Allowance for Credit Losses

9 Months Ended

Sep. 30, 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 September 30, 2022, loans totaling $7.45 billion were evaluated collectively and the allowance on these balances totaled $63.7 million and loans totaling $118.7 million were evaluated on an individual basis with the specific allocations of the allowance for credit losses totaling $5.2 million. Loans evaluated on an individual basis include $101.5 million in PCD loans, which had a specific allowance for credit losses of $3.4 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 September 30,				For the Nine Months Ended September 30,
(in thousands)	2022		2021		2022		2021
Balance at beginning of the period	$	68,836	$	60,389	$	58,047	$	71,124
Initial allowance for credit losses on PCD loans	—		—		12,077		—
Charge-offs on PCD loans	—		—		(7,634)		—
Charge-offs	(56)		(996)		(595)		(4,128)
Recoveries	88		1,266		760		1,785
Net recoveries (charge-offs)	32		270		(7,469)		(2,343)
Provision (benefit) for credit loss - loans	11		(2,706)		6,224		(10,828)
Balance at end of the period	$	68,879	$	57,953	$	68,879	$	57,953

The lower provision for credit losses on loans for the third quarter of 2022 was primarily due to a slight increase in the baseline estimate due to increased loan balances, which was largely offset by a decrease in the total of individually evaluated loans, while the provision for the nine months ended September 30, 2022 was predominantly due to the provision for the 1st Constitution's acquired non-purchased credit deteriorated loans and the additional charge-offs on PCD loans. The benefit for credit losses for the three and nine months ended September 30, 2021, was largely due to an improvement in macroeconomic factors. Charge-offs in the nine months ended September 30, 2022 include $7.6 million in charge-offs on 1st Constitution's acquired PCD loans. Non-performing loans totaling $6.6 million and $21.7 million were sold during the three and nine months ended September 30, 2021, respectively, resulting in net recoveries of $502,000 and net charge-offs of $706,000, respectively.

The following tables detail activity in the allowance for credit losses on loans by portfolio segment for the three months ended September 30, 2022 and 2021:


(in thousands)	Balance at June 30, 2022		Charge-offs		Recoveries		Provision (Benefit) for Credit Loss		Balance at September 30, 2022
Non-owner occupied commercial	$	23,926	$	—	$	—	$	294	$	24,220
Owner occupied commercial	6,938		—		—		(666)		6,272
Multifamily	8,441		—		—		426		8,867
Non-owner occupied residential	2,893		—		—		(101)		2,792
Commercial, industrial and other	10,089		—		49		(1,171)		8,967
Construction	2,937		—		—		(48)		2,889
Equipment finance	2,253		—		23		258		2,534
Residential mortgage	6,579		—		—		861		7,440
Consumer	4,780		(56)		16		158		4,898
Total	$	68,836	$	(56)	$	88	$	11	$	68,879


(in thousands)	Balance at June 30, 2021		Charge-offs		Recoveries		(Benefit) Provision for Credit Loss		Balance at September 30, 2021
Non owner occupied commercial	$	20,906	$	(465)	$	459	$	(387)	$	20,513
Owner occupied commercial	4,100		(204)		284		131		4,311
Multifamily	7,177		(28)		—		418		7,567
Non owner occupied residential	2,592		(11)		16		206		2,803
Commercial, industrial and other	10,489		(26)		290		(2,678)		8,075
Construction	1,034		(54)		4		(118)		866
Equipment finance	5,120		(138)		—		(142)		4,840
Residential mortgage	3,885		(28)		1		348		4,206
Consumer	5,086		(42)		212		(484)		4,772
Total	$	60,389	$	(996)	$	1,266	$	(2,706)	$	57,953

The following tables detail activity in the allowance for credit losses on loans by portfolio segment for the nine months ended September 30, 2022 and 2021:


(in thousands)	Balance at December 31, 2021		Initial allowance for credit losses on PCD loans		Charge-offs		Recoveries		(Benefit) Provision for Credit Loss		Balance at September 30, 2022
Non-owner occupied commercial	$	20,071	$	1,312	$	(4)	$	4	$	2,837	$	24,220
Owner occupied commercial	3,964		1,137		(38)		351		858		6,272
Multifamily	8,309		4		—		—		554		8,867
Non-owner occupied residential	2,380		175		—		14		223		2,792
Commercial, industrial and other	9,891		2,413		(1,128)		127		(2,336)		8,967
Construction	838		6,843		(6,807)		3		2,012		2,889
Equipment finance	3,663		—		(121)		102		(1,110)		2,534
Residential mortgage	3,914		179		—		48		3,299		7,440
Consumer	5,017		14		(131)		111		(113)		4,898
Total	$	58,047	$	12,077	$	(8,229)	$	760	$	6,224	$	68,879


(in thousands)	Balance at December 31, 2020		Charge-offs		Recoveries		(Benefit) Provision for Credit Loss		Balance at September 30, 2021
Non owner occupied commercial	$	25,910	$	(2,708)	$	462	$	(3,151)	$	20,513
Owner occupied commercial	3,955		(282)		301		337		4,311
Multifamily	7,253		(28)		—		342		7,567
Non owner occupied residential	3,321		(223)		29		(324)		2,803
Commercial, industrial and other	13,665		(401)		439		(5,628)		8,075
Construction	786		(54)		71		63		866
Equipment finance	6,552		(242)		17		(1,487)		4,840
Residential mortgage	3,623		(64)		177		470		4,206
Consumer	6,059		(126)		289		(1,450)		4,772
Total	$	71,124	$	(4,128)	$	1,785	$	(10,828)	$	57,953

The following tables present the recorded investment in loans by portfolio segment and the related allowance for credit losses at September 30, 2022 and December 31, 2021:


September 30, 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	$	427	$	2,822,565	$	50,832	$	2,873,824	$	857	$	23,363	$	24,220
Owner occupied commercial	12,853		1,101,625		26,812		1,141,290		999		5,273		6,272
Multifamily	—		1,179,539		6,497		1,186,036		17		8,850		8,867
Non-owner occupied residential	450		216,168		5,979		222,597		27		2,765		2,792
Commercial, industrial and other	3,491		600,151		9,586		613,228		3,116		5,851		8,967
Construction	—		381,109		—		381,109		—		2,889		2,889
Equipment finance	—		137,999		—		137,999		—		2,534		2,534
Residential mortgage	—		689,028		1,425		690,453		186		7,254		7,440
Consumer	—		321,938		352		322,290		15		4,883		4,898
Total loans	$	17,221	$	7,450,122	$	101,483	$	7,568,826	$	5,217	$	63,662	$	68,879


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 September 30, 2022, the balance of the allowance for credit loss on available for sale and held to maturity securities was $4.2 million and $152,000, 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.

The allowance for credit losses on securities is summarized in the following tables:


Available for Sale	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(in thousands)	2022		2021		2022		2021
Balance at beginning of the period	$	2,802	$	21	$	83	$	2
AFS - HTM Transfer	$	—	(3)		$	—	$	(3)



Provision for credit loss expense	1,363		32		4,082		51
Balance at end of the period	$	4,165	$	50	$	4,165	$	50


Held to Maturity	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(in thousands)	2022		2021		2022		2021
Balance at beginning of the period	$	190	$	137	$	181	$	—
AFS - HTM Transfer	$	—	$	3	$	—	$	3



(Benefit) provision for credit loss expense	(38)		43		(29)		180
Balance at end of the period	$	152	$	183	$	152	$	183

Accrued interest receivable on securities is reported as a component of accrued interest receivable on the consolidated balance sheets and totaled $8.6 million at September 30, 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 September 30, 2022 and December 31, 2021, the balance of the allowance for credit losses for off-balance sheet exposures was $3.3 million and $2.3 million, respectively. The Company recorded a provision for credit losses on off-balance-sheet exposures in other operating expense of $22,000 for the third quarter of 2022 and a benefit for credit losses on off-balance-sheet exposures of $72,000 for the third quarter of 2021. For the nine months ended September 30, 2022, the Company recorded a provision for credit losses on off-balance-sheet exposures in other operating expense of $997,000 and a benefit for credit losses on off-balance-sheet exposures of $707,000 for the same period in 2021