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 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 2014 Annual Report.

Management updates historical losses annually in the fourth quarter, or more frequently as deemed appropriate. With the inclusion of 2013 net charge-off information, management concluded that it was no longer appropriate to calculate the historical loss average with an even allocation across the five-year period. Rather than apply a 20% allocation to each year in the calculation of the historical annualized loss factor, management determined that it was appropriate to more heavily weight those years with higher losses in the historical loss calculation, given the continued uncertainty in the current economic environment. Specifically, rather than applying equal percentages to each year in the historical loss calculation, management applied more weight to the 2009-2011 periods compared to the 2012 and 2013 periods.

With the inclusion of 2014 net charge-off information in the fourth quarter of 2014, management extended the historical loss period to six years. Due to the same factors that management considered in 2013, management applied more weight to 2009 through 2011 periods compared to the 2012 through 2014 periods.

The activity in the allowance for loan losses for the three and six months ended June 30, 2015 and June 30, 2014 is summarized below.



	Three Months Ended June 30, 2015
(In thousands)	Commercial, financial and agricultural		Commercial real estate			Construction real estate			Residential real estate		Consumer		Leases			Total
Allowance for loan losses:
Beginning balance	$	11,361	$	9,296		$	8,755		$	14,512	$	11,484	$	—		$	55,408
Charge-offs	499		153			37			735		1,603		—			3,027
Recoveries	281		1,128			679			423		922		1			3,434
Net charge-offs/(recoveries)	218		(975		)	(642		)	312		681		(1		)	(407		)
Provision/(recovery)	981		(804		)	(727		)	1,068		1,095		(1		)	1,612
Ending balance	$	12,124	$	9,467		$	8,670		$	15,268	$	11,898	$	—		$	57,427



	Three Months Ended June 30, 2014
(In thousands)	Commercial, financial and agricultural			Commercial real estate			Construction real estate			Residential real estate		Consumer		Leases			Total
Allowance for loan losses:
Beginning balance	$	13,762		$	15,754		$	8,121		$	14,207	$	8,413	$	—		$	60,257
Charge-offs	214			5,274			21			680		1,506		—			7,695
Recoveries	347			2,177			3,023			356		705		1			6,609
Net charge-offs/(recoveries)	(133		)	3,097			(3,002		)	324		801		(1		)	1,086
Provision/(recovery)	301			(1,595		)	(3,302		)	636		2,701		(1		)	(1,260		)
Ending balance	$	14,196		$	11,062		$	7,821		$	14,519	$	10,313	$	—		$	57,911



	Six Months Ended June 30, 2015
(In thousands)	Commercial, financial and agricultural		Commercial real estate			Construction real estate			Residential real estate			Consumer		Leases			Total
Allowance for loan losses:
Beginning balance	$	10,719	$	8,808		$	8,652		$	14,772		$	11,401	$	—		$	54,352
Charge-offs	851		283			37			1,157			4,117		—			6,445
Recoveries	572		1,802			964			1,347			1,588		3			6,276
Net charge-offs/(recoveries)	279		(1,519		)	(927		)	(190		)	2,529		(3		)	169
Provision/(recovery)	1,684		(860		)	(909		)	306			3,026		(3		)	3,244
Ending balance	$	12,124	$	9,467		$	8,670		$	15,268		$	11,898	$	—		$	57,427



	Six Months Ended June 30, 2014
(In thousands)	Commercial, financial and agricultural		Commercial real estate			Construction real estate			Residential real estate			Consumer		Leases			Total
Allowance for loan losses:
Beginning balance	$	14,218	$	15,899		$	6,855		$	14,251		$	8,245	$	—		$	59,468
Charge-offs	853		6,068			24			1,276			3,301		—			11,522
Recoveries	594		3,913			5,974			1,593			1,374		2			13,450
Net charge-offs/(recoveries)	259		2,155			(5,950		)	(317		)	1,927		(2		)	(1,928		)
Provision/(recovery)	237		(2,682		)	(4,984		)	(49		)	3,995		(2		)	(3,485		)
Ending balance	$	14,196	$	11,062		$	7,821		$	14,519		$	10,313	$	—		$	57,911

Loans collectively evaluated for impairment in the following tables include all performing loans at June 30, 2015 and December 31, 2014, 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, 2015 and December 31, 2014, 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 2014 Annual Report).

The composition of the allowance for loan losses at June 30, 2015 and December 31, 2014 was as follows:



	June 30, 2015
(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	$	2,570		$	688		$	2,358		$	981		$	—		$	—		$	6,597
Collectively evaluated for impairment	9,554			8,779			6,312			14,287			11,898			—			50,830
Total ending allowance balance	$	12,124		$	9,467		$	8,670		$	15,268		$	11,898		$	—		$	57,427

Loan balance:
Loans individually evaluated for impairment	$	20,416		$	17,640		$	8,079		$	24,418		$	—		$	—		$	70,553
Loans collectively evaluated for impairment	828,392			1,069,467			137,892			1,840,303			951,263			3,104			4,830,421
Total ending loan balance	$	848,808		$	1,087,107		$	145,971		$	1,864,721		$	951,263		$	3,104		$	4,900,974

Allowance for loan losses as a percentage of loan balance:
Loans individually evaluated for impairment	12.59		%	3.90		%	29.19		%	4.02		%	—		%	—		%	9.35		%
Loans collectively evaluated for impairment	1.15		%	0.82		%	4.58		%	0.78		%	1.25		%	—		%	1.05		%
Total	1.43		%	0.87		%	5.94		%	0.82		%	1.25		%	—		%	1.17		%

Recorded investment:
Loans individually evaluated for impairment	$	20,429		$	17,647		$	8,079		$	24,441		$	—		$	—		$	70,596
Loans collectively evaluated for impairment	831,421			1,073,093			138,221			1,843,980			954,239			3,133			4,844,087
Total ending recorded investment	$	851,850		$	1,090,740		$	146,300		$	1,868,421		$	954,239		$	3,133		$	4,914,683



	December 31, 2014
(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	$	981		$	262		$	1,812		$	605		$	—		$	—		$	3,660
Collectively evaluated for impairment	9,738			8,546			6,840			14,167			11,401			—			50,692
Total ending allowance balance	$	10,719		$	8,808		$	8,652		$	14,772		$	11,401		$	—		$	54,352

Loan balance:
Loans individually evaluated for impairment	$	19,103		$	21,978		$	7,690		$	24,905		$	—		$	—		$	73,676
Loans collectively evaluated for impairment	837,432			1,047,659			148,114			1,826,470			893,160			3,171			4,756,006
Total ending loan balance	$	856,535		$	1,069,637		$	155,804		$	1,851,375		$	893,160		$	3,171		$	4,829,682

Allowance for loan losses as a percentage of loan balance:
Loans individually evaluated for impairment	5.14		%	1.19		%	23.56		%	2.43		%	—		%	—		%	4.97		%
Loans collectively evaluated for impairment	1.16		%	0.82		%	4.62		%	0.78		%	1.28		%	—		%	1.07		%
Total	1.25		%	0.82		%	5.55		%	0.80		%	1.28		%	—		%	1.13		%

Recorded investment:
Loans individually evaluated for impairment	$	19,106		$	21,989		$	7,687		$	24,930		$	—		$	—		$	73,712
Loans collectively evaluated for impairment	840,647			1,051,194			148,512			1,829,931			896,127			3,188			4,769,599
Total ending recorded investment	$	859,753		$	1,073,183		$	156,199		$	1,854,861		$	896,127		$	3,188		$	4,843,311