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 $13,679 adequate to cover loan losses inherent in the loan portfolio, at December 31, 2018. 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, 2018, 2017 and 2016. 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, 2018 Beginning balance Charge-offs Recoveries Provision (Credit) Ending Balance Commercial & Agriculture $ 1,562 $ (249 ) $ 169 $ 265 $ 1,747 Commercial Real Estate: Owner Occupied 2,043 (193 ) 158 (46 ) 1,962 Non-Owner Occupied 5,307 (153 ) 28 621 5,803 Residential Real Estate 1,910 (105 ) 208 (482 ) 1,531 Real Estate Construction 834 — — 212 1,046 Farm Real Estate 430 — 5 (38 ) 397 Consumer and Other 290 (203 ) 100 97 284 Unallocated 758 — — 151 909 Total $ 13,134 $ (903 ) $ 668 $ 780 $ 13,679 For the year ended December 31, 2018, the allowance for Commercial & Agriculture loans increased as a result of an increase in general reserves due to 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. 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, 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. 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. 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, 2018 and December 31, 2017. December 31, 2018 Loans acquired with credit deterioration Loans individually evaluated for impairment Loans collectively evaluated for impairment Total Allowance for loan losses: Commercial & Agriculture $ — $ — $ 1,747 $ 1,747 Commercial Real Estate: Owner Occupied — 12 1,950 1,962 Non-Owner Occupied — — 5,803 5,803 Residential Real Estate 8 122 1,401 1,531 Real Estate Construction — — 1,046 1,046 Farm Real Estate — 7 390 397 Consumer and Other — — 284 284 Unallocated — — 909 909 Total $ 8 $ 141 $ 13,530 $ 13,679 Outstanding loan balances: Commercial & Agriculture $ 41 $ 367 $ 176,693 $ 177,101 Commercial Real Estate: Owner Occupied — 484 209,637 210,121 Non-Owner Occupied — 31 523,567 523,598 Residential Real Estate 883 1,279 455,688 457,850 Real Estate Construction — — 135,195 135,195 Farm Real Estate — 696 37,817 38,513 Consumer and Other — — 19,563 19,563 Total $ 924 $ 2,857 $ 1,558,160 $ 1,561,941 NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) 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 The following tables represent credit exposures by internally assigned risk ratings for the periods ended December 31, 2018 and 2017. 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. • 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. NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) December 31, 2018 Pass Special Mention Substandard Doubtful Ending Balance Commercial & Agriculture $ 173,783 $ 1,509 $ 1,809 $ — $ 177,101 Commercial Real Estate: Owner Occupied 201,228 3,512 5,381 — 210,121 Non-Owner Occupied 520,487 2,023 1,088 — 523,598 Residential Real Estate 70,908 580 7,363 — 78,851 Real Estate Construction 124,769 13 41 — 124,823 Farm Real Estate 32,908 3,096 2,509 — 38,513 Consumer and Other 1,713 — 20 — 1,733 Total $ 1,125,796 $ 10,733 $ 18,211 $ — $ 1,154,740 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 The following tables present performing and nonperforming loans based solely on payment activity for the years ended December 31, 2018 and December 31, 2017 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, 2018 Residential Real Estate Real Estate Construction Consumer and Other Total Performing $ 378,999 $ 10,372 $ 17,830 $ 407,201 Nonperforming — — — — Total $ 378,999 $ 10,372 $ 17,830 $ 407,201 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 NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) The following tables include an aging analysis of the recorded investment of past due loans outstanding as of December 31, 2018 and 2017. December 31, 2018 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 $ 225 $ — $ 92 $ 317 $ 176,743 $ 41 $ 177,101 $ — Commercial Real Estate: Owner Occupied 547 413 564 1,524 208,597 — 210,121 — Non-Owner Occupied 288 290 372 950 522,648 — 523,598 — Residential Real Estate 7,118 677 806 8,601 448,366 883 457,850 — Real Estate Construction — 12 27 39 135,156 — 135,195 — Farm Real Estate 33 — 158 191 38,322 — 38,513 — Consumer and Other 117 57 9 183 19,380 — 19,563 — Total $ 8,328 $ 1,449 $ 2,028 $ 11,805 $ 1,549,212 $ 924 $ 1,561,941 $ — 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 The following table presents loans on nonaccrual status, excluding purchased credit-impaired (PCI) loans, as of December 31, 2018 and 2017. 2018 2017 Commercial & Agriculture $ 270 $ 887 Commercial Real Estate: Owner Occupied 942 1,476 Non-Owner Occupied 374 711 Residential Real Estate 3,886 2,778 Real Estate Construction 41 27 Farm Real Estate 338 186 Consumer and Other 18 67 Total $ 5,869 $ 6,132 NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) 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 $143 of the allowance for loan losses as of December 31, 2018, $169 as of December 31, 2017 and $278 as of December 31, 2016. Loan modifications that are considered TDRs completed during the twelve month periods ended December 31, 2018, 2017 and 2016 were as follows: For the Twelve Month Period Ended December 31, 2018 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 23 23 Real Estate Construction — — — Farm Real Estate 1 110 110 Consumer and Other — — — Total Loan Modifications 2 $ 133 $ 133 NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) 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 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 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, 2018, 2017 and 2016, there were no defaults on loans that were modified and considered TDRs during the previous twelve months. Impaired Loans: NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) 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, 2018 and 2017. December 31, 2018 December 31, 2017 Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded: Commercial & Agriculture $ 367 $ 367 $ — $ — Commercial Real Estate: Owner Occupied 193 193 693 913 Non-Owner Occupied 31 34 44 48 Residential Real Estate 1,017 1,089 977 1,049 Farm Real Estate 256 256 148 148 Consumer and Other — — — — Total 1,864 1,939 1,862 2,158 With an allowance recorded: Commercial & Agriculture — — $ — 438 438 $ 4 Commercial Real Estate: Owner Occupied 291 291 12 317 317 6 Non-Owner Occupied — — — — — — Residential Real Estate 262 265 122 383 387 109 Farm Real Estate 440 440 7 460 460 6 Total 993 996 141 1,598 1,602 125 Total: Commercial & Agriculture 367 367 — 438 438 4 Commercial Real Estate: Owner Occupied 484 484 12 1,010 1,230 6 Non-Owner Occupied 31 34 — 44 48 — Residential Real Estate 1,279 1,354 122 1,360 1,436 109 Farm Real Estate 696 696 7 608 608 6 Consumer and Other — — — — — — Total $ 2,857 $ 2,935 $ 141 $ 3,460 $ 3,760 $ 125 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, 2018, 2017 and 2016. For the year ended: December 31, 2018 December 31, 2017 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Commercial & Agriculture $ 636 $ 25 $ 1,375 $ 34 Commercial Real Estate: Owner Occupied 610 33 1,507 75 Non-Owner Occupied 39 5 233 6 Residential Real Estate 1,519 75 1,515 73 Real Estate Construction — — — — Farm Real Estate 716 29 613 28 Consumer and Other — — — — Total $ 3,520 $ 167 $ 5,243 $ 216 For the year ended: December 31, 2016 Average Recorded Investment Interest Income Recognized Commercial & Agriculture $ 2,036 $ 40 Commercial Real Estate: Owner Occupied 1,847 862 Non-Owner Occupied 1,039 83 Residential Real Estate 1,787 175 Real Estate Construction — 1 Farm Real Estate 1,006 95 Consumer and Other 2 — Total $ 7,717 $ 1,256 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, 2018 and 2017, a total of $0 and $16, respectively, of foreclosed assets were included with other assets. As of December 31, 2018 and 2017, the Company had initiated formal foreclosure procedures on $311 and $239, respectively, of consumer residential mortgages. Changes in the amortizable yield for PCI loans were as follows, since acquisition: At December 31, 2018 At December 31, 2017 (In Thousands) (In Thousands) Balance at beginning of period $ 15 $ 49 Acquisition of PCI loans 334 — Accretion (13 ) (34 ) Balance at end of period $ 336 $ 15 Loans acquired with credit deterioration of $878 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. NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) September 14, 2018 (In Thousands) Contractually required payments $ 2,353 Non-accretable discount (1,141 ) Expected cash flows 1,212 Accretable discount (334 ) Estimated fair value $ 878 The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30: At December 31, 2018 At December 31, 2017 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 $ 1,805 $ 775 Carrying amount 924 215 There has been $8 and $126 in allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of December 31, 2018 and 2017, respectively. |