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 2015 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.

Management extended the historical loss period to six years in 2014 and to seven years in 2015. Due to the same factors that management considered in 2013, management has continued to apply more weight to the 2009 through 2011 periods compared to the 2012 through 2015 periods.

The activity in the allowance for loan losses for the three and six months ended June 30, 2016 and June 30, 2015 is summarized below.



	Three Months Ended June 30, 2016
(In thousands)	Commercial, financial and agricultural		Commercial real estate			Construction real estate			Residential real estate		Consumer		Leases			Total
Allowance for loan losses:
Beginning balance	$	14,240	$	9,452		$	8,687		$	13,388	$	11,180	$	1		$	56,948
Charge-offs	870		77			18			736		2,718		—			4,419
Recoveries	216		1,814			110			407		985		1			3,533
Net charge-offs/(recoveries)	654		(1,737		)	(92		)	329		1,733		(1		)	886
Provision/(recovery)	2,892		(1,986		)	(523		)	121		2,134		(1		)	2,637
Ending balance	$	16,478	$	9,203		$	8,256		$	13,180	$	11,581	$	1		$	58,699



	Three Months Ended June 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	$	11,361	$	9,296		$	8,755		$	14,512	$	11,484	$	—		$	55,408
Charge-offs	499		153			37			735		1,603		—			3,027
Recoveries	281		1,128			679			423		922		1			3,434
Net charge-offs/(recoveries)	218		(975		)	(642		)	312		681		(1		)	(407		)
Provision/(recovery)	981		(804		)	(727		)	1,068		1,095		(1		)	1,612
Ending balance	$	12,124	$	9,467		$	8,670		$	15,268	$	11,898	$	—		$	57,427



	Six Months Ended June 30, 2016
(In thousands)	Commercial, financial and agricultural		Commercial real estate			Construction real estate			Residential real estate		Consumer		Leases			Total
Allowance for loan losses:
Beginning balance	$	13,694	$	9,197		$	8,564		$	13,514	$	11,524	$	1		$	56,494
Charge-offs	1,144		78			18			1,483		5,097		—			7,820
Recoveries	643		2,032			1,049			878		1,875		1			6,478
Net charge-offs/(recoveries)	501		(1,954		)	(1,031		)	605		3,222		(1		)	1,342
Provision/(recovery)	3,285		(1,948		)	(1,339		)	271		3,279		(1		)	3,547
Ending balance	$	16,478	$	9,203		$	8,256		$	13,180	$	11,581	$	1		$	58,699



	Six Months Ended June 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	851		283			37			1,157			4,117		—			6,445
Recoveries	572		1,802			964			1,347			1,588		3			6,276
Net charge-offs/(recoveries)	279		(1,519		)	(927		)	(190		)	2,529		(3		)	169
Provision/(recovery)	1,684		(860		)	(909		)	306			3,026		(3		)	3,244
Ending balance	$	12,124	$	9,467		$	8,670		$	15,268		$	11,898	$	—		$	57,427

Loans collectively evaluated for impairment in the following tables include all performing loans at June 30, 2016 and December 31, 2015, 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 June 30, 2016 and December 31, 2015, 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 2015 Annual Report).

The composition of the allowance for loan losses at June 30, 2016 and December 31, 2015 was as follows:



	June 30, 2016
(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	$	4,295		$	275		$	1,304		$	393		$	20		$	—		$	6,287
Collectively evaluated for impairment	12,183			8,928			6,952			12,787			11,561			1			52,412
Total ending allowance balance	$	16,478		$	9,203		$	8,256		$	13,180		$	11,581		$	1		$	58,699

Loan balance:
Loans individually evaluated for impairment	$	29,774		$	29,880		$	6,084		$	25,070		$	20		$	—		$	90,828
Loans collectively evaluated for impairment	934,298			1,101,187			166,740			1,815,153			1,015,789			3,649			5,036,816
Total ending loan balance	$	964,072		$	1,131,067		$	172,824		$	1,840,223		$	1,015,809		$	3,649		$	5,127,644

Allowance for loan losses as a percentage of loan balance:
Loans individually evaluated for impairment	14.43		%	0.92		%	21.43		%	1.57		%	—		%	—		%	6.92		%
Loans collectively evaluated for impairment	1.30		%	0.81		%	4.17		%	0.70		%	1.14		%	0.03		%	1.04		%
Total	1.71		%	0.81		%	4.78		%	0.72		%	1.14		%	0.03		%	1.14		%

Recorded investment:
Loans individually evaluated for impairment	$	29,779		$	29,889		$	6,086		$	25,070		$	20		$	—		$	90,844
Loans collectively evaluated for impairment	937,796			1,104,800			167,127			1,818,646			1,018,768			3,679			5,050,816
Total ending recorded investment	$	967,575		$	1,134,689		$	173,213		$	1,843,716		$	1,018,788		$	3,679		$	5,141,660



	December 31, 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	$	1,904		$	381		$	1,356		$	550		$	—		$	—		$	4,191
Collectively evaluated for impairment	11,790			8,816			7,208			12,964			11,524			1			52,303
Total ending allowance balance	$	13,694		$	9,197		$	8,564		$	13,514		$	11,524		$	1		$	56,494

Loan balance:
Loans individually evaluated for impairment	$	30,545		$	18,015		$	6,716		$	25,323		$	—		$	—		$	80,599
Loans collectively evaluated for impairment	925,182			1,095,588			166,629			1,830,120			967,111			2,856			4,987,486
Total ending loan balance	$	955,727		$	1,113,603		$	173,345		$	1,855,443		$	967,111		$	2,856		$	5,068,085

Allowance for loan losses as a percentage of loan balance:
Loans individually evaluated for impairment	6.23		%	2.11		%	20.19		%	2.17		%	—		%	—		%	5.20		%
Loans collectively evaluated for impairment	1.27		%	0.80		%	4.33		%	0.71		%	1.19		%	0.04		%	1.05		%
Total	1.43		%	0.83		%	4.94		%	0.73		%	1.19		%	0.04		%	1.11		%

Recorded investment:
Loans individually evaluated for impairment	$	30,595		$	18,025		$	6,720		$	25,324		$	—		$	—		$	80,664
Loans collectively evaluated for impairment	928,569			1,099,587			167,042			1,833,449			970,143			2,870			5,001,660
Total ending recorded investment	$	959,164		$	1,117,612		$	173,762		$	1,858,773		$	970,143		$	2,870		$	5,082,324