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. 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 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 $13,134 adequate to cover loan losses inherent in the loan portfolio, at December 31, 2017. 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, 2017, 2016 and 2015. The changes can be impacted by overall loan volume, adversely graded loans, historical charge-offs and economic factors. NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) Allowance for loan losses: December 31, 2017 Beginning balance Charge-offs Recoveries Provision (Credit) Ending Balance Commercial & Agriculture $ 2,018 $ (11 ) $ 372 $ (817 ) $ 1,562 Commercial Real Estate: Owner Occupied 2,171 (328 ) 69 131 2,043 Non-Owner Occupied 4,606 (38 ) 46 693 5,307 Residential Real Estate 3,089 (400 ) 194 (973 ) 1,910 Real Estate Construction 420 — 44 370 834 Farm Real Estate 442 — 3 (15 ) 430 Consumer and Other 314 (165 ) 43 98 290 Unallocated 245 — — 513 758 Total $ 13,305 $ (942 ) $ 771 $ — $ 13,134 For the year ended December 31, 2017, the allowance for Commercial & Agriculture 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 – Owner Occupied loans was reduced by a decrease in general reserves and charge-offs. 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. 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. 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 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. NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) Allowance for loan losses: December 31, 2016 Beginning balance Charge-offs Recoveries Provision (Credit) Ending Balance Commercial & Agriculture $ 1,478 $ (880 ) $ 105 $ 1,315 $ 2,018 Commercial Real Estate: Owner Occupied 2,467 (228 ) 56 (124 ) 2,171 Non-Owner Occupied 4,657 (23 ) 1,372 (1,400 ) 4,606 Residential Real Estate 4,086 (455 ) 479 (1,021 ) 3,089 Real Estate Construction 371 (115 ) 12 152 420 Farm Real Estate 538 — — (96 ) 442 Consumer and Other 382 (125 ) 46 11 314 Unallocated 382 — — (137 ) 245 Total $ 14,361 $ (1,826 ) $ 2,070 $ (1,300 ) $ 13,305 For the year ended December 31, 2016, the increase in 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 a decrease in general reserves due to decreases in classified, non-accrual loans and lower loss rates for this type. The result of these changes was represented as a decrease in the provision. The decrease in allowance for Commercial Real Estate – Non-Owner Occupied loans was the result of a decrease in general reserves required as a result of lower loss rates and improvement in past due, classified and non-accrual loans for this type. In addition, a payoff on a previously charged down loan was received 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 increased due to an increase in loss rates for this type of loan, which was represented as an increase 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. NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) Allowance for loan losses: December 31, 2015 Beginning balance Charge-offs Recoveries Provision (Credit) Ending Balance 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 resulted in a decline in the unallocated balance with corresponding increase in allocated balances within the reserve calculation. While loan balances were up, loss rates continued to trend downward, exclusive of the change in methodology, resulting in a lower allowance balance. While criticized loans increased slightly, we saw significant improvement in nonperforming loan balances resulting in a decline in specific reserves for impaired loans. As of December 31, 2015, management felt that the unallocated amount was appropriate and within the relevant range for the allowance that was reflective of the risk in the portfolio. NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) The following tables present, by portfolio segment, the allocation of the allowance for loan losses and related loan balances as of December 31, 2017 and December 31, 2016. December 31, 2017 Loans acquired with credit deterioration Loans individually evaluated for impairment Loans collectively evaluated for impairment Total Allowance for loan losses: Commercial & Agriculture $ 82 $ 4 $ 1,476 $ 1,562 Commercial Real Estate: Owner Occupied — 6 2,037 2,043 Non-Owner Occupied — — 5,307 5,307 Residential Real Estate 44 109 1,757 1,910 Real Estate Construction — — 834 834 Farm Real Estate — 6 424 430 Consumer and Other — — 290 290 Unallocated — — 758 758 Total $ 126 $ 125 $ 12,883 $ 13,134 Outstanding loan balances: Commercial & Agriculture $ 87 $ 438 $ 151,948 $ 152,473 Commercial Real Estate: Owner Occupied — 1,010 163,089 164,099 Non-Owner Occupied — 44 425,579 425,623 Residential Real Estate 128 1,360 267,247 268,735 Real Estate Construction — — 97,531 97,531 Farm Real Estate — 608 38,853 39,461 Consumer and Other — — 16,739 16,739 Total $ 215 $ 3,460 $ 1,160,986 $ 1,164,661 NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) December 31, 2016 Loans acquired with credit deterioration Loans individually evaluated for impairment Loans collectively evaluated for impairment 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 represent credit exposures by internally assigned risk ratings for the periods ended December 31, 2017 and 2016. 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 – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. • Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected. • Substandard – loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that Civista will sustain some loss if the deficiencies are not corrected. • Doubtful – loans classified as doubtful have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances. NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) • Loss – loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted. • Unrated – 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. December 31, 2017 Pass Special Mention Substandard Doubtful Ending Balance Commercial & Agriculture $ 140,842 $ 8,412 $ 3,219 $ — $ 152,473 Commercial Real Estate: Owner Occupied 155,756 1,166 7,177 — 164,099 Non-Owner Occupied 422,363 2,321 939 — 425,623 Residential Real Estate 62,628 1,997 5,873 — 70,498 Real Estate Construction 91,545 15 27 — 91,587 Farm Real Estate 25,228 11,236 2,997 — 39,461 Consumer and Other 1,312 — 70 — 1,382 Total $ 899,674 $ 25,147 $ 20,302 $ — $ 945,123 December 31, 2016 Pass Special Mention Substandard Doubtful Ending Balance 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 NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) The following tables present performing and nonperforming loans based solely on payment activity for the years ended December 31, 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. December 31, 2017 Residential Real Estate Real Estate Construction Consumer and Other Total Performing $ 198,237 $ 5,944 $ 15,341 $ 219,522 Nonperforming — — 16 16 Total $ 198,237 $ 5,944 $ 15,357 $ 219,538 December 31, 2016 Residential Real Estate Real Estate Construction Consumer and Other Total Performing $ 179,721 $ 5,572 $ 15,725 $ 201,018 Nonperforming — — 9 9 Total $ 179,721 $ 5,572 $ 15,734 $ 201,027 The following tables include an aging analysis of the recorded investment of past due loans outstanding as of December 31, 2017 and 2016. December 31, 2017 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Total Past Due Current Purchased Credit- Impaired Loans Total Loans Past Due 90 Days and Accruing Commercial & Agriculture $ 575 $ 2 $ 685 $ 1,262 $ 151,124 $ 87 $ 152,473 $ — Commercial Real Estate: Owner Occupied 897 104 484 1,485 162,614 — 164,099 — Non-Owner Occupied 133 — 470 603 425,020 — 425,623 — Residential Real Estate 1,613 229 785 2,627 265,980 128 268,735 — Real Estate Construction — — 27 27 97,504 — 97,531 — Farm Real Estate 27 — 186 213 39,248 — 39,461 — Consumer and Other 92 96 16 204 16,535 — 16,739 16 Total $ 3,337 $ 431 $ 2,653 $ 6,421 $ 1,158,025 $ 215 $ 1,164,661 $ 16 NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) December 31, 2016 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Total Past Due Current Purchased Credit- Impaired Loans Total Loans Past Due 90 Days and Accruing 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 December 31, 2017 and 2016. 2017 2016 Commercial & Agriculture $ 887 $ 1,622 Commercial Real Estate: Owner Occupied 1,476 1,461 Non-Owner Occupied 711 464 Residential Real Estate 2,778 3,266 Real Estate Construction 27 27 Farm Real Estate 186 2 Consumer and Other 67 101 Total $ 6,132 $ 6,943 Nonaccrual Loans: NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) 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 $169 of the allowance for loan losses as of December 31, 2017, $278 as of December 31, 2016 and $286 as of December 31, 2015. Loan modifications that are considered TDRs completed during the twelve month periods ended December 31, 2017, 2016 and 2015 were as follows: For the Twelve Month Period Ended December 31, 2017 Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Commercial & Agriculture — $ — $ — Commercial Real Estate: Owner Occupied — — — Non-Owner Occupied — — — Residential Real Estate 1 13 13 Real Estate Construction — — — Farm Real Estate — — — Consumer and Other — — — Total Loan Modifications 1 $ 13 $ 13 NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) For the Twelve Month Period Ended December 31, 2016 Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Commercial & Agriculture 4 $ 529 $ 529 Commercial Real Estate: Owner Occupied — — — Non-Owner Occupied — — — Residential Real Estate 2 308 308 Real Estate Construction — — — Farm Real Estate 3 700 700 Consumer and Other — — — Total Loan Modifications 9 $ 1,537 $ 1,537 For the Twelve Month Period Ended December 31, 2015 Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment 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 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 periods ended December 31, 2017 and 2016, there were no defaults on loans that were modified and considered TDRs during the previous twelve months. 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. NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) Impaired Loans: The following tables include the recorded investment and unpaid principal balances for impaired financing receivables, excluding PCI loans, with the associated allowance amount, if applicable, as of December 31, 2017 and 2016. December 31, 2017 December 31, 2016 Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded: Commercial & Agriculture $ — $ — $ 1,230 $ 1,751 Commercial Real Estate: Owner Occupied 693 913 1,658 1,803 Non-Owner Occupied 44 48 359 386 Residential Real Estate 977 1,049 1,259 1,590 Farm Real Estate 148 148 614 614 Consumer and Other — — 1 1 Total 1,862 2,158 5,121 6,145 With an allowance recorded: Commercial & Agriculture 438 438 $ 4 753 1,303 $ 82 Commercial Real Estate: Owner Occupied 317 317 6 238 238 4 Non-Owner Occupied — — — — — — Residential Real Estate 383 387 109 427 431 102 Farm Real Estate 460 460 6 — — — Total 1,598 1,602 125 1,418 1,972 188 Total: Commercial & Agriculture 438 438 4 1,983 3,054 82 Commercial Real Estate: Owner Occupied 1,010 1,230 6 1,896 2,041 4 Non-Owner Occupied 44 48 — 359 386 — Residential Real Estate 1,360 1,436 109 1,686 2,021 102 Farm Real Estate 608 608 6 614 614 — Consumer and Other — — — 1 1 — Total $ 3,460 $ 3,760 $ 125 $ 6,539 $ 8,117 $ 188 NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) 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, 2017, 2016 and 2015. For the year ended: December 31, 2017 December 31, 2016 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Commercial & Agriculture $ 1,375 $ 34 $ 2,036 $ 40 Commercial Real Estate: Owner Occupied 1,507 75 1,847 862 Non-Owner Occupied 233 6 1,039 83 Residential Real Estate 1,515 73 1,787 175 Real Estate Construction — — — 1 Farm Real Estate 613 28 1,006 95 Consumer and Other — — 2 — Total $ 5,243 $ 216 $ 7,717 $ 1,256 For the year ended: December 31, 2015 Average Recorded Investment Interest Income Recognized Commercial & Agriculture $ 1,519 $ 54 Commercial Real Estate: Owner Occupied 2,738 139 Non-Owner Occupied 1,946 32 Residential Real Estate 2,544 103 Real Estate Construction 16 — Farm Real Estate 653 56 Consumer and Other 4 — Total $ 9,420 $ 384 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, 2017 and 2016, a total of $16 and $37, respectively of foreclosed assets were included with other assets. As of December 31, 2017, included within the foreclosed assets is $16 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, 2017 and 2016, the Company had initiated formal foreclosure procedures on $239 and $710, respectively of consumer residential mortgages. NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) Changes in the amortizable yield for PCI loans were as follows, since acquisition: At December 31, 2017 At December 31, 2016 (In Thousands) (In Thousands) Balance at beginning of period $ 49 $ 80 Acquisition of PCI loans — — Accretion (34 ) (31 ) Balance at end of period $ 15 $ 49 The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30: At December 31, 2017 At December 31, 2016 Acquired Loans with Specific Evidence of Deterioration of Credit Quality (ASC 310-30) Acquired Loans with Specific Evidence of Deterioration of Credit Quality (ASC 310-30) (In Thousands) Outstanding balance $ 775 $ 850 Carrying amount 215 256 There has been $126 and $175 in allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of December 31, 2017 and 2016, respectively. |