Loans Receivable: The following table sets forth the composition of the Company’s loan portfolio segments, including net deferred fees, as of December 31, 2019 and December 31, 2018:

At December 31, 2019 and 2018, loan balances of approximately $2.5 billion and $2.3 billion, respectively, were pledged to secure borrowings from the Federal Home Loan Bank.

The loan segments in the above table have unique risk characteristics with respect to credit quality:

The repayment of commercial loans is generally dependent on the creditworthiness and cash flow of borrowers, and if applicable, guarantors, which may be negatively impacted by adverse economic conditions. While the majority of these loans are secured, collateral type, marketing, coverage, valuation and monitoring is not as uniform as in other portfolio classes and recovery from liquidation of such collateral may be subject to greater variability.

Payment on commercial mortgages is driven principally by operating results of the managed properties or underlying business and secondarily by the sale or refinance of such properties. Both primary and secondary sources of repayment, and value of the properties in liquidation, may be affected to a greater extent by adverse conditions in the real estate market or the economy in general.

Properties underlying construction, land and land development loans often do not generate sufficient cash flows to service debt and thus repayment is subject to ability of the borrower and, if applicable, guarantors, to complete development or construction of the property and carry the project, often for extended periods of time. As a result, the performance of these loans is contingent upon future events whose probability at the time of origination is uncertain.

The ability of borrowers to service debt in the residential and consumer loan portfolios is generally subject to personal income which may be impacted by general economic conditions, such as increased unemployment levels. These loans are predominately collateralized by first and/or second liens on single family properties. If a borrower cannot maintain the loan, the Company’s ability to recover against the collateral in sufficient amount and in a timely manner may be significantly influenced by market, legal and regulatory conditions.

Loans Held-For-Sale: The following table presents loans held-for-sale by loan segment as of December 31, 2019 and December 31, 2018:

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - Loans and the Allowance for Loan Losses – (continued)

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 carrying amount of those loans is as follows as of December 31, 2019 and December 31, 2018.

	2019		2018
	(dollars in thousands)
Commercial	$	5,452	$	2,509
Commercial real estate		1,101		-
Total carrying amount	$	6,553	$	2,509

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses for the years ended December 31, 2019 and 2018. No allowances for loan losses were reversed during 2019 and 2018.

The accretable yield, or income expected to be collected, on the purchased credit-impaired loans above is as follows as of December 31, 2019 and December 31, 2018.

	2019		2018		2017
	(dollars in thousands)
Balance at January 1,	$	1,134	$	1,387		2,860
New loans purchased		1,286		-		-
Accretion of income		(1,119)		(253)		(1,473	)
Balance at December 31,	$	1,301	$	1,134	$	1,387

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

	2019		2018
	(dollars in thousands)
Commercial	$	31,455	$	29,340
Commercial real estate		8,338		15,135
Commercial construction		6,773		2,934
Residential real estate		2,915		4,446
Consumer		-		-
Total loans receivable on nonaccrual status	$	49,481	$	51,855

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

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - 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 December 31, 2019 and December 31, 2018:

	December 31, 2019
	Pass		Special Mention		Substandard		Doubtful		Total
	(dollars in thousands)
Commercial	$	1,059,852	$	22,159	$	47,650	$	-	$	1,129,661
Commercial real estate		3,014,956		10,301		16,702		-		3,041,959
Commercial construction		604,298		4,609		14,419		-		623,326
Residential real estate		316,476		-		3,544		-		320,020
Consumer		3,328		-		-		-		3,328
Gross loans	$	4,998,910	$	37,069	$	82,315	$	-	$	5,118,294

	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

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - Loans and the Allowance for Loan Losses – (continued)

The following table provides an analysis of the impaired loans by class as of and for the years ended December 31, 2019, 2018 and 2017.

	December 31, 2019
No Related Allowance Recorded	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
Commercial	$	37,984	$	83,225			$	39,801	$	815
Commercial real estate		15,249		15,467				15,421		428
Commercial construction		8,649		8,649				8,394		332
Residential real estate		1,311		1,463				1,311		-
Consumer		-		-				-		-
Total	$	63,193	$	108,804			$	64,927	$	1,575

With An Allowance Recorded
Commercial construction	$	3,530		3,530		1,244		3,530		91
Residential real estate		263		263		23		257		11
Total	$	3,793	$	3,793		1,267	$	3,787	$	102

Total
Commercial	$	37,984	$	83,225	$	-	$	39,801	$	815
Commercial real estate		15,249		15,467		-		15,421		428
Commercial construction		12,179		12,179		1,244		11,924		423
Residential real estate		1,574		1,726		23		1,568		11
Consumer		-		-		-		-		-
Total (including related allowance)	$	66,986	$	112,597	$	1,267	$	68,714	$	1,677

	December 31, 2018
No Related Allowance Recorded	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
Commercial	$	29,896	$	83,596			$	31,721	$	66
Commercial real estate		16,839		17,935				17,676		149
Commercial construction		9,240		9,240				11,215		493
Residential real estate		2,209		2,521				2,284		-
Consumer		-		-				-		-
Total	$	58,184	$	113,292			$	62,896	$	708

With An Allowance Recorded
Commercial real estate	$	1,488		1,488		7		1,511		46
Residential real estate		260		266		29		265		-
Total	$	1,748	$	1,754		36	$	1,776	$	46

Total
Commercial	$	29,896	$	83,596	$	-	$	31,721	$	66
Commercial real estate		18,327		19,423		7		19,187		195
Commercial construction		9,240		9,240		-		11,215		493
Residential real estate		2,469		2,787		29		2,549		-
Consumer		-		-		-		-		-
Total (including related allowance)	$	59,932	$	115,046	$	36	$	64,672	$	754

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - Loans and the Allowance for Loan Losses – (continued)

	December 31, 2017
No Related Allowance Recorded	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
Commercial	$	49,761	$	101,066			$	10,552	$	161
Commercial real estate		23,905		23,976				24,099		585
Commercial construction		6,662		6,662				5,509		322
Residential real estate		3,203		3,442				3,255		-
Consumer		-		-				-		-
Total	$	83,531	$	135,146			$	43,415	$	1,068

With An Allowance Recorded
Commercial real estate	$	1,133	$	1,133	$	39	$	1,152	$	51

Total
Commercial	$	49,761	$	101,066	$	-	$	10,552	$	161
Commercial real estate		25,038		25,109		39		25,251		636
Commercial construction		6,662		6,662		-		5,509		322
Residential real estate		3,203		3,442		-		3,255		-
Consumer		-		-		-		-		-
Total (including related allowance)	$	84,664	$	136,279	$	39	$	44,567	$	1,119

Included in impaired loans at December 31, 2019 and December 31, 2018 are loans that are deemed troubled debt restructurings. Cash basis interest and interest income recognized on accrual basis approximate each other.

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - 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 December 31, 2019 and December 31, 2018 (dollars in thousands):

	December 31, 2019

	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due and Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Current		Total Loans Receivable
Commercial	$	239	$	-	$	3,107	$	31,455	$	34,801	$	1,094,860	$	1,129,661
Commercial real estate		1,980		490		-		8,338		10,808		3,031,151		3,041,959
Commercial construction		-		-		-		6,773		6,773		616,553		623,326
Residential real estate		3,357		143		-		2,915		6,415		313,605		320,020
Consumer		-		-		-		-		-		3,328		3,328
Total	$	5,576	$	633	$	3,107	$	49,481	$	58,797	$	5,059,497	$	5,118,294

Included in the 90 days or greater past due and still accruing category as of December 31, 2019 are purchased credit-impaired loans, net of fair value marks, which 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		Total Loans Receivable
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.

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - 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:

	December 31, 2019
	Commercial		Commercial real estate		Commercial construction		Residential real estate		Consumer		Unallocated		Total
	(dollars in thousands)
Allowance for loan losses
Individually evaluated for impairment	$	-	$	-	$	1,244	$	23	$	-	$	-	$	1,267
Collectively evaluated for impairment		8,309		19,967		5,744		1,662		3		99		35,784
Acquired portfolio		40		886		316		-		-		-		1,242
Acquired with deteriorated credit quality		-		-		-		-		-		-		-
Total	$	8,349	$	20,853	$	7,304	$	1,685	$	3	$	99	$	38,293

Gross loans
Individually evaluated for impairment	$	37,984	$	15,249	$	12,179	$	1,574	$	-			$	66,986
Collectively evaluated for impairment		1,011,708		2,669,999		578,620		276,177		3,064				4,539,568
Acquired portfolio		74,517		355,610		32,527		42,269		264				505,187
Acquired with deteriorated credit quality		5,452		1,101		-		-		-				6,553
Total	$	1,129,661	$	3,041,959	$	623,326	$	320,020	$	3,328			$	5,118,294

	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

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - Loans and the Allowance for Loan Losses – (continued)

The Company’s allowance for loan losses is analyzed quarterly. Many factors are considered, including growth in the portfolio, delinquencies, nonaccrual loan levels, and other factors inherent in the extension of credit.

A summary of the activity in the allowance for loan losses by loan segment is as follows:

	Commercial		Commercial real estate		Commercial construction		Residential real estate		Consumer		Unallocated		Total
	(dollars in thousands)
Balance at January 1, 2019	$	9,875	$	18,847	$	4,519	$	1,266	$	2	$	445	$	34,954
Loan charge-offs		(1,029)		(3,470)		-		(557)		(20)		-		(5,076)
Recoveries		265		30		-		3		17		-		315

Provision for loan losses		(762)		5,446		2,785		973		4		(346)		8,100
Balance at December 31, 2019	$	8,349	$	20,853	$	7,304	$	1,685	$	3	$	99	$	38,293

	Commercial		Commercial real estate		Commercial construction		Residential real estate		Consumer		Unallocated		Total
	(dollars in thousands)
Balance at January 1, 2018	$	8,233	$	17,112	$	4,747	$	1,050	$	1	$	605	$	31,748
Loan charge-offs		(17,066)		(915)		-		(23)		(7)		-		(18,011)
Recoveries		109		-		-		2		6		-		117

Provision for loan losses		18,599		2,650		(228)		237		2		(160)		21,100
Balance at December 31, 2018	$	9,875	$	18,847	$	4,519	$	1,266	$	2	$	445	$	34,954

	Commercial		Commercial real estate		Commercial construction		Residential real estate		Consumer		Unallocated		Total
	(dollars in thousands)
Balance at January 1, 2017	$	6,632	$	12,583	$	4,789	$	958	$	3	$	779	$	25,744
Loan charge-offs		(70)		(155)		-		-		(14)		-		(239)
Recoveries		178		51		-		12		2		-		243

Provision for loan losses		1,493		4,633		(42)		80		10		(174)		6,000
Balance at December 31, 2017	$	8,233	$	17,112	$	4,747	$	1,050	$	1	$	605	$	31,748

For the year ended December 31, 2018, the loan charge-offs within the commercial loan segment were primarily made up of $17.0 million in charge-offs related to the taxi medallion portfolio.

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, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a nonaccrual loan that has been modified in a troubled debt restructuring remains on nonaccrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on nonaccrual status.

At December 31, 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.

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - Loans and the Allowance for Loan Losses – (continued)

As of December 31, 2019, TDRs totaled $52.0 million, of which $30.6 million were on nonaccrual status and $21.4 million were performing under their restructured terms. 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 $1.3 million and $-0- million of specific allowance as of December 31, 2019 and December 31, 2018, respectively. There were no charge-offs in connection with a loan modification at the time of modification during the year ended December 31, 2019, 2018 and 2017. There were no TDRs for which there was a payment default within twelve months following the modification during the year ended December 31, 2019.

The following table presents loans by class modified as TDRs that occurred during the year ended December 31, 2019:

	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(dollars in thousands)
Troubled debt restructurings:
Commercial		11	$	14,558	$	14,558
Commercial real estate		3		5,863		5,863
Commercial construction		3		5,630		5,630

Total		17	$	26,051	$	26,051

Included in the commercial loan segment of the troubled debt restructurings is one taxi medallion loan totaling $0.3 million. This taxi medallion loan was on nonaccrual status prior to modification, and will remain on nonaccrual status post-modification. All loan modifications during the year ended December 31, 2019 included interest rate reductions and/or maturity extensions.

The following table presents loans by class modified as TDRs that occurred during the year ended December 31, 2018:

	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(dollars in thousands)
TDRs
Commercial		32	$	16,017	$	16,017
Commercial real estate		3		1,422		1,422
Commercial construction		3		4,773		4,773
Residential real estate		2		454		454

Total		40	$	22,666	$	22,666

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 year ended December 31, 2018 included interest rate reductions and/or maturity extensions.

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - Loans and the Allowance for Loan Losses – (continued)

The following table presents loans by class modified as TDRs that occurred during the year ended December 31, 2017:

	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(dollars in thousands)
TDRs
Commercial		1	$	692	$	692
Commercial real estate		2		3,007		3,007
Commercial construction		2		6,662		6,662
Residential real estate		1		17		17
Consumer		-		-		-

Total		6	$	10,378	$	10,378