Allowance for Loan Losses | (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 and lease losses, the Company has segmented certain loans in the portfolio by product type. 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 and one-half year period. The use of a three-year period for loss migration analysis is a change in methodology as of the third quarter of 2015. 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 $14,433 adequate to cover loan losses inherent in the loan portfolio, at March 31, 2016. The following tables present, by portfolio segment, the changes in the allowance for loan losses for the three months ended March 31, 2016 and 2015. Allowance for loan losses: March 31, 2016 Beginning Charge- Recoveries Provision Ending Commercial & Agriculture $ 1,478 $ (22 ) $ 5 $ (15 ) $ 1,446 Commercial Real Estate: Owner Occupied 2,467 — 49 (144 ) 2,372 Non-Owner Occupied 4,657 — 40 14 4,711 Residential Real Estate 4,086 (96 ) 89 35 4,114 Real Estate Construction 371 — 1 36 408 Farm Real Estate 538 — — (42 ) 496 Consumer and Other 382 (8 ) 14 (30 ) 358 Unallocated 382 — — 146 528 Total $ 14,361 $ (126 ) $ 198 $ — $ 14,433 For the three months ended March 31, 2016, the allowance for Commercial & Agriculture loans was reduced by a decrease in loan balances outstanding and by a decrease in the specific reserves required for this type, offset by an increase in general reserves as a result of higher loss rates. The result of these changes was represented as a decrease in the provision. The allowance for Commercial Real Estate – Owner Occupied loans was reduced not only by a decrease in specific reserves required for this type, but also by decreases in past due, classified and non-accrual loans for this type. The result of these changes was represented as a decrease in the provision. The allowance for Farm Real Estate loans was reduced by a decrease in general reserves required for this type as a result of lower outstanding loan balances and a decrease in loss rates. The result of these changes was represented as a decrease in the provision. The allowance for Consumer and Other loans was reduced by a decrease in general reserves required for this type as a result of lower loss rates. 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. Allowance for loan losses: March 31, 2015 Beginning Charge- Recoveries Provision Ending Commercial & Agriculture $ 1,819 $ — $ 19 $ (43 ) $ 1,795 Commercial Real Estate: Owner Occupied 2,221 (198 ) 2 (217 ) 1,808 Non-Owner Occupied 4,334 (9 ) 14 587 4,926 Residential Real Estate 3,747 (328 ) 131 116 3,666 Real Estate Construction 428 — 1 69 498 Farm Real Estate 822 — 51 (74 ) 799 Consumer and Other 200 (50 ) 14 26 190 Unallocated 697 — — (64 ) 633 Total $ 14,268 $ (585 ) $ 232 $ 400 $ 14,315 For the quarter ended March 31, 2015, the allowance for Commercial and Agriculture loans was reduced due to decreases in general reserve balances. While loan balances increased, these increases were from loans acquired which do not have an associated allowance allocation at acquisition. The acquired loans had very little impact on the provision. The result was represented as a decrease in the provision. The increase in the allowance for Commercial Real Estate—Non-Owner Occupied loans was the result of increasing 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. The allowance for Real Estate Construction loans increased as a result of a significant increase in loan balances. 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 reduce unallocated reserves at this time. The following tables present, by portfolio segment, the allocation of the allowance for loan losses and related loan balances as of March 31, 2016 and December 31, 2015. March 31, 2016 Loans acquired Loans Loans Total Allowance for loan losses: Commercial & Agriculture $ — $ — $ 1,446 $ 1,446 Commercial Real Estate: Owner Occupied — 4 2,368 2,372 Non-Owner Occupied — 23 4,688 4,711 Residential Real Estate 113 163 3,838 4,114 Real Estate Construction — — 408 408 Farm Real Estate — — 496 496 Consumer and Other — — 358 358 Unallocated — — 528 528 Total $ 113 $ 190 $ 14,130 $ 14,433 Outstanding loan balances: Commercial & Agriculture $ 131 $ 2,521 $ 119,555 $ 122,207 Commercial Real Estate: Owner Occupied — 1,650 165,209 166,859 Non-Owner Occupied — 1,982 342,735 344,717 Residential Real Estate 193 1,865 241,777 243,835 Real Estate Construction — — 64,176 64,176 Farm Real Estate — 1,398 43,562 44,960 Consumer and Other — 3 19,046 19,049 Total $ 324 $ 9,419 $ 996,060 $ 1,005,803 December 31, 2015 Loans acquired Loans Loans Total 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 The following tables present credit exposures by internally assigned grades for the periods ended March 31, 2016 and December 31, 2015. 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. March 31, 2016 Pass Special Substandard Doubtful Ending Commercial & Agriculture $ 115,464 $ 3,510 $ 3,233 $ — $ 122,207 Commercial Real Estate: Owner Occupied 157,323 4,363 5,173 — 166,859 Non-Owner Occupied 335,107 6,095 3,515 — 344,717 Residential Real Estate 60,528 1,640 7,574 — 69,742 Real Estate Construction 60,024 308 28 — 60,360 Farm Real Estate 36,407 5,664 2,889 — 44,960 Consumer and Other 2,006 2 122 — 2,130 Total $ 766,859 $ 21,582 $ 22,534 $ — $ 810,975 December 31, 2015 Pass Special Substandard Doubtful Ending 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 The following tables present performing and nonperforming loans based solely on payment activity for the periods ended March 31, 2016 and December 31, 2015 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 March 31, 2016 Performing $ 174,057 $ 3,816 $ 16,919 $ 194,792 Nonperforming 36 — — 36 Total $ 174,093 $ 3,816 $ 16,919 $ 194,828 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 The following tables include an aging analysis of the recorded investment of past due loans outstanding as of March 31, 2016 and December 31, 2015. March 31, 2016 30-59 60-89 90 Days Total Past Current Total Loans Past Due Commercial & Agriculture $ 274 $ — $ 1,264 $ 1,538 $ 120,669 $ 122,207 $ — Commercial Real Estate: Owner Occupied 245 216 590 1,051 165,808 166,859 — Non-Owner Occupied 144 1,213 340 1,697 343,020 344,717 — Residential Real Estate 2,720 70 1,482 4,272 239,563 243,835 — Real Estate Construction — — — — 64,176 64,176 — Farm Real Estate 525 — — 525 44,435 44,960 — Consumer and Other 62 9 3 74 18,975 19,049 — Total $ 3,970 $ 1,508 $ 3,679 $ 9,157 $ 996,646 $ 1,005,803 $ — December 31, 2015 30-59 60-89 90 Days Total Past Current Total Loans Past Due 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 $ — The following table presents loans on nonaccrual status as of March 31, 2016 and December 31, 2015. 2016 2015 Commercial & Agriculture $ 2,390 $ 1,185 Commercial Real Estate: Owner Occupied 1,465 1,645 Non-Owner Occupied 1,939 1,428 Residential Real Estate 4,529 4,542 Real Estate Construction 28 29 Farm Real Estate 790 961 Consumer and Other 111 100 Total $ 11,252 $ 9,890 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 March 31, 2016, TDRs accounted for $246 of the allowance for loan losses. As of December 31, 2015, TDRs accounted for $286 of the allowance for loan losses. Loan modifications that are considered TDRs completed during the three-month periods ended March 31, 2016 and March 31, 2015 were as follows: For the Three-Month Period Ended March Number Pre- Post- Commercial & Agriculture 3 $ 483 $ 483 Commercial Real Estate - Owner Occupied — — — Commercial Real Estate - Non-Owner Occupied — — — Residential Real Estate 1 232 232 Real Estate Construction — — — Farm Real Estate 2 614 614 Consumer and Other — — — Total Loan Modifications 6 $ 1,329 $ 1,329 For the Three-Month Period Ended March Number Pre- Post- Commercial & Agriculture 1 $ 6 $ 6 Commercial Real Estate - Owner Occupied — — — Commercial Real Estate - Non-Owner Occupied — — — Residential Real Estate 3 374 374 Real Estate Construction 1 41 41 Farm Real Estate — — — Consumer and Other — — — Total Loan Modifications 5 $ 421 $ 421 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-month periods ended March 31, 2016 and March 31, 2015, 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 loans with the related allowance amount, if applicable, as of March 31, 2016 and December 31, 2015. March 31, 2016 December 31, 2015 Recorded Unpaid Related Recorded Unpaid Related With no related allowance recorded: Commercial & Agriculture $ 2,521 $ 3,071 $ 851 $ 1,034 Commercial Real Estate: Owner Occupied 1,399 1,434 1,224 1,343 Non-Owner Occupied 1,921 1,924 1,742 1,826 Residential Real Estate 1,373 2,010 965 1,591 Farm Real Estate 1,398 1,398 953 1,026 Consumer and Other 3 3 3 3 Total 8,615 9,840 5,738 6,823 With an allowance recorded: Commercial & Agriculture — 22 $ — 22 23 $ 23 Commercial Real Estate: Owner Occupied 251 251 4 917 999 103 Non-Owner Occupied 61 61 23 — — — Residential Real Estate 492 511 163 808 683 260 Farm Real Estate — — — — — — Total 804 845 190 1,747 1,705 386 Total: Commercial & Agriculture 2,521 3,093 — 873 1,057 23 Commercial Real Estate: Owner Occupied 1,650 1,685 4 2,141 2,342 103 Non-Owner Occupied 1,982 1,985 23 1,742 1,826 — Residential Real Estate 1,865 2,521 163 1,773 2,274 260 Farm Real Estate 1,398 1,398 — 953 1,026 — Consumer and Other 3 3 — 3 3 — Total $ 9,419 $ 10,685 $ 190 $ 7,485 $ 8,528 $ 386 The following table includes the average recorded investment and interest income recognized for impaired financing receivables for the three-month periods ended March 31, 2016 and 2015. For the three months ended: March 31, 2016 March 31, 2015 Average Interest Average Interest Commercial & Agriculture $ 1,697 $ 39 $ 2,303 $ 26 Commercial Real Estate - Owner Occupied 1,895 26 3,328 47 Commercial Real Estate - Non-Owner Occupied 1,862 13 2,123 9 Residential Real Estate 1,753 31 2,628 27 Real Estate Construction — — 20 — Farm Real Estate 1,175 16 626 14 Consumer and Other 3 — 5 — Total $ 8,385 $ 125 $ 11,033 $ 123 Changes in the amortizable yield for purchased credit-impaired loans were as follows, since acquisition, for the three-month periods ended March 31, 2016 and 2015: At March 31, 2016 At March 31, 2015 (In Thousands) (In Thousands) Balance at beginning of period $ 80 $ — Acquisition of impaired loans — 140 Accretion (6 ) — Balance at end of period $ 74 $ 140 The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30: At March 31, 2016 At December 31, 2015 Acquired Loans with Acquired Loans with (In Thousands) Outstanding balance $ 943 $ 965 Carrying amount 324 263 There has been $113 in allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of March 31, 2016. 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 March 31, 2016 and December 31, 2015, a total of $57 and $116, respectively of foreclosed assets were included with other assets. As of March 31, 2016, included within the foreclosed assets is $57 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of March 31, 2016, the Company had initiated formal foreclosure procedures on $608 of consumer residential mortgages. |