 |  |  | 3,761 |  |  | 16 |
Total |  | $ | 50,034 |  | $ | 231 |  | $ | 49,425 |  | $ | 657 |
Impaired loans (allowance): |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  | $ | 23,024 |  | $ | - |  | $ | 23,195 |  | $ | - |
Commercial real estate |  |  | 2,722 |  |  | - |  |  | 2,722 |  |  | - |
Commercial construction |  |  | 2,934 |  |  | - |  |  | 2,934 |  |  | - |
Residential real estate |  |  | 261 |  |  | 5 |  |  | 262 |  |  | 5 |
Total |  | $ | 28,941 |  | $ | 5 |  | $ | 29,113 |  | $ | 5 |
Total impaired loans: |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  | $ | 35,290 |  | $ | 50 |  | $ | 35,295 |  | $ | 150 |
Commercial real estate |  |  | 15,182 |  |  | 74 |  |  | 15,137 |  |  | 229 |
Commercial construction |  |  | 24,231 |  |  | 91 |  |  | 24,083 |  |  | 262 |
Residential real estate |  |  | 4,272 |  |  | 21 |  |  | 4,023 |  |  | 21 |
Total |  | $ | 78,975 |  | $ | 236 |  | $ | 78,538 |  | $ | 662 |
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 September 30, 2021 and December 31, 2020 (dollars in thousands):
|  | September 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 |  | $ | 391 |  | $ | 417 |  | $ | 4,463 |  | $ | 30,479 |  | $ | 35,750 |  | $ | 1,289,738 |  | $ | 1,325,488
Commercial real Estate |  |  | - |  |  | 1,694 |  |  | 1,860 |  |  | 28,578 |  |  | 32,132 |  |  | 4,404,494 |  |  | 4,436,626
Commercial construction |  |  | - |  |  | - |  |  | - |  |  | 3,336 |  |  | 3,336 |  |  | 549,560 |  |  | 552,896
Residential real Estate |  |  | 338 |  |  | - |  |  | 8,360 |  |  | 3,566 |  |  | 12,264 |  |  | 258,529 |  |  | 270,793
Consumer |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 2,093 |  |  | 2,093
Total |  | $ | 729 |  | $ | 2,111 |  | $ | 14,683 |  | $ | 65,959 |  | $ | 83,482 |  | $ | 6,504,414 |  | $ | 6,587,896
90 days or greater past due and still accruing category reflects 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
90 days or greater past due and still accruing category reflects purchased credit-deteriorated 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:
|  | September 30, 2021
|  |  |  | Commercial |  | Commercial |  | Residential |  |  |  |  |  |  |  |  |
|  | Commercial |  | real estate |  | construction |  | real estate |  | Consumer |  |  |  | Total
|  | (dollars in thousands)
ACL |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 14,630 |  | $ | 1,199 |  | $ | - |  | $ | 66 |  | $ | - |  |  |  |  | $ | 15,895
Collectively evaluated for impairment |  |  | 9,487 |  |  | 40,222 |  |  | 3,702 |  |  | 3,302 |  |  | 8 |  |  |  |  |  | 56,721
Acquired with deteriorated credit quality individually analyzed |  |  | 3,219 |  |  | 1,921 |  |  | - |  |  | 230 |  |  | - |  |  |  |  |  | 5,370
Total |  | $ | 27,336 |  | $ | 43,342 |  | $ | 3,702 |  | $ | 3,598 |  | $ | 8 |  |  |  |  | $ | 77,986
Gross loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 33,970 |  | $ | 50,642 |  | $ | 12,582 |  | $ | 6,017 |  | $ | - |  |  |  |  | $ | 103,211
Collectively evaluated for impairment |  |  | 1,286,337 |  |  | 4,380,004 |  |  | 540,314 |  |  | 260,536 |  |  | 2,093 |  |  |  |  |  | 6,469,284
Acquired with deteriorated credit quality individually analyzed |  |  | 5,181 |  |  | 5,980 |  |  | - |  |  | 4,240 |  |  | - |  |  |  |  |  | 15,401
Total |  | $ | 1,325,488 |  | $ | 4,436,626 |  | $ | 552,896 |  | $ | 270,793 |  | $ | 2,093 |  |  |  |  | $ | 6,587,896
|  | 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 and nine months ended September 30, 2021 is summarized in the table below. Day 1 effect of CECL presented in the nine-months table below reflect 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 September 30, 2021
|  |  |  |  |  | Commercial |  | Commercial |  | Residential |  |  |  |  |  |  |  |  |  |  |
|  | Commercial |  | real estate |  | construction |  | real estate |  | Consumer |  | Unallocated |  | Total
|  | (dollars in thousands)
Balance as of June 30, 2021 |  | $ | 25,567 |  |  | $ | 43,815 |  |  | $ | 4,927 |  | $ | 4,366 |  |  | $ | 9 |  |  | $ | - |  | $ | 78,684 |
Charge-offs |  |  | (254 | ) |  |  | (1,473 | ) |  |  | - |  |  | - |  |  |  | - |  |  |  | - |  |  | (1,727 | )
Recoveries |  |  | 1 |  |  |  | 85 |  |  |  | - |  |  | 20 |  |  |  | 7 |  |  |  | - |  |  | 113 |
(Reversal of) provision for credit losses - loans |  |  | 2,022 |  |  |  | 915 |  |  |  | (1,225 | ) |  | (788 | ) |  |  | (8 | ) |  |  | - |  |  | 916 |
Balance as of September 30, 2021 |  | $ | 27,336 |  |  | $ | 43,342 |  |  | $ | 3,702 |  | $ | 3,598 |  |  | $ | 8 |  |  | $ | - |  | $ | 77,986 |
|  | Nine Months Ended September 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 |  |  | (304 | ) |  |  | (1,628 | ) |  |  | - |  |  | (7 | ) |  |  | - |  |  |  | - |  |  | (1,939 | )
Recoveries |  |  | 74 |  |  |  | 85 |  |  |  | - |  |  | 20 |  |  |  | 9 |  |  |  | - |  |  | 188 |
Provision for (reversal of) credit losses - loans |  |  | 3,348 |  |  |  | (4,050 | ) |  |  | (3,531 | ) |  | (1,799 | ) |  |  | (14 | ) |  |  | - |  |  | (6,046 | )
Balance as of September 30, 2021 |  | $ | 27,336 |  |  | $ | 43,342 |  |  | $ | 3,702 |  | $ | 3,598 |  |  | $ | 8 |  |  | $ | - |  | $ | 77,986 |
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. 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 September 30, 2020
|  |  |  |  |  | Commercial |  | Commercial |  | Residential |  |  |  |  |  |  |  |  |  |  |
|  | Commercial |  | real estate |  | construction |  | real estate |  | Consumer |  | Unallocated |  | Total
|  | (dollars in thousands)
Balance as of June 30, 2020 |  | $ | 9,345 |  |  | $ | 22,655 |  |  | $ | 8,026 |  | $ | 1,690 |  |  | $ | 5 |  |  | $ | 27,003 |  | $ | 68,724 |
Charge-offs |  |  | (48 | ) |  |  | - |  |  |  | - |  |  | (209 | ) |  |  | - |  |  |  | - |  |  | (257 | )
Recoveries |  |  | - |  |  |  | 800 |  |  |  | - |  |  | - |  |  |  | - |  |  |  | - |  |  | 800 |
Provision for (reversal of) credit losses - loans |  |  | 14,861 |  |  |  | 16,623 |  |  |  | (1,044 | ) |  | 1,019 |  |  |  | (2 | ) |  |  | (26,457 | ) |  | 5,000 |
Balance as of September 30, 2020 |  | $ | 24,158 |  |  | $ | 40,078 |  |  | $ | 6,982 |  | $ | 2,500 |  |  | $ | 3 |  |  | $ | 546 |  | $ | 74,267 |
|  | Nine Months Ended September 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 |  |  | (552 | ) |  |  | - |  |  |  | - |  |  | (278 | ) |  |  | (3 | ) |  |  | - |  |  | (833 | )
Recoveries |  |  | 2 |  |  |  | 802 |  |  |  | - |  |  | - |  |  |  | 3 |  |  |  | - |  |  | 807 |
Provision for (reversal of) credit losses - loans |  |  | 16,359 |  |  |  | 18,423 |  |  |  | (322 | ) |  | 1,093 |  |  |  | - |  |  |  | 447 |  |  | 36,000 |
Balance as of September 30, 2020 |  | $ | 24,158 |  |  | $ | 40,078 |  |  | $ | 6,982 |  | $ | 2,500 |  |  | $ | 3 |  |  | $ | 546 |  | $ | 74,267 |
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 (“TDR”) 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, maturity extensions, 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 TDR remains on nonaccrual status for a period of nine 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 September 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 a TDR. As of September 30, 2021, TDRs totaled $79.7 million, of which $38.5 million were on nonaccrual status and $41.2 million were classified as accruing and 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 classified as accruing and were performing under their restructured terms. The Company has allocated $10.5 million and $4.4 million of specific allowance related to TDRs as of September 30, 2021 and September 30, 2020, respectively. The following table presents loans by class modified as TDRs that occurred during the nine months ended September 30, 2021:
|  |  |  | Pre-Modification Outstanding |  | Post-Modification Outstanding
|  | Number of Loans |  | Recorded Investment |  | Recorded Investment
Troubled debt restructurings: |  | (dollars in thousands)
Commercial |  |  | 4 |  | $ | 1,276 |  | $ | 1,276
Commercial real estate |  |  | 10 |  |  | 35,595 |  |  | 35,595
Commercial construction |  |  | 1 |  |  | 1,641 |  |  | 1,641
Residential real estate |  |  | 3 |  |  | 1,758 |  |  | 1,758
Total |  |  | 18 |  | $ | 40,270 |  | $ | 40,270
The loans modified as TDRs during the nine months ended September 30, 2021 included maturity extensions and interest rate reductions. There were no loans modified as TDRs during the nine months ended September 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 nine months ended September 30, 2021 and September 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 nine 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 September 30, 2021, the Bank had 10 deferred loans totaling $10.3 million, compared to 113 deferred loans totaling $207.0 million as of December 31, 2020 that are not considered TDRs. 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 September 30, 2021:
|  |  |  | Unpaid
|  | Number of Loans |  | Principal Balance
|  | (dollars in thousands)
Commercial |  |  | 4 |  | $ | 309
Commercial real estate |  |  | 6 |  |  | 9,988
Total |  |  | 10 |  | $ | 10,297
As of September 30, 2021, there were no deferred loans that were delinquent or on nonaccrual status. As of September 30, 2021, $5.5 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 nine months ended September 30, 2021 (dollars in thousands):
|  | Three Months Ended
|  | September 30, 2021
Balance as of beginning of period |  | $ | 2,380
Provision for (reversal of) credit losses - unfunded commitments |  |  | 184
Balance as of end of period |  | $ | 2,564
|  | Nine Months Ended
|  | September 30, 2021
Balance as of beginning of period |  | $ | -
Day 1 Effect of CECL |  |  | 2,833
Provision for (reversal of) credit losses - unfunded commitments |  |  | (269)
Balance as of end of period |  | $ | 2,564
Components of (Reversal of) Provision for Credit Losses The following table summarizes the provision for (reversal of) provision for credit losses for the three and nine months ended September 30, 2021 (dollars in thousands):
|  | Three Months Ended September 30, 2021 |  | Nine Months Ended September 30, 2021
Provision for (reversal of) credit losses - loans |  | $ | 916 |  | $ | (6,046)
Provision for (reversal of) credit losses - unfunded commitments |  |  | 184 |  |  | (269)
Provision for (reversal of) credit losses |  | $ | 1,100 |  | $ | (6,315)

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