Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2017
  
Commission File Number
1-13006
 
Park National Corporation
(Exact name of registrant as specified in its charter)
 
Ohio
 
31-1179518
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
50 North Third Street, Newark, Ohio 43055
(Address of principal executive offices) (Zip Code)
 
(740) 349-8451
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 Yes   ý   No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   ý   No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company    
¨
(Do not check if a smaller reporting company)
Emerging growth company
¨

 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 Yes   ¨   No   ý

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 15,288,211 Common shares, no par value per share, outstanding at October 30, 2017.




PARK NATIONAL CORPORATION
 
CONTENTS
 
Page
PART I.   FINANCIAL INFORMATION
 
 
 
Item 1.  Financial Statements
 
 
 
 
 
 
 
 
 
 
 
Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 (unaudited)
 
 
 
 
 
 
 
 
 
 
73 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

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PARK NATIONAL CORPORATION AND SUBSIDARIES
Consolidated Condensed Balance Sheets (Unaudited)
(in thousands, except share and per share data)                    
 
September 30,
2017
 
December 31, 2016
Assets:
 

 
 

Cash and due from banks
$
118,884

 
$
122,811

Money market instruments
331,468

 
23,635

Cash and cash equivalents
450,352

 
146,446

Investment securities:
 

 
 

Securities available-for-sale, at fair value (amortized cost of $1,163,893 and $1,262,761 at September 30, 2017 and December 31, 2016, respectively)
1,166,562

 
1,258,139

Securities held-to-maturity, at amortized cost (fair value of $347,110 and $256,672 at September 30, 2017 and December 31, 2016, respectively)
342,665

 
259,833

Other investment securities
61,811

 
61,811

Total investment securities
1,571,038

 
1,579,783

 
 
 
 
Loans
5,365,877

 
5,271,857

Allowance for loan losses
(55,232
)
 
(50,624
)
Net loans
5,310,645

 
5,221,233

Bank owned life insurance
188,254

 
185,234

Prepaid assets
95,717

 
88,874

Goodwill
72,334

 
72,334

Premises and equipment, net
56,179

 
57,971

Affordable housing tax credit investments
54,355

 
52,947

Other real estate owned
14,366

 
13,926

Accrued interest receivable
21,246

 
18,822

Mortgage loan servicing rights, net
9,479

 
9,266

Other
18,730

 
20,750

Total assets
$
7,862,695

 
$
7,467,586

 
 
 
 
Liabilities and Shareholders' Equity:
 

 
 

Deposits:
 

 
 

Noninterest bearing
$
1,568,177

 
$
1,523,417

Interest bearing
4,406,145

 
3,998,539

Total deposits
5,974,322

 
5,521,956

Short-term borrowings
192,896

 
394,795

Long-term debt
848,992

 
694,281

Subordinated notes
15,000

 
45,000

Unfunded commitments in affordable housing tax credit investments
21,282

 
14,282

Accrued interest payable
2,582

 
2,151

Other
48,254

 
52,881

Total liabilities
$
7,103,328

 
$
6,725,346

 
 
 
 
 


 


Shareholders' equity:
 

 
 

Preferred shares (200,000 shares authorized; 0 shares issued)
$

 
$

Common shares (No par value; 20,000,000 shares authorized; 16,150,769 shares issued at September 30, 2017 and 16,150,807 shares issued at December 31, 2016)
307,143

 
305,826

Retained earnings
553,434

 
535,631

Treasury shares (873,708 shares at September 30, 2017 and 810,089 at December 31, 2016)
(88,205
)
 
(81,472
)
Accumulated other comprehensive loss, net of taxes
(13,005
)
 
(17,745
)
Total shareholders' equity
759,367

 
742,240

Total liabilities and shareholders’ equity
$
7,862,695

 
$
7,467,586


SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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Table of Contents

PARK NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Income (Unaudited)
(in thousands, except share and per share data)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Interest and dividend income:
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Interest and fees on loans
$
63,110

 
$
59,893

 
$
184,240

 
$
178,346

 
 
 
 
 
 
 
 
Interest and dividends on:
 

 
 

 
 
 
 
Obligations of U.S. Government, its agencies and other securities
6,757

 
7,339

 
20,787

 
23,718

Obligations of states and political subdivisions
1,974

 
689

 
5,098

 
1,653

Other interest income
1,383

 
321

 
2,330

 
844

Total interest and dividend income
73,224

 
68,242

 
212,455

 
204,561

 
 
 
 
 
 
 
 
Interest expense:
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Interest on deposits:
 

 
 

 
 
 
 
Demand and savings deposits
2,882

 
1,094

 
6,787

 
2,851

Time deposits
2,521

 
2,352

 
7,139

 
7,128

 
 
 
 
 
 
 
 
Interest on borrowings:
 

 
 

 
 
 
 
Short-term borrowings
197

 
84

 
616

 
330

Long-term debt
6,073

 
6,179

 
17,632

 
18,415

 
 
 
 
 
 
 
 
Total interest expense
11,673

 
9,709

 
32,174

 
28,724

 
 
 
 
 
 
 
 
Net interest income
61,551

 
58,533

 
180,281

 
175,837

 
 
 
 
 
 
 
 
Provision for (recovery of) loan losses
3,283

 
(7,366
)
 
8,740

 
(3,819
)
Net interest income after provision for (recovery of) loan losses
58,268

 
65,899

 
171,541

 
179,656

 
 
 
 
 
 
 
 
Other income:
 

 
 

 
 
 
 
Income from fiduciary activities
5,932

 
5,315

 
17,471

 
15,866

Service charges on deposit accounts
3,216

 
3,800

 
9,511

 
10,798

Other service income
3,357

 
3,640

 
9,608

 
9,565

Checkcard fee income
3,974

 
3,780

 
11,775

 
11,180

Bank owned life insurance income
1,573

 
1,038

 
3,790

 
3,284

ATM fees
605

 
581

 
1,708

 
1,734

OREO valuation adjustments
(22
)
 
(233
)
 
(367
)
 
(572
)
Gain on sale of OREO, net
51

 
783

 
204

 
1,079

Miscellaneous
3,403

 
1,831

 
5,147

 
3,726

Total other income
22,089

 
20,535

 
58,847

 
56,660

 
 
 
 
 
 
 
 
 



4

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PARK NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Income (Unaudited) (Continued)
(in thousands, except share and per share data)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Other expense:
 

 
 

 
 
 
 
Salaries
$
23,302

 
$
22,084

 
$
69,020

 
$
64,894

Employee benefits
4,656

 
5,073

 
14,756

 
14,740

Occupancy expense
2,559

 
2,506

 
7,759

 
7,693

Furniture and equipment expense
3,868

 
3,437

 
11,126

 
10,296

Data processing fees
1,919

 
1,450

 
5,560

 
4,040

Professional fees and services
6,100

 
6,356

 
16,947

 
18,424

Marketing
1,122

 
1,062

 
3,262

 
3,246

Insurance
1,499

 
1,423

 
4,586

 
4,272

Communication
1,110

 
1,154

 
3,598

 
3,728

State tax expense
912

 
895

 
2,918

 
2,619

Miscellaneous
2,764

 
1,316

 
5,847

 
8,009

Total other expense
49,811

 
46,756

 
145,379

 
141,961

 
 
 
 
 
 
 
 
Income before income taxes
30,546

 
39,678

 
85,009

 
94,355

 
 
 
 
 
 
 
 
Federal income taxes
8,434

 
12,229

 
23,598

 
28,222

 
 
 
 
 
 
 
 
Net income
$
22,112

 
$
27,449

 
$
61,411

 
$
66,133

 
 
 
 
 
 
 
 
Earnings per Common Share:
 
 
 
 
 
 
 
Basic
$
1.45

 
$
1.79

 
$
4.01

 
$
4.31

Diluted
$
1.44

 
$
1.78

 
$
3.99

 
$
4.29

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 

 
 

 
 
 
 
Basic
15,287,974

 
15,330,791

 
15,299,039

 
15,330,802

Diluted
15,351,590

 
15,399,707

 
15,394,199

 
15,401,825

 
 
 
 
 
 
 
 
Cash dividends declared
$
0.94

 
$
0.94

 
$
2.82

 
$
2.82

 
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 



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PARK NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Comprehensive Income (Unaudited)
(in thousands)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
22,112

 
$
27,449

 
$
61,411

 
$
66,133

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized net holding gain (loss) on securities available-for-sale, net of federal income tax effect of $380 and $(1,174) for the three months ended September 30, 2017 and 2016, and $2,551 and $7,459 for the nine months ended September 30, 2017 and 2016, respectively
707

 
(2,182
)
 
4,740

 
13,850

Other comprehensive income (loss)
$
707

 
$
(2,182
)
 
$
4,740

 
$
13,850

 
 
 
 
 
 
 
 
Comprehensive income
$
22,819

 
$
25,267

 
$
66,151

 
$
79,983

 
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


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PARK NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Changes in Shareholders' Equity (Unaudited)
(in thousands, except share and per share data)
  
 
 
Preferred
Shares
 
Common
Shares
 
Retained
Earnings
 
Treasury
Shares
 
Accumulated
Other
Comprehensive
(Loss) Income
Balance at January 1, 2016
 
$

 
$
303,966

 
$
507,505

 
$
(82,473
)
 
$
(15,643
)
Net income
 
 

 
 

 
66,133

 
 

 
 

Other comprehensive income, net of tax
 
 

 
 
 
 
 
 
 
13,850

Dividends on common shares at $2.82 per share
 
 

 
 

 
(43,461
)
 
 

 
 

Cash payment for fractional common shares in dividend reinvestment plan
 
 

 
(3
)
 
 

 
 

 
 

Share-based compensation expense
 
 
 
1,189

 
 
 
 
 
 
Balance at September 30, 2016
 
$


$
305,152

 
$
530,177

 
$
(82,473
)
 
$
(1,793
)
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
 
$

 
$
305,826

 
$
535,631

 
$
(81,472
)
 
$
(17,745
)
Net income
 
 

 


 
61,411

 


 


Other comprehensive income, net of tax
 
 

 


 


 


 
4,740

Dividends on common shares at $2.82 per share
 
 

 


 
(43,411
)
 


 


Cash payment for fractional common shares in dividend reinvestment plan
 
 

 
(4
)
 


 


 


Issuance of 9,674 common shares under share-based compensation awards, net of 3,293 common shares withheld to pay employee income taxes
 
 
 
(795
)
 
(197
)
 
645

 
 
Repurchase of 70,000 common shares to be held as treasury shares
 
 
 
 
 
 
 
(7,378
)
 
 
Share-based compensation expense
 
 
 
2,116

 
 
 
 
 
 
Balance at September 30, 2017
 
$

 
$
307,143

 
$
553,434

 
$
(88,205
)
 
$
(13,005
)
 
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


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PARK NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows (Unaudited)
(in thousands)
 
Nine Months Ended
September 30,
 
2017
 
2016
Operating activities:
 

 
 

Net income
$
61,411

 
$
66,133

 
 
 
 
Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Provision for (recovery of) loan losses
8,740

 
(3,819
)
Amortization of loan fees and costs, net
6,927

 
5,439

Provision for depreciation
6,463

 
6,283

Amortization of investment securities, net
1,013

 
103

Amortization of prepayment penalty on long-term debt
4,711

 
4,618

Loan originations to be sold in secondary market
(168,255
)
 
(205,576
)
Proceeds from sale of loans in secondary market
170,703

 
201,616

Gain on sale of loans in secondary market
(3,431
)
 
(3,938
)
Share-based compensation expense
2,116

 
1,189

OREO valuation adjustments
367

 
572

Gain on sale of OREO, net
(204
)
 
(1,079
)
Bank owned life insurance income
(3,790
)
 
(3,284
)
 
 
 
 
Changes in assets and liabilities:
 

 
 

Increase in other assets
(15,603
)
 
(15,890
)
(Decrease) increase in other liabilities
(4,502
)
 
5,443

Net cash provided by operating activities
$
66,666

 
$
57,810

 
 
 
 
Investing activities:
 

 
 

Proceeds from calls and maturities of:
 

 
 

Available-for-sale securities
$
128,736

 
$
706,634

Held-to-maturity securities
12,264

 
19,301

Purchases of:
 

 
 

Available-for-sale securities
(29,684
)
 
(473,627
)
Held-to-maturity securities
(96,293
)
 
(61,155
)
Net loan originations, portfolio loans
(95,808
)
 
(109,114
)
Investments in qualified affordable housing projects

 
(4,555
)
  Proceeds from the sale of OREO
2,363

 
6,954

  Life insurance death benefits
1,037

 
1,050

  Purchases of premises and equipment, net
(4,995
)
 
(5,516
)
Net cash (used in) provided by investing activities
$
(82,380
)
 
$
79,972

 
 
 
 
 
 
 
 

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PARK NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows (Unaudited) (Continued)
(in thousands)
 
Nine Months Ended
September 30,
 
2017
 
2016
Financing activities:
 

 
 

Net increase in deposits
$
452,366

 
$
172,017

Net decrease in short-term borrowings
(201,899
)
 
(176,028
)
Proceeds from issuance of long-term debt
150,000

 

Repayment of subordinated notes
(30,000
)
 

Value of common shares withheld to pay employee income taxes
(347
)
 

Repurchase of common shares to be held as treasury shares
(7,378
)
 

Cash dividends paid
(43,122
)
 
(43,232
)
Net cash provided by (used in) financing activities
$
319,620

 
$
(47,243
)
 
 
 
 
Increase in cash and cash equivalents
303,906

 
90,539

 
 
 
 
Cash and cash equivalents at beginning of year
146,446

 
149,459

 
 
 
 
Cash and cash equivalents at end of period
$
450,352

 
$
239,998

 
 
 
 
Supplemental disclosures of cash flow information:
 

 
 

 
 
 
 
Cash paid for:
 

 
 

Interest
$
31,743

 
$
28,757

 
 
 
 
Income taxes
$
18,690

 
$
17,460

 
 
 
 
Non-cash items:
 
 
 
Loans transferred to OREO
$
2,991

 
$
2,856

 
 
 
 
Securities purchase commitments
$

 
$
4,323

 
 
 
 
New commitments in affordable housing tax credit investments
$
7,000

 
$
9,000


SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


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PARK NATIONAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation
 
The accompanying unaudited consolidated condensed financial statements included in this report have been prepared for Park National Corporation (sometimes also referred to as the “Registrant”) and its subsidiaries. Unless the context otherwise requires, references to "Park", the "Corporation" or the "Company" and similar terms mean Park National Corporation and its subsidiaries. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results of operations for the interim periods included herein have been made. The results of operations for the three-month and nine-month periods ended September 30, 2017 are not necessarily indicative of the operating results to be anticipated for the fiscal year ending December 31, 2017.
 
The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a fair presentation of the condensed balance sheets, condensed statements of income, condensed statements of comprehensive income, condensed statements of changes in shareholders’ equity and condensed statements of cash flows in conformity with United States ("U.S.") generally accepted accounting principles (“U.S. GAAP”). These financial statements should be read in conjunction with the consolidated financial statements incorporated by reference in the Annual Report on Form 10-K of Park for the fiscal year ended December 31, 2016 from Park’s 2016 Annual Report to Shareholders (“Park's 2016 Annual Report”). Certain prior period amounts have been reclassified to conform to the current period presentation.
 
Park’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in Park’s 2016 Annual Report. For interim reporting purposes, Park follows the same basic accounting policies, as updated by the information contained in this report, and considers each interim period an integral part of an annual period.
 
Note 2 – Recent Accounting Pronouncements

ASU 2014-09 - Revenue from Contracts with Customers (Topic 606): In May 2014, the Financial Accounting Standards Board (the "FASB") issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. While interest income is specifically out of scope of this guidance, management is currently evaluating the revenue streams within "Other income" to assess the applicability of this guidance. Specifically, management is evaluating the impact of this new guidance on deposit fees recorded within "Service charges on deposit accounts", interchange income recorded within "Checkcard fee income", and trust income recorded within "Income from fiduciary activities." Additionally, management is evaluating new disclosure requirements as a result of this ASU.

ASU 2016-01 - Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. In January 2016, the FASB issued ASU 2016-01 - Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Changes to the current U.S. GAAP model primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale securities. The new guidance is effective for annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2017. The adoption of this guidance is not expected to have a material impact on Park's consolidated financial statements, but will impact the fair value disclosures in Note 14.

ASU 2016-02 - Leases (Topic 842): In February 2016, the FASB issued ASU 2016-02 - Leases (Topic 842). The ASU will require all organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Additional qualitative and quantitative disclosures will be required so that users can understand more about the nature of an entity’s leasing activities. The new guidance is effective for annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted.

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Management is currently analyzing data on leased assets. The adoption of this guidance is expected to increase both assets and liabilities, but is not expected to have a material impact on Park's consolidated statements of income.

ASU 2016-09 - Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting: In March 2016, FASB issued ASU 2016-09 - Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU provides simplification for several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new guidance was effective for annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2016. The adoption of this guidance on January 1, 2017 did not have a material impact on Park's consolidated financial statements.

ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments: In June 2016, FASB issued ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new guidance replaces the incurred loss model with an expected loss model, which is referred to as the current expected credit loss ("CECL") model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables, held-to-maturity debt securities, and reinsurance receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor. The CECL model requires an entity to estimate the credit losses over the life of an asset or off-balance sheet exposure. The new guidance is effective for annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted for annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2018.

Management is currently evaluating the impact of the adoption of this guidance on Park's consolidated financial statements. We anticipate that the adoption of the CECL model will result in a material increase to Park's allowance for loan losses. Management has established a committee to oversee the implementation of CECL and is currently in the process of implementing a software solution to assist in the adoption of this ASU. Management plans to run our current incurred loss model and a CECL model concurrently for 12 months prior to the adoption of this guidance on January 1, 2020.

ASU 2016-15 - Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force):  In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force).  This ASU provides guidance on eight specific cash flow issues where current U.S. GAAP is either unclear or does not include specific guidance. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2017.  As such transactions arise, management will utilize the updated guidance in determining the amounts reported in Park’s consolidated statements of cash flows. 

ASU 2017-01 – Business Combinations (Topic 805): Clarifying the Definition of a Business: In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new guidance is effective for annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. Park intends to adopt this guidance in the fourth quarter of 2017 and will apply this guidance to all future transactions.

ASU 2017-04 - Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment:  In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU eliminates Step 2 from the goodwill impairment test. Instead, under the new guidance, an entity is to perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The early adoption of this guidance with Park's April 1, 2017 annual goodwill impairment test did not have an impact on Park's consolidated financial statements.

ASU 2017-07 - Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost: In March 2017, the FASB issued ASU 2017-07 - Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net

11

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benefit cost are required to be presented in the income statement separately from the service cost component. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted for interim or annual periods. The adoption of this guidance is not expected to have a material impact on Park's consolidated financial statements.

ASU 2017-08 - Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities: In March 2017, the FASB issued ASU 2017-08 - Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This ASU amends the amortization period for certain purchased callable debt securities held at a premium. It shortens the amortization period for the premium to the earliest call date. Under current U.S. GAAP, premiums on callable debt securities generally are amortized to the maturity date. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted for interim or annual periods. The adoption of this guidance is not expected to have a material impact on Park's consolidated financial statements.

ASU 2017-09 - Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting: In May 2017, the FASB issued ASU 2017-09 - Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU amends the guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted for interim or annual periods. The adoption of this guidance is not expected to have a material impact on Park's consolidated financial statements.

ASU 2017-12 - Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities: In August 2017, the FASB issued ASU 2017-12 - Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU amends the guidance with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. In addition, this ASU amends the current guidance to simplify the application of the hedge accounting guidance. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted for interim or annual periods. The adoption of this guidance is not expected to have a material impact on Park's consolidated financial statements. Park is considering the early adoption of this guidance.


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Note 3 – Loans
 
The composition of the loan portfolio, by class of loan, as of September 30, 2017 and December 31, 2016 was as follows:
 
 
September 30, 2017
 
 
December 31, 2016
(In thousands)
Loan
Balance
 
Accrued
Interest
Receivable
 
Recorded
Investment
 
 
Loan
Balance
 
Accrued
Interest
Receivable
 
Recorded
Investment
Commercial, financial and agricultural *
$
1,025,057

 
$
4,581

 
$
1,029,638

 
 
$
994,619

 
$
3,558

 
$
998,177

Commercial real estate *
1,155,662

 
4,464

 
1,160,126

 
 
1,155,703

 
4,161

 
1,159,864

Construction real estate:
 

 
 

 
 

 
 
 

 
 

 
 

Commercial
139,210

 
462

 
139,672

 
 
135,343

 
398

 
135,741

Mortgage
47,629

 
109

 
47,738

 
 
48,699

 
106

 
48,805

Installment
4,209

 
11

 
4,220

 
 
4,903

 
17

 
4,920

Residential real estate:
 

 
 

 
 

 
 
 

 
 

 
 

Commercial
391,502

 
959

 
392,461

 
 
406,687

 
940

 
407,627

Mortgage
1,135,289

 
1,469

 
1,136,758

 
 
1,169,495

 
1,459

 
1,170,954

HELOC
206,665

 
896

 
207,561

 
 
212,441

 
853

 
213,294

Installment
19,131

 
54

 
19,185

 
 
19,874

 
67

 
19,941

Consumer
1,238,191

 
3,409

 
1,241,600

 
 
1,120,850

 
3,385

 
1,124,235

Leases
3,332

 
52

 
3,384

 
 
3,243

 
29

 
3,272

Total loans
$
5,365,877

 
$
16,466

 
$
5,382,343

 
 
$
5,271,857

 
$
14,973

 
$
5,286,830

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

Loans are shown net of deferred origination fees, costs and unearned income of $12.0 million at September 30, 2017 and $11.1 million at December 31, 2016, which represented a net deferred income position in both periods.

Overdrawn deposit accounts of $1.8 million and $2.9 million had been reclassified to loans at September 30, 2017 and December 31, 2016, respectively, and are included in the commercial, financial and agricultural loan class above.


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Credit Quality
 
The following tables present the recorded investment in nonaccrual loans, accruing troubled debt restructurings ("TDRs"), and loans past due 90 days or more and still accruing by class of loan as of September 30, 2017 and December 31, 2016:
 
 
 
September 30, 2017
(In thousands)
 
Nonaccrual
Loans
 
Accruing Troubled Debt Restructurings
 
Loans Past Due
90 Days or More
and Accruing
 
Total
Nonperforming
Loans
Commercial, financial and agricultural
 
$
29,141

 
$
737

 
$

 
$
29,878

Commercial real estate
 
17,889

 
5,106

 

 
22,995

Construction real estate:
 
 

 
 

 
 

 
 

Commercial
 
1,096

 
364

 

 
1,460

Mortgage
 
8

 
84

 

 
92

Installment
 
57

 

 

 
57

Residential real estate:
 
 

 
 

 
 

 
 

Commercial
 
19,071

 
227

 

 
19,298

Mortgage
 
17,860

 
10,599

 
882

 
29,341

HELOC
 
1,514

 
1,094

 

 
2,608

Installment
 
778

 
556

 

 
1,334

Consumer
 
3,154

 
736

 
1,155

 
5,045

Total loans
 
$
90,568

 
$
19,503

 
$
2,037

 
$
112,108

 
 
 
December 31, 2016
(In thousands)
 
Nonaccrual
Loans
 
Accruing Troubled Debt Restructurings
 
Loans Past Due
90 Days or More
and Accruing
 
Total
Nonperforming
Loans
Commercial, financial and agricultural
 
$
20,057

 
$
600

 
$
15

 
$
20,672

Commercial real estate
 
19,169

 
5,305

 

 
24,474

Construction real estate:
 
 

 
 

 
 

 
 
Commercial
 
1,833

 
393

 

 
2,226

Mortgage
 

 
104

 

 
104

Installment
 
61

 
95

 
12

 
168

Residential real estate:
 
 

 
 

 
 

 
 

Commercial
 
23,013

 
89

 

 
23,102

Mortgage
 
18,313

 
9,612

 
887

 
28,812

HELOC
 
1,783

 
673

 
25

 
2,481

Installment
 
644

 
609

 
60

 
1,313

Consumer
 
2,949

 
748

 
1,139

 
4,836

Total loans
 
$
87,822

 
$
18,228

 
$
2,138

 
$
108,188


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The following table provides additional information regarding those nonaccrual loans and accruing TDR loans that were individually evaluated for impairment and those collectively evaluated for impairment as of September 30, 2017 and December 31, 2016.

 
 
September 30, 2017
 
 
December 31, 2016
(In thousands)
 
Nonaccrual and Accruing TDRs
 
Loans
Individually
Evaluated for
Impairment
 
Loans
Collectively
Evaluated for
Impairment
 
 
Nonaccrual and Accruing TDRs
 
Loans
Individually
Evaluated for
Impairment
 
Loans
Collectively
Evaluated for
Impairment
Commercial, financial and agricultural
 
$
29,878

 
$
29,848

 
$
30

 
 
$
20,657

 
$
20,624

 
$
33

Commercial real estate
 
22,995

 
22,995

 

 
 
24,474

 
24,474

 

Construction real estate:
 
 

 
 

 
 

 
 
 

 
 

 
 

Commercial
 
1,460

 
1,460

 

 
 
2,226

 
2,226

 

Mortgage
 
92

 

 
92

 
 
104

 

 
104

Installment
 
57

 

 
57

 
 
156

 

 
156

Residential real estate:
 
 

 
 

 
 

 
 
 

 
 

 
 

Commercial
 
19,298

 
19,298

 

 
 
23,102

 
23,102

 

Mortgage
 
28,459

 

 
28,459

 
 
27,925

 

 
27,925

HELOC
 
2,608

 

 
2,608

 
 
2,456

 

 
2,456

Installment
 
1,334

 

 
1,334

 
 
1,253

 

 
1,253

Consumer
 
3,890

 
8

 
3,882

 
 
3,697

 

 
3,697

Total loans
 
$
110,071

 
$
73,609

 
$
36,462

 
 
$
106,050

 
$
70,426

 
$
35,624

 
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, together with the related allowance recorded, as of September 30, 2017 and December 31, 2016.
 
 
 
September 30, 2017
 
 
December 31, 2016
(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
 
$
22,233

 
$
16,980

 
$

 
 
$
41,075

 
$
19,965

 
$

Commercial real estate
 
18,558

 
18,158

 

 
 
23,961

 
23,474

 

Construction real estate:
 
 

 
 

 
 

 
 
 

 
 

 
 

Commercial
 
2,923

 
1,460

 

 
 
3,662

 
2,226

 

Residential real estate:
 
 

 
 

 
 

 
 
 

 
 

 
 

Commercial
 
19,393

 
19,009

 

 
 
24,409

 
22,687

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
With an allowance recorded:
 
 

 
 

 
 

 
 
 

 
 

 
 

Commercial, financial and agricultural
 
14,735

 
12,868

 
4,761

 
 
810

 
659

 
152

Commercial real estate
 
5,357

 
4,837

 
320

 
 
1,014

 
1,000

 
309

Construction real estate:
 
 

 
 

 
 

 
 
 

 
 

 
 

Commercial
 

 

 

 
 

 

 

Residential real estate:
 
 

 
 

 
 

 
 
 

 
 

 
 

Commercial
 
289

 
289

 
13

 
 
427

 
415

 
87

Consumer
 
8

 
8

 
8

 
 

 

 

Total
 
$
83,496

 
$
73,609

 
$
5,102

 
 
$
95,358

 
$
70,426

 
$
548


Management’s general practice is to proactively charge down loans individually evaluated for impairment to the fair value of the underlying collateral. At September 30, 2017 and December 31, 2016, there were $7.5 million and $24.7 million, respectively, of partial charge-offs on loans individually evaluated for impairment with no related allowance recorded and $2.4 million and $0.2 million, respectively, of partial charge-offs on loans individually evaluated for impairment that also had a specific reserve allocated.

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Table of Contents

The allowance for loan losses included specific reserves related to loans individually evaluated for impairment at September 30, 2017 and December 31, 2016 of $5.1 million and $0.5 million, respectively. These loans with specific reserves had a recorded investment of $18.0 million and $2.1 million as of September 30, 2017 and December 31, 2016, respectively.
 
Interest income on nonaccrual loans individually evaluated for impairment is recognized on a cash basis only when Park expects to receive the entire recorded investment of the loan. Interest income on accruing TDRs individually evaluated for impairment continues to be recorded on an accrual basis. The following table presents the average recorded investment and interest income recognized subsequent to impairment on loans individually evaluated for impairment as of and for the three and nine months ended September 30, 2017 and September 30, 2016:

 
Three Months Ended
September 30, 2017
 
 
Three Months Ended
September 30, 2016
(In thousands)
Recorded Investment as of September 30, 2017
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
 
Recorded Investment as of September 30, 2016
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Commercial, financial and agricultural
$
29,848

 
$
28,412

 
$
398

 
 
$
23,856

 
$
26,679

 
$
194

Commercial real estate
22,995

 
22,241

 
192

 
 
26,065

 
27,982

 
243

Construction real estate:
 
 
 
 
 
 
 
 
 
 
 
 
   Commercial
1,460

 
1,554

 
18

 
 
4,377

 
5,643

 
16

Residential real estate:
 
 
 
 
 
 
 
 
 
 
 
 
   Commercial
19,298

 
20,365

 
46

 
 
23,700

 
24,422

 
314

Consumer
8

 
8

 

 
 

 
10

 

Total
$
73,609

 
$
72,580

 
$
654

 
 
$
77,998

 
$
84,736

 
$
767


 
Nine Months Ended
September 30, 2017
 
 
Nine Months Ended
September 30, 2016
(In thousands)
Recorded Investment as of September 30, 2017
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
 
Recorded Investment as of September 30, 2016
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Commercial, financial and agricultural
$
29,848

 
$
23,770

 
$
738

 
 
$
23,856

 
$
28,217

 
$
740

Commercial real estate
22,995

 
22,470

 
663

 
 
26,065

 
22,108

 
608

Construction real estate:
 
 
 
 
 
 
 
 
 
 
 
 
   Commercial
1,460

 
1,830

 
49

 
 
4,377

 
6,244

 
44

Residential real estate:
 
 
 
 
 
 
 
 
 
 
 
 
   Commercial
19,298

 
20,876

 
452

 
 
23,700

 
24,618

 
2,619

Consumer
8

 
7

 

 
 

 
4

 

Total
$
73,609

 
$
68,953

 
$
1,902

 
 
$
77,998

 
$
81,191

 
$
4,011




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Table of Contents

The following tables present the aging of the recorded investment in past due loans as of September 30, 2017 and December 31, 2016 by class of loan. 

 
September 30, 2017
(In thousands)
Accruing Loans
Past Due 30-89
Days
 
Past Due 
Nonaccrual
Loans and Loans Past
Due 90 Days or
More and 
Accruing (1)
 
Total Past Due
 
Total Current (2)
 
Total Recorded
Investment
Commercial, financial and agricultural
$
70

 
$
10,527

 
$
10,597

 
$
1,019,041

 
$
1,029,638

Commercial real estate
82

 
3,455

 
3,537

 
1,156,589

 
1,160,126

Construction real estate:
 

 
 

 
 

 
 

 
 

Commercial

 

 

 
139,672

 
139,672

Mortgage
213

 

 
213

 
47,525

 
47,738

Installment
11

 
48

 
59

 
4,161

 
4,220

Residential real estate:
 

 
 

 
 

 
 

 
 

Commercial

 
1,345

 
1,345

 
391,116

 
392,461

Mortgage
11,305

 
9,354

 
20,659

 
1,116,099

 
1,136,758

HELOC
400

 
917

 
1,317

 
206,244

 
207,561

Installment
349

 
261

 
610

 
18,575

 
19,185

Consumer
10,426

 
2,333

 
12,759

 
1,228,841

 
1,241,600

Leases

 

 

 
3,384

 
3,384

Total loans
$
22,856

 
$
28,240

 
$
51,096

 
$
5,331,247

 
$
5,382,343

(1) Includes $2.0 million of loans past due 90 days or more and accruing. The remaining are past due nonaccrual loans.
(2) Includes $64.4 million of nonaccrual loans which are current in regards to contractual principal and interest payments.

 
December 31, 2016
(in thousands)
Accruing Loans
Past Due 30-89
Days
 
Past Due 
Nonaccrual
Loans and Loans Past
Due 90 Days or
More and 
Accruing
(1)
 
Total Past Due
 
Total Current (2)
 
Total Recorded
Investment
Commercial, financial and agricultural
$
371

 
$
4,113

 
$
4,484

 
$
993,693

 
$
998,177

Commercial real estate
355

 
2,499

 
2,854

 
1,157,010

 
1,159,864

Construction real estate:
 

 
 

 
 
 
 

 
 

Commercial

 
541

 
541

 
135,200

 
135,741

Mortgage
559

 

 
559

 
48,246

 
48,805

Installment
223

 
64

 
287

 
4,633

 
4,920

Residential real estate:
 

 
 

 
 

 
 

 
 

Commercial
330

 
3,631

 
3,961

 
403,666

 
407,627

Mortgage
10,854

 
9,769

 
20,623

 
1,150,331

 
1,170,954

HELOC
970

 
1,020

 
1,990

 
211,304

 
213,294

Installment
350

 
319

 
669

 
19,272

 
19,941

Consumer
12,579

 
2,094

 
14,673

 
1,109,562

 
1,124,235

Leases

 

 

 
3,272

 
3,272

Total loans
$
26,591

 
$
24,050

 
$
50,641

 
$
5,236,189

 
$
5,286,830

(1) Includes $2.1 million of loans past due 90 days or more and accruing. The remaining are past due nonaccrual loans.
(2) Includes $65.9 million of nonaccrual loans which are current in regards to contractual principal and interest payments.


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Table of Contents

Credit Quality Indicators
 
Management utilizes past due information as a credit quality indicator across the loan portfolio. Past due information as of September 30, 2017 and December 31, 2016 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 commercial loans on a scale from 1 to 8. Credit grades are continuously monitored by the responsible 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 that are pass-rated (graded an 1 through a 4) 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 Park’s credit position at some future date. Commercial loans graded 6 (substandard), also considered to be 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 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 placed on nonaccrual status and 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, 2017 and December 31, 2016 for all commercial loans:
 
 
September 30, 2017
(In thousands)
5 Rated
 
6 Rated
 
Nonaccrual and Accruing Troubled Debt Restructurings
 
Pass-Rated
 
Recorded
Investment
Commercial, financial and agricultural *
$
2,981

 
$
395

 
$
29,878

 
$
996,384

 
$
1,029,638

Commercial real estate *
8,364

 

 
22,995

 
1,128,767

 
1,160,126

Construction real estate:
 

 
 

 
 

 
 

 
 

Commercial

 
114

 
1,460

 
138,098

 
139,672

Residential real estate:
 

 
 

 
 

 
 

 
 

Commercial
395

 
5

 
19,298

 
372,763

 
392,461

Leases

 

 

 
3,384

 
3,384

Total commercial loans
$
11,740

 
$
514

 
$
73,631

 
$
2,639,396

 
$
2,725,281

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


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Table of Contents

 
December 31, 2016
(In thousands)
5 Rated
 
6 Rated
 
Nonaccrual and Accruing Troubled Debt Restructurings
 
Pass-Rated
 
Recorded
Investment
Commercial, financial and agricultural *
$
5,826

 
$

 
$
20,657

 
$
971,694

 
$
998,177

Commercial real estate *
7,548

 
190

 
24,474

 
1,127,652

 
1,159,864

Construction real estate:
 

 
 

 
 

 
 

 
 

Commercial
287

 
118

 
2,226

 
133,110

 
135,741

Residential real estate:
 

 
 

 
 

 
 

 
 

Commercial
1,055

 
124

 
23,102

 
383,346

 
407,627

Leases

 

 

 
3,272

 
3,272

Total Commercial Loans
$
14,716

 
$
432

 
$
70,459

 
$
2,619,074

 
$
2,704,681

 * Included within each of commercial, financial and agricultural loans and commercial real estate 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 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. A court's discharge of a borrower's debt in a Chapter 7 bankruptcy is considered a concession when the borrower does not reaffirm the discharged debt.

Certain loans which were modified during the nine-month periods ended September 30, 2017 and September 30, 2016 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.
 
Quarterly, 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 did 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 if 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. There were no TDR classifications removed during the three-month or nine-month periods ended September 30, 2017. The TDR classification was removed on $335,000 of loans during the three-month period ended September 30, 2016 and on $2.0 million of loans during the nine-month period ended September 30, 2016.

At September 30, 2017 and December 31, 2016, there were $42.1 million and $46.9 million, respectively, of TDRs included in the nonaccrual loan totals. At September 30, 2017 and December 31, 2016, $35.6 million and $38.0 million, respectively, of these nonaccrual TDRs were performing in accordance with the terms of the restructured note. As of September 30, 2017 and December 31, 2016, loans with a recorded investment of $19.5 million and $18.2 million, respectively, were included in accruing TDR 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 September 30, 2017 and December 31, 2016, Park had commitments to lend $0.5 million and $0.7 million, respectively, of additional funds to borrowers whose outstanding loan terms had been modified in a TDR.
 

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Table of Contents

There were $0.8 million and $0.2 million of specific reserves related to TDRs at September 30, 2017 and December 31, 2016, respectively. Modifications made in 2016 and 2017 were largely the result of renewals and 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 Accounting Standards Codification (ASC) 310.  There were no specific reserves recorded during the three-month periods ended September 30, 2017 and September 30, 2016 as a result of TDRs identified in the respective period. Additional specific reserves of $290,000 and $975,000 were recorded during the nine-month periods ended September 30, 2017 and September 30, 2016, respectively, as a result of TDRs identified in the respective period.

The terms of certain other loans were modified during the three-month and nine-month periods ended September 30, 2017 and September 30, 2016 that did not meet the definition of a TDR. Substandard commercial loans modified during the three-month and nine-month periods ended September 30, 2017 which did not meet the definition of a TDR had a total recorded investment of $918,000 and $1.0 million, respectively. Substandard commercial loans with a recorded investment of $425,000 and $437,000 were modified during the three-month and nine-month periods ended September 30, 2016 and did not meet the definition of a TDR. The renewal/modification of these loans: (1) resulted in a delay in a payment that was considered to be insignificant, or (2) resulted in Park obtaining additional collateral or guarantees that improved the likelihood of the ultimate collection of the loans such that each modification was deemed to be at market terms. Consumer loans modified during the three-month and nine-month periods ended September 30, 2017 which did not meet the definition of a TDR had a total recorded investment of $3.1 million and $6.7 million, respectively. Consumer loans with a recorded investment of $1.3 million and $5.1 million were modified during the three-month and nine-month periods ended September 30, 2016 and did not meet the definition of a TDR. 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 and nine-month periods ended September 30, 2017 and September 30, 2016, as well as the recorded investment of these contracts at September 30, 2017 and September 30, 2016. 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
September 30, 2017
(In thousands)
Number of
Contracts
 
Accruing
 
Nonaccrual
 
Total
Recorded
Investment
Commercial, financial and agricultural
14

 
$
400

 
$
1,015

 
$
1,415

Commercial real estate
3

 
974

 
481

 
1,455

Construction real estate:
 
 
 
 
 
 
 
  Commercial

 

 

 

  Mortgage

 

 

 

  Installment

 

 

 

Residential real estate:
 
 
 
 
 
 
 
  Commercial
10

 
144

 
354

 
498

  Mortgage
5

 
211

 
206

 
417

  HELOC
4

 
123

 
45

 
168

  Installment
4

 
110

 
41

 
151

Consumer
99

 
99

 
735

 
834

Total loans
139

 
$
2,061

 
$
2,877

 
$
4,938


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Table of Contents

 
Three Months Ended
September 30, 2016
(In thousands)
Number of
Contracts
 
Accruing
 
Nonaccrual
 
Total
Recorded
Investment
Commercial, financial and agricultural
12

 
$
152

 
$
6,451

 
$
6,603

Commercial real estate
6

 

 
1,777

 
1,777

Construction real estate:
 
 
 
 
 
 
 
  Commercial
1

 

 
947

 
947

  Mortgage

 

 

 

  Installment

 

 

 

Residential real estate:
 
 
 
 
 
 
 
  Commercial
4

 

 
225

 
225

  Mortgage
14

 

 
1,173

 
1,173

  HELOC
2

 

 
91

 
91

  Installment
2

 
33

 
4

 
37

Consumer
74

 
61

 
1,508

 
1,569

Total loans
115

 
$
246

 
$
12,176

 
$
12,422


Of those loans which were modified and determined to be a TDR during the three-month period ended September 30, 2017, $0.5 million were on nonaccrual status as of December 31, 2016. Of those loans which were modified and determined to be a TDR during the three-month period ended September 30, 2016, $7.6 million were on nonaccrual status as of December 31, 2015.

 
Nine Months Ended
September 30, 2017
(In thousands)
Number of
Contracts
 
Accruing
 
Nonaccrual
 
Total
Recorded
Investment
Commercial, financial and agricultural
25

 
$
400

 
$
3,769

 
$
4,169

Commercial real estate
9

 
1,525

 
795

 
2,320

Construction real estate:
 
 
 
 
 
 
 
  Commercial

 

 

 

  Mortgage
1

 

 
8

 
8

  Installment

 

 

 

Residential real estate:
 
 
 
 
 
 
 
  Commercial
15

 
144

 
558

 
702

  Mortgage
24

 
746

 
923

 
1,669

  HELOC
16

 
478

 
51

 
529

  Installment
7

 
175

 
41

 
216

Consumer
228

 
140

 
1,012

 
1,152

Total loans
325

 
$
3,608

 
$
7,157

 
$
10,765



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Table of Contents

 
Nine Months Ended
September 30, 2016
(In thousands)
Number of
Contracts
 
Accruing
 
Nonaccrual
 
Total
Recorded
Investment
Commercial, financial and agricultural
29

 
$
102

 
$
7,242

 
$
7,344

Commercial real estate
10

 
2,812

 
2,306

 
5,118

Construction real estate:
 
 
 
 
 
 
 
  Commercial
2

 

 
1,144

 
1,144

  Mortgage

 

 

 

  Installment
1

 

 
9

 
9

Residential real estate:
 
 
 
 
 
 
 
  Commercial
7

 

 
918

 
918

  Mortgage
23

 
96

 
1,713

 
1,809

  HELOC
10

 
17

 
184

 
201

  Installment
4

 
72

 
7

 
79

Consumer
223

 
115

 
2,042

 
2,157

Total loans
309

 
$
3,214

 
$
15,565

 
$
18,779


Of those loans which were modified and determined to be a TDR during the nine-month period ended September 30, 2017, $3.0 million were on nonaccrual status as of December 31, 2016. Of those loans which were modified and determined to be a TDR during the nine-month period ended September 30, 2016, $8.5 million were on nonaccrual status as of December 31, 2015.

The following tables present 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 and nine-month periods ended September 30, 2017 and September 30, 2016, respectively. For these tables, 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
September 30, 2017
 
 
Three Months Ended
September 30, 2016
 
(In thousands)
Number of
Contracts
 
Recorded
Investment
 
 
Number of
Contracts
 
Recorded
Investment
 
Commercial, financial and agricultural
1

 
$
20

 
 
5

 
$
129

 
Commercial real estate
1

 
72

 
 
4

 
808

 
Construction real estate:
 

 
 

 
 
 
 
 
 
Commercial

 

 
 

 

 
Mortgage

 

 
 

 

 
Installment

 

 
 

 

 
Residential real estate:
 

 
 

 
 
 
 
 
 
Commercial
1

 
17

 
 
3

 
679

 
Mortgage
6

 
427

 
 
13

 
1,687

 
HELOC
2

 
27

 
 

 

 
Installment

 

 
 
2

 
7

 
Consumer
33

 
262

 
 
53

 
559

 
Leases

 

 
 

 

 
Total loans
44

 
$
825

 
 
80

 
$
3,869

 

Of the $0.8 million in modified TDRs which defaulted during the three months ended September 30, 2017, there were no accruing loans. Of the $3.9 million in modified TDRs which defaulted during the three months ended September 30, 2016, $14,000 were accruing loans and $3.9 million were nonaccrual loans.


22

Table of Contents

 
Nine Months Ended
September 30, 2017
 
 
Nine Months Ended
September 30, 2016
 
(In thousands)
Number of
Contracts
 
Recorded
Investment
 
 
Number of
Contracts
 
Recorded
Investment
 
Commercial, financial and agricultural
1

 
$
20

 
 
5

 
$
129

 
Commercial real estate
2

 
248

 
 
4

 
808

 
Construction real estate:
 
 
 
 
 
 
 
 
 
Commercial

 

 
 

 

 
Mortgage

 

 
 

 

 
Installment

 

 
 

 

 
Residential real estate:
 
 
 
 
 
 
 
 
 
Commercial
1

 
17

 
 
4

 
709

 
Mortgage
6

 
426

 
 
13

 
1,687

 
HELOC
3

 
32

 
 

 

 
Installment

 

 
 
2

 
7

 
Consumer
45

 
345

 
 
60

 
611

 
Leases

 

 
 

 

 
Total loans
58

 
$
1,088

 
 
88

 
$
3,951

 

Of the $1.1 million in modified TDRs which defaulted during the nine months ended September 30, 2017, $2,000 were accruing loans and $1.1 million were nonaccrual loans. Of the $4.0 million in modified TDRs which defaulted during the nine months ended September 30, 2016, $14,000 were accruing loans and $3.9 million were nonaccrual loans.

Note 4 – Allowance for Loan Losses
 
The allowance for loan losses ("ALLL") 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 2016 Annual Report.

Loss factors are reviewed quarterly and updated at least annually to reflect recent loan loss history and incorporate current risk and trends which may not be recognized in historical data. The historical loss factors were last updated in the fourth quarter of 2016 to incorporate losses through December 31, 2016.
The activity in the allowance for loan losses for the three-month and nine-month periods ended September 30, 2017 and September 30, 2016 is summarized in the following tables.
 
 
Three Months Ended
September 30, 2017
(In thousands)
Commercial,
financial and
agricultural
 
Commercial
real estate
 
Construction
real estate
 
Residential
real estate
 
Consumer
 
Leases
 
Total
Allowance for loan losses:
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
16,746

 
$
10,451

 
$
4,677

 
$
10,319

 
$
11,629

 
$

 
$
53,822

Charge-offs
626

 
628

 
78

 
217

 
2,828

 

 
4,377

Recoveries
115

 
13

 
303

 
1,061

 
1,011

 
1

 
2,504

Net charge-offs/(recoveries)
511

 
615

 
(225
)
 
(844
)
 
1,817

 
(1
)
 
1,873

Provision/(recovery)
1,742

 
336

 
499

 
(1,078
)
 
1,785

 
(1
)
 
3,283

Ending balance
$
17,977

 
$
10,172

 
$
5,401

 
$
10,085

 
$
11,597

 
$

 
$
55,232

 

23

Table of Contents

 
Three Months Ended
September 30, 2016
(In thousands)
Commercial,
financial and
agricultural
 
Commercial
real estate
 
Construction
real estate
 
Residential
real estate
 
Consumer
 
Leases
 
Total
Allowance for loan losses:
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
16,478

 
$
9,203

 
$
8,256

 
$
13,180

 
$
11,581

 
$
1

 
$
58,699

Charge-offs
457

 
4

 
1,300

 
293

 
2,086

 

 
4,140

Recoveries
246

 
973

 
3,659

 
348

 
1,142

 
1

 
6,369

Net charge-offs/(recoveries)
211

 
(969
)
 
(2,359
)
 
(55
)
 
944

 
(1
)
 
(2,229
)
Provision/(recovery)
3

 
401

 
(5,257
)
 
(1,907
)
 
(604
)
 
(2
)
 
(7,366
)
Ending balance
$
16,270

 
$
10,573

 
$
5,358

 
$
11,328

 
$
10,033

 
$

 
$
53,562


 
Nine Months Ended
September 30, 2017
(In thousands)
Commercial,
financial and
agricultural
 
Commercial
real estate
 
Construction
real estate
 
Residential
real estate
 
Consumer
 
Leases
 
Total
Allowance for loan losses:
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
13,434

 
$
10,432

 
$
5,247

 
$
10,958

 
$
10,553

 
$

 
$
50,624

Charge-offs
1,283

 
1,050

 
105

 
987

 
7,706

 

 
11,131

Recoveries
647

 
368

 
686

 
1,688

 
3,609

 
1

 
6,999

Net charge-offs/(recoveries)
636

 
682

 
(581
)
 
(701
)
 
4,097

 
(1
)
 
4,132

Provision/(recovery)
5,179

 
422

 
(427
)
 
(1,574
)
 
5,141

 
(1
)
 
8,740

Ending balance
$
17,977

 
$
10,172

 
$
5,401

 
$
10,085

 
$
11,597

 
$

 
$
55,232

 
 
Nine Months Ended
September 30, 2016
(In thousands)
Commercial,
financial and
agricultural
 
Commercial
real estate
 
Construction
real estate
 
Residential
real estate
 
Consumer
 
Leases
 
Total
Allowance for loan losses:
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
13,694

 
$
9,197

 
$
8,564

 
$
13,514

 
$
11,524

 
$
1

 
$
56,494

Charge-offs
1,601

 
82

 
1,318

 
1,776

 
7,183

 

 
11,960

Recoveries
889

 
3,005

 
4,708

 
1,226

 
3,017

 
2

 
12,847

Net charge-offs/(recoveries)
712

 
(2,923
)
 
(3,390
)
 
550

 
4,166

 
(2
)
 
(887
)
Provision/(recovery)
3,288

 
(1,547
)
 
(6,596
)
 
(1,636
)
 
2,675

 
(3
)
 
(3,819
)
Ending balance
$
16,270

 
$
10,573

 
$
5,358

 
$
11,328

 
$
10,033

 
$

 
$
53,562


Loans collectively evaluated for impairment in the following tables include all performing loans at September 30, 2017 and December 31, 2016, 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 September 30, 2017 and December 31, 2016, 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 2016 Annual Report).


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Table of Contents

The composition of the allowance for loan losses at September 30, 2017 and December 31, 2016 was as follows:
 
 
September 30, 2017
(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
$
4,761

 
$
320

 
$

 
$
13

 
$
8

 
$

 
$
5,102

Collectively evaluated for impairment
13,216

 
9,852

 
5,401

 
10,072

 
11,589

 

 
50,130

Total ending allowance balance
$
17,977

 
$
10,172

 
$
5,401

 
$
10,085

 
$
11,597

 
$

 
$
55,232

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan balance:
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans individually evaluated for impairment
$
29,844

 
$
22,943

 
$
1,458

 
$
19,297

 
$
8

 
$

 
$
73,550

Loans collectively evaluated for impairment
995,213

 
1,132,719

 
189,590

 
1,733,290

 
1,238,183

 
3,332

 
5,292,327

Total ending loan balance
$
1,025,057

 
$
1,155,662

 
$
191,048

 
$
1,752,587

 
$
1,238,191

 
$
3,332

 
$
5,365,877

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses as a percentage of loan balance:
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans individually evaluated for impairment
15.95
%
 
1.39
%
 
%
 
0.07
%
 
%
 
%
 
6.94
%
Loans collectively evaluated for impairment
1.33
%
 
0.87
%
 
2.85
%
 
0.58
%
 
0.94
%
 
%
 
0.95
%
Total
1.75
%
 
0.88
%
 
2.83
%
 
0.58
%
 
0.94
%
 
%
 
1.03
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment:
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans individually evaluated for impairment
$
29,848

 
$
22,995

 
$
1,460

 
$
19,298

 
$
8

 
$

 
$
73,609

Loans collectively evaluated for impairment
999,790

 
1,137,131

 
190,170

 
1,736,667

 
1,241,592

 
3,384

 
5,308,734

Total ending recorded investment
$
1,029,638

 
$
1,160,126

 
$
191,630

 
$
1,755,965

 
$
1,241,600

 
$
3,384

 
$
5,382,343

 

25

Table of Contents

 
 
December 31, 2016
(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
 
$
152

 
$
309

 
$

 
$
87

 
$

 
$

 
$
548

Collectively evaluated for impairment
 
13,282

 
10,123

 
5,247

 
10,871

 
10,553

 

 
50,076

Total ending allowance balance
 
$
13,434

 
$
10,432

 
$
5,247

 
$
10,958

 
$
10,553

 
$

 
$
50,624

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan balance:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans individually evaluated for impairment
 
$
20,622

 
$
24,465

 
$
2,226

 
$
23,102

 
$

 
$

 
$
70,415

Loans collectively evaluated for impairment
 
973,997

 
1,131,238

 
186,719

 
1,785,395

 
1,120,850

 
3,243

 
5,201,442

Total ending loan balance
 
$
994,619

 
$
1,155,703

 
$
188,945

 
$
1,808,497

 
$
1,120,850

 
$
3,243

 
$
5,271,857

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses as a percentage of loan balance:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans individually evaluated for impairment
 
0.74
%
 
1.26
%
 
%
 
0.38
%
 
%
 
%
 
0.78
%
Loans collectively evaluated for impairment
 
1.36
%
 
0.89
%
 
2.81
%
 
0.61
%
 
0.94
%
 
%
 
0.96
%
Total
 
1.35
%
 
0.90
%
 
2.78
%
 
0.61
%
 
0.94
%
 
%
 
0.96
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans individually evaluated for impairment
 
$
20,624

 
$
24,474

 
$
2,226

 
$
23,102

 
$

 
$

 
$
70,426

Loans collectively evaluated for impairment
 
977,553

 
1,135,390

 
187,240

 
1,788,714

 
1,124,235

 
3,272

 
5,216,404

Total ending recorded investment
 
$
998,177

 
$
1,159,864

 
$
189,466

 
$
1,811,816

 
$
1,124,235

 
$
3,272

 
$
5,286,830

 
Note 5 – Other Real Estate Owned ("OREO")
 
Park typically transfers a loan to OREO at the time that Park takes deed/title to the asset. The carrying amounts of foreclosed properties held at September 30, 2017 and December 31, 2016 are listed below, as well as the recorded investment of loans secured by residential real estate properties for which formal foreclosure proceedings were in process at those dates.

(in thousands)
 
September 30, 2017
 
December 31, 2016
OREO:
 
 
 
 
Commercial real estate
 
$
8,049

 
$
7,642

Construction real estate
 
4,861

 
4,624

Residential real estate
 
1,456

 
1,660

Total OREO
 
$
14,366

 
$
13,926

 
 
 
 
 
Loans in process of foreclosure:
 
 
 
 
Residential real estate
 
$
3,288

 
$
3,250




26

Table of Contents

Note 6 – Earnings Per Common Share
 
The following table sets forth the computation of basic and diluted earnings per common share for the three and nine months ended September 30, 2017 and 2016.
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In thousands, except share and per common share data)
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 

 
 

 
 
 
 
Net income
 
$
22,112

 
$
27,449

 
$
61,411

 
$
66,133

Denominator:
 
 

 
 

 
 
 
 
Weighted-average common shares outstanding
 
15,287,974

 
15,330,791

 
15,299,039

 
15,330,802

Effect of dilutive performance-based restricted stock units
 
63,616

 
68,916

 
95,160

 
71,023

Weighted-average common shares outstanding adjusted for the effect of dilutive performance-based restricted stock units
 
15,351,590

 
15,399,707

 
15,394,199

 
15,401,825

Earnings per common share:
 
 

 
 

 
 

 
 

Basic earnings per common share
 
$
1.45

 
$
1.79

 
$
4.01

 
$
4.31

Diluted earnings per common share
 
$
1.44

 
$
1.78

 
$
3.99

 
$
4.29


Park awarded 45,788 and 41,550 performance-based restricted stock units ("PBRSUs") to certain employees during the nine months ended September 30, 2017 and 2016, respectively. No PBRSUs were awarded during the three months ended September 30, 2017 and 2016. As of September 30, 2017, 119,587 PBRSUs were outstanding. The PBRSUs vest based on service and performance conditions. The dilutive effect of the outstanding PBRSUs was the addition of 63,616 and 68,916 common shares for the three months ended September 30, 2017 and 2016, respectively, and 95,160 and 71,023 common shares for the nine months ended September 30, 2017 and 2016, respectively.

Park repurchased 20,000 and 70,000 common shares during the three months and nine months ended September 30, 2017, respectively, to fund the PBRSUs and common shares awarded to directors of Park and to directors of Park's subsidiary PNB (and its divisions). Park did not repurchase any common shares during the three or nine months ended September 30, 2016.

Note 7 – Segment Information
 
The Corporation is a financial holding company headquartered in Newark, Ohio. The operating segments for the Corporation are its chartered national bank subsidiary, The Park National Bank (headquartered in Newark, Ohio) (“PNB”), SE Property Holdings, LLC (“SEPH”), and Guardian Financial Services Company (“GFSC”).
 
Management is required to disclose information about the different types of business activities in which a company engages and also information on the different economic environments in which a company operates, so that the users of the financial statements can better understand the company’s performance, better understand the potential for future cash flows, and make more informed judgments about the company as a whole. Park has three operating segments, as: (i) discrete financial information is available for each operating segment and (ii) the segments are aligned with internal reporting to Park’s Chief Executive Officer and President, who is the chief operating decision maker.


27

Table of Contents

 
 
Operating Results for the three months ended September 30, 2017
(In thousands)
 
PNB
 
GFSC
 
SEPH
 
All Other
 
Total
Net interest income
 
$
59,415

 
$
1,455

 
$
401

 
$
280

 
$
61,551

Provision for (recovery of) loan losses
 
3,820

 
609

 
(1,146
)
 

 
3,283

Other income
 
20,367

 
18

 
411

 
1,293

 
22,089

Other expense
 
45,987

 
734

 
996

 
2,094

 
49,811

Income (loss) before income taxes
 
$
29,975

 
$
130

 
$
962

 
$
(521
)
 
$
30,546

Federal income tax expense (benefit)
 
8,678

 
46

 
336

 
(626
)
 
8,434

Net income
 
$
21,297

 
$
84

 
$
626

 
$
105

 
$
22,112

 
 
 
 
 
 
 
 
 
 
 
Assets (as of September 30, 2017)
 
$
7,788,248

 
$
33,260

 
$
25,377

 
$
15,810

 
$
7,862,695

 
 
 
Operating Results for the three months ended September 30, 2016
(In thousands)
 
PNB
 
GFSC
 
SEPH
 
All Other
 
Total
Net interest income
 
$
57,033

 
$
1,472

 
$
8

 
$
20

 
$
58,533

Recovery of loan losses
 
(3,345
)
 
(313
)
 
(3,708
)
 

 
(7,366
)
Other income (loss)
 
19,279

 
(1
)
 
1,126

 
131

 
20,535

Other expense
 
42,327

 
800

 
1,789

 
1,840

 
46,756

Income (loss) before income taxes
 
$
37,330

 
$
984

 
$
3,053

 
$
(1,689
)
 
$
39,678

Federal income tax expense (benefit)
 
11,839

 
344

 
1,070

 
(1,024
)
 
12,229

Net income (loss)
 
$
25,491

 
$
640

 
$
1,983

 
$
(665
)
 
$
27,449

 
 
 
 
 
 
 
 
 
 
 
Assets (as of September 30, 2016)
 
$
7,287,923

 
$
32,759

 
$
36,938

 
$
6,472

 
$
7,364,092


 
 
Operating Results for the nine months ended September 30, 2017
(In thousands)
 
PNB
 
GFSC
 
SEPH
 
All Other
 
Total
Net interest income
 
$
174,717

 
$
4,424

 
$
884

 
$
256

 
$
180,281

Provision for (recovery of) loan losses
 
9,114

 
1,419

 
(1,793
)
 

 
8,740

Other income
 
57,257

 
10

 
390

 
1,190

 
58,847

Other expense
 
133,667

 
2,295

 
3,010

 
6,407

 
145,379

Income (loss) before income taxes
 
$
89,193

 
$
720

 
$
57

 
$
(4,961
)
 
$
85,009

Federal income tax expense (benefit)
 
26,247

 
252

 
20

 
(2,921
)
 
23,598

Net income (loss)
 
$
62,946

 
$
468

 
$
37

 
$
(2,040
)
 
$
61,411

 
 
 
Operating Results for the nine months ended September 30, 2016
(In thousands)
 
PNB
 
GFSC
 
SEPH
 
All Other
 
Total
Net interest income (expense)
 
$
170,194

 
$
4,416

 
$
1,240

 
$
(13
)
 
$
175,837

(Recovery of) provision for loan losses
 
(450
)
 
1,658

 
(5,027
)
 

 
(3,819
)
Other income (loss)
 
55,010

 
(1
)
 
1,272

 
379

 
56,660

Other expense
 
126,418

 
3,632

 
4,525

 
7,386

 
141,961

Income (loss) before income taxes
 
$
99,236

 
$
(875
)
 
$
3,014

 
$
(7,020
)
 
$
94,355

Federal income tax expense (benefit)
 
30,923

 
(305
)
 
1,056

 
(3,452
)
 
28,222

Net income (loss)
 
$
68,313

 
$
(570
)
 
$
1,958

 
$
(3,568
)
 
$
66,133


The operating results of the Parent Company in the “All Other” column are used to reconcile the segment totals to the consolidated condensed statements of income for the three-month and nine-month periods ended September 30, 2017 and 2016. The reconciling amounts for consolidated total assets for the periods ended September 30, 2017 and 2016 consisted of the elimination of intersegment borrowings and the assets of the Parent Company which were not eliminated.


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Table of Contents

Note 8 – Loans Held For Sale
 
Mortgage loans held for sale are carried at their fair value. At September 30, 2017 and December 31, 2016, respectively, Park had approximately $11.4 million and $10.4 million in mortgage loans held for sale. These amounts are included in loans on the consolidated condensed balance sheets and in the residential real estate loan segments in Note 3 and Note 4. The contractual balance was $11.2 million and $10.3 million at September 30, 2017 and December 31, 2016, respectively. The gain expected upon sale was $153,000 and $131,000 at September 30, 2017 and December 31, 2016, respectively. None of these loans were 90 days or more past due or on nonaccrual status as of September 30, 2017 or December 31, 2016.

Note 9 – Investment Securities
 
The amortized cost and fair value of investment securities are shown in the following tables. Management performs a quarterly evaluation of investment securities for any other-than-temporary impairment. For the three-month and nine-month periods ended September 30, 2017 and 2016, there were no investment securities deemed to be other-than-temporarily impaired.
 
Investment securities at September 30, 2017, were as follows:
 
Securities Available-for-Sale (In thousands)
 
Amortized
Cost
 
Gross
Unrealized
Holding 
Gains
 
Gross
Unrealized
Holding 
Losses
 
Estimated 
Fair Value
Obligations of U.S. Treasury and other U.S. Government sponsored entities
 
$
270,000

 
$

 
$
1,159

 
$
268,841

U.S. Government sponsored entities' asset-backed securities
 
892,784

 
6,329

 
5,408

 
893,705

Other equity securities
 
1,109

 
2,907

 

 
4,016

Total
 
$
1,163,893

 
$
9,236

 
$
6,567

 
$
1,166,562

 
Securities Held-to-Maturity (In thousands)
 
Amortized
Cost
 
Gross
Unrecognized
Holding 
Gains
 
Gross
Unrecognized
Holding 
Losses
 
Estimated
Fair Value
U.S. Government sponsored entities' asset-backed securities
 
$
58,947

 
$
1,003

 
$
15

 
$
59,935

Obligations of states and political subdivisions
 
283,718

 
5,080

 
$
1,623

 
287,175

Total
 
$
342,665

 
$
6,083

 
$
1,638

 
$
347,110

 

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Table of Contents

Investment securities with unrealized/unrecognized losses at September 30, 2017, were as follows:
 
 
 
Unrealized/unrecognized loss position for less than 12 months
 
Unrealized/unrecognized loss position for 12 months or longer
 
Total
(In thousands)
 
Fair value
 
Unrealized/unrecognized
losses
 
Fair value
 
Unrealized/unrecognized
losses
 
Fair
value
 
Unrealized/unrecognized
losses
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of U.S. Treasury and other U.S. Government sponsored entities
 
$
24,967

 
$
33

 
$
243,874

 
$
1,126

 
$
268,841

 
$
1,159

U.S. Government sponsored entities' asset-backed securities
 
519,984

 
4,815

 
$
63,505

 
593

 
$
583,489

 
5,408

Total
 
$
544,951

 
$
4,848

 
$
307,379

 
$
1,719

 
$
852,330

 
$
6,567

Securities Held-to-Maturity
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Government sponsored entities' asset-backed securities
 
$

 
$

 
$
7,423

 
$
15

 
$
7,423

 
$
15

Obligations of states and political subdivisions
 
97,120

 
$
1,247

 
12,983

 
376

 
$
110,103

 
1,623

Total
 
$
97,120

 
$
1,247

 
$
20,406

 
$
391

 
$
117,526

 
$
1,638

 
Investment securities at December 31, 2016, were as follows:
 
Securities Available-for-Sale (In thousands)
 
Amortized
Cost
 
Gross
Unrealized
Holding 
Gains
 
Gross
Unrealized
Holding 
Losses
 
Estimated 
Fair Value
Obligations of U.S. Treasury and other U.S. Government sponsored entities
 
$
270,000

 
$

 
$
2,467

 
$
267,533

U.S. Government sponsored entities' asset-backed securities
 
991,642

 
5,372

 
9,842

 
987,172

Other equity securities
 
1,119

 
2,315

 

 
3,434

Total
 
$
1,262,761

 
$
7,687

 
$
12,309

 
$
1,258,139

 
Securities Held-to-Maturity (In thousands)
 
Amortized
Cost
 
Gross
Unrecognized
Holding 
Gains
 
Gross
Unrecognized
Holding 
Losses
 
Estimated
Fair Value
Obligations of states and political subdivision
 
$
188,622

 
$
977

 
$
5,148

 
$
184,451

U.S. Government sponsored entities' asset-backed securities
 
71,211

 
1,097

 
87

 
72,221

Total
 
$
259,833

 
$
2,074

 
$
5,235

 
$
256,672

 

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Table of Contents

Investment securities with unrealized/unrecognized losses at December 31, 2016, were as follows:
 
 
 
Unrealized/unrecognized loss position for less than 12 months
 
Unrealized/unrecognized loss position for 12 months or longer
 
Total
(In thousands)
 
Fair value
 
Unrealized/unrecognized
losses
 
Fair value
 
Unrealized/unrecognized
losses
 
Fair
value
 
Unrealized/unrecognized
losses
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of U.S. Treasury and other U.S. Government sponsored entities
 
$
247,695

 
$
2,305

 
$
19,838

 
$
162

 
$
267,533

 
$
2,467

U.S. Government sponsored entities' asset-backed securities
 
612,321

 
9,473

 
27,325

 
369

 
639,646

 
9,842

Total
 
$
860,016

 
$
11,778

 
$
47,163

 
$
531

 
$
907,179

 
$
12,309

Securities Held-to-Maturity
 
 

 
 

 
 

 
 

 
 

 
 

Obligations of states and political subdivision
 
$
134,909

 
$
5,148

 
$

 
$

 
$
134,909

 
$
5,148

U.S. Government sponsored entities' asset-backed securities
 

 

 
7,564

 
87

 
7,564

 
87

Total
 
$
134,909

 
$
5,148

 
$
7,564

 
$
87

 
$
142,473

 
$
5,235

 
Management does not believe any of the unrealized/unrecognized losses at September 30, 2017 or December 31, 2016 represented other-than-temporary impairment. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized within net income in the period the other-than-temporary impairment is identified.

Park’s U.S. Government sponsored entities' asset-backed securities consist of 15-year residential mortgage-backed securities and collateralized mortgage obligations.
 

31

Table of Contents

The amortized cost and estimated fair value of investments in debt securities at September 30, 2017, are shown in the following table by contractual maturity, except for asset-backed securities, which are shown as a single total, due to the unpredictability of the timing of principal repayments. 
Securities Available-for-Sale (In thousands)
 
Amortized
cost
 
Fair value
 
Tax equivalent yield
Obligations of U.S. Treasury and other U.S. Government sponsored entities' obligations:
 
 

 
 

 
 
Due less than one year
 
$
75,000

 
$
74,930

 
1.02
%
Due one through five years
 
195,000

 
193,911

 
1.25
%
Total
 
$
270,000

 
$
268,841

 
1.18
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored entities' asset-backed securities
 
$
892,784

 
$
893,705

 
2.09
%
Securities Held-to-Maturity (In thousands)
 
Amortized
cost
 
Fair value
 
Tax equivalent yield (1)
Obligations of state and political subdivisions:
 
 
 
 
 
 
Due over ten years
 
$
283,718

 
$
287,175

 
4.47
%
Total (1)
 
$
283,718

 
$
287,175

 
4.47
%
 
 
 
 
 
 
 
U.S. Government sponsored entities' asset-backed securities
 
$
58,947

 
$
59,935

 
3.20
%
(1) The tax equivalent yield for obligations of state and political subdivisions includes the effects of a taxable equivalent adjustment using a 35% rate. The aggregate taxable equivalent adjustment was $2.7 million for the nine months ended September 30, 2017.
 
All of Park’s securities shown in the table above as obligations of U.S. Treasury and other U.S. Government sponsored entities' obligations are callable notes. These callable notes have final maturities of 0.1 years to 2.7 years. Of the $268.8 million reported at September 30, 2017, none were expected to be called. The remaining average life of the entire investment portfolio is estimated to be 4.3 years.

There were no sales of investment securities during the three-month or nine-month periods ended September 30, 2017 or 2016.

Investment securities having an amortized cost of $933 million and $937 million at September 30, 2017 and December 31, 2016, respectively, were pledged to collateralize government and trust department deposits in accordance with federal and state requirements, to secure repurchase agreements sold and as collateral for FHLB advance borrowings.

Note 10 – Other Investment Securities
 
Other investment securities consist of stock investments in the Federal Home Loan Bank ("FHLB"), the Federal Reserve Bank ("FRB") and other equities carried at cost. The FHLB and FRB restricted stock investments are carried at their redemption value.
 
 
 
September 30,
2017
 
December 31, 2016
(In thousands)
 
 
FHLB stock
 
$
50,086

 
$
50,086

FRB stock
 
8,225

 
8,225

Other equity investments carried at cost
 
3,500

 
3,500

Total other investment securities
 
$
61,811

 
$
61,811



32

Table of Contents

Note 11 - Share-Based Compensation

The Park National Corporation 2013 Long-Term Incentive Plan (the "2013 Incentive Plan") was adopted by the Board of Directors of Park on January 28, 2013 and was approved by Park's shareholders at the Annual Meeting of Shareholders on April 22, 2013. The 2013 Incentive Plan made equity-based awards and cash-based awards available for grant to participants in the form of incentive stock options, nonqualified stock options, stock appreciation rights (“SARs”), restricted common shares (“Restricted Stock”), restricted stock unit awards that may be settled in common shares, cash or a combination of the two (“Restricted Stock Units”), unrestricted common shares (“Other Stock-Based Awards”) and cash-based awards. Under the 2013 Incentive Plan, 600,000 common shares were authorized to be delivered in connection with grants under the 2013 Incentive Plan. The common shares to be delivered under the 2013 Incentive Plan are to consist of either common shares currently held or common shares subsequently acquired by Park as treasury shares, including common shares purchased in the open market or in private transactions. As of September 30, 2017, there were 119,587 common shares subject to performance-based restricted stock units (“PBRSUs”) issued under the 2013 Incentive Plan.

The Park National Corporation 2017 Long-Term Incentive Plan for Employees (the "2017 Employees LTIP") was adopted by the Board of Directors of Park on January 23, 2017 and was approved by Park's shareholders at the Annual Meeting of Shareholders on April 24, 2017. The 2017 Employees LTIP makes equity-based awards and cash-based awards available for grant to participants in the form of incentive stock options, nonqualified stock options, SARs, Restricted Stock, Restricted Stock Units, Other Stock-Based Awards and cash-based awards. Under the 2017 Employees LTIP, 750,000 common shares are authorized to be delivered in connection with grants under the 2017 Employees LTIP. The common shares to be delivered under the 2017 Employees LTIP are to consist of either common shares currently held or common shares subsequently acquired by Park as treasury shares, including common shares purchased in the open market or in private transactions. At September 30, 2017, 750,000 common shares were available for future grants under the 2017 Employee LTIP.

The Park National Corporation 2017 Long-Term Incentive Plan for Non-Employee Directors (the "2017 Non-Employee Directors LTIP") was adopted by the Board of Directors of Park on January 23, 2017 and was approved by Park's shareholders at the Annual Meeting of Shareholders on April 24, 2017. The 2017 Non-Employee Directors LTIP makes equity-based awards and cash-based awards available for grant to participants in the form of nonqualified stock options, SARs, Restricted Stock, Restricted Stock Units, Other Stock-Based Awards, and cash-based awards. Under the 2017 Non-Employee Directors LTIP, 150,000 common shares are authorized to be delivered in connection with grants under the 2017 Non-Employee Directors LTIP. The common shares to be delivered under the 2017 Non-Employee Directors LTIP are to consist of either common shares currently held or common shares subsequently acquired by Park as treasury shares, including common shares purchased in the open market or in private transactions. At September 30, 2017, 150,000 common shares were available for future grants under the 2017 Non-Employee Director LTIP.

The 2017 Employees LTIP and the 2017 Non-Employee Directors LTIP have replaced the provisions of the 2013 Incentive Plan with respect to the grant of future awards. As a result of the approval of the 2017 Employees LTIP and the 2017 Non-Employee Directors LTIP, Park will not grant any additional awards under the 2013 Incentive Plan after April 24, 2017. Awards made under the 2013 Incentive Plan prior to April 24, 2017 will remain in effect in accordance with their respective terms.

During the nine months ended September 30, 2017 and 2016, the Compensation Committee of the Board of Directors of Park granted awards of PBRSUs, under the 2013 Incentive Plan, covering an aggregate of 45,788 and 41,550 common shares, respectively, to certain employees of Park and its subsidiaries. No PBRSUs were granted during the three months ended September 30, 2017 and 2016. The number of PBRSUs earned or settled will depend on the level of achievement with respect to certain performance criteria and are also subject to subsequent service-based vesting.


33

Table of Contents

A summary of changes in the common shares subject to nonvested PBRSUs for the nine months ended September 30, 2017 follows:

 
Common shares subject to PBRSUs
Nonvested at January 1, 2017
85,425

Granted
45,788

Vested
9,674

Forfeited
150

Adjustment for performance conditions of PBRSUs (1)
(1,802
)
Nonvested at September 30, 2017
119,587

(1) The number of PBRSUs earned depends on the level of achievement with respect to certain performance criteria. Adjustment herein represents the difference between the maximum number of common shares which could be earned and the actual number earned for those PBRSUs as to which the performance period was completed.

On March 31, 2017, 9,674 PBRSUs granted in 2014 vested. A total of 3,293 common shares were withheld to pay employee income taxes. This resulted in a net amount of 6,381 common shares being issued to employees of Park.

Share-based compensation expense of $727,000 and $398,000 was recognized for the three-month periods ended September 30, 2017 and 2016, respectively, and $2.1 million and $1.2 million for the nine-month periods ended September 30, 2017 and 2016, respectively.

The following table details expected additional share-based compensation expense related to PBRSUs currently outstanding:

(In thousands)
 
 
Three months ending December 31, 2017
 
$
711

2018
 
2,509

2019
 
1,867

2020
 
845

2021
 
141

Total
 
$
6,073


Note 12 – Pension Plan
 
Park has a noncontributory defined benefit pension plan covering substantially all of its employees. The plan provides benefits based on an employee’s years of service and compensation.
 
There were no pension plan contributions for the three-month or nine-month periods ended September 30, 2017 and 2016.
 
The following table shows the components of net periodic benefit income:

 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In thousands)
 
2017
 
2016
 
2017
 
2016
Service cost
 
$
1,317

 
$
1,264

 
$
3,951

 
$
3,792

Interest cost
 
1,271

 
1,217

 
3,813

 
3,651

Expected return on plan assets
 
(2,863
)
 
(2,737
)
 
(8,589
)
 
(8,211
)
Amortization of prior service cost
 

 

 

 

Recognized net actuarial loss
 
144

 
193

 
432

 
579

Net periodic benefit income
 
$
(131
)
 
$
(63
)
 
$
(393
)
 
$
(189
)
 



34

Table of Contents

Note 13 – Loan Servicing
 
Park serviced sold mortgage loans of $1.36 billion at September 30, 2017, $1.33 billion at December 31, 2016 and $1.31 billion at September 30, 2016. At September 30, 2017, $3.2 million of the sold mortgage loans were sold with recourse, compared to $4.1 million at December 31, 2016 and $4.3 million at September 30, 2016. Management closely monitors the delinquency rates on the mortgage loans sold with recourse. At both September 30, 2017 and December 31, 2016, management had established reserves of $266,000 to account for expected losses on loan repurchases.
 
When Park sells mortgage loans with servicing rights retained, servicing rights are initially recorded at fair value. Park selected the “amortization method” as permissible within U.S. GAAP, whereby the servicing rights capitalized are amortized in proportion to and over the period of estimated future servicing income of the underlying loan. At the end of each reporting period, the carrying value of mortgage servicing rights (“MSRs”) is assessed for impairment with a comparison to fair value. MSRs are carried at the lower of their amortized cost or fair value.

Activity for MSRs and the related valuation allowance follows:
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In thousands)
 
2017
 
2016
 
2017
 
2016
Mortgage servicing rights:
 
 
 
 
 
 
 
 
Carrying amount, net, beginning of period
 
$
9,476

 
$
8,880

 
$
9,266

 
$
9,008

Additions
 
559

 
747

 
1,434

 
1,618

Amortization
 
(448
)
 
(522
)
 
(1,213
)
 
(1,312
)
Changes in valuation allowance
 
(108
)
 
(360
)
 
(8
)
 
(569
)
Carrying amount, net, end of period
 
$
9,479

 
$
8,745

 
$
9,479

 
$
8,745

 
 
 
 
 
 
 
 
 
Valuation allowance:
 
 
 
 
 
 
 
 
Beginning of period
 
$
635

 
$
751

 
$
735

 
$
542

Changes in valuation allowance
 
108

 
360

 
8

 
569

End of period
 
$
743

 
$
1,111

 
$
743

 
$
1,111

 
Servicing fees included in other service income were $0.8 million for the three months ended September 30, 2017 and $0.9 million for the same period of 2016. Servicing fees included in other service income were $2.6 million for the nine months ended September 30, 2017 and $2.5 million for the same period of 2016.
 
Note 14 – Fair Value
 
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that Park uses to measure fair value are as follows:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that Park has the ability to access as of the measurement date.
Level 2: Level 1 inputs for assets or liabilities that are not actively traded. Also consists of an observable market price for a similar asset or liability. This includes the use of “matrix pricing” to value debt securities absent the exclusive use of quoted prices.
Level 3: Consists of unobservable inputs that are used to measure fair value when observable market inputs are not available. This could include the use of internally developed models, financial forecasting and similar inputs.
 
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability between market participants at the balance sheet date. When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to observable market data for similar assets and liabilities. However, certain assets and liabilities are not traded in observable markets and Park must use other valuation methods to develop a fair value. The fair value of impaired loans is typically based on the fair value of the underlying collateral, which is estimated through third-party appraisals in accordance with Park's valuation requirements under its commercial and real estate loan policies.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis:
 
The following table presents assets and liabilities measured at fair value on a recurring basis:
 
Fair Value Measurements at September 30, 2017 using:
(In thousands)
 
Level 1
 
Level 2
 
Level 3
 
Balance at September 30, 2017
Assets
 
 

 
 

 
 

 
 

Investment securities:
 
 

 
 

 
 

 
 

Obligations of U.S. Treasury and other U.S. Government sponsored entities
 
$

 
$
268,841

 
$

 
$
268,841

U.S. Government sponsored entities’ asset-backed securities
 

 
893,705

 

 
893,705

Equity securities
 
3,521

 

 
495

 
4,016

Mortgage loans held for sale
 

 
11,396

 

 
11,396

Mortgage IRLCs
 

 
98

 

 
98

 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

Fair value swap
 
$

 
$

 
$
226

 
$
226

 
Fair Value Measurements at December 31, 2016 using:
(In thousands)
 
Level 1
 
Level 2
 
Level 3
 
Balance at December 31, 2016
Assets
 
 

 
 

 
 

 
 

Investment securities:
 
 

 
 

 
 

 
 

Obligations of U.S. Treasury and other U.S. Government sponsored entities
 
$

 
$
267,533

 
$

 
$
267,533

U.S. Government sponsored entities’ asset-backed securities
 

 
987,172

 

 
987,172

Equity securities
 
2,644

 

 
790

 
3,434

Mortgage loans held for sale
 

 
10,413

 

 
10,413

Mortgage IRLCs
 

 
124

 

 
124

 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

Fair value swap
 
$

 
$

 
$
226

 
$
226

 
There were no transfers between Level 1 and Level 2 during the three or nine months ended September 30, 2017 or 2016. Management’s policy is to transfer assets or liabilities from one level to another when the methodology to obtain the fair value changes such that there are more or fewer unobservable inputs as of the end of the reporting period.
 
The following methods and assumptions were used by the Company in determining the fair value of the financial assets and liabilities discussed above:
 
Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows.
 
Fair value swap: The fair value of the swap agreement entered into with the purchaser of the Visa Class B shares represents an internally developed estimate of the exposure based upon probability-weighted potential Visa litigation losses.


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Table of Contents

Mortgage Interest Rate Lock Commitments (IRLCs): Mortgage IRLCs are based on current secondary market pricing and are classified as Level 2.
 
Mortgage loans held for sale: Mortgage loans held for sale are carried at their fair value. Mortgage loans held for sale are estimated using security prices for similar product types and, therefore, are classified in Level 2.
 
The tables below are a reconciliation of the beginning and ending balances of the Level 3 inputs for the three and nine months ended September 30, 2017 and 2016, for financial instruments measured on a recurring basis and classified as Level 3:

Level 3 Fair Value Measurements
Three months ended September 30, 2017 and 2016
(In thousands)
 
Equity
Securities
 
Fair value
swap
Balance at July 1, 2017
 
$
458

 
$
(226
)
Total gains/(losses)
 
 

 
 

Included in other comprehensive income
 
37

 

Balance at September 30, 2017
 
$
495

 
$
(226
)
 
 
 
 
 
Balance at July 1, 2016
 
$
821

 
$
(226
)
Total gains/(losses)
 
 

 
 

Included in other comprehensive income
 
(42
)
 

Balance at September 30, 2016
 
$
779

 
$
(226
)

Level 3 Fair Value Measurements
Nine months ended September 30, 2017 and 2016
(In thousands)
 
Equity
Securities
 
Fair value
swap
Balance at January 1, 2017
 
$
790

 
$
(226
)
Total gains/(losses)
 
 

 
 

Transfers out of Level 3 (1)
 
(346
)
 

Included in other comprehensive income
 
51

 

Balance at September 30, 2017
 
$
495

 
$
(226
)
 
 
 
 
 
Balance at January 1, 2016
 
$
769

 
$
(226
)
Total gains/(losses)
 
 

 
 

Included in other comprehensive income
 
10

 

Balance at September 30, 2016
 
$
779

 
$
(226
)
(1) Transfered from Level 3 to Level 1 as the result of a quoted market price becoming available.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis:
 
The following methods and assumptions were used by the Company in determining the fair value of assets and liabilities measured at fair value on a nonrecurring basis described below:

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Collateral dependent impaired loans carried at fair value have been partially charged-off or receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is generally based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales approach and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments result in a Level 3 classification of the inputs for determining fair value. Collateral is then adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted

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accordingly. Additionally, updated independent valuations are obtained annually for all impaired loans in accordance with Company policy.
 
Other Real Estate Owned ("OREO"): Assets acquired through or in lieu of loan foreclosure are initially recorded at fair value less costs to sell when acquired. The carrying value of OREO is not re-measured to fair value on a recurring basis, but is subject to fair value adjustments when the carrying value exceeds the fair value, less estimated selling costs. Fair value is based on recent real estate appraisals and is updated at least annually. These appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales approach and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments result in a Level 3 classification of the inputs for determining fair value.
 
Appraisals for both collateral dependent impaired loans and OREO are performed by licensed appraisers. Appraisals are generally obtained to support the fair value of collateral. In general, there are three types of appraisals received by the Company: real estate appraisals, income approach appraisals, and lot development loan appraisals. These are discussed below:
 
Real estate appraisals typically incorporate measures such as recent sales prices for comparable properties. Appraisers may make adjustments to the sales prices of the comparable properties as deemed appropriate based on the age, condition or general characteristics of the subject property. Management generally applies a 15% discount to real estate appraised values which management expects will cover all disposition costs (including selling costs). This 15% discount is based on historical discounts to appraised values on sold OREO properties.

Income approach appraisals typically incorporate the annual net operating income of the business divided by an appropriate capitalization rate, as determined by the appraiser. Management generally applies a 15% discount to income approach appraised values which management expects will cover all disposition costs (including selling costs).

Lot development loan appraisals are typically performed using a discounted cash flow analysis. Appraisers determine an anticipated absorption period and a discount rate that takes into account an investor’s required rate of return based on recent comparable sales. Management generally applies a 6% discount to lot development appraised values, which is an additional discount above the net present value calculation included in the appraisal, to account for selling costs.

MSRs: MSRs are carried at the lower of cost or fair value. MSRs do not trade in active, open markets with readily observable prices. For example, sales of MSRs do occur, but precise terms and conditions typically are not readily available. As such, management, with the assistance of a third-party specialist, determines fair value based on the discounted value of the future cash flows estimated to be received. Significant inputs include the discount rate and assumed prepayment speeds. The calculated fair value is then compared to market values where possible to ascertain the reasonableness of the valuation in relation to current market expectations for similar products. Accordingly, MSRs are classified as Level 2.
 

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Table of Contents

The following tables present assets and liabilities measured at fair value on a nonrecurring basis. Collateral dependent impaired loans are carried at fair value if they have been charged down to fair value or if a specific valuation allowance has been established. A new cost basis is established at the time a property is initially recorded in OREO. OREO properties are carried at fair value if a devaluation has been taken to the property's value subsequent to the initial measurement.
 
Fair Value Measurements at September 30, 2017 using:
(In thousands)
 
Level 1
 
Level 2
 
Level 3
 
Balance at September 30, 2017
Impaired loans recorded at fair value:
 
 

 
 

 
 

 
 

Commercial real estate
 
$

 
$

 
$
6,147

 
$
6,147

Construction real estate
 

 

 
127

 
127

Residential real estate
 

 

 
863

 
863

Total impaired loans recorded at fair value
 
$

 
$

 
$
7,137

 
$
7,137

 
 
 
 
 
 
 
 
 
Mortgage servicing rights
 
$

 
$
7,110

 
$

 
$
7,110

 
 
 
 
 
 
 
 
 
OREO:
 
 
 
 
 
 
 
 
Commercial real estate
 

 

 
2,457

 
2,457

Construction real estate
 

 

 
3,212

 
3,212

Residential real estate
 

 

 
1,093

 
1,093

Total OREO recorded at fair value
 
$

 
$

 
$
6,762

 
$
6,762

 
Fair Value Measurements at December 31, 2016 using:
(In thousands)
 
Level 1
 
Level 2
 
Level 3
 
Balance at December 31, 2016
Impaired loans recorded at fair value:
 
 

 
 

 
 

 
 

Commercial real estate
 
$

 
$

 
$
3,057

 
$
3,057

Construction real estate
 

 

 
541

 
541

Residential real estate
 

 

 
2,385

 
2,385

Total impaired loans recorded at fair value
 
$

 
$

 
$
5,983

 
$
5,983

 
 
 
 
 
 
 
 
 
Mortgage servicing rights
 
$

 
$
6,769

 
$

 
$
6,769

 
 
 
 
 
 
 
 
 
OREO:
 
 
 
 
 
 
 
 
Commercial real estate
 

 

 
2,644

 
2,644

Construction real estate
 

 

 
3,322

 
3,322

Residential real estate
 

 

 
931

 
931

Total OREO recorded at fair value
 
$

 
$

 
$
6,897

 
$
6,897

 
The table below provides additional detail on those impaired loans which are recorded at fair value as well as the remaining impaired loan portfolio not included above. The remaining impaired loans consist of loans which are not collateral dependent as well as loans carried at cost as the fair value of the underlying collateral or the present value of expected future cash flows on each of the loans exceeded the book value for each respective credit.

 
 
September 30, 2017
(In thousands)
 
Recorded Investment
 
Prior Charge-Offs
 
Specific Valuation Allowance
 
Carrying Balance
Impaired loans recorded at fair value
 
$
7,470

 
$
2,822

 
$
333

 
$
7,137

Remaining impaired loans
 
66,139

 
7,124

 
4,769

 
61,370

Total impaired loans
 
$
73,609

 
$
9,946

 
$
5,102

 
$
68,507



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Table of Contents

 
 
December 31, 2016
(In thousands)
 
Recorded Investment
 
Prior Charge-Offs
 
Specific Valuation Allowance
 
Carrying Balance
Impaired loans recorded at fair value
 
$
6,379

 
$
3,681

 
$
396

 
$
5,983

Remaining impaired loans
 
64,047

 
21,262

 
152

 
63,895

Total impaired loans
 
$
70,426

 
$
24,943

 
$
548

 
$
69,878


The (expense) income from credit adjustments related to impaired loans carried at fair value during the three months ended September 30, 2017 and 2016 was $(0.7) million and $2.9 million, respectively. The (expense) income from credit adjustments related to impaired loans carried at fair value during the nine months ended September 30, 2017 and 2016 was $(1.2) million and $1.9 million, respectively.

MSRs totaled $9.5 million at September 30, 2017. Of this $9.5 million MSR carrying balance, $7.1 million was recorded at fair value and included a valuation allowance of $0.7 million. The remaining $2.4 million was recorded at cost, as the fair value of the MSRs exceeded cost at September 30, 2017. At December 31, 2016, MSRs totaled $9.3 million. Of this $9.3 million MSR carrying balance, $6.8 million was recorded at fair value and included a valuation allowance of $0.7 million. The remaining $2.5 million was recorded at cost, as the fair value exceeded cost at December 31, 2016. The expense related to MSRs carried at fair value during the three months ended September 30, 2017 and 2016 was $108,000 and $360,000, respectively. The expense related to MSRs carried at fair value during the nine months ended September 30, 2017 and 2016 was $8,000 and $569,000, respectively.
 
Total OREO held by Park at September 30, 2017 and December 31, 2016 was $14.4 million and $13.9 million, respectively. Approximately 47% and 50% of OREO held by Park at September 30, 2017 and December 31, 2016, respectively, was carried at fair value due to fair value adjustments made subsequent to the initial OREO measurement. At September 30, 2017 and December 31, 2016, OREO held at fair value, less estimated selling costs, amounted to $6.8 million and $6.9 million, respectively. The net expense related to OREO fair value adjustments was $22,000 and $233,000 for the three-month periods ended September 30, 2017 and 2016, respectively. The net expense related to OREO fair value adjustments was $367,000 and $572,000 for the nine-month periods ended September 30, 2017 and 2016, respectively.
 

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The following tables present qualitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2017 and December 31, 2016:

September 30, 2017
(In thousands)
 
Fair Value
 
Valuation Technique
 
Unobservable Input(s)
 
Range
(Weighted Average)
Impaired loans:
 
 

 
 
 
 
 
 
Commercial real estate
 
$
6,147

 
Sales comparison approach
 
Adj to comparables
 
0.0% - 102.0% (40.1%)
 
 
 
 
Income approach
 
Capitalization rate
 
8.8% - 12.5% (9.4%)
 
 
 
 
Cost approach
 
Accumulated depreciation
 
90.1% (90.1%)
 
 
 
 
 
 
 
 
 
Construction real estate
 
$
127

 
Sales comparison approach
 
Adj to comparables
 
0.0% - 4.8% (2.4%)
 
 
 
 
 
 
 
 
 
Residential real estate
 
$
863

 
Sales comparison approach
 
Adj to comparables
 
0.1% - 33.0% (11.7%)
 
 
 
 
Income approach
 
Capitalization rate
 
10.5% (10.5%)
 
 
 
 
 
 
 
 
 
Other real estate owned:
 
 
 
 
 
 
 
 
Commercial real estate
 
$
2,457

 
Sales comparison approach
 
Adj to comparables
 
0.0% - 68.4% (28.9%)
 
 
 
 
Income approach
 
Capitalization rate
 
12.0% - 13.0% (12.9%)
 
 
 
 
 
 
 
 
 
Construction real estate
 
$
3,212

 
Sales comparison approach
 
Adj to comparables
 
0.0% - 90.0% (24.4%)
 
 
 
 
Bulk sale approach
 
Discount rate
 
15.0% (15.0%)
 
 
 
 
 
 
 
 
 
Residential real estate
 
$
1,093

 
Sales comparison approach
 
Adj to comparables
 
1.2% - 79.7% (30.8%)


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Table of Contents

Balance at December 31, 2016
(In thousands)
 
Fair Value
 
Valuation Technique
 
Unobservable Input(s)
 
Range
(Weighted Average)
Impaired loans:
 
 

 
 
 
 
 
 
Commercial real estate
 
$
3,057

 
Sales comparison approach
 
Adj to comparables
 
0.0% - 90.0% (20.2%)
 
 
 
 
Income approach
 
Capitalization rate
 
9.0% - 10.6% (10.1%)
 
 
 
 
Cost approach
 
Accumulated depreciation
 
17.0% - 18.0% (17.8%)
 
 
 
 
 
 
 
 
 
Construction real estate
 
$
541

 
Sales comparison approach
 
Adj to comparables
 
0.0% - 11.1% (1.6%)
 
 
 
 
Bulk sale approach
 
Discount rate
 
10.0% (10.0%)
 
 
 
 
 
 
 
 
 
Residential real estate
 
$
2,385

 
Sales comparison approach
 
Adj to comparables
 
0.3% - 110.0% (17.0%)
 
 
 
 
Income approach
 
Capitalization rate
 
10.0% (10.0%)
 
 
 
 
 
 
 
 
 
Other real estate owned:
 
 
 
 
 
 
 
 
Commercial real estate
 
$
2,644

 
Sales comparison approach
 
Adj to comparables
 
0.0% - 68.4% (26.5%)
 
 
 
 
Income approach
 
Capitalization rate
 
13.0% - 14.0% (13.1%)
 
 
 
 
 
 
 
 
 
Construction real estate
 
$
3,322

 
Sales comparison approach
 
Adj to comparables
 
0.0% - 90.0% (24.7%)
 
 
 
 
Bulk sale approach
 
Discount rate
 
15.0% (15.0%)
 
 
 
 
 
 
 
 
 
Residential real estate
 
$
931

 
Sales comparison approach
 
Adj to comparables
 
3.2% - 79.7% (30.6%)


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Table of Contents

The following methods and assumptions were used by Park in estimating its fair value disclosures for assets and liabilities not discussed above:
 
Cash and cash equivalents: The carrying amounts reported in the consolidated condensed balance sheets for cash and short-term instruments approximate those assets’ fair values.

Other investments: FHLB and FRB stock within "Other investments" are carried at their respective redemption values as it is not practical to calculate their fair values. Additional investments within "Other investments" are carried at their cost basis as these investments do not have a readily determinable fair value and Park does not have the ability to influence the operating or financial decisions of the investee.
 
Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for certain mortgage loans (e.g., one-to-four family residential) are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair values for other loans are estimated using discounted cash flow analyses, based upon interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The methods utilized to estimate the fair value do not necessarily represent what the exit price would be.
 
Off-balance sheet instruments: Fair values for Park’s loan commitments and standby letters of credit are based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The carrying amount and fair value are not material.

Deposit liabilities: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and money market accounts) are, by definition, equal to the amounts payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed-term certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities of time deposits.
 
Short-term borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements and other short-term borrowings approximate their fair values.
 
Long-term debt: Fair values for long-term debt are estimated using a discounted cash flow calculation that applies interest rates currently being offered on long-term debt to a schedule of monthly maturities.
 
Subordinated notes: Fair values for subordinated notes are estimated using a discounted cash flow calculation that applies interest rate spreads currently being offered on similar debt structures to a schedule of monthly maturities.
 



43

Table of Contents

The fair value of financial instruments at September 30, 2017 and December 31, 2016, was as follows:

 
 
September 30, 2017
 
 
 
 
Fair Value Measurements
(In thousands)
 
Carrying value
 
Level 1
 
Level 2
 
Level 3
 
Total fair value
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and money market instruments
 
$
450,352

 
$
450,352

 
$

 
$

 
$
450,352

Investment securities (1)
 
1,509,227

 
3,521

 
1,509,656

 
495

 
1,513,672

Accrued interest receivable - securities
 
4,780

 

 
4,780

 

 
4,780

Accrued interest receivable - loans
 
16,466

 

 

 
16,466

 
16,466


 
 
 
 
 
 
 
 
 
 
Loans held for sale
 
11,396

 

 
11,396

 

 
11,396

Mortgage IRLCs
 
98

 

 
98

 

 
98

Impaired loans carried at fair value
 
7,137

 

 

 
7,137

 
7,137

Other loans, net
 
5,292,014

 

 

 
5,269,250

 
5,269,250

Loans receivable, net
 
$
5,310,645

 
$

 
$
11,494

 
$
5,276,387

 
$
5,287,881

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 

 
 

 
 

 
 

 
 

Noninterest bearing checking accounts
 
$
1,568,177

 
$
1,568,177

 
$

 
$

 
$
1,568,177

Interest bearing transactions accounts
 
1,374,401

 
1,374,401

 

 

 
1,374,401

Savings accounts
 
1,969,887

 
1,969,887

 

 

 
1,969,887

Time deposits
 
1,056,570

 

 
1,058,886

 

 
1,058,886

Other
 
5,287

 
5,287

 

 

 
5,287

Total deposits
 
$
5,974,322

 
$
4,917,752

 
$
1,058,886

 
$

 
$
5,976,638

 
 
 
 
 
 
 
 
 
 
 
Short-term borrowings
 
$
192,896

 
$

 
$
192,896

 
$

 
$
192,896

Long-term debt
 
848,992

 

 
859,473

 

 
859,473

Subordinated notes
 
15,000

 

 
12,738

 

 
12,738

Accrued interest payable – deposits
 
1,142

 
63

 
1,079

 

 
1,142

Accrued interest payable – debt/borrowings
 
1,140

 
2

 
1,438

 

 
1,440

 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 

 
 

 
 

 
 

 
 

Fair value swap
 
$
226

 
$

 
$

 
$
226

 
$
226

(1) Investment securities excludes the category "Other investment securities." This category consists of FHLB and FRB stock carried at their respective redemption values as it is not practical to calculate their fair values. Additional investments within "Other investment securities" are carried at their cost basis as these investments do not have a readily determinable fair value and Park does not have the ability to influence the operating or financial decisions of the investee.


44

Table of Contents

 
 
December 31, 2016
 
 
 
 
Fair Value Measurements
(In thousands)
 
Carrying value
 
Level 1
 
Level 2
 
Level 3
 
Total fair value
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and money market instruments
 
$
146,466

 
$
146,466

 
$

 
$

 
$
146,466

Investment securities (1)
 
1,517,972

 
2,644

 
1,511,377

 
790

 
1,514,811

Accrued interest receivable - securities
 
3,849

 

 
3,849

 

 
3,849

Accrued interest receivable - loans
 
14,973

 

 

 
14,973

 
14,973


 
 
 
 
 
 
 
 
 
 
Loans held for sale
 
10,413

 

 
10,413

 

 
10,413

Mortgage IRLCs
 
124

 

 
124

 

 
124

Impaired loans carried at fair value
 
5,983

 

 

 
5,983

 
5,983

Other loans, net
 
5,204,713

 

 

 
5,161,919

 
5,161,919

Loans receivable, net
 
$
5,221,233

 
$

 
$
10,537

 
$
5,167,902

 
$
5,178,439

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 

 
 

 
 

 
 

 
 

Noninterest bearing checking accounts
 
$
1,523,417

 
$
1,523,417

 
$

 
$

 
$
1,523,417

Interest bearing transactions accounts
 
1,174,448

 
1,174,448

 

 

 
1,174,448

Savings accounts
 
1,704,920

 
1,704,920

 

 

 
1,704,920

Time deposits
 
1,117,870

 

 
1,122,598

 

 
1,122,598

Other
 
1,301

 
1,301

 

 

 
1,301

Total deposits
 
$
5,521,956

 
$
4,404,086

 
$
1,122,598

 
$

 
$
5,526,684

 
 
 
 
 
 
 
 
 
 
 
Short-term borrowings
 
$
394,795

 
$

 
$
394,795

 
$

 
$
394,795

Long-term debt
 
694,281

 

 
712,958

 

 
712,958

Subordinated notes
 
45,000

 

 
40,903

 

 
40,903

Accrued interest payable – deposits
 
900

 
82

 
818

 

 
900

Accrued interest payable – debt/borrowings
 
1,251

 
1

 
1,250

 

 
1,251

 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 

 
 

 
 

 
 

 
 

Fair value swap
 
$
226

 
$

 
$

 
$
226

 
$
226

(1) Investment securities excludes the category "Other investment securities." This category consists of FHLB and FRB stock carried at their respective redemption values as it is not practical to calculate their fair values. Additional investments within "Other investment securities" are carried at their cost basis as these investments do not have a readily determinable fair value and Park does not have the ability to influence the operating or financial decisions of the investee.


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Note 15 – Other Comprehensive Income

Other comprehensive income components, net of tax, are shown in the following table for the three-month and nine-month periods ended September 30, 2017 and 2016:

(in thousands)
 
Changes in pension plan assets and benefit obligations
 
Unrealized gains (losses) on available for sale securities
 
Total
Beginning balance at July 1, 2017
 
$
(14,740
)
 
$
1,028

 
$
(13,712
)
 
Other comprehensive income before reclassifications
 

 
707

 
707

 
Amounts reclassified from accumulated other comprehensive loss
 

 

 

Net current period other comprehensive income
 

 
707

 
707

Ending balance at September 30, 2017
 
$
(14,740
)
 
$
1,735

 
$
(13,005
)
 
 
 
 
 
 
 
 
Beginning balance at July 1, 2016
 
$
(15,351
)
 
$
15,740

 
$
389

 
Other comprehensive loss before reclassifications
 

 
(2,182
)
 
(2,182
)
 
Amounts reclassified from accumulated other comprehensive loss
 

 

 

Net current period other comprehensive loss
 

 
(2,182
)
 
(2,182
)
Ending balance at September 30, 2016
 
$
(15,351
)
 
$
13,558

 
$
(1,793
)


(in thousands)
 
Changes in pension plan assets and benefit obligations
 
Unrealized gains (losses) on available for sale securities
 
Total
Beginning balance at January 1, 2017
 
$
(14,740
)
 
$
(3,005
)
 
$
(17,745
)
 
Other comprehensive income before reclassifications
 

 
4,740

 
4,740

 
Amounts reclassified from accumulated other comprehensive loss
 

 

 

Net current period other comprehensive income
 

 
4,740

 
4,740

Ending balance at September 30, 2017
 
$
(14,740
)
 
$
1,735

 
$
(13,005
)
 
 
 
 
 
 
 
 
Beginning balance at January 1, 2016
 
$
(15,351
)
 
$
(292
)
 
$
(15,643
)
 
Other comprehensive income before reclassifications
 

 
13,850

 
13,850

 
Amounts reclassified from accumulated other comprehensive loss
 

 

 

Net current period other comprehensive income
 

 
13,850

 
13,850

Ending balance at September 30, 2016
 
$
(15,351
)
 
$
13,558

 
$
(1,793
)

During the three-month and nine-month periods ended September 30, 2017 and 2016, there were no reclassifications out of accumulated other comprehensive income.

Note 16 – Investment in Qualified Affordable Housing

Park makes certain equity investments in various limited partnerships that sponsor affordable housing projects. The purposes of these investments are to achieve a satisfactory return on capital, help create affordable housing opportunities, and assist the Company to achieve our goals associated with the Community Reinvestment Act.

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The table below details the balances of Park’s affordable housing tax credit investments and related unfunded commitments as of September 30, 2017 and December 31, 2016.
(in thousands)
 
September 30, 2017
December 31, 2016
Affordable housing tax credit investments
 
$
54,355

$
52,947

Unfunded commitments
 
21,282

14,282


Commitments are funded when capital calls are made by the general partner. Park expects that the current commitments will be funded between 2017 and 2027.
During the three months ended September 30, 2017 and 2016, Park recognized amortization expense of $1.9 million and $1.8 million, respectively, and during the nine months ended September 30, 2017 and 2016, Park recognized amortization expense of $5.6 million and $5.5 million, respectively, which was included within the provision for income taxes. Additionally, during each of the three months ended September 30, 2017 and 2016, Park recognized tax credits and other benefits from its affordable housing tax credit investments of $2.3 million, respectively, and during the nine months ended September 30, 2017 and 2016, recognized tax credits and other benefits from its affordable housing tax credit investments of $6.9 million and $7.0 million, respectively.
Note 17 – Repurchase Agreement Borrowings

Securities sold under agreements to repurchase ("repurchase agreements") with customers represent funds deposited by customers, generally on an overnight basis, that are collateralized by investment securities owned by Park. Repurchase agreements with customers are included in short-term borrowings on the consolidated condensed balance sheets. Park's repurchase agreements with a third-party financial institution are classified as long-term debt on the consolidated condensed balance sheets.

All repurchase agreements are subject to terms and conditions of repurchase/security agreements between Park and the client and are accounted for as secured borrowings. Park's repurchase agreements reflected in short-term borrowings consisted of customer accounts and securities which are pledged on an individual security basis.

At September 30, 2017 and December 31, 2016, Park's repurchase agreement borrowings totaled $493 million and $510 million, respectively. At both September 30, 2017 and December 31, 2016, $300 million of Park's repurchase agreement borrowings were classified as long-term debt with the remaining amount being classified as short-term debt on the consolidated condensed balance sheets. These borrowings were collateralized with U.S. government and agency securities with a carrying value of $540 million and $569 million at September 30, 2017 and December 31, 2016, respectively. Declines in the value of the collateral would require Park to pledge additional securities. As of September 30, 2017 and December 31, 2016, Park had $619 million and $640 million, respectively, of available unpledged securities.

The table below shows the remaining contractual maturity of repurchase agreements by collateral pledged at September 30, 2017 and December 31, 2016:

 
 
September 30, 2017
(in thousands)
 
Remaining Contractual Maturity of the Agreements
 
 
Overnight and Continuous
 
Up to 30 days
 
30 - 90 days
 
Greater than 90 days
 
Total
U.S. government and agency securities
 
$
191,792

 
$

 
$
300,000

 
$
1,104

 
$
492,896

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
(in thousands)
 
Remaining Contractual Maturity of the Agreements
 
 
Overnight and Continuous
 
Up to 30 days
 
30 - 90 days
 
Greater than 90 days
 
Total
U.S. government and agency securities
 
$
208,691

 
$

 
$

 
$
301,104

 
$
509,795



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On November 30, 2012, Park restructured $300 million in repurchase agreements with a third-party financial institution and paid a $25 million prepayment penalty. The penalty is included in long-term debt and is being amortized as an adjustment to interest expense over the remaining term of the repurchase agreements using the effective interest method. Of the $25 million prepayment penalty, $868,000 and $4.7 million remained unamortized as of September 30, 2017 and December 31, 2016, respectively. These repurchase agreements mature on November 30, 2017.

Note 18 - Contingent Liabilities

The Company is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. Legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes accruals for the outcome of litigation where losses are deemed probable and reasonably estimable. The Company’s assessment of the current exposure could change in the event of the discovery of additional facts with respect to legal matters pending against the Company or determinations by judges, juries, administrative agencies or other finders of fact that are not in accordance with the Company’s evaluation of claims.

As of June 30, 2017, the Company had accrued charges of approximately $2.3 million for legal contingencies related to various legal and other adversary proceedings. This amount was paid out in full settlement of the related litigation during the three months ended September 30, 2017.


ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 
Management’s discussion and analysis (“MD&A”) contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance.  The forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties.  Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements.  Risks and uncertainties that could cause actual results to differ materially include, without limitation: Park's ability to execute our business plan successfully and within the expected timeframe; general economic and financial market conditions, specifically in the real estate markets and the credit markets, either nationally or in the states in which Park and our subsidiaries do business, may experience a slowing or reversal of the recent economic expansion in addition to continuing residual effects of recessionary conditions and an uneven spread of positive impacts of recovery on the economy and our counterparties, resulting in adverse impacts on the demand for loan, deposit and other financial services, delinquencies, defaults and counterparties' ability to meet credit and other obligations; changes in interest rates and prices may adversely impact the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity of our consolidated balance sheet as well as reduce interest margins and impact loan demand; changes in consumer spending, borrowing and saving habits, whether due to changing business and economic conditions, legislative and regulatory initiatives, or other factors; changes in unemployment; changes in customers', suppliers', and other counterparties' performance and creditworthiness; asset/liability repricing risks and liquidity risks; our liquidity requirements could be adversely affected by changes to regulations governing bank and bank holding company capital and liquidity standards as well as by changes in our assets and liabilities; competitive factors among financial services organizations could increase significantly, including product and pricing pressures, changes to third-party relationships and our ability to attract, develop and retain qualified bank professionals; clients could pursue alternatives to bank deposits, causing us to lose a relatively inexpensive source of funding; uncertainty regarding the nature, timing and effect of changes in banking regulations or other regulatory or legislative requirements affecting the respective businesses of Park and our subsidiaries, including major reform of the regulatory oversight structure of the financial services industry and changes in laws and regulations concerning taxes, pensions, bankruptcy, consumer protection, accounting, bank products and services, bank capital and liquidity standards, fiduciary standards, securities and other aspects of the financial services industry, specifically the reforms provided for in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and the Basel III regulatory capital reforms, as well as regulations already adopted and which may be adopted in the future by the relevant regulatory agencies, including the Consumer Financial Protection Bureau, the OCC, the FDIC, and the Federal Reserve Board, to implement the Dodd-Frank Act's provisions, the Budget Control Act of 2011, the American Taxpayer Relief Act of 2012, the JOBS Act, the FAST Act and the Basel III regulatory capital reforms; the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board, the SEC, the Public Company Accounting Oversight Board and other regulatory agencies, and the accuracy of our assumptions and estimates used to prepare our financial statements; changes in law and policy accompanying the new presidential administration and uncertainty or speculation pending the enactment of such changes; the effect of healthcare laws in the United States and potential changes for such laws which may

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increase our healthcare and other costs and negatively impact our operations and financial results; significant changes in the tax laws, which may adversely affect the fair values of net deferred tax assets and obligations of state and political subdivisions held in Park's investment securities portfolio; the effect of trade, monetary, fiscal and other governmental policies of the U.S. federal government, including money supply and interest rate policies of the Federal Reserve Board; disruption in the liquidity and other functioning of U.S. financial markets; the impact on financial markets and the economy of any changes in the credit ratings of the U.S. Treasury obligations and other U.S. government-backed debt, as well as issues surrounding the levels of U.S., European and Asian government debt and concerns regarding the creditworthiness of certain sovereign governments, supranationals and financial institutions in Europe and Asia; the uncertainty surrounding the actions to be taken to implement the referendum by United Kingdom voters to exit the European Union; our litigation and regulatory compliance exposure, including any adverse developments in legal proceedings or other claims and unfavorable resolution of regulatory and other governmental examinations or other inquiries; the adequacy of our risk management program; the impact of our ability to anticipate and respond to technological changes on our ability to respond to customer needs and meet competitive demands; the ability to secure confidential information and deliver products and services through the use of computer systems and telecommunications networks; a failure in or breach of our operational or security systems or infrastructure, or those of our third-party vendors and other service providers, including as a result of cyber attacks; fraud, scams and schemes of third parties; the impact of widespread natural and other disasters, pandemics, dislocations, civil unrest, terrorist activities or international hostilities on the economy and financial markets generally or on us or our counterparties specifically; demand for loans in the respective market areas served by Park and our subsidiaries; and other risk factors relating to the banking industry as detailed from time to time in Park's reports filed with the SEC including those described in "Item 1A. Risk Factors" of Part I of Park's Annual Report on Form 10-K for the fiscal year ended December 31, 2016. Park does not undertake, and specifically disclaims any obligation, to publicly release the results of any revisions that may be made to update any forward-looking statement to reflect the events or circumstances after the date on which the forward-looking statement was made, or reflect the occurrence of unanticipated events, except to the extent required by law.

Critical Accounting Policies
 
Note 1 of the Notes to Consolidated Financial Statements included in Park’s 2016 Annual Report lists significant accounting policies used in the development and presentation of Park’s consolidated financial statements. The accounting and reporting policies of Park conform with U.S. GAAP and general practices within the financial services industry. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
 
Park believes the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance for loan losses is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb probable incurred credit losses in the loan portfolio. Management’s determination of the adequacy of the allowance for loan losses is based on periodic evaluations of the loan portfolio and of current economic conditions. However, this evaluation has subjective components requiring material estimates, including expected default probabilities, the expected loss given default, the amounts and timing of expected future cash flows on impaired loans, and estimated losses on consumer loans and residential mortgage loans based on historical loss experience and current economic conditions. All of these factors may be susceptible to significant change. To the extent that actual results differ from management estimates, additional loan loss provisions may be required that would adversely impact earnings in future periods. Refer to the “Credit Metrics and Provision for (Recovery of) Loan Losses” section within this MD&A for additional discussion.

Other real estate owned (“OREO”), property acquired through foreclosure, is recorded at estimated fair value less anticipated selling costs (net realizable value). If the net realizable value is below the carrying value of the loan on the date of transfer, the difference is charged to the allowance for loan losses. Subsequent declines in value, OREO devaluations, are reported as adjustments to the carrying amount of OREO and are expensed within other income. Gains or losses not previously recognized, resulting from the sale of OREO, are recognized within other income on the date of sale.
 
U.S. GAAP requires management to establish a fair value hierarchy, which has the objective of maximizing the use of observable market inputs. U.S. GAAP also requires enhanced disclosures regarding the inputs used to calculate fair value. These are classified as Level 1, Level 2, and Level 3. Level 3 inputs are those with significant unobservable inputs that reflect a company’s own assumptions about the market for a particular instrument. Some of these inputs could be based on internal models and cash flow analyses. The large majority of Park’s assets whose fair value is determined using Level 2 inputs consists of available-for-sale (“AFS”) securities. The fair value of these AFS securities is obtained largely through the use of matrix pricing, which is a mathematical technique widely used in the financial services industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather relying on the securities’ relationship to other

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benchmark quoted securities. Please see Note 14 - Fair Value of the Notes to Unaudited Consolidated Condensed Financial Statements in this Quarterly Report on Form 10-Q for additional information on fair value.
 
Management believes that the accounting for goodwill also involves a higher degree of judgment than most other significant accounting policies. U.S. GAAP establishes standards for the impairment assessment of goodwill. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Park’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Park’s Ohio-based national bank subsidiary, The Park National Bank (“PNB”) to provide quality, cost-effective banking services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base, the inability to deliver cost-effective services over sustained periods or significant credit problems can lead to impairment of goodwill that could adversely impact earnings in future periods. U.S. GAAP requires an annual evaluation of goodwill for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Park’s most recent evaluation was completed during the second quarter of 2017 and resulted in no impairment of goodwill. Further, there have been no events subsequent to that analysis that provide any evidence that goodwill is impaired. The fair value of the goodwill, which resides on the books of PNB, is estimated by reviewing the past and projected operating results for PNB, deposit and loan totals for PNB and banking industry comparable information.

The determination of pension plan obligations and related expenses requires the use of assumptions to estimate the amount of benefits that employees earn while working, as well as the present value of those benefits. Annual pension expense is principally based on four components: (1) the value of benefits earned by employees for working during the year (service cost), (2) the increase in the liability due to the passage of time (interest cost), and (3) other gains and losses, reduced by (4) the expected return on plan assets for our pension plan.

Significant assumptions used to measure our annual pension expense include:

the interest rate used to determine the present value of liabilities (discount rate);
certain employee-related factors, such as turnover, retirement age and mortality;
the expected return on assets in our funded plan; and
for pension expense, the rate of salary increases where benefits are based on earnings.

Our assumptions reflect our historical experience and management’s best judgment regarding future expectations. Due to the significant management judgment involved, our assumptions could have a material impact on the measurement of our pension plan expense and obligation. 

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Comparison of Results of Operations
For the Three and Nine Months Ended September 30, 2017 and 2016
 
Summary Discussion of Results

Net income for the three months ended September 30, 2017 was $22.1 million, compared to $27.4 million for the third quarter of 2016. Diluted earnings per common share were $1.44 for the third quarter of 2017, compared to $1.78 for the third quarter of 2016. Weighted average diluted common shares outstanding were 15,351,590 for the third quarter of 2017, compared to 15,399,707 weighted average diluted common shares outstanding for the third quarter of 2016.

Net income for the nine months ended September 30, 2017 was $61.4 million, compared to $66.1 million for the same period of 2016. Diluted earnings per common share for the nine months ended September 30, 2017 were $3.99, compared to $4.29 for the same period of 2016. Weighted average diluted common shares outstanding were 15,394,199 for the nine months ended September 30, 2017, compared to 15,401,825 weighted average diluted common shares outstanding for the same period of 2016.

Financial Results by segment

The table below reflects the net income (loss) by segment for the first, second and third quarters of 2017, for the first nine months of 2017 and 2016, and for the fiscal years ended December 31, 2016 and 2015. Park's segments include The Park National Bank ("PNB"), Guardian Financial Services Company ("GFSC"), SE Property Holdings, LLC ("SEPH") and all other which primarily consists of Park as the "Parent Company."
Net income (loss) by segment
 
 
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
Q3 2017
 
Q2 2017
 
Q1 2017
 
Nine months YTD 2017
 
Nine months YTD 2016
 
2016
 
2015
PNB
$
21,297

 
$
20,163

 
$
21,486

 
$
62,946

 
$
68,313

 
$
84,451

 
$
84,345

GFSC
84

 
186

 
198

 
468

 
(570
)
 
(307
)
 
1,423

Parent Company
105

 
(919
)
 
(1,226
)
 
(2,040
)
 
(3,568
)
 
(4,557
)
 
(4,549
)
   Ongoing operations
$
21,486

 
$
19,430

 
$
20,458

 
$
61,374

 
$
64,175

 
$
79,587

 
$
81,219

SEPH
626

 
(398
)
 
(191
)
 
37

 
1,958

 
6,548

 
(207
)
   Total Park
$
22,112

 
$
19,032

 
$
20,267

 
$
61,411

 
$
66,133

 
$
86,135

 
$
81,012


The category “Parent Company” above excludes the results for SEPH, an entity which is winding down commensurate with the disposition of SEPH's nonperforming assets. Management considers the “Ongoing operations” results, which exclude the results of SEPH, to reflect the business of Park and Park's subsidiaries going forward. The discussion below provides additional information regarding the segments that make up the “Ongoing operations”, followed by additional information regarding SEPH.


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The Park National Bank (PNB)

The table below reflects PNB's net income for the first, second and third quarters of 2017, for the first nine months of 2017 and 2016, and for the fiscal years ended December 31, 2016 and 2015.
(In thousands)
Q3 2017
Q2 2017
Q1 2017
Nine months YTD 2017
Nine months YTD 2016
2016
2015
Net interest income
$
59,415

$
57,822

$
57,480

$
174,717

$
170,194

$
227,576

$
220,879

Provision for (recovery of) loan losses
3,820

4,574

720

9,114

(450
)
2,611

7,665

Other income
20,367

19,179

17,711

57,257

55,010

74,803

75,188

Other expense
45,987

43,877

43,803

133,667

126,418

177,562

167,476

Income before income taxes
$
29,975

$
28,550

$
30,668

$
89,193

$
99,236

$
122,206

$
120,926

    Federal income tax expense
8,678

8,387

9,182

26,247

30,923

37,755

36,581

Net income
$
21,297

$
20,163

$
21,486

$
62,946

$
68,313

$
84,451

$
84,345


Net interest income of $174.7 million for the nine months ended September 30, 2017 represented a $4.5 million, or 2.7%, increase compared to $170.2 million for the same period of 2016. The increase was the result of an $8.8 million increase in interest income offset by a $4.3 million increase in interest expense.
The $8.8 million increase in interest income was due to a $6.8 million increase in interest income on loans, along with a $2.0 million increase in interest income on investments. The increase in interest income on loans was largely the result of a $226 million, or 4.5%, increase in average loans from $5.09 billion for the nine months ended September 30, 2016, to $5.31 billion for the nine months ended September 30, 2017. Included in interest income for the nine months ended September 30, 2017 and 2016 was $149,000 and $725,000 in interest income, respectively, related to PNB participations in legacy Vision Bank ("Vision") assets.
The $4.3 million increase in interest expense was due to a $4.0 million increase in interest expense on deposits, along with a $354,000 increase in interest expense on borrowings. The increase in interest expense on deposits was partially the result of a $168 million, or 4.0%, increase in average interest-bearing deposits from $4.19 billion for the nine months ended September 30, 2016, to $4.36 billion for the nine months ended September 30, 2017. Additionally, the cost of deposits increased by 11 basis points from 0.32% for the nine months ended September 30, 2016 to 0.43% for the nine months ended September 30, 2017.
The provision for loan losses of $9.1 million for the nine months ended September 30, 2017 represented an increase of $9.6 million, compared to a recovery of loan losses of $450,000 for the same period of 2016. Refer to the “Credit Metrics and Provision for (Recovery of) Loan Losses” section for additional details regarding the level of the provision for (recovery of) loan losses recognized in each period presented above.
Other income of $57.3 million for the nine months ended September 30, 2017 represented an increase of $2.2 million, or 4.1%, compared to $55.0 million for the same period of 2016. The $2.2 million increase was primarily related to a $1.6 million increase in fiduciary income, income of $478,000 related to proceeds from the death benefits received from bank owned life insurance policies, a $437,000 increase in miscellaneous income, mainly related to an incentive received on check cards, a $261,000 increase in other service income, and a $595,000 increase in check card fee income, offset by a $1.3 million decrease in service charges on deposit accounts.
Other expense of $133.7 million for the nine months ended September 30, 2017 represented an increase of $7.2 million, or 5.7%, compared to $126.4 million for the same period of 2016. The $7.2 million increase was primarily related to a $4.0 million increase in salaries expense, a $391,000 increase in employee benefits expense, an $1.5 million increase in data processing fees, an $824,000 increase in furniture and equipment expense, a $381,000 increase in insurance expense, and a $732,000 increase in professional fees and services, offset by an $817,000 decrease in non-loan related losses which are included in miscellaneous expense.


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PNB's results for the nine months ended September 30, 2017 and 2016, and for the fiscal year ended December 31, 2016, included income and expense related to participations in legacy Vision assets. The impact of these participations on particular items within PNB's income and expense for these periods is detailed in the table below:
 
Nine months YTD 2017
 
Nine months YTD 2016
 
2016
(In thousands)
 PNB as reported
Adjustments (1)
 PNB as adjusted
 
 PNB as reported
Adjustments (1)
 PNB as adjusted
 
 PNB as reported
Adjustments (1)
 PNB as adjusted
Net interest income
$
174,717

$
149

$
174,568

 
$
170,194

$
725

$
169,469

 
$
227,576

$
801

$
226,775

Provision for (recovery of) loan losses
9,114

(5
)
9,119

 
(450
)
(2,736
)
2,286

 
2,611

(3,118
)
5,729

Other income
57,257

216

57,041

 
55,010

163

54,847

 
74,803

194

74,609

Other expense
133,667

398

133,269

 
126,418

479

125,939

 
177,562

662

176,900

Income (loss) before income taxes
$
89,193

$
(28
)
$
89,221

 
$
99,236

$
3,145

$
96,091

 
$
122,206

$
3,451

$
118,755

Federal income tax expense (benefit)
26,247

(8
)
26,255

 
30,923

980

29,943

 
37,755

1,066

36,689

Net income (expense)
$
62,946

$
(20
)
$
62,966

 
$
68,313

$
2,165

$
66,148

 
$
84,451

$
2,385

$
82,066

(1) Adjustments consist of the impact on the particular items reported in PNB's income statement of PNB participations in legacy Vision assets.

The table below provides certain balance sheet information and financial ratios for PNB as of or for the period ended September 30, 2017, June 30, 2017, December 31, 2016 and September 30, 2016.
(In thousands)
September 30, 2017
June 30, 2017
December 31, 2016
September 30, 2016
 
% change from 6/30/17
% change from 12/31/16
% change from 09/30/16
Loans
$
5,332,308

$
5,329,172

$
5,234,828

$
5,148,482

 
0.06
 %
1.86
 %
3.57
 %
Allowance for loan losses
52,888

51,699

48,782

51,573

 
2.30
 %
8.42
 %
2.55
 %
Net loans
5,279,420

5,277,473

5,186,046

5,096,909

 
0.04
 %
1.80
 %
3.58
 %
Investment securities
1,564,051

1,573,092

1,573,320

1,475,863

 
(0.57
)%
(0.59
)%
5.98
 %
Total assets
7,788,248

7,754,898

7,389,538

7,287,923

 
0.43
 %
5.40
 %
6.87
 %
Total deposits
6,051,268

6,037,148

5,630,199

5,626,391

 
0.23
 %
7.48
 %
7.55
 %
Average assets (1)
7,665,957

7,571,295

7,337,438

7,339,517

 
1.25
 %
4.48
 %
4.45
 %
Efficiency ratio
56.76
%
56.77
%
58.26
%
55.73
%
 
(0.02
)%
(2.57
)%
1.85
 %
Return on average assets (2)
1.10
%
1.11
%
1.15
%
1.24
%
 
(0.90
)%
(4.35
)%
(11.29
)%
(1) Average assets for the nine months ended September 30, 2017 and 2016, for the six months ended June 30, 2017 and for the fiscal year ended December 31, 2016.
(2) Annualized for the nine months ended September 30, 2017 and 2016 and for the six months ended June 30, 2017.

Loans outstanding at September 30, 2017 were $5.33 billion, compared to $5.23 billion at December 31, 2016, an increase of $97.5 million, or an annualized 2.5%. The loan growth for the first nine months of 2017 consisted of consumer loan growth of $116.2 million (13.8% annualized) and commercial loan growth of $21.9 million (1.1% annualized), offset by a reduction in HELOC loan balances of $5.8 million (3.6% annualized) and residential loan balances of $33.7 million (3.7% annualized).

PNB's allowance for loan losses increased by $4.1 million, or 8.4%, to $52.9 million at September 30, 2017, compared to $48.8 million at December 31, 2016. Net charge-offs were $5.0 million, or 0.13% (annualized) of total average loans, for the nine months ended September 30, 2017. Net charge-offs consisted of net charge-offs of consumer loans of $3.1 million, commercial loans of $1.2 million, mortgage loans of $278,000 and other loans of $487,000. Refer to the “Credit Metrics and Provision for (Recovery of) Loan Losses” section for additional information regarding PNB's loan portfolio and the level of provision for (recovery of) loan losses recognized in each period presented.


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Table of Contents

Total deposits at September 30, 2017 were $6.05 billion, compared to $5.63 billion at December 31, 2016, an increase of $421.1 million, or an annualized 10.0%, and compared to $5.63 billion at September 30, 2016, an increase of $424.9 million, or 7.6%. The deposit growth for the first nine months of 2017 consisted of savings deposits growth of $265.2 million (20.8% annualized), transaction account growth of $200.0 million (22.8% annualized) and non-interest bearing deposit growth of $13.3 million (1.1% annualized), offset by a decline in time deposits of $61.3 million (7.3% annualized). The deposit growth for the twelve months ended September 30, 2017 consisted of savings growth of $253.1 million (14.8%), transaction account growth of $146.4 million (11.9%), and non-interest bearing deposit growth of $109.2 million (7.1%), offset by a reduction in time deposits of $83.7 million (7.3%).

Guardian Financial Services Company (GFSC)

The table below reflects GFSC's net income (loss) for the first, second and third quarters of 2017, for the first nine months of 2017 and 2016, and for the fiscal years ended December 31, 2016 and 2015.
(In thousands)
Q3 2017
Q2 2017
Q1 2017
Nine months YTD 2017
Nine months YTD 2016
2016
2015
Net interest income
$
1,455

$
1,491

$
1,478

$
4,424

$
4,416

$
5,874

$
6,588

Provision for loan losses
609

373

437

1,419

1,658

1,887

1,415

Other income (loss)
18

(8
)

10

(1
)
(1
)
2

Other expense
734

825

736

2,295

3,632

4,457

2,984

Income (loss) before income taxes
$
130

$
285

$
305

$
720

$
(875
)
$
(471
)
$
2,191

    Federal income tax expense (benefit)
46

99

107

252

(305
)
(164
)
768

Net income (loss)
$
84

$
186

$
198

$
468

$
(570
)
$
(307
)
$
1,423


The provision for loan losses of $1.4 million for the nine months ended September 30, 2017 represented a decrease of $239,000, compared to $1.7 million for the same period of 2016. Refer to the “Credit Metrics and Provision for (Recovery of) Loan Losses” section for additional information regarding Guardian's loan portfolio and the level of provision for loan losses recognized in each period presented.

Other expense of $2.3 million for the nine months ended September 30, 2017 represented a $1.3 million decrease, compared to $3.6 million for the nine months ended September 30, 2016. This decrease was primarily related to the evaluation of respective litigation accruals during 2017 and 2016.

The table below provides certain balance sheet information and financial ratios for GFSC as of or for the period ended September 30, 2017, June 30, 2017, December 31, 2016 and September 30, 2016.
(In thousands)
September 30, 2017
June 30, 2017
December 31, 2016
September 30, 2016
 
% change from 06/30/17
% change from 12/31/16
% change from 09/30/16
Loans
$
33,686

$
34,179

$
32,661

$
32,236

 
(1.44
)%
3.14
%
4.50
 %
Allowance for loan losses
2,344

2,123

1,842

1,988

 
10.41
 %
27.25
%
17.91
 %
Net loans
31,342

32,056

30,819

30,248

 
(2.23
)%
1.70
%
3.62
 %
Total assets
33,260

33,860

32,268

32,759

 
(1.77
)%
3.07
%
1.53
 %
Average assets (1)
33,537

33,691

33,370

33,621

 
(0.46
)%
0.50
%
(0.25
)%
Return on average assets (2)
1.86
%
2.29
%
(0.92
)%
(2.27
)%
 
(18.78
)%
N.M.

N.M.

(1) Average assets for the nine months ended September 30, 2017 and 2016, for the six months ended June 30, 2017 and for the fiscal year ended December 31, 2016.
(2) Annualized for the nine months ended September 30, 2017 and 2016 and for the six months ended June 30, 2017.


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Table of Contents

Park Parent Company

The table below reflects the Park Parent Company net income (loss) for the first, second and third quarters of 2017, for the first nine months of 2017 and 2016, and for the fiscal years ended December 31, 2016 and 2015.
(In thousands)
Q3 2017
Q2 2017
Q1 2017
Nine months YTD 2017
Nine months YTD 2016
2016
2015
Net interest income (expense)
$
280

$
183

$
(207
)
$
256

$
(13
)
$
(138
)
$
239

Provision for loan losses







Other income (loss)
1,293

101

(204
)
1,190

379

955

513

Other expense
2,094

2,166

2,147

6,407

7,386

9,731

9,972

Loss before income tax benefit
$
(521
)
$
(1,882
)
$
(2,558
)
$
(4,961
)
$
(7,020
)
$
(8,914
)
$
(9,220
)
    Federal income tax benefit
(626
)
(963
)
(1,332
)
(2,921
)
(3,452
)
(4,357
)
(4,671
)
Net income (loss)
$
105

$
(919
)
$
(1,226
)
$
(2,040
)
$
(3,568
)
$
(4,557
)
$
(4,549
)

The net interest income (expense) for Park's parent company included, for all periods presented, interest income on subordinated debt investments in PNB, which were eliminated in the consolidated Park National Corporation totals. For the fiscal years 2016 and 2015 and for the nine months ended September 30, 2016, the net interest income (expense) included interest income on loans to SEPH (paid off on December 14, 2016). Additionally, net interest income (expense) included interest expense related to the $30.00 million of 7% Subordinated Notes due April 20, 2022 issued by Park to accredited investors on April 20, 2012, which Park prepaid in full (principal plus accrued interest) on April 24, 2017.

Other income of $1.2 million for the nine months ended September 30, 2017 represented an increase of $811,000 compared to $379,000 for the nine months ended September 30, 2016. The $811,000 increase was primarily related to an $832,000 increase in income from certain equity investments.

Other expense of $6.4 million for the nine months ended September 30, 2017 represented a decrease of $1.0 million, or 13.3%, compared to $7.4 million for the nine months ended September 30, 2016. The $1.0 million decrease was primarily related to a decrease of $835,000 in professional fees and services, a $322,000 decrease in miscellaneous other expense and a $331,000 decrease in employee benefit expense, offset by an increase of $235,000 in salaries expense and an increase of $315,000 in state tax expense.

SEPH

The table below reflects SEPH's net income (loss) for the first, second and third quarters of 2017, for the first nine months of 2017 and 2016, and for the fiscal years ended December 31, 2016 and 2015. SEPH holds the remaining assets and liabilities retained by Vision subsequent to the sale of the Vision business on February 16, 2012. Prior to holding the remaining Vision assets, SEPH held OREO assets that were transferred from Vision to SEPH. This segment represents a run-off portfolio of the legacy Vision assets.
(In thousands)
Q3 2017
Q2 2017
Q1 2017
Nine months YTD 2017
Nine months YTD 2016
2016
2015
Net interest income (expense)
$
401

$
282

$
201

$
884

$
1,240

$
4,774

$
(74
)
Recovery of loan losses
(1,146
)
(366
)
(281
)
(1,793
)
(5,027
)
(9,599
)
(4,090
)
Other income (loss)
411

(21
)

390

1,272

2,974

1,848

Other expense
996

1,238

776

3,010

4,525

7,273

6,182

Income (loss) before income taxes
$
962

$
(611
)
$
(294
)
$
57

$
3,014

$
10,074

$
(318
)
    Federal income tax expense (benefit)
336

(213
)
(103
)
20

1,056

3,526

(111
)
Net income (loss)
$
626

$
(398
)
$
(191
)
$
37

$
1,958

$
6,548

$
(207
)


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Table of Contents

Net interest income decreased to $884,000 for the nine months ended September 30, 2017 from $1.2 million for the same period in 2016. The decrease was largely the result of a decline in interest payments received from SEPH impaired loan relationships.

For the nine months ended September 30, 2017, SEPH had net recoveries of loan losses of $1.8 million, compared to $5.0 million for the same period in 2016.

The $1.5 million decrease in other expense for the nine months ended September 30, 2017, compared to the same period of 2016, was primarily the result of a $832,000 decline in management and consulting fees and a $496,000 decline in legal fees.

Legacy Vision assets at SEPH totaled $18.7 million as of September 30, 2017, compared to $20.3 million at December 31, 2016 and $22.3 million at September 30, 2016. In addition to these SEPH assets, PNB participations in legacy Vision assets totaled $9.0 million at September 30, 2017, compared to $9.6 million at both December 31, 2016 and September 30, 2016.

Park National Corporation

The table below reflects Park's consolidated net income for the first, second and third quarters of 2017, for the first nine months of 2017 and 2016, and for the fiscal years ended December 31, 2016 and 2015.
(In thousands)
Q3 2017
Q2 2017
Q1 2017
Nine months YTD 2017
Nine months YTD 2016
2016
2015
Net interest income
$
61,551

$
59,778

$
58,952

$
180,281

$
175,837

$
238,086

$
227,632

Provision for (recovery of) loan losses
3,283

4,581

876

8,740

(3,819
)
(5,101
)
4,990

Other income
22,089

19,251

17,507

58,847

56,660

78,731

77,551

Other expense
49,811

48,106

47,462

145,379

141,961

199,023

186,614

Income before income taxes
$
30,546

$
26,342

$
28,121

$
85,009

$
94,355

$
122,895

$
113,579

    Federal income taxes
8,434

7,310

7,854

23,598

28,222

36,760

32,567

Net income
$
22,112

$
19,032

$
20,267

$
61,411

$
66,133

$
86,135

$
81,012




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Table of Contents

Net Interest Income

Park’s principal source of earnings is net interest income, the difference between total interest income and total interest expense. Net interest income results from average balances outstanding for interest earning assets and interest bearing liabilities in conjunction with the average rates earned and paid on them.

Comparison for the Third Quarter of 2017 and 2016
 
Net interest income increased by $3.0 million, or 5.2%, to $61.6 million for the third quarter of 2017, compared to $58.5 million for the third quarter of 2016. See the discussion under the table below.
 
 
 
Three months ended 
September 30, 2017
 
Three months ended 
September 30, 2016
(Dollars in thousands)
 
Average
balance
Interest
Tax
equivalent 
yield/cost
 
Average
balance
Interest
Tax
equivalent 
yield/cost
Loans (1)
 
$
5,337,206

$
63,338

4.71
%
 
$
5,139,781

$
60,141

4.66
%
Taxable investments
 
1,293,571

6,757

2.07
%
 
1,388,892

7,339

2.10
%
Tax-exempt investments (2)
 
271,305

3,037

4.44
%
 
95,513

1,060

4.41
%
Money market instruments
 
427,157

1,383

1.28
%
 
247,475

321

0.52
%
Interest earning assets
 
$
7,329,239

$
74,515

4.03
%
 
$
6,871,661

$
68,861

3.99
%
 
 
 
 
 
 
 
 
 
Interest bearing deposits
 
$
4,505,040

5,403

0.48
%
 
$
4,238,301

3,446

0.32
%
Short-term borrowings
 
187,319

197

0.42
%
 
214,559

85

0.16
%
Long-term debt
 
863,205

6,073

2.79
%
 
787,202

6,178

3.12
%
Interest bearing liabilities
 
$
5,555,564

$
11,673

0.83
%
 
$
5,240,062

$
9,709

0.74
%
Excess interest earning assets
 
$
1,773,675

 
 

 
$
1,631,599

 
 

Tax equivalent net interest income
 
 
$
62,842

 
 
 
$
59,152

 
Net interest spread
 
 

 
3.20
%
 
 

 
3.25
%
Net interest margin
 
 

 
3.40
%
 
 

 
3.42
%
(1) Loan interest income includes the effects of taxable equivalent adjustments using a 35% tax rate in 2017 and 2016. The taxable equivalent adjustment was $228,000 for the three months ended September 30, 2017 and $248,000 for the same period of 2016.
(2) Interest income on tax-exempt investment securities includes the effects of taxable equivalent adjustments using a 35% tax rate in 2017 and 2016. The taxable equivalent adjustment was $1.1 million for the three months ended September 30, 2017 and $371,000 for the same period of 2016.
 
Average interest earning assets for the third quarter of 2017 increased by $458 million, or 6.7%, to $7,329 million, compared to $6,872 million for the third quarter of 2016. The average yield on interest earning assets increased by 4 basis points to 4.03% for the third quarter of 2017, compared to 3.99% for the third quarter of 2016.

Average interest bearing liabilities for the third quarter of 2017 increased by $316 million, or 6.0%, to $5,556 million, compared to $5,240 million for the third quarter of 2016. The average cost of interest bearing liabilities increased by 9 basis points to 0.83% for the third quarter of 2017, compared to 0.74% for the third quarter of 2016.


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Table of Contents

Yield on Loans: Average loan balances increased by $197 million, or 3.8%, to $5,337 million for the third quarter of 2017, compared to $5,140 million for the third quarter of 2016. The average yield on the loan portfolio increased by 5 basis points to 4.71% for the third quarter of 2017, compared to 4.66% for the third quarter of 2016.

The table below shows for the three months ended September 30, 2017 and 2016, the average balance and tax equivalent yield by type of loan.

 
 
Three months ended 
September 30, 2017
 
Three months ended 
September 30, 2016
(Dollars in thousands)
 
Average
balance
 
Tax
equivalent 
yield
 
Average
balance
 
Tax
equivalent 
yield
Home equity
 
$
208,741

 
4.56
%
 
$
213,630

 
3.99
%
Installment and indirect loans
 
1,261,542

 
4.96
%
 
1,071,493

 
5.28
%
Real estate loans
 
1,188,550

 
3.87
%
 
1,229,884

 
3.82
%
Commercial loans (1)
 
2,673,207

 
4.96
%
 
2,618,728

 
4.83
%
Other
 
5,166

 
11.97
%
 
6,046

 
10.95
%
Total loans and leases before allowance
 
$
5,337,206

 
4.71
%
 
$
5,139,781

 
4.66
%
(1) Commercial loan interest income includes the effects of taxable equivalent adjustments using a 35% tax rate in 2017 and 2016. The taxable equivalent adjustment was $228,000 for the three months ended September 30, 2017 and $248,000 for the same period of 2016.

Cost of Deposits: Average interest bearing deposit balances increased by $267 million, or 6.3%, to $4,505 million for the third quarter of 2017, compared to $4,238 million for the third quarter of 2016. The average cost of funds on deposit balances increased by 16 basis points to 0.48% for the third quarter of 2017, compared to 0.32% for the third quarter of 2016.

The table below shows for the three months ended September 30, 2017 and 2016, the average balance and cost of funds by type of deposit.

 
 
Three months ended 
September 30, 2017
 
Three months ended 
September 30, 2016
(Dollars in thousands)
 
Average
balance
 
Cost of funds
 
Average
balance
 
Cost of funds
Transaction accounts
 
$
1,395,919

 
0.30
%
 
$
1,271,801

 
0.11
%
Savings deposits and clubs
 
2,011,251

 
0.36
%
 
1,753,451

 
0.17
%
Time deposits
 
1,097,870

 
0.91
%
 
1,213,049

 
0.77
%
Total interest bearing deposits
 
$
4,505,040

 
0.48
%
 
$
4,238,301

 
0.32
%


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Table of Contents

Comparison for the First Nine Months of 2017 and 2016
 
Net interest income increased by $4.4 million, or 2.5%, to $180.3 million for the first nine months of 2017, compared to $175.8 million for the first nine months of 2016. See the discussion under the table below.
 
 
 
Nine months ended 
September 30, 2017
 
Nine months ended 
September 30, 2016
(Dollars in thousands)
 
Average
balance
Interest
Tax
equivalent 
yield/cost
 
Average
balance
Interest
Tax
equivalent 
yield/cost
Loans (1)
 
$
5,314,501

$
185,034

4.66
%
 
$
5,091,148

$
179,074

4.70
%
Taxable investments
 
1,329,589

20,787

2.09
%
 
1,443,131

23,718

2.20
%
Tax-exempt investments (2)
 
232,751

7,844

4.51
%
 
75,538

2,543

4.50
%
Money market instruments
 
271,778

2,330

1.15
%
 
220,461

844

0.51
%
Interest earning assets
 
$
7,148,619

$
215,995

4.04
%
 
$
6,830,278

$
206,179

4.03
%
 
 
 
 
 
 
 
 
 
Interest bearing deposits
 
$
4,363,065

13,926

0.43
%
 
$
4,195,328

9,979

0.32
%
Short-term borrowings
 
223,043

616

0.37
%
 
238,514

330

0.19
%
Long-term debt
 
806,584

17,632

2.92
%
 
785,661

18,415

3.13
%
Interest bearing liabilities
 
$
5,392,692

$
32,174

0.80
%
 
$
5,219,503

$
28,724

0.74
%
Excess interest earning assets
 
$
1,755,927

 
 

 
$
1,610,775

 
 

Tax equivalent net interest income
 
 
$
183,821

 
 
 
$
177,455

 
Net interest spread
 
 

 
3.24
%
 
 

 
3.29
%
Net interest margin
 
 

 
3.44
%
 
 

 
3.47
%
(1) Loan interest income includes the effects of taxable equivalent adjustments using a 35% tax rate in 2017 and 2016. The taxable equivalent adjustment was $794,000 for the nine months ended September 30, 2017 and $728,000 for the same period of 2016.
(2) Interest income on tax-exempt investment securities includes the effects of taxable equivalent adjustments using a 35% tax rate in 2017 and 2016. The taxable equivalent adjustment was $2.7 million for the nine months ended September 30, 2017 and $890,000 for the same period of 2016.
 
Average interest earning assets for the first nine months of 2017 increased by $318 million, or 4.7%, to $7,149 million, compared to $6,830 million for the first nine months of 2016. The average yield on interest earning assets increased by 1 basis point to 4.04% for the first nine months of 2017, compared to 4.03% for the same period of 2016. Interest income for the first nine months of 2016 included $1.7 million related to a payment from one SEPH impaired loan relationship which is also participated with PNB. Excluding this income, the yield on loans was 4.65%, the yield on interest earning assets was 4.00%, and the net interest margin was 3.44%.

Average interest bearing liabilities for the first nine months of 2017 increased by $173 million, or 3.3%, to $5,393 million, compared to $5,220 million for the same period of 2016. The average cost of interest bearing liabilities increased by 6 basis points to 0.80% for the first nine months of 2017, compared to 0.74% for the same period of 2016.

Yield on Loans: Average loan balances increased by $223 million, or 4.4%, to $5,315 million for the first nine months of 2017, compared to $5,091 million for the same period of 2016. The average yield on the loan portfolio decreased by 4 basis points to 4.66% for the first nine months of 2017, compared to 4.70% for the first nine months of 2016. The yield on loans for the first nine months of 2016 was positively impacted by a payment from one SEPH impaired loan relationship which is also participated with PNB. Excluding this income, for the first nine months of 2016, the yield on commercial loans and the yield on total loans was 4.80% and 4.65%, respectively.

59

Table of Contents

The table below shows for the nine months ended September 30, 2017 and 2016, the average balance and tax equivalent yield by type of loan.
 
 
Nine months ended 
September 30, 2017
 
Nine months ended 
September 30, 2016
(Dollars in thousands)
 
Average
balance
 
Tax
equivalent 
yield
 
Average
balance
 
Tax
equivalent 
yield
Home equity
 
$
210,648

 
4.38
%
 
$
211,958

 
4.03
%
Installment and indirect loans
 
1,226,508

 
4.97
%
 
1,034,864

 
5.39
%
Real estate loans
 
1,199,414

 
3.84
%
 
1,236,143

 
3.80
%
Commercial loans (1)
 
2,672,555

 
4.89
%
 
2,602,252

 
4.89
%
Other
 
5,376

 
11.55
%
 
5,931

 
11.36
%
Total loans and leases before allowance
 
$
5,314,501

 
4.66
%
 
$
5,091,148

 
4.70
%
(1) Commercial loan interest income includes the effects of taxable equivalent adjustments using a 35% tax rate in 2017 and 2016. The taxable equivalent adjustment was $794,000 for the nine months ended September 30, 2017 and $728,000 for the same period of 2016.

Yield on Average Interest Earning Assets: The following table shows the tax equivalent yield on average interest earning assets for the nine months ended September 30, 2017 and for the fiscal years ended December 31, 2016, 2015 and 2014.

 
 
Loans (1)
 
Investments (2)
 
Money Market
Instruments
 
Total
2014 - year
 
4.84
%
 
2.58
%
 
0.25
%
 
4.19
%
2015 - year
 
4.66
%
 
2.46
%
 
0.26
%
 
3.95
%
2016 - year
 
4.74
%
 
2.30
%
 
0.51
%
 
4.08
%
2017 - first nine months
 
4.66
%
 
2.45
%
 
1.15
%
 
4.04
%
(1) Loan interest income includes the effects of taxable equivalent adjustments using a 35% tax rate. The taxable equivalent adjustment was $794,000 for the nine months ended September 30, 2017, and $1.0 million, $767,000 and $843,000 for the fiscal years ended December 31, 2016, 2015 and 2014, respectively.
(2) Interest income on tax-exempt investment securities includes the effects of taxable equivalent adjustments using a 35% tax rate. The taxable equivalent adjustment was $2.7 million for the nine months ended September 30, 2017, and $1.4 million, $98,000, and $2,000 for the fiscal years ended December 31, 2016, 2015, and 2014, respectively.

Cost of Deposits: Average interest bearing deposit balances increased by $168 million, or 4.0%, to $4,363 million for the first nine months of 2017, compared to $4,195 million for the same period of 2016. The average cost of funds on deposit balances increased by 11 basis points to 0.43% for the first nine months of 2017, compared to 0.32% for the first nine months of 2016.

The table below shows for the nine months ended September 30, 2017 and 2016, the average balance and cost of funds by type of deposit.

 
 
Nine months ended 
September 30, 2017
 
Nine months ended 
September 30, 2016
(Dollars in thousands)
 
Average
balance
 
Cost of funds
 
Average
balance
 
Cost of funds
Transaction accounts
 
$
1,319,492

 
0.24
%
 
$
1,243,323

 
0.10
%
Savings deposits and clubs
 
1,935,887

 
0.30
%
 
1,704,914

 
0.15
%
Time deposits
 
1,107,686

 
0.86
%
 
1,247,091

 
0.76
%
Total interest bearing deposits
 
$
4,363,065

 
0.43
%
 
$
4,195,328

 
0.32
%

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Cost of Average Interest Bearing Liabilities: The following table shows the cost of funds on average interest bearing liabilities for the nine months ended September 30, 2017 and for the fiscal years ended December 31, 2016, 2015 and 2014.

 
 
Interest bearing deposits
 
Short-term borrowings
 
Long-term debt
 
Total
2014 - year
 
0.29
%
 
0.20
%
 
3.29
%
 
0.81
%
2015 - year
 
0.30
%
 
0.18
%
 
3.10
%
 
0.72
%
2016 - year
 
0.32
%
 
0.19
%
 
3.13
%
 
0.74
%
2017 - first nine months
 
0.43
%
 
0.37
%
 
2.92
%
 
0.80
%

Credit Metrics and Provision for (Recovery of) Loan Losses

The provision for (recovery of) loan losses is the amount added to the allowance for loan and lease losses ("ALLL") to ensure the allowance is sufficient to absorb probable, incurred credit losses. The amount of the provision for (recovery of) loan losses is determined by management after reviewing the risk characteristics of the loan portfolio, historic and current loan loss experience and current economic conditions.

Park's Ohio-based subsidiaries, PNB and GFSC, are the only subsidiaries that carry an ALLL balance. The table below provides additional information on the provision for (recovery of) loan losses and the ALLL for Park, Park's Ohio-based operations, and SEPH for the three-month and nine-month periods ended September 30, 2017 and 2016.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(Dollars in thousands)
2017
2016
 
2017
2016
ALLL, beginning balance
$
53,822

$
58,699

 
$
50,624

$
56,494

 
 
 
 
 
 
Net charge-offs (recoveries) :
 
 
 
 
 
Park's Ohio-based operations
3,019

1,479

 
5,925

4,140

SEPH
(1,146
)
(3,708
)
 
(1,793
)
(5,027
)
Park
1,873

(2,229
)
 
4,132

(887
)
 
 
 
 

 
Provision for (recovery of) loan losses:
 
 
 
 
 
Park's Ohio-based operations
4,429

(3,658
)
 
10,533

1,208

SEPH
(1,146
)
(3,708
)
 
(1,793
)
(5,027
)
Park
3,283

(7,366
)
 
8,740

(3,819
)
 
 
 
 
 
 
ALLL, ending balance
$
55,232

$
53,562

 
$
55,232

$
53,562

 
 
 
 
 
 
Annualized ratio of net charge-offs (recoveries) to average loans:
 
 
 
 
 
Park's Ohio-based operations
0.22
 %
0.11
 %
 
0.15
 %
0.11
 %
SEPH
(41.46
)%
(102.63
)%
 
(20.54
)%
(45.63
)%
Park
0.14
 %
(0.17
)%
 
0.10
 %
(0.02
)%
 
SEPH, as a non-bank subsidiary of Park, does not carry an ALLL balance, but recognizes a provision for loan losses when a charge-off is taken and recognizes a recovery of loan losses when a recovery is received.


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The following table provides additional information related to the allowance for loan losses for Park's Ohio-based operations, including information related to specific reserves and general reserves, at September 30, 2017, December 31, 2016 and September 30, 2016.
Park Ohio-based operations - Allowance for Loan Losses
(In thousands)
 
September 30, 2017
 
December 31, 2016
 
September 30, 2016
Total allowance for loan losses
 
$
55,232

 
$
50,624

 
$
53,562

Specific reserves
 
5,102

 
548

 
4,232

General reserves
 
$
50,130

 
$
50,076

 
$
49,330

 
 
 
 
 
 
 
Total loans
 
$
5,355,142

 
$
5,259,503

 
$
5,172,601

Impaired commercial loans
 
63,407

 
58,676

 
64,313

Non-impaired loans
 
$
5,291,735

 
$
5,200,827

 
$
5,108,288

 
 
 
 
 
 
 
Total allowance for loan losses to total loans ratio
 
1.03
%
 
0.96
%
 
1.04
%
General reserves as a % of non-impaired loans
 
0.95
%
 
0.96
%
 
0.97
%

The allowance for loan losses of $55.2 million at September 30, 2017 represented a $4.6 million, or 9.1%, increase compared to $50.6 million at December 31, 2016. This increase was mainly the result of a $4.6 million increase in specific reserves. The increase in specific reserves was largely due to a $3.6 million reserve established on a commercial loan relationship in PNB's national portfolio of loans to non-bank consumer finance companies, of which $800,000 was established in the third quarter of 2017.

Generally, management obtains updated valuations for all nonperforming loans, including those held at SEPH, at least annually. As new valuation information is received, management performs an evaluation and applies a discount for anticipated disposition costs to determine the net realizable value of the collateral, which is compared against the outstanding principal balance to determine if additional write-downs are necessary.

Nonperforming Assets: Nonperforming assets include: 1) loans whose interest is accounted for on a nonaccrual basis; 2) TDRs on accrual status; 3) loans which are contractually past due 90 days or more as to principal or interest payments but whose interest continues to accrue; and (4) OREO which results from taking possession of property that served as collateral for a defaulted loan.

The following table compares Park’s nonperforming assets at September 30, 2017, December 31, 2016 and September 30, 2016.
 
Park National Corporation - Nonperforming Assets 
(In thousands)
 
September 30, 2017
 
December 31, 2016
 
September 30, 2016
Nonaccrual loans
 
$
90,568

 
$
87,822

 
$
97,832

Accruing TDRs
 
19,401

 
18,175

 
17,350

Loans past due 90 days or more
 
1,980

 
2,086

 
1,682

Total nonperforming loans
 
$
111,949

 
$
108,083

 
$
116,864

 
 
 
 
 
 
 
OREO – PNB
 
6,701

 
6,025

 
7,004

OREO – SEPH
 
7,665

 
7,901

 
7,937

Total nonperforming assets
 
$
126,315

 
$
122,009


$
131,805

 
 
 
 
 
 
 
Percentage of nonaccrual loans to total loans
 
1.69
%
 
1.67
%
 
1.89
%
Percentage of nonperforming loans to total loans
 
2.09
%
 
2.05
%
 
2.25
%
Percentage of nonperforming assets to total loans
 
2.35
%
 
2.31
%
 
2.54
%
Percentage of nonperforming assets to total assets
 
1.61
%
 
1.63
%
 
1.79
%
 

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Nonperforming assets for Park's Ohio-based operations and for SEPH as of September 30, 2017, December 31, 2016 and September 30, 2016 were as reported in the following two tables:
  
Park's Ohio-based operations - Nonperforming Assets 
(In thousands)
 
September 30, 2017
 
December 31, 2016
 
September 30, 2016
Nonaccrual loans
 
$
80,424

 
$
76,084

 
$
84,045

Accruing TDRs
 
19,401

 
18,175

 
17,350

Loans past due 90 days or more
 
1,980

 
2,086

 
1,682

Total nonperforming loans
 
$
101,805

 
$
96,345

 
$
103,077

 
 
 
 
 
 
 
OREO – PNB
 
6,701

 
6,025

 
7,004

Total nonperforming assets

$
108,506


$
102,370

 
$
110,081

 
 
 
 
 
 
 
Percentage of nonaccrual loans to total loans
 
1.50
%
 
1.45
%
 
1.62
%
Percentage of nonperforming loans to total loans
 
1.90
%
 
1.83
%
 
1.99
%
Percentage of nonperforming assets to total loans
 
2.03
%
 
1.95
%
 
2.13
%
Percentage of nonperforming assets to total assets
 
1.39
%
 
1.38
%
 
1.51
%
  
SEPH - Nonperforming Assets 
(In thousands)
 
September 30, 2017
 
December 31, 2016
 
September 30, 2016
Nonaccrual loans
 
$
10,144

 
$
11,738

 
$
13,787

Accruing TDRs
 

 

 

Loans past due 90 days or more
 

 

 

Total nonperforming loans
 
$
10,144

 
$
11,738

 
$
13,787

 
 
 
 
 
 
 
OREO – SEPH
 
7,665

 
7,901

 
7,937

Total nonperforming assets
 
$
17,809


$
19,639

 
$
21,724

 
Impaired Loans:  Park’s allowance for loan losses includes an allocation for loans specifically identified as impaired under GAAP. At September 30, 2017, loans considered to be impaired consisted substantially of commercial loans graded as "substandard" or “doubtful” and placed on non-accrual status.  Specific reserves on impaired commercial loans are typically based on management’s best estimate of the fair value of collateral securing these loans. The amount ultimately charged off for these loans may be different from the specific reserve as the ultimate liquidation of the collateral may be for amounts different from management’s estimates.

When determining the quarterly loan loss provision, Park reviews the grades of commercial loans. These loans are graded from 1 to 8. A grade of 1 indicates little or no credit risk and a grade of 8 is considered a loss. Commercial loans that are pass-rated (graded an 1 through a 4) 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. Commercial loans graded 6 (substandard), also considered to be watch list credits, represent higher credit risk than those rated special mention and, as a result, a higher loan loss reserve percentage is allocated to these loans. Commercial loans that are graded a 7 (doubtful) are shown as nonperforming and Park charges these loans down to their fair value by taking a partial charge-off or recording a specific reserve. Certain 6-rated loans and all 7-rated loans are included within the impaired category. A loan is deemed impaired when management determines that 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.
 
As of September 30, 2017, Park had taken partial charge-offs of $9.9 million related to the $73.6 million of commercial loans considered to be impaired, compared to partial charge-offs of approximately $24.9 million related to the $70.4 million of impaired commercial loans at December 31, 2016.
 

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Allowance for loan losses: Loss factors are reviewed quarterly and updated at least annually to reflect recent loan loss history and incorporate current risks and trends which may not be recognized in historical data. The historical loss factors were last updated in the fourth quarter of 2016 to incorporate losses through December 31, 2016.

The allowance for loan losses related to performing commercial loans was $32.4 million or 1.23% of the outstanding principal balance of performing commercial loans at September 30, 2017. At September 30, 2017, the coverage level within the commercial loan portfolio was approximately 3.12 years compared to 3.20 years at December 31, 2016. Historical loss experience, defined as charge-offs plus changes in specific reserves, over the 84 month period ended December 31, 2016, for the commercial loan portfolio was 0.39%. This 84-month loss experience includes only the performance of the PNB loan portfolio and excludes the impact of PNB participations in Vision loans.

The overall reserve of 1.23% for accruing commercial loans breaks down as follows: pass-rated commercial loans are reserved at 1.22%; special mention commercial loans are reserved at 2.99%; and substandard commercial loans are reserved at 15.71%. The reserve levels for pass-rated, special mention and substandard commercial loans in excess of the 84-month loss experience of 0.39% are due to the following factors which management reviews on a quarterly or annual basis:

Loss Emergence Period Factor: At least annually, management calculates the loss emergence period for each commercial loan segment. Each loss emergence period is calculated based upon the average period of time it takes from the probable occurrence of a loss event to a credit being moved to nonaccrual status. If the loss emergence period for any commercial loan segment is greater than one year, management applies additional general reserves to all performing loans within that segment of the commercial loan portfolio. The loss emergence periods were last updated in the fourth quarter of 2016.
Loss Migration Factor: Park’s commercial loans are individually risk graded. If loan downgrades occur, the probability of default increases, and accordingly, management allocates a higher percentage reserve to those accruing commercial loans graded special mention and substandard. Annually, management calculates a loss migration factor for each commercial loan segment for special mention and substandard credits based on a review of losses over the period of time a loan takes to migrate from pass-rated to impaired. The loss migration factors were last updated in the fourth quarter of 2016.
Environmental Loss Factor: Management has identified certain macroeconomic factors that trend in accordance with losses in Park’s commercial loan portfolio. These macroeconomic factors are reviewed quarterly and the adjustments made to the environmental loss factor impacting each segment in the performing commercial loan portfolio correlate to changes in the macroeconomic environment.
Generally, consumer loans are not individually graded. Consumer loans include: (1) mortgage and installment loans included in the construction real estate segment of the loan portfolio; (2) mortgage, home equity lines of credit ("HELOC"), and installment loans included in the residential real estate segment of the loan portfolio; and (3) all loans included in the consumer segment of the loan portfolio. The amount of loan loss reserve assigned to these loans is based on historical loss experience over the past 84 months, through December 31, 2016. Management generally considers a one-year coverage period (the “Historical Loss Factor”) appropriate because the probable loss on any given loan in the consumer loan pool should ordinarily become apparent in that time frame. However, management may incorporate adjustments to the Historical Loss Factor as circumstances warrant additional reserves (e.g., increased loan delinquencies, improving or deteriorating economic conditions, changes in lending management and changes in underwriting standards, etc.). At September 30, 2017, the coverage level within the consumer loan portfolio was approximately 1.90 years compared to 1.95 years at December 31, 2016. Historical loss experience, over the 84-month period ended December 31, 2016, for the consumer loan portfolio was 0.35%.

The judgmental increases discussed above incorporate management’s evaluation of the impact of environmental qualitative factors which pose additional risks and assignment of a component of the allowance for loan losses in consideration of these factors. Such environmental qualitative factors include: global, national and local economic trends and conditions; experience, ability and depth of lending management and staff; effects of any changes in lending policies and procedures; and levels of, and trends in, consumer bankruptcies, delinquencies, impaired loans and charge-offs and recoveries. The determination of this component of the allowance for loan losses requires considerable management judgment. Actual loss experience may be more or less than the amount allocated.
 

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Table of Contents

Other Income
 
Other income increased by $1.6 million to $22.1 million for the quarter ended September 30, 2017, compared to $20.5 million for the third quarter of 2016 and increased by $2.2 million to $58.8 million for the nine months ended September 30, 2017, compared to $56.7 million for the same period of 2016.

The following table is a summary of the changes in the components of other income:
 
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(In thousands)
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Income from fiduciary activities
 
$
5,932

 
$
5,315

 
$
617

 
$
17,471

 
$
15,866

 
$
1,605

Service charges on deposit accounts
 
3,216

 
3,800

 
(584
)
 
9,511

 
10,798

 
(1,287
)
Other service income
 
3,357

 
3,640

 
(283
)
 
9,608

 
9,565

 
43

Check card fee income
 
3,974

 
3,780

 
194

 
11,775

 
11,180

 
595

Bank owned life insurance income
 
1,573

 
1,038

 
535

 
3,790

 
3,284

 
506

ATM fees
 
605

 
581

 
24

 
1,708

 
1,734

 
(26
)
OREO valuation adjustments
 
(22
)
 
(233
)
 
211

 
(367
)
 
(572
)
 
205

Gain on sale of OREO, net
 
51

 
783

 
(732
)
 
204

 
1,079

 
(875
)
Miscellaneous
 
3,403

 
1,831

 
1,572

 
5,147

 
3,726

 
1,421

Total other income
 
$
22,089

 
$
20,535

 
$
1,554

 
$
58,847

 
$
56,660

 
$
2,187

 
The following table breaks out the change in total other income for the three and nine months ended September 30, 2017 compared to the same periods ended September 30, 2016 between Park’s Ohio-based operations and SEPH.

 
 
Change from 2016 to 2017 for the three months ended September 30
 
Change from 2016 to 2017 for the nine months ended September 30
(In thousands)
 
Ohio-based operations
 
SEPH
 
Total
 
Ohio-based operations
 
SEPH
 
Total
Income from fiduciary activities
 
$
617

 
$

 
$
617

 
$
1,605

 
$

 
$
1,605

Service charges on deposit accounts
 
(584
)
 

 
(584
)
 
(1,287
)
 

 
(1,287
)
Other service income
 
(357
)
 
74

 
(283
)
 
252

 
(209
)
 
43

Check card fee income
 
194

 

 
194

 
595

 

 
595

Bank owned life insurance income
 
535

 

 
535

 
506

 

 
506

ATM fees
 
24

 

 
24

 
(26
)
 

 
(26
)
OREO valuation adjustments
 
211

 

 
211

 
205

 

 
205

Gain on sale of OREO, net
 
10

 
(742
)
 
(732
)
 
(67
)
 
(808
)
 
(875
)
Miscellaneous
 
1,619

 
(47
)
 
1,572

 
1,286

 
135

 
1,421

Total other income
 
$
2,269

 
$
(715
)
 
$
1,554

 
$
3,069

 
$
(882
)
 
$
2,187


Income from fiduciary activities, which represents revenue earned from Park’s trust activities, increased by $617,000, or 11.6%, to $5.9 million for the three months ended September 30, 2017, compared to $5.3 million for the same period in 2016. Fiduciary income increased by $1.6 million, or 10.1%, to $17.5 million for the nine months ended September 30, 2017, compared to $15.9 million for the same period in 2016. Fiduciary fees charged are generally based on the market value of customer accounts. The average market value for assets under management for the nine months ended September 30, 2017 was $4,976 million compared to $4,501 million for the nine months ended September 30, 2016.

Service charges on deposit accounts decreased by $584,000, or 15.4%, to $3.2 million for the three months ended September 30, 2017, compared to $3.8 million for the same period of 2016. Service charges on deposits decreased by $1.3 million, or 11.9%, to $9.5 million for the nine months ended September 30, 2017, compared to $10.8 million for the same period of 2016. The decreases were primarily related to declines in NSF fee income and the discontinuation of daily overdraft fees related to deposit products.


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Table of Contents


Check card fee income, which is generated from debit card transactions, increased by $194,000, or 5.1%, to $4.0 million for the three months ended September 30, 2017, compared to $3.8 million for the same period in 2016. Check card fee income increased by $595,000, or 5.3%, to $11.8 million for the nine months ended September 30, 2017, compared to $11.2 million for the same period in 2016. The increases were primarily related to an increase in the volume of debit card transactions.

Bank owned life insurance income increased by $535,000, or 51.5%, to $1.6 million for the three months ended September 30, 2017, compared to $1.0 million for the same period in 2016. Bank owned life insurance income increased by $506,000, or 15.4%, to $3.8 million for the nine months ended September 30, 2017, compared to $3.3 million for the same period in 2016. The increases were related to income of $478,000 related to proceeds from death benefits received during the three months ended September 30, 2017.

Gain on sale of OREO, net decreased by $732,000, or 93.5%, to $51,000 for the three months ended September 30, 2017, compared to $783,000 for the same period in 2016. Gain on sale of OREO, net decreased by $875,000, or 81.1%, to $204,000 for the nine months ended September 30, 2017, compared to $1.1 million for the same period in 2016. The book value on OREO sales for the three months ended September 30, 2017 was $593,000, compared to $3.1 million for the same period of 2016. The book value on OREO sales for the nine months ended September 30, 2017 was $2.1 million, compared to $5.9 million for the same period of 2016.

Miscellaneous income increased by $1.6 million, or 85.9%, to $3.4 million for the three months ended September 30, 2017, compared to $1.8 million for the same period in 2016. Miscellaneous income increased by $1.4 million, or 38.1%, to $5.1 million, compared to $3.7 million for the same period of 2016. The increase is mainly related to an $832,000 increase in income from certain equity investments and a $738,000 increase in the timing of income from check card incentives.

Other Expense

Other expense increased by $3.1 million to $49.8 million for the quarter ended September 30, 2017, compared to $46.8 million for the third quarter of 2016 and increased by $3.4 million to $145.4 million for the nine months ended September 30, 2017, compared to $142.0 million for the same period of 2016.

The following table is a summary of the changes in the components of other expense:

 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(In thousands)
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Salaries
 
$
23,302

 
$
22,084

 
$
1,218

 
$
69,020

 
$
64,894

 
$
4,126

Employee benefits
 
4,656

 
5,073

 
(417
)
 
14,756

 
14,740

 
16

Occupancy expense
 
2,559

 
2,506

 
53

 
7,759

 
7,693

 
66

Furniture and equipment expense
 
3,868

 
3,437

 
431

 
11,126

 
10,296

 
830

Data processing fees
 
1,919

 
1,450

 
469

 
5,560

 
4,040

 
1,520

Professional fees and services
 
6,100

 
6,356

 
(256
)
 
16,947

 
18,424

 
(1,477
)
Marketing
 
1,122

 
1,062

 
60

 
3,262

 
3,246

 
16

Insurance
 
1,499

 
1,423

 
76

 
4,586

 
4,272

 
314

Communication
 
1,110

 
1,154

 
(44
)
 
3,598

 
3,728

 
(130
)
State tax expense
 
912

 
895

 
17

 
2,918

 
2,619

 
299

Miscellaneous
 
2,764

 
1,316

 
1,448

 
5,847

 
8,009

 
(2,162
)
Total other expense
 
$
49,811

 
$
46,756

 
$
3,055

 
$
145,379

 
$
141,961

 
$
3,418


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Table of Contents

The following table breaks out the change in total other expense for the three and nine months ended September 30, 2017, compared to the same periods ended September 30, 2016 between Park’s Ohio-based operations and SEPH.
 
 
 
Change from 2016 to 2017 for the three months ended September 30
 
Change from 2016 to 2017 for the nine months ended September 30
(In thousands)
 
Ohio based operations
 
SEPH
 
Total
 
Ohio based operations
 
SEPH
 
Total
Salaries
 
$
1,232

 
$
(14
)
 
$
1,218

 
$
4,146

 
$
(20
)
 
$
4,126

Employee benefits
 
(402
)
 
(15
)
 
(417
)
 
60

 
(44
)
 
16

Occupancy expense
 
53

 

 
53

 
66

 

 
66

Furniture and equipment expense
 
431

 

 
431

 
830

 

 
830

Data processing fees
 
469

 

 
469

 
1,520

 

 
1,520

Professional fees and services
 
452

 
(708
)
 
(256
)
 
(139
)
 
(1,338
)
 
(1,477
)
Marketing
 
60

 

 
60

 
19

 
(3
)
 
16

Insurance
 
76

 

 
76

 
316

 
(2
)
 
314

Communication
 
(43
)
 
(1
)
 
(44
)
 
(127
)
 
(3
)
 
(130
)
State tax expense
 
53

 
(36
)
 
17

 
355

 
(56
)
 
299

Miscellaneous
 
1,467

 
(19
)
 
1,448

 
(2,112
)
 
(50
)
 
(2,162
)
Total other expense
 
$
3,848

 
$
(793
)
 
$
3,055

 
$
4,934

 
$
(1,516
)
 
$
3,418


Salaries increased by $1.2 million, or 5.5%, to $23.3 million for the three months ended September 30, 2017, compared to $22.1 million for the same period in 2016. Salaries increased by $4.1 million, or 6.4%, to $69.0 million for the nine months ended September 30, 2017, compared to $64.9 million for the same period in 2016. The increase for the three months ended September 30, 2017 was due to an $1.1 million increase in salary expense and a $329,000 increase in share-based compensation expense related to performance-based restricted stock unit awards granted under the 2013 Incentive Plan, offset by a $244,000 decrease in incentive compensation expense. The increase for the nine months ended September 30, 2017 was due to a $3.9 million increase in salary expense and a $926,000 increase in share-based compensation expense related to performance-based restricted stock unit awards granted under the 2013 Incentive Plan, offset by a $731,000 decrease in incentive compensation expense.

Furniture and equipment expense increased by $431,000, or 12.5%, to $3.9 million for the three months ended September 30, 2017, compared to $3.4 million for the same period in 2016, and increased by $830,000, or 8.1%, to $11.1 million for the nine months ended September 30, 2017, compared to $10.3 million for the same period in 2016. The increases for the three and nine months ended September 30, 2017 were primarily due to maintenance and repairs on equipment.

Data processing fees increased by $469,000, or 32.3%, to $1.9 million for the three months ended September 30, 2017, compared to $1.5 million for the same period in 2016. Data processing fees increased by $1.5 million, or 37.6%, to $5.6 million for the nine months ended September 30, 2017, compared to $4.0 million for the same period in 2016. The increases for the three and nine months ended September 30, 2017 were primarily related to an increase in expenses related to the issuance of new chip enabled debit cards and related card costs, plus an increase in debit card transactions.

Professional fees and services decreased by $256,000, or 4.0%, to $6.1 million for the three months ended September 30, 2017, compared to $6.4 million for the same period in 2016. Professional fees and services decreased by $1.5 million, or 8.0%, to $16.9 million for the nine months ended September 30, 2017, compared to $18.4 million for the same period in 2016. The decreases for the three months and nine months ended September 30, 2017 were primarily due to an overall decrease in legal and consulting expenses.


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Miscellaneous expense increased by $1.4 million, or 110.0%, to $2.8 million for the three months ended September 30, 2017, compared to $1.3 million for the same period of 2016. Miscellaneous expense decreased by $2.2 million, or 27.0%, to $5.8 million for the nine months ended September 30, 2017, compared to $8.0 million for the same period of 2016.  The increase for the three months ended September 30, 2017 was due to a $1.5 million increase in contribution expense. The decrease for the nine months ended September 30, 2017 was due to the fact that miscellaneous expense for the nine months ended September 30, 2016 included $1.7 million in accruals due to the ongoing evaluation of litigation and other proceedings impacting the GFSC subsidiary and the Parent Company. Additionally, there was a $822,000 decrease in non-loan related losses for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.

Income Tax
 
Federal income tax expense was $8.4 million for the third quarter of 2017, compared to $12.2 million for the third quarter of 2016. The effective federal income tax rate for the third quarter of 2017 was 27.6%, compared to 30.8% for the same period in 2016. Federal income tax expense was $23.6 million for the first nine months of 2017, compared to $28.2 million for the first nine months of 2016. The effective federal income tax rate for the first nine months of 2017 was 27.8%, compared to 29.9% for the same period in 2016. The difference between the statutory federal income tax rate of 35% and Park’s effective tax rate is due to permanent tax differences, primarily consisting of tax-exempt interest income from investments and loans, the tax benefit of investments in qualified affordable housing projects, federal historic preservation tax credits, bank owned life insurance income, and dividends paid on the common shares held within Park’s salary deferral plan. Park expects permanent tax differences for the 2017 year will be approximately $8.3 million.
 
Park and its Ohio-based affiliates do not pay state income taxes to the state of Ohio, but Park pays a franchise tax based on Park's year-end equity. The franchise tax expense is included in “state taxes” as part of other expense on Park’s Consolidated Condensed Statements of Income.


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Comparison of Financial Condition
At September 30, 2017 and December 31, 2016
 
Changes in Financial Condition
 
Total assets increased by $395.1 million, or 5.3%, during the first nine months of 2017 to $7,863 million at September 30, 2017, compared to $7,468 million at December 31, 2016. This increase was primarily due to the following:

Cash and cash equivalents increased by $303.9 million to $450.4 million at September 30, 2017, compared to $146.4 million at December 31, 2016. Money market instruments represented the majority of this increase, and were $331.5 million at September 30, 2017, compared to $23.6 million at December 31, 2016. Management has increased cash balances in anticipation of the maturity of $350 million of long-term debt in November of 2017.
Loans increased by $94.0 million, or 1.8%, to $5,366 million at September 30, 2017, compared to $5,272 million at December 31, 2016.
 
Total liabilities increased by $378.0 million, or 5.6%, during the first nine months of 2017 to $7,103 million at September 30, 2017, from $6,725 million at December 31, 2016. This increase was primarily due to the following:

Total deposits increased by $452.4 million, or 8.2%, to $5,974 million at September 30, 2017, compared to $5,522 million at December 31, 2016. The increase in deposits in the first nine months of 2017 was largely the result of the product offering for Promontory's Insured Cash Sweep ("ICS") deposits.
Short-term borrowings decreased by $201.9 million, or 51.1%, to $192.9 million at September 30, 2017, compared to $394.8 million at December 31, 2016.
Long-term borrowings increased by $154.7 million, or 22.3%, to $849.0 million at September 30, 2017, compared to $694.3 million at December 31, 2016.
 
Total shareholders’ equity increased by $17.1 million, or 2.3%, to $759.4 million at September 30, 2017, from $742.2 million at December 31, 2016.

Retained earnings increased by $17.8 million during the period as a result of net income of $61.4 million, offset by common share dividends of $43.4 million.
Treasury shares increased by $6.7 million during the period as a result of the repurchase of treasury shares in the total amount of $7.4 million, offset by the issuance of treasury shares of $0.6 million.
Accumulated other comprehensive loss, net of taxes decreased during the period as a result of unrealized net holding gains on securities available for sale, net of taxes, of $4.7 million.
 
Increases or decreases in the investment securities portfolio, short-term borrowings and long-term debt are greatly dependent upon the growth in loans and deposits. The primary objective of management is to grow loan and deposit totals. To the extent that management is unable to grow loan totals at a desired growth rate, additional investment securities may be acquired. Likewise, both short-term borrowings and long-term debt are utilized to fund the growth in earning assets if the growth in deposits and cash flow from operations are not sufficient to do so.
 
Liquidity

Cash provided by operating activities was $66.7 million and $57.8 million for the nine months ended September 30, 2017 and 2016, respectively. Net income was the primary source of cash from operating activities for each of the nine months ended September 30, 2017 and 2016.
Cash used in investing activities was $82.4 million for the nine months ended September 30, 2017 and cash provided by investing activities was $80.0 million for the nine months ended September 30, 2016. Proceeds from the sale, repayment, or maturity of investment securities provide cash and purchases of investment securities use cash. Net investment securities transactions provided cash of $15.0 million for the nine months ended September 30, 2017 and $191.2 million for the nine months ended September 30, 2016. Another major use or source of cash in investing activities is the net increase or decrease in the loan portfolio. Cash used by the net increase in the loan portfolio was $95.8 million and $109.1 million for the nine months ended September 30, 2017 and 2016, respectively.
Cash provided by financing activities was $319.6 million for the nine months ended September 30, 2017 and cash used by financing activities was $47.2 million for the nine months ended September 30, 2016. A major source of cash for financing activities is the net change in deposits. Deposits increased and provided $452.4 million and $172.0 million of cash for the nine

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months ended September 30, 2017 and 2016, respectively. Another major source of cash from financing activities is borrowings in the form of short-term borrowings and long-term debt. For the nine months ended September 30, 2017, net short-term borrowings decreased and used $201.9 million in cash, net long-term borrowings increased and provided $150.0 million in cash and the repayment of subordinated notes used $30.0 million in cash. For the nine months ended September 30, 2016, net short-term borrowings decreased and used $176.0 million in cash and net long-term borrowings remained unchanged. Finally, cash declined by $43.1 million and $43.2 million, respectively, for each of the nine months ended September 30, 2017 and 2016, from the payment of dividends.
Effective liquidity management ensures that the cash flow requirements of depositors and borrowers, as well as the operating cash needs of the Corporation, are met. Funds are available from a number of sources, including the securities portfolio, the core deposit base, Federal Home Loan Bank borrowings, the capability to securitize or package loans for sale, and a $10.0 million revolving line of credit with another financial institution, which did not have an outstanding balance as of September 30, 2017. The Corporation’s loan to asset ratio was 68.24% at September 30, 2017, compared to 70.60% at December 31, 2016 and 70.44% at September 30, 2016. Cash and cash equivalents were $450.4 million at September 30, 2017, compared to $146.4 million at December 31, 2016 and $240.0 million at September 30, 2016. Management believes that the present funding sources provide more than adequate liquidity for the Corporation to meet its cash flow needs.
  
Capital Resources
 
Shareholders’ equity at September 30, 2017 was $759.4 million, or 9.7% of total assets, compared to $742.2 million, or 9.9% of total assets, at December 31, 2016 and $751.1 million, or 10.2% of total assets, at September 30, 2016.
 
Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts and bank holding companies. Park has elected not to include the net unrealized gain or loss on available-for-sale securities in computing regulatory capital. During the first quarter of 2015, Park adopted the Basel III regulatory capital framework as approved by the federal banking agencies. The adoption of this framework modified the calculation of the various capital ratios, added a new ratio, common equity tier 1, and revised the adequately and well capitalized thresholds. Additionally, under this framework, in order to avoid limitations on capital distributions, including dividend payments, and repurchases of common shares, Park must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer is being phased in from 0.0% for 2015 to 2.50% by 2019. The capital conservation buffer for 2017 is 1.25%. The amounts shown below as the adequately capitalized ratio plus capital conservation buffer includes the fully phased-in 2.50% buffer.
 
PNB met each of the well capitalized ratio guidelines at September 30, 2017. The following table indicates the capital ratios for PNB and Park at September 30, 2017 and December 31, 2016.
 
 
As of September 30, 2017
 
Leverage
 
Tier 1
Risk-Based
 
Common Equity Tier 1
 
Total
Risk-Based
The Park National Bank
7.06
%
 
10.18
%
 
10.18
%
 
11.63
%
Park National Corporation
9.08
%
 
13.03
%
 
12.76
%
 
14.07
%
Adequately capitalized ratio
4.00
%
 
6.00
%
 
4.50
%
 
8.00
%
Adequately capitalized ratio plus capital conservation buffer
4.00
%
 
8.50
%
 
7.00
%
 
10.50
%
Well capitalized ratio (PNB only)
5.00
%
 
8.00
%
 
6.50
%
 
10.00
%

 
As of December 31, 2016
 
Leverage
 
Tier 1
Risk-Based
 
Common Equity Tier 1
 
Total
Risk-Based
The Park National Bank
7.34
%
 
10.09
%
 
10.09
%
 
11.49
%
Park National Corporation
9.56
%
 
13.11
%
 
12.83
%
 
14.63
%
Adequately capitalized ratio
4.00
%
 
6.00
%
 
4.50
%
 
8.00
%
Adequately capitalized ratio plus capital conservation buffer
4.00
%
 
8.50
%
 
7.00
%
 
10.50
%
Well capitalized ratio (PNB only)
5.00
%
 
8.00
%
 
6.50
%
 
10.00
%



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Contractual Obligations and Commitments
 
In the ordinary course of operations, Park enters into certain contractual obligations. Such obligations include the funding of operations through debt issuances as well as leases for premises. See page 43 of Park’s 2016 Annual Report (Table 36) for disclosure concerning contractual obligations and commitments at December 31, 2016. There were no significant changes in contractual obligations and commitments during the first nine months of 2017.
 
Financial Instruments with Off-Balance Sheet Risk
 
PNB is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include loan commitments and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements.
 
The exposure to credit loss (for PNB) in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. PNB uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Since many of the loan commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.
 
The total amounts of off-balance sheet financial instruments with credit risk were as follows:

(In thousands)
 
September 30,
2017
 
December 31, 2016
Loan commitments
 
$
910,949

 
$
912,007

Standby letters of credit
 
$
11,107

 
$
13,746

 

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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Management reviews interest rate sensitivity on a monthly basis by modeling the consolidated financial statements under various interest rate scenarios. The primary reason for these efforts is to guard Park from adverse impacts of unforeseen changes in interest rates. Management continues to believe that further changes in interest rates will have a small impact on net income, consistent with the disclosure on page 42 of Park’s 2016 Annual Report.
 
On page 42 (Table 35) of Park’s 2016 Annual Report, management reported that Park’s twelve-month cumulative rate sensitivity gap was a positive (assets exceeding liabilities) $198.6 million or 2.89% of total interest earning assets at December 31, 2016. At September 30, 2017, Park’s twelve-month cumulative rate sensitivity gap was a positive (assets exceeding liabilities) $450.8 million or 6.20% of total interest earning assets.
 
Management supplements the interest rate sensitivity gap analysis with periodic simulations of balance sheet sensitivity under various interest rate and what-if scenarios to better forecast and manage the net interest margin. Management uses a 50 basis point change in market interest rates per quarter for a total of 200 basis points per year in evaluating the impact of changing interest rates on net interest income and net income over a twelve-month horizon.
 
On page 42 of Park’s 2016 Annual Report, management reported that at December 31, 2016, the earnings simulation model projected that net income would decrease by 1.9% using a rising interest rate scenario and decrease by 6.3% using a declining interest rate scenario over the next year. At September 30, 2017, the earnings simulation model projected that net income would decrease by 2.6% using a rising interest rate scenario and would decrease by 5.1% in a declining interest rate scenario. At September 30, 2017, management continues to believe that gradual changes in interest rates (50 basis points per quarter for a total of 200 basis points per year) will have a small impact on net income.
 
ITEM 4 – CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
With the participation of the Chief Executive Officer and President (the principal executive officer) and the Chief Financial Officer, Secretary and Treasurer (the principal financial officer) of Park, Park’s management has evaluated the effectiveness of Park’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, Park’s Chief Executive Officer and President and Park’s Chief Financial Officer, Secretary and Treasurer have concluded that:
 
information required to be disclosed by Park in this Quarterly Report on Form 10-Q and other reports that Park files or submits under the Exchange Act would be accumulated and communicated to Park’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure;
information required to be disclosed by Park in this Quarterly Report on Form 10-Q and the other reports that Park files or submits under the Exchange Act would be recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and
Park’s disclosure controls and procedures were effective as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q.

Changes in Internal Control Over Financial Reporting
 
There were no changes in Park’s internal control over financial reporting (as defined in Rule 13a-5(f) under the Exchange Act) that occurred during Park’s fiscal quarter ended September 30, 2017, that have materially affected, or are reasonably likely to materially affect, Park’s internal control over financial reporting.


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PART II – OTHER INFORMATION

Item 1.       Legal Proceedings

The Company is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. Legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes accruals for the outcome of litigation where losses are deemed probable and reasonably estimable. The Company’s assessment of the current exposure could change in the event of the discovery of additional facts with respect to legal matters pending against the Company or determinations by judges, juries, administrative agencies or other finders of fact that are not in accordance with the Company’s evaluation of claims.


Item 1A.     Risk Factors
 
There are certain risks and uncertainties in our business that could cause our actual results to differ materially from those anticipated. In “ITEM 1A. RISK FACTORS” of Part I of Park’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (the “2016 Form 10-K”), we included a detailed discussion of our risk factors. All of these risk factors should be read carefully in connection with evaluating our business and in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q. Any of the risks described in the 2016 Form 10-K could materially adversely affect our business, financial condition or future results and the actual outcome of matters as to which forward-looking statements are made. These are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds

(a)
Not applicable
(b)
Not applicable
(c)
The following table provides information concerning purchases of Park’s common shares made by or on behalf of Park or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, during the three months ended September 30, 2017, as well as the maximum number of common shares that may be purchased under Park’s previously announced stock repurchase authorization to fund the 2013 Long-Term Incentive Plan (the "2013 Incentive Plan"), which was replaced on April 24, 2017, the 2017 Long-Term Incentive Plan for Employees (the "2017 Employees LTIP") and the 2017 Long-Term Incentive Plan for Non-Employee Directors (the "2017 Non-Employee Directors LTIP") and Park's previously announced 2017 stock repurchase authorization:

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Period
 
Total number of
common shares
purchased
 
Average price
paid per
common
share
 
Total number of common
shares purchased as part of
publicly announced plans
or programs
 
Maximum number of
common shares that may
yet be purchased under the
plans or programs (1)
July 1 through July 31, 2017
 

 
$

 

 
1,400,000

August 1 through August 31, 2017
 
20,000

 
97.64

 

 
1,380,000

September 1 through September 30, 2017
 

 

 

 
1,380,000

Total
 
20,000

 
$
97.64

 

 
1,380,000

(1)
The number shown represents, as of the end of each period, the maximum number of common shares that may yet be purchased as part of Park’s publicly announced stock repurchase authorization to fund the 2017 Employees LTIP which became effective on April 24, 2017, the 2017 Non-Employee Directors LTIP which became effective on April 24, 2017 and Park's publicly announced 2017 stock repurchase authorization which became effective on January 23, 2017.
 
At the 2013 Annual Meeting of Shareholders held on April 22, 2013, Park's shareholders approved the 2013 Incentive Plan. The aggregate number of common shares with respect to which awards could be granted under the 2013 Incentive Plan was 600,000. The common shares to be issued and delivered under the 2013 Incentive Plan were to consist of either common shares currently held or common shares subsequently acquired by Park as treasury shares. As of April 24, 2017, the date on which the 2013 Incentive Plan was replaced with respect to the grant of future awards as discussed below, there were outstanding performance-based restricted stock unit awards covering a maximum of 119,587 common shares and 429,889 common shares available for future grants. As of April 24, 2017, Park held sufficient treasury shares to satisfy the outstanding awards under the 2013 Incentive Plan and, as a result, no additional common shares are to be repurchased in order to fund the 2013 Incentive Plan.

At the 2017 Annual Meeting of Shareholders held on April 24, 2017, Park's shareholders approved the 2017 Employees LTIP and the 2017 Non-Employee Directors LTIP. The common shares to be issued and delivered under the 2017 Employees LTIP and the 2017 Non-Employee Directors LTIP may consist of either common shares currently held or common shares subsequently acquired by Park as treasury shares. No newly-issued common shares will be delivered under the 2017 Employees LTIP or the 2017 Non-Employee Directors LTIP. On April 24, 2017, Park's Board of Directors authorized the purchase, from time to time, of up to 750,000 Park common shares and 150,000 common shares, respectively, to be held as treasury shares for subsequent issuance and delivery under the 2017 Employees LTIP and the 2017 Non-Employee Directors LTIP.

The 2017 Employees LTIP and the 2017 Non-Employee Directors LTIP have replaced the provisions of the 2013 Incentive Plan with respect to the grant of future awards. As a result of the approval of the 2017 Employees LTIP and the 2017 Non-Employee Directors LTIP, Park will not grant any additional awards under the 2013 Incentive Plan after April 24, 2017. Awards made under the 2013 Incentive Plan prior to April 24, 2017 will remain in effect in accordance with their respective terms.

On January 23, 2017, the Park Board of Directors authorized Park to purchase, from time to time, up to an aggregate of 500,000 Common Shares. Purchases may be made through NYSE American, in the over-the-counter market or in privately negotiated transactions, in each case in compliance with applicable laws and regulations and the rules applicable to issuers having securities listed on NYSE American. Purchases will be made upon such terms and conditions and at such times and in such amounts as any one or more of the authorized officers of Park deem to be appropriate, subject to market conditions, regulatory requirements and other factors, and in the best interest of Park and Park's shareholders. The January 23, 2017 stock repurchase authorization is distinct from the stock repurchase authorization to fund the 2017 Employees LTIP and the 2017 Non-Employee Directors LTIP.

Item 3.      Defaults Upon Senior Securities
 
(a), (b) Not applicable.


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Item 4.      Mine Safety Disclosures
 
Not applicable.

Item 5.      Other Information
 
(a), (b) Not applicable.


Item 6.      Exhibits
 
 
3.1(a)
Articles of Incorporation of Park National Corporation as filed with the Ohio Secretary of State on March 24, 1992 (Incorporated herein by reference to Exhibit 3(a) to Park National Corporation’s Form 8-B, filed on May 20, 1992 (File No. 0-18772) (“Park’s Form 8-B”))
 
 
 
 
3.1(b)
Certificate of Amendment to the Articles of Incorporation of Park National Corporation as filed with the Ohio Secretary of State on May 6, 1993 (Incorporated herein by reference to Exhibit 3(b) to Park National Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-18772))
 
 
 
 
3.1(c)
 
 
 
 
3.1(d)
 
 
 
 
3.1(e)
 
 
 
 
3.1(f)
 
 
 
 
3.1(g)
 
 
 
 
3.1(h)
 
 
 
 
3.2(a)
Regulations of Park National Corporation (Incorporated herein by reference to Exhibit 3(b) to Park’s Form 8-B)

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3.2(b)
 
 
 
 
3.2(c)
 
 
 
 
3.2(d)
 
 
 
 
3.2(e)
 
 
 
 
31.1
 
 
 
 
31.2
 
 
 
 
32.1
 
 
 
 
32.2
 
 
 
 
101
The following information from Park’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017 formatted in XBRL (eXtensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Condensed Balance Sheets as of September 30, 2017 and December 31, 2016 (unaudited); (ii) the Consolidated Condensed Statements of Income for the three and nine months ended September 30, 2017 and 2016 (unaudited); (iii) the Consolidated Condensed Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016 (unaudited); (iv) the Consolidated Condensed Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2017 and 2016 (unaudited); (v) the Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 (unaudited); and (vi) the Notes to Unaudited Consolidated Condensed Financial Statements (electronically submitted herewith).


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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
PARK NATIONAL CORPORATION
 
 
 
DATE: October 31, 2017
 
/s/ David L. Trautman
 
 
David L. Trautman
 
 
Chief Executive Officer and President
 
 
 
 
 
 
DATE: October 31, 2017
 
/s/ Brady T. Burt
 
 
Brady T. Burt
 
 
Chief Financial Officer, Secretary and Treasurer
 
 
 



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