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 and lease losses, the Company has segmented certain loans in the portfolio by product type. Loss migration rates for each risk category are and calculated and used as the basis for calculating loan loss allowance allocations. Loss migration rates are calculated over a three-year period for all portfolio segments, except for the segment consisting of purchased automobile loans which is calculated over a two-year period. The use of a three-year period for loss migration analysis is a change in methodology for this period. Previously, a two-year loss migration analysis had been used for the entire portfolio. With continued improvement and stability in economic conditions, regulatory guidance recommends a longer look-back period. In addition, Civista made significant changes to consumer and commercial lending policies in the first quarter of 2012. Combined, the stable economy and now seasoned policy changes indicate a three year period is more reflective of future expectations. Management also considers certain economic factors for trends that management uses to account for the qualitative and environmental changes in risk, which affects the level 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 $14,760 adequate to cover loan losses inherent in the loan portfolio, at September 30, 2015. The following tables present, by portfolio segment, the changes in the allowance for loan losses for the three and nine months ended September 30, 2015 and 2014. Commercial & Commercial Commercial Residential Real Estate Consumer Unallocated Total For the nine months ended September 30, 2015 Allowance for loan losses: Beginning balance $ 1,822 $ 2,580 $ 4,798 $ 3,747 $ 428 $ 196 $ 697 $ 14,268 Charge-offs (187 ) (363 ) (81 ) (779 ) — (114 ) — (1,524 ) Recoveries 157 223 105 289 4 38 — 816 Provision (405 ) 506 512 964 (4 ) 245 (618 ) 1,200 Ending Balance $ 1,387 $ 2,946 $ 5,334 $ 4,221 $ 428 $ 365 $ 79 $ 14,760 For the nine months ended September 30, 2015, the allowance for Commercial and Agriculture loans was reduced due to decreases in specific reserves for impaired loans of $625. The decrease in specific reserves for impaired loans was the result of the resolution of an impaired loan. The Company did not incur losses with this resolution. In addition, criticized commercial & agriculture loan balances have decreased. 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, which is attributable to the change in the lookback period to a three-year period. The increase in the allowance for Commercial Real Estate – Non–Owner Occupied loans was the result of an increase in loss migration rates, which is attributable to the change in the lookback period to a three-year period. The ending reserve balance for Residential Real Estate loans increased from the end of the previous year due to an increase in loss migration rates, which is attributable to the change in the look-back period to a three-year period. The increase in the allowance for Consumer and other loans increased due to an increase in loss migration rates. Unallocated reserves declined due to a change in the Company’s look-back period. The Company changed from a two-year look-back period to a three-year look-back period when calculating all but one segment’s loss migration rates during the third quarter of 2015. The change in methodology is reflected in a decline in the unallocated balance with corresponding increase in allocated balances within the reserve calculation. While loan balances are up, loss rates continue to trend downward, exclusive of the change in methodology, resulting in a lower allowance balance. While criticized loans in total have increased slightly, we have seen significant improvement in nonperforming loan balances resulting in a decline in specific reserves for impaired loans. Management feels that the unallocated amount is appropriate and within the relevant range for the allowance that is reflective of the risk in the portfolio. Commercial & Commercial Commercial Residential Real Estate Consumer Unallocated Total For the nine months ended September 30, 2014 Allowance for loan losses: Beginning balance $ 2,841 $ 3,263 $ 4,296 $ 5,224 $ 184 $ 214 $ 506 $ 16,528 Charge-offs (326 ) (1,615 ) (105 ) (1,329 ) — (65 ) — (3,440 ) Recoveries 238 316 34 216 5 48 — 857 Provision (1,148 ) 902 753 201 176 18 598 1,500 Ending Balance $ 1,605 $ 2,866 $ 4,978 $ 4,312 $ 365 $ 215 $ 1,104 $ 15,445 For the nine months ended September 30, 2014, the allowance for Commercial & 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, which was driven by a decrease in the volume of impaired loans. 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 and a significant decline in past-dues and nonaccrual loans. The net result of these changes was represented as a decrease in the allowance. The allowance for Consumer and Other loans increased slightly from the beginning of the year. While loan balances and past-dues are up, loss rates continue to decrease resulting in the allowance being relatively unchanged. Overall, we have seen continued improvement in asset quality and loss rates. However, since the process of estimating probable credit losses requires considerable judgment, management decided to increase unallocated reserves. Unallocated reserves remain within policy guidelines as a percent of total reserves at 7.1 percent. Commercial & Commercial Commercial Residential Real Estate Consumer Unallocated Total For the three months ended September 30, 2015 Allowance for loan losses: Beginning balance $ 1,395 $ 3,383 $ 5,427 $ 3,470 $ 434 $ 190 $ 408 $ 14,707 Charge-offs (187 ) (164 ) (18 ) (237 ) — (28 ) — (634 ) Recoveries 127 13 14 124 1 8 — 287 Provision 52 (286 ) (89 ) 864 (7 ) 195 (329 ) 400 Ending Balance $ 1,387 $ 2,946 $ 5,334 $ 4,221 $ 428 $ 365 $ 79 $ 14,760 For the three months ended September 30, 2015, the decrease in the allowance for Commercial Real Estate – Owner Occupied was the result of a significant change in the Special Mention loss migration rate that had been adversely effected by a specific loss on one relationship that occurred in 2014. The effect of this loss as of this quarter end migrated to the Substandard pool and has less of an impact to the reserve. The ending reserve balance for Residential Real Estate loans increased due an increase in criticized loan balances and an increase in loss migration rates. The increase in the allowance for Consumer and other loans increased due to an increase in loss rates. Unallocated reserves declined due to a change in the Company’s lookback period. The Company changed from a two-year lookback period to a three-year lookback period when calculating all but one segment’s loss migration rates during the third quarter of 2015. The change in methodology is reflected in a decline in the unallocated balance with corresponding increase in allocated balances within the reserve calculation. While loan balances are up, loss rates continue to trend downward, exclusive of the change in methodology, resulting in a lower allowance balance. While criticized loans have increased slightly, we have seen significant improvement in nonperforming loan balances resulting in a decline in specific reserves for impaired loans. Management feels that the unallocated amount is appropriate and within the relevant range for the allowance that is reflective of the risk in the portfolio. Commercial & Commercial Commercial Residential Real Estate Consumer Unallocated Total For the three months ended September 30, 2014 Allowance for loan losses: Beginning balance $ 2,067 $ 3,135 $ 4,853 $ 4,439 $ 287 $ 196 $ 418 $ 15,395 Charge-offs (13 ) (146 ) — (275 ) — (22 ) — (456 ) Recoveries 143 241 10 95 2 15 — 506 Provision (592 ) (364 ) 115 53 76 26 686 — Ending Balance $ 1,605 $ 2,866 $ 4,978 $ 4,312 $ 365 $ 215 $ 1,104 $ 15,445 For the three months ended September 30, 2014, the allowance for Commercial and Agriculture loans was reduced not only by charge-offs, but also due to a decrease in the loan balances outstanding, the balance of impaired loans in this segment and decreases in both the specific and general reserves required for this type. The allowance for Commercial Real Estate loans was reduced not only by charge-offs, but also due to a decrease in both the specific and general reserves required for this type. The result of these changes for each loan type was represented as a decrease in the provision. 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 allowance. We have seen continued improvement in asset quality and loss rates. However, since the process of estimating probable credit losses requires considerable judgment, management decided to increase unallocated reserves. Unallocated reserves remain within policy guidelines as a percent of total reserves at 7.1 percent. The following tables present, by portfolio segment, the allocation of the allowance for loan losses and related loan balances as of September 30, 2015 and December 31, 2014. Commercial & Commercial Commercial Residential Real Estate Consumer Unallocated Total September 30, 2015 Allowance for loan losses: Loans acquired with credit deterioration $ — $ — $ — $ 131 $ — $ — $ — $ 131 Ending balance: Individually evaluated for impairment $ 16 $ 4 $ — $ 164 $ — $ — $ — $ 184 Ending balance: Collectively evaluated for impairment $ 1,371 $ 2,942 $ 5,334 $ 3,926 $ 428 $ 365 $ 79 $ 14,445 Ending balance $ 1,387 $ 2,946 $ 5,334 $ 4,221 $ 428 $ 365 $ 79 $ 14,760 Loan balances outstanding: Loans acquired with credit deterioration $ 16 $ 30 $ — $ 381 $ — $ — $ 427 Ending balance: Individually evaluated for impairment $ 894 $ 2,626 $ 1,828 $ 1,746 $ — $ 4 $ 7,098 Ending balance: Collectively evaluated for impairment $ 128,209 $ 157,801 $ 338,874 $ 282,772 $ 67,461 $ 17,633 $ 992,750 Ending balance $ 129,119 $ 160,457 $ 340,702 $ 284,899 $ 67,461 $ 17,637 $ 1,000,275 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 September 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 September 30, 2015 Pass $ 124,065 $ 147,049 $ 326,014 $ 111,857 $ 58,947 $ 8,201 $ 776,133 Special Mention 862 5,180 10,998 1,783 18 — 18,841 Substandard 4,192 8,228 3,690 8,208 30 32 24,380 Doubtful — — — — — — — Ending Balance $ 129,119 $ 160,457 $ 340,702 $ 121,848 $ 58,995 $ 8,233 $ 819,354 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 September 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 September 30, 2015 Performing $ 163,051 $ 8,466 $ 9,404 $ 180,921 Nonperforming — — — — Total $ 163,051 $ 8,466 $ 9,404 $ 180,921 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 September 30, 2015 and December 31, 2014. September 30, 2015 30-59 60-89 90 Days or Total Past Current Total Loans Past Due Commercial & Agriculture $ 34 $ 941 $ 286 $ 1,261 $ 127,858 $ 129,119 $ — Commercial Real Estate—Owner Occupied 161 37 393 591 159,866 160,457 — Commercial Real Estate—Non-Owner Occupied 4 — 1,496 1,500 339,202 340,702 — Residential Real Estate 912 1,788 1,971 4,671 280,228 284,899 — Real Estate Construction 199 — — 199 67,262 67,461 — Consumer and Other 490 18 24 532 17,105 17,637 24 Total $ 1,800 $ 2,784 $ 4,170 $ 8,754 $ 991,521 $ 1,000,275 $ 24 December 31, 2014 30-59 60-89 90 Days or Total Past Current Total Loans Past Due Commercial & 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 September 30, 2015 and December 31, 2014. 2015 2014 Commercial & Agriculture $ 2,146 $ 1,264 Commercial Real Estate—Owner Occupied 1,219 3,403 Commercial Real Estate—Non-Owner Occupied 1,519 2,134 Residential Real Estate 5,602 6,674 Real Estate Construction 30 41 Consumer and Other 29 42 Total $ 10,545 $ 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 September 30, 2015, TDRs accounted for $184 of the allowance for loan losses. As of December 31, 2014, TDRs accounted for $895 of the allowance for loan losses. The decrease is mainly the result of pay-offs. Loan modifications that are considered TDRs completed during the nine-month periods ended September 30, 2015 and September 30, 2014 were as follows: For the Nine-Month Period Ended For the Nine-Month Period Ended Number Pre-Modification Post- Number Pre-Modification Post- Commercial & Agriculture — $ — $ — — $ — $ — Commercial Real Estate—Owner Occupied — — — — — — Commercial Real Estate—Non-Owner Occupied — — — — — — Residential Real Estate — — — 5 245 245 Real Estate Construction 1 41 41 — — — Consumer and Other — — — — — — Total Loan Modifications 1 $ 41 $ 41 5 $ 245 $ 245 Loan modifications that are considered TDRs completed during the quarter ended September 30, 2015 and September 30, 2014 were as follows: For the Three-Month Period Ended For the Three-Month Period Ended Number Pre- Post- Number Pre-Modification Post- Commercial & Agriculture — $ — $ — — $ — $ — Commercial Real Estate — — — — — — Residential Real Estate — — — 3 97 97 Real Estate Construction — — — — — — Consumer and Other — — — — — — Total Loan Modifications — $ — $ — 3 $ 97 $ 97 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 origination loans, so modified loans present a higher risk of loss than do new origination loans. During both the three and nine-month periods ended September 30, 2015 and September 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 September 30, 2015 and December 31, 2014. September 30, 2015 December 31, 2014 Recorded Unpaid Related Recorded Unpaid Related With no related allowance recorded: Commercial & Agriculture $ 871 $ 1,036 $ 1,377 $ 1,504 Commercial Real Estate - Owner Occupied 2,368 2,583 2,961 3,327 Commercial Real Estate - Non-Owner Occupied 1,828 2,094 92 140 Residential Real Estate 960 1,505 1,893 3,487 Consumer and Other 4 4 5 5 Total 6,031 7,222 6,328 8,463 With an allowance recorded: Commercial & Agriculture 23 23 $ 16 927 1,056 $ 641 Commercial Real Estate - Owner Occupied 258 258 4 596 643 57 Commercial Real Estate - Non-Owner Occupied — — — 2,083 2,287 20 Residential Real Estate 1,145 1,162 295 1,215 1,223 305 Real Estate Construction — — — — — — Total 1,426 1,443 315 4,821 5,209 1,023 Total: Commercial & Agriculture 894 1,059 16 2,304 2,560 641 Commercial Real Estate - Owner Occupied 2,626 2,841 4 3,557 3,970 57 Commercial Real Estate - Non-Owner Occupied 1,828 2,094 — 2,175 2,427 20 Residential Real Estate 2,105 2,667 295 3,108 4,710 305 Real Estate Construction — — — — — — Consumer and Other 4 4 — 5 5 — Total $ 7,457 $ 8,665 $ 315 $ 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 nine-month periods ended September 30, 2015 and 2014. For the nine months ended: September 30, 2015 September 30, 2014 Average Interest Average Interest Commercial & Agriculture $ 1,680 $ 54 $ 3,570 $ 104 Commercial Real Estate - Owner Occupied 3,507 168 6,313 208 Commercial Real Estate - Non-Owner Occupied 1,997 31 2,913 31 Residential Real Estate 2,640 128 3,559 220 Real Estate Construction 20 — — — Consumer and Other 5 — 7 — Total $ 9,849 $ 381 $ 16,362 $ 563 For the three months ended: September 30, 2015 September 30, 2014 Average Interest Average Interest Commercial & Agriculture $ 1,058 $ 9 $ 2,829 $ 25 Commercial Real Estate - Owner Occupied 3,263 39 5,115 21 Commercial Real Estate - Non-Owner Occupied 1,870 12 2,770 (4 ) Residential Real Estate 2,450 49 3,336 74 Real Estate Construction 20 — — — Consumer and Other 4 — 6 — Total $ 8,665 $ 109 $ 14,056 $ 116 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 September 30, 2015 and December 31, 2014, a total of $494 and $560, respectively of foreclosed assets were included with other assets. As of September 30, 2015, included within the foreclosed assets is $494 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of September 30, 2015, the Company had initiated formal foreclosure procedures on $669 of consumer residential mortgages. |