Allowance For Credit Losses

9 Months Ended

Sep. 30, 2022

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

Allowance For Loan Losses

Allowance for Credit Losses

The ACL is an estimate of the expected credit losses on financial assets measured at amortized cost, which is measured using relevant information about past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. A provision for credit losses is charged to operations based on management’s periodic evaluation of these and other pertinent factors.

During the first quarter of 2021, Park adopted ASU 2016-13, including the CECL methodology for estimating the ACL. This standard was adopted prospectively on January 1, 2021, resulting in a $6.1 million increase to the ACL and a $3.9 million increase to the allowance for unfunded credit losses. A cumulative effect adjustment resulting in an $8.0 million decrease to retained earnings and a $2.1 million increase to deferred tax assets was also recorded as of the adoption of ASU 2016-13.

Quantitative Considerations

The ACL is primarily calculated utilizing a DCF model. Key inputs and assumptions used in this model are discussed below:

•Forecast model - For each portfolio segment, a LDA was performed in order to identify appropriate loss drivers and create a regression model for use in forecasting cash flows. The LDA analysis utilized Park's own FFIEC Call Report data for the commercial, financial and agricultural and residential real estate portfolio segments. Peer data was incorporated into the analysis for the commercial real estate, construction real estate, and consumer portfolio segments. Park plans to update the LDA annually; however, due to the impact of COVID-19, the LDA analysis was last updated in the fourth quarter of 2019.

•Probability of default – PD is the probability that an asset will be in default within a given time frame. Park has defined default to be when a charge-off has occurred, a loan is nonaccrual, or a loan is greater than 90 days past due.

Whenever possible, Park utilizes its own loan-level PDs for the reasonable and supportable forecast period. When loan-level data is not available reflecting the forecasted economic conditions, a forecast model is utilized to estimate PDs.

•Loss given default – LGD is the percentage of the asset not expected to be collected due to default. Whenever possible, Park utilizes its own loan-level LGDs for the reasonable and supportable forecast period. When it is not possible to use Park's own LGDs, the LGD is derived using a method referred to as Frye Jacobs.

•Prepayments and curtailments – Prepayments and curtailments are calculated based on Park’s own data utilizing a three-year average. This analysis is updated annually in the fourth quarter and was last updated in the fourth quarter of 2021.

•Forecast and reversion – Park has established a one-year reasonable and supportable forecast period with a one-year straight line reversion to the long-term historical average.

•Economic forecast - Park utilizes a third party to provide economic forecasts under various scenarios, which are weighted in order to reflect model risk in the current economic environment. The scenario weighting is evaluated by management on a quarterly basis.

◦As of December 31, 2021, the "most likely" scenario forecasted Ohio unemployment between 3.32% and 3.97% during the next four quarters. In determining the appropriate weighting of scenarios at December 31, 2021, management considered the range of forecasted unemployment as well as a number of economic indicators. While some economic indications continued to be optimistic, the Omicron variant, rising inflation, volatility in consumer confidence, employment, supply chain and workforce challenges continued to cause uncertainty in the overall economic environment. Considering these factors, management determined it was appropriate to weigh the "most likely" scenario 50% and the "moderate recession" scenario 50% at December 31, 2021.

◦As of March 31, 2022, the "most likely" scenario forecasted Ohio unemployment between 3.36% and 3.75% during the next four quarters. In determining the appropriate weighting of scenarios at March 31, 2022, management considered the range of forecasted unemployment as well as a number of economic indicators. While some economic indications were optimistic, the surging inflation, volatility in consumer confidence, workforce challenges, and geopolitical conflict (including the conflict between Russia and Ukraine) continued to cause uncertainty in the overall economic environment. Considering these factors, management determined it was appropriate to maintain the previous quarter's weighting, and weigh the "most likely" scenario 50% and the "moderate recession" scenario 50% at March 31, 2022. Improved forecasts, largely in the "moderate recession" scenario, resulted in a 4 basis point decline in the weighted quantitative allowance.

◦As of June 30, 2022, the "most likely" scenario forecasted Ohio unemployment between 3.36% and 3.57% during the next four quarters. In determining the appropriate weighting of scenarios at June 30, 2022, management considered the range of forecasted unemployment as well as a number of economic indicators. While some economic indications were optimistic, the surging inflation, declining consumer confidence, rising interest rates, geopolitical conflict (including the conflict between Russia and Ukraine), and workforce and supply chain challenges continued to cause uncertainty to the overall economic environment. Considering these factors, management determined it was appropriate to maintain the previous quarter's weighting, and weigh the "most likely" scenario 50% and the "moderate recession" scenario 50% at June 30, 2022. Deteriorating forecasts, largely in the "moderate recession" scenario, resulted in a 4 basis point increase in the weighted quantitative allowance.

◦As of September 30, 2022, the "most likely" scenario forecasted Ohio unemployment between 3.86% and 4.05% during the next four quarters. In determining the appropriate weighting of scenarios at September 30, 2022, management considered the range of forecasted unemployment as well as a number of economic indicators. The continued high inflation, low consumer confidence, rising interest rates, geopolitical conflict (including the conflict between Russia and Ukraine), and workforce and supply chain challenges continued to cause uncertainty to the overall economic environment. Considering these factors, management determined it was appropriate to maintain the previous quarter's weighting, and weigh the "most likely" scenario 50% and the "moderate recession" scenario 50% at September 30, 2022. Deteriorating forecasts, largely in the "moderate recession" scenario, resulted in a 4 basis point increase in the weighted quantitative allowance.

Qualitative Considerations

Park reviews various internal and external factors to consider the need for any qualitative adjustments to the quantitative model. Factors considered include the following:

•The nature and volume of Park’s financial assets; the existence, growth, and effect of any concentrations of credit and the volume and severity of past due financial assets, the volume of nonaccrual assets, and the volume and severity of adversely classified or graded assets. Specifically, management considers:

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

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

◦Level of and trend in new nonaccrual loans.

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

•Park's lending policies and procedures, including changes in lending strategies, underwriting standards and practices for collections, write-offs and recoveries.

•The quality of Park’s credit review function.

•The experience, ability, and depth of Park’s lending, investment, collection, and other relevant management and staff.

•The effect of other external factors such as the regulatory, legal and technological environments; competition; geopolitical conflict; and events such as natural disasters or pandemics.

•Actual and expected changes in international, national, regional and local economic and business conditions and developments in the markets in which Park operates that affect the collectibility of financial assets.

•Where the U.S. economy is within a given credit cycle.

•The extent that there is government assistance (stimulus).

During 2020, Park added an additional reserve for three industries at particularly high risk due to the COVID-19 pandemic: hotels and accommodations; restaurants and food service; and strip shopping centers. These industries have experienced 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 relatively higher percentage of the 4-rated credits in these portfolios will eventually migrate to special mention, substandard, or doubtful. In adopting CECL, management determined it was appropriate to retain this qualitative adjustment as this adjustment takes into account the additional risk in these portfolios, which is not captured in the quantitative calculation. Even though COVID-19 case numbers have declined since December 31, 2021, these industries are still recovering from the pandemic effects. As of September 30, 2022, additional reserves totaling $1.4 million were added for these portfolios on top of the quantitative reserve already calculated. This was a decrease from $5.2 million as of December 31, 2021 and reflected improvement in COVID-19 cases, eased COVID-19 health department precautions and improving affected industry performance. Management believes there is still residual risk in these portfolios related to pandemic effects and uncertainty in future COVID-19 strains and related impacts.

A breakout of the 4-rated balances within these portfolios and the additional reserve related to these portfolios is detailed in the following table:

	September 30, 2022				December 31, 2021
(in thousands)	4-Rated Balance		Additional Reserve		4-Rated Balance		Additional Reserve
Hotels and accommodations	$	182,806	$	687	$	148,018	$	2,226
Restaurants and food service	49,500		279		40,648		917
Strip shopping centers	168,144		464		184,171		2,033
Total	$	400,450	$	1,430	$	372,837	$	5,176

Additionally, at September 30, 2022, management applied a 0.50% reserve to all hotels and accommodations loans in the collectively evaluated population to account for increased valuation risk. This 0.50% reserve was reduced from 0.75% at June 30, 2022 and 1.00% at December 31, 2021. At September 30, 2022, Park's collectively evaluated hotels and accommodation loans had a balance of $218.0 million with an additional reserve related to valuation risks of $1.1 million. At December 31, 2021, Park's collectively evaluated hotels and accommodation loans had a balance of $203.9 million with an additional reserve related to valuation risks of $2.0 million.

As of September 30, 2022, Park had $5.7 million of PPP loans which were 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.

ACL Activity

The activity in the ACL for the three-month and the nine-month periods ended September 30, 2022 and September 30, 2021 is summarized in the following tables:

	Three Months Ended September 30, 2022
(In thousands)	Commercial, financial and agricultural		Commercial real estate		Construction real estate		Residential real estate		Consumer		Leases		Total
ACL:
Beginning balance	$	12,747	$	22,339	$	4,391	$	13,619	$	28,149	$	203	$	81,448
Charge-offs	543		—		—		—		1,169		36		1,748
Recoveries	110		36		20		20		884		1		1,071
Net charge-offs/(recoveries)	$	433	$	(36)	$	(20)	$	(20)	$	285	$	35	$	677
Provision for (recovery of) credit losses	563		(1,653)		87		1,464		2,699		30		3,190
Ending balance	$	12,877	$	20,722	$	4,498	$	15,103	$	30,563	$	198	$	83,961

 

	Three Months Ended September 30, 2021
(In thousands)	Commercial, financial and agricultural		Commercial real estate		Construction real estate		Residential real estate		Consumer		Leases		Total
ACL:
Beginning balance	$	15,222	$	22,749	$	5,670	$	13,113	$	26,261	$	562	$	83,577
Charge-offs	221		—		—		—		781		—		1,002
Recoveries	132		428		1,597		729		696		—		3,582
Net charge-offs/(recoveries)	$	89	$	(428)	$	(1,597)	$	(729)	$	85	$	—	$	(2,580)
Provision for (recovery of) credit losses	843		2,991		(1,003)		(2,080)		1,483		(262)		1,972
Ending balance	$	15,976	$	26,168	$	6,264	$	11,762	$	27,659	$	300	$	88,129

	Nine Months Ended September 30, 2022
(In thousands)	Commercial, financial and agricultural		Commercial real estate		Construction real estate		Residential real estate		Consumer		Leases		Total
ACL:
Beginning balance	$	14,025	$	25,466	$	5,758	$	11,424	$	26,286	$	238	$	83,197
Charge-offs	1,456		598		33		81		3,287		42		5,497
Recoveries	544		624		550		106		2,859		2		4,685
Net charge-offs/(recoveries)	$	912	$	(26)	$	(517)	$	(25)	$	428	$	40	$	812
(Recovery of) provision for credit losses	(236)		(4,770)		(1,777)		3,654		4,705		—		1,576
Ending balance	$	12,877	$	20,722	$	4,498	$	15,103	$	30,563	$	198	$	83,961

	Nine Months Ended September 30, 2021
(In thousands)	Commercial, financial and agricultural		Commercial real estate		Construction real estate		Residential real estate		Consumer		Leases		Total
ACL:
Beginning balance, prior to adoption of ASC 326	$	25,608	$	23,480	$	7,288	$	11,363	$	17,418	$	518	$	85,675
Impact of adopting ASC 326	(8,257)		2,119		(1,898)		3,121		10,925		80		6,090
Charge-offs	675		—		—		37		3,061		—		3,773
Recoveries	487		724		2,078		859		2,912		—		7,060
Net charge-offs/(recoveries)	$	188	$	(724)	$	(2,078)	$	(822)	$	149	$	—	$	(3,287)
Recovery of credit losses	(1,187)		(155)		(1,204)		(3,544)		(535)		(298)		(6,923)
Ending balance	$	15,976	$	26,168	$	6,264	$	11,762	$	27,659	$	300	$	88,129

ACL Summary

Loans collectively evaluated for impairment in the following tables include all performing loans at September 30, 2022 and December 31, 2021, 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 ACL. Loans individually evaluated for impairment include all internally classified commercial nonaccrual loans and TDRs at September 30, 2022 and December 31, 2021, which are individually 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 2021 Form 10-K).

The composition of the ACL at September 30, 2022 and December 31, 2021 was as follows:

 

	September 30, 2022
(In thousands)	Commercial, financial and agricultural			Commercial real estate			Construction real estate			Residential real estate			Consumer			Leases			Total
ACL:
Ending allowance balance attributed to loans:
Individually evaluated for impairment	$	579		$	1,153		$	—		$	—		$	—		$	18		$	1,750
Collectively evaluated for impairment	12,298			19,569			4,498			15,103			30,563			180			82,211
Acquired with deteriorated credit quality	—			—			—			—			—			—			—
Total ending allowance balance	$	12,877		$	20,722		$	4,498		$	15,103		$	30,563		$	198		$	83,961
Loan balance:
Loans individually evaluated for impairment	$	12,138		$	27,904		$	439		$	2,154		$	—		$	1,035		$	43,670
Loans collectively evaluated for impairment	1,265,734			1,759,335			310,600			1,758,695			1,941,509			18,836			7,054,709
Loans acquired with deteriorated credit quality	121			3,562			668			516			—			—			4,867
Total ending loan balance	$	1,277,993		$	1,790,801		$	311,707		$	1,761,365		$	1,941,509		$	19,871		$	7,103,246
ACL as a percentage of loan balance:
Loans individually evaluated for impairment	4.77		%	4.13		%	—		%	—		%	—		%	1.74		%	4.01		%
Loans collectively evaluated for impairment	0.97		%	1.11		%	1.45		%	0.86		%	1.57		%	0.96		%	1.17		%
Loans acquired with deteriorated credit quality	—		%	—		%	—		%	—		%	—		%	—		%	—		%
Total	1.01		%	1.16		%	1.44		%	0.86		%	1.57		%	1.00		%	1.18		%

	December 31, 2021
(In thousands)	Commercial, financial and agricultural			Commercial real estate			Construction real estate			Residential real estate			Consumer			Leases			Total
ACL:
Ending allowance balance attributed to loans:
Individually evaluated for impairment	$	1,385		$	188		$	—		$	—		$	—		$	43		$	1,616
Collectively evaluated for impairment	12,640			25,278			5,758			11,424			26,286			195			81,581
Acquired with deteriorated credit quality	—			—			—			—			—			—			—
Total ending allowance balance	$	14,025		$	25,466		$	5,758		$	11,424		$	26,286		$	238		$	83,197
Loan balance:
Loans individually evaluated for impairment	$	22,666		$	47,820		$	222		$	2,606		$	—		$	1,188		$	74,502
Loans collectively evaluated for impairment	1,275,783			1,748,854			320,608			1,735,226			1,689,679			19,321			6,789,471
Loans acquired with deteriorated credit quality	177			5,118			956			875			—			23			7,149
Total ending loan balance	$	1,298,626		$	1,801,792		$	321,786		$	1,738,707		$	1,689,679		$	20,532		$	6,871,122
ACL as a percentage of loan balance:
Loans individually evaluated for impairment	6.11		%	0.39		%	—		%	—		%	—		%	3.62		%	2.17		%
Loans collectively evaluated for impairment	0.99		%	1.45		%	1.80		%	0.66		%	1.56		%	1.01		%	1.20		%
Loans acquired with deteriorated credit quality	—		%	—		%	—		%	—		%	—		%	—		%	—		%
Total	1.08		%	1.41		%	1.79		%	0.66		%	1.56		%	1.16		%	1.21		%