Loans Receivable: The following table sets forth the composition of the Company’s loan portfolio segments, including net deferred fees, as of December 31, 2021 and December 31, 2020:

As of December 31, 2021, and 2020, loan balances of approximately $2.5 billion and $2.7 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.

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 – Loans and the Allowance for Credit Losses – (continued)

Loans Held-For-Sale: The following table presents loans held-for-sale by loan segment as of December 31, 2021 and December 31, 2020:

	2021		2020
	(dollars in thousands)
Commercial	$	-	$	-
Commercial real estate		-		1,990
Residential mortgage		250		2,720
Total carrying amount	$	250	$	4,710

Loans Receivable on Nonaccrual Status - The following tables present nonaccrual loans with an allowance for credit loss (“ACL”) as of December 31, 2021 and nonaccrual loans without an ACL as of December 31, 2021:

	December 31, 2021
	Nonaccrual loans with ACL		Nonaccrual loans without ACL		Total Nonaccrual loans
	(dollars in thousands)
Commercial	$	28,746	$	1,316	$	30,062
Commercial real estate		15,362		10,031		25,393
Commercial construction		-		3,150		3,150
Residential real estate		1,239		1,856		3,095
Consumer		-		-		-
Total	$	45,347	$	16,353	$	61,700

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.

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 – Loans and the Allowance for Credit Losses – (continued)

Credit Quality Indicators - The Company continuously monitors the credit quality of its loans receivable. In addition to its internal monitoring, the Company utilizes the services of a third-party loan review firm to periodically validate the credit quality of its loans receivable on a sample basis. Credit quality is monitored by reviewing certain credit quality indicators. Assets classified 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.

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 December 31, 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
	2021		2020		2019		2018		2017		Prior			Loans		Gross Loans
Commercial
Pass	$	403,203	$	58,534	$	54,485	$	60,409	$	95,727	$	86,556		$	471,588	$	1,230,502
Special mention		-		-		-		-		1		4,045			4,266		8,312
Substandard		170		-		1,842		13,298		9,740		21,024			14,540		60,614
Doubtful		-		-		-		-		-		-			-		-
Total Commercial	$	403,373	$	58,534	$	56,327	$	73,707	$	105,468	$	111,625		$	490,394	$	1,299,428

Commercial Real Estate
Pass	$	1,692,098	$	533,315	$	420,995	$	452,262	$	497,065	$	842,244		$	170,721	$	4,608,700
Special mention		-		-		-		-		5,142		50,438			6,601		62,181
Substandard		1,968		9,039		4,006		20,624		-		26,108			8,964		70,709
Doubtful		-		-		-		-		-		-			-		-
Total Commercial Real Estate	$	1,694,066	$	542,354	$	425,001	$	472,886	$	502,207	$	918,790		$	186,286	$	4,741,590

Commercial Construction
Pass	$	8,018	$	7,370	$	12,625	$	2,600	$	2,339	$	-		$	490,119		523,071
Special mention		-		-		-		-		350		-			1,443		1,793
Substandard		-		-		-		-		-		-			15,314		15,314
Doubtful		-		-		-		-		-		-			-		-
Total Commercial Construction	$	8,018	$	7,370	$	12,625	$	2,600	$	2,689	$	-		$	506,876	$	540,178

Residential Real Estate
Pass	$	27,081	$	29,539	$	23,611	$	25,070	$	28,701	$	66,249		$	44,221	$	244,472
Special mention		-		-		-		-		-		-			-		-
Substandard		-		-		-		-		-		7,262			3,535		10,797
Doubtful		-		-		-		-		-		-			-		-
Total Residential Real Estate	$	27,081	$	29,539	$	23,611	$	25,070	$	28,701	$	73,511		$	47,756	$	255,269

Consumer
Pass	$	1,594	$	85	$	39	$	21	$	28	$	(4	)	$	123	$	1,886
Special mention		-		-		-		-		-		-			-		-
Substandard		-		-		-		-		-		-			-		-
Doubtful		-		-		-		-		-		-			-		-
Total Consumer	$	1,594	$	85	$	39	$	21	$	28	$	(4	)	$	123	$	1,886

Total
Pass	$	2,131,994	$	628,843	$	511,755	$	540,362	$	623,860	$	995,045		$	1,176,772	$	6,608,631
Special mention		-		-		-		-		5,493		54,483			12,310		72,286
Substandard		2,138		9,039		5,848		33,922		9,740		54,394			42,353		157,434
Doubtful		-		-		-		-		-		-			-		-
Grand Total	$	2,134,132	$	637,882	$	517,603	$	574,284	$	639,093	$	1,103,922		$	1,231,435	$	6,838,351

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 – 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 December 31, 2021:

	December 31, 2021
	Real Estate		Other		Total
	(dollars in thousands)
Commercial	$	6,385	$	26,182	$	32,567
Commercial real estate		55,244		-		55,244
Commercial construction		13,196		-		13,196
Residential real estate		8,856		-		8,856
Consumer		-		-		-
Total	$	83,681	$	26,182	$	109,863

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 – 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 twelve months ended December 31, 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
No Related Allowance Recorded	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
Commercial	$	11,325	$	11,835		-	$	11,627	$	203
Commercial real estate		13,105		13,449		-		13,215		287
Commercial construction		24,284		24,907		-		21,279		377
Residential real estate		5,378		5,723		-		4,733		104
Consumer		-		-		-		-		-
Total	$	54,092	$	55,914		-	$	50,854	$	971

With An Allowance Recorded
Commercial	$	23,736	$	69,122	$	12,985	$	23,625	$	-
Commercial real estate		2,722		2,722		1,329		2,722		-
Total	$	26,458	$	71,844	$	14,314	$	26,347	$	-

Total
Commercial	$	35,061	$	80,957	$	12,985	$	35,252	$	203
Commercial real estate		15,827		16,171		1,329		15,937		287
Commercial construction		24,284		24,907		-		21,279		377
Residential real estate		5,378		5,723		-		4,733		104
Consumer		-		-		-		-		-
Total (including related allowance)	$	80,550	$	127,758	$	14,314	$	77,201	$	971

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 – 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 December 31, 2021 and December 31, 2020 (dollars in thousands):

	December 31, 2021
	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due and Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Current		Gross Loans
Commercial	$	4,305	$	729	$	4,457	$	30,062	$	39,553	$	1,259,875	$	1,299,428
Commercial real Estate		1,622		1,009		5,935		25,393		33,959		4,707,631		4,741,590
Commercial construction		-		-		-		3,150		3,150		537,028		540,178
Residential real Estate		1,437		292		3,139		3,095		7,963		247,306		255,269
Consumer		-		-		-		-		-		1,886		1,886
Total	$	7,364	$	2,030	$	13,531	$	61,700	$	84,625	$	6,753,726	$	6,838,351

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-impaired loans, net of fair value marks, which accrete income per the valuation at date of acquisition.

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 – Loans and the Allowance for Credit Losses – (continued)

The following tables detail, at the period-end presented, the amount of gross loans (excluding loans held-for-sale) that are evaluated individually, and collectively, for impairment, those acquired with deteriorated quality, and the related portion of the allowance for credit losses for loans that are allocated to each loan portfolio segment. “Prior to January 1, 2021, the allowance for loan losses is based on a calculation methodology disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.”

	December 31, 2021
	Commercial		Commercial real estate		Commercial construction		Residential real estate		Consumer		Total
	(dollars in thousands)
Allowance for credit losses - loans
Individually evaluated	$	15,131	$	955	$	-	$	131	$	-	$	16,217
Collectively evaluated		8,561		42,713		3,580		3,497		7		58,358
Acquired with deteriorated credit quality individually analyzed		2,277		1,921		-		-		-		4,198
Total	$	25,969	$	45,589	$	3,580	$	3,628	$	7	$	78,773
Gross loans
Individually evaluated	$	33,726	$	49,310	$	13,196	$	5,717	$	-	$	101,949
Collectively evaluated		1,260,537		4,686,346		526,982		246,413	$	1,886	$	6,722,164
Acquired with deteriorated credit quality individually analyzed		5,165		5,934		-		3,139		-		14,238
Total	$	1,299,428	$	4,741,590	$	540,178	$	255,269	$	1,886	$	6,838,351

	December 31, 2020
	Commercial		Commercial real estate		Commercial construction		Residential 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

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 – Loans and the Allowance for Credit Losses – (continued)

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

	Commercial			Commercial real estate			Commercial construction			Residential real estate			Consumer			Unallocated			Total
	(dollars in thousands)
Balance as of January 1, 2021	$	28,443		$	39,330		$	8,194		$	2,687		$	4		$	568		$	79,226
Day 1 Adjustment CECL		(4,225	)		9,605			(961	)		2,697			9			(568	)		6,557
Balance as of January 1, 2021		24,218			48,935			7,233			5,384			13			-			85,783
Loan charge-offs		(382	)		(1,780	)		-			(235	)		-			-			(2,397	)
Recoveries		289			85			-			20			11			-			405

Provision for (reversal of) credit losses		1,844			(1,651	)		(3,653	)		(1,541	)		(17	)		-			(5,018	)
Balance as of December 31, 2021	$	25,969		$	45,589		$	3,580		$	3,628		$	7		$	-		$	78,773

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 allowance for credit losses. 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 allowance for credit losses for loans of $6.6 million, which did not impact our consolidated income statement.

	Commercial			Commercial real estate		Commercial construction		Residential real estate			Consumer			Unallocated		Total
	(dollars in thousands)
Balance as of January 1, 2020	$	8,349		$	20,853	$	7,304	$	1,685		$	3		$	99	$	38,293
Loan charge-offs		(552	)		-		-		(341	)		(7	)		-		(900	)
Recoveries		4			802		-		23			4			-		833

Provision for loan losses		20,642			17,675		890		1,320			4			469		41,000
Balance as of December 31, 2020	$	28,443		$	39,330	$	8,194	$	2,687		$	4		$	568	$	79,226

	Commercial			Commercial real estate			Commercial construction		Residential real estate			Consumer			Unallocated			Total
	(dollars in thousands)
Balance as of 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 as of December 31, 2019	$	8,349		$	20,853		$	7,304	$	1,685		$	3		$	99		$	38,293

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 December 31, 2021, there were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status or were contractually past due 90 days or greater and still accruing interest, or whose terms have been modified in a TDR.

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 – Loans and the Allowance for Credit Losses – (continued)

As of December 31, 2021, TDRs totaled $79.5 million, of which $35.9 million were on nonaccrual status and $43.6 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 $10.4 million and $-0- of specific allowance related to TDRs as of December 31, 2021 and December 31, 2020, respectively. There were no TDRs for which there was a payment default within twelve months following the modification during the year ended December 31, 2021, 2020 and 2019.

The following table presents loans by class modified as TDRs that occurred during the year ended December 31, 2021:

	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(dollars in thousands)
Troubled debt restructurings:
Commercial		4	$	1,276	$	1,276
Commercial real estate		11		35,635		35,635
Commercial construction		1		1,641		1,641
Residential real estate		3		1,758		1,758

Total		19	$	40,310	$	40,310

The loans modified as TDRs during the year ended December 31, 2021 included maturity extensions and interest rate reductions.

The following table presents loans by class modified as TDRs that occurred during year ended December 31, 2020

	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(dollars in thousands)
Troubled debt restructurings:
Commercial		1	$	188	$	188
Commercial real estate		1		93		93
Commercial construction		1		4,021		4,021
Residential real estate		2		2,184		2,184

Total		5	$	6,486	$	6,486

The five loan modifications during the year ended December 31, 2020 were maturity extensions:

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

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 – Loans and the Allowance for Credit Losses – (continued)

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.

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 clients 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 December 31, 2021, the Bank had 1 deferred loan outstanding totaling $0.5 million, compared to 113 deferred loans totaling $207.1 million as of December 31, 2020 that were not considered TDRs.

Allowance for Credit Losses 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 allowance for credit losses for unfunded commitments for the year ended December 31, 2021 (dollars in thousands):

	Year Ended December 31, 2021
Balance as of beginning of period	$	-
Day 1 Effect of CECL		2,833
Provision for (reversal of) credit losses - unfunded commitments		(482	)
Balance as of end of period	$	2,351

Components of (Reversal of) Provision for Credit Losses

The following table summarizes the provision for (reversal of) provision for credit losses for the year ended December 31, 2021 (dollars in thousands):

	Year Ended December 31, 2021
Provision for (reversal of) credit losses - loans	$	5,018
Provision for (reversal of) credit losses - unfunded commitments		(482	)
Provision for (reversal of) credit losses	$	(5,500	)