Loans

The composition of the loan portfolio, by class of loan, as of March 31, 2014 and December 31, 2013 was as follows:



	March 31, 2014						December 31, 2013
(In thousands)	Loan balance		Accrued interest receivable		Recorded investment		Loan balance		Accrued interest receivable		Recorded investment
Commercial, financial and agricultural *	$	806,732	$	3,237	$	809,969	$	825,432	$	3,079	$	828,511
Commercial real estate *	1,099,997		3,330		1,103,327		1,112,273		3,765		1,116,038
Construction real estate:
SEPH commercial land and development *	4,955		2		4,957		5,846		2		5,848
Remaining commercial	113,575		263		113,838		110,842		263		111,105
Mortgage	29,291		84		29,375		31,882		96		31,978
Installment	7,593		26		7,619		7,546		26		7,572
Residential real estate:
Commercial	405,138		1,016		406,154		407,387		904		408,291
Mortgage	1,152,163		1,604		1,153,767		1,144,754		1,559		1,146,313
HELOC	211,005		825		211,830		213,565		870		214,435
Installment	31,804		123		31,927		33,841		132		33,973
Consumer	758,347		2,578		760,925		723,733		2,775		726,508
Leases	3,326		47		3,373		3,404		23		3,427
Total loans	$	4,623,926	$	13,135	$	4,637,061	$	4,620,505	$	13,494	$	4,633,999

* 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.

Credit Quality

The following tables present 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 March 31, 2014 and December 31, 2013:



	March 31, 2014
(In thousands)	Nonaccrual loans		Accruing troubled debt restructurings		Loans past due 90 days or more and accruing		Total nonperforming loans
Commercial, financial and agricultural	$	19,841	$	6	$	83	$	19,930
Commercial real estate	38,161		1,234		—		39,395
Construction real estate:
SEPH commercial land and development	4,102		—		—		4,102
Remaining commercial	10,225		305		—		10,530
Mortgage	99		96		—		195
Installment	36		160		—		196
Residential real estate:
Commercial	30,183		1,030		—		31,213
Mortgage	19,528		11,966		465		31,959
HELOC	1,888		737		—		2,625
Installment	994		896		53		1,943
Consumer	2,969		1,614		724		5,307
Total loans	$	128,026	$	18,044	$	1,325	$	147,395



	December 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

The following table provides additional information regarding those nonaccrual and accruing troubled debt restructured loans that were individually evaluated for impairment and those collectively evaluated for impairment as of March 31, 2014 and December 31, 2013.



	March 31, 2014						December 31, 2013
(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	$	19,847	$	19,835	$	12	$	20,740	$	20,727	$	13
Commercial real estate	39,395		39,395		—		41,822		41,822		—
Construction real estate:
SEPH commercial land and development	4,102		4,102		—		4,777		4,777		—
Remaining commercial	10,530		10,530		—		10,782		10,782		—
Mortgage	195		—		195		184		—		184
Installment	196		—		196		231		—		231
Residential real estate:
Commercial	31,213		31,213		—		33,408		33,408		—
Mortgage	31,494		—		31,494		32,272		—		32,272
HELOC	2,625		—		2,625		2,880		—		2,880
Installment	1,890		—		1,890		1,850		—		1,850
Consumer	4,583		798		3,785		5,079		799		4,280
Total loans	$	146,070	$	105,873	$	40,197	$	154,025	$	112,315	$	41,710

All of the loans individually evaluated for impairment were evaluated using the fair value of the underlying 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 March 31, 2014 and December 31, 2013.



	March 31, 2014						December 31, 2013
(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	$	22,101	$	12,659	$	—	$	22,429	$	12,885	$	—
Commercial real estate	51,428		31,257		—		56,870		34,149		—
Construction real estate:
SEPH commercial land and development	17,493		4,102		—		23,722		4,777		—
Remaining commercial	5,248		3,694		—		8,429		6,872		—
Residential real estate:
Commercial	33,875		29,258		—		36,709		31,461		—
Consumer	799		798		—		799		799		—

With an allowance recorded:
Commercial, financial and agricultural	11,982		7,176		3,064		12,616		7,842		3,268
Commercial real estate	8,313		8,138		5,514		7,966		7,673		5,496
Construction real estate:
SEPH commercial land and development	—		—		—		—		—		—
Remaining commercial	6,835		6,836		2,304		3,909		3,910		1,132
Residential real estate:
Commercial	2,126		1,955		440		2,129		1,947		555
Consumer	—		—		—		—		—		—
Total	$	160,200	$	105,873	$	11,322	$	175,578	$	112,315	$	10,451

Management’s general practice is to proactively charge down loans individually evaluated for impairment to the fair value of the underlying collateral. At March 31, 2014 and December 31, 2013, there were $49.2 million and $58.1 million, respectively, of partial charge-offs on loans individually evaluated for impairment with no related allowance recorded and $5.1 million and $5.2 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 March 31, 2014 and December 31, 2013 of $11.3 million and $10.5 million, respectively. These loans with specific reserves had a recorded investment of $24.1 million and $21.4 million as of March 31, 2014 and December 31, 2013, respectively.

Interest income on loans individually evaluated for impairment is recognized on a cash basis. The following table presents the average recorded investment and interest income recognized on loans individually evaluated for impairment as of and for the three months ended March 31, 2014 and March 31, 2013:



	Three Months Ended March 31, 2014						Three Months Ended March 31, 2013
(In thousands)	Recorded investment as of March 31, 2014		Average recorded investment		Interest income recognized		Recorded investment as of March 31, 2013		Average recorded investment		Interest income recognized
Commercial, financial and agricultural	$	19,835	$	20,140	$	61	$	21,742	$	21,479	$	128
Commercial real estate	39,395		40,995		253		40,075		43,191		256
Construction real estate:
SEPH commercial land and development	4,102		4,464		56		10,482		12,082		—
Remaining commercial	10,530		10,379		47		20,483		20,912		220
Residential real estate:
Commercial	31,213		31,101		263		36,722		35,859		130
Consumer	798		799		—		799		204		—
Total	$	105,873	$	107,878	$	680	$	130,303	$	133,727	$	734

The following tables present the aging of the recorded investment in past due loans as of March 31, 2014 and December 31, 2013 by class of loan.



	March 31, 2014
(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	$	4,313	$	12,910	$	17,223	$	792,746	$	809,969
Commercial real estate	998		18,196		19,194		1,084,133		1,103,327
Construction real estate:
SEPH commercial land and development	—		3,925		3,925		1,032		4,957
Remaining commercial	—		3,460		3,460		110,378		113,838
Mortgage	328		87		415		28,960		29,375
Installment	83		12		95		7,524		7,619
Residential real estate:
Commercial	698		22,243		22,941		383,213		406,154
Mortgage	10,550		10,674		21,224		1,132,543		1,153,767
HELOC	675		585		1,260		210,570		211,830
Installment	541		471		1,012		30,915		31,927
Consumer	8,288		3,157		11,445		749,480		760,925
Leases	—		—		—		3,373		3,373
Total loans	$	26,474	$	75,720	$	102,194	$	4,534,867	$	4,637,061

* Includes $1.3 million of loans past due 90 days or more and accruing. The remaining are past due, nonaccrual loans and accruing troubled debt restructurings.



	December 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 and accruing troubled debt restructurings.

Credit Quality Indicators

Management utilizes past due information as a credit quality indicator across the loan portfolio. Past due information as of March 31, 2014 and December 31, 2013 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 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 the value 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 Park will sustain some loss if the deficiencies are not corrected. Commercial loans that are graded a 7 (doubtful) are shown as nonaccrual and Park 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 March 31, 2014 and December 31, 2013 for all commercial loans:



	March 31, 2014
(In thousands)	5 Rated		6 Rated		Impaired		Pass Rated		Recorded Investment
Commercial, financial and agricultural *	$	6,105	$	320	$	19,847	$	783,697	$	809,969
Commercial real estate *	8,764		434		39,395		1,054,734		1,103,327
Construction real estate:
SEPH commercial land and development *	—		—		4,102		855		4,957
Remaining commercial	6,591		—		10,530		96,717		113,838
Residential real estate:
Commercial	4,090		288		31,213		370,563		406,154
Leases	—		—		—		3,373		3,373
Total Commercial Loans	$	25,550	$	1,042	$	105,087	$	2,309,939	$	2,441,618



	December 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

Troubled Debt Restructurings (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 in accordance with 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 March 31, 2014 and March 31, 2013 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 has 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 three months ended March 31, 2014, Park removed the TDR classification on $966,000 of loans that met the requirements discussed above. The TDR classification was not removed on any loans during the three months ended March 31, 2013.

At March 31, 2014 and December 31, 2013, there were $70.7 million and $76.3 million, respectively, of TDRs included in nonaccrual loan totals. At March 31, 2014 and December 31, 2013, $27.6 million and $50.6 million of these nonaccrual TDRs were performing in accordance with the terms of the restructured note. As of March 31, 2014 and December 31, 2013, there were $18.0 million and $18.8 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 of the loans back to accrual status in the future.

At March 31, 2014 and December 31, 2013, Park had commitments to lend $2.7 million and $4.0 million, respectively, of additional funds to borrowers whose outstanding loan terms had been modified in a TDR.

The specific reserve related to TDRs at March 31, 2014 and December 31, 2013 was $8.2 million and $7.5 million, respectively. Modifications made in 2013 and 2014 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 $18,000 and $238,000 were recorded during the three-month periods ended March 31, 2014 and March 31, 2013, respectively, as a result of TDRs identified in the respective year.

The terms of certain other loans were modified/renewed during the three-month periods ended March 31, 2014 and March 31, 2013 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 March 31, 2014 and March 31, 2013 of $392,000 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 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 March 31, 2014 and March 31, 2013 of $5.7 million and $6.6 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 three-month periods ended March 31, 2014 and March 31, 2013, as well as the recorded investment of these contracts at March 31, 2014 and March 31, 2013. The recorded investment pre- and post-modification is generally the same due to the fact that Park does not typically provide for forgiveness of principal.



	Three Months Ended March 31, 2014
(In thousands)	Number of Contracts	Accruing		Nonaccrual		Total Recorded Investment
Commercial, financial and agricultural	5	$	—	$	60	$	60
Commercial real estate	3	161		523		684
Construction real estate:
SEPH commercial land and development	—	—		—		—
Remaining commercial	—	—		—		—
Mortgage	—	—		—		—
Installment	—	—		—		—
Residential real estate:
Commercial	2	—		68		68
Mortgage	7	164		495		659
HELOC	—	—		—		—
Installment	4	36		36		72
Consumer	71	382		108		490
Total loans	92	$	743	$	1,290	$	2,033



	Three Months Ended March 31, 2013
(In thousands)	Number of Contracts	Accruing		Nonaccrual		Total Recorded Investment
Commercial, financial and agricultural	7	$	—	$	320	$	320
Commercial real estate	2	25		152		177
Construction real estate:
SEPH commercial land and development	—	—		—		—
Remaining commercial	1	37		—		37
Mortgage	—	—		—		—
Installment	2	—		26		26
Residential real estate:
Commercial	6	493		1,561		2,054
Mortgage	12	880		242		1,122
HELOC	4	54		—		54
Installment	4	40		9		49
Consumer	72	332		137		469
Total loans	110	$	1,861	$	2,447	$	4,308

Of those loans which were modified and determined to be a TDR during the three-month period ended March 31, 2014, $900,000 were on nonaccrual status as of December 31, 2013. Of those loans which were modified and determined to be a TDR during the three-month period ended March 31, 2013, $300,000 were on nonaccrual status as of December 31, 2012.

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-month periods ended March 31, 2014 and March 31, 2013, respectively. For this table, a loan is considered to be in default when it becomes 30 days contractually past due under the modified terms. The additional allowance for loan loss resulting from the defaults on TDR loans was immaterial.



	Three Months Ended March 31, 2014			Three Months Ended March 31, 2013
(In thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Commercial, financial and agricultural	7	$	89	10	$	979
Commercial real estate	5	872		2	198
Construction real estate:
SEPH commercial land and development	—	—		2	45
Remaining commercial	—	—		3	506
Mortgage	—	—		1	85
Installment	—	—		1	12
Residential real estate:
Commercial	2	302		2	857
Mortgage	19	1,144		34	3,430
HELOC	—	—		2	77
Installment	6	108		10	273
Consumer	49	345		100	617
Leases	—	—		—	—
Total loans	88	$	2,860	167	$	7,079

Of the $2.9 million in modified TDRs which defaulted during the three months ended March 31, 2014, $499,000 were accruing loans and $2.4 million were nonaccrual loans. Of the $7.1 million in modified TDRs which defaulted during the three months ended March 31, 2013, $768,000 were accruing loans and $6.3 million were nonaccrual loans.