(5) Allowance for Loan Losses

Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan and lease losses, the Company has segmented certain loans in the portfolio by product type. Loss migration rates for each risk category are calculated and used as the basis for calculating loan loss allowance allocations. Loss migration rates are calculated over a three-year period for all portfolio segments, except for the segment consisting of purchased automobile loans which is calculated over a two and one-half year period. The use of a three-year period for loss migration analysis is a change in methodology as of the third quarter of 2015. Previously, a two-year loss migration analysis had been used for the entire portfolio. With continued improvement and stability in economic conditions, regulatory guidance recommends a longer look-back period. In addition, Civista made significant changes to consumer and commercial lending policies in the first quarter of 2012. Combined, the stable economy and now seasoned policy changes indicate a three-year period is more reflective of future expectations. 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 Civista’s 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 $14,433 adequate to cover loan losses inherent in the loan portfolio, at March 31, 2016. The following tables present, by portfolio segment, the changes in the allowance for loan losses for the three months ended March 31, 2016 and 2015.

Allowance for loan losses:


March 31, 2016	Beginning balance		Charge- offs			Recoveries		Provision			Ending Balance
Commercial & Agriculture	$	1,478	$	(22	)	$	5	$	(15	)	$	1,446
Commercial Real Estate:
Owner Occupied		2,467		—			49		(144	)		2,372
Non-Owner Occupied		4,657		—			40		14			4,711
Residential Real Estate		4,086		(96	)		89		35			4,114
Real Estate Construction		371		—			1		36			408
Farm Real Estate		538		—			—		(42	)		496
Consumer and Other		382		(8	)		14		(30	)		358
Unallocated		382		—			—		146			528

Total	$	14,361	$	(126	)	$	198	$	—		$	14,433

For the three months ended March 31, 2016, the allowance for Commercial & Agriculture loans was reduced by a decrease in loan balances outstanding and by a decrease in the specific reserves required for this type, offset by an increase in general reserves as a result of higher loss rates. The result of these changes was represented as a decrease in the provision. The allowance for Commercial Real Estate – Owner Occupied loans was reduced not only by a decrease in specific reserves required for this type, but also by decreases in past due, classified and non-accrual loans for this type. The result of these changes was represented as a decrease in the provision. The 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. The allowance for Consumer and Other loans was reduced by a decrease in general reserves required for this type as a result of lower loss rates. While criticized loans have increased slightly, we have seen significant improvement in nonperforming loan balances resulting in a decline in specific reserves for impaired loans. Management feels that the unallocated amount is appropriate and within the relevant range for the allowance that is reflective of the risk in the portfolio.

Allowance for loan losses:


March 31, 2015	Beginning balance		Charge- offs			Recoveries		Provision			Ending Balance
Commercial & Agriculture	$	1,819	$	—		$	19	$	(43	)	$	1,795
Commercial Real Estate:
Owner Occupied		2,221		(198	)		2		(217	)		1,808
Non-Owner Occupied		4,334		(9	)		14		587			4,926
Residential Real Estate		3,747		(328	)		131		116			3,666
Real Estate Construction		428		—			1		69			498
Farm Real Estate		822		—			51		(74	)		799
Consumer and Other		200		(50	)		14		26			190
Unallocated		697		—			—		(64	)		633

Total	$	14,268	$	(585	)	$	232	$	400		$	14,315

For the quarter ended March 31, 2015, the allowance for Commercial and Agriculture loans was reduced due to decreases in general reserve balances. While loan balances increased, these increases were from loans acquired which do not have an associated allowance allocation at acquisition. The acquired loans had very little impact on the provision. The result was represented as a decrease in the provision. The increase in the allowance for Commercial Real Estate—Non-Owner Occupied loans was the result of increasing loan balances. The ending reserve balance for Residential Real Estate loans declined from the end of the previous year due to charge-offs of loans that had a specific reserve previously applied. The allowance for Real Estate Construction loans increased as a result of a significant increase in loan balances. The allowance for Consumer and Other loans decreased slightly during the year. While loan balances are up, loss rates continue to decrease resulting in the allowance being slightly lower. While we have seen improvement in asset quality, given the uncertainty in the economy, management determined that it was appropriate to reduce unallocated reserves at this time.

The following tables present, by portfolio segment, the allocation of the allowance for loan losses and related loan balances as of March 31, 2016 and December 31, 2015.


March 31, 2016	Loans acquired with credit deterioration		Loans individually evaluated for impairment		Loans collectively evaluated for impairment		Total
Allowance for loan losses:
Commercial & Agriculture	$	—	$	—	$	1,446	$	1,446
Commercial Real Estate:
Owner Occupied		—		4		2,368		2,372
Non-Owner Occupied		—		23		4,688		4,711
Residential Real Estate		113		163		3,838		4,114
Real Estate Construction		—		—		408		408
Farm Real Estate		—		—		496		496
Consumer and Other		—		—		358		358
Unallocated		—		—		528		528

Total	$	113	$	190	$	14,130	$	14,433

Outstanding loan balances:
Commercial & Agriculture	$	131	$	2,521	$	119,555	$	122,207
Commercial Real Estate:
Owner Occupied		—		1,650		165,209		166,859
Non-Owner Occupied		—		1,982		342,735		344,717
Residential Real Estate		193		1,865		241,777		243,835
Real Estate Construction		—		—		64,176		64,176
Farm Real Estate		—		1,398		43,562		44,960
Consumer and Other		—		3		19,046		19,049

Total	$	324	$	9,419	$	996,060	$	1,005,803


December 31, 2015	Loans acquired with credit deterioration		Loans individually evaluated for impairment		Loans collectively evaluated for impairment		Total
Allowance for loan losses:
Commercial & Agriculture	$	—	$	23	$	1,455	$	1,478
Commercial Real Estate:
Owner Occupied		—		103		2,364		2,467
Non-Owner Occupied		—		—		4,657		4,657
Residential Real Estate		123		137		3,826		4,086
Real Estate Construction		—		—		371		371
Farm Real Estate		—		—		538		538
Consumer and Other		—		—		382		382
Unallocated		—		—		382		382

Total	$	123	$	263	$	13,975	$	14,361

Outstanding loan balances:
Commercial & Agriculture	$	132	$	873	$	123,397	$	124,402
Commercial Real Estate:
Owner Occupied		—		2,141		165,756		167,897
Non-Owner Occupied		—		1,742		346,697		348,439
Residential Real Estate		131		1,642		234,565		236,338
Real Estate Construction		—		—		58,898		58,898
Farm Real Estate		—		953		46,040		46,993
Consumer and Other		—		3		18,557		18,560

Total	$	263	$	7,354	$	993,910	$	1,001,527

The following tables present credit exposures by internally assigned grades for the periods ended March 31, 2016 and December 31, 2015. The risk rating analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans.

The Company’s internally assigned grades are as follows:

•

Pass – 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 loans are not risk-graded, except when collateral is used for a business purpose.


March 31, 2016	Pass		Special Mention		Substandard		Doubtful		Ending Balance
Commercial & Agriculture	$	115,464	$	3,510	$	3,233	$	—	$	122,207
Commercial Real Estate:
Owner Occupied		157,323		4,363		5,173		—		166,859
Non-Owner Occupied		335,107		6,095		3,515		—		344,717
Residential Real Estate		60,528		1,640		7,574		—		69,742
Real Estate Construction		60,024		308		28		—		60,360
Farm Real Estate		36,407		5,664		2,889		—		44,960
Consumer and Other		2,006		2		122		—		2,130

Total	$	766,859	$	21,582	$	22,534	$	—	$	810,975


December 31, 2015	Pass		Special Mention		Substandard		Doubtful		Ending Balance
Commercial & Agriculture	$	117,739	$	3,090	$	3,573	$	—	$	124,402
Commercial Real Estate:
Owner Occupied		156,622		5,571		5,704		—		167,897
Non-Owner Occupied		339,734		6,100		2,605		—		348,439
Residential Real Estate		62,147		1,671		7,435		—		71,253
Real Estate Construction		52,399		216		29		—		52,644
Farm Real Estate		39,787		4,024		3,182		—		46,993
Consumer and Other		1,987		3		111		—		2,101

Total	$	770,415	$	20,675	$	22,639	$	—	$	813,729

The following tables present performing and nonperforming loans based solely on payment activity for the periods ended March 31, 2016 and December 31, 2015 that have not been assigned an internal risk grade. The types of loans presented here are not assigned a risk grade unless there is evidence of a problem. Payment activity is reviewed by management on a monthly basis to evaluate performance. Loans are considered to be nonperforming when they become 90 days past due or if management thinks that we may not collect all of our principal and interest. Nonperforming loans also include certain loans that have been modified in Troubled Debt Restructurings (TDRs) where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions due to economic status. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.


	Residential Real Estate		Real Estate Construction		Consumer and Other		Total
March 31, 2016
Performing	$	174,057	$	3,816	$	16,919	$	194,792
Nonperforming		36		—		—		36

Total	$	174,093	$	3,816	$	16,919	$	194,828


	Residential Real Estate		Real Estate Construction		Consumer and Other		Total
December 31, 2015
Performing	$	165,048	$	6,254	$	16,458	$	187,760
Nonperforming		37		—		1		38

Total	$	165,085	$	6,254	$	16,459	$	187,798

The following tables include an aging analysis of the recorded investment of past due loans outstanding as of March 31, 2016 and December 31, 2015.


March 31, 2016	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater		Total Past Due		Current		Total Loans		Past Due 90 Days and Accruing
Commercial & Agriculture	$	274	$	—	$	1,264	$	1,538	$	120,669	$	122,207	$	—
Commercial Real Estate:
Owner Occupied		245		216		590		1,051		165,808		166,859		—
Non-Owner Occupied		144		1,213		340		1,697		343,020		344,717		—
Residential Real Estate		2,720		70		1,482		4,272		239,563		243,835		—
Real Estate Construction		—		—		—		—		64,176		64,176		—
Farm Real Estate		525		—		—		525		44,435		44,960		—
Consumer and Other		62		9		3		74		18,975		19,049		—

Total	$	3,970	$	1,508	$	3,679	$	9,157	$	996,646	$	1,005,803	$	—


December 31, 2015	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater		Total Past Due		Current		Total Loans		Past Due 90 Days and Accruing
Commercial & Agriculture	$	9	$	32	$	37	$	78	$	124,324	$	124,402	$	—
Commercial Real Estate:
Owner Occupied		982		36		284		1,302		166,595		167,897		—
Non-Owner Occupied		269		330		123		722		347,717		348,439		—
Residential Real Estate		2,845		404		1,725		4,974		231,364		236,338		—
Real Estate Construction		8		—		—		8		58,890		58,898		—
Farm Real Estate		—		—		—		—		46,993		46,993		—
Consumer and Other		98		68		8		174		18,386		18,560		—

Total	$	4,211	$	870	$	2,177	$	7,258	$	994,269	$	1,001,527	$	—

The following table presents loans on nonaccrual status as of March 31, 2016 and December 31, 2015.


	2016		2015
Commercial & Agriculture	$	2,390	$	1,185
Commercial Real Estate:
Owner Occupied		1,465		1,645
Non-Owner Occupied		1,939		1,428
Residential Real Estate		4,529		4,542
Real Estate Construction		28		29
Farm Real Estate		790		961
Consumer and Other		111		100

Total	$	11,252	$	9,890

Nonaccrual Loans: Loans are considered for nonaccrual status upon reaching 90 days delinquency, unless the loan is well secured and in the process of collection, although the Company may be receiving partial payments of interest and partial repayments of principal on such loans. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is deducted from interest income. A loan may be returned to accruing status only if one of three conditions are met: the loan is well-secured and none of the principal and interest has been past due for a minimum of 90 days; the loan is a TDR and has made a minimum of six months payments; or the principal and interest payments are reasonably assured and a sustained period of performance has occurred, generally six months.

Modifications: A modification of a loan constitutes a TDR when the Company for economic or legal reasons related to a borrower’s financial difficulties grants a concession to the borrower that it would not otherwise consider. The Company offers various types of concessions when modifying a loan, however, forgiveness of principal is rarely granted. Commercial Real Estate loans modified in a TDR often involve reducing the interest rate lower than the current market rate for new debt with similar risk. Real Estate loans modified in a TDR were primarily comprised of interest rate reductions where monthly payments were lowered to accommodate the borrowers’ financial needs.

Loans modified in a TDR are typically already on non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR may have the financial effect of increasing the specific allowance associated with the loan. An allowance for impaired loans that have been modified in a TDR are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates. As of March 31, 2016, TDRs accounted for $246 of the allowance for loan losses. As of December 31, 2015, TDRs accounted for $286 of the allowance for loan losses.

Loan modifications that are considered TDRs completed during the three-month periods ended March 31, 2016 and March 31, 2015 were as follows:


	For the Three-Month Period Ended March 31, 2016
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Commercial & Agriculture		3	$	483	$	483
Commercial Real Estate - Owner Occupied		—		—		—
Commercial Real Estate - Non-Owner Occupied		—		—		—
Residential Real Estate		1		232		232
Real Estate Construction		—		—		—
Farm Real Estate		2		614		614
Consumer and Other		—		—		—

Total Loan Modifications		6	$	1,329	$	1,329


	For the Three-Month Period Ended March 31, 2015
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Commercial & Agriculture		1	$	6	$	6
Commercial Real Estate - Owner Occupied		—		—		—
Commercial Real Estate - Non-Owner Occupied		—		—		—
Residential Real Estate		3		374		374
Real Estate Construction		1		41		41
Farm Real Estate		—		—		—
Consumer and Other		—		—		—

Total Loan Modifications		5	$	421	$	421

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-month periods ended March 31, 2016 and March 31, 2015, there were no defaults on loans that were modified and considered TDRs during the respective twelve previous months.

Impaired Loans: Larger (greater than $350) Commercial & Agricultural and Commercial Real Estate loan relationships, all TDRs and Residential Real Estate and Consumer loans that are part of a larger relationship are tested for impairment on a quarterly basis. These loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance.

The following tables include the recorded investment and unpaid principal balances for impaired loans with the related allowance amount, if applicable, as of March 31, 2016 and December 31, 2015.


	March 31, 2016						December 31, 2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial & Agriculture	$	2,521	$	3,071			$	851	$	1,034
Commercial Real Estate:
Owner Occupied		1,399		1,434				1,224		1,343
Non-Owner Occupied		1,921		1,924				1,742		1,826
Residential Real Estate		1,373		2,010				965		1,591
Farm Real Estate		1,398		1,398				953		1,026
Consumer and Other		3		3				3		3

Total		8,615		9,840				5,738		6,823
With an allowance recorded:
Commercial & Agriculture		—		22	$	—		22		23	$	23
Commercial Real Estate:
Owner Occupied		251		251		4		917		999		103
Non-Owner Occupied		61		61		23		—		—		—
Residential Real Estate		492		511		163		808		683		260
Farm Real Estate		—		—		—		—		—		—

Total		804		845		190		1,747		1,705		386
Total:
Commercial & Agriculture		2,521		3,093		—		873		1,057		23
Commercial Real Estate:
Owner Occupied		1,650		1,685		4		2,141		2,342		103
Non-Owner Occupied		1,982		1,985		23		1,742		1,826		—
Residential Real Estate		1,865		2,521		163		1,773		2,274		260
Farm Real Estate		1,398		1,398		—		953		1,026		—
Consumer and Other		3		3		—		3		3		—

Total	$	9,419	$	10,685	$	190	$	7,485	$	8,528	$	386

The following table includes the average recorded investment and interest income recognized for impaired financing receivables for the three-month periods ended March 31, 2016 and 2015.


For the three months ended:	March 31, 2016				March 31, 2015
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial & Agriculture	$	1,697	$	39	$	2,303	$	26
Commercial Real Estate - Owner Occupied		1,895		26		3,328		47
Commercial Real Estate - Non-Owner Occupied		1,862		13		2,123		9
Residential Real Estate		1,753		31		2,628		27
Real Estate Construction		—		—		20		—
Farm Real Estate		1,175		16		626		14
Consumer and Other		3		—		5		—

Total	$	8,385	$	125	$	11,033	$	123

Changes in the amortizable yield for purchased credit-impaired loans were as follows, since acquisition, for the three-month periods ended March 31, 2016 and 2015:


	At March 31, 2016			At March 31, 2015
	(In Thousands)			(In Thousands)
Balance at beginning of period	$	80		$	—
Acquisition of impaired loans		—			140
Accretion		(6	)		—

Balance at end of period	$	74		$	140

The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30:


	At March 31, 2016		At December 31, 2015
	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	$	943	$	965
Carrying amount		324		263

There has been $113 in allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of March 31, 2016.

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 March 31, 2016 and December 31, 2015, a total of $57 and $116, respectively of foreclosed assets were included with other assets. As of March 31, 2016, included within the foreclosed assets is $57 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of March 31, 2016, the Company had initiated formal foreclosure procedures on $608 of consumer residential mortgages.