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. 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 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 $13,047 adequate to cover loan losses inherent in the loan portfolio, at June 30, 2017. The following tables present, by portfolio segment, the changes in the allowance for loan losses for the three and six months ended June 30, 2017 and 2016. Allowance for loan losses: For the six months ended June 30, 2017 June 30, 2017 Beginning Charge- Recoveries Provision Ending Commercial & Agriculture $ 2,018 $ (1 ) $ 83 $ (492 ) $ 1,608 Commercial Real Estate: Owner Occupied 2,171 (210 ) 18 31 2,010 Non-Owner Occupied 4,606 — 9 124 4,739 Residential Real Estate 3,089 (196 ) 87 (304 ) 2,676 Real Estate Construction 420 — 19 43 482 Farm Real Estate 442 — — (17 ) 425 Consumer and Other 314 (81 ) 14 77 324 Unallocated 245 — — 538 783 Total $ 13,305 $ (488 ) $ 230 $ — $ 13,047 For the six months ended June 30, 2017, the allowance for Commercial & Agriculture loans was reduced by a decrease in general reserves as a result of lower loss rates, offset by an increase in the specific reserves required for this type. The result of these changes was represented as a decrease in the provision. The allowance for Commercial Real Estate – Owner Occupied loans was reduced by a decrease in general reserves as a result of lower loss rates. The allowance for Commercial Real Estate – Non-Owner Occupied loans increased due to an increase in general reserves required for this type as a result of higher loan balances, offset by lower loss rates. The allowance for Residential Real Estate loans was reduced by a decrease in general reserves required for this type as a result of a decrease in loss rates, represented by a decrease in the provision. The allowance for Real Estate Construction loans increased due to higher outstanding loan balances for this type of loan and recoveries. 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. The result of these changes was represented as a decrease in the provision. The allowance for Consumer and Other loans was increased by an increase in general reserves required for this type as a result of higher loss rates. 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: For the six months ended June 30, 2016 Beginning Charge- Recoveries Provision Ending Commercial & Agriculture $ 1,478 $ (42 ) $ 35 $ 86 $ 1,557 Commercial Real Estate: Owner Occupied 2,467 (42 ) 52 (84 ) 2,393 Non-Owner Occupied 4,657 — 1,359 (1,047 ) 4,969 Residential Real Estate 4,086 (225 ) 361 (323 ) 3,899 Real Estate Construction 371 — 2 (7 ) 366 Farm Real Estate 538 — — (62 ) 476 Consumer and Other 382 (47 ) 33 (10 ) 358 Unallocated 382 — — 147 529 Total $ 14,361 $ (356 ) $ 1,842 $ (1,300 ) $ 14,547 For the six months ended June 30, 2016, the increase in the allowance for Commercial & Agriculture loans was due to an increase in general reserves as a result of higher balances and higher loss rates in criticized loans. The result was represented as an increase 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 increase in the allowance for Commercial Real Estate – Non-Owner Occupied loans was the result of an increase in general reserves required as a result of higher balances. Offsetting this was a payoff on a previously charged down loan that was received during the period resulting in a recovery of approximately $1,303. The net result was represented as a decrease in the provision. The allowance for Residential Real Estate loans was reduced by a decrease in general reserves required for this type as a result of a decrease in loss rates, represented by 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. 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: For the three months ended June 30, 2017 Beginning Charge- Recoveries Provision Ending Commercial & Agriculture $ 1,569 $ — $ 27 $ 12 $ 1,608 Commercial Real Estate: Owner Occupied 2,259 (210 ) 16 (55 ) 2,010 Non-Owner Occupied 4,543 — 4 192 4,739 Residential Real Estate 3,022 (107 ) 32 (271 ) 2,676 Real Estate Construction 413 — 14 55 482 Farm Real Estate 407 — — 18 425 Consumer and Other 354 (40 ) 11 (1 ) 324 Unallocated 733 — — 50 783 Total $ 13,300 $ (357 ) $ 104 $ — $ 13,047 For the three months ended June 30, 2017, the increase in the allowance for Commercial & Agriculture loans was due to an increase in general reserves as a result of higher loan balances. The result was represented as an increase in the provision. The allowance for Commercial Real Estate – Owner Occupied loans was reduced by a decrease in general reserves as a result of lower loss rates. The result was represented as a decrease in the provision. The allowance for Commercial Real Estate – Non-Owner Occupied loans increased due to an increase in general reserves required for this type as a result of higher loan balances, offset by lower loss rates. The allowance for Residential Real Estate loans was reduced by a decrease in general reserves required for this type as a result of a decrease in loss rates, represented by a decrease in the provision. The allowance for Real Estate Construction loans increased due to higher outstanding loan balances for this type of loan and recoveries. The allowance for Farm Real Estate loans increased due to higher outstanding loan balances for this type of loan. 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: For the three months ended June 30, 2016 Beginning Charge- Recoveries Provision Ending Commercial & Agriculture $ 1,446 $ (20 ) $ 30 $ 101 $ 1,557 Commercial Real Estate: Owner Occupied 2,372 (42 ) 3 60 2,393 Non-Owner Occupied 4,711 — 1,319 (1,061 ) 4,969 Residential Real Estate 4,114 (129 ) 272 (358 ) 3,899 Real Estate Construction 408 — 1 (43 ) 366 Farm Real Estate 496 — — (20 ) 476 Consumer and Other 358 (39 ) 19 20 358 Unallocated 528 — — 1 529 Total $ 14,433 $ (230 ) $ 1,644 $ (1,300 ) $ 14,547 For the three months ended June 30, 2016, the increase in the allowance for Commercial & Agriculture loans was due to an increase in general reserves as a result of higher loss rates in criticized loans. The result was represented as an increase in the provision. The allowance for Commercial Real Estate – Non-Owner Occupied loans increased as the result of an increase in general reserves required as a result of higher balances. Offsetting this was a payoff on a previously charged down loan that was received during the period resulting in a recovery of approximately $1,303. The net result was represented as a decrease in the provision. The allowance for Residential Real Estate loans was reduced by a decrease in general reserves required for this type as a result of a decrease in loss rates, represented by a decrease in the provision. The allowance for Real Estate Construction loans was reduced by a decrease in general reserves required for this type as result of decreased loan balances, represented by 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, represented as a decrease in the provision. 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. The following tables present, by portfolio segment, the allocation of the allowance for loan losses and related loan balances as of June 30, 2017 and December 31, 2016. June 30, 2017 Loans acquired Loans Loans Total Allowance for loan losses: Commercial & Agriculture $ 82 $ 235 $ 1,291 $ 1,608 Commercial Real Estate: Owner Occupied — 4 2,006 2,010 Non-Owner Occupied — — 4,739 4,739 Residential Real Estate 73 103 2,500 2,676 Real Estate Construction — — 482 482 Farm Real Estate — 6 419 425 Consumer and Other — — 324 324 Unallocated — — 783 783 Total $ 155 $ 348 $ 12,544 $ 13,047 Outstanding loan balances: Commercial & Agriculture $ 87 $ 1,562 $ 142,059 $ 143,708 Commercial Real Estate: Owner Occupied — 1,715 170,547 172,262 Non-Owner Occupied — 355 405,521 405,876 Residential Real Estate 151 1,487 256,942 258,580 Real Estate Construction — — 63,538 63,538 Farm Real Estate — 614 38,455 39,069 Consumer and Other — — 17,784 17,784 Total $ 238 $ 5,733 $ 1,094,846 $ 1,100,817 December 31, 2016 Loans acquired Loans Loans Total Allowance for loan losses: Commercial & Agriculture $ 86 $ 82 $ 1,850 $ 2,018 Commercial Real Estate: Owner Occupied — 4 2,167 2,171 Non-Owner Occupied — — 4,606 4,606 Residential Real Estate 89 102 2,898 3,089 Real Estate Construction — — 420 420 Farm Real Estate — — 442 442 Consumer and Other — — 314 314 Unallocated — — 245 245 Total $ 175 $ 188 $ 12,942 $ 13,305 Outstanding loan balances: Commercial & Agriculture $ 88 $ 1,983 $ 133,391 $ 135,462 Commercial Real Estate: Owner Occupied — 1,896 159,468 161,364 Non-Owner Occupied — 359 395,572 395,931 Residential Real Estate 168 1,686 245,454 247,308 Real Estate Construction — — 56,293 56,293 Farm Real Estate — 614 40,556 41,170 Consumer and Other — 1 17,977 17,978 Total $ 256 $ 6,539 $ 1,048,711 $ 1,055,506 The following tables present credit exposures by internally assigned grades for the periods ended June 30, 2017 and December 31, 2016. 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 and Other loans are not risk-graded, except when collateral is used for a business purpose. June 30, 2017 Pass Special Substandard Doubtful Ending Commercial & Agriculture $ 136,174 $ 5,245 $ 2,289 $ — $ 143,708 Commercial Real Estate: Owner Occupied 160,769 6,233 5,260 — 172,262 Non-Owner Occupied 403,157 1,916 803 — 405,876 Residential Real Estate 61,022 2,098 6,255 — 69,375 Real Estate Construction 58,340 15 27 — 58,382 Farm Real Estate 30,753 6,311 2,005 — 39,069 Consumer and Other 1,794 — 75 — 1,869 Total $ 852,009 $ 21,818 $ 16,714 $ — $ 890,541 December 31, 2016 Pass Special Substandard Doubtful Ending Commercial & Agriculture $ 127,867 $ 4,300 $ 3,295 $ — $ 135,462 Commercial Real Estate: Owner Occupied 151,659 4,016 5,689 — 161,364 Non-Owner Occupied 393,592 1,676 663 — 395,931 Residential Real Estate 59,015 1,661 6,911 — 67,587 Real Estate Construction 50,678 16 27 — 50,721 Farm Real Estate 31,814 5,673 3,683 — 41,170 Consumer and Other 2,135 — 109 — 2,244 Total $ 816,760 $ 17,342 $ 20,377 $ — $ 854,479 The following tables present performing and nonperforming loans based solely on payment activity for the periods ended June 30, 2017 and December 31, 2016 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, 2017 Performing $ 189,205 $ 5,156 $ 15,871 $ 210,232 Nonperforming — — 44 44 Total $ 189,205 $ 5,156 $ 15,915 $ 210,276 Residential Real Estate Consumer Total December 31, 2016 Performing $ 179,721 $ 5,572 $ 15,725 $ 201,018 Nonperforming — — 9 9 Total $ 179,721 $ 5,572 $ 15,734 $ 201,027 Civista Bancshares, Inc. Notes to Interim Consolidated Financial Statements (Unaudited) Form 10-Q (Amounts in thousands, except share data) The following tables include an aging analysis of the recorded investment of past due loans outstanding as of June 30, 2017 and December 31, 2016. June 30, 2017 30-59 60-89 90 Days Total Past Current Purchased Total Loans Past Due Commercial & Agriculture $ 249 $ — $ 10 $ 259 $ 143,362 $ 87 $ 143,708 $ — Commercial Real Estate: Owner Occupied 334 640 614 1,588 170,674 — 172,262 — Non-Owner Occupied — — 600 600 405,276 — 405,876 — Residential Real Estate 263 198 979 1,440 256,989 151 258,580 — Real Estate Construction — — 27 27 63,511 — 63,538 — Farm Real Estate 504 — — 504 38,565 — 39,069 — Consumer and Other 150 11 44 205 17,579 — 17,784 44 Total $ 1,500 $ 849 $ 2,274 $ 4,623 $ 1,095,956 $ 238 $ 1,100,817 $ 44 December 31, 2016 30-59 60-89 90 Days Total Past Current Purchased Total Loans Past Due Commercial & Agriculture $ 156 $ 20 $ 152 $ 328 $ 135,046 $ 88 $ 135,462 $ — Commercial Real Estate: Owner Occupied 722 553 280 1,555 159,809 — 161,364 — Non-Owner Occupied 147 — 316 463 395,468 — 395,931 — Residential Real Estate 1,812 507 1,049 3,368 243,772 168 247,308 — Real Estate Construction — — 27 27 56,266 — 56,293 — Farm Real Estate 93 — — 93 41,077 — 41,170 — Consumer and Other 215 31 31 277 17,701 — 17,978 9 Total $ 3,145 $ 1,111 $ 1,855 $ 6,111 $ 1,049,139 $ 256 $ 1,055,506 $ 9 The following table presents loans on nonaccrual status, excluding purchased credit-impaired (PCI) loans, as of June 30, 2017 and December 31, 2016. June 30, December 31, Commercial & Agriculture $ 1,342 $ 1,622 Commercial Real Estate: Owner Occupied 1,715 1,461 Non-Owner Occupied 611 464 Residential Real Estate 2,987 3,266 Real Estate Construction 27 27 Farm Real Estate — 2 Consumer and Other 70 101 Total $ 6,752 $ 6,943 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, 2017, TDRs accounted for $421 of the allowance for loan losses. As of December 31, 2016, TDRs accounted for $278 of the allowance for loan losses. Loan modifications that are considered TDRs completed during the periods ended June 30, 2017 and June 30, 2016 were as follows: For the Six-Month Period Ended June 30, 2017 Number Pre-Modification Post- Commercial & Agriculture — $ — $ — Commercial Real Estate—Owner Occupied — — — Commercial Real Estate—Non-Owner Occupied — — — Residential Real Estate 1 13 13 Real Estate Construction — — — Farm Real Estate — — — Consumer and Other — — — Total Loan Modifications 1 $ 13 $ 13 For the Six-Month Period Ended June 30, 2016 Number Pre-Modification Post- Commercial & Agriculture 4 $ 529 $ 529 Commercial Real Estate—Owner Occupied — — — Commercial Real Estate—Non-Owner Occupied — — — Residential Real Estate 2 308 308 Real Estate Construction — — — Farm Real Estate 2 614 614 Consumer and Other — — — Total Loan Modifications 8 $ 1,451 $ 1,451 For the Three-Month Period Ended June 30, 2017 Number Pre-Modification Post- Commercial & Agriculture — $ — $ — Commercial Real Estate—Owner Occupied — — — Commercial Real Estate—Non-Owner Occupied — — — Residential Real Estate 1 13 13 Real Estate Construction — — — Farm Real Estate — — — Consumer and Other — — — Total Loan Modifications 1 $ 13 $ 13 For the Three-Month Period Ended June 30, 2016 Number Pre-Modification Post- Commercial & Agriculture 1 $ 47 $ 47 Commercial Real Estate—Owner Occupied — — — Commercial Real Estate—Non-Owner Occupied — — — Residential Real Estate 1 76 76 Real Estate Construction — — — Farm Real Estate — — — Consumer and Other — — — Total Loan Modifications 2 $ 123 $ 123 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 six-month periods ended June 30, 2017 and June 30, 2016, there were no defaults on loans that were modified and considered TDRs during the respective twelve previous months. Impaired Loans: The following table includes the recorded investment and unpaid principal balances for impaired financing receivables, excluding PCI loans, with the associated allowance amount, if applicable, as of June 30, 2017 and December 31, 2016. June 30, 2017 December 31, 2016 Recorded Unpaid Related Recorded Unpaid Related With no related allowance recorded: Commercial & Agriculture $ 375 $ 376 $ 1,230 $ 1,751 Commercial Real Estate: Owner Occupied 1,485 1,650 1,658 1,803 Non-Owner Occupied 355 381 359 386 Residential Real Estate 1,105 1,177 1,259 1,590 Farm Real Estate 150 150 614 614 Consumer and Other — — 1 1 Total 3,470 3,734 5,121 6,145 With an allowance recorded: Commercial & Agriculture 1,187 1,737 $ 235 753 1,303 $ 82 Commercial Real Estate: Owner Occupied 230 230 4 238 238 4 Non-Owner Occupied — — — — — — Residential Real Estate 382 386 103 427 431 102 Farm Real Estate 464 464 6 — — — Total 2,263 2,817 348 1,418 1,972 188 Total: Commercial & Agriculture 1,562 2,113 235 1,983 3,054 82 Commercial Real Estate: Owner Occupied 1,715 1,880 4 1,896 2,041 4 Non-Owner Occupied 355 381 — 359 386 — Residential Real Estate 1,487 1,563 103 1,686 2,021 102 Farm Real Estate 614 614 6 614 614 — Consumer and Other — — — 1 1 — Total $ 5,733 $ 6,551 $ 348 $ 6,539 $ 8,117 $ 188 The following table includes the average recorded investment and interest income recognized for impaired financing receivables for the three- and six-month periods ended June 30, 2017 and 2016. For the six months ended: June 30, 2017 June 30, 2016 Average Interest Average Interest Commercial & Agriculture $ 1,756 $ 20 $ 1,937 $ 11 Commercial Real Estate—Owner Occupied 1,829 48 1,800 45 Commercial Real Estate—Non-Owner Occupied 357 3 1,489 857 Residential Real Estate 1,610 39 1,799 39 Real Estate Construction — — — — Farm Real Estate 614 13 1,250 10 Consumer and Other — — 3 — Total $ 6,166 $ 123 $ 8,278 $ 962 For the three months ended: June 30, 2017 June 30, 2016 Average Interest Average Interest Commercial & Agriculture $ 1,643 $ 6 $ 2,469 $ 8 Commercial Real Estate—Owner Occupied 1,795 26 1,630 20 Commercial Real Estate—Non-Owner Occupied 356 2 1,363 853 Residential Real Estate 1,572 19 1,878 20 Real Estate Construction — — — — Farm Real Estate 614 7 1,398 6 Consumer and Other — — 2 — Total $ 5,980 $ 60 $ 8,740 $ 907 Changes in the amortizable yield for PCI loans were as follows, since acquisition: For the Six-Month For the Six-Month (In Thousands) (In Thousands) Balance at beginning of period $ 49 $ 82 Acquisition of PCI loans — — Accretion (18 ) (16 ) Balance at end of period $ 31 $ 66 For the Three-Month For the Three-Month (In Thousands) (In Thousands) Balance at beginning of period $ 40 $ 74 Acquisition of PCI loans — — Accretion (9 ) (8 ) Balance at end of period $ 31 $ 66 The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30: At June 30, 2017 At December 31, 2016 Acquired Loans with Acquired Loans with (In Thousands) Outstanding balance $ 814 $ 850 Carrying amount 238 256 There has been $155 and $175 in allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of June 30, 2017 and December 31, 2016, respectively. 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, 2017 and December 31, 2016, a total of $27 and $37, respectively of foreclosed assets were included with other assets. As of June 30, 2017, included within the foreclosed assets is $27 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, 2017 and December 31, 2016, the Company had initiated formal foreclosure procedures on $328 and $710, respectively, of consumer residential mortgages. |