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 2017 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. The following are factors management reviews on a quarterly or annual basis.

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Historical Loss Factor: Management updated the historical loss calculation during the fourth quarter of 2017, incorporating net charge-offs plus changes in specific reserves through December 31, 2017. With the addition of 2017 historical losses, management extended the historical loss period to 96 months from 84 months. The 96-month historical loss period captures all annual periods subsequent to June 2009, the end of the most recent recession, thus encompassing the full economic cycle to date.

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Loss Emergence Period Factor: At least annually, management calculates the loss emergence period for each commercial loan segment. This loss emergence period is calculated based upon the average period of time it takes from the probable occurrence of a loss event to the credit being moved to nonaccrual. If the loss emergence period for any commercial loan segment is greater than one year, management applies additional general reserves to all performing loans within that segment of the commercial loan portfolio. The loss emergence period was last updated in the fourth quarter of 2017.

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Loss Migration Factor: Park’s commercial loans are individually risk graded. If loan downgrades occur, the probability of default increases, and accordingly, management allocates a higher percentage reserve to those accruing commercial loans graded special mention and substandard. Annually, management calculates a loss migration factor for each commercial loan segment for special mention and substandard credits based on a review of losses over the period of time a loan takes to migrate from pass-rated to impaired. The loss migration factor was last updated in the fourth quarter of 2017.

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Environmental Loss Factor: Management has identified certain macroeconomic factors that trend in accordance with losses in Park’s commercial loan portfolio. These macroeconomic factors are reviewed quarterly and the adjustments made to the environmental loss factor impacting each segment in the performing commercial loan portfolio correlate to changes in the macroeconomic environment. There was no change to the environmental loss factor during the first quarter of 2018.

The activity in the allowance for loan losses for the three-month periods ended March 31, 2018 and March 31, 2017 is summarized in the following tables.



	Three Months Ended March 31, 2018
(In thousands)	Commercial, financial and agricultural			Commercial real estate			Construction real estate			Residential real estate			Consumer		Leases		Total
Allowance for loan losses:
Beginning balance	$	15,022		$	9,601		$	4,430		$	9,321		$	11,614	$	—	$	49,988
Charge-offs	649			47			—			116			2,638		—		3,450
Recoveries	652			87			59			360			1,013		—		2,171
Net (recoveries)/charge-offs	(3		)	(40		)	(59		)	(244		)	1,625		—		1,279
(Recovery)/provision	(948		)	(153		)	(26		)	(150		)	1,537		—		260
Ending balance	$	14,077		$	9,488		$	4,463		$	9,415		$	11,526	$	—	$	48,969



	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

Loans collectively evaluated for impairment in the following tables include all performing loans at March 31, 2018 and December 31, 2017, 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, 2018 and December 31, 2017, 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 2017 Annual Report).

The composition of the allowance for loan losses at March 31, 2018 and December 31, 2017 was as follows:



	March 31, 2018
(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	$	1,165		$	29		$	8		$	5		$	—		$	—		$	1,207
Collectively evaluated for impairment	12,912			9,459			4,455			9,410			11,526			—			47,762
Total ending allowance balance	$	14,077		$	9,488		$	4,463		$	9,415		$	11,526		$	—		$	48,969

Loan balance:
Loans individually evaluated for impairment	$	27,045		$	18,960		$	1,391		$	2,896		$	—		$	—		$	50,292
Loans collectively evaluated for impairment	973,741			1,137,603			179,793			1,695,764			1,252,251			2,905			5,242,057
Total ending loan balance	$	1,000,786		$	1,156,563		$	181,184		$	1,698,660		$	1,252,251		$	2,905		$	5,292,349

Allowance for loan losses as a percentage of loan balance:
Loans individually evaluated for impairment	4.31		%	0.15		%	0.58		%	0.17		%	—		%	—		%	2.40		%
Loans collectively evaluated for impairment	1.33		%	0.83		%	2.48		%	0.55		%	0.92		%	—		%	0.91		%
Total	1.41		%	0.82		%	2.46		%	0.55		%	0.92		%	—		%	0.93		%

Recorded investment:
Loans individually evaluated for impairment	$	27,050		$	18,983		$	1,393		$	2,896		$	—		$	—		$	50,322
Loans collectively evaluated for impairment	977,979			1,141,627			180,296			1,699,087			1,255,713			2,951			5,257,653
Total ending recorded investment	$	1,005,029		$	1,160,610		$	181,689		$	1,701,983		$	1,255,713		$	2,951		$	5,307,975



	December 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	$	681		$	2		$	—		$	1		$	—		$	—		$	684
Collectively evaluated for impairment	14,341			9,599			4,430			9,320			11,614			—			49,304
Total ending allowance balance	$	15,022		$	9,601		$	4,430		$	9,321		$	11,614		$	—		$	49,988

Loan balance:
Loans individually evaluated for impairment	$	18,034		$	18,131		$	1,322		$	19,058		$	—		$	—		$	56,545
Loans collectively evaluated for impairment	1,035,419			1,149,476			180,148			1,706,166			1,241,736			2,993			5,315,938
Total ending loan balance	$	1,053,453		$	1,167,607		$	181,470		$	1,725,224		$	1,241,736		$	2,993		$	5,372,483

Allowance for loan losses as a percentage of loan balance:
Loans individually evaluated for impairment	3.78		%	0.01		%	—		%	0.01		%	—		%	—		%	1.21		%
Loans collectively evaluated for impairment	1.39		%	0.84		%	2.46		%	0.55		%	0.94		%	—		%	0.93		%
Total	1.43		%	0.82		%	2.44		%	0.54		%	0.94		%	—		%	0.93		%

Recorded investment:
Loans individually evaluated for impairment	$	18,039		$	18,142		$	1,324		$	19,059		$	—		$	—		$	56,564
Loans collectively evaluated for impairment	1,039,827			1,153,748			180,693			1,709,737			1,245,544			3,029			5,332,578
Total ending recorded investment	$	1,057,866		$	1,171,890		$	182,017		$	1,728,796		$	1,245,544		$	3,029		$	5,389,142