Allowance for Credit Losses

3 Months Ended

Mar. 31, 2022

The Company measures expected credit losses for financial assets measured at amortized cost, including loans, investments and certain off-balance-sheet credit exposures in accordance with ASU 2016-13. See Note 1 - Summary of Significant Accounting Policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for a description of the Company's methodology.

Under the standard, the Company's methodology for determining the allowance for credit losses on loans is based upon key assumptions, including the lookback periods, historic net charge-off factors, economic forecasts, reversion periods, prepayments and qualitative adjustments. The allowance is measured on a collective, or pool, basis when similar risk characteristics exist. Loans that do not share common risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation. At March 31, 2022, loans totaling $7.01 billion were evaluated collectively and the allowance on these balances totaled $59.1 million and loans evaluated on an individual basis totaled $132.0 million with the specific allocations of the allowance for credit losses totaling $8.0 million. Loans evaluated on an individual basis include $114.3 million in PCD loans, which had a specific allowance for credit losses of $4.6 million. The Company made the election to exclude accrued interest receivable from the estimate of credit losses.

Allowance for Credit Losses - Loans

The allowance for credit losses on loans is summarized in the following table:


	For the Three Months Ended March 31,
(in thousands)	2022		2021
Balance at beginning of the period	$	58,047	$	71,124
Initial allowance for credit losses on PCD loans	12,077		—
Charge-offs on PCD loans	(7,634)		—
Charge-offs	(170)		(1,270)
Recoveries	162		206
Net charge-offs	(7,642)		(1,064)
Provision (benefit) for credit loss - loans	4,630		(2,808)
Balance at end of the period	$	67,112	$	67,252

The provision for credit losses on loans for the three months ended March 31, 2022, was predominantly due to the provision for the 1st Constitution's acquired non-purchased credit deteriorated loans, while the benefit for credit losses for the three months ended March 31, 2021, was largely due to an improvement in economic conditions. Charge-offs in the first quarter of 2022 include $7.6 million in charge-offs on 1st Constitution's acquired PCD loans. Non-performing loans totaling $10.1 million were sold during the first quarter of 2021 resulting in net charge-offs of $1.1 million.

The following tables detail activity in the allowance for credit losses on loans by portfolio segment for the three months ended March 31, 2022 and 2021:


(in thousands)	Balance at 12/31/2021		Initial allowance for credit losses on PCD loans		Charge-offs		Recoveries		Provision (Benefit) for Credit Loss		Balance at 3/31/2022
Non-owner occupied commercial	$	20,071	$	1,312	$	(4)	$	—	$	2,270	$	23,649
Owner occupied commercial	3,964		1,137		(34)		10		1,048		6,125
Multifamily	8,309		4		—		—		(13)		8,300
Non-owner occupied residential	2,380		175		—		14		339		2,908
Commercial, industrial and other	9,891		2,413		(823)		45		148		11,674
Construction	838		6,843		(6,807)		3		850		1,727
Equipment finance	3,663		—		(97)		15		(1,122)		2,459
Residential mortgage	3,914		179		—		48		1,545		5,686
Consumer	5,017		14		(39)		27		(435)		4,584
Total	$	58,047	$	12,077	$	(7,804)	$	162	$	4,630	$	67,112


(in thousands)	Balance at 12/31/2020		Charge-offs		Recoveries		(Benefit) Provision for Credit Loss		Balance at 3/31/2021
Non owner occupied commercial	$	25,910	$	(593)	$	1	$	(1,438)	$	23,880
Owner occupied commercial	3,955		(78)		8		118		4,003
Multifamily	7,253		—		—		255		7,508
Non owner occupied residential	3,321		(208)		2		(232)		2,883
Commercial, industrial and other	13,665		(265)		44		(1,305)		12,139
Construction	786		—		25		318		1,129
Equipment finance	6,552		(94)		11		(205)		6,264
Residential mortgage	3,623		—		58		100		3,781
Consumer	6,059		(32)		57		(419)		5,665
Total	$	71,124	$	(1,270)	$	206	$	(2,808)	$	67,252

The following tables present the recorded investment in loans by portfolio segment and the related allowance for credit losses at March 31, 2022 and December 31, 2021:


March 31, 2022	Loans								Allowance for Credit Losses
(in thousands)	Individually evaluated for impairment		Collectively evaluated for impairment		Acquired with deteriorated credit quality		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
Non-owner occupied commercial	$	3,059	$	2,581,075	$	55,650	$	2,639,784	1,130		$	22,519	$	23,649
Owner occupied commercial	6,640		1,084,443		31,671		1,122,754		1,124		5,001		6,125
Multifamily	—		1,100,716		3,490		1,104,206		4		8,296		8,300
Non-owner occupied residential	2,145		217,102		6,548		225,795		163		2,745		2,908
Commercial, industrial and other	5,815		640,447		11,134		657,396		5,383		6,291		11,674
Construction	—		400,572		3,614		404,186		35		1,692		1,727
Equipment finance	—		123,943		—		123,943		—		2,459		2,459
Residential mortgage	—		562,199		1,843		564,042		170		5,516		5,686
Consumer	—		295,325		362		295,687		17		4,567		4,584
Total loans	$	17,659	$	7,005,822	$	114,312	$	7,137,793	$	8,026	$	59,086	$	67,112


December 31, 2021	Loans								Allowance for Credit Losses
(in thousands)	Individually evaluated for impairment		Collectively evaluated for impairment		Acquired with deteriorated credit quality		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
Non-owner occupied commercial	$	3,063	$	2,313,047	$	174	2,316,284		$	—	$	20,071	$	20,071
Owner occupied commercial	6,678		901,638		133		908,449		69		3,895		3,964
Multifamily	—		972,233		—		972,233		—		8,309		8,309
Non-owner occupied residential	2,567		174,463		67		177,097		—		2,380		2,380
Commercial, industrial and other	6,537		455,306		563		462,406		4,182		5,709		9,891
Construction	—		302,228		—		302,228		—		838		838
Equipment finance	—		123,212		—		123,212		—		3,663		3,663
Residential mortgage	1,416		437,294		—		438,710		—		3,914		3,914
Consumer	—		275,529		—		275,529		—		5,017		5,017
Total loans	$	20,261	$	5,954,950	$	937	$	5,976,148	$	4,251	$	53,796	$	58,047

Allowance for Credit Losses - Securities

At March 31, 2022, the balance of the allowance for credit loss on available for sale and held to maturity securities was $1.3 million and $199,000, respectively. At December 31, 2021, the Company reported an allowance for credit losses on available for sale securities of $83,000 and an allowance for credit losses on held to maturity securities of $181,000. For the first quarter of 2022, the Company recorded a provision for credit losses on available for sale securities of $1.2 million and a provision for credit losses on held to maturity securities of $18,000. For the first quarter of 2021, the Company recorded a provision for credit losses of $142,000 on securities available for sale and no provision for credit losses on held to maturity securities. Accrued interest receivable on securities is reported as a component of accrued interest receivable on the consolidated balance sheets and totaled $7.9 million at March 31, 2022 and $5.3 million and December 31, 2021. The Company made the election to exclude accrued interest receivable from the estimate of credit losses on securities.

Allowance for Credit Losses - Off-Balance-Sheet Exposures

The allowance for credit losses on off-balance sheet exposures is reported in other liabilities in the Consolidated Balance Sheets. The liability represents an estimate of expected credit losses arising from off balance sheet exposures such as letters of credit, guarantees and unfunded loan commitments. The process for measuring lifetime expected credit losses on these exposures is consistent with that for loans as discussed above, but is subject to an additional estimate reflecting the likelihood that funding will occur. No liability is recognized for off balance sheet credit exposures that are unconditionally cancellable by the Company. Adjustments to the liability are reported as a component of the provision for credit losses.

At March 31, 2022 and December 31, 2021, the balance of the allowance for credit losses for off-balance sheet exposures was $2.8 million and $2.3 million, respectively. The Company recorded a provision for credit losses on off-balance-sheet exposures in other operating expense of $440,000 and $24,000 for the three months ended March 31, 2022 and 2021, respectively.