Allowance for Credit Losses

9 Months Ended

Sep. 30, 2023

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, 2022 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, 2023, loans totaling $8.21 billion were evaluated collectively and the allowance on these balances totaled $72.7 million and loans totaling $80.5 million were evaluated on an individual basis with the specific allocations of the allowance for credit losses totaling $2.5 million. Loans evaluated on an individual basis include $72.4 million in PCD loans, which had a specific allowance for credit losses of $2.5 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)	2023		2022		2023		2022
Balance at beginning of the period	$	73,965	$	68,836	$	70,264	$	58,047
Initial allowance for credit losses on PCD loans	—		—		—		12,077
Charge-offs on PCD loans	—		—		—		(7,634)
Charge-offs	(217)		(56)		(504)		(595)
Recoveries	84		88		437		760
Net recoveries (charge-offs)	(133)		32		(67)		(7,469)
Provision for credit loss - loans	1,327		11		4,962		6,224
Balance at end of the period	$	75,159	$	68,879	$	75,159	$	68,879

The increase in the provision for credit losses on loans for the third quarter of 2023 compared to the third quarter of 2022 included an increase in qualitative factors across multiple segments, which was partially offset by a decrease in the total of individually evaluated loans. The decrease in the provision for credit losses from the nine months ended September 30, 2022 to the nine months ended September 30, 2023 was predominantly due to the provision for the 1st Constitution's acquired non-purchased credit deteriorated loans recorded at the time of acquisition in January 2022. Charge-offs in the nine months ended September 30, 2022 include $7.6 million in charge-offs on 1st Constitution's acquired PCD loans.

The following tables detail activity in the allowance for credit losses on loans by portfolio segment for the three and nine months ended 2023 and 2022:


(in thousands)	Balance at June 30, 2023		Charge-offs		Recoveries		Provision (Benefit) for Credit Loss		Balance at September 30, 2023
Non-owner occupied commercial	$	23,543	$	—	$	—	$	(62)	$	23,481
Owner occupied commercial	6,164		—		—		332		6,496
Multifamily	9,037		—		—		196		9,233
Non-owner occupied residential	2,404		—		—		2		2,406
Commercial, industrial and other	8,879		(14)		14		130		9,009
Construction	2,732		—		—		(148)		2,584
Equipment finance	6,484		(136)		—		518		6,866
Residential mortgage	9,605		—		—		304		9,909
Consumer	5,117		(67)		70		55		5,175
Total	$	73,965	$	(217)	$	84	$	1,327	$	75,159


(in thousands)	Balance at June 30, 2022		Initial allowance for credit losses on PCD loans		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 December 31, 2022		Charge-offs		Recoveries		Provision (Benefit) for Credit Loss		Balance at September 30, 2023
Non-owner occupied commercial	$	23,462	$	—	$	—	$	19	$	23,481
Owner occupied commercial	6,696		—		6		(206)		6,496
Multifamily	9,425		—		—		(192)		9,233
Non-owner occupied residential	2,643		—		—		(237)		2,406
Commercial, industrial and other	8,836		(27)		225		(25)		9,009
Construction	2,968		(13)		—		(371)		2,584
Equipment finance	3,445		(219)		25		3,615		6,866
Residential mortgage	8,041		—		—		1,868		9,909
Consumer	4,748		(245)		181		491		5,175
Total	$	70,264	$	(504)	$	437	$	4,962	$	75,159


(in thousands)	Balance at December 31, 2021		Initial allowance for credit losses on PCD loans		Charge-offs		Recoveries		Provision (Benefit) 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

The following tables present the recorded investment in loans by portfolio segment and the related allowance for credit losses at September 30, 2023 and December 31, 2022:


September 30, 2023	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	$	—	$	2,951,929	$	28,882	$	2,980,811	$	570	$	22,911	$	23,481
Owner occupied commercial	6,474		1,261,978		31,525		1,299,977		907		5,589		6,496
Multifamily	1,106		1,354,839		5,683		1,361,628		5		9,228		9,233
Non-owner occupied residential	523		207,018		1,019		208,560		14		2,392		2,406
Commercial, industrial and other	—		628,946		3,973		632,919		827		8,182		9,009
Construction	—		333,998		—		333,998		—		2,584		2,584
Equipment finance	—		174,946		—		174,946		—		6,866		6,866
Residential mortgage	—		955,332		1,203		956,535		149		9,760		9,909
Consumer	—		344,544		139		344,683		—		5,175		5,175
Total loans	$	8,103	$	8,213,530	$	72,424	$	8,294,057	$	2,472	$	72,687	$	75,159


December 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	$	—	$	2,871,950	$	34,064	2,906,014		$	753	$	22,709	$	23,462
Owner occupied commercial	12,041		1,202,919		31,229		1,246,189		983		5,713		6,696
Multifamily	—		1,254,412		6,402		1,260,814		5		9,420		9,425
Non-owner occupied residential	441		216,516		1,069		218,026		16		2,627		2,643
Commercial, industrial and other	2,806		594,568		9,337		606,711		2,150		6,686		8,836
Construction	980		379,120		—		380,100		—		2,968		2,968
Equipment finance	—		151,574		—		151,574		—		3,445		3,445
Residential mortgage	—		764,340		1,212		765,552		181		7,860		8,041
Consumer	—		330,920		150		331,070		3		4,745		4,748
Total loans	$	16,268	$	7,766,319	$	83,463	$	7,866,050	$	4,091	$	66,173	$	70,264

Allowance for Credit Losses - Securities

At September 30, 2023, the balance of the allowance for credit loss on available for sale and held to maturity securities was $0 and $146,000, respectively. At December 31, 2022, the Company reported an allowance for credit losses on available for sale securities of $310,000 and an allowance for credit losses on held to maturity securities of $107,000.

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)	2023		2022		2023		2022
Balance at beginning of the period	$	—	$	2,802	$	310	$	83

Charge-offs	$	—	$	—	(6,640)		—
Recoveries	$	—	$	—	—		—
Net charge-offs	$	—	$	—	(6,640)
(Benefit) provision for credit loss expense	—		1,363		6,330		4,082
Balance at end of the period	$	—	$	4,165	$	—	$	4,165


Held to Maturity	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(in thousands)	2023		2022		2023		2022
Balance at beginning of the period	$	146	$	190	$	107	$	181




(Benefit) provision for credit loss expense	—		(38)		39		(29)
Balance at end of the period	$	146	$	152	$	146	$	152

The provision for credit loss expense for available for sale securities increased from $4.1 million for the nine months ended September 30, 2022 to $6.3 million for the nine months ended September 30, 2023 as a result of a $6.6 million provision and subsequent charge-off of subordinated debt securities of Signature Bank which failed in March 2023.

Accrued interest receivable on securities is reported as a component of accrued interest receivable on the consolidated balance sheets and totaled $8.3 million at September 30, 2023 and $8.7 million at December 31, 2022. 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, 2023 and December 31, 2022, the balance of the allowance for credit losses for off-balance sheet exposures was $2.8 million and $3.0 million, respectively. For the three months ended September 30, 2023 and three months ended September 30, 2022, the Company recorded a benefit for credit losses on off-balance-sheet exposures of $65,000 and a provision for credit losses on off-balance sheet exposures of $22,000, respectively. For the nine months ended September 30, 2023 and nine months ended September 30, 2022, the Company recorded a benefit for credit losses on off-balance sheet exposures of $229,000 and a provision for credit losses on off-balance sheet exposures of $997,000, respectively