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 2014 Annual Report.

Management updates historical losses annually in the fourth quarter, or more frequently as deemed appropriate. With the inclusion of 2013 net charge-off information, management concluded that it was no longer appropriate to calculate the historical loss 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.

With the inclusion of 2014 net charge-off information in the fourth quarter of 2014, management extended the historical loss period to six years. Due to the same factors that management considered in 2013, management applied more weight to 2009 through 2011 periods compared to the 2012 through 2014 periods.

The activity in the allowance for loan losses for the three and nine months ended September 30, 2015 and September 30, 2014 is summarized below.



	Three Months Ended September 30, 2015
(In thousands)	Commercial, financial and agricultural		Commercial real estate			Construction real estate			Residential real estate			Consumer		Leases		Total
Allowance for loan losses:
Beginning balance	$	12,124	$	9,467		$	8,670		$	15,268		$	11,898	$	—	$	57,427
Charge-offs	829		46			4			575			2,262		—		3,716
Recoveries	415		386			274			461			832		—		2,368
Net charge-offs/(recoveries)	414		(340		)	(270		)	114			1,430		—		1,348
Provision/(recovery)	1,549		(352		)	50			(132		)	1,289		—		2,404
Ending balance	$	13,259	$	9,455		$	8,990		$	15,022		$	11,757	$	—	$	58,483



	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



	Nine Months Ended September 30, 2015
(In thousands)	Commercial, financial and agricultural		Commercial real estate			Construction real estate			Residential real estate			Consumer		Leases			Total
Allowance for loan losses:
Beginning balance	$	10,719	$	8,808		$	8,652		$	14,772		$	11,401	$	—		$	54,352
Charge-offs	1,680		329			41			1,732			6,379		—			10,161
Recoveries	987		2,188			1,238			1,808			2,420		3			8,644
Net charge-offs/(recoveries)	693		(1,859		)	(1,197		)	(76		)	3,959		(3		)	1,517
Provision/(recovery)	3,233		(1,212		)	(859		)	174			4,315		(3		)	5,648
Ending balance	$	13,259	$	9,455		$	8,990		$	15,022		$	11,757	$	—		$	58,483



	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

Loans collectively evaluated for impairment in the following tables include all performing loans at September 30, 2015 and December 31, 2014, 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, 2015 and December 31, 2014, 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 2014 Annual Report).

The composition of the allowance for loan losses at September 30, 2015 and December 31, 2014 was as follows:



	September 30, 2015
(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	$	2,495		$	488		$	2,118		$	637		$	—		$	—		$	5,738
Collectively evaluated for impairment	10,764			8,967			6,872			14,385			11,757			—			52,745
Total ending allowance balance	$	13,259		$	9,455		$	8,990		$	15,022		$	11,757		$	—		$	58,483

Loan balance:
Loans individually evaluated for impairment	$	19,150		$	17,651		$	8,038		$	24,349		$	—		$	—		$	69,188
Loans collectively evaluated for impairment	889,875			1,073,927			152,334			1,841,951			969,586			3,051			4,930,724
Total ending loan balance	$	909,025		$	1,091,578		$	160,372		$	1,866,300		$	969,586		$	3,051		$	4,999,912

Allowance for loan losses as a percentage of loan balance:
Loans individually evaluated for impairment	13.03		%	2.76		%	26.35		%	2.62		%	—		%	—		%	8.29		%
Loans collectively evaluated for impairment	1.21		%	0.83		%	4.51		%	0.78		%	1.21		%	—		%	1.07		%
Total	1.46		%	0.87		%	5.61		%	0.80		%	1.21		%	—		%	1.17		%

Recorded investment:
Loans individually evaluated for impairment	$	19,154		$	17,662		$	8,038		$	24,370		$	—		$	—		$	69,224
Loans collectively evaluated for impairment	893,349			1,078,155			152,710			1,845,487			972,535			3,104			4,945,340
Total ending recorded investment	$	912,503		$	1,095,817		$	160,748		$	1,869,857		$	972,535		$	3,104		$	5,014,564



	December 31, 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	$	981		$	262		$	1,812		$	605		$	—		$	—		$	3,660
Collectively evaluated for impairment	9,738			8,546			6,840			14,167			11,401			—			50,692
Total ending allowance balance	$	10,719		$	8,808		$	8,652		$	14,772		$	11,401		$	—		$	54,352

Loan balance:
Loans individually evaluated for impairment	$	19,103		$	21,978		$	7,690		$	24,905		$	—		$	—		$	73,676
Loans collectively evaluated for impairment	837,432			1,047,659			148,114			1,826,470			893,160			3,171			4,756,006
Total ending loan balance	$	856,535		$	1,069,637		$	155,804		$	1,851,375		$	893,160		$	3,171		$	4,829,682

Allowance for loan losses as a percentage of loan balance:
Loans individually evaluated for impairment	5.14		%	1.19		%	23.56		%	2.43		%	—		%	—		%	4.97		%
Loans collectively evaluated for impairment	1.16		%	0.82		%	4.62		%	0.78		%	1.28		%	—		%	1.07		%
Total	1.25		%	0.82		%	5.55		%	0.80		%	1.28		%	—		%	1.13		%

Recorded investment:
Loans individually evaluated for impairment	$	19,106		$	21,989		$	7,687		$	24,930		$	—		$	—		$	73,712
Loans collectively evaluated for impairment	840,647			1,051,194			148,512			1,829,931			896,127			3,188			4,769,599
Total ending recorded investment	$	859,753		$	1,073,183		$	156,199		$	1,854,861		$	896,127		$	3,188		$	4,843,311