(6) 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. Historical loss percentages for each risk category are calculated and used as the basis for calculating loan loss allowance allocations. These historical loss percentages are calculated over a two-year period for all portfolio segments. Certain economic factors are also considered for trends which management uses to establish the directionality of changes to the unallocated portion 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 $14,315 adequate to cover loan losses inherent in the loan portfolio, at March 31, 2015. The following tables present, by portfolio segment, the changes in the allowance for loan losses and the loan balances outstanding for the three months ended March 31, 2015 and 2014.


	Commercial & Agriculture			Commercial Real Estate - Owner Occupied			Commercial Real Estate - Non-Owner Occupied			Residential Real Estate			Real Estate Construction		Consumer and Other			Unallocated			Total
For the three months ending March 31, 2015

Allowance for loan losses:

Beginning balance	$	1,822		$	2,580		$	4,798		$	3,747		$	428	$	196		$	697		$	14,268
Charge-offs		—			(198	)		(9	)		(328	)		—		(50	)		—			(585	)
Recoveries		19			2			65			131			1		14			—			232
Provision		(47	)		224			72			116			69		26			(60	)		400

Ending Balance	$	1,794		$	2,608		$	4,926		$	3,666		$	498	$	186		$	637		$	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.


	Commercial & Agriculture			Commercial Real Estate - Owner Occupied			Commercial Real Estate - Non-Owner Occupied			Residential Real Estate			Real Estate Construction		Consumer and Other			Unallocated		Total
For the three months ending March 31, 2014

Allowance for loan losses:

Beginning balance	$	2,841		$	3,263		$	4,296		$	5,224		$	184	$	214		$	506	$	16,528
Charge-offs		(229	)		(47	)		(27	)		(317	)		—		(32	)		—		(652	)
Recoveries		58			5			12			49			1		16			—		141
Provision		(63	)		608			(113	)		94			110		41			73		750

Ending Balance	$	2,607		$	3,829		$	4,168		$	5,050		$	295	$	239		$	579	$	16,767

For the three months ended March 31, 2014, the allowance for Commercial & Agriculture loans was reduced not only by charge-offs, but also due to a decrease in both the loan balances outstanding and the specific reserve required for this type. The net result of these changes was represented as a decrease in the provision. The increase in the allowance for Commercial Real Estate was the result of increased specific reserves.


	Commercial & Agriculture		Commercial Real Estate - Owner Occupied		Commercial Real Estate - Non-Owner Occupied		Residential Real Estate		Real Estate Construction		Consumer and Other		Unallocated		Total

March 31, 2015

Allowance for loan losses:
Loans acquired with credit deterioration	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Ending balance:
Individually evaluated for impairment	$	641	$	4	$	4	$	177	$	29	$	—	$	—	$	855

Ending balance:
Collectively evaluated for impairment	$	1,153	$	2,604	$	4,922	$	3,489	$	469	$	186	$	637	$	13,460


Ending balance	$	1,794	$	2,608	$	4,926	$	3,666	$	498	$	186	$	637	$	14,315


Loan balances outstanding:
Loans acquired with credit deterioration	$	535	$	83	$	—	$	683	$	—	$	—			$	1,301

Ending balance:
Individually evaluated for impairment	$	2,301	$	4,351	$	2,070	$	2,149	$	40	$	5			$	10,916

Ending balance:
Collectively evaluated for impairment	$	117,314	$	161,073	$	316,963	$	281,703	$	75,042	$	19,793			$	971,888


Ending balance	$	120,150	$	165,507	$	319,033	$	284,535	$	75,082	$	19,798			$	984,105


	Commercial & Agriculture		Commercial Real Estate - Owner Occupied		Commercial Real Estate - Non-Owner Occupied		Residential Real Estate		Real Estate Construction		Consumer and Other		Unallocated		Total

December 31, 2014

Allowance for loan losses:

Ending balance:
Individually evaluated for impairment	$	641	$	57	$	20	$	305	$	—	$	—	$	—	$	1,023

Ending balance:
Collectively evaluated for impairment	$	1,181	$	2,523	$	4,778	$	3,442	$	428	$	196	$	697	$	13,245


Ending balance	$	1,822	$	2,580	$	4,798	$	3,747	$	428	$	196	$	697	$	14,268


Loan balances outstanding:

Ending balance:
Individually evaluated for impairment	$	2,304	$	3,557	$	2,175	$	3,108	$	—	$	5			$	11,149

Ending balance:
Collectively evaluated for impairment	$	111,882	$	139,457	$	306,491	$	265,402	$	65,452	$	15,024			$	903,708


Ending balance	$	114,186	$	143,014	$	308,666	$	268,510	$	65,452	$	15,029			$	914,857

The following tables present credit exposures by internally assigned grades for the period ended March 31, 2015 and December 31, 2014. 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.


	Commercial & Agriculture		Commercial Real Estate - Owner Occupied		Commercial Real Estate - Non-Owner Occupied		Residential Real Estate		Real Estate Construction		Consumer and Other		Total

March 31, 2015
Pass	$	113,993	$	150,282	$	307,746	$	115,453	$	68,988	$	10,490	$	766,952
Special Mention		1,161		4,864		6,765		826		19		—		13,635
Substandard		4,996		10,361		4,522		8,542		32		50		28,503
Doubtful		—		—		—		—		—		—		—

Ending Balance	$	120,150	$	165,507	$	319,033	$	124,821	$	69,039	$	10,540	$	809,090


	Commercial & Agriculture		Commercial Real Estate - Owner Occupied		Commercial Real Estate - Non-Owner Occupied		Residential Real Estate		Real Estate Construction		Consumer and Other		Total

December 31, 2014
Pass	$	107,903	$	128,222	$	298,237	$	100,810	$	59,584	$	5,651	$	700,407
Special Mention		3,446		5,492		6,305		697		19		—		15,959
Substandard		2,837		9,300		4,124		8,834		41		46		25,182
Doubtful		—		—		—		—		—		—		—

Ending Balance	$	114,186	$	143,014	$	308,666	$	110,341	$	59,644	$	5,697	$	741,548

The following tables present performing and nonperforming loans based solely on payment activity for the periods ended March 31, 2015 and December 31, 2014 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, 2015
Performing	$	159,714	$	6,043	$	9,258	$	175,015
Nonperforming		—		—		—		—

Total	$	159,714	$	6,043	$	9,258	$	175,015


	Residential Real Estate		Real Estate Construction		Consumer and Other		Total

December 31, 2014
Performing	$	158,169	$	5,808	$	9,332	$	173,309
Nonperforming		—		—		—		—

Total	$	158,169	$	5,808	$	9,332	$	173,309

The following tables include an aging analysis of the recorded investment of past due loans outstanding as of March 31, 2015 and December 31, 2014.


March 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

Commericial & Agriculture	$	171	$	444	$	321	$	936	$	119,214	$	120,150	$	—
Commercial Real Estate - Owner Occupied		338		57		654		1,049		164,458		165,507		—
Commercial Real Estate - Non-Owner Occupied		157		—		1,965		2,122		316,911		319,033		—
Residential Real Estate		2,875		222		1,620		4,717		279,818		284,535		—
Real Estate Construction		—		—		—		—		75,082		75,082		—
Consumer and Other		184		44		18		246		19,552		19,798		—

Total	$	3,725	$	767	$	4,578	$	9,070	$	975,035	$	984,105	$	—


December 31, 2014	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

Commericial & Agriculture	$	58	$	—	$	187	$	245	$	113,941	$	114,186	$	—
Commercial Real Estate - Owner Occupied		622		251		657		1,530		141,484		143,014		—
Commercial Real Estate - Non-Owner Occupied		521		5		2,103		2,629		306,037		308,666		—
Residential Real Estate		1,923		721		2,347		4,991		263,519		268,510		—
Real Estate Construction		33		—		8		41		65,411		65,452		—
Consumer and Other		131		8		19		158		14,871		15,029		—

Total	$	3,288	$	985	$	5,321	$	9,594	$	905,263	$	914,857	$	—

The following table presents loans on nonaccrual status as of March 31, 2015 and December 31, 2014.


	2015		2014

Commericial & Agriculture	$	1,274	$	1,264
Commercial Real Estate - Owner Occupied		4,507		3,403
Commercial Real Estate - Non-Owner Occupied		1,994		2,134
Residential Real Estate		5,735		6,674
Real Estate Construction		32		41
Consumer and Other		40		42

Total	$	13,582	$	13,558

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 troubled debt restructuring (“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, 2015, TDRs accounted for $855 of the allowance for loan losses. As of December 31, 2014, TDRs accounted for $895 or the allowance for loan losses.

Loan modifications that are considered TDRs completed during the three-month periods ended March 31, 2015 and March 31, 2014 were as follows:


	For the Three Month Period Ended March 31, 2015						For the Three Month Period Ended March 31, 2014
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment

Commericial & Agriculture		1	$	6	$	6		—	$	—	$	—
Commercial Real Estate - Owner Occupied		—		—		—		—		—		—
Commercial Real Estate - Non-Owner Occupied		—		—		—		—		—		—
Residential Real Estate		3		374		374		2		149		149
Real Estate Construction		1		41		41		—		—		—
Consumer and Other		—		—		—		—		—		—

Total Loan Modifications		5	$	421	$	421		2	$	149	$	149

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. Loans modified in a TDR increased $272 compared to March 31, 2014. The increase is the result of loans purchased in the acquisition of TCNB. During both the three month period ended March 31, 2015 and March 31, 2014, there were no defaults on loans that were modified and considered TDRs during the respective twelve previous months.

Impaired Loans: Larger (greater than $500) commercial loans and commercial real estate loans, all TDRs and residential real estate and consumer loans that are part of a larger relationship are tested for impairment. 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 financing receivables with the associated allowance amount, if applicable, as of March 31, 2015 and December 31, 2014.


	March 31, 2015						December 31, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance

With no related allowance recorded:
Commericial & Agriculture	$	1,384	$	1,510			$	1,377	$	1,504
Commercial Real Estate - Owner Occupied		3,968		4,407				2,961		3,327
Commercial Real Estate - Non-Owner Occupied		1,657		1,886				92		140
Residential Real Estate		1,237		1,771				1,893		3,487
Consumer and Other		5		5				5		5

Total		8,251		9,579				6,328		8,463

With an allowance recorded:
Commericial & Agriculture		917		1,056	$	641		927		1,056	$	641
Commercial Real Estate - Owner Occupied		383		383		4		596		643		57
Commercial Real Estate - Non-Owner Occupied		413		444		4		2,083		2,287		20
Residential Real Estate		912		914		177		1,215		1,223		305
Real Estate Construction		40		40		29		—		—		—

Total		2,665		2,837		855		4,821		5,209		1,023

Total:
Commericial & Agriculture		2,301		2,566		641		2,304		2,560		641
Commercial Real Estate - Owner Occupied		4,351		4,790		4		3,557		3,970		57
Commercial Real Estate - Non-Owner Occupied		2,070		2,330		4		2,175		2,427		20
Residential Real Estate		2,149		2,685		177		3,108		4,710		305
Real Estate Construction		40		40		29		—		—		—
Consumer and Other		5		5		—		5		5		—

Total	$	10,916	$	12,416	$	855	$	11,149	$	13,672	$	1,023

The following tables include the average recorded investment and interest income recognized for impaired financing receivables for the three-month periods ended March 31, 2015 and 2014.


For the three months ended:	March 31, 2015				March 31, 2014
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

Commericial & Agriculture	$	2,303	$	34	$	4,310	$	65
Commercial Real Estate - Owner Occupied		3,752		63		7,512		126
Commercial Real Estate - Non-Owner Occupied		2,123		9		3,057		21
Residential Real Estate		2,830		40		3,782		92
Real Estate Construction		20		—		—		—
Consumer and Other		5		—		7		—

Total	$	11,033	$	146	$	18,668	$	304

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, 2015 and December 31, 2014 included with other assets are $528 and $560, respectively of foreclosed assets. As of March 31, 2015, included within the foreclosed assets is $502 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, 2015, the Company has initiated formal foreclosure procedures on $899 of consumer residential mortgages.