Allowance for Loan Losses | (6) Allowance for Loan Losses Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Company has segmented certain loans in the portfolio by product type. Historical loss percentages for each risk category are calculated and used as the basis for calculating loan loss allowance allocations. These historical loss percentages are calculated over a two-year period for all portfolio segments. Certain economic factors are also considered for trends which management uses to establish the directionality of changes to the unallocated portion of the reserve. The following economic factors are analyzed: • Changes in lending policies and procedures • Changes in experience and depth of lending and management staff • Changes in quality of Civista’s credit review system • Changes in nature and volume of the loan portfolio • Changes in past due, classified and nonaccrual loans and TDRs • Changes in economic and business conditions • Changes in competition or legal and regulatory requirements • Changes in concentrations within the loan portfolio • Changes in the underlying collateral for collateral dependent loans The total allowance reflects management’s estimate of loan losses inherent in the loan portfolio at the balance sheet date. The Company considers the allowance for loan losses of $14,707 adequate to cover loan losses inherent in the loan portfolio, at June 30, 2015. The following tables present, by portfolio segment, the changes in the allowance for loan losses for the three and six months ended June 30, 2015 and 2014. Commercial & Commercial Commercial Residential Real Estate Consumer Unallocated Total For the six months ended June 30, 2015 Allowance for loan losses: Beginning balance $ 1,822 $ 2,580 $ 4,798 $ 3,747 $ 428 $ 196 $ 697 $ 14,268 Charge-offs — (198 ) (64 ) (541 ) — (87 ) — (890 ) Recoveries 31 210 90 165 3 30 — 529 Provision (458 ) 2,835 (1,441 ) 99 3 51 (289 ) 800 Ending Balance $ 1,395 $ 5,427 $ 3,383 $ 3,470 $ 434 $ 190 $ 408 $ 14,707 For the six months ended June 30, 2015, the allowance for Commercial and Agriculture loans was reduced due to decreases in specific reserves for impaired loans. The decrease in specific reserves for impaired loans was the result of the anticipated resolution of an impaired loan. The Company does not expect to incur losses with this resolution. This decrease was offset by an increase in criticized loan balances. The result was represented as a decrease in the provision. The increase in the allowance for Commercial Real Estate—Owner Occupied loans was the result of an increase in loss migration rates for special mention loans, based on the migration of loans into the special mention category during the migration analysis period, and an increase in substandard rated loan balances. The allowance for Commercial Real Estate—Non-Owner Occupied loans was reduced due to a decrease in loss migration rates offset by an increase in criticized loan balances. The ending reserve balance for Residential Real Estate loans declined from the end of the previous year due to charge-offs of loans that had a specific reserve previously applied. While loan balances are up, loss rates continue to decrease resulting in the allowance being lower. While criticized loan balances have increased, we have seen improvement in loss migration rates and a decline in specific reserves for impaired loans, management determined that it was appropriate to reduce unallocated reserves at this time. Commercial & Commercial Commercial Residential Real Estate Consumer Unallocated Total For the six months ended June 30, 2014 Allowance for loan losses: Beginning balance $ 2,841 $ 3,263 $ 4,296 $ 5,224 $ 184 $ 214 $ 506 $ 16,528 Charge-offs (313 ) (1,469 ) (105 ) (1,054 ) — (43 ) — (2,984 ) Recoveries 95 75 24 121 3 33 — 351 Provision (556 ) 1,266 638 148 100 (8 ) (88 ) 1,500 Ending Balance $ 2,067 $ 3,135 $ 4,853 $ 4,439 $ 287 $ 196 $ 418 $ 15,395 For the six months ended June 30, 2014, the allowance for Commercial and Agriculture loans was reduced not only by charge-offs, but also due to a decrease in both the loan balances outstanding and the specific reserve required for this type. The net result of these changes was represented as a decrease in the provision. The increase in the allowance for Commercial Real Estate loans was the result of large charge offs, which led to increased general reserves due to an increase in loss rate. The net result of these changes was represented as an increase in the provision. The allowance for Residential Real Estate loans decreased during the period due to charge-offs of loans that had a specific reserve previously applied, a reduction in total loans past due and a reduction in nonaccrual loans. The net result of these changes was represented as a decrease in the provision. The loss rate on Consumer loans decreased for the six months ended June 30, 2014 and is reflected in a negative provision. Overall, we saw continued improvement in asset quality during the period, leading to a small decrease in unallocated reserves. Commercial & Commercial Commercial Non-Owner Residential Real Estate Consumer Unallocated Total For the three months ended June 30, 2015 Allowance for loan losses: Beginning balance $ 1,794 $ 2,608 $ 4,926 $ 3,666 $ 498 $ 186 $ 637 $ 14,315 Charge-offs — — (55 ) (213 ) — (37 ) — (305 ) Recoveries 12 208 25 34 2 16 — 297 Provision (411 ) 2,611 (1,513 ) (17 ) (66 ) 25 (229 ) 400 Ending Balance $ 1,395 $ 5,427 $ 3,383 $ 3,470 $ 434 $ 190 $ 408 $ 14,707 For the three months ended June 30, 2015, the allowance for Commercial and Agriculture loans was reduced due to decreases in specific reserves for impaired loans. The decrease in specific reserves for impaired loans was the result of the anticipated resolution of an impaired loan. The Company does not expect to incur losses with this resolution. This decrease was offset by an increase in criticized loan balances. The result was represented as a decrease in the provision. The increase in the allowance for Commercial Real Estate—Owner Occupied loans was the result of an increase in loss migration rates for special mention loans, based on the migration of loans into the special mention category during the migration analysis period, and an increase in substandard rated loan balances. The allowance for Commercial Real Estate—Non-Owner Occupied loans was reduced due to a decrease in loss migration rates and offset by an increase in criticized loan balances. The ending reserve balance for Residential Real Estate loans declined due to charge-offs of loans that had a specific reserve previously applied and a decline in the loss rates applied. The ending reserve balance for Real Estate Construction loans declined from the end of the previous quarter due to a decline in balances. While loan balances are up, loss migration rates continue to decrease resulting in the allowance being lower. While criticized loan balances have increased, we have seen improvement in loss migration rates and a decline in specific reserves for impaired loans, management determined that it was appropriate to reduce unallocated reserves at this time. Commercial & Commercial Commercial Residential Real Estate Consumer Unallocated Total For the three months ended June 30, 2014 Allowance for loan losses: Beginning balance $ 2,607 $ 3,829 $ 4,168 $ 5,050 $ 295 $ 239 $ 579 $ 16,767 Charge-offs (84 ) (1,422 ) (78 ) (737 ) — (11 ) — (2,332 ) Recoveries 37 70 12 72 2 17 — 210 Provision (493 ) 658 751 54 (10 ) (49 ) (161 ) 750 Ending Balance $ 2,067 $ 3,135 $ 4,853 $ 4,439 $ 287 $ 196 $ 418 $ 15,395 For the three months ended June 30, 2014, the allowance for Commercial and Agriculture loans decreased both as a result of decreased reserves on specific loans and a decrease in the loss rate. The result of these changes was represented as a decrease in the provision. The allowance for Commercial Real Estate loans was reduced by charge-offs, which was partially offset by an increase in the loss rate. The impact of these two changes was nearly equal and offsetting. The allowance for Residential Real Estate loans was reduced as a result of charge offs, a reduction in total loans past due and a reduction in nonaccrual loans, partially offset by changes related to increased volume. The net result of these changes was represented as a decrease in the provision. We saw continued improvement in asset quality during the period, leading to a small decrease in unallocated reserves. The following tables present, by portfolio segment, the allocation of the allowance for loan losses and related loan balances as of June 30, 2015 and December 31, 2014. Commercial & Commercial Commercial Residential Real Estate Consumer Unallocated Total June 30, 2015 Allowance for loan losses: Loans acquired with credit deterioration $ 91 $ — $ — $ 123 $ — $ — $ — $ 214 Ending balance: Individually evaluated for impairment $ 137 $ 4 $ — $ 255 $ 1 $ — $ — $ 397 Ending balance: Collectively evaluated for impairment $ 1,167 $ 5,423 $ 3,383 $ 3,092 $ 433 $ 190 $ 408 $ 14,096 Ending balance $ 1,395 $ 5,427 $ 3,383 $ 3,470 $ 434 $ 190 $ 408 $ 14,707 Loan balances outstanding: Loans acquired with credit deterioration $ 203 $ 33 $ — $ 211 $ — $ — $ 447 Ending balance: Individually evaluated for impairment $ 1,223 $ 4,290 $ 1,913 $ 2,403 $ 40 $ 4 $ 9,873 Ending balance: Collectively evaluated for impairment $ 127,546 $ 165,277 $ 329,917 $ 279,998 $ 68,694 $ 21,165 $ 992,597 Ending balance $ 128,972 $ 169,600 $ 331,830 $ 282,612 $ 68,734 $ 21,169 $ 1,002,917 Commercial & Commercial Commercial Residential Real Estate Consumer Unallocated Total December 31, 2014 Allowance for loan losses: Ending balance: Individually evaluated for impairment $ 641 $ 57 $ 20 $ 305 $ — $ — $ — $ 1,023 Ending balance: Collectively evaluated for impairment $ 1,181 $ 2,523 $ 4,778 $ 3,442 $ 428 $ 196 $ 697 $ 13,245 Ending balance $ 1,822 $ 2,580 $ 4,798 $ 3,747 $ 428 $ 196 $ 697 $ 14,268 Loan balances outstanding: Ending balance: Individually evaluated for impairment $ 2,304 $ 3,557 $ 2,175 $ 3,108 $ — $ 5 $ 11,149 Ending balance: Collectively evaluated for impairment $ 111,882 $ 139,457 $ 306,491 $ 265,402 $ 65,452 $ 15,024 $ 903,708 Ending balance $ 114,186 $ 143,014 $ 308,666 $ 268,510 $ 65,452 $ 15,029 $ 914,857 The following tables present credit exposures by internally assigned grades for the periods ended June 30, 2015 and December 31, 2014. The risk rating analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans. The Company’s internally assigned grades are as follows: • Pass • Special Mention • Substandard • Doubtful • Loss Generally, Residential Real Estate, Real Estate Construction and Consumer loans are not risk-graded, except when collateral is used for a business purpose. Commercial & Commercial Commercial Residential Real Estate Consumer Total June 30, 2015 Pass $ 122,194 $ 152,878 $ 314,420 $ 110,665 $ 62,170 $ 11,699 $ 774,026 Special Mention 1,154 5,232 13,381 1,970 19 — 21,756 Substandard 5,624 11,490 4,029 8,130 31 82 29,386 Doubtful — — — — — — — Ending Balance $ 128,972 $ 169,600 $ 331,830 $ 120,765 $ 62,220 $ 11,781 $ 825,168 Commercial & Commercial Commercial Residential Real Estate Consumer Total December 31, 2014 Pass $ 107,903 $ 128,222 $ 298,237 $ 100,810 $ 59,584 $ 5,651 $ 700,407 Special Mention 3,446 5,492 6,305 697 19 — 15,959 Substandard 2,837 9,300 4,124 8,834 41 46 25,182 Doubtful — — — — — — — Ending Balance $ 114,186 $ 143,014 $ 308,666 $ 110,341 $ 59,644 $ 5,697 $ 741,548 The following tables present performing and nonperforming loans based solely on payment activity for the periods ended June 30, 2015 and December 31, 2014 that have not been assigned an internal risk grade. The types of loans presented here are not assigned a risk grade unless there is evidence of a problem. Payment activity is reviewed by management on a monthly basis to evaluate performance. Loans are considered to be nonperforming when they become 90 days past due or if management thinks that we may not collect all of our principal and interest. Nonperforming loans also include certain loans that have been modified in Troubled Debt Restructurings (TDRs) where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions due to economic status. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. Residential Real Estate Consumer Total June 30, 2015 Performing $ 161,847 $ 6,514 $ 9,388 $ 177,749 Nonperforming — — — — Total $ 161,847 $ 6,514 $ 9,388 $ 177,749 Residential Real Estate Consumer Total December 31, 2014 Performing $ 158,169 $ 5,808 $ 9,332 $ 173,309 Nonperforming — — — — Total $ 158,169 $ 5,808 $ 9,332 $ 173,309 The following tables include an aging analysis of the recorded investment of past due loans outstanding as of June 30, 2015 and December 31, 2014. June 30, 2015 30-59 60-89 90 Days or Total Past Current Total Loans Past Due Commericial & Agriculture $ 379 $ 77 $ 591 $ 1,047 $ 127,925 $ 128,972 $ — Commercial Real Estate - Owner Occupied 489 — 873 1,362 168,238 169,600 — Commercial Real Estate - Non-Owner Occupied 2,425 62 143 2,630 329,200 331,830 — Residential Real Estate 688 917 1,716 3,321 279,291 282,612 — Real Estate Construction — — — — 68,734 68,734 — Consumer and Other 71 56 1 128 21,041 21,169 — Total $ 4,052 $ 1,112 $ 3,324 $ 8,488 $ 994,429 $ 1,002,917 $ — December 31, 2014 30-59 60-89 90 Days or Total Past Current Total Loans Past Due Commericial & Agriculture $ 58 $ — $ 187 $ 245 $ 113,941 $ 114,186 $ — Commercial Real Estate - Owner Occupied 622 251 657 1,530 141,484 143,014 — Commercial Real Estate - Non-Owner Occupied 521 5 2,103 2,629 306,037 308,666 — Residential Real Estate 1,923 721 2,347 4,991 263,519 268,510 — Real Estate Construction 33 — 8 41 65,411 65,452 — Consumer and Other 131 8 19 158 14,871 15,029 — Total $ 3,288 $ 985 $ 5,321 $ 9,594 $ 905,263 $ 914,857 $ — The following table presents loans on nonaccrual status as of June 30, 2015 and December 31, 2014. 2015 2014 Commericial & Agriculture $ 1,496 $ 1,264 Commercial Real Estate - Owner Occupied 4,054 3,403 Commercial Real Estate - Non-Owner Occupied 1,658 2,134 Residential Real Estate 5,608 6,674 Real Estate Construction 31 41 Consumer and Other 73 42 Total $ 12,920 $ 13,558 Nonaccrual Loans: Modifications: Loans modified in a TDR are typically already on non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR may have the financial effect of increasing the specific allowance associated with the loan. An allowance for impaired loans that have been modified in a TDR are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates. As of June 30, 2015, TDRs accounted for $337 of the allowance for loan losses. As of December 31, 2014, TDRs accounted for $895 of the allowance for loan losses. Loan modifications that are considered TDRs completed during the six-month periods ended June 30, 2015 and June 30, 2014 were as follows: For the Six-Month Period Ended For the Six-Month Period Ended Number Pre- Post- Number Pre- Post- Commericial & Agriculture 1 $ 6 $ 6 — $ — $ — Commercial Real Estate - Owner Occupied — — — — — — Commercial Real Estate - Non-Owner Occupied — — — — — — Residential Real Estate 3 374 374 2 149 149 Real Estate Construction 1 41 41 — — — Consumer and Other — — — — — — Total Loan Modifications 5 $ 421 $ 421 2 $ 149 $ 149 There were no loan modifications that are considered troubled debt restructurings (TDRs) completed during the quarter ended June 30, 2015 and June 30, 2014. Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-accrual loan. Recidivism occurs at a notably higher rate than do defaults on new originations loans, so modified loans present a higher risk of loss than do new origination loans. Loans modified in a TDR increased $272 compared to June 30, 2014. The increase is the result of loans purchased in the acquisition of TCNB. During both the three and six month period ended June 30, 2015 and June 30, 2014, there were no defaults on loans that were modified and considered TDRs during the respective twelve previous months. Impaired Loans: The following tables include the recorded investment and unpaid principal balances for impaired financing receivables with the associated allowance amount, if applicable, as of June 30, 2015 and December 31, 2014. June 30, 2015 December 31, 2014 Recorded Unpaid Related Recorded Unpaid Related With no related allowance recorded: Commericial & Agriculture $ 881 $ 1,037 $ 1,377 $ 1,504 Commercial Real Estate - Owner Occupied 3,911 4,384 2,961 3,327 Commercial Real Estate - Non-Owner Occupied 1,913 2,178 92 140 Residential Real Estate 1,049 1,594 1,893 3,487 Consumer and Other 4 4 5 5 Total 7,758 9,197 6,328 8,463 With an allowance recorded: Commericial & Agriculture 342 346 $ 137 927 1,056 $ 641 Commercial Real Estate - Owner Occupied 379 379 4 596 643 57 Commercial Real Estate - Non-Owner Occupied — — — 2,083 2,287 20 Residential Real Estate 1,354 1,359 255 1,215 1,223 305 Real Estate Construction 40 40 1 — — — Total 2,115 2,124 397 4,821 5,209 1,023 Total: Commericial & Agriculture 1,223 1,383 137 2,304 2,560 641 Commercial Real Estate - Owner Occupied 4,290 4,763 4 3,557 3,970 57 Commercial Real Estate - Non-Owner Occupied 1,913 2,178 — 2,175 2,427 20 Residential Real Estate 2,403 2,953 255 3,108 4,710 305 Real Estate Construction 40 40 1 — — — Consumer and Other 4 4 — 5 5 — Total $ 9,873 $ 11,321 $ 397 $ 11,149 $ 13,672 $ 1,023 The following tables include the average recorded investment and interest income recognized for impaired financing receivables for the three and six-month periods ended June 30, 2015 and 2014. For the six months ended: June 30, 2015 June 30, 2014 Average Interest Average Interest Commericial & Agriculture $ 1,943 $ 37 $ 3,986 $ 79 Commercial Real Estate - Owner Occupied 3,866 125 7,058 187 Commercial Real Estate - Non-Owner Occupied 2,053 19 2,976 35 Residential Real Estate 2,752 66 3,628 146 Real Estate Construction 27 — — — Consumer and Other 5 — 7 — Total $ 10,646 $ 247 $ 17,655 $ 447 For the three months ended: June 30, 2015 June 30, 2014 Average Interest Average Interest Commericial & Agriculture $ 1,762 $ 3 $ 4,045 $ 14 Commercial Real Estate - Owner Occupied 4,125 62 6,996 61 Commercial Real Estate - Non-Owner Occupied 1,992 10 2,911 14 Residential Real Estate 2,471 26 3,495 54 Real Estate Construction 40 — — — Consumer and Other 5 — 7 — Total $ 10,395 $ 101 $ 17,454 $ 143 Foreclosed Assets Held For Sale Foreclosed assets acquired in settlement of loans are carried at fair value less estimated costs to sell and are included in other assets on the Consolidated Balance Sheet. As of June 30, 2015 and December 31, 2014, a total of $473 and $560, respectively of foreclosed assets were included with other assets. As of June 30, 2015, included within the foreclosed assets is $473 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of June 30, 2015, the Company had initiated formal foreclosure procedures on $1,052 of consumer residential mortgages. |