Loans

The composition of the loan portfolio, by class of loan, as of September 30, 2012 and December 31, 2011 was as follows:



	September 30, 2012						December 31, 2011
(In thousands)	Loan balance		Accrued interest receivable		Recorded investment		Loan balance		Accrued interest receivable		Recorded investment
Commercial, financial and agricultural *	$	772,773	$	3,384	$	776,157	$	743,797	$	3,121	$	746,918
Commercial real estate *	1,081,605		4,369		1,085,974		1,108,574		4,235		1,112,809
Construction real estate:
Vision/SEPH commercial land and development *	15,809		17		15,826		31,603		31		31,634
Remaining commercial	138,687		360		139,047		156,053		394		156,447
Mortgage	25,791		83		25,874		20,039		64		20,103
Installment	8,792		35		8,827		9,851		61		9,912
Residential real estate:
Commercial	395,703		1,080		396,783		395,824		1,105		396,929
Mortgage	1,047,670		1,916		1,049,586		953,758		1,522		955,280
HELOC	218,228		898		219,126		227,682		942		228,624
Installment	45,402		204		45,606		51,354		236		51,590
Consumer	646,612		2,751		649,363		616,505		2,930		619,435
Leases	3,438		48		3,486		2,059		43		2,102
Total loans	$	4,400,510	$	15,145	$	4,415,655	$	4,317,099	$	14,684	$	4,331,783

* Included within commercial, financial and agricultural loans, commercial real estate loans, and Vision/SEPH commercial land and development loans is an immaterial amount of consumer loans that are not broken out by class.

Credit Quality

The following tables present the recorded investment in nonaccrual, accruing restructured, and loans past due 90 days or more and still accruing by class of loan as of September 30, 2012 and December 31, 2011:



	September 30, 2012
(In thousands)	Nonaccrual loans		Accruing restructured loans		Loans past due 90 days or more and accruing		Total nonperforming loans
Commercial, financial and agricultural	$	17,600	$	4,514	$	—	$	22,114
Commercial real estate	40,371		2,607		—		42,978
Construction real estate:
SEPH commercial land and development	13,965		—		—		13,965
Remaining commercial	15,977		11,441		—		27,418
Mortgage	158		101		—		259
Installment	155		177		—		332
Residential real estate:
Commercial	36,583		—		—		36,583
Mortgage	28,999		9,099		1,132		39,230
HELOC	2,197		718		—		2,915
Installment	1,497		694		129		2,320
Consumer	2,562		2,139		870		5,571
Leases	—		—		—		—
Total loans	$	160,064	$	31,490	$	2,131	$	193,685



	December 31, 2011
(In thousands)	Nonaccrual loans		Accruing restructured loans		Loans past due 90 days or more and accruing		Total nonperforming loans
Commercial, financial and agricultural	$	37,797	$	2,848	$	—	$	40,645
Commercial real estate	43,704		8,274		—		51,978
Construction real estate:
Vision commercial land and development	25,761		—		—		25,761
Remaining commercial	14,021		11,891		—		25,912
Mortgage	66		—		—		66
Installment	30		—		—		30
Residential real estate:
Commercial	43,461		815		—		44,276
Mortgage	25,201		4,757		2,610		32,568
HELOC	1,412		—		—		1,412
Installment	1,777		98		58		1,933
Consumer	1,876		—		893		2,769
Leases	—		—		—		—
Total loans	$	195,106	$	28,683	$	3,561	$	227,350

The following table provides additional information regarding those nonaccrual and accruing restructured loans that were individually evaluated for impairment and those collectively evaluated for impairment as of September 30, 2012 and December 31, 2011.



	September 30, 2012						December 31, 2011
(In thousands)	Nonaccrual and accruing restructured loans		Loans individually evaluated for impairment		Loans collectively evaluated for impairment		Nonaccrual and accruing restructured loans		Loans individually evaluated for impairment		Loans collectively evaluated for impairment
Commercial, financial and agricultural	$	22,114	$	22,103	$	11	$	40,645	$	40,621	$	24
Commercial real estate	42,978		42,978		—		51,978		51,978		—
Construction real estate:
Vision/SEPH commercial land and development	13,965		13,261		704		25,761		24,328		1,433
Remaining commercial	27,418		27,418		—		25,912		25,912		—
Mortgage	259		—		259		66		—		66
Installment	332		—		332		30		—		30
Residential real estate:
Commercial	36,583		36,583		—		44,276		44,276		—
Mortgage	38,098		—		38,098		29,958		—		29,958
HELOC	2,915		—		2,915		1,412		—		1,412
Installment	2,191		—		2,191		1,875		—		1,875
Consumer	4,701		19		4,682		1,876		20		1,856
Leases	—		—		—		—		—		—
Total loans	$	191,554	$	142,362	$	49,192	$	223,789	$	187,135	$	36,654

All of the loans individually evaluated for impairment were evaluated using the fair value of the collateral or present value of expected future cash flows as the measurement method.

The following table presents loans individually evaluated for impairment by class of loan as of September 30, 2012 and December 31, 2011.



	September 30, 2012						December 31, 2011
(In thousands)	Unpaid principal balance		Recorded investment		Allowance for loan losses allocated		Unpaid principal balance		Recorded investment		Allowance for loan losses allocated
With no related allowance recorded:
Commercial, financial and agricultural	$	36,774	$	14,739	$	—	$	23,164	$	18,098	$	—
Commercial real estate	57,045		36,215		—		58,242		41,506		—
Construction real estate:
Vision/SEPH commercial land and development	57,629		13,261		—		54,032		17,786		—
Remaining commercial	32,831		18,597		—		33,319		18,372		—
Residential real estate:
Commercial	42,535		32,495		—		49,341		38,686		—
Consumer	19		19		—		20		20		—

With an allowance recorded:
Commercial, financial and agricultural	11,333		7,364		2,005		23,719		22,523		5,819
Commercial real estate	7,214		6,763		1,134		12,183		10,472		4,431
Construction real estate:
Vision/SEPH commercial land and development	—		—		—		20,775		6,542		1,540
Remaining commercial	9,193		8,821		3,334		9,711		7,540		1,874
Residential real estate:
Commercial	5,254		4,088		1,106		6,402		5,590		2,271
Consumer	—		—		—		—		—		—
Total	$	259,827	$	142,362	$	7,579	$	290,908	$	187,135	$	15,935

Management’s general practice is to proactively charge down loans individually evaluated for impairment to the fair value of the underlying collateral, less costs to sell. At September 30, 2012 and December 31, 2011, there were $111.5 million and $83.7 million, respectively, of partial charge-offs on loans individually evaluated for impairment with no related allowance recorded and $6.0 million and $20.1 million, respectively, of partial charge-offs on loans individually evaluated for impairment that also had a specific reserve allocated.

The allowance for loan losses included specific reserves related to loans individually evaluated for impairment at September 30, 2012 and December 31, 2011, of $7.6 million and $15.9 million, respectively, related to loans with a recorded investment of $27.0 million and $52.7 million, respectively.

The following table presents the average recorded investment and interest income recognized on loans individually evaluated for impairment as of and for the three and nine months ended September 30, 2012 and September 30, 2011:



	Three Months Ended September 30, 2012						Three Months Ended September 30, 2011
(In thousands)	Recorded investment as of September 30, 2012		Average recorded investment		Interest income recognized		Recorded investment as of September 30, 2011		Average recorded investment		Interest income recognized
Commercial, financial and agricultural	$	22,103	$	35,720	$	100	$	24,925	$	24,049	$	49
Commercial real estate	42,978		43,499		351		44,099		45,162		26
Construction real estate:
Vision/SEPH commercial land and development	13,261		14,991		—		42,036		43,555		—
Remaining commercial	27,418		28,400		411		33,961		34,027		116
Residential real estate:
Commercial	36,583		37,121		233		47,422		48,064		—
Consumer	19		19		—		21		21		—
Total	$	142,362	$	159,750	$	1,095	$	192,464	$	194,878	$	191



	Nine Months Ended September 30, 2012						Nine Months Ended September 30, 2011
(In thousands)	Recorded investment as of September 30, 2012		Average recorded investment		Interest income recognized		Recorded investment as of September 30, 2011		Average recorded investment		Interest income recognized
Commercial, financial and agricultural	$	22,103	$	38,989	$	410	$	24,925	$	21,361	$	155
Commercial real estate	42,978		45,026		845		44,099		50,874		150
Construction real estate:
Vision/SEPH commercial land and development	13,261		18,481		—		42,036		67,135		—
Remaining commercial	27,418		28,633		861		33,961		29,573		330
Residential real estate:
Commercial	36,583		40,199		398		47,422		54,454		153
Consumer	19		19		1		21		15		1
Total	$	142,362	$	171,347	$	2,515	$	192,464	$	223,412	$	789

The following tables present the aging of the recorded investment in past due loans as of September 30, 2012 and December 31, 2011 by class of loan.



	September 30, 2012
(In thousands)	Accruing loans past due 30-89 days		Past due nonaccrual loans and loans past due 90 days or more and accruing*		Total past due		Total current		Total recorded investment
Commercial, financial and agricultural	$	2,096	$	12,214	$	14,310	$	761,847	$	776,157
Commercial real estate	6,205		16,830		23,035		1,062,939		1,085,974
Construction real estate:
SEPH commercial land and development	497		10,611		11,108		4,718		15,826
Remaining commercial	47		5,327		5,374		133,673		139,047
Mortgage	560		85		645		25,229		25,874
Installment	284		40		324		8,503		8,827
Residential real estate:
Commercial	2,134		9,002		11,136		385,647		396,783
Mortgage	12,397		18,558		30,955		1,018,631		1,049,586
HELOC	484		634		1,118		218,008		219,126
Installment	747		781		1,528		44,078		45,606
Consumer	11,194		3,064		14,258		635,105		649,363
Leases	—		—		—		3,486		3,486
Total loans	$	36,645	$	77,146	$	113,791	$	4,301,864	$	4,415,655

* Includes $2.1 million of loans past due 90 days or more and accruing. The remaining are past due, nonaccrual loans.



	December 31, 2011
(in thousands)	Accruing loans past due 30-89 days		Past due nonaccrual loans and loans past due 90 days or more and accruing*		Total past due		Total current		Total recorded investment
Commercial, financial and agricultural	$	3,106	$	11,308	$	14,414	$	732,504	$	746,918
Commercial real estate	2,632		21,798		24,430		1,088,379		1,112,809
Construction real estate:
Vision commercial land and development	—		19,235		19,235		12,399		31,634
Remaining commercial	99		7,839		7,938		148,509		156,447
Mortgage	76		—		76		20,027		20,103
Installment	421		8		429		9,483		9,912
Residential real estate:
Commercial	1,545		10,097		11,642		385,287		396,929
Mortgage	15,879		20,614		36,493		918,787		955,280
HELOC	1,015		436		1,451		227,173		228,624
Installment	1,549		1,136		2,685		48,905		51,590
Consumer	11,195		2,192		13,387		606,048		619,435
Leases	—		—		—		2,102		2,102
Total loans	$	37,517	$	94,663	$	132,180	$	4,199,603	$	4,331,783

* Includes $3.6 million of loans past due 90 days or more and accruing. The remaining are past due, nonaccrual loans.

Credit Quality Indicators

Management utilizes past due information as a credit quality indicator across the loan portfolio. Past due information as of September 30, 2012 and December 31, 2011 is included in the tables above. Generally, Park considers loans 90 days or more past due to be nonperforming. The past due information is the primary credit quality indicator within the following classes of loans: (1) mortgage loans and installment loans in the construction real estate segment; (2) mortgage loans, HELOC and installment loans in the residential real estate segment; and (3) consumer loans. The primary credit indicator for commercial loans is based on an internal grading system that grades all commercial loans from 1 to 8. Credit grades are continuously monitored by the respective loan officer and adjustments are made when appropriate. A grade of 1 indicates little or no credit risk and a grade of 8 is considered a loss. Commercial loans with grades of 1 to 4.5 (pass-rated) are considered to be of acceptable credit risk. Commercial loans graded a 5 (special mention) are considered to be watch list credits and a higher loan loss reserve percentage is allocated to these loans. Loans classified as special mention have potential weaknesses that require management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Commercial loans graded 6 (substandard), also considered watch list credits, are considered to represent higher credit risk and, as a result, a higher loan loss reserve percentage is allocated to these loans. Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Commercial loans that are graded a 7 (doubtful) are shown as nonaccrual and Park generally charges these loans down to their fair value by taking a partial charge-off or recording a specific reserve. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Certain 6-rated loans and all 7-rated loans are included within the impaired category. A loan is deemed impaired when management determines the borrower's ability to perform in accordance with the contractual loan agreement is in doubt. Any commercial loan graded an 8 (loss) is completely charged-off.

The tables below present the recorded investment by loan grade at September 30, 2012 and December 31, 2011 for all commercial loans:



	September 30, 2012
(In thousands)	5 Rated		6 Rated		Impaired		Pass Rated		Recorded Investment
Commercial, financial and agricultural *	$	5,655	$	12,942	$	22,114	$	735,446	$	776,157
Commercial real estate *	31,877		6,158		42,978		1,004,961		1,085,974
Construction real estate:
SEPH commercial land and development *	893		—		13,965		968		15,826
Remaining commercial	7,903		—		27,418		103,726		139,047
Residential real estate:
Commercial	10,964		1,327		36,583		347,909		396,783
Leases	—		—		—		3,486		3,486
Total Commercial Loans	$	57,292	$	20,427	$	143,058	$	2,196,496	$	2,417,273

* Included within commercial, financial and agricultural loans, commercial real estate loans, and SEPH commercial land and development loans is an immaterial amount of consumer loans that are not broken out by class.



	December 31, 2011
(In thousands)	5 Rated		6 Rated		Impaired		Pass Rated		Recorded Investment
Commercial, financial and agricultural *	$	11,785	$	7,628	$	40,645	$	686,860	$	746,918
Commercial real estate *	37,445		10,460		51,978		1,012,926		1,112,809
Construction real estate:
Vision commercial land and development *	3,102		—		25,761		2,771		31,634
Remaining commercial	6,982		8,311		25,912		115,242		156,447
Residential real estate:
Commercial	17,120		3,785		44,276		331,748		396,929
Leases	—		—		—		2,102		2,102
Total Commercial Loans	$	76,434	$	30,184	$	188,572	$	2,151,649	$	2,446,839

* Included within commercial, financial and agricultural loans, commercial real estate loans, and Vision commercial land and development loans is an immaterial amount of consumer loans that are not broken out by class.

Troubled Debt Restructurings (TDRs)

Management classifies loans as TDRs when a borrower is experiencing financial difficulties and Park has granted a concession. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of the borrower's debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy. Management’s policy is to modify loans by extending the term or by granting a temporary or permanent contractual interest rate below the market rate, not by forgiving debt. Certain loans which were modified during the period ended September 30, 2012 did not meet the definition of a TDR as the modification was a delay in a payment that was considered to be insignificant. Management considers a forbearance period of up to three months or a delay in payment of up to 30 days to be insignificant. TDRs may be classified as accruing if the borrower has been current for a period of at least six months with respect to loan payments and management expects that the borrower will be able to continue to make payments in accordance with the terms of the restructured note. Management reviews all accruing TDRs quarterly to ensure payments continue to be made in accordance with the modified terms.

At September 30, 2012 and December 31, 2011, there were $86.8 million and $100.4 million, respectively, of TDRs included in nonaccrual loan totals. As of September 30, 2012 and December 31, 2011, there were $31.5 million and $28.7 million, respectively, of TDRs included in accruing loan totals. At September 30, 2012 and December 31, 2011, $60.5 million and $79.9 million of the nonaccrual TDRs were current. Management will continue to review the restructured loans and may determine it appropriate to move certain of the loans back to accrual status in the future. At September 30, 2012 and December 31, 2011, Park had commitments to lend $4.1 million and $4.0 million, respectively, of additional funds to borrowers whose terms had been modified in a TDR.

The specific reserve related to TDRs at September 30, 2012 and December 31, 2011 was $5.5 million and $9.1 million, respectively. Modifications made in 2011 and 2012 were largely the result of renewals, extending the maturity date of the loan, at terms consistent with the original note. These modifications were deemed to be TDRs primarily due to Park’s conclusion that the borrower would likely not have qualified for similar terms through another lender. Many of the modifications deemed to be TDRs were previously identified as impaired loans, and thus were also previously evaluated for impairment under ASC 310. Additional specific reserves of $167,000 and $1.2 million were recorded during the three month and nine month periods ending September 30, 2012, respectively, as a result of TDRs identified in the 2012 year.

The terms of certain other loans were modified during the nine month period ended September 30, 2012 that did not meet the definition of a TDR. Modified substandard commercial loans which did not meet the definition of a TDR had a total recorded investment as of September 30, 2012 of $2.1 million. The modification of these loans: (1) involved a modification of the terms of a loan to a borrower who was not experiencing financial difficulties, (2) resulted in a delay in a payment that was considered to be insignificant, or (3) resulted in Park obtaining additional collateral or guarantees that improved the likelihood of the ultimate collection of the loan such that the modification was deemed to be at market terms. Modified consumer loans which did not meet the definition of a TDR had a total recorded investment as of September 30, 2012 of $20.5 million. Many of these loans were to borrowers who were not experiencing financial difficulties but who were looking to reduce their cost of funds.

During the third quarter, as a result of guidance from the Office of the Comptroller of the Currency ("OCC"), $10.3 million of consumer loans were identified as troubled debt restructurings ("TDR") whereby the borrower's obligation to PNB has been discharged in bankruptcy and the borrower has not reaffirmed the debt. These newly identified TDRs are included in the current year modified loan totals below.

The following tables detail the number of contracts modified as TDRs during the three and nine month periods ended September 30, 2012 as well as the recorded investment of these contracts at September 30, 2012. The recorded investment pre- and post-modification is generally the same.



	Three Months Ended September 30, 2012
(In thousands)	Number of Contracts	Accruing		Nonaccrual		Total Recorded Investment
Commercial, financial and agricultural	12	$	121	$	418	$	539
Commercial real estate	2	—		257		257
Construction real estate:
SEPH commercial land and development	2	—		60		60
Remaining commercial	3	—		369		369
Mortgage	2	101		85		186
Installment	6	177		97		274
Residential real estate:
Commercial	5	—		610		610
Mortgage	82	3,780		2,000		5,780
HELOC	43	718		143		861
Installment	48	675		271		946
Consumer	526	2,047		895		2,942
Leases	—	—		—		—
Total loans	731	$	7,619	$	5,205	$	12,824



	Nine Months Ended September 30, 2012
(In thousands)	Number of Contracts	Accruing		Nonaccrual		Total Recorded Investment
Commercial, financial and agricultural	28	$	2,195	$	1,910	$	4,105
Commercial real estate	22	1,823		3,432		5,255
Construction real estate:
SEPH commercial land and development	6	—		887		887
Remaining commercial	13	3,695		6,561		10,256
Mortgage	2	101		85		186
Installment	6	177		97		274
Residential real estate:
Commercial	10	—		871		871
Mortgage	97	4,006		4,361		8,367
HELOC	43	718		143		861
Installment	51	675		440		1,115
Consumer	527	2,138		895		3,033
Leases	—	—		—		—
Total loans	805	$	15,528	$	19,682	$	35,210

Of those loans listed in the tables above which were modified during the three and nine month periods ended September 30, 2012, $1.2 million and $7.2 million were on nonaccrual status as of December 31, 2011 but were not classified as TDRs.

The following table presents the recorded investment in financing receivables which were modified as TDRs within the previous 12 months and for which there was a payment default during the three and/or nine month period ended September 30, 2012. For this table, a loan is considered to be in default when it becomes 30 days contractually past due under the modified terms.



	Three Months Ended September 30, 2012			Nine Months Ended September 30, 2012
(In thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Commercial, financial and agricultural	10	$	4,800	13	$	4,935
Commercial real estate	6	1,224		7	1,936
Construction real estate:
SEPH commercial land and development	6	2,435		6	2,435
Remaining commercial	6	2,172		7	2,275
Mortgage	1	85		1	85
Installment	1	16		2	43
Residential real estate:
Commercial	4	1,201		4	1,201
Mortgage	32	2,657		36	3,016
HELOC	8	92		9	104
Installment	8	227		10	312
Consumer	129	796		154	898
Leases	—	—		—	—
Total loans	211	$	15,705	249	$	17,240

Of the $15.7 million in modified TDRs which defaulted during the three months ended September 30, 2012, $91,000 were accruing loans and $15.6 million were nonaccrual loans. Of the $17.2 million in modified TDRs which defaulted during the nine months ended September 30, 2012, $362,000 were accruing loans and $16.9 million were nonaccrual loans.