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 second quarter of 2018.

The activity in the allowance for loan losses for the three-month and six-month periods ended June 30, 2018 and June 30, 2017 is summarized in the following tables.



	Three Months Ended June 30, 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	$	14,077	$	9,488	$	4,463		$	9,415		$	11,526	$	—	$	48,969
Charge-offs	287		182		31			102			2,114		—		2,716
Recoveries	206		89		220			244			1,054		—		1,813
Net charge-offs/(recoveries)	81		93		(189		)	(142		)	1,060		—		903
Provision/(recovery)	482		11		—			(312		)	1,205		—		1,386
Ending balance	$	14,478	$	9,406	$	4,652		$	9,245		$	11,671	$	—	$	49,452



	Three Months Ended June 30, 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	$	13,437	$	10,281	$	4,368		$	10,745		$	11,091	$	—	$	49,922
Charge-offs	318		310		—			290			2,128		—		3,046
Recoveries	163		241		325			336			1,300		—		2,365
Net charge-offs/(recoveries)	155		69		(325		)	(46		)	828		—		681
Provision/(recovery)	3,464		239		(16		)	(472		)	1,366		—		4,581
Ending balance	$	16,746	$	10,451	$	4,677		$	10,319		$	11,629	$	—	$	53,822



	Six Months Ended June 30, 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	936			229			31			218			4,752		—		6,166
Recoveries	858			176			279			604			2,067		—		3,984
Net charge-offs/(recoveries)	78			53			(248		)	(386		)	2,685		—		2,182
(Recovery)/provision	(466		)	(142		)	(26		)	(462		)	2,742		—		1,646
Ending balance	$	14,478		$	9,406		$	4,652		$	9,245		$	11,671	$	—	$	49,452



	Six Months Ended June 30, 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	657		422		27			770			4,878		—		6,754
Recoveries	532		355		383			627			2,598		—		4,495
Net charge-offs/(recoveries)	125		67		(356		)	143			2,280		—		2,259
Provision/(recovery)	3,437		86		(926		)	(496		)	3,356		—		5,457
Ending balance	$	16,746	$	10,451	$	4,677		$	10,319		$	11,629	$	—	$	53,822

Loans collectively evaluated for impairment in the following tables include all performing loans at June 30, 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 June 30, 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 June 30, 2018 and December 31, 2017 was as follows:



	June 30, 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	$	1,366		$	27		$	—		$	3		$	—		$	—		$	1,396
Collectively evaluated for impairment	13,112			9,379			4,652			9,242			11,671			—			48,056
Total ending allowance balance	$	14,478		$	9,406		$	4,652		$	9,245		$	11,671		$	—		$	49,452

Loan balance:
Loans individually evaluated for impairment	$	29,942		$	26,485		$	2,529		$	2,749		$	—		$	—		$	61,705
Loans collectively evaluated for impairment	984,681			1,124,360			189,389			1,687,823			1,274,349			2,667			5,263,269
Total ending loan balance	$	1,014,623		$	1,150,845		$	191,918		$	1,690,572		$	1,274,349		$	2,667		$	5,324,974

Allowance for loan losses as a percentage of loan balance:
Loans individually evaluated for impairment	4.56		%	0.10		%	—		%	0.11		%	—		%	—		%	2.26		%
Loans collectively evaluated for impairment	1.34		%	0.83		%	2.45		%	0.55		%	0.91		%	—		%	0.91		%
Total	1.43		%	0.82		%	2.42		%	0.55		%	0.92		%	—		%	0.93		%

Recorded investment:
Loans individually evaluated for impairment	$	29,943		$	26,528		$	2,529		$	2,750		$	—		$	—		$	61,750
Loans collectively evaluated for impairment	989,446			1,128,558			189,948			1,691,217			1,277,946			2,690			5,279,805
Total ending recorded investment	$	1,019,389		$	1,155,086		$	192,477		$	1,693,967		$	1,277,946		$	2,690		$	5,341,555



	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