Allowance for Loan Losses

The allowance for loan losses is that amount management believes is adequate to absorb probable incurred credit losses in the loan portfolio based on management’s evaluation of various factors including overall growth in the loan portfolio, an analysis of individual loans, prior and current loss experience, and current economic conditions. A provision for loan losses is charged to operations based on management’s periodic evaluation of these and other pertinent factors as discussed within Note 1 of the Notes to Consolidated Financial Statements included in Park’s 2013 Annual Report.

With the inclusion of 2013 net charge-off information in the fourth quarter of 2013, management concluded that it was no longer appropriate to calculate the historical average with an even allocation across the five-year period. Rather than apply a 20% allocation to each year in the calculation of the historical annualized loss factor, management determined that it was appropriate to more heavily weight those years with higher losses in the historical loss calculation, given the continued uncertainty in the current economic environment. Specifically, rather than applying equal percentages to each year in the historical loss calculation, management applied more weight to the 2009-2011 periods compared to the 2012 and 2013 periods. Management will update the historical loss factors annually in the fourth quarter, or more frequently as deemed appropriate.

The activity in the allowance for loan losses for the three and nine months ended September 30, 2014 and September 30, 2013 is summarized below.



	Three Months Ended September 30, 2014
(In thousands)	Commercial, financial and agricultural		Commercial real estate		Construction real estate			Residential real estate		Consumer		Leases			Total
Allowance for loan losses:
Beginning balance	$	14,196	$	11,062	$	7,821		$	14,519	$	10,313	$	—		$	57,911
Charge-offs	874		463		11			623		2,014		—			3,985
Charge-offs upon transfer to held for sale	597		1,467		1,262			1,012		—		—			4,338
Recoveries	161		161		2,368			284		607		4			3,585
Net charge-offs/(recoveries)	1,310		1,769		(1,095		)	1,351		1,407		(4		)	4,738
Provision/(recovery)	136		1,136		(262		)	1,678		1,817		(4		)	4,501
Ending balance	$	13,022	$	10,429	$	8,654		$	14,846	$	10,723	$	—		$	57,674



	Three Months Ended September 30, 2013
(In thousands)	Commercial, financial and agricultural		Commercial real estate		Construction real estate			Residential real estate			Consumer		Leases		Total
Allowance for loan losses:
Beginning balance	$	15,391	$	11,025	$	7,132		$	14,647		$	6,916	$	—	$	55,111
Charge-offs	3,297		457		100			725			709		—		5,288
Recoveries	216		358		4,026			620			353		—		5,573
Net charge-offs/(recoveries)	3,081		99		(3,926		)	105			356		—		(285		)
Provision/(recovery)	1,741		4,611		(4,704		)	(942		)	1,792		—		2,498
Ending balance	$	14,051	$	15,537	$	6,354		$	13,600		$	8,352	$	—	$	57,894



	Nine Months Ended September 30, 2014
(In thousands)	Commercial, financial and agricultural		Commercial real estate			Construction real estate			Residential real estate		Consumer		Leases			Total
Allowance for loan losses:
Beginning balance	$	14,218	$	15,899		$	6,855		$	14,251	$	8,245	$	—		$	59,468
Charge-offs	1,727		6,531			35			1,899		5,315		—			15,507
Charge-offs upon transfer to held for sale	597		1,467			1,262			1,012		—		—			4,338
Recoveries	755		4,074			8,342			1,877		1,981		6			17,035
Net charge-offs/(recoveries)	1,569		3,924			(7,045		)	1,034		3,334		(6		)	2,810
Provision/(recovery)	373		(1,546		)	(5,246		)	1,629		5,812		(6		)	1,016
Ending balance	$	13,022	$	10,429		$	8,654		$	14,846	$	10,723	$	—		$	57,674



	Nine Months Ended September 30, 2013
(In thousands)	Commercial, financial and agricultural		Commercial real estate		Construction real estate			Residential real estate			Consumer		Leases			Total
Allowance for loan losses:
Beginning balance	$	15,635	$	11,736	$	6,841		$	14,759		$	6,566	$	—		$	55,537
Charge-offs	6,781		1,533		1,771			2,047			3,503		—			15,635
Recoveries	1,133		620		5,874			5,260			1,604		1			14,492
Net charge-offs/(recoveries)	5,648		913		(4,103		)	(3,213		)	1,899		(1		)	1,143
Provision/(recovery)	4,064		4,714		(4,590		)	(4,372		)	3,685		(1		)	3,500
Ending balance	$	14,051	$	15,537	$	6,354		$	13,600		$	8,352	$	—		$	57,894

Loans collectively evaluated for impairment in the following tables include all performing loans at September 30, 2014 and December 31, 2013, as well as nonperforming loans internally classified as consumer loans. Nonperforming consumer loans are not typically individually evaluated for impairment, but receive a portion of the statistical allocation of the allowance for loan losses. Loans individually evaluated for impairment include all impaired loans internally classified as commercial loans at September 30, 2014 and December 31, 2013, which are evaluated for impairment in accordance with U.S. GAAP (see Note 1 of the Notes to Consolidated Financial Statements included in Park’s 2013 Annual Report).

The composition of the allowance for loan losses at September 30, 2014 and December 31, 2013 was as follows:



	September 30, 2014
(In thousands)	Commercial, financial and agricultural			Commercial real estate			Construction real estate			Residential real estate			Consumer			Leases		Total
Allowance for loan losses:
Ending allowance balance attributed to loans:
Individually evaluated for impairment	$	1,652		$	252		$	1,951		$	230		$	35		$	—	$	4,120
Collectively evaluated for impairment	11,370			10,177			6,703			14,616			10,688			—		53,554
Total ending allowance balance	$	13,022		$	10,429		$	8,654		$	14,846		$	10,723		$	—	$	57,674

Loan balance:
Loans individually evaluated for impairment	$	23,186		$	21,298		$	8,067		$	23,612		$	35		$	—	$	76,198
Loans collectively evaluated for impairment	786,364			1,051,252			162,319			1,807,508			883,613			3,179		4,694,235
Total ending loan balance	$	809,550		$	1,072,550		$	170,386		$	1,831,120		$	883,648		$	3,179	$	4,770,433

Allowance for loan losses as a percentage of loan balance:
Loans individually evaluated for impairment	7.12		%	1.18		%	24.18		%	0.97		%	100.00		%	—		5.41		%
Loans collectively evaluated for impairment	1.45		%	0.97		%	4.13		%	0.81		%	1.21		%	—		1.14		%
Total	1.61		%	0.97		%	5.08		%	0.81		%	1.21		%	—		1.21		%

Recorded investment:
Loans individually evaluated for impairment	$	23,186		$	21,303		$	8,067		$	23,640		$	35		$	—	$	76,231
Loans collectively evaluated for impairment	789,508			1,055,117			162,789			1,811,116			886,380			3,235		4,708,145
Total ending recorded investment	$	812,694		$	1,076,420		$	170,856		$	1,834,756		$	886,415		$	3,235	$	4,784,376



	December 31, 2013
(In thousands)	Commercial, financial and agricultural			Commercial real estate			Construction real estate			Residential real estate			Consumer			Leases		Total
Allowance for loan losses:
Ending allowance balance attributed to loans:
Individually evaluated for impairment	$	3,268		$	5,496		$	1,132		$	555		$	—		$	—	$	10,451
Collectively evaluated for impairment	10,950			10,403			5,723			13,696			8,245			—		49,017
Total ending allowance balance	$	14,218		$	15,899		$	6,855		$	14,251		$	8,245		$	—	$	59,468

Loan balance:
Loans individually evaluated for impairment	$	20,724		$	41,816		$	15,559		$	33,406		$	799		$	—	$	112,304
Loans collectively evaluated for impairment	804,708			1,070,457			140,557			1,764,475			722,934			3,404		4,506,535
Total ending loan balance	$	825,432		$	1,112,273		$	156,116		$	1,797,881		$	723,733		$	3,404	$	4,618,839

Allowance for loan losses as a percentage of loan balance:
Loans individually evaluated for impairment	15.77		%	13.14		%	7.28		%	1.66		%	—			—		9.31		%
Loans collectively evaluated for impairment	1.36		%	0.97		%	4.07		%	0.78		%	1.14		%	—		1.09		%
Total	1.72		%	1.43		%	4.39		%	0.79		%	1.14		%	—		1.29		%

Recorded investment:
Loans individually evaluated for impairment	$	20,727		$	41,822		$	15,559		$	33,408		$	799		$	—	$	112,315
Loans collectively evaluated for impairment	807,784			1,074,216			140,944			1,767,938			725,709			3,427		4,520,018
Total ending recorded investment	$	828,511		$	1,116,038		$	156,503		$	1,801,346		$	726,508		$	3,427	$	4,632,333