(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. 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 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 $12,814 adequate to cover loan losses inherent in the loan portfolio, at March 31, 2018. The following tables present, by portfolio segment, the changes in the allowance for loan losses for the three months ended March 31, 2018 and 2017.

Allowance for loan losses:

March 31, 2018	Beginning balance		Charge-offs			Recoveries		Provision			Ending Balance
Commercial & Agriculture	$	1,562	$	(125	)	$	19	$	(97	)	$	1,359
Commercial Real Estate:
Owner Occupied		2,043		(193	)		9		171			2,030
Non-Owner Occupied		5,307		(44	)		14		393			5,670
Residential Real Estate		1,910		(22	)		58		(196	)		1,750
Real Estate Construction		834		—			—		(14	)		820
Farm Real Estate		430		—			1		(20	)		411
Consumer and Other		290		(41	)		4		(6	)		247
Unallocated		758		—			—		(231	)		527
Total	$	13,134	$	(425	)	$	105	$	—		$	12,814

For the three months ended March 31, 2018, the allowance for Commercial & Agriculture loans was reduced by a decrease in general reserves as a result of lower outstanding balances and 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 outstanding loan balances and loss rates, represented by a decrease in the provision. The allowance for Real Estate Construction loans decreased due to lower outstanding loan balances for this type of loan. The result 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. The result was represented as a decrease in the provision. The allowance for Consumer and Other loans decreased due to a decrease in general reserves required for this type as a result of lower loss rates, lower outstanding balances and net charge-offs. 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.

Allowance for loan losses:

March 31, 2017	Beginning balance		Charge-offs			Recoveries		Provision			Ending Balance
Commercial & Agriculture	$	2,018	$	(1	)	$	56	$	(504	)	$	1,569
Commercial Real Estate:
Owner Occupied		2,171		—			2		86			2,259
Non-Owner Occupied		4,606		—			5		(68	)		4,543
Residential Real Estate		3,089		(89	)		55		(33	)		3,022
Real Estate Construction		420		—			5		(12	)		413
Farm Real Estate		442		—			—		(35	)		407
Consumer and Other		314		(41	)		3		78			354
Unallocated		245		—			—		488			733
Total	$	13,305	$	(131	)	$	126	$	—		$	13,300

For the three months ended March 31, 2017, the allowance for Commercial & Agriculture loans was reduced by a decrease in general reserves as a result of lower loss rates, offset by an increase in the specific reserves required for this type. The result of these changes was represented as a decrease in the provision. The increase in the allowance for Commercial Real Estate – Owner Occupied was due to an increase in the specific reserves required for this type, but also to an increase in general reserves due to higher loan balances, offset by a decrease in loss rates. The allowance for Commercial Real Estate – Non-Owner Occupied loans was reduced by a decrease in loss rates required for this type. The result of these changes 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 decreased due to lower outstanding loan balances for this type of loan and recoveries, which 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 classified loans for this type. The result of these changes was represented as a decrease in the provision. The allowance for Consumer and Other loans was increased by an increase in general reserves required for this type as a result of higher loss rates. 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.

The following tables present, by portfolio segment, the allocation of the allowance for loan losses and related loan balances as of March 31, 2018 and December 31, 2017.

March 31, 2018	Loans acquired with credit deterioration		Loans individually evaluated for impairment		Loans collectively evaluated for impairment		Total
Allowance for loan losses:
Commercial & Agriculture	$	—	$	60	$	1,299	$	1,359
Commercial Real Estate:
Owner Occupied		—		8		2,022		2,030
Non-Owner Occupied		—		—		5,670		5,670
Residential Real Estate		37		105		1,608		1,750
Real Estate Construction		—		—		820		820
Farm Real Estate		—		6		405		411
Consumer and Other		—		—		247		247
Unallocated		—		—		527		527
Total	$	37	$	179	$	12,598	$	12,814
Outstanding loan balances:
Commercial & Agriculture	$	80	$	1,025	$	135,971	$	137,076
Commercial Real Estate:
Owner Occupied		—		532		162,453		162,985
Non-Owner Occupied		—		43		436,117		436,160
Residential Real Estate		119		1,335		265,976		267,430
Real Estate Construction		—		—		95,856		95,856
Farm Real Estate		—		793		37,135		37,928
Consumer and Other		—		—		16,323		16,323
Total	$	199	$	3,728	$	1,149,831	$	1,153,758

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 present credit exposures by internally assigned grades as of March 31, 2018 and December 31, 2017. 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 and Other loans are not risk-graded, except when collateral is used for a business purpose.

March 31, 2018	Pass		Special Mention		Substandard		Doubtful		Ending Balance
Commercial & Agriculture	$	131,082	$	2,820	$	3,174	$	—	$	137,076
Commercial Real Estate:
Owner Occupied		155,400		1,273		6,312		—		162,985
Non-Owner Occupied		433,379		2,334		447		—		436,160
Residential Real Estate		61,428		1,884		5,628		—		68,940
Real Estate Construction		89,195		1,276		27		—		90,498
Farm Real Estate		29,034		6,094		2,800		—		37,928
Consumer and Other		1,434		—		67		—		1,501
Total	$	900,952	$	15,681	$	18,455	$	—	$	935,088

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 periods ended March 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.

March 31, 2018	Residential Real Estate		Real Estate Construction		Consumer and Other		Total
Performing	$	198,490	$	5,358	$	14,802	$	218,650
Nonperforming		—		—		20		20
Total	$	198,490	$	5,358	$	14,822	$	218,670

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

The following tables include an aging analysis of the recorded investment of past due loans outstanding as of March 31, 2018 and December 31, 2017.

March 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	$	188	$	41	$	808	$	1,037	$	135,959	$	80	$	137,076	$	—
Commercial Real Estate:
Owner Occupied		320		44		390		754		162,231		—		162,985		—
Non-Owner Occupied		—		49		167		216		435,944		—		436,160		—
Residential Real Estate		1,643		64		554		2,261		265,050		119		267,430		—
Real Estate Construction		—		—		27		27		95,829		—		95,856		—
Farm Real Estate		152		—		186		338		37,590		—		37,928		—
Consumer and Other		64		76		20		160		16,163		—		16,323		20
Total	$	2,367	$	274	$	2,152	$	4,793	$	1,148,766	$	199	$	1,153,758	$	20

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 March 31, 2018 and December 31, 2017.

	March 31, 2018		December 31, 2017
Commercial & Agriculture	$	1,004	$	887
Commercial Real Estate:
Owner Occupied		806		1,476
Non-Owner Occupied		268		711
Residential Real Estate		2,589		2,778
Real Estate Construction		27		27
Farm Real Estate		186		186
Consumer and Other		64		67
Total	$	4,944	$	6,132

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. Payments received on nonaccrual loans are applied to the unpaid principal balance. 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 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, 2018, TDRs accounted for $216 of the allowance for loan losses. As of December 31, 2017, TDRs accounted for $169 of the allowance for loan losses.

Loan modifications that are considered TDRs completed during the three-month period ended March 31, 2018 were as follows. There were no loans modified in trouble debt restructuring during the three-month period ended March 31, 2017:

	For the Three-Month Period Ended
	March 31, 2018
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Commercial & Agriculture		3	$	591	$	591
Commercial Real Estate—Owner Occupied		—		—		—
Commercial Real Estate—Non-Owner Occupied		—		—		—
Residential Real Estate		—		—		—
Real Estate Construction		—		—		—
Farm Real Estate		—		—		—
Consumer and Other		—		—		—
Total Loan Modifications		3	$	591	$	591

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 the three-month periods ended March 31, 2018 and March 31, 2017, 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 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 March 31, 2018 and December 31, 2017.

	March 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	$	760	$	760			$	—	$	—
Commercial Real Estate:
Owner Occupied		218		218				693		913
Non-Owner Occupied		43		47				44		48
Residential Real Estate		957		1,030				977		1,049
Farm Real Estate		333		333				148		148
Consumer and Other		—		—				—		—
Total		2,311		2,388				1,862		2,158
With an allowance recorded:
Commercial & Agriculture		265		365	$	60		438		438	$	4
Commercial Real Estate:
Owner Occupied		314		314		8		317		317		6
Non-Owner Occupied		—		—		—		—		—		—
Residential Real Estate		378		381		105		383		387		109
Farm Real Estate		460		460		6		460		460		6
Total		1,417		1,520		179		1,598		1,602		125
Total:
Commercial & Agriculture		1,025		1,125		60		438		438		4
Commercial Real Estate:
Owner Occupied		532		532		8		1,010		1,230		6
Non-Owner Occupied		43		47		—		44		48		—
Residential Real Estate		1,335		1,411		105		1,360		1,436		109
Farm Real Estate		793		793		6		608		608		6
Consumer and Other		—		—		—		—		—		—
Total	$	3,728	$	3,908	$	179	$	3,460	$	3,760	$	125

The following table includes the average recorded investment and interest income recognized for impaired financing receivables for the three-month periods ended March 31, 2018 and 2017.

	March 31, 2018				March 31, 2017
For the three months ended:	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial & Agriculture	$	732	$	7	$	1,852	$	6
Commercial Real Estate—Owner Occupied		771		9		1,886		22
Commercial Real Estate—Non-Owner Occupied		43		1		358		—
Residential Real Estate		1,348		17		1,671		16
Real Estate Construction		—		—		—		—
Farm Real Estate		701		7		614		6
Consumer and Other		—		—		1		—
Total	$	3,595	$	41	$	6,382	$	50

Changes in the amortizable yield for PCI loans were as follows, since acquisition:

	For the Three-Month Period Ended March 31, 2018			For the Three-Month Period Ended March 31, 2017
	(In Thousands)			(In Thousands)
Balance at beginning of period	$	15		$	49
Acquisition of PCI loans		—			—
Accretion		(7	)		(9	)
Balance at end of period	$	8		$	40

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

	At March 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	$	752	$	775
Carrying amount		199		215

There has been $37 and $126 in allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of March 31, 2018 and December 31, 2017, 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 March 31, 2018 and December 31, 2017, a total of $11 and $16, respectively of foreclosed assets were included with other assets. As of March 31, 2018, included within the foreclosed assets is $11 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, 2018 and December 31, 2017, the Company had initiated formal foreclosure procedures on $454 and $239, respectively, of consumer residential mortgages.