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 2016 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.

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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.

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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 when management adopted this weighting no longer appear to exist, resulting in the adjustment back to equal weightings of all years evaluated.


•	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 utilizing a more granular process.

The impact of the changes 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 historical loss factors were updated again in the fourth quarter of 2016 to incorporate losses through December 31, 2016. As part of the normal quarterly process, during the first quarter of 2017, management reviewed and updated the environmental loss factors applied to the commercial portfolio in order to incorporate changes in the macroeconomic environment.

The activity in the allowance for loan losses for the three months ended March 31, 2017 and March 31, 2016 is summarized below.



	Three Months Ended March 31, 2017
(In thousands)	Commercial, financial and agricultural			Commercial real estate			Construction real estate			Residential real estate			Consumer		Leases		Total
Allowance for loan losses:
Beginning balance	$	13,434		$	10,432		$	5,247		$	10,958		$	10,553	$	—	$	50,624
Charge-offs	339			112			27			480			2,750		—		3,708
Recoveries	369			114			58			291			1,298		—		2,130
Net (recoveries)/charge-offs	(30		)	(2		)	(31		)	189			1,452		—		1,578
(Recovery)/provision	(27		)	(153		)	(910		)	(24		)	1,990		—		876
Ending balance	$	13,437		$	10,281		$	4,368		$	10,745		$	11,091	$	—	$	49,922



	Three Months Ended March 31, 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	274			1			—			747		2,379		—		3,401
Recoveries	427			218			939			471		890		—		2,945
Net (recoveries)/charge-offs	(153		)	(217		)	(939		)	276		1,489		—		456
Provision/(recovery)	393			38			(816		)	150		1,145		—		910
Ending balance	$	14,240		$	9,452		$	8,687		$	13,388	$	11,180	$	1	$	56,948

Loans collectively evaluated for impairment in the following tables include all performing loans at March 31, 2017 and December 31, 2016, 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 March 31, 2017 and December 31, 2016, 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 2016 Annual Report).

The composition of the allowance for loan losses at March 31, 2017 and December 31, 2016 was as follows:



	March 31, 2017
(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	$	596		$	179		$	32		$	275		$	9		$	—		$	1,091
Collectively evaluated for impairment	12,841			10,102			4,336			10,470			11,082			—			48,831
Total ending allowance balance	$	13,437		$	10,281		$	4,368		$	10,745		$	11,091		$	—		$	49,922

Loan balance:
Loans individually evaluated for impairment	$	22,541		$	22,708		$	2,039		$	22,802		$	9		$	—		$	70,099
Loans collectively evaluated for impairment	972,836			1,164,687			163,195			1,760,449			1,178,727			3,648			5,243,542
Total ending loan balance	$	995,377		$	1,187,395		$	165,234		$	1,783,251		$	1,178,736		$	3,648		$	5,313,641

Allowance for loan losses as a percentage of loan balance:
Loans individually evaluated for impairment	2.64		%	0.79		%	1.57		%	1.21		%	—		%	—		%	1.56		%
Loans collectively evaluated for impairment	1.32		%	0.87		%	2.66		%	0.59		%	0.94		%	—		%	0.93		%
Total	1.35		%	0.87		%	2.64		%	0.60		%	0.94		%	—		%	0.94		%

Recorded investment:
Loans individually evaluated for impairment	$	22,542		$	22,732		$	2,041		$	22,803		$	9		$	—		$	70,127
Loans collectively evaluated for impairment	976,733			1,168,533			163,655			1,763,491			1,181,845			3,706			5,257,963
Total ending recorded investment	$	999,275		$	1,191,265		$	165,696		$	1,786,294		$	1,181,854		$	3,706		$	5,328,090



	December 31, 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	$	152		$	309		$	—		$	87		$	—		$	—		$	548
Collectively evaluated for impairment	13,282			10,123			5,247			10,871			10,553			—			50,076
Total ending allowance balance	$	13,434		$	10,432		$	5,247		$	10,958		$	10,553		$	—		$	50,624

Loan balance:
Loans individually evaluated for impairment	$	20,622		$	24,465		$	2,226		$	23,102		$	—		$	—		$	70,415
Loans collectively evaluated for impairment	973,997			1,131,238			186,719			1,785,395			1,120,850			3,243			5,201,442
Total ending loan balance	$	994,619		$	1,155,703		$	188,945		$	1,808,497		$	1,120,850		$	3,243		$	5,271,857

Allowance for loan losses as a percentage of loan balance:
Loans individually evaluated for impairment	0.74		%	1.26		%	—		%	0.38		%	—		%	—		%	0.78		%
Loans collectively evaluated for impairment	1.36		%	0.89		%	2.81		%	0.61		%	0.94		%	—		%	0.96		%
Total	1.35		%	0.90		%	2.78		%	0.61		%	0.94		%	—		%	0.96		%

Recorded investment:
Loans individually evaluated for impairment	$	20,624		$	24,474		$	2,226		$	23,102		$	—		$	—		$	70,426
Loans collectively evaluated for impairment	977,553			1,135,390			187,240			1,788,714			1,124,235			3,272			5,216,404
Total ending recorded investment	$	998,177		$	1,159,864		$	189,466		$	1,811,816		$	1,124,235		$	3,272		$	5,286,830