Loans

The composition of the loan portfolio, by class of loan, as of December 31, 2013 and December 31, 2012 was as follows:



	12/31/2013						12/31/2012
(In thousands)	Loan Balance		Accrued Interest Receivable		Recorded Investment		Loan Balance		Accrued Interest Receivable		Recorded Investment

Commercial, financial and agricultural *	$	825,432	$	3,079	$	828,511	$	823,927	$	2,976	$	826,903
Commercial real estate *	1,112,273		3,765		1,116,038		1,092,164		3,839		1,096,003
Construction real estate:
SEPH commercial land and development *	5,846		2		5,848		15,105		37		15,142
Remaining commercial	110,842		263		111,105		115,473		331		115,804
Mortgage	31,882		96		31,978		26,373		81		26,454
Installment	7,546		26		7,572		8,577		33		8,610
Residential real estate:
Commercial	407,387		904		408,291		392,203		959		393,162
Mortgage	1,144,754		1,559		1,146,313		1,064,787		1,399		1,066,186
HELOC	213,565		870		214,435		212,905		892		213,797
Installment	33,841		132		33,973		43,750		176		43,926
Consumer	723,733		2,775		726,508		651,930		2,835		654,765
Leases	3,404		23		3,427		3,128		29		3,157
Total loans	$	4,620,505	$	13,494	$	4,633,999	$	4,450,322	$	13,587	$	4,463,909

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

Loans are shown net of deferred origination fees, costs and unearned income of $7.3 million at December 31, 2013 and $6.7 million at December 31, 2012, which represented a net deferred income position in both years.

Overdrawn deposit accounts of $3.3 million and $3.0 million have been reclassified to loans at December 31, 2013 and 2012, respectively.

Credit Quality

The following table presents the recorded investment in nonaccrual loans, accruing troubled debt restructurings, and loans past due 90 days or more and still accruing by class of loan as of December 31, 2013 and December 31, 2012:



	12/31/2013
(In thousands)	Nonaccrual Loans		Accruing Troubled Debt Restructurings		Loans Past Due 90 Days or More and Accruing		Total Nonperforming Loans
Commercial, financial and agricultural	$	20,633	$	107	$	80	$	20,820
Commercial real estate	39,588		2,234		2		41,824
Construction real estate:
SEPH commercial land and development	4,777		—		—		4,777
Remaining commercial	10,476		306		—		10,782
Mortgage	87		97		—		184
Installment	39		192		—		231
Residential real estate:
Commercial	32,495		913		—		33,408
Mortgage	20,564		11,708		549		32,821
HELOC	2,129		751		—		2,880
Installment	965		885		80		1,930
Consumer	3,463		1,616		1,016		6,095
Total loans	$	135,216	$	18,809	$	1,727	$	155,752



	12/31/2012
(In thousands)	Nonaccrual Loans		Accruing Troubled Debt Restructurings		Loans Past Due 90 Days or More and Accruing		Total Nonperforming Loans
Commercial, financial and agricultural	$	17,324	$	5,277	$	37	$	22,638
Commercial real estate	40,983		3,295		1,007		45,285
Construction real estate:
SEPH commercial land and development	13,939		—		—		13,939
Remaining commercial	14,977		6,597		—		21,574
Mortgage	158		100		—		258
Installment	149		175		—		324
Residential real estate:
Commercial	33,961		1,661		94		35,716
Mortgage	28,260		9,425		950		38,635
HELOC	1,689		736		—		2,425
Installment	1,670		780		54		2,504
Consumer	2,426		1,900		888		5,214
Total loans	$	155,536	$	29,946	$	3,030	$	188,512

The following table provides additional information regarding those nonaccrual and accruing troubled debt restructured loans that are individually evaluated for impairment and those collectively evaluated for impairment as of December 31, 2013 and December 31, 2012.



	12/31/2013						12/31/2012
(In thousands)	Nonaccrual and accruing troubled debt restructurings		Loans individually evaluated for impairment		Loans collectively evaluated for impairment		Nonaccrual and accruing troubled debt restructurings		Loans individually evaluated for impairment		Loans collectively evaluated for impairment
Commercial, financial and agricultural	$	20,740	$	20,727	$	13	$	22,601	$	22,587	$	14
Commercial real estate	41,822		41,822		—		44,278		44,278		—
Construction real estate:
SEPH commercial land and development	4,777		4,777		—		13,939		13,260		679
Remaining commercial	10,782		10,782		—		21,574		21,574		—
Mortgage	184		—		184		258		—		258
Installment	231		—		231		324		—		324
Residential real estate:
Commercial	33,408		33,408		—		35,622		35,622		—
Mortgage	32,272		—		32,272		37,685		—		37,685
HELOC	2,880		—		2,880		2,425		—		2,425
Installment	1,850		—		1,850		2,450		—		2,450
Consumer	5,079		799		4,280		4,326		18		4,308
Total loans	$	154,025	$	112,315	$	41,710	$	185,482	$	137,339	$	48,143

All of the loans individually evaluated for impairment were evaluated using the fair value of the collateral or the 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 December 31, 2013 and December 31, 2012.



	12/31/2013						12/31/2012
(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	$	22,429	$	12,885	$	—	$	23,782	$	14,683	$	—
Commercial real estate	56,870		34,149		—		56,258		35,097		—
Construction real estate:
SEPH commercial land and development	23,722		4,777		—		57,346		13,260		—
Remaining commercial	8,429		6,872		—		29,328		14,093		—
Residential real estate:
Commercial	36,709		31,461		—		39,918		31,957		—
Consumer	799		799		—		18		18		—
With an allowance recorded
Commercial, financial and agricultural	12,616		7,842		3,268		12,268		7,904		3,180
Commercial real estate	7,966		7,673		5,496		11,412		9,181		1,540
Construction real estate:
Remaining commercial	3,909		3,910		1,132		8,071		7,481		2,277
Residential real estate:
Commercial	2,129		1,947		555		3,944		3,665		1,279
Consumer	—		—		—		—		—		—
Total	$	175,578	$	112,315	$	10,451	$	242,345	$	137,339	$	8,276

Management’s general practice is to proactively charge down loans individually evaluated for impairment rather than carry significant specific reserves within the allowance for loan losses. At December 31, 2013 and December 31, 2012, there were $58.1 million and $97.6 million, respectively, in partial charge-offs on loans individually evaluated for impairment with no related allowance recorded and $5.2 million and $7.5 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 December 31, 2013 and 2012, of $10.5 million and $8.3 million, respectively. These loans had a recorded investment as of December 31, 2013 and 2012 of $21.4 million and $28.2 million, respectively.

The average balance of loans individually evaluated for impairment was $124.1 million, $164.2 million, and $214.0 million for 2013, 2012, and 2011, respectively.

Interest income on loans individually evaluated for impairment is recognized on a cash basis. The following tables present the average recorded investment and interest income recognized on loans individually evaluated for impairment for the years ended December 31, 2013, 2012, and 2011.



			Year ended December 31, 2013
(In thousands)	Recorded Investment as of December 31, 2013		Average recorded investment		Interest income recognized
Commercial, financial and agricultural	$	20,727	$	20,523	$	412
Commercial real estate	41,822		41,426		1,151
Construction real estate:
SEPH commercial land and development	4,777		8,723		—
Remaining commercial	10,782		17,829		616
Residential real estate:
Commercial	33,408		34,972		461
Consumer	799		616		—
Total	$	112,315	$	124,089	$	2,640



			Year ended December 31, 2012
(In thousands)	Recorded Investment as of December 31, 2012		Average recorded investment		Interest income recognized
Commercial, financial and agricultural	$	22,587	$	35,305	$	529
Commercial real estate	44,278		44,541		968
Construction real estate:
SEPH commercial land and development	13,260		17,277		—
Remaining commercial	21,574		27,774		818
Residential real estate:
Commercial	35,622		39,248		497
Consumer	18		19		1
Total	$	137,339	$	164,164	$	2,813



			Year ended December 31, 2011
(In thousands)	Recorded Investment as of December 31, 2011		Average recorded investment		Interest income recognized
Commercial, financial and agricultural	$	40,621	$	23,518	$	209
Commercial real estate	51,978		49,927		829
Construction real estate:
Vision commercial land and development	24,328		58,792		—
Remaining commercial	25,912		29,152		339
Residential real estate:
Commercial	44,276		52,640		214
Consumer	20		16		1
Total	$	187,135	$	214,045	$	1,592

The following tables present the aging of the recorded investment in past due loans as of December 31, 2013 and December 31, 2012 by class of loan.



	12/31/2013
(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	$	1,233	$	13,275	$	14,508	$	814,003	$	828,511
Commercial real estate	2,168		18,274		20,442		1,095,596		1,116,038
Construction real estate:
SEPH commercial land and development	—		4,242		4,242		1,606		5,848
Remaining commercial	—		3,463		3,463		107,642		111,105
Mortgage	264		75		339		31,639		31,978
Installment	207		14		221		7,351		7,572
Residential real estate:
Commercial	900		5,659		6,559		401,732		408,291
Mortgage	13,633		11,829		25,462		1,120,851		1,146,313
HELOC	571		402		973		213,462		214,435
Installment	696		436		1,132		32,841		33,973
Consumer	12,143		3,941		16,084		710,424		726,508
Leases	—		—		—		3,427		3,427
Total loans	$	31,815	$	61,610	$	93,425	$	4,540,574	$	4,633,999

* Includes $1.7 million of loans past due 90 days or more and accruing. The remaining are past due, nonaccrual loans.



	12/31/2012
(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	$	6,251	$	11,811	$	18,062	$	808,841	$	826,903
Commercial real estate	2,212		26,355		28,567		1,067,436		1,096,003
Construction real estate:
SEPH commercial land and development	686		11,314		12,000		3,142		15,142
Remaining commercial	3,652		5,838		9,490		106,314		115,804
Mortgage	171		85		256		26,198		26,454
Installment	135		40		175		8,435		8,610
Residential real estate:
Commercial	1,163		5,917		7,080		386,082		393,162
Mortgage	11,948		17,370		29,318		1,036,868		1,066,186
HELOC	620		309		929		212,868		213,797
Installment	563		787		1,350		42,576		43,926
Consumer	12,924		2,688		15,612		639,153		654,765
Leases	—		—		—		3,157		3,157
Total loans	$	40,325	$	82,514	$	122,839	$	4,341,070	$	4,463,909

* Includes $3.0 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 December 31, 2013 and December 31, 2012 is included in the tables above. 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 deserve 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 loans 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 December 31, 2013 and December 31, 2012 for all commercial loans:



	12/31/2013
(In thousands)	5 Rated		6 Rated		Impaired		Pass Rated		Recorded Investment
Commercial, financial and agricultural*	$	6,055	$	532	$	20,740	$	801,184	$	828,511
Commercial real estate*	11,591		1,525		41,822		1,061,100		1,116,038
Construction real estate:
SEPH commercial land and development*	354		—		4,777		717		5,848
Remaining commercial	6,858		244		10,782		93,221		111,105
Residential real estate:
Commercial	5,033		397		33,408		369,453		408,291
Leases	—		—		—		3,427		3,427
Total Commercial Loans	$	29,891	$	2,698	$	111,529	$	2,329,102	$	2,473,220

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



	12/31/2012
(In thousands)	5 Rated		6 Rated		Impaired		Pass Rated		Recorded Investment
Commercial, financial and agricultural*	$	9,537	$	10,874	$	22,601	$	783,891	$	826,903
Commercial real estate*	25,616		3,960		44,278		1,022,149		1,096,003
Construction real estate:
SEPH commercial land and development*	411		—		13,939		792		15,142
Remaining commercial	6,734		—		21,574		87,496		115,804
Residential real estate:
Commercial	8,994		2,053		35,622		346,493		393,162
Leases	—		—		—		3,157		3,157
Total Commercial Loans	$	51,292	$	16,887	$	138,014	$	2,243,978	$	2,450,171

Troubled Debt Restructuring (TDRs)

Management classifies loans as TDRs when a borrower is experiencing financial difficulties and Park has granted a concession to the borrower as part of a modification or in the loan renewal process. 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 periods ended December 31, 2013 and December 31, 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.

Management reviews renewals/modifications of loans previously identified as TDRs to consider if it is appropriate to remove the TDR classification. If the borrower is no longer experiencing financial difficulty and the renewal/modification does not contain a concessionary interest rate or other concessionary terms, management considers the potential removal of the TDR classification. If deemed appropriate, the TDR classification is removed as the borrower had complied with the terms of the loan at the date of the renewal/modification and there was a reasonable expectation that the borrower would continue to comply with the terms of the loan subsequent to the date of the renewal/modification. The majority of these TDRs were originally considered restructurings in a prior year as a result of a renewal/modification with an interest rate that was not commensurate with the risk of the underlying loan at the time of the renewal/modification. During the year ended December 31, 2013, Park removed the TDR classification on $7.7 million of loans that met the requirements discussed above.

At December 31, 2013 and December 31, 2012, there were $76.3 million and $84.7 million, respectively, of TDRs included in nonaccrual loan totals. At December 31, 2013 and December 31, 2012, $50.6 million and $52.6 million of these nonaccrual TDRs were performing in accordance with the terms of the restructured note. As of December 31, 2013 and December 31, 2012, there were $18.8 million and $29.9 million, respectively, of TDRs included in accruing loan totals. Management will continue to review the restructured loans and may determine it appropriate to move certain nonaccrual TDRs to accrual status in the future. At December 31, 2013 and December 31, 2012, Park had commitments to lend $4.0 million and $5.0 million, respectively, of additional funds to borrowers whose loan terms had been modified in a TDR.

The specific reserve related to TDRs at December 31, 2013 and December 31, 2012 was $7.5 million and $5.6 million, respectively. Modifications made in 2012 and 2013 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 $1.1 million were recorded during the year ended December 31, 2013, as a result of TDRs identified in the 2013 year. Additional specific reserves of $2.3 million were recorded during the year ended December 31, 2012 as a result of TDRs identified in the 2012 year.

The terms of certain other loans were modified during the years ended December 31, 2013 and December 31, 2012 that did not meet the definition of a TDR. Modified/renewed substandard commercial loans which did not meet the definition of a TDR had a total recorded investment as of December 31, 2013 and December 31, 2012 of $878,000 and $800,000, respectively. The renewal/modification of these loans: (1) involved a renewal/modification of the terms of a loan to a borrower who was no longer 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 December 31, 2013 and December 31, 2012 of $24.2 million and $26.5 million, respectively. Many of these loans were to borrowers who were not experiencing financial difficulties but who were looking to reduce their cost of funds.

The following tables detail the number of contracts modified as TDRs during the years ended December 31, 2013 and December 31, 2012 as well as the recorded investment of these contracts at December 31, 2013 and December 31, 2012. The recorded investment pre- and post-modification is generally the same.



	Year ended December 31, 2013
(In thousands)	Number of Contracts	Accruing		Nonaccrual		Recorded Investment
Commercial, financial and agricultural	34	$	7	$	1,334	$	1,341
Commercial real estate	22	—		8,563		8,563
Construction real estate:
SEPH commercial land and development	—	—		—		—
Remaining commercial	3	—		98		98
Mortgage	—	—		—		—
Installment	4	26		25		51
Residential real estate:
Commercial	15	—		2,552		2,552
Mortgage	62	1,967		2,278		4,245
HELOC	16	175		—		175
Installment	13	113		179		292
Consumer	327	805		345		1,150
Total loans	496	$	3,093	$	15,374	$	18,467



	Year ended December 31, 2012
(In thousands)	Number of Contracts	Accruing		Nonaccrual		Recorded Investment
Commercial, financial and agricultural	44	$	2,843	$	1,499	$	4,342
Commercial real estate	25	2,648		3,611		6,259
Construction real estate:
SEPH commercial land and development	12	—		1,301		1,301
Remaining commercial	15	531		6,579		7,110
Mortgage	2	99		85		184
Installment	6	175		78		253
Residential real estate:
Commercial	18	1,139		1,842		2,981
Mortgage	129	4,279		5,776		10,055
HELOC	46	736		58		794
Installment	57	761		508		1,269
Consumer	600	1,899		670		2,569
Total loans	954	$	15,110	$	22,007	$	37,117

Of those loans listed in the tables above which were modified during the year ended December 31, 2013, $5.5 million were on nonaccrual status as of December 31, 2012, but were not classified as TDRs. Of those loans which were modified during the year ended December 31, 2012, $6.5 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 year ended December 31, 2013 and December 31, 2012. For this table, a loan is considered to be in default when it becomes 30 days contractually past due under modified terms. The additional allowance for loan loss resulting from the defaults on TDR loans was immaterial.



	Year ended December 31, 2013			Year ended December 31, 2012
(In thousands)	Number of Contracts	Recorded Investment		Number of Contracts		Recorded Investment
Commercial, financial and agricultural	11	$	771	8		$	244
Commercial real estate	11	2,839		10		2,113
Construction real estate:
SEPH commercial land and development	—	—		7		970
Remaining commercial	—	—		4		1,476
Mortgage	—	—		1		85
Installment	1	10		1		27
Residential real estate:
Commercial	4	1,683		1		16
Mortgage	26	1,533		39		2,863
HELOC	—	—		5		70
Installment	5	72		9		272
Consumer	74	471		123		743
Leases	—	—		—		—
Total loans	132	$	7,379	$	208	$	8,879

Of the $7.4 million in modified TDRs which defaulted during the year ended December 31, 2013, $397,000 were accruing loans and $7.0 million were nonaccrual loans. Of the $8.9 million in modified TDRs which defaulted during the year ended December 31, 2012, $606,000 were accruing loans and $8.3 million were nonaccrual loans.

Management transfers a loan to OREO at the time that Park takes deed/title of the asset. At December 31, 2013 and 2012, Park had $34.6 million and $35.7 million, respectively, of OREO.

Certain of the Corporation’s executive officers, directors and related entities of directors are loan customers of PNB. As of December 31, 2013 and 2012, credit exposure aggregating approximately $49.7 million and $39.4 million, respectively, was outstanding to such parties. Of this total exposure, approximately $37.7 million and $35.3 million were outstanding at December 31, 2013 and 2012, respectively, with the remaining balance representing available credit. During 2013, new loans and advances on existing loans were made to these executive officers, directors and related entities totaling $547,000 and $11.9 million, respectively. These extensions of credit were offset by payments of $10.0 million. During 2012, new loans and advances on existing loans were $1.7 million and $13.0 million, respectively. These extensions of credit were offset by payments of $17.2 million and the removal of $4.4 million in loans to Vision Bank's executive officers, directors and related entities.