Allowance for Loan Losses

The allowance for loan losses ("ALLL") 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.

Loss factors are reviewed quarterly and updated at least annually to reflect recent loan loss history and incorporate current risk and trends which may not be recognized in historical data. Several enhancements were made in the third quarter of 2016 as a result of management's quarterly review.

•

Management updated the historical loss calculation during the third quarter of 2016, incorporating annualized net charge-offs plus changes in specific reserves through September 30, 2016. Additionally, management removed net charge-offs plus changes in specific reserves for the year ended December 31, 2009. Management's belief has been that historical losses should encompass the complete economic cycle. However, given the extended length of the recovery, management determined that 2009 data was no longer reflective of the current portfolio. Management has taken the look back period into consideration in the quarterly evaluation of environmental loss factors.

As part of this mid-year historical loss update, management determined that it was no longer appropriate to more heavily weight those years with higher losses in the historical loss calculation and applied equal percentages to each of the years in this calculation. The trends that existed resulting in management applying this weighting no longer appear to exist, resulting in the adjustment back to equal weightings.


•	As part of the normal quarterly process, management reviewed and updated the environmental loss factors applied to the commercial portfolio in order to incorporate changes in the macroeconomic environment. Additionally, management updated the calculation of the loss emergence period.

The impact of the changes as described above resulted in a decrease of $3.8 million in the ALLL at September 30, 2016, compared to what the ALLL would have been had the calculation, and related assumptions, used at June 30, 2016 remained constant.

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



	Three Months Ended September 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	$	16,478	$	9,203		$	8,256		$	13,180		$	11,581		$	1		$	58,699
Charge-offs	457		4			1,300			293			2,086			—			4,140
Recoveries	246		973			3,659			348			1,142			1			6,369
Net charge-offs/(recoveries)	211		(969		)	(2,359		)	(55		)	944			(1		)	(2,229		)
Provision/(recovery)	3		401			(5,257		)	(1,907		)	(604		)	(2		)	(7,366		)
Ending balance	$	16,270	$	10,573		$	5,358		$	11,328		$	10,033		$	—		$	53,562



	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



	Nine Months Ended September 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	1,601		82			1,318			1,776			7,183		—			11,960
Recoveries	889		3,005			4,708			1,226			3,017		2			12,847
Net charge-offs/(recoveries)	712		(2,923		)	(3,390		)	550			4,166		(2		)	(887		)
Provision/(recovery)	3,288		(1,547		)	(6,596		)	(1,636		)	2,675		(3		)	(3,819		)
Ending balance	$	16,270	$	10,573		$	5,358		$	11,328		$	10,033	$	—		$	53,562



	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

Loans collectively evaluated for impairment in the following tables include all performing loans at September 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 September 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 September 30, 2016 and December 31, 2015 was as follows:



	September 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	$	3,191		$	525		$	61		$	455		$	—		$	—		$	4,232
Collectively evaluated for impairment	13,079			10,048			5,297			10,873			10,033			—			49,330
Total ending allowance balance	$	16,270		$	10,573		$	5,358		$	11,328		$	10,033		$	—		$	53,562

Loan balance:
Loans individually evaluated for impairment	$	23,852		$	26,057		$	4,377		$	23,700		$	—		$	—		$	77,986
Loans collectively evaluated for impairment	934,177			1,114,945			181,599			1,806,352			1,068,343			3,602			5,109,018
Total ending loan balance	$	958,029		$	1,141,002		$	185,976		$	1,830,052		$	1,068,343		$	3,602		$	5,187,004

Allowance for loan losses as a percentage of loan balance:
Loans individually evaluated for impairment	13.38		%	2.01		%	1.39		%	1.92		%	—		%	—		%	5.43		%
Loans collectively evaluated for impairment	1.40		%	0.90		%	2.92		%	0.60		%	0.94		%	—		%	0.97		%
Total	1.70		%	0.93		%	2.88		%	0.62		%	0.94		%	—		%	1.03		%

Recorded investment:
Loans individually evaluated for impairment	$	23,856		$	26,065		$	4,377		$	23,700		$	—		$	—		$	77,998
Loans collectively evaluated for impairment	937,959			1,119,205			182,020			1,809,513			1,071,227			3,657			5,123,581
Total ending recorded investment	$	961,815		$	1,145,270		$	186,397		$	1,833,213		$	1,071,227		$	3,657		$	5,201,579



	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