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 $14,767 adequate to cover loan losses inherent in the loan portfolio, at December 31, 2019. 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, 2019, 2018 and 2017. 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, 2019 Beginning balance Charge-offs Recoveries Provision (Credit) Ending Balance Commercial & Agriculture $ 1,747 $ (114 ) $ 86 $ 500 $ 2,219 Commercial Real Estate: Owner Occupied 1,962 (161 ) 289 451 2,541 Non-Owner Occupied 5,803 — 102 679 6,584 Residential Real Estate 1,531 (294 ) 259 86 1,582 Real Estate Construction 1,046 (24 ) 3 225 1,250 Farm Real Estate 397 — 5 (58 ) 344 Consumer and Other 284 (183 ) 85 61 247 Unallocated 909 — — (909 ) — Total $ 13,679 $ (776 ) $ 829 $ 1,035 $ 14,767 For the year ended December 31, 2019, 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 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 – 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 increased as a result of an increase in general reserves required for this type as a result of an increase in outstanding loan balances, represented by an increase 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, 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. 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) The following tables present, by portfolio segment, the allocation of the allowance for loan losses and related loan balances as of December 31, 2019 and December 31, 2018. December 31, 2019 Loans acquired with credit deterioration Loans individually evaluated for impairment Loans collectively evaluated for impairment Total Allowance for loan losses: Commercial & Agriculture $ — $ — $ 2,219 $ 2,219 Commercial Real Estate: Owner Occupied — 9 2,532 2,541 Non-Owner Occupied — — 6,584 6,584 Residential Real Estate — 82 1,500 1,582 Real Estate Construction — — 1,250 1,250 Farm Real Estate — — 344 344 Consumer and Other — — 247 247 Unallocated — — — — Total $ — $ 91 $ 14,676 $ 14,767 Outstanding loan balances: Commercial & Agriculture $ — $ 367 $ 202,743 $ 203,110 Commercial Real Estate: Owner Occupied — 426 245,180 245,606 Non-Owner Occupied — 374 591,848 592,222 Residential Real Estate 467 1,764 460,801 463,032 Real Estate Construction — — 155,825 155,825 Farm Real Estate — 666 33,448 34,114 Consumer and Other — — 15,061 15,061 Total $ 467 $ 3,597 $ 1,704,906 $ 1,708,970 NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) 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 The following tables represent credit exposures by internally assigned risk ratings for the periods ended December 31, 2019 and 2018. 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, 2019 Pass Special Mention Substandard Doubtful Ending Balance Commercial & Agriculture $ 199,649 $ 2,236 $ 1,225 $ — $ 203,110 Commercial Real Estate: Owner Occupied 237,171 5,617 2,818 — 245,606 Non-Owner Occupied 588,633 2,155 1,434 — 592,222 Residential Real Estate 73,289 528 6,495 — 80,312 Real Estate Construction 145,251 — 9 — 145,260 Farm Real Estate 30,808 567 2,739 — 34,114 Consumer and Other 1,289 — 6 — 1,295 Total $ 1,276,090 $ 11,103 $ 14,726 $ — $ 1,301,919 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 The following tables present performing and nonperforming loans based solely on payment activity for the years ended December 31, 2019 and December 31, 2018 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, 2019 Residential Real Estate Real Estate Construction Consumer and Other Total Performing $ 382,720 $ 10,565 $ 13,766 $ 407,051 Nonperforming — — — — Total $ 382,720 $ 10,565 $ 13,766 $ 407,051 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 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, 2019 and 2018. December 31, 2019 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 $ 27 $ 35 $ 106 $ 168 $ 202,942 $ — $ 203,110 $ — Commercial Real Estate: Owner Occupied 453 63 663 1,179 244,427 — 245,606 — Non-Owner Occupied — — 8 8 592,214 — 592,222 — Residential Real Estate 2,399 198 1,775 4,372 458,193 467 463,032 — Real Estate Construction — — — — 155,825 — 155,825 — Farm Real Estate — — 7 7 34,107 — 34,114 — Consumer and Other 129 46 — 175 14,886 — 15,061 — Total $ 3,008 $ 342 $ 2,559 $ 5,909 $ 1,702,594 $ 467 $ 1,708,970 $ — 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 $ — The following table presents loans on nonaccrual status, excluding purchased credit-impaired (PCI) loans, as of December 31, 2019 and 2018. 2019 2018 Commercial & Agriculture $ 173 $ 270 Commercial Real Estate: Owner Occupied 938 942 Non-Owner Occupied 8 374 Residential Real Estate 4,183 3,886 Real Estate Construction 9 41 Farm Real Estate 284 338 Consumer and Other 4 18 Total $ 5,599 $ 5,869 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 $91 of the allowance for loan losses as of December 31, 2019, $141 as of December 31, 2018 and $169 as of December 31, 2017. Loan modifications that are considered TDRs completed during the twelve month periods ended December 31, 2019, 2018 and 2017 were as follows: For the Twelve Month Period Ended December 31, 2019 Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Commercial & Agriculture — $ — $ — Commercial Real Estate: Owner Occupied — — — Non-Owner Occupied 1 382 382 Residential Real Estate — — — Real Estate Construction — — — Farm Real Estate — — — Consumer and Other — — — Total Loan Modifications 1 $ 382 $ 382 NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) 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 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 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, 2019, 2018 and 2017, 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 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 December 31, 2019 and 2018. December 31, 2019 December 31, 2018 Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded: Commercial & Agriculture $ 367 $ 367 $ 367 $ 367 Commercial Real Estate: Owner Occupied 168 168 193 193 Non-Owner Occupied 374 374 31 34 Residential Real Estate 1,571 1,643 1,017 1,089 Farm Real Estate 666 666 256 256 Total 3,146 3,218 1,864 1,939 With an allowance recorded: Commercial Real Estate: Owner Occupied 258 258 $ 9 291 291 $ 12 Residential Real Estate 193 197 82 262 265 122 Farm Real Estate — — — 440 440 7 Total 451 455 91 993 996 141 Total: Commercial & Agriculture 367 367 — 367 367 — Commercial Real Estate: Owner Occupied 426 426 9 484 484 12 Non-Owner Occupied 374 374 — 31 34 — Residential Real Estate 1,764 1,840 82 1,279 1,354 122 Farm Real Estate 666 666 — 696 696 7 Total $ 3,597 $ 3,673 $ 91 $ 2,857 $ 2,935 $ 141 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, 2019, 2018 and 2017. For the year ended: December 31, 2019 December 31, 2018 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Commercial & Agriculture $ 367 $ 33 $ 636 $ 25 Commercial Real Estate: Owner Occupied 456 32 610 33 Non-Owner Occupied 308 20 39 5 Residential Real Estate 1,271 58 1,519 75 Farm Real Estate 683 29 716 29 Total $ 3,085 $ 172 $ 3,520 $ 167 For the year ended: December 31, 2017 Average Recorded Investment Interest Income Recognized Commercial & Agriculture $ 1,375 $ 34 Commercial Real Estate: Owner Occupied 1,507 75 Non-Owner Occupied 233 6 Residential Real Estate 1,515 73 Farm Real Estate 613 28 Total $ 5,243 $ 216 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, 2019 and 2018, respectively, there were no foreclosed assets included in other assets. As of December 31, 2019 and 2018, the Company had initiated formal foreclosure procedures on $1,022 and $311, respectively, of consumer residential mortgages. Changes in the amortizable yield for PCI loans were as follows, since acquisition: At December 31, 2019 At December 31, 2018 (In Thousands) (In Thousands) Balance at beginning of period $ 336 $ 15 Acquisition of PCI loans — 334 Accretion (164 ) (13 ) Transfers from non-accretable to accretable 83 — Balance at end of period $ 255 $ 336 NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30: At December 31, 2019 At December 31, 2018 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 $ 1,149 $ 1,805 Carrying amount 467 924 There was $0 and $8 in allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of December 31, 2019 and 2018, respectively. |