Allowance for Loan Losses | NOTE 5 - 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. Loans are segmented into the following pools: Commercial and Agriculture loans, Commercial Real Estate – Owner Occupied loans, Commercial Real Estate – Non-owner Occupied loans, Residential Real Estate loans, Real Estate Construction loans, Farm Real Estate loans and Consumer and Other loans. Loss migration rates for each risk category are 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. The Company began using the three-year period for loss migration during the third quarter of 2015. Previously, a two-year loss migration analysis had been used for the entire loan 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 the 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 consolidated balance sheet date. The Company considers the allowance for loan losses of $14,361 adequate to cover loan losses inherent in the loan portfolio, at December 31, 2015. The following tables present, by portfolio segment, the changes in the allowance for loan losses, the ending allocation of the allowance for loan losses and the loan balances outstanding for the years ended December 31, 2015 and December 31, 2014. The changes can be impacted by overall loan volume, adversely graded loans, historical charge-offs and economic factors. Beginning Charge-offs Recoveries Provision Ending Allowance for loan losses: December 31, 2015 Commercial & Agriculture $ 1,819 $ (190 ) $ 182 $ (333 ) $ 1,478 Commercial Real Estate: Owner Occupied 2,221 (523 ) 187 582 2,467 Non-Owner Occupied 4,334 (81 ) 115 289 4,657 Residential Real Estate 3,747 (1,135 ) 331 1,143 4,086 Real Estate Construction 428 — 5 (62 ) 371 Farm Real Estate 822 — 76 (360 ) 538 Consumer and Other 200 (120 ) 46 256 382 Unallocated 697 — — (315 ) 382 Total $ 14,268 $ (2,049 ) $ 942 $ 1,200 $ 14,361 For the year ended December 31, 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 primarily the result of the resolution of an impaired loan. The Company did not incur losses with this resolution. 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 allowance for Real Estate Construction loans decreased as a result of decreasing loan balances. The allowance for Farm Real Estate loans decreased as a result of decreasing loan balances and loss rates offset by an increase in classified loans. The increase in the allowance for Consumer and other loans increased due to an increase in loss rates, which is attributable to the change in the look-back period. Unallocated reserves declined due to a change in the Company’s lookback period. As described above, 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. Beginning Charge-offs Recoveries Provision Ending Allowance for loan losses: December 31, 2014 Commercial & Agriculture $ 2,838 $ (338 ) $ 251 $ (932 ) $ 1,819 Commercial Real Estate: Owner Occupied 2,931 (1,661 ) 360 591 2,221 Non-Owner Occupied 3,888 (198 ) 50 594 4,334 Residential Real Estate 5,224 (2,449 ) 293 679 3,747 Real Estate Construction 184 — 6 238 428 Farm Real Estate 740 — — 82 822 Consumer and Other 217 (135 ) 61 57 200 Unallocated 506 — — 191 697 Total $ 16,528 $ (4,781 ) $ 1,021 $ 1,500 $ 14,268 For the year ended December 31, 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, which was driven by a decrease in the volume of impaired loans and classified loans. The net result of these changes was represented as a decrease in the provision. The decrease in the allowance for Commercial Real Estate - Owner Occupied loans was the result of eleven charge-offs, but also due to a decrease in loan balances outstanding and a decline in nonaccrual loans. The result of these changes was represented as a decrease in the allowance. The increase in the allowance for Commercial Real Estate - Non-Owner Occupied loans was the result of increasing loan balances and increased past-due balances. The allowance for Real Estate Construction loans increased as a result of a significant increase in 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. Additionally, a single relationship resulted in losses of $1,436 related to protecting the Company’s collateral. The net result of the changes was represented as a decrease in the allowance. The allowance for Consumer and Other loans decreased slightly during the year. While loan balances are up, loss rates continue to decrease resulting in the allowance being slightly lower. While we have seen improvement in asset quality, given the uncertainty in the economy, management determined that it was appropriate to maintain unallocated reserves at a slightly higher level at this time. Beginning Charge- Recoveries Provision Ending Allowance for loan losses: December 31, 2013 Commercial & Agriculture $ 2,811 $ (483 ) $ 141 $ 369 $ 2,838 Commercial Real Estate: Owner Occupied 4,565 (989 ) 265 (910 ) 2,931 Non-Owner Occupied 4,942 (815 ) 184 (423 ) 3,888 Residential Real Estate 5,780 (2,800 ) 391 1,853 5,224 Real Estate Construction 349 (136 ) 108 (137 ) 184 Farm Real Estate 632 (107 ) 67 148 740 Consumer and Other 246 (220 ) 80 111 217 Unallocated 417 — — 89 506 Total $ 19,742 $ (5,550 ) $ 1,236 $ 1,100 $ 16,528 For the year ended December 31, 2013, the allowance for Commercial Real Estate loans was reduced not only by charge-offs, but also due to the specific reserve required for impaired loans within this segment. The net result of these changes was represented as a decrease in the provision. The allowance for Real Estate Construction loans was reduced as a result of changes to specific reserves required for impaired loans and a reduction in the historical charge-offs for this segment. The result of these changes was represented as a decrease in the provision. The ending reserve balance for Residential Real Estate loans declined from the end of the previous year due to charge-offs during the period. Since these charged-off loans already had specific reserves assigned to them, we no longer need to carry as large a reserve for this segment. While we have seen improvement in asset quality, given the uncertainty in the economy, management determined that it was appropriate to maintain unallocated reserves at a higher level at this time. Loans acquired Loans Loans Total December 31, 2015 Allowance for loan losses: Commercial & Agriculture $ — $ 23 $ 1,455 $ 1,478 Commercial Real Estate: Owner Occupied — 103 2,364 2,467 Non-Owner Occupied — — 4,657 4,657 Residential Real Estate 123 137 3,826 4,086 Real Estate Construction — — 371 371 Farm Real Estate — — 538 538 Consumer and Other — — 382 382 Unallocated — — 382 382 Total $ 123 $ 263 $ 13,975 $ 14,361 Outstanding loan balances: Commercial & Agriculture $ 132 $ 873 $ 123,397 $ 124,402 Commercial Real Estate: Owner Occupied — 2,141 165,756 167,897 Non-Owner Occupied — 1,742 346,697 348,439 Residential Real Estate 131 1,642 234,565 236,338 Real Estate Construction — — 58,898 58,898 Farm Real Estate — 953 46,040 46,993 Consumer and Other — 3 18,557 18,560 Total $ 263 $ 7,354 $ 993,910 $ 1,001,527 Loans acquired Loans Loans Total December 31, 2014 Allowance for loan losses: Commercial & Agriculture $ — $ 641 $ 1,178 $ 1,819 Commercial Real Estate: Owner Occupied — 4 2,217 2,221 Non-Owner Occupied — 20 4,314 4,334 Residential Real Estate — 305 3,442 3,747 Real Estate Construction — — 428 428 Farm Real Estate — 53 769 822 Consumer and Other — — 200 200 Unallocated — — 697 697 Total $ — $ 1,023 $ 13,245 $ 14,268 Outstanding loan balances: Commercial & Agriculture $ — $ 2,304 $ 110,961 $ 113,265 Commercial Real Estate: Owner Occupied — 3,348 139,666 143,014 Non-Owner Occupied — 2,176 306,490 308,666 Residential Real Estate — 3,108 211,429 214,537 Real Estate Construction — — 65,452 65,452 Farm Real Estate — 208 53,765 53,973 Consumer and Other — 5 15,945 15,950 Total $ — $ 11,149 $ 903,708 $ 914,857 The following tables represent credit exposures by internally assigned risk ratings for the periods ended December 31, 2015 and 2014. The remaining loans in the Residential Real Estate, Real Estate Construction and Consumer and Other loan categories that are not assigned a risk grade are presented in a separate table below. 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 rating system is based on experiences with similarly graded loans. The Company’s internally assigned grades are as follows: • Pass • Special Mention • Substandard • Doubtful • Loss • Unrated Pass Special Substandard Doubtful Ending December 31, 2015 Commercial & Agriculture $ 117,739 $ 3,090 $ 3,573 $ — $ 124,402 Commercial Real Estate: Owner Occupied 156,622 5,571 5,704 — 167,897 Non-Owner Occupied 339,734 6,100 2,605 — 348,439 Residential Real Estate 62,147 1,671 7,435 — 71,253 Real Estate Construction 52,399 216 29 — 52,644 Farm Real Estate 39,787 4,024 3,182 — 46,993 Consumer and Other 1,987 3 111 — 2,101 Total $ 770,415 $ 20,675 $ 22,639 $ — $ 813,729 Pass Special Substandard Doubtful Ending December 31, 2014 Commercial & Agriculture $ 106,989 $ 3,446 $ 2,830 $ — $ 113,265 Commercial Real Estate: Owner Occupied 129,849 4,378 8,787 — 143,014 Non-Owner Occupied 299,167 5,682 3,817 — 308,666 Residential Real Estate 49,249 697 8,833 — 58,779 Real Estate Construction 59,584 19 41 — 59,644 Farm Real Estate 51,416 1,737 820 — 53,973 Consumer and Other 1,567 — 53 — 1,620 Total $ 697,821 $ 15,959 $ 25,181 $ — $ 738,961 The following tables present performing and nonperforming loans based solely on payment activity for the years ended December 31, 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 December 31, 2015 Performing $ 165,048 $ 6,254 $ 16,458 $ 187,760 Nonperforming 37 — 1 38 Total $ 165,085 $ 6,254 $ 16,459 $ 187,798 Residential Real Estate Consumer Total December 31, 2014 Performing $ 155,758 $ 5,808 $ 14,312 $ 175,878 Nonperforming — — 18 18 Total $ 155,758 $ 5,808 $ 14,330 $ 175,896 The following tables include an aging analysis of the recorded investment of past due loans outstanding as of December 31, 2015 and 2014. 30-59 60-89 90 Days Total Past Current Total Loans Past Due December 31, 2015 Commercial & Agriculture $ 9 $ 32 $ 37 $ 78 $ 124,324 $ 124,402 $ — Commercial Real Estate: Owner Occupied 982 36 284 1,302 166,595 167,897 — Non-Owner Occupied 269 330 123 722 347,717 348,439 — Residential Real Estate 2,845 404 1,725 4,974 231,364 236,338 — Real Estate Construction 8 — — 8 58,890 58,898 — Farm Real Estate — — — — 46,993 46,993 — Consumer and Other 98 68 8 174 18,386 18,560 — Total $ 4,211 $ 870 $ 2,177 $ 7,258 $ 994,269 $ 1,001,527 $ — 30-59 60-89 90 Days Total Past Current Total Loans Past Due December 31, 2014 Commercial & Agriculture $ 58 $ — $ 187 $ 245 $ 113,020 $ 113,265 $ — Commercial Real Estate: 622 251 656 1,529 141,485 143,014 — Owner Occupied Non-Owner Occupied 520 5 2,103 2,628 306,038 308,666 — Residential Real Estate 1,923 721 2,177 4,821 209,716 214,537 — Real Estate Construction 33 — 8 41 65,411 65,452 — Farm Real Estate — — 171 171 53,802 53,973 — Consumer and Other 131 9 37 177 15,773 15,950 18 Total $ 3,287 $ 986 $ 5,339 $ 9,612 $ 905,245 $ 914,857 $ 18 The following table presents loans on nonaccrual status as of December 31, 2015 and 2014. 2015 2014 Commercial & Agriculture $ 1,185 $ 1,264 Commercial Real Estate: Owner Occupied 1,645 3,403 Non-Owner Occupied 1,428 2,134 Residential Real Estate 4,542 6,280 Real Estate Construction 29 41 Farm Real Estate 961 394 Consumer and Other 100 42 Total $ 9,890 $ 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. TDRs accounted for $286 of the allowance for loan losses for December 31, 2015, $895 as of December 31, 2014 and $750 as of December 31, 2013. Loan modifications that are considered TDRs completed during the twelve month periods ended December 31, 2015, 2014 and 2013 were as follows: For the Twelve Month Period Ended Number Pre- Post- Commercial & Agriculture — $ — $ — Commercial Real Estate: Owner Occupied — — — Non-Owner Occupied — — — Residential Real Estate — — — Real Estate Construction 1 41 41 Farm Real Estate — — — Consumer and Other — — — Total Loan Modifications 1 $ 41 $ 41 For the Twelve Month Period Ended Number Pre- Post- Commercial & Agriculture — $ — $ — Commercial Real Estate: Owner Occupied — — — Non-Owner Occupied — — — Residential Real Estate 9 619 554 Real Estate Construction 1 35 35 Farm Real Estate — — — Consumer and Other — — — Total Loan Modifications 10 $ 654 $ 589 For the Twelve Month Period Ended Number Pre- Post- Commercial & Agriculture — $ — $ — Commercial Real Estate: Owner Occupied 2 547 547 Non-Owner Occupied — — — Residential Real Estate — — — Real Estate Construction — — — Farm Real Estate — — — Consumer and Other — — — Total Loan Modifications 2 $ 547 $ 547 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. During the twelve month period ended December 31, 2015, there was one default, totaling $107, on loans which were modified and considered TDRs during the previous twelve months. During the period ended December 31, 2014, there were no defaults on loans that were modified and considered TDRs during the previous twelve 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 December 31, 2015 and 2014. December 31, 2015 December 31, 2014 Recorded Unpaid Related Recorded Unpaid Related With no related allowance recorded: Commercial & Agriculture $ 851 $ 1,034 $ 1,377 $ 1,504 Commercial Real Estate: Owner Occupied 1,224 1,343 2,961 3,327 Non-Owner Occupied 1,742 1,826 92 140 Residential Real Estate 965 1,591 1,893 3,487 Farm Real Estate 953 1,026 — — Consumer and Other 3 3 5 5 Total 5,738 6,823 6,328 8,463 With an allowance recorded: Commercial & Agriculture 22 23 $ 23 927 1,056 $ 641 Commercial Real Estate: Owner Occupied 917 999 103 388 387 4 Non-Owner Occupied — — — 2,083 2,287 20 Residential Real Estate 808 683 260 1,215 1,223 305 Farm Real Estate — — — 208 256 53 Total 1,747 1,705 386 4,821 5,209 1,023 Total: Commercial & Agriculture 873 1,057 23 2,304 2,560 641 Commercial Real Estate: Owner Occupied 2,141 2,342 103 3,349 3,714 4 Non-Owner Occupied 1,742 1,826 — 2,175 2,427 20 Residential Real Estate 1,773 2,274 260 3,108 4,710 305 Farm Real Estate 953 1,026 — 208 256 53 Consumer and Other 3 3 — 5 5 — Total $ 7,485 $ 8,528 $ 386 $ 11,149 $ 13,672 $ 1,023 Changes in the amortizable yield for purchased credit-impaired loans were as follows for the year ended December 31, 2015: At December 31, 2015 (In Thousands) Balance at beginning of period $ — Acquisition of impaired loans 140 Accretion (60 ) Balance at end of period $ 80 Loans acquired with credit deterioration and of $831 and accounted for in accordance with ASC 310-30 were individually evaluated to estimate credit losses and a net recovery amount for each loan. The net cash flows for each loan were then discounted to present value using a risk-adjusted market rate. The table below presents the components of the purchase accounting adjustments. March 6, 2015 Contractually required payments $ 1,305 Non-accretable discount (691 ) Expected cash flows 614 Accretable discount (140 ) Estimated fair value $ 474 The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30: At March 6, 2015 At December 31, 2015 Acquired Loans with Acquired Loans with (In Thousands) Outstanding balance $ 1,305 $ 965 Carrying amount 474 263 There has been $123 in allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of December 31, 2015. The following tables include the average recorded investment and interest income recognized for impaired financing receivables as of, and for the years ended, December 31, 2015, 2014 and 2013. December 31, 2015 December 31, 2014 Average Interest Average Interest For the year ended: Commercial & Agriculture $ 1,519 $ 72 $ 3,316 $ 104 Commercial Real Estate: Owner Occupied 2,738 139 5,720 200 Non-Owner Occupied 1,946 32 2,767 40 Residential Real Estate 2,544 152 3,291 207 Real Estate Construction 16 — — — Farm Real Estate 653 56 219 19 Consumer and Other 4 — 6 — Total $ 9,420 $ 451 $ 15,319 $ 570 December 31, 2013 Average Interest For the year ended: Commercial & Agriculture $ 4,761 $ 186 Commercial Real Estate: Owner Occupied 6,065 417 Non-Owner Occupied 5,855 85 Residential Real Estate 4,792 282 Real Estate Construction 302 — Farm Real Estate 246 19 Consumer and Other 30 — Total $ 22,051 $ 989 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 December 31, 2015 and December 31, 2014, a total of $116 and $560, respectively of foreclosed assets were included with other assets. As of December 31, 2015, included within the foreclosed assets is $116 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of December 31, 2015, the Company had initiated formal foreclosure procedures on $340 of consumer residential mortgages. |