Loans receivable - The following table sets forth the composition of the Company’s loan portfolio, including net deferred loan fees, at September 30, 2019 and December 31, 2018:

	September 30, 2019			December 31, 2018
	(dollars in thousands)
Commercial	$	1,113,743		$	988,758
Commercial real estate		3,030,816			2,778,167
Commercial construction		646,172			465,389
Residential real estate		322,307			309,991
Consumer		2,435			2,594
Gross loans		5,115,473			4,544,899
Net deferred loan fees		(5,002	)		(3,807	)
Total loans receivable	$	5,110,471		$	4,541,092

At September 30, 2019 and December 31, 2018, loan balances of approximately $2.5 billion and $2.3 billion, respectively, were pledged to secure borrowings from the FHLB of New York.

Loans held-for-sale - The following table sets forth the composition of the Company's loans held-for-sale portfolio at September 30, 2019 and December 31, 2018:

	September 30, 2019		December 31, 2018
		(dollars in thousands)
Commercial	$	2,294	$	-
Commercial real estate		29,353		-
Residential real estate		1,598		-
Total carrying amount	$	33,245	$	-

Purchased Credit-Impaired Loans - The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected. The recorded investment in those loans is as follows at September 30, 2019 and December 31, 2018.

	September 30, 2019		December 31, 2018
		(dollars in thousands)
Commercial	$	5,459	$	2,509
Commercial real estate		1,123		-
	$	6,582	$	2,509

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during either the three and nine months ended September 30, 2019 and September 30, 2018. There were no reversals from the allowance for loan losses during the three and nine months ended September 30, 2019 and September 30, 2018.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 6. Loans and the Allowance for Loan Losses – (continued)

The following table presents the accretable yield, or income expected to be collected, on the purchased credit-impaired loans for three and nine months ended September 30, 2019 and September 30, 2018:

Three Months

Ended

September 30, 2019

Three Months

Ended

September 30, 2018

(dollars in thousands)

Balance at June 30

$

1,637

$

1,259

Accretion of income

(167

)

(63

)

Balance at September 30

$

1,470

$

1,196

Nine Months

Ended

September 30, 2019

Nine Months

Ended

September 30, 2018

(dollars in thousands)

Balance at January 1

$

1,134

$

1,387

New loans purchased

1,286

-

Accretion of income

(950

)

(191

)

Balance at September 30

$

1,470

$

1,196

Loans Receivable on Nonaccrual Status - The following tables present nonaccrual loans included in loans receivable by loan class as of September 30, 2019 and December 31, 2018:

September 30,

2019

December 31,

2018

(dollars in thousands)

Commercial

$

33,781

$

29,340

Commercial real estate

7,529

15,135

Commercial construction

7,101

2,934

Residential real estate

2,910

4,446

Total nonaccrual loans

$

51,321

$

51,855

Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and loans individually evaluated for impairment.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 6. Loans and the Allowance for Loan Losses – (continued)

Credit Quality Indicators - The Company continuously monitors the credit quality of its loans receivable. In addition to its internal monitoring, the Company utilizes the services of a third-party loan review firm to periodically validate the credit quality of its loans receivable on a sample basis. Credit quality is monitored by reviewing certain credit quality indicators. Assets classified “Pass” are deemed to possess average to superior credit quality, requiring no more than normal attention. Assets classified as “Special Mention” have generally acceptable credit quality yet possess higher risk characteristics/circumstances than satisfactory assets. Such conditions include strained liquidity, slow pay, stale financial statements, or other conditions that require more stringent attention from the lending staff. These conditions, if not corrected, may weaken the loan quality or inadequately protect the Company’s credit position at some future date. Assets are classified “Substandard” if the asset has a well-defined weakness that requires management’s attention to a greater degree than for loans classified special mention. Such weakness, if left uncorrected, could possibly result in the compromised ability of the loan to perform to contractual requirements. An asset is classified as “Doubtful” if it is inadequately protected by the net worth and/or paying capacity of the obligor or of the collateral, if any, that secures the obligation. Assets classified as doubtful include assets for which there is a “distinct possibility” that a degree of loss will occur if the inadequacies are not corrected. All loans past due 90 days or greater and all impaired loans are included in the appropriate category below. The following table presents information about the loan credit quality by loan class of gross loans (which exclude net deferred fees) at September 30, 2019 and December 31, 2018:

September 30, 2019

Pass

Special

Mention

Substandard

Doubtful

Total

(dollars in thousands)

Commercial

$

1,040,210

$

23,219

$

50,314

$

-

$

1,113,743

Commercial real estate

3,007,226

6,418

17,172

-

3,030,816

Commercial construction

629,778

1,918

14,475

-

646,172

Residential real estate

318,754

-

3,553

-

322,307

Consumer

2,434

-

1

-

2,435

Gross loans

$

4,998,403

$

31,555

$

85,515

$

-

$

5,115,473

December 31, 2018

Pass

Special

Mention

Substandard

Doubtful

Total

(dollars in thousands)

Commercial

$

951,610

$

3,371

$

33,777

$

-

$

988,758

Commercial real estate

2,742,989

12,574

22,604

-

2,778,167

Commercial construction

453,598

5,515

6,276

-

465,389

Residential real estate

305,414

-

4,577

-

309,991

Consumer

2,576

-

18

-

2,594

Gross loans

$

4,456,187

$

21,460

$

67,252

$

-

$

4,544,899

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 6. Loans and the Allowance for Loan Losses – (continued)

The following table provides an analysis of the impaired loans by segment as of September 30, 2019 and December 31, 2018:

September 30, 2019

Recorded

Investment

Unpaid

Principal

Balance

Related

Allowance

No related allowance recorded

(dollars in thousands)

Commercial

$

41,030

$

87,716

Commercial real estate

12,136

12,301

Commercial construction

6,079

6,085

Residential real estate

1,533

1,897

Total (no related allowance)

$

60,778

$

107,999

With an allowance recorded

Commercial real estate

$

388

$

388

$

23

Commercial construction

6,467

6,467

1,339

Residential real estate

264

264

24

Total (with allowance)

$

7,119

$

7,119

$

1,386

Total

Commercial

$

41,030

$

87,716

$

-

Commercial real estate

12,524

12,689

23

Commercial construction

12,546

12,552

1,339

Residential real estate

1,797

2,161

24

Total

$

67,897

$

115,118

$

1,386

December 31, 2018

Recorded

Investment

Unpaid

Principal

Balance

Related

Allowance

No related allowance recorded

(dollars in thousands)

Commercial

$

29,896

$

83,596

Commercial real estate

16,839

17,935

Commercial construction

9,240

9,240

Residential real estate

2,209

2,521

Total (no related allowance)

$

58,184

$

113,292

With an allowance recorded

Commercial real estate

$

1,488

$

1,488

$

7

Residential real estate

260

266

29

$

1,748

$

1,754

$

36

Total

Commercial

$

29,896

$

83,596

$

-

Commercial real estate

18,327

19,423

7

Commercial construction

9,240

9,240

-

Residential real estate

2,469

2,787

29

Total

$

59,932

$

115,046

$

36

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 6. Loans and the Allowance for Loan Losses – (continued)

The following table provides an analysis related to the average recorded investment and interest income recognized on impaired loans by segment as of and for the three and nine months ended September 30, 2019 and 2018:

Three Months Ended September 30,

Nine Months Ended September 30,

2019

2018

2019

2018

Average Recorded Investment

Interest Income Recognized

Average

Recorded

Investment

Interest

Income

Recognized

Average

Recorded

Investment

Interest

Income

Recognized

Average

Recorded

Investment

Interest

Income

Recognized

(dollars in thousands)

Impaired loans (no allowance)

Commercial

$

41,332

$

570

$

31,769

$

36

$

41,731

$

733

$

39,132

$

102

Commercial real estate

12,178

79

21,557

105

12,213

221

21,714

475

Commercial construction

6,044

58

10,297

92

6,047

138

11,718

387

Residential real estate

1,552

-

2,249

-

1,579

19

2,304

-

Total

$

61,106

$

707

$

65,872

$

233

$

61,570

$

1,111

$

74,868

$

964

Impaired loans (allowance):

Commercial real estate

$

392

$

-

$

8,534

$

11

$

393

$

-

$

8,544

$

34

Commercial construction

6,439

220

-

-

6,378

220

-

-

Residential real estate

252

9

264

-

255

9

267

-

Total

$

7,083

$

936

$

8,798

$

11

$

7,026

$

229

$

8,811

$

34

Total impaired loans:

Commercial

$

41,332

$

570

$

31,769

$

36

$

41,731

$

733

$

39,132

$

102

Commercial real estate

12,570

79

30,091

116

12,606

221

30,258

509

Commercial construction

12,483

278

10,297

92

12,425

358

11,718

387

Residential real estate

1,804

9

2,513

-

1,834

28

2,571

-

Total

$

68,189

$

936

$

74,760

$

244

$

68,596

$

1,340

$

83,679

$

998

Included in impaired loans at September 30, 2019 and December 31, 2018 are loans that are deemed troubled debt restructurings. The recorded investment in loans include accrued interest receivable and other capitalized costs such as real estate taxes paid on behalf of the borrower and loan origination fees, net, when applicable. Cash basis interest and interest income recognized on accrual basis approximate each other.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 6. Loans and the Allowance for Loan Losses – (continued)

Aging Analysis - The following table provides an analysis of the aging of the loans by class, excluding net deferred fees, that are past due at September 30, 2019 and December 31, 2018:

September 30, 2019

30-59 Days

Past Due

60-89 Days

Past Due

90 Days or Greater Past Due and Still Accruing

Nonaccrual

Total Past

Due and

Nonaccrual

Current

Gross

Loans

(dollars in thousands)

Commercial

$

5,812

$

1,438

$

3,098

$

33,781

$

44,129

$

1,069,614

$

1,113,743

Commercial real estate

-

689

-

7,529

8,218

3,022,598

3,030,816

Commercial construction

-

-

-

7,101

7,101

639,071

646,172

Residential real estate

698

-

-

2,910

3,608

318,699

322,307

Consumer

-

-

-

-

-

2,435

2,435

Total

$

6,510

$

2,127

$

3,098

$

51,321

$

63,056

$

5,052,417

$

5,115,473

Included in the 90 days or greater past due and still accruing category as of September 30, 2019 are purchased credit-impaired loans, net of fair value marks, which accretes income per the valuation at date of acquisition.

December 31, 2018

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

$

1,673

$

-

$

1,647

$

29,340

$

32,660

$

956,098

$

988,758

Commercial real estate

6,162

1,840

-

15,135

23,137

2,755,030

2,778,167

Commercial construction

2,496

564

-

2,934

5,994

459,395

465,389

Residential real estate

3,455

119

-

4,446

8,020

301,971

309,991

Consumer

-

-

-

-

-

2,594

2,594

Total

$

13,786

$

2,523

$

1,647

$

51,855

$

69,811

$

4,475,088

$

4,544,899

Included in the 90 days or greater past due and still accruing category as of December 31, 2018 are purchased credit-impaired loans, net of fair value marks, which accretes income per the valuation at date of acquisition.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 6. Loans and the Allowance for Loan Losses – (continued)

The following tables detail, at the period-end presented, the amount of gross loans (excluding loans held-for-sale) that are evaluated individually, and collectively, for impairment, those acquired with deteriorated quality, and the related portion of the allowance for loan losses that are allocated to each loan portfolio segment:

September 30, 2019

Commercial

Commercial real estate

Commercial construction

Residential real estate

Consumer

Unallocated

Total

(dollars in thousands)

ALLL

Individually evaluated for impairment

$

-

$

23

$

1,339

$

24

$

-

$

-

$

1,386

Collectively evaluated for impairment

8,125

19,987

5,836

1,737

4

496

36,185

Acquired portfolio

200

1,000

-

-

-

-

1,200

Acquired with deteriorated credit quality

-

-

-

-

-

-

-

Total

$

8,325

$

21,010

$

7,175

$

1,761

$

4

$

496

$

38,771

Gross loans

Individually evaluated for impairment

$

41,030

$

12,524

$

12,545

$

1,797

$-

$

67,896

Collectively evaluated for impairment

977,895

2,645,903

597,352

276,457

2,162

4,499,769

Acquired portfolio

89,359

371,266

36,275

44,053

273

541,226

Acquired with deteriorated credit quality

5,459

1,123

-

-

-

6,582

Total

$

1,113,743

$

3,030,816

$

646,172

$

322,307

$

2,435

$

5,115,473

December 31, 2018

Commercial

Commercial real estate

Commercial construction

Residential real estate

Consumer

Unallocated

Total

(dollars in thousands)

Allowance for loan losses

Individually evaluated for impairment

$

-

$

7

$

-

$

29

$

-

$

-

$

36

Collectively evaluated for impairment

9,675

17,840

4,519

1,237

2

445

33,718

Acquired portfolio

200

1,000

-

-

-

-

1,200

Acquired with deteriorated credit quality

-

-

-

-

-

-

-

Total

$

9,875

$

18,847

$

4,519

$

1,266

$

2

$

445

$

34,954

Gross loans

Individually evaluated for impairment

$

29,896

$

18,327

$

9,240

$

2,469

$

-

$

59,932

Collectively evaluated for impairment

949,129

2,500,132

456,149

263,449

2,484

4,171,343

Acquired portfolio

7,224

259,708

-

44,073

110

311,115

Acquired with deteriorated credit quality

2,509

-

-

-

-

2,509

Total

$

988,758

$

2,778,167

$

465,389

$

309,991

$

2,594

$

4,544,899

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 6. Loans and the Allowance for Loan Losses – (continued)

The Company’s allowance for loan losses is analyzed quarterly. Many factors are considered, including growth in the portfolio, delinquencies, nonaccrual loan levels, and other factors inherent in the extension of credit. There have been no material changes to the allowance for loan losses (“ALLL”) methodology as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. A summary of the activity in the ALLL is as follows:

Three Months Ended September 30, 2019

Commercial

Commercial real estate

Commercial construction

Residential real estate

Consumer

Unallocated

Total

(dollars in thousands)

Balance at June 30, 2019

$

8,721

$

21,485

$

5,542

$

1,208

$

2

$

740

$

37,698

Charge-offs

-

(387

)

-

(557

)

(20

)

-

(964

)

Recoveries

28

-

-

-

9

-

37

Provision

(424

)

(88

)

1,633

1,110

13

(244

)

2,000

Balance at September 30, 2019

$

8,325

$

21,010

$

7,175

$

1,761

$

4

$

496

$

38,771

Three Months Ended September 30, 2018

Commercial

Commercial real estate

Commercial construction

Residential real estate

Consumer

Unallocated

Total

(dollars in thousands)

Balance at June 30, 2018

$

8,960

$

18,221

$

4,812

$

1,167

$

3

$

431

$

33,594

Charge-offs

-

-

-

-

(6

)

-

(6

)

Recoveries

56

-

-

-

5

-

61

Provision for loan losses

933

7

(22

)

48

1

133

1,100

Balance at September 30, 2018

$

9,949

$

18,228

$

4,790

$

1,215

$

3

$

564

$

34,749

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 6. Loans and the Allowance for Loan Losses – (continued)

Nine Months Ended September 30, 2019

Commercial

Commercial real estate

Commercial construction

Residential real estate

Consumer

Unallocated

Total

(dollars in thousands)

Balance at December 31, 2018

$

9,875

$

18,847

$

4,519

$

1,266

$

2

$

445

$

34,954

Charge-offs

-

(3,469

)

-

(557

)

(20

)

-

(4,046

)

Recoveries

214

30

-

3

16

-

263

Provision

(1,764)

5,602

2,656

1,049

6

51

7,600

Balance at September 30, 2019

$

8,325

$

21,010

$

7,175

$

1,761

$

4

$

496

$

38,771

Nine Months Ended September 30, 2018

Commercial

Commercial real estate

Commercial construction

Residential real estate

Consumer

Unallocated

Total

(dollars in thousands)

Balance at December 31, 2017

$

8,233

$

17,112

$

4,747

$

1,050

$

1

$

605

$

31,748

Charge-offs

(17,066

)

-

-

(18

)

(7

)

-

(17,091

)

Recoveries

87

-

-

-

5

-

92

Provision

18,695

1,116

43

183

4

(41

)

20,000

Balance at September 30, 2018

$

9,949

$

18,228

$

4,790

$

1,215

$

3

$

564

$

34,749

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 6. Loans and the Allowance for Loan Losses – (continued)

Troubled Debt Restructurings

Loans are considered to have been modified in a troubled debt restructuring (“TDRs”) when 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, longer amortization of principal payments, maturity extension, 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.

At September 30, 2019, there were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status or were contractually past due 90 days or greater and still accruing interest, or whose terms have been modified in troubled debt restructurings.

As of September 30, 2019, TDRs totaled $51.5 million, of which $31.8 million were on nonaccrual status and $19.7 million were performing under their restructured terms. As of December 31, 2018, TDRs totaled $34.5 million, of which $23.3 million were on nonaccrual status and $11.2 million were performing under their restructured terms. The Company has allocated $1.4 million and $0.1 million of specific allowance as of September 30, 2019 and September 30, 2018, respectively. There were no charge-offs in connection with a loan modification at the time of modification during the three and nine months ended September 30, 2019. There were no TDRs for which there was a payment default within twelve months following the modification during the three and nine months ended September 30, 2019.

The following table presents loans by class modified as TDRs that occurred during the nine months ended September 30, 2019:

Number of

Loans

Pre-Modification

Outstanding

Recorded

Investment

Post-Modification

Outstanding

Recorded

Investment

Troubled debt restructurings:

(dollars in thousands)

Commercial

8

$

13,753

$

13,753

Commercial real estate

2

2,635

2,635

Commercial construction

3

5,630

5,630

Total

13

$

22,018

$

22,018

These 13 loan modifications included were maturity extensions.

The following table presents loans by class modified as TDRs that occurred during the nine months ended September 30, 2018:

Number of

Loans

Pre-Modification

Outstanding

Recorded

Investment

Post-Modification

Outstanding

Recorded

Investment

TDRs

(dollars in thousands)

Commercial

31

$

15,737

$

15,737

Commercial real estate

2

209

209

Commercial construction

2

1,839

1,839

Residential real estate

2

454

454

Total

37

$

18,239

$

18,239

Included in the commercial loan segment of the troubled debt restructurings are 27 taxi medallion loans totaling $11.2 million. All 27 taxi medallion loans included above were on nonaccrual status prior to modification, and remain on nonaccrual status post-modification. All loan modifications during the nine months ended September 30, 2018 included interest rate reductions and maturity extensions.