Allowance For Loan Losses

9 Months Ended

Sep. 30, 2020

Financing Receivable, Allowance for Credit Loss, Writeoff, after Recovery [Abstract]

Allowance For Loan Losses

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 the 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 - Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in Park's 2019 Form 10-K.

Loss factors are reviewed quarterly and updated at least annually to reflect recent loan loss history and incorporate current risks and trends which may not be recognized in historical data. Management updated the historical loss calculation during the fourth quarter of 2019, incorporating annualized net charge-offs plus changes in specific reserves through December 31, 2019. With the addition of 2019 historical losses, management extended the historical loss period to 120 months from 108 months. The 120-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.

For all loan types, management considers the following factors in determining loan collectability and the appropriate level of the allowance:

•Changes in the nature and volume of the portfolio and in the terms of loans, including:

◦Trends (e.g., growth, reduction) in specific categories of the loan portfolio, as well as adjustments to the types of loans offered by PNB and GFSC.

◦Level of and trend in loan delinquencies, troubled loans, commercial watch list and impaired loans.

◦Level of and trend in new nonaccrual loans.

◦Level of and trend in loan charge-offs and recoveries.

•Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices.

•Changes in national and local economic and business conditions and developments that affect the collectability of the portfolio.

•The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated losses in Park's existing portfolio.

The following are factors management reviews specifically for commercial loans on a quarterly or annual basis.

•Loss Emergence Period Factor: At least annually, management calculates the loss emergence period for each commercial loan segment. The 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 calculation of the loss emergence period was last updated in the fourth quarter of 2019.

During the third quarter of 2020, Park made the decision to extend the loss emergence period on all commercial loan types by six months. Management believes that the start of the COVID-19 pandemic in March 2020 represents the loss event. Management continues to refine estimated losses as a result of this March 2020 loss event. Approximately six months following the start of the pandemic, Park has experienced very little, if any, increase in delinquencies and charge-offs. Management believes that this is due to the unprecedented level of economic stimulus and CARES Act accommodations provided by the U.S. government which has delayed loan defaults and losses.

•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 2019.

•Environmental Loss Factor: Management has identified certain macroeconomic factors that trend in accordance with losses in Park’s commercial loan portfolio. Certain environmental loss factors have been determined to correlate with higher charge-offs while other adjustments are based on a subjective evaluation of other environmental loss factors.

Environmental factors applicable to the commercial loan portfolio include: the Ohio unemployment rate, percent change in Ohio GDP, the consumer confidence index, the prevalence of fixed rate loans in the portfolio, and other environmental factors. In evaluating the ongoing relevance and amount of the other environmental factors, management considers: changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off and recovery practices, changes in national and local economic and business conditions, and developments that affect the collectability of the portfolio, and the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated losses in Park's existing portfolio. All of these factors are evaluated in relation to the historical look back period. At September 30, 2020 and December 31, 2019, such subjective environmental loss factor inputs accounted for 39% and 42%, respectively, of the allowance for loan losses driven by environmental loss factors.

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. The environmental loss factors were updated in the first, second, and third quarters of 2020 to consider the economic impact of the COVID-19 pandemic. These factors were increased from 0.60% of applicable loans at December 31, 2019 to 0.675% of applicable loans at March 31, 2020, to 0.75% of applicable loans at June 30, 2020, and to 0.825% at September 30, 2020. The increase in the first and second quarters of 2020 was the result of upward adjustments to the factors for Ohio unemployment, percent change in Ohio GDP and consumer confidence. The increase in the third quarter of 2020 was due to the increased uncertainty in the overall economic environment, the unknown length and severity of the pandemic and the limitations in the incurred loss model to capture all probable incurred losses during such uncertain times. Management will continue to evaluate this estimate of incurred losses as new information becomes available.

In addition to the increases in the environmental loss factor, in the second quarter, Park added additional reserves for three industries at particularly high risk due to the pandemic: hotels and accommodations, restaurants and food service, and strip shopping centers. These industries have had high levels of deferrals and have been particularly impacted by shut downs of non-essential businesses, increased health department regulations, and changes in consumer behavior. Management expects that a high percentage of the 4-rated credits in these portfolios will eventually migrate to special mention, substandard, or impaired status. As a result, additional reserves totaling $3.9 million were added for these portfolios on top of that already calculated. This amount was calculated by applying the loss factor for special mention credits to all 4-rated loans in these portfolios. A breakout of the 4-rated balances and additional reserve related to these portfolios is detailed in the following table.

	September 30, 2020
(in thousands)	4-Rated Balance		4-Rated Balance - Originated		4-Rated Balance - Purchased		Additional Reserve
Hotels and accommodations	$	86,041	$	85,050	$	991	$	1,435
Restaurants and food service	34,263		28,291		5,972		658
Strip shopping centers	181,517		158,790		22,727		1,789
Total	$	301,821	$	272,131	$	29,690	$	3,882

Additionally, management applied a 1% reserve to all hotels and accommodations loans in the general reserve population to account for increased valuation risk. At September 30, 2020, Park's originated hotels and accommodation loans had a balance of $178.8 million with an additional reserve related to valuation risks of $1.8 million.

For the consumer portfolio, a specific COVID-19 factor was added to each segment equal to 50% of the 120-month historical loss factor. This increase considers the payment deferrals being provided to consumer loan customers as well as the likely delays in delinquencies and charge-offs as a result.

Much is still unknown about the economic impact of COVID-19, including the duration of the pandemic, future government programs that may be established as a result of the pandemic, and the resiliency of the U.S. economy. Management will continue to evaluate this estimate of incurred losses as new information becomes available. Given uncertainty about the magnitude and length of the COVID-19 pandemic and related economic shutdown, additional loan loss provisions may be required that would adversely impact earnings in future periods.

As of September 30, 2020, Park had $542.8 million of PPP loans which are included in the commercial, financial and agricultural portfolio segment. These loans are guaranteed by the SBA and thus have not been reserved for using the same

methodology as the rest of Park’s loan portfolio. A 10 basis point reserve was calculated for these loans to reflect minimal credit risk.

The activity in the allowance for loan losses for the three-month and nine-month periods ended September 30, 2020 and September 30, 2019 is summarized in the following tables.

	Three Months Ended September 30, 2020
(In thousands)	Commercial, financial and agricultural		Commercial real estate		Construction real estate		Residential real estate		Consumer		Leases		Total
Allowance for loan losses:
Beginning balance	$	23,476	$	16,469	$	6,828	$	10,507	$	15,624	$	572	$	73,476
Charge-offs	241		45		—		34		1,208		1		1,529
Recoveries	181		47		35		189		803		—		1,255
Net charge-offs/(recoveries)	60		(2)		(35)		(155)		405		1		274
Provision	3,571		6,417		1,544		546		1,750		8		13,836
Ending balance	$	26,987	$	22,888	$	8,407	$	11,208	$	16,969	$	579	$	87,038

	Three Months Ended September 30, 2019
(In thousands)	Commercial, financial and agricultural		Commercial real estate		Construction real estate		Residential real estate		Consumer		Leases		Total
Allowance for loan losses:
Beginning balance	$	17,370	$	10,377	$	5,065	$	8,869	$	12,265	$	57	$	54,003
Charge-offs	585		8		—		85		1,801		—		2,479
Recoveries	403		246		432		98		1,183		—		2,362
Net charge-offs/(recoveries)	182		(238)		(432)		(13)		618		—		117
Provision/(recovery)	1,238		(177)		(65)		49		908		14		1,967
Ending balance	$	18,426	$	10,438	$	5,432	$	8,931	$	12,555	$	71	$	55,853

	Nine Months Ended September 30, 2020
(In thousands)	Commercial, financial and agricultural		Commercial real estate		Construction real estate		Residential real estate		Consumer		Leases		Total
Allowance for loan losses:
Beginning balance	$	20,203	$	10,229	$	5,311	$	8,610	$	12,211	$	115	$	56,679
Charge-offs	1,041		45		6		176		5,060		16		6,344
Recoveries	1,061		690		628		457		2,654		—		5,490
Net (recoveries)/charge-offs	(20)		(645)		(622)		(281)		2,406		16		854
Provision	6,764		12,014		2,474		2,317		7,164		480		31,213
Ending balance	$	26,987	$	22,888	$	8,407	$	11,208	$	16,969	$	579	$	87,038

	Nine Months Ended September 30, 2019
(In thousands)	Commercial, financial and agricultural		Commercial real estate		Construction real estate		Residential real estate		Consumer		Leases		Total
Allowance for loan losses:
Beginning balance	$	16,777	$	9,768	$	4,463	$	8,731	$	11,773	$	—	$	51,512
Charge-offs	1,498		401		—		176		6,319		—		8,394
Recoveries	983		360		543		640		3,824		1		6,351
Net charge-offs/(recoveries)	515		41		(543)		(464)		2,495		(1)		2,043
Provision/(recovery)	2,164		711		426		(264)		3,277		70		6,384
Ending balance	$	18,426	$	10,438	$	5,432	$	8,931	$	12,555	$	71	$	55,853

Loans collectively evaluated for impairment in the following tables include all performing loans at September 30, 2020 and December 31, 2019, 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, 2020 and December 31, 2019, which are evaluated for impairment in accordance with U.S. GAAP (see Note 1 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Park’s 2019 Form 10-K).

The composition of the allowance for loan losses at September 30, 2020 and December 31, 2019 was as follows:

	September 30, 2020
(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	$	5,033		$	3,014		$	—		$	155		$	—		$	464		$	8,666
Collectively evaluated for impairment	21,913			19,872			8,407			10,993			16,969			115			78,269
Acquired with deteriorated credit quality	41			2			—			60			—			—			103
Total ending allowance balance	$	26,987		$	22,888		$	8,407		$	11,208		$	16,969		$	579		$	87,038
Loan balance:
Loans individually evaluated for impairment	$	33,075		$	72,499		$	3,142		$	4,898		$	—		$	2,524		$	116,138
Loans collectively evaluated for impairment	1,693,568			1,608,993			354,845			1,815,628			1,652,638			24,859			7,150,531
Loans acquired with deteriorated credit quality	373			7,985			1,009			2,383			—			127			11,877
Total ending loan balance	$	1,727,016		$	1,689,477		$	358,996		$	1,822,909		$	1,652,638		$	27,510		$	7,278,546
Allowance for loan losses as a percentage of loan balance:
Loans individually evaluated for impairment	15.22		%	4.16		%	—		%	3.16		%	—		%	18.38		%	7.46		%
Loans collectively evaluated for impairment	1.29		%	1.24		%	2.37		%	0.61		%	1.03		%	0.46		%	1.09		%
Loans acquired with deteriorated credit quality	10.99		%	0.03		%	—		%	2.52		%	—		%	—		%	0.87		%
Total	1.56		%	1.35		%	2.34		%	0.61		%	1.03		%	2.10		%	1.20		%
Recorded investment:
Loans individually evaluated for impairment	$	33,098		$	72,519		$	3,142		$	4,897		$	—		$	2,524		$	116,180
Loans collectively evaluated for impairment	1,700,477			1,615,685			355,806			1,819,008			1,657,153			24,881			7,173,010
Loans acquired with deteriorated credit quality	375			8,084			1,012			2,393			—			127			11,991
Total ending recorded investment	$	1,733,950		$	1,696,288		$	359,960		$	1,826,298		$	1,657,153		$	27,532		$	7,301,181

	December 31, 2019
(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	$	5,104		$	35		$	—		$	42		$	—		$	49		$	5,230
Collectively evaluated for impairment	14,948			10,187			5,311			8,458			12,211			66			51,181
Acquired with deteriorated credit quality	151			7			—			110			—			—			268
Total ending allowance balance	$	20,203		$	10,229		$	5,311		$	8,610		$	12,211		$	115		$	56,679
Loan balance:
Loans individually evaluated for impairment	$	33,077		$	41,770		$	453		$	2,025		$	—		$	134		$	77,459
Loans collectively evaluated for impairment	1,151,073			1,558,550			330,106			1,888,088			1,452,373			29,424			6,409,614
Loans acquired with deteriorated credit quality (1)	960			9,093			1,140			2,613			2			523			14,331
Total ending loan balance	$	1,185,110		$	1,609,413		$	331,699		$	1,892,726		$	1,452,375		$	30,081		$	6,501,404
Allowance for loan losses as a percentage of loan balance:
Loans individually evaluated for impairment	15.43		%	0.08		%	—		%	2.07		%	—		%	36.57		%	6.75		%
Loans collectively evaluated for impairment	1.30		%	0.65		%	1.61		%	0.45		%	0.84		%	0.22		%	0.80		%
Loans acquired with deteriorated credit quality	15.73		%	0.08		%	—		%	4.21		%	—		%	—		%	1.87		%
Total	1.70		%	0.64		%	1.60		%	0.45		%	0.84		%	0.38		%	0.87		%
Recorded investment:
Loans individually evaluated for impairment	$	33,088		$	41,791		$	453		$	2,025		$	—		$	134		$	77,491
Loans collectively evaluated for impairment	1,155,449			1,564,011			331,161			1,891,941			1,456,687			29,444			6,428,693
Loans acquired with deteriorated credit quality (1)	966			9,182			1,143			2,625			2			523			14,441
Total ending recorded investment	$	1,189,503		$	1,614,984		$	332,757		$	1,896,591		$	1,456,689		$	30,101		$	6,520,625

 (1) Excludes loans acquired with deteriorated credit quality which were individually evaluated for impairment due to additional credit deterioration or modification post acquisition. These loans had a balance of $5,000, a recorded investment of $6,000, and no allowance as of December 31, 2019.