Allowance for Loan Losses | (5) Allowance for Loan Losses Management has an established methodology for determining 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. 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 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 $22,637 adequate to cover loan losses inherent in the loan portfolio, at September 30, 2020. The following tables present, by portfolio segment, the changes in the allowance for loan losses for the three and nine months ended September 30, 2020 and 2019. Allowance for loan losses: For the three months ended September 30, 2020 Beginning Charge-offs Recoveries Provision Ending Balance Commercial & Agriculture $ 2,799 $ — $ 1 $ (139 ) $ 2,661 Commercial Real Estate: Owner Occupied 3,411 (147 ) 6 685 3,955 Non-Owner Occupied 9,169 — 3 1,406 10,578 Residential Real Estate 2,434 (11 ) 117 (83 ) 2,457 Real Estate Construction 1,844 — 1 500 2,345 Farm Real Estate 361 — 3 (4 ) 360 Consumer and Other 247 (27 ) 21 (21 ) 220 Unallocated 155 — — (94 ) 61 Total $ 20,420 $ (185 ) $ 152 $ 2,250 $ 22,637 For the three months ended September 30, 2020, the Company provided $2,250 to the allowance for loan losses. The provision was primarily the result of an increase in Civista’s qualitative factors, primarily changes in international, national, regional and local conditions, related to the economic shutdown driven by the ongoing COVID-19 pandemic, as well as the significant increase in classified assets during the quarter, particularly in the special mention category. Economic impacts from the COVID-19 pandemic include the loss of revenue being experienced by our business clients, disruption of supply chains, additional employee costs for businesses due to the pandemic, higher unemployment rates throughout our footprint and a large number of customers requesting payment relief. The allowance for Commercial & Agriculture loans decreased due to a decrease in general reserves required for this type as a result of a decrease in loan balances. The result was represented as a decrease in the provision. The allowance for Commercial Real Estate – Owner Occupied loans increased due to an increase in general reserves required for this type as a result of factors related to the COVID-19 pandemic, increased loan balances and loss rates and by increased classified and non-accrual loans. 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 as a result of an increase in loan balances and by an increase in classified loans. This was represented as an increase in the provision. The allowance for Residential Real Estate loans increased due to an increase in recoveries for this type of loan. The result was represented by a decrease in the provision. The allowance for Real Estate Construction loans increased due to an increase in loss rates on classified loans, represented by an increase 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 at September 30, 2020. Allowance for loan losses: For the three months ended September 30, 2019 Beginning balance Charge-offs Recoveries Provision Ending Balance Commercial & Agriculture $ 1,828 $ — $ 61 $ 43 $ 1,932 Commercial Real Estate: Owner Occupied 2,009 — 43 85 2,137 Non-Owner Occupied 5,867 — 55 226 6,148 Residential Real Estate 1,698 (20 ) 67 (136 ) 1,609 Real Estate Construction 1,135 — 1 47 1,183 Farm Real Estate 365 — 1 1 367 Consumer and Other 201 (16 ) 16 52 253 Unallocated 683 — — (168 ) 515 Total $ 13,786 $ (36 ) $ 244 $ 150 $ 14,144 For the three months ended September 30, 2019, the Company provided $150 to the allowance for loan losses. The allowance for Commercial & Agriculture loans increased due to an increase in general reserves required for this type 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 increased due to an increase in general reserves required for this type as a result of 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 as a result of an increase in loan balances. This was represented as an increase in the provision. The allowance for Residential Real Estate loans decreased due to 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 general reserves required as a result of an increase in loan balances. The allowance for Consumer and Other loans increased due to an increase in loss rates. The result was represented as an increase in the provision. Management determined that the unallocated amount was appropriate and within the relevant range for the allowance that was reflective of the risk in the portfolio at September 30, 2019. Allowance for loan losses: For the nine months ended September 30, 2020 Beginning balance Charge-offs Recoveries Provision Ending Balance Commercial & Agriculture $ 2,219 $ (15 ) $ 5 $ 452 $ 2,661 Commercial Real Estate: Owner Occupied 2,541 (148 ) 20 1,542 3,955 Non-Owner Occupied 6,584 — 44 3,950 10,578 Residential Real Estate 1,582 (108 ) 196 787 2,457 Real Estate Construction 1,250 — 3 1,092 2,345 Farm Real Estate 344 — 10 6 360 Consumer and Other 247 (54 ) 55 (28 ) 220 Unallocated — — — 61 61 Total $ 14,767 $ (325 ) $ 333 $ 7,862 $ 22,637 For the nine months ended September 30, 2020, the Company provided $7,862 to the allowance for loan losses. The provision was primarily the result of an increase in Civista’s qualitative factors, primarily changes in international, national, regional and local conditions, related to the economic shutdown driven by the ongoing COVID-19 pandemic. Economic impacts related to the COVID-19 pandemic include the loss of revenue being experienced by our business clients, disruption of supply chains, additional employee costs for businesses due to the pandemic, higher unemployment rates throughout our footprint and a large number of customers requesting payment relief. The allowance for Commercial & Agriculture loans increased due to an increase in general reserves required for this type as a result of an increase in loan balances mainly from Civista’s participation in the PPP loan program, offset by a decrease in loss rates, resulting in an increase in the provision. PPP loans are eligible for a 100% guaranty by the SBA. However, in the event of a loss resulting from a default on a PPP loan, and a determination by the SBA that there was a deficiency in the manner on which the PPP loan was originated or funded, the SBA may deny its liability under the guaranty. The reserve percentage for PPP loans is substantially less than the other loans in this segment resulting in an overall decrease in the reserve percentage. The allowance for Commercial Real Estate – Owner Occupied loans increased due to an increase in general reserves required for this type as a result of higher loan balances, an increase in classified and non-accrual loans and an increase in loss rates. 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 as a result of an increase in loan balances, an increase in classified loans, offset by a decrease in loss rates. This was represented as an increase in the provision. The allowance for Residential Real Estate loans increased due to an increase in general reserves required for this type as a result of factors related to the COVID-19 pandemic, offset by a decrease in loan balances and loss rates, represented by an increase in the provision. The allowance for Real Estate Construction loans increased due to an increase in general reserves required as a result of an increase in loan balances and an increase in loss rates on classified loans, represented by an increase in the provision. The allowance for Farm Real Estate loans increased due to an increase in general reserves required as a result of an increase in loan balances. The result was represented as an increase 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 at September 30, 2020. Allowance for loan losses: For the nine months ended September 30, 2019 Beginning balance Charge-offs Recoveries Provision Ending Balance Commercial & Agriculture $ 1,747 $ (27 ) $ 65 $ 147 $ 1,932 Commercial Real Estate: Owner Occupied 1,962 (60 ) 282 (47 ) 2,137 Non-Owner Occupied 5,803 — 99 246 6,148 Residential Real Estate 1,531 (223 ) 229 72 1,609 Real Estate Construction 1,046 (24 ) 1 160 1,183 Farm Real Estate 397 — 3 (33 ) 367 Consumer and Other 284 (97 ) 67 (1 ) 253 Unallocated 909 — — (394 ) 515 Total $ 13,679 $ (431 ) $ 746 $ 150 $ 14,144 For the nine months ended September 30, 2019, the Company provided $150 to the allowance for loan losses. The allowance for Commercial & Agriculture loans increased due to an increase in general reserves required for this type as a result of higher loan balances, offset by a decrease in the loss rates. The result was represented as an increase in the provision. The allowance for Commercial Real Estate –Owner Occupied loans increased due to an increase in general reserves required as a result of higher loan balances and higher loss rates, offset by net recoveries on previously charged off amounts, resulting in a decrease in the provision. The allowance for Commercial Real Estate – Non-Owner Occupied loans increased due to an increase in general reserves required as a result of higher loan balances, offset by a decrease in the loss rates. This was represented as an increase in the provision. The allowance for Residential Real Estate loans increased due to an increase in general reserves required for this type as a result of an increase in loan balances and loss rates, represented by an increase in the provision. The allowance for Real Estate Construction loans increased due to an increase in general reserves required as a result of higher loan balances. The allowance for Farm Real Estate loans was reduced by a decrease in classified loan balances and the reserve required for this type of loan. The result was represented as a decrease in the provision. The allowance for Consumer and Other loans decreased due to a decrease in the general reserves required for the type as a result of a decrease in loan balances and loss rates. The result was represented as a decrease in the provision. Management determined that the unallocated amount was appropriate and within the relevant range for the allowance that was reflective of the risk in the portfolio at September 30, 2019. The following tables present, by portfolio segment, the allocation of the allowance for loan losses and related loan balances as of September 30, 2020 and December 31, 2019. September 30, 2020 Loans acquired with credit deterioration Loans individually evaluated for impairment Loans collectively evaluated for impairment Total Allowance for loan losses: Commercial & Agriculture $ — $ — $ 2,661 $ 2,661 Commercial Real Estate: Owner Occupied — 8 3,947 3,955 Non-Owner Occupied — — 10,578 10,578 Residential Real Estate — 85 2,372 2,457 Real Estate Construction — — 2,345 2,345 Farm Real Estate — — 360 360 Consumer and Other — — 220 220 Unallocated — — 61 61 Total $ — $ 93 $ 22,544 $ 22,637 Outstanding loan balances: Commercial & Agriculture $ — $ — $ 435,285 $ 435,285 Commercial Real Estate: Owner Occupied — 379 260,856 261,235 Non-Owner Occupied — 55 683,524 683,579 Residential Real Estate 377 1,168 442,415 443,960 Real Estate Construction — — 167,560 167,560 Farm Real Estate — 634 34,598 35,232 Consumer and Other — — 14,089 14,089 Total $ 377 $ 2,236 $ 2,038,327 $ 2,040,940 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 The following tables present credit exposures by internally assigned risk grades as of September 30, 2020 and December 31, 2019 . 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 risk 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. 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. Only those loans that have been risk rated are included below. September 30, 2020 Pass Special Mention Substandard Doubtful Ending Balance Commercial & Agriculture $ 427,539 $ 6,009 $ 1,737 $ — $ 435,285 Commercial Real Estate: Owner Occupied 227,536 27,108 6,591 — 261,235 Non-Owner Occupied 597,582 83,622 2,375 — 683,579 Residential Real Estate 75,648 647 5,686 — 81,981 Real Estate Construction 153,132 — 493 — 153,625 Farm Real Estate 32,297 490 2,445 — 35,232 Consumer and Other 1,616 — 18 — 1,634 Total $ 1,515,350 $ 117,876 $ 19,345 $ — $ 1,652,571 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 The following tables present performing and nonperforming loans based solely on payment activity for the periods ended September 30, 2020 and December 31, 2019 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 and if management determines 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. September 30, 2020 Residential Real Estate Real Estate Construction Consumer and Other Total Performing $ 361,979 $ 13,935 $ 12,455 $ 388,369 Nonperforming — — — — Total $ 361,979 $ 13,935 $ 12,455 $ 388,369 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 The following tables include an aging analysis of the recorded investment of past due loans outstanding as of September 30, 2020 and December 31, 2019. September 30, 2020 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 $ 176 $ 300 $ 55 $ 531 $ 434,754 $ — $ 435,285 $ — Commercial Real Estate: Owner Occupied 168 369 359 896 260,339 — 261,235 — Non-Owner Occupied — — 7 7 683,572 — 683,579 — Residential Real Estate 84 441 1,269 1,794 441,789 377 443,960 — Real Estate Construction — — — — 167,560 — 167,560 — Farm Real Estate — — 4 4 35,228 — 35,232 — Consumer and Other 54 6 7 67 14,022 — 14,089 — Total $ 482 $ 1,116 $ 1,701 $ 3,299 $ 2,037,264 $ 377 $ 2,040,940 $ — 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 $ — The following table presents loans on nonaccrual status, excluding purchased credit-impaired (PCI) loans, as of September 30, 2020 and December 31, 2019. September 30, 2020 December 31, 2019 Commercial & Agriculture $ 156 $ 173 Commercial Real Estate: Owner Occupied 1,241 938 Non-Owner Occupied 7 8 Residential Real Estate 3,854 4,183 Real Estate Construction 7 9 Farm Real Estate 85 284 Consumer and Other 16 4 Total $ 5,366 $ 5,599 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 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 September 30, 2020, TDRs accounted for $93 of the allowance for loan losses. As of December 31, 2019, TDRs accounted for $91 of the allowance for loan losses. There were no loans modified as TDRs during the three-month periods ended September 30, 2020 or 2019 or during the nine-month period ended September 30, 2020. For the Nine-Month Period Ended September 30, 2019 Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Commercial & Agriculture — $ — $ — Commercial Real Estate—Owner Occupied — — — Commercial Real Estate—Non-Owner Occupied 1 382 382 Residential Real Estate — — — Real Estate Construction — — — Farm Real Estate — — — Consumer and Other — — — Total Loan Modifications 1 $ 382 $ 382 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 nine-month periods ended September 30, 2020 and September 30, 2019, there were no defaults on loans that were modified and considered TDRs during the respective previous twelve months. Impaired Loans: The following table includes the recorded investment and unpaid principal balances for impaired loans, excluding PCI loans, with the associated allowance amount, if applicable, as of September 30, 2020 and December 31, 2019. September 30, 2020 December 31, 2019 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 149 149 168 168 Non-Owner Occupied 55 55 374 374 Residential Real Estate 993 1,017 1,571 1,643 Farm Real Estate 634 634 666 666 Total 1,831 1,855 3,146 3,218 With an allowance recorded: Commercial Real Estate: Owner Occupied 230 230 $ 8 258 258 $ 9 Residential Real Estate 175 179 85 193 197 82 Total 405 409 93 451 455 91 Total: Commercial & Agriculture — — — 367 367 — Commercial Real Estate: Owner Occupied 379 379 8 426 426 9 Non-Owner Occupied 55 55 — 374 374 — Residential Real Estate 1,168 1,196 85 1,764 1,840 82 Farm Real Estate 634 634 — 666 666 — Total $ 2,236 $ 2,264 $ 93 $ 3,597 $ 3,673 $ 91 The following tables include the average recorded investment and interest income recognized for impaired financing receivables for the three-and nine-month periods ended September 30, 2020 and 2019. September 30, 2020 September 30, 2019 For the three months ended Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Commercial & Agriculture $ — $ — $ 367 $ 12 Commercial Real Estate—Owner Occupied 391 7 448 8 Commercial Real Estate—Non-Owner Occupied 212 5 378 6 Residential Real Estate 1,175 10 1,083 14 Farm Real Estate 644 7 681 7 Total $ 2,422 $ 29 $ 2,957 $ 47 September 30, 2020 September 30, 2019 For the nine months ended Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Commercial & Agriculture $ 92 $ 4 $ 367 $ 24 Commercial Real Estate—Owner Occupied 406 21 463 25 Commercial Real Estate—Non-Owner Occupied 292 15 292 15 Residential Real Estate 1,464 34 1,148 45 Farm Real Estate 655 20 687 22 Total $ 2,909 $ 94 $ 2,957 $ 131 Changes in the accretable yield for PCI loans were as follows, since acquisition: For the Three-Month Period Ended September 30, 2020 For the Three-Month Period Ended September 30, 2019 (In Thousands) (In Thousands) Balance at beginning of period $ 205 $ 259 Acquisition of PCI loans — — Accretion (101 ) (3 ) Transfer from non-accretable to accretable 74 — Balance at end of period $ 178 $ 256 For the Nine-Month Period Ended September 30, 2020 For the Nine-Month Period Ended September 30, 2019 (In Thousands) (In Thousands) Balance at beginning of period $ 255 $ 336 Acquisition of PCI loans — — Accretion (270 ) (80 ) Transfer fron non-accretable to accretable 193 — Balance at end of period $ 178 $ 256 The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30: At September 30, 2020 At December 31, 2019 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 $ 789 $ 1,149 Carrying amount 377 467 There was no allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of September 30, 2020 or December 31, 2019, 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 September 30, 2020 and December 31, 2019, respectively, there were no foreclosed assets included in other assets. As of September 30, 2020 and December 31, 2019, the Company had initiated formal foreclosure procedures on $1,056 and $1,022, respectively, of consumer residential mortgages. |