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 $27,773 adequate to cover loan losses inherent in the loan portfolio, at September 30, 2022. The following tables present, by portfolio segment, the changes in the allowance for loan losses for the three- and nine-months ended September 30, 2022 and 2021. Allowance for loan losses: For the three months ended September 30, 2022 Beginning Charge-offs Recoveries Provision Ending Balance Commercial & Agriculture $ 2,790 $ (22 ) $ 12 $ (51 ) $ 2,729 Commercial Real Estate: Owner Occupied 4,729 — 15 182 4,926 Non-Owner Occupied 14,711 — 16 (300 ) 14,427 Residential Real Estate 2,859 (39 ) 64 152 3,036 Real Estate Construction 1,969 — — 44 2,013 Farm Real Estate 236 — 1 14 251 Consumer and Other 130 (13 ) 4 21 142 Unallocated 11 — — 238 249 Total $ 27,435 $ (74 ) $ 112 $ 300 $ 27,773 For the three months ended September 30, 2022, the Company provided $300 to the allowance for loan losses, as compared to a provision of $0 for the three months ended September 30, 2021. The increase in the provision in the third quarter of 2022, as compared to the third quarter of 2021, reflects the Company’s strong loan growth during the quarter. Our credit quality metrics remain stable despite the ongoing headwinds of the challenging international, national, regional and local economic conditions. While the direct impact of COVID-19 wains, we remain cautious due to increasing inflationary pressures. Criticized loans were reduced in the third quarter, primarily loans to borrowers in the hotel industry, due to improved occupancy. Economic impacts related to the COVID-19 pandemic have improved somewhat, but continued concerns linger due to the disruption of supply chains, workforce shortages, rising inflationary pressures and the prospects of recession. During the three months ended September 30, 2022, 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 Commercial & Agriculture loan balances during the quarter. 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 increased loan balances. The result was represented as an increase in the provision. The allowance for Commercial Real Estate – Non-Owner Occupied loans decreased due to a decrease in risk rated loans and lower loss rates, offset by an increase in general reserves required as a result of an increase in loan balances. This was represented as a decrease 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 increased loan balances. The result was represented by an increase in the provision. The allowance for Real Estate Construction loans increased due to an increase in loan balances. This 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, 2022. Allowance for loan losses: For the three months ended September 30, 2021 Beginning balance Charge-offs Recoveries Provision Ending Balance Commercial & Agriculture $ 2,320 $ — $ 1 $ 191 $ 2,512 Commercial Real Estate: Owner Occupied 4,027 — — 389 4,416 Non-Owner Occupied 13,546 — 381 (757 ) 13,170 Residential Real Estate 2,531 (77 ) 53 89 2,596 Real Estate Construction 2,177 — — 282 2,459 Farm Real Estate 290 — 3 15 308 Consumer and Other 202 — 10 — 212 Unallocated 1,104 — — (209 ) 895 Total $ 26,197 $ (77 ) $ 448 $ — $ 26,568 For the three months ended September 30, 2021, the Company provided $0 to the allowance for loan losses. The lack of a provision for the third quarter of 2021 was due to the stability of our credit quality metrics coupled with the stabilization and, in some cases, improvement of international, national, regional and local economic conditions that were adversely impacted by the 2020 economic shutdown and restrictions in response to the ongoing COVID-19 pandemic. During the three months ended September 30, 2021, 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 non-PPP loan balances. Commercial & Agriculture loan balances decreased during the quarter mainly as a result of the forgiveness and payoff of PPP loans. 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 increased loan balances, offset by a decrease in classified loans balances. The result was represented as an increase in the provision. The allowance for Commercial Real Estate – Non-Owner Occupied loans decreased due to decreases in classified loan balances and loss rates, offset by an increase in general reserves required as a result of an increase in loan balances. This was represented as a decrease in the provision. The allowance for Residential Real Estate loans increased due to an increase in loss rates for this type of loan. The result was represented by an increase in the provision. The allowance for Real Estate Construction loans increased due to an increase in loss rates on substandard classified loan balances, offset by lower loan balances. This 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, 2021. Allowance for loan losses: For the nine months ended September 30, 2022 Beginning balance Charge-offs Recoveries Provision Ending Balance Commercial & Agriculture $ 2,600 $ (22 ) $ 16 $ 135 $ 2,729 Commercial Real Estate: Owner Occupied 4,464 — 42 420 4,926 Non-Owner Occupied 13,860 — 68 499 14,427 Residential Real Estate 2,597 (97 ) 140 396 3,036 Real Estate Construction 1,810 — — 203 2,013 Farm Real Estate 287 — 5 (41 ) 251 Consumer and Other 176 (45 ) 25 (14 ) 142 Unallocated 847 — — (598 ) 249 Total $ 26,641 $ (164 ) $ 296 $ 1,000 $ 27,773 For the nine months ended September 30, 2022, the Company provided $1,000 to the allowance for loan losses, as compared to a provision of $830 for the nine months ended September 30, 2021. The increase in provision was due to the strong loan growth during the first nine months of 2022 challenges of the international, national, regional and local economic conditions, particularly inflation, have taken greater focus from the prior economic shutdown and restrictions in response to the COVID-19 pandemic. Despite these concerns our portfolio quality has remained stable overall with decreases in criticized loans. We continue to be optimistic that asset quality will continue to remain strong despite ongoing headwinds. While we remain cautious given the impact of inflation on all of our borrowers, we are encouraged by strong loan growth. During the nine months ended September 30, 2022, 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 loss rates, partially offset by a decrease in Commercial & Agriculture loan balances during the first nine months of the year mainly due to the forgiveness or payoff of PPP loans. 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 increased 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 increased due to an increase in general reserves required for this type as a result of increased loan balances. The result was represented by an increase in the provision. The allowance for Real Estate Construction loans increased due to an increase in loan balances. This was represented as an increase in the provision. The allowance for Consumer and Other loans decreased due to a decrease in loan balances. This 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 at September 30, 2022. Allowance for loan losses: For the nine months ended September 30, 2021 Beginning balance Charge-offs Recoveries Provision Ending Balance Commercial & Agriculture $ 2,810 $ (15 ) $ 164 $ (447 ) $ 2,512 Commercial Real Estate: Owner Occupied 4,057 — 6 353 4,416 Non-Owner Occupied 12,451 — 392 327 13,170 Residential Real Estate 2,484 (114 ) 232 (6 ) 2,596 Real Estate Construction 2,439 — 1 19 2,459 Farm Real Estate 338 — 9 (39 ) 308 Consumer and Other 209 (19 ) 54 (32 ) 212 Unallocated 240 — — 655 895 Total $ 25,028 $ (148 ) $ 858 $ 830 $ 26,568 For the nine months ended September 30, 2021, the Company provided $830 to the allowance for loan losses. The decrease in the provision in the first nine months of 2021 as compared to the same period of 2020, was due to the stability of our metrics coupled with the stabilization and, in some cases, improvement of international, national, regional and local economic conditions that were adversely impacted by the 2020 economic shutdown and restrictions in response to the ongoing COVID-19 pandemic. For the nine months ended September 30, 2021, 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 loss rates. Commercial & Agriculture loan balances decreased during the period mainly from Civista’s participation in the PPP loan program. 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 increased loan balances, offset by decreases in classified 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, offset by a decrease in classified loan balances and 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 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 loan balances, represented by an increase in the provision. The allowance for Farm Real Estate loans decreased due to a decrease in general reserves required for this type as a result of decreased 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 at September 30, 2021. The following tables present, by portfolio segment, the allocation of the allowance for loan losses and related loan balances as of September 30, 2022 and December 31, 2021. September 30, 2022 Loans acquired with credit deterioration Loans individually evaluated for impairment Loans collectively evaluated for impairment Total Allowance for loan losses: Commercial & Agriculture $ — $ — $ 2,729 $ 2,729 Commercial Real Estate: Owner Occupied — 6 4,920 4,926 Non-Owner Occupied — — 14,427 14,427 Residential Real Estate — 1 3,035 3,036 Real Estate Construction — — 2,013 2,013 Farm Real Estate — — 251 251 Consumer and Other — — 142 142 Unallocated — — 249 249 Total $ — $ 7 $ 27,766 $ 27,773 Outstanding loan balances: Commercial & Agriculture $ 809 $ 343 $ 226,235 $ 227,387 Commercial Real Estate: Owner Occupied 1,770 833 361,865 364,468 Non-Owner Occupied 120 140 955,909 956,169 Residential Real Estate 1,410 586 529,168 531,164 Real Estate Construction — — 202,793 202,793 Farm Real Estate — — 25,636 25,636 Consumer and Other 1 — 20,996 20,997 Total $ 4,110 $ 1,902 $ 2,322,602 $ 2,328,614 December 31, 2021 Loans acquired with credit deterioration Loans individually evaluated for impairment Loans collectively evaluated for impairment Total Allowance for loan losses: Commercial & Agriculture $ — $ — $ 2,600 $ 2,600 Commercial Real Estate: Owner Occupied — 7 4,457 4,464 Non-Owner Occupied — — 13,860 13,860 Residential Real Estate — 11 2,586 2,597 Real Estate Construction — — 1,810 1,810 Farm Real Estate — — 287 287 Consumer and Other — — 176 176 Unallocated — — 847 847 Total $ — $ 18 $ 26,623 $ 26,641 Outstanding loan balances: Commercial & Agriculture $ — $ — $ 246,502 $ 246,502 Commercial Real Estate: Owner Occupied — 187 295,265 295,452 Non-Owner Occupied — 0 829,310 829,310 Residential Real Estate 290 526 429,244 430,060 Real Estate Construction — — 157,127 157,127 Farm Real Estate — 509 27,910 28,419 Consumer and Other — — 11,009 11,009 Total $ 290 $ 1,222 $ 1,996,367 $ 1,997,879 The following tables present credit exposures by internally assigned risk grades as of September 30, 2022 and December 31, 2021. 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, 2022 Pass Special Mention Substandard Doubtful Ending Balance Commercial & Agriculture $ 212,692 $ 12,155 $ 2,540 $ — $ 227,387 Commercial Real Estate: Owner Occupied 351,464 9,751 3,253 — 364,468 Non-Owner Occupied 932,606 19,526 4,037 — 956,169 Residential Real Estate 141,827 116 5,506 — 147,449 Real Estate Construction 172,120 — 3 — 172,123 Farm Real Estate 25,197 392 47 — 25,636 Consumer and Other 11,993 — 27 — 12,020 Total $ 1,847,899 $ 41,940 $ 15,413 $ — $ 1,905,252 December 31, 2021 Pass Special Mention Substandard Doubtful Ending Balance Commercial & Agriculture $ 244,787 $ 526 $ 1,189 $ — $ 246,502 Commercial Real Estate: Owner Occupied 290,617 3,119 1,716 — 295,452 Non-Owner Occupied 764,181 28,042 37,087 — 829,310 Residential Real Estate 77,594 164 4,455 — 82,213 Real Estate Construction 136,149 260 5 — 136,414 Farm Real Estate 27,023 205 1,191 — 28,419 Consumer and Other 764 — 20 — 784 Total $ 1,541,115 $ 32,316 $ 45,663 $ — $ 1,619,094 The following tables present performing and nonperforming loans based solely on payment activity for the periods ended September 30, 2022 and December 31, 2021 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, 2022 Residential Real Estate Real Estate Construction Consumer and Other Total Performing $ 383,389 $ 30,670 $ 8,977 $ 423,036 Nonperforming 326 — — 326 Total $ 383,715 $ 30,670 $ 8,977 $ 423,362 December 31, 2021 Residential Real Estate Real Estate Construction Consumer and Other Total Performing $ 347,847 $ 20,713 $ 10,225 $ 378,785 Nonperforming — — — — Total $ 347,847 $ 20,713 $ 10,225 $ 378,785 The following tables include an aging analysis of the recorded investment of past due loans outstanding as of September 30, 2022 and December 31, 2021. September 30, 2022 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Past Due Total Past Due Current Purchased Credit- Impaired Loans Total Loans Past Due 90 Days and Accruing Commercial & Agriculture $ 423 $ 2 $ 694 $ 1,119 $ 225,459 $ 809 $ 227,387 $ — Commercial Real Estate: Owner Occupied 24 — 79 103 362,595 1,770 364,468 — Non-Owner Occupied — — 2 2 956,047 120 956,169 — Residential Real Estate 416 827 1,222 2,465 527,289 1,410 531,164 326 Real Estate Construction — — — — 202,793 — 202,793 — Farm Real Estate — — — — 25,636 — 25,636 — Consumer and Other 58 63 52 173 20,823 1 20,997 — Total $ 921 $ 892 $ 2,049 $ 3,862 $ 2,320,642 $ 4,110 $ 2,328,614 $ 326 December 31, 2021 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Past Due Total Past Due Current Purchased Credit- Impaired Loans Total Loans Past Due 90 Days and Accruing Commercial & Agriculture $ 249 $ 13 $ 78 $ 340 $ 246,162 $ — $ 246,502 $ — Commercial Real Estate: Owner Occupied — — 106 106 295,346 — 295,452 — Non-Owner Occupied — — 4 4 829,306 — 829,310 — Residential Real Estate 1,848 879 842 3,569 426,201 290 430,060 — Real Estate Construction — — — — 157,127 — 157,127 — Farm Real Estate — — — — 28,419 — 28,419 — Consumer and Other 42 — 9 51 10,958 — 11,009 — Total $ 2,139 $ 892 $ 1,039 $ 4,070 $ 1,993,519 $ 290 $ 1,997,879 $ — The following table presents loans on nonaccrual status, excluding purchased credit-impaired (PCI) loans, as of September 30, 2022 and December 31, 2021. September 30, 2022 December 31, 2021 Commercial & Agriculture $ 668 $ 78 Commercial Real Estate: Owner Occupied 206 334 Non-Owner Occupied 2 4 Residential Real Estate 3,514 3,232 Real Estate Construction 3 5 Farm Real Estate — — Consumer and Other 60 20 Total $ 4,453 $ 3,673 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, 2022, TDRs accounted for $7 of the allowance for loan losses. As of December 31, 2021, TDRs accounted for $18 of the allowance for loan losses. There were no loans modified as TDRs during the three- and nine-month periods ended September 30, 2022 or 2021. 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- and nine-month periods ended September 30, 2022 and September 30, 2021, 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, 2022 and December 31, 2021. September 30, 2022 December 31, 2021 Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded: Commercial & Agriculture $ 343 $ 343 $ — $ — Commercial Real Estate: Owner Occupied 676 676 — — Non-Owner Occupied 140 140 — — Residential Real Estate 579 604 503 528 Farm Real Estate — — 509 509 Total 1,738 1,763 1,012 1,037 With an allowance recorded: Commercial Real Estate: Owner Occupied 157 157 $ 6 187 187 $ 7 Residential Real Estate 7 11 1 23 27 11 Total 164 168 7 210 214 18 Total: Commercial & Agriculture 343 343 — — — — Commercial Real Estate: Owner Occupied 833 833 6 187 187 7 Non-Owner Occupied 140 140 — — — — Residential Real Estate 586 615 1 526 555 11 Farm Real Estate — — — 509 509 — Total $ 1,902 $ 1,931 $ 7 $ 1,222 $ 1,251 $ 18 The following table includes the average recorded investment and interest income recognized for impaired financing receivables for the three- and nine-month periods ended September 30, 2022 and 2021. September 30, 2022 September 30, 2021 For the three months ended Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Commercial & Agriculture $ 172 $ — $ — $ — Commercial Real Estate—Owner Occupied 504 3 252 4 Commercial Real Estate—Non-Owner Occupied 70 — 15 — Residential Real Estate 503 9 551 8 Farm Real Estate 247 2 557 6 Total $ 1,496 $ 14 $ 1,375 $ 18 September 30, 2022 September 30, 2021 For the nine months ended Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Commercial & Agriculture $ 86 $ — $ 19 $ — Commercial Real Estate—Owner Occupied 349 10 449 15 Commercial Real Estate—Non-Owner Occupied 35 — 29 1 Residential Real Estate 516 19 654 24 Farm Real Estate 381 14 584 18 Total $ 1,367 $ 43 $ 1,735 $ 58 Changes in the accretable yield for PCI loans were as follows, since acquisition: For the Three-Month Period Ended September 30, 2022 For the Three-Month Period Ended September 30, 2021 (In Thousands) (In Thousands) Balance at beginning of period $ 216 $ 224 Acquisition of PCI loans — — Accretion (7 ) (6 ) Transfer from non-accretable to accretable 7 — Balance at end of period $ 216 $ 218 For the Nine-Month Period Ended September 30, 2022 For the Nine-Month Period Ended September 30, 2021 (In Thousands) (In Thousands) Balance at beginning of period $ 217 $ 225 Acquisition of PCI loans — — Accretion (27 ) (62 ) Transfer from non-accretable to accretable 26 55 Balance at end of period $ 216 $ 218 The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30: At September 30, 2022 At December 31, 2021 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 $ 4,952 $ 512 Carrying amount 4,110 290 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, 2022 or December 31, 2021. 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, 2022 and December 31, 2021, there were no foreclosed assets included in Other assets. As of September 30, 2022 and December 31, 2021, the Company had initiated formal foreclosure procedures on $488 and $293, respectively, of consumer residential mortgages. |