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 June 30, 2018
  
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: 15,686,552 Common shares, no par value per share, outstanding at July 26, 2018.




PARK NATIONAL CORPORATION
 
CONTENTS
 
Page
PART I.   FINANCIAL INFORMATION
 
 
 
Item 1.  Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
77 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Table of Contents

PARK NATIONAL CORPORATION AND SUBSIDARIES
Consolidated Condensed Balance Sheets (Unaudited)
(in thousands, except share and per share data)                    
 
June 30,
2018
 
December 31, 2017
Assets:
 

 
 

Cash and due from banks
$
122,915

 
$
131,946

Money market instruments
23,244

 
37,166

Cash and cash equivalents
146,159

 
169,112

Investment securities:
 

 
 

Debt securities available-for-sale, at fair value (amortized cost of $1,127,511 and $1,097,645 at June 30, 2018 and December 31, 2017, respectively)
1,091,678

 
1,091,881

Debt securities held-to-maturity, at amortized cost (fair value of $348,192 and $363,779 at June 30, 2018 and December 31, 2017, respectively)
351,431

 
357,197

Other investment securities
70,129

 
63,746

Total investment securities
1,513,238

 
1,512,824

 
 
 
 
Loans
5,324,974

 
5,372,483

Allowance for loan losses
(49,452
)
 
(49,988
)
Net loans
5,275,522

 
5,322,495

Bank owned life insurance
190,245

 
189,322

Prepaid assets
100,551

 
97,712

Goodwill
72,334

 
72,334

Premises and equipment, net
55,555

 
55,901

Affordable housing tax credit investments
45,967

 
49,669

Other real estate owned
5,729

 
14,190

Accrued interest receivable
21,970

 
22,164

Mortgage loan servicing rights
10,077

 
9,688

Other
24,809

 
22,209

Total assets
$
7,462,156

 
$
7,537,620

 
 
 
 
Liabilities and Shareholders' Equity:
 

 
 

Deposits:
 

 
 

Noninterest bearing
$
1,591,962

 
$
1,633,941

Interest bearing
4,423,882

 
4,183,385

Total deposits
6,015,844

 
5,817,326

Short-term borrowings
216,139

 
391,289

Long-term debt
400,000

 
500,000

Subordinated notes
15,000

 
15,000

Unfunded commitments in affordable housing tax credit investments
14,282

 
14,282

Accrued interest payable
2,325

 
2,278

Other
43,478

 
41,344

Total liabilities
$
6,707,068

 
$
6,781,519

 
 
 
 
 


 


Shareholders' equity:
 

 
 

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

 
$

Common shares (No par value; 20,000,000 shares authorized; 16,150,732 shares issued at June 30, 2018 and 16,150,752 shares issued at December 31, 2017)
308,144

 
307,726

Retained earnings
593,512

 
561,908

Treasury shares (899,637 shares at June 30, 2018 and 862,558 at December 31, 2017)
(91,559
)
 
(87,079
)
Accumulated other comprehensive loss, net of taxes
(55,009
)
 
(26,454
)
Total shareholders' equity
755,088

 
756,101

Total liabilities and shareholders’ equity
$
7,462,156

 
$
7,537,620


SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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PARK NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Income (Unaudited)
(in thousands, except share and per share data)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Interest and dividend income:
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Interest and fees on loans
$
64,496

 
$
61,222

 
$
128,898

 
$
121,130

 
 
 
 
 
 
 
 
Interest and dividends on:
 

 
 

 
 
 
 
Obligations of U.S. Government, its agencies and other securities - taxable
7,746

 
6,892

 
14,513

 
14,030

Obligations of states and political subdivisions - tax-exempt
2,178

 
1,664

 
4,352

 
3,124

Other interest income
271

 
698

 
642

 
947

Total interest and dividend income
74,691

 
70,476

 
148,405

 
139,231

 
 
 
 
 
 
 
 
Interest expense:
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Interest on deposits:
 

 
 

 
 
 
 
Demand and savings deposits
4,107

 
2,291

 
7,397

 
3,905

Time deposits
2,886

 
2,457

 
5,437

 
4,618

 
 
 
 
 
 
 
 
Interest on borrowings:
 

 
 

 
 
 
 
Short-term borrowings
420

 
184

 
995

 
419

Long-term debt
2,536

 
5,766

 
4,984

 
11,559

 
 
 
 
 
 
 
 
Total interest expense
9,949

 
10,698

 
18,813

 
20,501

 
 
 
 
 
 
 
 
Net interest income
64,742

 
59,778

 
129,592

 
118,730

 
 
 
 
 
 
 
 
Provision for loan losses
1,386

 
4,581

 
1,646

 
5,457

Net interest income after provision for loan losses
63,356

 
55,197

 
127,946

 
113,273

 
 
 
 
 
 
 
 
Other income:
 

 
 

 
 
 
 
Income from fiduciary activities
6,666

 
6,025

 
13,061

 
11,539

Service charges on deposit accounts
2,826

 
3,156

 
5,748

 
6,295

Other service income
3,472

 
3,447

 
7,644

 
6,251

Checkcard fee income
4,382

 
4,040

 
8,384

 
7,801

Bank owned life insurance income
1,031

 
1,114

 
2,040

 
2,217

ATM fees
510

 
561

 
1,034

 
1,103

OREO valuation adjustments
(114
)
 
(272
)
 
(321
)
 
(345
)
(Loss) gain on sale of OREO, net
(147
)
 
53

 
4,174

 
153

Net loss on sale of investment securities

 

 
(2,271
)
 

Unrealized gain on equity securities
304

 

 
3,793

 

Other components of net periodic pension benefit income
1,705

 
1,448

 
3,410

 
2,896

Miscellaneous
2,607

 
1,127

 
3,449

 
1,744

Total other income
23,242

 
20,699

 
50,145

 
39,654

 
 
 
 
 
 
 
 
 


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
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Other expense:
 

 
 

 
 
 
 
Salaries
$
24,103

 
$
23,001

 
$
49,423

 
$
45,718

Employee benefits
7,630

 
6,206

 
14,659

 
12,674

Occupancy expense
2,570

 
2,565

 
5,506

 
5,200

Furniture and equipment expense
4,013

 
3,640

 
8,162

 
7,258

Data processing fees
1,902

 
1,676

 
3,675

 
3,641

Professional fees and services
6,123

 
6,018

 
12,313

 
10,847

Marketing
1,185

 
1,084

 
2,403

 
2,140

Insurance
1,196

 
1,517

 
2,624

 
3,087

Communication
1,189

 
1,155

 
2,439

 
2,488

State tax expense
958

 
943

 
2,063

 
2,006

Miscellaneous
1,665

 
1,749

 
3,575

 
3,405

Total other expense
52,534

 
49,554

 
106,842

 
98,464

 
 
 
 
 
 
 
 
Income before income taxes
34,064

 
26,342

 
71,249

 
54,463

 
 
 
 
 
 
 
 
Federal income taxes
5,823

 
7,310

 
11,885

 
15,164

 
 
 
 
 
 
 
 
Net income
$
28,241

 
$
19,032

 
$
59,364

 
$
39,299

 
 
 
 
 
 
 
 
Earnings per Common Share:
 
 
 
 
 
 
 
Basic
$
1.85

 
$
1.24

 
$
3.88

 
$
2.57

Diluted
$
1.83

 
$
1.24

 
$
3.85

 
$
2.55

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 

 
 

 
 
 
 
Basic
15,285,532

 
15,297,085

 
15,286,932

 
15,304,572

Diluted
15,417,607

 
15,398,865

 
15,424,585

 
15,415,765

 
 
 
 
 
 
 
 
Cash dividends declared
$
1.21

 
$
0.94

 
$
2.15

 
$
1.88

 
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
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
28,241

 
$
19,032

 
$
59,364

 
$
39,299

 
 
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Net loss realized on sale of securities, net of income tax benefit of $538 for the six months ended June 30, 2018

 

 
2,024

 

Unrealized net holding (loss) gain on debt securities available-for-sale, net of federal income tax effect of $(630) and $1,621 for the three months ended June 30, 2018 and 2017, and $(6,853) and $2,171 for the six months ended June 30, 2018 and 2017, respectively
(2,368
)
 
3,011

 
(25,778
)
 
4,033

Other comprehensive (loss) income
$
(2,368
)
 
$
3,011

 
$
(23,754
)
 
$
4,033

 
 
 
 
 
 
 
 
Comprehensive income
$
25,873

 
$
22,043

 
$
35,610

 
$
43,332

 
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, 2017
 
$

 
$
305,826

 
$
535,631

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

 
 

 
39,299

 
 

 
 

Other comprehensive income, net of tax
 
 

 
 
 
 
 
 
 
4,033

Dividends on common shares at $1.88 per share
 
 

 
 

 
(28,939
)
 
 

 
 

Cash payment for fractional common shares in dividend reinvestment plan
 
 

 
(2
)
 
 

 
 

 
 

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 50,000 common shares to be held as treasury shares
 
 
 
 
 
 
 
$
(5,425
)
 
 
Share-based compensation expense
 
 
 
1,389

 
 
 
 
 
 
Balance at June 30, 2017
 
$


$
306,418

 
$
545,794

 
$
(86,252
)
 
$
(13,712
)
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018, as previously presented
 
$

 
$
307,726

 
$
561,908

 
$
(87,079
)
 
$
(26,454
)
Cumulative effect of change in accounting principle for marketable equity securities, net of tax
 
 
 
 
 
1,917

 
 
 
(995
)
Balance at January 1, 2018, as adjusted
 

 
307,726

 
563,825

 
(87,079
)
 
(27,449
)
Reclassification of disproportionate income tax effects
 
 
 
 
 
3,806

 
 
 
(3,806
)
Net income
 
 

 


 
59,364

 


 


Other comprehensive loss, net of tax
 
 

 


 


 


 
(23,754
)
Dividends on common shares at $2.15 per share
 
 

 


 
(33,166
)
 


 


Cash payment for fractional common shares in dividend reinvestment plan
 
 

 
(2
)
 


 


 


Issuance of 18,800 common shares under share-based compensation awards, net of 5,879 common shares withheld to pay employee income taxes
 
 
 
(1,597
)
 
(317
)
 
1,304

 
 
Repurchase of 50,000 common shares to be held as treasury shares
 
 
 
 
 
 
 
(5,784
)
 
 
Share-based compensation expense
 
 
 
2,017

 
 
 
 
 
 
Balance at June 30, 2018
 
$

 
$
308,144

 
$
593,512

 
$
(91,559
)
 
$
(55,009
)
 
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)
 
Six Months Ended
June 30,
 
2018
 
2017
Operating activities:
 

 
 

Net income
$
59,364

 
$
39,299

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

 
 

Provision for loan losses
1,646

 
5,457

Amortization of loan fees and costs, net
(3,055
)
 
(2,821
)
Increase in prepaid dealer premiums
(1,079
)
 
(3,734
)
Provision for depreciation
4,294

 
4,284

Amortization of investment securities, net
656

 
597

Realized net investment securities losses
2,271

 

Unrealized gain on equity securities
(3,793
)
 

Amortization of prepayment penalty on long-term debt

 
3,107

Loan originations to be sold in secondary market
(96,290
)
 
(106,685
)
Proceeds from sale of loans in secondary market
94,550

 
107,046

Gain on sale of loans in secondary market
(2,266
)
 
(2,063
)
Share-based compensation expense
2,017

 
1,389

OREO valuation adjustments
321

 
345

Gain on sale of OREO, net
(4,174
)
 
(153
)
Bank owned life insurance income
(2,040
)
 
(2,217
)
Investment in qualified affordable housing tax credits amortization
3,702

 
3,728

 
 
 
 
Changes in assets and liabilities:
 

 
 

Decrease (increase) in other assets
2,667

 
(3,179
)
Increase (decrease) in other liabilities
1,731

 
(4,394
)
Net cash provided by operating activities
$
60,522

 
$
40,006

 
 
 
 
Investing activities:
 

 
 

Proceeds from sales of securities
$
244,398

 
$

Proceeds from calls and maturities of:
 

 
 

Available-for-sale debt securities
97,008

 
83,308

Held-to-maturity debt securities
9,885

 
9,371

Purchases of:
 

 
 

Available-for-sale debt securities
(373,372
)
 
(14,965
)
Held-to-maturity debt securities
(4,946
)
 
(72,258
)
Equity securities
(2,590
)
 

Net loan paydowns (originations), portfolio loans
53,162

 
(94,207
)
  Proceeds from the sale of OREO
11,461

 
1,688

  Life insurance death benefits
1,379

 
74

  Purchases of premises and equipment, net
(3,950
)
 
(2,474
)
Net cash provided by (used in) investing activities
$
32,435

 
$
(89,463
)
 
 
 
 

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PARK NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows (Unaudited) (Continued)
(in thousands)
 
Six Months Ended
June 30,
 
2018
 
2017
Financing activities:
 

 
 

Net increase in deposits
$
198,518

 
$
439,620

Net decrease in short-term borrowings
(175,150
)
 
(211,007
)
Proceeds from issuance of long-term debt
25,000

 
150,000

Repayment of subordinated notes

 
(30,000
)
Repayment of long-term debt
(125,000
)
 

Value of common shares withheld to pay employee income taxes
(610
)
 
(347
)
Repurchase of common shares to be held as treasury shares
(5,784
)
 
(5,425
)
Cash dividends paid
(32,884
)
 
(28,751
)
Net cash (used in) provided by financing activities
$
(115,910
)
 
$
314,090

 
 
 
 
(Decrease) increase in cash and cash equivalents
(22,953
)
 
264,633

 
 
 
 
Cash and cash equivalents at beginning of year
169,112

 
146,446

 
 
 
 
Cash and cash equivalents at end of period
$
146,159

 
$
411,079

 
 
 
 
Supplemental disclosures of cash flow information:
 

 
 

 
 
 
 
Cash paid for:
 

 
 

Interest
$
18,766

 
$
20,258

 
 
 
 
Income taxes
$
2,500

 
$
11,220

 
 
 
 
Non-cash items:
 
 
 
Loans transferred to OREO
$
861

 
$
2,891

 
 
 
 
New commitments in affordable housing tax credit investments
$

 
$
7,000


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 six-month periods ended June 30, 2018 are not necessarily indicative of the operating results to be anticipated for the fiscal year ending December 31, 2018.
 
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, 2017 from Park’s 2017 Annual Report to Shareholders (“Park's 2017 Annual Report”). Prior period financial statement reflect the retrospective application of Accounting Standards Update ("ASU") 2017-07 - Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This change in classification had no effect on reported net income.
 
Park’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in Park’s 2017 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 - Adoption of New Accounting Pronouncements and Issued But Not Yet Effective Accounting Standards

The following is a summary of new accounting pronouncements impacting Park's consolidated financial statements, and issued but not yet effective accounting standards:

Adoption of New Accounting Pronouncements

ASU 2014-09 - Revenue from Contracts with Customers (Topic 606): In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This 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. The majority of the Company's revenues come from interest income and other sources, including loans, leases, securities and derivatives, that are outside the scope of ASC 606. Certain services that fall within the scope of ASC 606 are presented within Other Income and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of ASC 606 include income from fiduciary activities, service charges on deposit accounts, other service income, checkcard fee income, ATM fees, and gain on sale of OREO, net. The adoption of this guidance on January 1, 2018 did not have a material impact on Park's consolidated financial statements. However, the adoption of this standard resulted in additional disclosures beginning with the first quarter 2018 Form 10-Q. Reference Note 19, Revenue from Contracts with Customers, for further discussion on the Company's accounting policies for revenue sources within the scope of ASC 606.

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 reflected in 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, this ASU clarifies guidance related to the

10

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valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale ("AFS") 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 on January 1, 2018 resulted in an $1.9 million increase to beginning retained earnings and a $995,000 increase to beginning accumulated other comprehensive loss. Additional income of $3.2 million and $1.3 million was recorded in the first and second quarters of 2018, respectively, as a result of changes to the accounting for equity investments. Further, beginning with the first quarter of 2018, Park's fair value disclosures in Note 14, Fair Value, have incorporated the revised disclosure requirements for financial investments.

ASU 2016-15 - Statement of Cash Flows (Topic 203): 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 203): 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 then current GAAP was either unclear or did 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.  The adoption of this guidance on January 1, 2018 did not have an impact on Park's consolidated financial statements. As such transactions arise, management will utilize the updated guidance in providing disclosures within Park’s consolidated condensed statements of cash flows. 

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 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. As a result of the adoption of this guidance on January 1, 2018, all prior periods have been recast to separately record the service cost component and other components of net benefit cost. For all periods presented, this resulted in an increase in other income and an offsetting increase in other expense with no change to net income. See Note 12, Benefit Plans, for further details.

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 concerning which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under Topic 718. 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 on January 1, 2018 did not impact 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 current 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 early adoption of this guidance on July 1, 2018 did not have an impact on Park's consolidated financial statements. Park will apply this guidance to future transactions.

ASU 2018-02 - Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income: In February 2018, the FASB issued ASU 2018-02 - Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects, resulting from the newly - enacted federal corporate income tax rate. The amount of the reclassification is the difference between the historical federal corporate income tax rate and the newly-enacted 21% federal corporate income tax rate. The 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 early adoption of this guidance effective January 1, 2018 resulted in a $3.8 million increase to Park's accumulated other comprehensive loss and a $3.8 million increase to retained earnings.

ASU 2018-03 - Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. In February 2018, the FASB issued ASU 2018-03 - Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and

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Measurement of Financial Assets and Financial Liabilities. This ASU includes amendments that clarify certain aspects of the guidance issued in ASU 2016-01. Park considered this clarification in determining the appropriate adoption of ASU 2016-01 effective as of January 1, 2018.

Issued But Not Yet Effective Accounting Standards

ASU 2016-02 - Leases (Topic 842): In February 2016, the FASB issued ASU 2016-02 - Leases (Topic 842). This 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. 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 statement of income.

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 ("HTM") 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 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 the CECL model and is currently in the process of implementing a software solution to assist in implementing the adoption of this ASU. Management plans to run our current allowance model and a CECL model concurrently for 12 months prior to the adoption of this guidance on January 1, 2020.

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.


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Note 3 – Loans
 
The composition of the loan portfolio, by class of loan, as of June 30, 2018 and December 31, 2017 was as follows:
 
 
June 30, 2018
 
 
December 31, 2017
(In thousands)
Loan
Balance
 
Accrued
Interest
Receivable
 
Recorded
Investment
 
 
Loan
Balance
 
Accrued
Interest
Receivable
 
Recorded
Investment
Commercial, financial and agricultural *
$
1,014,623

 
$
4,766

 
$
1,019,389

 
 
$
1,053,453

 
$
4,413

 
$
1,057,866

Commercial real estate *
1,150,845

 
4,241

 
1,155,086

 
 
1,167,607

 
4,283

 
1,171,890

Construction real estate:
 

 
 

 
 

 
 
 

 
 

 
 

Commercial
136,058

 
423

 
136,481

 
 
125,389

 
401

 
125,790

Mortgage
52,895

 
127

 
53,022

 
 
52,203

 
133

 
52,336

Installment
2,965

 
9

 
2,974

 
 
3,878

 
13

 
3,891

Residential real estate:
 

 
 

 
 

 
 
 

 
 

 
 

Commercial
390,651

 
1,069

 
391,720

 
 
393,094

 
1,029

 
394,123

Mortgage
1,094,657

 
1,358

 
1,096,015

 
 
1,110,426

 
1,516

 
1,111,942

HELOC
188,663

 
921

 
189,584

 
 
203,178

 
974

 
204,152

Installment
16,601

 
47

 
16,648

 
 
18,526

 
53

 
18,579

Consumer
1,274,349

 
3,597

 
1,277,946

 
 
1,241,736

 
3,808

 
1,245,544

Leases
2,667

 
23

 
2,690

 
 
2,993

 
36

 
3,029

Total loans
$
5,324,974

 
$
16,581

 
$
5,341,555

 
 
$
5,372,483

 
$
16,659

 
$
5,389,142

* 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 $12.3 million at June 30, 2018 and $12.2 million at December 31, 2017, which represented a net deferred income position in both periods.

Overdrawn deposit accounts of $1.0 million and $1.9 million had been reclassified to loans at June 30, 2018 and December 31, 2017, 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 June 30, 2018 and December 31, 2017:
 
 
 
June 30, 2018
(In thousands)
 
Nonaccrual
Loans
 
Accruing
TDRs
 
Loans Past Due
90 Days or More
and Accruing
 
Total
Nonperforming
Loans
Commercial, financial and agricultural
 
$
29,847

 
$
187

 
$
6

 
$
30,040

Commercial real estate
 
23,313

 
3,215

 

 
26,528

Construction real estate:
 
 

 
 

 
 

 
 

Commercial
 
2,187

 
342

 

 
2,529

Mortgage
 

 
16

 

 
16

Installment
 
42

 
15

 

 
57

Residential real estate:
 
 

 
 

 
 

 
 

Commercial
 
2,531

 
219

 

 
2,750

Mortgage
 
17,508

 
9,644

 
399

 
27,551

HELOC
 
1,772

 
1,230

 
60

 
3,062

Installment
 
464

 
808

 
103

 
1,375

Consumer
 
3,460

 
724

 
910

 
5,094

Total loans
 
$
81,124

 
$
16,400

 
$
1,478

 
$
99,002

 
 
 
December 31, 2017
(In thousands)
 
Nonaccrual
Loans
 
Accruing
TDRs
 
Loans Past Due
90 Days or More
and Accruing
 
Total
Nonperforming
Loans
Commercial, financial and agricultural
 
$
16,773

 
$
1,291

 
$

 
$
18,064

Commercial real estate
 
12,979

 
5,163

 

 
18,142

Construction real estate:
 
 

 
 

 
 

 
 
Commercial
 
986

 
338

 

 
1,324

Mortgage
 
8

 
92

 

 
100

Installment
 
52

 

 

 
52

Residential real estate:
 
 

 
 

 
 

 
 

Commercial
 
18,835

 
224

 

 
19,059

Mortgage
 
16,841

 
10,766

 
568

 
28,175

HELOC
 
1,593

 
1,025

 
14

 
2,632

Installment
 
586

 
616

 
7

 
1,209

Consumer
 
3,403

 
662

 
1,256

 
5,321

Total loans
 
$
72,056

 
$
20,177

 
$
1,845

 
$
94,078


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Table of Contents

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 June 30, 2018 and December 31, 2017.

 
 
June 30, 2018
 
 
December 31, 2017
(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
 
$
30,034

 
$
29,943

 
$
91

 
 
$
18,064

 
$
18,039

 
$
25

Commercial real estate
 
26,528

 
26,528

 

 
 
18,142

 
18,142

 

Construction real estate:
 
 

 
 

 
 

 
 
 

 
 

 
 

Commercial
 
2,529

 
2,529

 

 
 
1,324

 
1,324

 

Mortgage
 
16

 

 
16

 
 
100

 

 
100

Installment
 
57

 

 
57

 
 
52

 

 
52

Residential real estate:
 
 

 
 

 
 

 
 
 

 
 

 
 

Commercial
 
2,750

 
2,750

 

 
 
19,059

 
19,059

 

Mortgage
 
27,152

 

 
27,152

 
 
27,607

 

 
27,607

HELOC
 
3,002

 

 
3,002

 
 
2,618

 

 
2,618

Installment
 
1,272

 

 
1,272

 
 
1,202

 

 
1,202

Consumer
 
4,184

 

 
4,184

 
 
4,065

 

 
4,065

Total loans
 
$
97,524

 
$
61,750

 
$
35,774

 
 
$
92,233

 
$
56,564

 
$
35,669

 
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 June 30, 2018 and December 31, 2017.
 
 
 
June 30, 2018
 
 
December 31, 2017
(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
 
$
29,897

 
$
26,740

 
$

 
 
$
19,899

 
$
14,704

 
$

Commercial real estate
 
25,145

 
24,469

 

 
 
18,974

 
18,060

 

Construction real estate:
 
 

 
 

 
 

 
 
 

 
 

 
 

Commercial
 
5,342

 
2,529

 

 
 
2,788

 
1,324

 

Residential real estate:
 
 

 
 

 
 

 
 
 

 
 

 
 

Commercial
 
3,080

 
2,717

 

 
 
19,346

 
19,012

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
With an allowance recorded:
 
 

 
 

 
 

 
 
 

 
 

 
 

Commercial, financial and agricultural
 
5,256

 
3,203

 
1,366

 
 
5,394

 
3,335

 
681

Commercial real estate
 
2,238

 
2,059

 
27

 
 
137

 
82

 
2

Construction real estate:
 
 

 
 

 
 

 
 
 

 
 

 
 

Commercial
 

 

 

 
 

 

 

Residential real estate:
 
 

 
 

 
 

 
 
 

 
 

 
 

Commercial
 
33

 
33

 
3

 
 
47

 
47

 
1

Consumer
 

 

 

 
 

 

 

Total
 
$
70,991

 
$
61,750

 
$
1,396

 
 
$
66,585

 
$
56,564

 
$
684


Management’s general practice is to proactively charge down loans individually evaluated for impairment to the fair value of the underlying collateral. At June 30, 2018 and December 31, 2017, there were $9.2 million and $7.9 million, respectively, of partial charge-offs on loans individually evaluated for impairment with no related allowance recorded. At June 30, 2018 and December 31, 2017, there were $2.2 million and $2.1 million, respectively, of partial charge-offs on loans individually evaluated for impairment that also had a specific reserve allocated.

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The allowance for loan losses included specific reserves related to loans individually evaluated for impairment at June 30, 2018 and December 31, 2017 of $1.4 million and $0.7 million, respectively. These loans with specific reserves had a recorded investment of $5.3 million and $3.5 million as of June 30, 2018 and December 31, 2017, 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 six months ended June 30, 2018 and June 30, 2017:

 
Three Months Ended
June 30, 2018
 
 
Three Months Ended
June 30, 2017
(In thousands)
Recorded Investment as of June 30, 2018
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
 
Recorded Investment as of June 30, 2017
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Commercial, financial and agricultural
$
29,943

 
$
27,637

 
$
145

 
 
$
28,475

 
$
23,320

 
$
120

Commercial real estate
26,528

 
20,711

 
201

 
 
21,790

 
21,768

 
240

Construction real estate:
 
 
 
 
 
 
 
 
 
 
 
 
   Commercial
2,529

 
1,510

 
13

 
 
1,636

 
1,843

 
16

Residential real estate:
 
 
 
 
 
 
 
 
 
 
 
 
   Commercial
2,750

 
2,653

 
27

 
 
21,235

 
20,732

 
61

Consumer

 

 

 
 
8

 
9

 

Total
$
61,750

 
$
52,511

 
$
386

 
 
$
73,144

 
$
67,672

 
$
437


 
Six Months Ended
June 30, 2018
 
 
Six Months Ended
June 30, 2017
(In thousands)
Recorded Investment as of June 30, 2018
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
 
Recorded Investment as of June 30, 2017
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Commercial, financial and agricultural
$
29,943

 
$
23,402

 
$
319

 
 
$
28,475

 
$
21,789

 
$
340

Commercial real estate
26,528

 
19,519

 
403

 
 
21,790

 
22,504

 
471

Construction real estate:
 
 
 
 
 
 
 
 
 
 
 
 
   Commercial
2,529

 
1,451

 
27

 
 
1,636

 
1,960

 
31

Residential real estate:
 
 
 
 
 
 
 
 
 
 
 
 
   Commercial
2,750

 
7,511

 
58

 
 
21,235

 
21,220

 
406

Consumer

 

 

 
 
8

 
6

 

Total
$
61,750

 
$
51,883

 
$
807

 
 
$
73,144

 
$
67,479

 
$
1,248




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Table of Contents

The following tables present the aging of the recorded investment in past due loans as of June 30, 2018 and December 31, 2017 by class of loan. 

 
June 30, 2018
(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
$
3,556

 
$
12,913

 
$
16,469

 
$
1,002,920

 
$
1,019,389

Commercial real estate
156

 
2,104

 
2,260

 
1,152,826

 
1,155,086

Construction real estate:
 

 
 

 
 

 
 

 
 

Commercial
41

 
1,821

 
1,862

 
134,619

 
136,481

Mortgage
506

 

 
506

 
52,516

 
53,022

Installment
39

 
17

 
56

 
2,918

 
2,974

Residential real estate:
 

 
 

 
 

 
 

 
 

Commercial

 
1,112

 
1,112

 
390,608

 
391,720

Mortgage
12,214

 
8,169

 
20,383

 
1,075,632

 
1,096,015

HELOC
500

 
768

 
1,268

 
188,316

 
189,584

Installment
190

 
322

 
512

 
16,136

 
16,648

Consumer
9,527

 
1,932

 
11,459

 
1,266,487

 
1,277,946

Leases

 

 

 
2,690

 
2,690

Total loans
$
26,729

 
$
29,158

 
$
55,887

 
$
5,285,668

 
$
5,341,555

(1) Includes $1.5 million of loans past due 90 days or more and accruing. The remaining loans were past due nonaccrual loans.
(2) Includes $53.4 million of nonaccrual loans which were current in regards to contractual principal and interest payments.

 
December 31, 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
$
145

 
$
1,043

 
$
1,188

 
$
1,056,678

 
$
1,057,866

Commercial real estate
856

 
2,360

 
3,216

 
1,168,674

 
1,171,890

Construction real estate:
 

 
 

 
 
 
 

 
 

Commercial
29

 

 
29

 
125,761

 
125,790

Mortgage
256

 

 
256

 
52,080

 
52,336

Installment
54

 
19

 
73

 
3,818

 
3,891

Residential real estate:
 

 
 

 
 

 
 

 
 

Commercial
16

 
1,586

 
1,602

 
392,521

 
394,123

Mortgage
11,515

 
9,232

 
20,747

 
1,091,195

 
1,111,942

HELOC
616

 
876

 
1,492

 
202,660

 
204,152

Installment
239

 
253

 
492

 
18,087

 
18,579

Consumer
11,515

 
2,407

 
13,922

 
1,231,622

 
1,245,544

Leases

 

 

 
3,029

 
3,029

Total loans
$
25,241

 
$
17,776

 
$
43,017

 
$
5,346,125

 
$
5,389,142

(1) Includes $1.8 million of loans past due 90 days or more and accruing. The remaining loans were past due nonaccrual loans.
(2) Includes $56.1 million of nonaccrual loans which were current in regards to contractual principal and interest payments.








17

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 June 30, 2018 and December 31, 2017 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 a 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 June 30, 2018 and December 31, 2017 for all commercial loans:
 
 
June 30, 2018
(In thousands)
5 Rated
 
6 Rated
 
Nonaccrual and Accruing TDRs
 
Pass-Rated
 
Recorded
Investment
Commercial, financial and agricultural *
$
1,195

 
$
57

 
$
30,034

 
$
988,103

 
$
1,019,389

Commercial real estate *
3,060

 

 
26,528

 
1,125,498

 
1,155,086

Construction real estate:
 

 
 

 
 

 
 

 
 

Commercial
21

 

 
2,529

 
133,931

 
136,481

Residential real estate:
 

 
 

 
 

 
 

 
 

Commercial
317

 
46

 
2,750

 
388,607

 
391,720

Leases

 

 

 
2,690

 
2,690

Total commercial loans
$
4,593

 
$
103

 
$
61,841

 
$
2,638,829

 
$
2,705,366

 * 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, 2017
(In thousands)
5 Rated
 
6 Rated
 
Nonaccrual and Accruing TDRs
 
Pass-Rated
 
Recorded
Investment
Commercial, financial and agricultural *
$
17,272

 
$
153

 
$
18,064

 
$
1,022,377

 
$
1,057,866

Commercial real estate *
5,322

 
457

 
18,142

 
1,147,969

 
1,171,890

Construction real estate:
 

 
 

 
 

 
 

 
 

Commercial
278

 

 
1,324

 
124,188

 
125,790

Residential real estate:
 

 
 

 
 

 
 

 
 

Commercial
216

 
1

 
19,059

 
374,847

 
394,123

Leases

 

 

 
3,029

 
3,029

Total Commercial Loans
$
23,088

 
$
611

 
$
56,589

 
$
2,672,410

 
$
2,752,698

 * 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 three-month periods ended June 30, 2018 and June 30, 2017 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. The TDR classification was removed on $1.9 million of loans during the three-month period ended June 30, 2018 and $2.2 million of loans during the six-month period ended June 30, 2018. There were no TDR classifications removed during the three-month or six-month periods ended June 30, 2017.

At June 30, 2018 and December 31, 2017, there were $23.9 million and $38.5 million, respectively, of TDRs included in the nonaccrual loan totals. At June 30, 2018 and December 31, 2017, $18.1 million and $32.4 million, respectively, of these nonaccrual TDRs were performing in accordance with the terms of the restructured note. As of June 30, 2018 and December 31, 2017, loans with a recorded investment of $16.4 million and $20.2 million, respectively, were included in accruing TDR loan totals. Management will continue to review the restructured loans and may determine it is appropriate to move certain nonaccrual TDRs to accrual status in the future.

At June 30, 2018 and December 31, 2017, Park had commitments to lend $0.6 million and $1.3 million, respectively, of additional funds to borrowers whose outstanding loan terms had been modified in a TDR.
 

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Table of Contents

At both June 30, 2018 and December 31, 2017, there were $0.5 million of specific reserves related to TDRs. Modifications made in 2017 and 2018 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 additional specific reserves recorded during the three-month period ended June 30, 2018 as a result of TDRs identified in the period. Additional specific reserves of $10,000 were recorded during the three-month period ended June 30, 2017 as a result of TDRs identified in the period. Additional specific reserves of $10,000 and $290,000 were recorded during the six-month periods ended June 30, 2018 and June 30, 2017, respectively, as a result of TDRs identified in the respective periods.

The terms of certain other loans were modified during the three-month and six-month periods ended June 30, 2018 and June 30, 2017 that did not meet the definition of a TDR. Substandard commercial loans modified during the three-month and six-month periods ended June 30, 2018 which did not meet the definition of a TDR had a total recorded investment of $0.1 million and $0.2 million, respectively. There were no substandard commercial loans modified during the three-month period ended June 30, 2017 which did not meet the definition of a TDR. Substandard commercial loans with a recorded investment of $0.1 million were modified during the six-month period ended June 30, 2017 which 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 six-month periods ended June 30, 2018 which did not meet the definition of a TDR had a total recorded investment of $4.7 million and $11.0 million, respectively. Consumer loans with a recorded investment of $3.4 million and $5.0 million were modified during the three-month and six-month periods ended June 30, 2017 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 periods ended June 30, 2018 and June 30, 2017, as well as the recorded investment of these contracts at June 30, 2018 and June 30, 2017. The recorded investment pre- and post-modification is generally the same due to the fact that Park does not typically forgive principal.

 
Three Months Ended
June 30, 2018
(In thousands)
Number of
Contracts
 
Accruing
 
Nonaccrual
 
Total
Recorded
Investment
Commercial, financial and agricultural
4

 
$
123

 
$
26

 
$
149

Commercial real estate
3

 
455

 
134

 
589

Construction real estate:
 
 
 
 
 
 
 
  Commercial

 

 

 

  Mortgage

 

 

 

  Installment
2

 
14

 

 
14

Residential real estate:
 
 
 
 
 
 
 
  Commercial

 

 

 

  Mortgage
4

 
93

 
224

 
317

  HELOC
6

 
409

 
43

 
452

  Installment
4

 
71

 
4

 
75

Consumer
85

 
58

 
720

 
778

Total loans
108

 
$
1,223

 
$
1,151

 
$
2,374



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Table of Contents

 
Three Months Ended
June 30, 2017
(In thousands)
Number of
Contracts
 
Accruing
 
Nonaccrual
 
Total
Recorded
Investment
Commercial, financial and agricultural
3

 
$

 
$
164

 
$
164

Commercial real estate
2

 
802

 

 
802

Construction real estate:
 
 
 
 
 
 
 
  Commercial

 

 

 

  Mortgage
1

 

 
8

 
8

  Installment

 

 

 

Residential real estate:
 
 
 
 
 
 
 
  Commercial
4

 

 
282

 
282

  Mortgage
10

 
438

 
506

 
944

  HELOC
9

 
160

 
48

 
208

  Installment
2

 
40

 

 
40

Consumer
72

 
37

 
551

 
588

Total loans
103

 
$
1,477

 
$
1,559

 
$
3,036


Of those loans which were modified and determined to be a TDR during the three-month period ended June 30, 2018, $5,000 were on nonaccrual status as of December 31, 2017. Of those loans which were modified and determined to be a TDR during the three-month period ended June 30, 2017, $175,000 were on nonaccrual status as of December 31, 2016.

 
Six Months Ended
June 30, 2018
(In thousands)
Number of
Contracts
 
Accruing
 
Nonaccrual
 
Total
Recorded
Investment
Commercial, financial and agricultural
8

 
$
123

 
$
70

 
$
193

Commercial real estate
6

 
455

 
265

 
720

Construction real estate:
 
 
 
 
 
 
 
  Commercial
1

 

 

 

  Mortgage

 

 

 

  Installment
2

 
14

 

 
14

Residential real estate:
 
 
 
 
 
 
 
  Commercial

 

 

 

  Mortgage
13

 
93

 
868

 
961

  HELOC
8

 
661

 
130

 
791

  Installment
9

 
104

 
17

 
121

Consumer
135

 
61

 
906

 
967

Total loans
182

 
$
1,511

 
$
2,256

 
$
3,767



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Table of Contents

 
Six Months Ended
June 30, 2017
(In thousands)
Number of
Contracts
 
Accruing
 
Nonaccrual
 
Total
Recorded
Investment
Commercial, financial and agricultural
11

 
$

 
$
3,052

 
$
3,052

Commercial real estate
6

 
803

 
380

 
1,183

Construction real estate:
 
 
 
 
 
 
 
  Commercial

 

 

 

  Mortgage
1

 

 
8

 
8

  Installment

 

 

 

Residential real estate:
 
 
 
 
 
 
 
  Commercial
5

 

 
282

 
282

  Mortgage
19

 
438

 
1,110

 
1,548

  HELOC
12

 
359

 
47

 
406

  Installment
3

 
73

 

 
73

Consumer
129

 
52

 
965

 
1,017

Total loans
186

 
$
1,725

 
$
5,844

 
$
7,569


Of those loans which were modified and determined to be a TDR during the six-month period ended June 30, 2018, $0.4 million were on nonaccrual status as of December 31, 2017. Of those loans which were modified and determined to be a TDR during the six-month period ended June 30, 2017, $2.8 million were on nonaccrual status as of December 31, 2016.

The following table presents the recorded investment in financing receivables which were modified as TDRs within the previous 12 months and for which there was a payment default during the three-month and six-month periods ended June 30, 2018 and June 30, 2017, respectively. For this table, a loan is considered to be in default when it becomes 30 days contractually past due under the modified terms. The additional allowance for loan loss resulting from the defaults on TDR loans was immaterial.
 
 
Three Months Ended
June 30, 2018
 
 
Three Months Ended
June 30, 2017
 
(In thousands)
Number of
Contracts
 
Recorded
Investment
 
 
Number of
Contracts
 
Recorded
Investment
 
Commercial, financial and agricultural
3

 
$
144

 
 
4

 
$
109

 
Commercial real estate

 

 
 
4

 
657

 
Construction real estate:
 

 
 

 
 
 
 
 
 
Commercial

 

 
 

 

 
Mortgage

 

 
 

 

 
Installment

 

 
 

 

 
Residential real estate:
 

 
 

 
 
 
 
 
 
Commercial

 

 
 
1

 
29

 
Mortgage
6

 
600

 
 
10

 
724

 
HELOC
1

 
88

 
 
2

 
10

 
Installment

 

 
 
1

 
2

 
Consumer
42

 
403

 
 
48

 
579

 
Leases

 

 
 

 

 
Total loans
52

 
$
1,235

 
 
70

 
$
2,110

 

Of the $1.2 million in modified TDRs which defaulted during the three-month period ended June 30, 2018, $21,000 were accruing loans and $1.2 million were nonaccrual loans. Of the $2.1 million in modified TDRs which defaulted during the three-month period ended June 30, 2017, $13,000 were accruing loans and $2.1 million were nonaccrual loans.


22

Table of Contents

 
Six Months Ended
June 30, 2018
 
 
Six Months Ended
June 30, 2017
 
(In thousands)
Number of
Contracts
 
Recorded
Investment
 
 
Number of
Contracts
 
Recorded
Investment
 
Commercial, financial and agricultural
3

 
$
144

 
 
4

 
$
109

 
Commercial real estate

 

 
 
5

 
834

 
Construction real estate:
 
 
 
 
 
 
 
 
 
Commercial

 

 
 

 

 
Mortgage

 

 
 

 

 
Installment

 

 
 

 

 
Residential real estate:
 
 
 
 
 
 
 
 
 
Commercial

 

 
 
1

 
29

 
Mortgage
7

 
703

 
 
10

 
724

 
HELOC
1

 
88

 
 
2

 
10

 
Installment

 

 
 
1

 
2

 
Consumer
47

 
445

 
 
56

 
618

 
Leases

 

 
 

 

 
Total loans
58

 
$
1,380

 
 
79

 
$
2,326

 

Of the $1.4 million in modified TDRs which defaulted during the six-month period ended June 30, 2018, $21,000 were accruing loans and $1.4 million were nonaccrual loans. Of the $2.3 million in modified TDRs which defaulted during the six-month period ended June 30, 2017, $13,000 were accruing loans and $2.3 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 2017 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 following are factors management reviews on a quarterly or annual basis.

Historical Loss Factor: Management updated the historical loss calculation during the fourth quarter of 2017, incorporating net charge-offs plus changes in specific reserves through December 31, 2017.  With the addition of 2017 historical losses, management extended the historical loss period to 96 months from 84 months. The 96-month historical loss period captures all annual periods subsequent to June 2009, the end of the most recent recession, thus encompassing the full economic cycle to date.

Loss Emergence Period Factor: At least annually, management calculates the loss emergence period for each commercial loan segment. This loss emergence period is calculated based upon the average period of time it takes from the probable occurrence of a loss event to the credit being moved to nonaccrual. 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 period was last updated in the fourth quarter of 2017.

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 factor was last updated in the fourth quarter of 2017.


23

Table of Contents

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. There was no change to the environmental loss factor during the second quarter of 2018.

The activity in the allowance for loan losses for the three-month and six-month periods ended June 30, 2018 and June 30, 2017 is summarized in the following tables.
 
 
Three Months Ended
June 30, 2018
(In thousands)
Commercial,
financial and
agricultural
 
Commercial
real estate
 
Construction
real estate
 
Residential
real estate
 
Consumer
 
Leases
 
Total
Allowance for loan losses:
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
14,077

 
$
9,488

 
$
4,463

 
$
9,415

 
$
11,526

 
$

 
$
48,969

Charge-offs
287

 
182

 
31

 
102

 
2,114

 

 
2,716

Recoveries
206

 
89

 
220

 
244

 
1,054

 

 
1,813

Net charge-offs/(recoveries)
81

 
93

 
(189
)
 
(142
)
 
1,060

 

 
903

Provision/(recovery)
482

 
11

 

 
(312
)
 
1,205

 

 
1,386

Ending balance
$
14,478

 
$
9,406

 
$
4,652

 
$
9,245

 
$
11,671

 
$

 
$
49,452

 
 
Three Months Ended
June 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
$
13,437

 
$
10,281

 
$
4,368

 
$
10,745

 
$
11,091

 
$

 
$
49,922

Charge-offs
318

 
310

 

 
290

 
2,128

 

 
3,046

Recoveries
163

 
241

 
325

 
336

 
1,300

 

 
2,365

Net charge-offs/(recoveries)
155

 
69

 
(325
)
 
(46
)
 
828

 

 
681

Provision/(recovery)
3,464

 
239

 
(16
)
 
(472
)
 
1,366

 

 
4,581

Ending balance
$
16,746

 
$
10,451

 
$
4,677

 
$
10,319

 
$
11,629

 
$

 
$
53,822


 
Six Months Ended
June 30, 2018
(In thousands)
Commercial,
financial and
agricultural
 
Commercial
real estate
 
Construction
real estate
 
Residential
real estate
 
Consumer
 
Leases
 
Total
Allowance for loan losses:
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
15,022

 
$
9,601

 
$
4,430

 
$
9,321

 
$
11,614

 
$

 
$
49,988

Charge-offs
936

 
229

 
31

 
218

 
4,752

 

 
6,166

Recoveries
858

 
176

 
279

 
604

 
2,067

 

 
3,984

Net charge-offs/(recoveries)
78

 
53

 
(248
)
 
(386
)
 
2,685

 

 
2,182

(Recovery)/provision
(466
)
 
(142
)
 
(26
)
 
(462
)
 
2,742

 

 
1,646

Ending balance
$
14,478

 
$
9,406

 
$
4,652

 
$
9,245

 
$
11,671

 
$

 
$
49,452

 

24

Table of Contents

 
Six Months Ended
June 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
657

 
422

 
27

 
770

 
4,878

 

 
6,754

Recoveries
532

 
355

 
383

 
627

 
2,598

 

 
4,495

Net charge-offs/(recoveries)
125

 
67

 
(356
)
 
143

 
2,280

 

 
2,259

Provision/(recovery)
3,437

 
86

 
(926
)
 
(496
)
 
3,356

 

 
5,457

Ending balance
$
16,746

 
$
10,451

 
$
4,677

 
$
10,319

 
$
11,629

 
$

 
$
53,822



Loans collectively evaluated for impairment in the following tables include all performing loans at June 30, 2018 and December 31, 2017, as well as nonperforming loans internally classified as consumer loans. Nonperforming consumer loans are not typically individually evaluated for impairment, but receive a portion of the statistical allocation of the allowance for loan losses. Loans individually evaluated for impairment include all impaired loans internally classified as commercial loans at June 30, 2018 and December 31, 2017, 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 2017 Annual Report).

The composition of the allowance for loan losses at June 30, 2018 and December 31, 2017 was as follows:
 
 
June 30, 2018
(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
$
1,366

 
$
27

 
$

 
$
3

 
$

 
$

 
$
1,396

Collectively evaluated for impairment
13,112

 
9,379

 
4,652

 
9,242

 
11,671

 

 
48,056

Total ending allowance balance
$
14,478

 
$
9,406

 
$
4,652

 
$
9,245

 
$
11,671

 
$

 
$
49,452

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan balance:
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans individually evaluated for impairment
$
29,942

 
$
26,485

 
$
2,529

 
$
2,749

 
$

 
$

 
$
61,705

Loans collectively evaluated for impairment
984,681

 
1,124,360

 
189,389

 
1,687,823

 
1,274,349

 
2,667

 
5,263,269

Total ending loan balance
$
1,014,623

 
$
1,150,845

 
$
191,918

 
$
1,690,572

 
$
1,274,349

 
$
2,667

 
$
5,324,974

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses as a percentage of loan balance:
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans individually evaluated for impairment
4.56
%
 
0.10
%
 
%
 
0.11
%
 
%
 
%
 
2.26
%
Loans collectively evaluated for impairment
1.33
%
 
0.83
%
 
2.46
%
 
0.55
%
 
0.92
%
 
%
 
0.91
%
Total
1.43
%
 
0.82
%
 
2.42
%
 
0.55
%
 
0.92
%
 
%
 
0.93
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment:
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans individually evaluated for impairment
$
29,943

 
$
26,528

 
$
2,529

 
$
2,750

 
$

 
$

 
$
61,750

Loans collectively evaluated for impairment
989,446

 
1,128,558

 
189,948

 
1,691,217

 
1,277,946

 
2,690

 
5,279,805

Total ending recorded investment
$
1,019,389

 
$
1,155,086

 
$
192,477

 
$
1,693,967

 
$
1,277,946

 
$
2,690

 
$
5,341,555

 

25

Table of Contents

 
 
December 31, 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
 
$
681

 
$
2

 
$

 
$
1

 
$

 
$

 
$
684

Collectively evaluated for impairment
 
14,341

 
9,599

 
4,430

 
9,320

 
11,614

 

 
49,304

Total ending allowance balance
 
$
15,022

 
$
9,601

 
$
4,430

 
$
9,321

 
$
11,614

 
$

 
$
49,988

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan balance:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans individually evaluated for impairment
 
$
18,034

 
$
18,131

 
$
1,322

 
$
19,058

 
$

 
$

 
$
56,545

Loans collectively evaluated for impairment
 
1,035,419

 
1,149,476

 
180,148

 
1,706,166

 
1,241,736

 
2,993

 
5,315,938

Total ending loan balance
 
$
1,053,453

 
$
1,167,607

 
$
181,470

 
$
1,725,224

 
$
1,241,736

 
$
2,993

 
$
5,372,483

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses as a percentage of loan balance:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans individually evaluated for impairment
 
3.78
%
 
0.01
%
 
%
 
0.01
%
 
%
 
%
 
1.21
%
Loans collectively evaluated for impairment
 
1.39
%
 
0.84
%
 
2.46
%
 
0.55
%
 
0.94
%
 
%
 
0.93
%
Total
 
1.43
%
 
0.82
%
 
2.44
%
 
0.54
%
 
0.94
%
 
%
 
0.93
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans individually evaluated for impairment
 
$
18,039

 
$
18,142

 
$
1,324

 
$
19,059

 
$

 
$

 
$
56,564

Loans collectively evaluated for impairment
 
1,039,827

 
1,153,748

 
180,693

 
1,709,737

 
1,245,544

 
3,029

 
5,332,578

Total ending recorded investment
 
$
1,057,866

 
$
1,171,890

 
$
182,017

 
$
1,728,796

 
$
1,245,544

 
$
3,029

 
$
5,389,142

 
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 June 30, 2018 and December 31, 2017 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)
 
June 30, 2018
 
December 31, 2017
OREO:
 
 
 
 
Commercial real estate
 
$
2,295

 
$
7,888

Construction real estate
 
2,425

 
4,852

Residential real estate
 
1,009

 
1,450

Total OREO
 
$
5,729

 
$
14,190

 
 
 
 
 
Loans in process of foreclosure:
 
 
 
 
Residential real estate
 
$
2,633

 
$
2,948




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 six months ended June 30, 2018 and 2017.
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(In thousands, except share and per common share data)
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 

 
 

 
 
 
 
Net income
 
$
28,241

 
$
19,032

 
$
59,364

 
$
39,299

Denominator:
 
 

 
 

 
 
 
 
Weighted-average common shares outstanding
 
15,285,532

 
15,297,085

 
15,286,932

 
15,304,572

Effect of dilutive performance-based restricted stock units
 
132,075

 
101,780

 
137,653

 
111,193

Weighted-average common shares outstanding adjusted for the effect of dilutive performance-based restricted stock units
 
15,417,607

 
15,398,865

 
15,424,585

 
15,415,765

Earnings per common share:
 
 

 
 

 
 

 
 

Basic earnings per common share
 
$
1.85

 
$
1.24

 
$
3.88

 
$
2.57

Diluted earnings per common share
 
$
1.83

 
$
1.24

 
$
3.85

 
$
2.55


Park awarded 48,053 and 45,788 PBRSUs to certain employees during the six months ended June 30, 2018 and 2017, respectively. No PBRSUs were awarded during either of the three months ended June 30, 2018 and 2017. As of June 30, 2018, 138,994 PBRSUs were outstanding. The PBRSUs vest based on service and performance conditions. The dilutive effect of the outstanding PBRSUs was the addition of 132,075 and 101,780 common shares for the three months ended June 30, 2018 and 2017, respectively, and 137,653 and 111,193 common shares for the six months ended June 30, 2018 and 2017, respectively.

Park repurchased 50,000 common shares during the three and six months ended June 30, 2018 to fund the PBRSUs and common shares to be awarded to directors of Park and to directors of Park's subsidiary PNB (and its divisions). Park repurchased 50,000 common shares during the six months ended June 30, 2017 to fund the PBRSUs and common shares to be awarded to directors of Park and to directors of Park's subsidiary PNB (and its divisions). Park did not repurchase any common shares during three months ended June 30, 2017.

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 June 30, 2018
(In thousands)
 
PNB
 
GFSC
 
SEPH
 
All Other
 
Total
Net interest income
 
$
62,683

 
$
1,261

 
$
616

 
$
182

 
$
64,742

Provision for (recovery of) loan losses
 
1,623

 
87

 
(324
)
 

 
1,386

Other income
 
22,070

 
42

 
71

 
1,059

 
23,242

Other expense
 
48,169

 
842

 
857

 
2,666

 
52,534

Income (loss) before income taxes
 
$
34,961

 
$
374

 
$
154

 
$
(1,425
)
 
$
34,064

Federal income tax expense (benefit)
 
6,164

 
79

 
32

 
(452
)
 
5,823

Net income (loss)
 
$
28,797

 
$
295

 
$
122

 
$
(973
)
 
$
28,241

 
 
 
 
 
 
 
 
 
 
 
Assets (as of June 30, 2018)
 
$
7,404,498

 
$
29,232

 
$
7,786

 
$
20,640

 
$
7,462,156

 
 
 
Operating Results for the three months ended June 30, 2017
(In thousands)
 
PNB
 
GFSC
 
SEPH
 
All Other
 
Total
Net interest income
 
$
57,822

 
$
1,491

 
$
282

 
$
183

 
$
59,778

Provision for (recovery of) loan losses
 
4,574

 
373

 
(366
)
 

 
4,581

Other income
 
20,582

 
8

 
8

 
101

 
20,699

Other expense
 
45,280

 
841

 
1,267

 
2,166

 
49,554

Income (loss) before income taxes
 
$
28,550

 
$
285

 
$
(611
)
 
$
(1,882
)
 
$
26,342

Federal income tax expense (benefit)
 
8,387

 
99

 
(213
)
 
(963
)
 
7,310

Net income (loss)
 
$
20,163

 
$
186

 
$
(398
)
 
$
(919
)
 
$
19,032

 
 
 
 
 
 
 
 
 
 
 
Assets (as of June 30, 2017)
 
$
7,754,898

 
$
33,860

 
$
24,595

 
$
18,739

 
$
7,832,092


 
 
Operating Results for the six months ended June 30, 2018
(In thousands)
 
PNB
 
GFSC
 
SEPH
 
All Other
 
Total
Net interest income
 
$
124,124

 
$
2,566

 
$
2,493

 
$
409

 
$
129,592

Provision for (recovery of) loan losses
 
1,556

 
590

 
(500
)
 

 
1,646

Other income
 
41,985

 
72

 
3,658

 
4,430

 
50,145

Other expense
 
97,170

 
1,602

 
2,882

 
5,188

 
106,842

Income (loss) before income taxes
 
$
67,383

 
$
446

 
$
3,769

 
$
(349
)
 
$
71,249

Federal income tax expense (benefit)
 
11,841

 
94

 
791

 
(841
)
 
11,885

Net income
 
$
55,542

 
$
352

 
$
2,978

 
$
492

 
$
59,364

 
 
 
Operating Results for the six months ended June 30, 2017
(In thousands)
 
PNB
 
GFSC
 
SEPH
 
All Other
 
Total
Net interest income
 
$
115,302

 
$
2,969

 
$
483

 
$
(24
)
 
$
118,730

Provision for (recovery of) loan losses
 
5,294

 
810

 
(647
)
 

 
5,457

Other income (loss)
 
39,696

 
24

 
37

 
(103
)
 
39,654

Other expense
 
90,486

 
1,593

 
2,072

 
4,313

 
98,464

Income (loss) before income taxes
 
$
59,218

 
$
590

 
$
(905
)
 
$
(4,440
)
 
$
54,463

Federal income tax expense (benefit)
 
17,569

 
206

 
(316
)
 
(2,295
)
 
15,164

Net income (loss)
 
$
41,649

 
$
384

 
$
(589
)
 
$
(2,145
)
 
$
39,299


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 six-month periods ended June 30, 2018 and 2017. The reconciling amounts for consolidated total assets for the periods ended June 30, 2018 and 2017 consisted of the elimination of intersegment borrowings and the assets of the Parent Company which were not eliminated.


28

Table of Contents

Note 8 – Loans Held For Sale
 
Mortgage loans held for sale are carried at their fair value. At June 30, 2018 and December 31, 2017, respectively, Park had approximately $8.2 million and $4.1 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, Loans, and Note 4, Allowance for Loan Losses. The contractual balance was $8.0 million and $4.1 million at June 30, 2018 and December 31, 2017, respectively. The gain expected upon sale was $108,000 and $55,000 at June 30, 2018 and December 31, 2017, respectively. None of these loans were 90 days or more past due or on nonaccrual status as of June 30, 2018 or December 31, 2017.

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 six-month periods ended June 30, 2018 and 2017, there were no investment securities deemed to be other-than-temporarily impaired.
 
Investment securities at June 30, 2018, were as follows:

Debt Securities Available-for-Sale (In thousands)
 
Amortized
Cost
 
Gross
Unrealized
Holding 
Gains
 
Gross
Unrealized
Holding 
Losses
 
Estimated 
Fair Value
U.S. Government sponsored entities' asset-backed securities
 
1,127,511

 
476

 
36,309

 
1,091,678

Total
 
$
1,127,511

 
$
476

 
$
36,309

 
$
1,091,678

 
Debt 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
 
$
47,192

 
$
95

 
$
1,236

 
$
46,051

Obligations of states and political subdivisions
 
304,239

 
2,225

 
$
4,323

 
302,141

Total
 
$
351,431

 
$
2,320

 
$
5,559

 
$
348,192

 
Investment securities with unrealized/unrecognized losses at June 30, 2018, 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
Debt Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored entities' asset-backed securities
 
775,132

 
19,613

 
$
279,486

 
16,696

 
$
1,054,618

 
36,309

Total
 
$
775,132

 
$
19,613

 
$
279,486

 
$
16,696

 
$
1,054,618

 
$
36,309

Debt Securities Held-to-Maturity
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Government sponsored entities' asset-backed securities
 
$
40,016

 
$
1,236

 
$

 
$

 
$
40,016

 
$
1,236

Obligations of states and political subdivisions
 
129,738

 
$
2,237

 
58,541

 
2,086

 
$
188,279

 
4,323

Total
 
$
169,754

 
$
3,473

 
$
58,541

 
$
2,086

 
$
228,295

 
$
5,559

 

29

Table of Contents

Investment securities at December 31, 2017, were as follows:

Debt 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
 
$
245,000

 
$

 
$
2,280

 
$
242,720

U.S. Government sponsored entities' asset-backed securities
 
852,645

 
4,645

 
8,129

 
849,161

Total
 
$
1,097,645

 
$
4,645

 
$
10,409

 
$
1,091,881

 
Debt Securities Held-to-Maturity (In thousands)
 
Amortized
Cost
 
Gross
Unrecognized
Holding 
Gains
 
Gross
Unrecognized
Holding 
Losses
 
Estimated
Fair Value
Obligations of states and political subdivisions
 
$
300,412

 
$
6,575

 
$
713

 
$
306,274

U.S. Government sponsored entities' asset-backed securities
 
56,785

 
758

 
38

 
57,505

Total
 
$
357,197

 
$
7,333

 
$
751

 
$
363,779

 
Investment securities with unrealized/unrecognized losses at December 31, 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
Debt Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of U.S. Treasury and other U.S. Government sponsored entities
 
$
24,931

 
$
70

 
$
217,789

 
$
2,210

 
$
242,720

 
$
2,280

U.S. Government sponsored entities' asset-backed securities
 
236,924

 
2,786

 
318,797

 
5,343

 
555,721

 
8,129

Total
 
$
261,855

 
$
2,856

 
$
536,586

 
$
7,553

 
$
798,441

 
$
10,409

Debt Securities Held-to-Maturity
 
 

 
 

 
 

 
 

 
 

 
 

Obligations of states and political subdivisions
 
$
26,644

 
$
194

 
$
45,498

 
$
519

 
$
72,142

 
$
713

U.S. Government sponsored entities' asset-backed securities
 
7,331

 
38

 

 

 
7,331

 
38

Total
 
$
33,975

 
$
232

 
$
45,498

 
$
519

 
$
79,473

 
$
751

 
Management does not believe any of the unrealized/unrecognized losses at June 30, 2018 or December 31, 2017 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.
 

30

Table of Contents

The amortized cost and estimated fair value of investments in debt securities at June 30, 2018, 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
U.S. Government sponsored entities' asset-backed securities
 
$
1,127,511

 
$
1,091,678

 
2.35
%
Securities Held-to-Maturity (In thousands)
 
Amortized
cost
 
Fair value
 
Tax equivalent yield (1)
Obligations of state and political subdivisions:
 
 
 
 
 
 
Due five through ten years
 
$
2,438

 
$
2,395

 
2.97
%
Due over ten years
 
$
301,801

 
$
299,746

 
3.68
%
Total (1)
 
$
304,239

 
$
302,141

 
3.67
%
 
 
 
 
 
 
 
U.S. Government sponsored entities' asset-backed securities
 
$
47,192

 
$
46,051

 
2.83
%
(1) The tax equivalent yield for obligations of state and political subdivisions includes the effects of a taxable equivalent adjustment using a 21% federal corporate income tax rate.
 
The remaining average life of the entire investment portfolio is estimated to be 4.9 years.

There were no sales of investment securities during the three-month period ended June 30, 2018. During the six-month period ended June 30, 2018, Park sold certain AFS debt securities with a book value of $247.0 million at a loss of $2.6 million. Additionally, during the six-month period ended June 30, 2018, Park sold certain HTM debt securities with a book value of $7.4 million at a gain of $291,000. These HTM securities had been paid down by 96.3% of the principal outstanding at acquisition. There were no sales of investment securities during the three-month or six-month periods ended June 30, 2017.

Investment securities having an amortized cost of $618 million and $557 million at June 30, 2018 and December 31, 2017, 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 Federal Home Loan Bank ("FHLB") advance borrowings.

Note 10 – Other Investment Securities
 
Other investment securities consist of stock investments in the FHLB, the Federal Reserve Bank ("FRB"), and equity securities. The FHLB and FRB restricted stock investments are carried at their redemption value. Equity securities with a readily determinable fair value are carried at fair value. Beginning on January 1, 2018, with the adoption of ASU 2016-01, changes in fair value are included in other income on the consolidated condensed statement of income as opposed to in accumulated other comprehensive loss on the consolidated condensed balance sheet. Equity securities without a readily determinable fair value are recorded at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions ("modified cost").

The carrying amount of other investment securities at June 30, 2018 and December 31, 2017 was as follows:
 
(In thousands)
 
June 30, 2018
 
December 31, 2017
FHLB stock
 
$
50,086

 
$
50,086

FRB stock
 
8,225

 
8,225

Equity investments carried at fair value
 
9,229

 
1,935

Equity investments carried at cost/modified cost (1)
 
2,589

 
3,500

Total other investment securities
 
$
70,129

 
$
63,746

(1) There have been no impairments, downward adjustments, or upward adjustments made to equity investments carried at modified cost.


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Table of Contents

During the three months ended March 31, 2018, an equity investment previously carried at cost, with a carrying amount of $3.5 million, was measured at fair value as a readily determinable market value became available.

During the three and six months ended June 30, 2018, $0.3 million and $3.8 million, respectively, of unrealized gains were recorded within "unrealized gain on equity securities" on the consolidated condensed statements of income, which relate to investment securities held at June 30, 2018.

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 June 30, 2018, there were 92,404 common shares subject to performance-based restricted stock units (“PBRSUs”) issued under the 2013 Incentive Plan, which represented the only awards outstanding 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 June 30, 2018, 703,410 common shares were available for future grants under the 2017 Employees 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 June 30, 2018, 138,850 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 has not granted and 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 six months ended June 30, 2018, the Compensation Committee of the Board of Directors of Park granted awards of PBRSUs, under the 2017 Employees LTIP, covering an aggregate of 48,053 common shares to certain employees of Park and its subsidiaries. During the six months ended June 30, 2017, 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 common shares to certain employees of Park and its subsidiaries. There were no awards granted during either of the three months ended June 30, 2018 or 2017. 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.


32

Table of Contents

A summary of changes in the common shares subject to nonvested PBRSUs for the six months ended June 30, 2018 follows:

 
Common shares subject to PBRSUs
Nonvested at January 1, 2018
116,716

Granted
48,053

Vested
(18,800
)
Forfeited
(4,655
)
Adjustment for performance conditions of PBRSUs (1)
(2,320
)
Nonvested at June 30, 2018
138,994

(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, 2018, an aggregate of 18,800 of the PBRSUs granted in 2014 and 2015 vested in full due to the level of achievement with respect to certain performance criteria and the satisfaction of the service-based vesting requirement. A total of 5,879 common shares were withheld to satisfy employee income tax withholding obligations. This resulted in a net amount of 12,921 common shares being issued to employees of Park. On March 31, 2017, 9,674 of the PBRSUs granted in 2014 vested in full due to the level of achievement with respect to certain performance criteria and the satisfaction of the service-based vesting requirement. A total of 3,293 common shares were withheld to satisfy employee income tax withholding obligations. This resulted in a net amount of 6,381 common shares being issued to employees of Park.

Share-based compensation expense of $0.9 million and $0.6 million was recognized for the three-month periods ended June 30, 2018 and 2017, respectively, and of $2.0 million and $1.4 million was recognized for the six-month periods ended June 30, 2018 and 2017, respectively.

The following table details expected additional share-based compensation expense related to PBRSUs outstanding as of June 30, 2018:

(In thousands)
 
 
Six months ending December 31, 2018
 
$
1,809

2019
 
3,084

2020
 
2,061

2021
 
841

2022
 
132

Total
 
$
7,927


Note 12 – Benefit Plans
 
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 and six-month periods ended June 30, 2018 and 2017.
 

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The following table shows the components of net periodic pension benefit income:

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
Affected Line Item in the Consolidated
Condensed Statement of Income
(In thousands)
 
2018
 
2017
 
2018
 
2017
Service cost
 
$
1,637

 
$
1,317

 
$
3,274

 
$
2,634

Employee benefits
Interest cost
 
1,309

 
1,271

 
2,618

 
2,542

Other components of net
periodic pension benefit income
Expected return on plan assets
 
(3,354
)
 
(2,863
)
 
(6,708
)
 
(5,726
)
Other components of net
periodic pension benefit income
Amortization of prior service cost
 

 

 

 

Other components of net
periodic pension benefit income
Recognized net actuarial loss
 
340

 
144

 
680

 
288

Other components of net
periodic pension benefit income
Net periodic pension benefit income
 
$
(68
)
 
$
(131
)
 
$
(136
)
 
$
(262
)
 

Park has entered into Supplemental Executive Retirement Plan Agreements (the “SERP Agreements”) with certain key officers of the Corporation and its subsidiaries which provide defined pension benefits in excess of limits imposed by federal tax law. The expense for the Corporation related to the SERP Agreements for the three months and six months ended June 30, 2018 and 2017 was as follows:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
Affected Line Item in the Consolidated
Condensed Statement of Income
(In thousands)
 
2018
 
2017
 
2018
 
2017
Service cost
 
$
244

 
$
185

 
$
478

 
$
370

Employee benefits
Interest cost
 
44

 
161

 
161

 
322

Miscellaneous expense
Total SERP expense
 
$
288

 
$
346

 
$
639

 
$
692

 

Previously, the net periodic benefit income/expense related to Park’s Pension and the expense related to the SERP Agreements had been recorded within the "Employee benefits" line item.
During the first quarter of 2018, Park adopted ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement. 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 benefit cost are required to be presented in the income statement separately from the service cost component. This ASU is required to be applied retrospectively to all periods presented. For all periods presented, this resulted in an increase in other income and an offsetting increase in other expense with no change to net income. As a practical expedient, Park used the amounts disclosed in "Note 12 - Pension Plan" of the Notes to Unaudited Consolidated Condensed Financial Statements, included under Item 1 of Part I of Park's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017 as the estimation basis for applying the retrospective presentation requirements.

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The following table summarizes the impact of retrospective application of this ASU to the consolidated condensed statement of income for the three and six months ended June 30, 2017.
(in thousands)
 
Three Months Ended
June 30, 2017
 
Six Months Ended
June 30, 2017
Other components of net periodic pension benefit income
 
 
 
 
As previously reported
 
$

 
$

As reported under new guidance
 
1,448

 
2,896

 
 
 
 
 
Total other income
 
 
 
 
As previously reported
 
$
19,251

 
$
36,758

As reported under new guidance
 
20,699

 
39,654

 
 
 
 
 
Employee benefits expense
 
 
 
 
As previously reported
 
$
4,919

 
$
10,100

As reported under new guidance
 
6,206

 
12,674

 
 
 
 
 
Miscellaneous expense
 
 
 
 
As previously reported
 
$
1,588

 
$
3,083

As reported under new guidance
 
1,749

 
3,405

 
 
 
 
 
Total other expense
 
 
 
 
As previously reported
 
$
48,106

 
$
95,568

As reported under new guidance
 
49,554

 
98,464


Note 13 – Loan Servicing
 
Park serviced sold mortgage loans of $1.38 billion at June 30, 2018, $1.37 billion at December 31, 2017 and $1.35 billion at June 30, 2017. At June 30, 2018, $2.6 million of the sold mortgage loans were sold with recourse, compared to $3.0 million at December 31, 2017 and $3.4 million at June 30, 2017. Management closely monitors the delinquency rates on the mortgage loans sold with recourse. At June 30, 2018 and December 31, 2017, management had established reserves of $43,000 and $270,000, respectively, to account for expected losses on loan repurchases.
 
When Park sells mortgage loans with servicing rights retained, these 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 with respect to 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. The amortization of MSRs is included within other service income in the consolidated condensed statements of income.


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Activity for MSRs and the related valuation allowance follows:
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(In thousands)
 
2018
 
2017
 
2018
 
2017
Mortgage servicing rights:
 
 
 
 
 
 
 
 
Carrying amount, net, beginning of period
 
$
9,969

 
$
9,321

 
$
9,688

 
$
9,266

Additions
 
448

 
521

 
776

 
875

Amortization
 
(417
)
 
(407
)
 
(769
)
 
(765
)
Changes in valuation allowance
 
77

 
41

 
382

 
100

Carrying amount, net, end of period
 
$
10,077

 
$
9,476

 
$
10,077

 
$
9,476

 
 
 
 
 
 
 
 
 
Valuation allowance:
 
 
 
 
 
 
 
 
Beginning of period
 
$
325

 
$
676

 
$
630

 
$
735

Changes in valuation allowance
 
(77
)
 
(41
)
 
(382
)
 
(100
)
End of period
 
$
248

 
$
635

 
$
248

 
$
635

 
Servicing fees included in other service income were $0.9 million for each of the three months ended June 30, 2018 and 2017, and were $1.8 million for each of the six months ended June 30, 2018 and 2017.
 
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 (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction 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 June 30, 2018 using:
(In thousands)
 
Level 1
 
Level 2
 
Level 3
 
Balance at June 30, 2018
Assets
 
 

 
 

 
 

 
 

Investment securities:
 
 

 
 

 
 

 
 

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

 
$
1,091,678

 
$

 
$
1,091,678

Equity securities
 
8,809

 

 
420

 
9,229

Mortgage loans held for sale
 

 
8,154

 

 
8,154

Mortgage IRLCs
 

 
141

 

 
141

 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

Fair value swap
 
$

 
$

 
$
226

 
$
226

 
Fair Value Measurements at December 31, 2017 using:
(In thousands)
 
Level 1
 
Level 2
 
Level 3
 
Balance at December 31, 2017
Assets
 
 

 
 

 
 

 
 

Investment securities:
 
 

 
 

 
 

 
 

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

 
$
242,720

 
$

 
$
242,720

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

 
849,161

 

 
849,161

Equity securities
 
1,518

 

 
417

 
1,935

Mortgage loans held for sale
 

 
4,148

 

 
4,148

Mortgage IRLCs
 

 
94

 

 
94

 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

Fair value swap
 
$

 
$

 
$
226

 
$
226

 
There were no transfers between Level 1 and Level 2 during either of the three months ended June 30, 2018 or 2017. 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 (Level 1). If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows (Level 3).
 
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.

Mortgage Interest Rate Lock Commitments (IRLCs): Mortgage IRLCs are based on current secondary market pricing and are classified as Level 2.
 

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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 table below presents a reconciliation of the beginning and ending balances of the Level 3 inputs for the three and six months ended June 30, 2018 and 2017, for financial instruments measured on a recurring basis and classified as Level 3:

Level 3 Fair Value Measurements
Three months ended June 30, 2018 and 2017
(In thousands)
 
Equity
Securities
 
Fair value
swap
Balance at April 1, 2018
 
$
420

 
$
(226
)
Total gains/(losses)
 
 

 
 

Included in other income
 

 

Balance at June 30, 2018
 
$
420

 
$
(226
)
 
 
 
 
 
Balance at April 1, 2017
 
$
776

 
$
(226
)
Total gains/(losses)
 
 

 
 

Transfers out of Level 3 (1)
 
(330
)
 

Included in other comprehensive income
 
12

 

Balance at June 30, 2017
 
$
458

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

Level 3 Fair Value Measurements
Six months ended June 30, 2018 and 2017
(In thousands)
 
Equity
Securities
 
Fair value
swap
Balance at January 1, 2018
 
$
417

 
$
(226
)
Total gains/(losses)
 
 

 
 

Included in other income
 
3

 

Balance at June 30, 2018
 
$
420

 
$
(226
)
 
 
 
 
 
Balance at January 1, 2017
 
$
790

 
$
(226
)
Total gains/(losses)
 
 

 
 

Transfers out of Level 3 (1)
 
(346
)
 

Included in other comprehensive income
 
14

 

Balance at June 30, 2017
 
$
458

 
$
(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 accordingly. Additionally, updated independent valuations are obtained annually for all impaired loans in accordance with Company policy.

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Table of Contents

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.
 
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 June 30, 2018 using:
(In thousands)
 
Level 1
 
Level 2
 
Level 3
 
Balance at June 30, 2018
Impaired loans recorded at fair value:
 
 

 
 

 
 

 
 

Commercial real estate
 
$

 
$

 
$
4,192

 
$
4,192

Construction real estate
 

 

 
1,635

 
1,635

Residential real estate
 

 

 
643

 
643

Total impaired loans recorded at fair value
 
$

 
$

 
$
6,470

 
$
6,470

 
 
 
 
 
 
 
 
 
Mortgage servicing rights
 
$

 
$
869

 
$

 
$
869

 
 
 
 
 
 
 
 
 
OREO:
 
 
 
 
 
 
 
 
Commercial real estate
 

 

 
2,295

 
2,295

Construction real estate
 

 

 
1,123

 
1,123

Residential real estate
 

 

 
887

 
887

Total OREO recorded at fair value
 
$

 
$

 
$
4,305

 
$
4,305

 

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Table of Contents

Fair Value Measurements at December 31, 2017 using:
(In thousands)
 
Level 1
 
Level 2
 
Level 3
 
Balance at December 31, 2017
Impaired loans recorded at fair value:
 
 

 
 

 
 

 
 

Commercial real estate
 
$

 
$

 
$
2,735

 
$
2,735

Construction real estate
 

 

 
127

 
127

Residential real estate
 

 

 
712

 
712

Total impaired loans recorded at fair value
 
$

 
$

 
$
3,574

 
$
3,574

 
 
 
 
 
 
 
 
 
Mortgage servicing rights
 
$

 
$
7,316

 
$

 
$
7,316

 
 
 
 
 
 
 
 
 
OREO:
 
 
 
 
 
 
 
 
Commercial real estate
 

 

 
2,295

 
2,295

Construction real estate
 

 

 
3,204

 
3,204

Residential real estate
 

 

 
1,021

 
1,021

Total OREO recorded at fair value
 
$

 
$

 
$
6,520

 
$
6,520


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.

 
 
June 30, 2018
(In thousands)
 
Recorded Investment
 
Prior Charge-Offs
 
Specific Valuation Allowance
 
Carrying Balance
Impaired loans recorded at fair value
 
$
6,499

 
$
4,075

 
$
29

 
$
6,470

Remaining impaired loans
 
55,251

 
7,309

 
1,367

 
53,884

Total impaired loans
 
$
61,750

 
$
11,384

 
$
1,396

 
$
60,354


 
 
December 31, 2017
(In thousands)
 
Recorded Investment
 
Prior Charge-Offs
 
Specific Valuation Allowance
 
Carrying Balance
Impaired loans recorded at fair value
 
$
3,577

 
$
2,780

 
$
3

 
$
3,574

Remaining impaired loans
 
52,987

 
7,260

 
681

 
52,306

Total impaired loans
 
$
56,564

 
$
10,040

 
$
684

 
$
55,880


The expense from credit adjustments related to impaired loans carried at fair value during the three months ended June 30, 2018 and 2017 was $0.2 million and $0.1 million, respectively. The expense from credit adjustments related to impaired loans carried at fair value during the six months ended June 30, 2018 and 2017 was $0.3 million and $0.5 million, respectively.

MSRs totaled $10.1 million at June 30, 2018. Of this $10.1 million MSR carrying balance, $0.9 million was recorded at fair value and included a valuation allowance of $0.2 million. The remaining $9.2 million was recorded at cost, as the fair value of the MSRs exceeded cost at June 30, 2018. At December 31, 2017, MSRs totaled $9.7 million. Of this $9.7 million MSR carrying balance, $7.3 million was recorded at fair value and included a valuation allowance of $0.6 million. The remaining $2.4 million was recorded at cost, as the fair value exceeded cost at December 31, 2017. The income related to MSRs carried at fair value during the three months ended June 30, 2018 and 2017 was $77,000 and $41,000, respectively. The income related to MSRs carried at fair value during the six months ended June 30, 2018 and 2017 was $382,000 and $100,000, respectively.
 
Total OREO held by Park at June 30, 2018 and December 31, 2017 was $5.7 million and $14.2 million, respectively. Approximately 75% and 46% of OREO held by Park at June 30, 2018 and December 31, 2017, respectively, was carried at fair value due to fair value adjustments made subsequent to the initial OREO measurement. At June 30, 2018 and December 31,

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2017, OREO held at fair value, less estimated selling costs, amounted to $4.3 million and $6.5 million, respectively. The net expense related to OREO fair value adjustments was $114,000 and $272,000 for the three-month periods ended June 30, 2018 and 2017, respectively. The net expense related to OREO fair value adjustments was $321,000 and $345,000 for the six-month periods ended June 30, 2018 and 2017, respectively.
 
The following tables present qualitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at June 30, 2018 and December 31, 2017:

June 30, 2018
(In thousands)
 
Fair Value
 
Valuation Technique
 
Unobservable Input(s)
 
Range
(Weighted Average)
Impaired loans:
 
 

 
 
 
 
 
 
Commercial real estate
 
$
4,192

 
Sales comparison approach
 
Adj to comparables
 
0.0% - 55.0% (25.4%)
 
 
 
 
Income approach
 
Capitalization rate
 
10.6% - 11.8% (11.5%)
 
 
 
 
Cost approach
 
Accumulated depreciation
 
3.7% - 90.1% (13.1%)
 
 
 
 
 
 
 
 
 
Construction real estate
 
$
1,635

 
Sales comparison approach
 
Adj to comparables
 
5.0% - 90.0% (26.1%)
 
 
 
 
 
 
 
 
 
Residential real estate
 
$
643

 
Sales comparison approach
 
Adj to comparables
 
1.7% - 40.0% (18.5%)
 
 
 
 
 
 
 
 
 
 
 
 
 
Income approach
 
Capitalization rate
 
10.5% (10.5%)
 
 
 
 
 
 
 
 
 
Other real estate owned:
 
 
 
 
 
 
 
 
Commercial real estate
 
$
2,295

 
Sales comparison approach
 
Adj to comparables
 
0.9% - 68.4% (34.7%)
 
 
 
 
Income approach
 
Capitalization rate
 
13.0% (13.0%)
Construction real estate
 
$
1,123

 
Sales comparison approach
 
Adj to comparables
 
0.0% - 45.0% (21.7%)
 
 
 
 
 
 
 
 
 
Residential real estate
 
$
887

 
Sales comparison approach
 
Adj to comparables
 
0.4% - 54.6% (33.2%)


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Table of Contents

Balance at December 31, 2017
(In thousands)
 
Fair Value
 
Valuation Technique
 
Unobservable Input(s)
 
Range
(Weighted Average)
Impaired loans:
 
 

 
 
 
 
 
 
Commercial real estate
 
$
2,735

 
Sales comparison approach
 
Adj to comparables
 
0.0% - 90.0% (22.7%)
 
 
 
 
Income approach
 
Capitalization rate
 
9.0% - 11.0% (9.9%)
 
 
 
 
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
 
$
712

 
Sales comparison approach
 
Adj to comparables
 
0.3% - 33.0% (12.5%)
 
 
 
 
Income approach
 
Capitalization rate
 
10.5% (10.5%)
 
 
 
 
 
 
 
 
 
Other real estate owned:
 
 
 
 
 
 
 
 
Commercial real estate
 
$
2,295

 
Sales comparison approach
 
Adj to comparables
 
0.9% - 68.4% (34.7%)
 
 
 
 
Income approach
 
Capitalization rate
 
13.0% (13.0%)
 
 
 
 
 
 
 
 
 
Construction real estate
 
$
3,204

 
Sales comparison approach
 
Adj to comparables
 
0.0% - 90.0% (24.5%)
 
 
 
 
Bulk sale approach
 
Discount rate
 
15.0% (15.0%)
 
 
 
 
 
 
 
 
 
Residential real estate
 
$
1,021

 
Sales comparison approach
 
Adj to comparables
 
1.2% - 79.7% (31.8%)

Assets Measured at Net Asset Value:

The adoption of ASU 2016-01 on January 1, 2018 required Park to evaluate the accounting for equity investments, including those previously held at cost. Under the new guidance, Park determined that its portfolio of equity investments in limited partnerships which provide mezzanine funding ("Partnership Investments") should be valued using the net asset value ("NAV") practical expedient in accordance with ASC 820. The adoption of this guidance on January 1, 2018, resulted in a $1.2 million increase to Partnership Investments, which are included within other assets on the consolidated condensed balance sheet, and a $922,000 increase to beginning retained earnings.

As of June 30, 2018 and December 31, 2017, Park had Partnerships Investments with a NAV of $9.4 million and $8.8 million, respectively. As of June 30, 2018 and December 31, 2017, Park had $7.1 million and $7.2 million in unfunded commitments related to these Partnership Investments. For the six months ended June 30, 2018, Park had recognized $752,000 in income related to these Partnership Investments.



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The fair value of certain financial instruments at June 30, 2018 and December 31, 2017, was as follows:

 
 
June 30, 2018
 
 
 
 
Fair Value Measurements
(In thousands)
 
Carrying value
 
Level 1
 
Level 2
 
Level 3
 
Total fair value
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and money market instruments
 
$
146,159

 
$
146,159

 
$

 
$

 
$
146,159

Investment securities (1)
 
1,443,109

 

 
1,439,870

 

 
1,439,870

Other investment securities (2)
 
9,229

 
8,809

 

 
420

 
9,229


 
 
 
 
 
 
 
 
 
 
Loans held for sale
 
8,154

 

 
8,154

 

 
8,154

Mortgage IRLCs
 
141

 

 
141

 

 
141

Impaired loans carried at fair value
 
6,470

 

 

 
6,470

 
6,470

Other loans, net (3)
 
5,260,757

 

 

 
5,204,775

 
5,204,775

Loans receivable, net
 
$
5,275,522

 
$

 
$
8,295

 
$
5,211,245

 
$
5,219,540

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 

 
 

 
 

 
 

 
 

Time deposits
 
1,026,920

 

 
1,026,550

 

 
1,026,550

Other
 
3,967

 
3,967

 


 

 
3,967

Deposits (excluding demand deposits)
 
$
1,030,887

 
$
3,967

 
$
1,026,550

 
$

 
$
1,030,517

 
 
 
 
 
 
 
 
 
 
 
Short-term borrowings
 
$
216,139

 
$

 
$
216,139

 
$

 
$
216,139

Long-term debt
 
400,000

 

 
398,668

 

 
398,668

Subordinated notes
 
15,000

 

 
13,161

 

 
13,161

 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 

 
 

 
 

 
 

 
 

Fair value swap
 
$
226

 
$

 
$

 
$
226

 
$
226

(1) Includes debt securities AFS and debt securities HTM.
(2) Excludes FHLB and FRB stock which are carried at their respective redemption values. Additionally, excludes investment securities accounted for at modified cost, as these investments do not have a readily determinable fair value.
(3) Fair value calculated using an exit price notion consistent with Topic 820, Fair Value Measurement.


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Table of Contents

 
 
December 31, 2017
 
 
 
 
Fair Value Measurements
(In thousands)
 
Carrying value
 
Level 1
 
Level 2
 
Level 3
 
Total fair value
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and money market instruments
 
$
169,112

 
$
169,112

 
$

 
$

 
$
169,112

Investment securities (1)
 
1,449,078

 

 
1,455,660

 

 
1,455,660

Other investment securities (2)
 
1,935

 
1,518

 

 
417

 
1,935


 
 
 
 
 
 
 
 
 
 
Loans held for sale
 
4,148

 

 
4,148

 

 
4,148

Mortgage IRLCs
 
94

 

 
94

 

 
94

Impaired loans carried at fair value
 
3,574

 

 

 
3,574

 
3,574

Other loans, net
 
5,314,679

 

 

 
5,247,021

 
5,247,021

Loans receivable, net
 
$
5,322,495

 
$

 
$
4,242

 
$
5,250,595

 
$
5,254,837

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 

 
 

 
 

 
 

 
 

Time deposits
 
1,033,476

 

 
1,035,093

 

 
1,035,093

Other
 
1,269

 
1,269

 

 

 
1,269

Total deposits
 
$
1,034,745

 
$
1,269

 
$
1,035,093

 
$

 
$
1,036,362

 
 
 
 
 
 
 
 
 
 
 
Short-term borrowings
 
$
391,289

 
$

 
$
391,289

 
$

 
$
391,289

Long-term debt
 
500,000

 

 
504,503

 

 
504,503

Subordinated notes
 
15,000

 

 
13,370

 

 
13,370

 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 

 
 

 
 

 
 

 
 

Fair value swap
 
$
226

 
$

 
$

 
$
226

 
$
226

(1) Includes debt securities AFS and debt securities HTM.
(2) Excludes FHLB and FRB stock which are carried at their respective redemption values. Additionally, excludes investment securities carried at their cost basis as these investments do not have a readily determinable fair value.


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Note 15 – Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) components, net of income tax, are shown in the following table for the three-month and six-month periods ended June 30, 2018 and 2017:

(in thousands)
 
Changes in pension plan assets and benefit obligations
 
Change in unrealized losses on debt securities
 
Total
Beginning balance at April 1, 2018
 
$
(26,701
)
 
$
(25,940
)
 
$
(52,641
)
 
Other comprehensive loss before reclassifications
 

 
(2,368
)
 
(2,368
)
 
Amounts reclassified from accumulated other comprehensive loss
 

 

 

Activity for the period
 

 
(2,368
)
 
(2,368
)
Ending balance at June 30, 2018
 
$
(26,701
)
 
$
(28,308
)
 
$
(55,009
)
 
 
 
 
 
 
 
 
Beginning balance at April 1, 2017
 
$
(14,740
)
 
$
(1,983
)
 
$
(16,723
)
 
Other comprehensive income before reclassifications
 

 
3,011

 
3,011

 
Amounts reclassified from accumulated other comprehensive loss
 

 

 

Net current period other comprehensive income
 

 
3,011

 
3,011

Ending balance at June 30, 2017
 
$
(14,740
)
 
$
1,028

 
$
(13,712
)


(in thousands)
 
Changes in pension plan assets and benefit obligations
 
Change in unrealized losses on debt securities
 
Total
Beginning balance at January 1, 2018
 
$
(23,526
)
 
$
(2,928
)
 
$
(26,454
)
 
Other comprehensive loss before reclassifications
 

 
(25,778
)
 
(25,778
)
 
Reclassification of disproportionate income tax effects
 
(3,175
)
 
(631
)
 
(3,806
)
 
Cumulative effect of change in accounting principle for marketable equity securities, net of tax
 

 
(995
)
 
(995
)
 
Amounts reclassified from accumulated other comprehensive loss
 

 
2,024

 
2,024

Activity for the period
 
(3,175
)
 
(25,380
)
 
(28,555
)
Ending balance at June 30, 2018
 
$
(26,701
)
 
$
(28,308
)
 
$
(55,009
)
 
 
 
 
 
 
 
 
Beginning balance at January 1, 2017
 
$
(14,740
)
 
$
(3,005
)
 
$
(17,745
)
 
Other comprehensive income before reclassifications
 

 
4,033

 
4,033

 
Amounts reclassified from accumulated other comprehensive loss
 

 

 

Net current period other comprehensive income
 

 
4,033

 
4,033

Ending balance at June 30, 2017
 
$
(14,740
)
 
$
1,028

 
$
(13,712
)

During the six-month period ended June 30, 2018, there was $2.6 million ($2.0 million net of tax) reclassified out of accumulated other comprehensive loss due to losses on the sale of AFS debt securities. These losses were recorded within net loss on sale of investment securities on the consolidated condensed statements of income. During the three-month periods ended June 30, 2018 and June 30, 2017 and the six-month period ended June 30, 2017, there were no reclassifications out of accumulated other comprehensive loss.

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 its 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 June 30, 2018 and December 31, 2017.
(in thousands)
 
June 30, 2018
December 31, 2017
Affordable housing tax credit investments
 
$
45,967

$
49,669

Unfunded commitments
 
14,282

14,282


Commitments are funded when capital calls are made by the general partner. Park expects that the current commitments will be funded between 2018 and 2027.
During each of the three months ended June 30, 2018 and 2017, Park recognized amortization expense of $1.9 million and during each of the six months ended June 30, 2018 and 2017, Park recognized amortization expense of $3.7 million, which was included within the provision for income taxes. Additionally, during the three months ended June 30, 2018 and 2017, Park recognized tax credits and other benefits from its affordable housing tax credit investments of $2.2 million and $2.4 million, respectively, and during each of the the six months ended June 30, 2018 and 2017, Park recognized tax credits and other benefits from its affordable housing tax credit investments of $4.9 million.
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.

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 consisted of customer accounts and securities which are pledged on an individual security basis.

At June 30, 2018 and December 31, 2017, Park's repurchase agreement borrowings totaled $165 million and $183 million, respectively. These borrowings were collateralized with U.S. government and agency securities with a carrying value of $198 million and $213 million at June 30, 2018 and December 31, 2017, respectively. Declines in the value of the collateral would require Park to pledge additional securities. As of June 30, 2018 and December 31, 2017, Park had $961 million and $975 million, respectively, of available unpledged securities.

The table below shows the remaining contractual maturity of repurchase agreements by collateral pledged at June 30, 2018 and December 31, 2017:

 
 
June 30, 2018
(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
 
$
165,139

 
$

 
$

 
$

 
$
165,139

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 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
 
$
182,185

 
$

 
$

 
$
1,104

 
$
183,289


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

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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.  As of June 30, 2018, the Company had accrued charges of $20,000 for legal contingencies related to various legal and other adversary proceedings.

Note 19 - Revenue from Contracts with Customers

The Company adopted ASC 606 using the modified retrospective method applied to all contracts not completed as of January 1, 2018.  Results for reporting periods beginning on and after January 1, 2018 are presented under ASC 606 while prior period amounts continue to be reported in accordance with legacy GAAP.  The adoption of ASC 606 did not result in a change to the accounting for any of the in-scope revenue streams; as such, no cumulative effect adjustment was recorded. 

All of Park's revenue from contracts with customers within the scope of ASC 606 is recognized within "Other income" in the Consolidated Condensed Statements of Income. The following table presents the Corporation's sources of other income by revenue stream and operating segment for the three-month and six-month periods ended June 30, 2018 and June 30, 2017.

 
 
Three Months Ended
June 30, 2018
Revenue by Operating Segment (in thousands)
 
PNB
 
GFSC
 
SEPH
 
All Other
 
Total
Income from fiduciary activities
 
 
 
 
 
 
 


 
 
   Personal trust and agency accounts
 
$
2,263

 
$

 
$

 
$

 
$
2,263

   Employee benefit and retirement-related accounts
 
1,657

 

 

 

 
1,657

   Investment management and investment advisory agency accounts
 
2,339

 

 

 

 
2,339

   Other
 
407

 

 

 

 
407

Service charges on deposit accounts
 
 
 
 
 
 
 
 
 
 
    Non-sufficient funds (NSF) fees
 
1,848

 

 

 

 
1,848

    Demand deposit account (DDA) charges
 
813

 

 

 

 
813

    Other
 
165

 

 

 

 
165

Other service income (1)
 
 
 
 
 
 
 
 
 
 
    Credit card
 
556

 
7

 

 

 
563

    HELOC
 
118

 

 

 

 
118

    Installment
 
73

 

 

 

 
73

    Real estate
 
2,357

 

 

 

 
2,357

    Commercial
 
314

 

 
47

 

 
361

Checkcard fee income
 
4,382

 

 

 

 
4,382

Bank owned life insurance income (2)
 
940

 

 

 
91

 
1,031

ATM fees
 
510

 

 

 

 
510

OREO valuation adjustments (2)
 
(71
)
 

 
(43
)
 

 
(114
)
Gain on sale of OREO, net
 
(179
)
 

 
32

 

 
(147
)
Net loss on sale of investment securities (2)
 

 

 

 

 

Unrealized gain on equity securities (2)
 
6

 

 

 
298

 
304

Other components of net periodic pension benefit income (2)
 
1,652

 
19

 
34

 

 
1,705

Miscellaneous (3)
 
1,920

 
16

 
1

 
670

 
2,607

Total other income
 
$
22,070

 
$
42

 
$
71

 
$
1,059

 
$
23,242

(1) Of the $3.5 million of revenue included within "Other service income", approximately $2.4 million is within the scope of ASC 606, with the remaining $1.1 million consisting primarily of residential real estate loan fees which are out of scope.
(2) Not within the scope of ASC 606.
(3) "Miscellaneous" income includes brokerage income, safe deposit box rentals, and miscellaneous bank fees totaling $2.6 million, all of which are within the scope of ASC 606.

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Table of Contents

 
 
Three Months Ended June 30, 2017 (4)
Revenue by Operating Segment (in thousands)
 
PNB
 
GFSC
 
SEPH
 
All Other
 
Total
Income from fiduciary activities
 
 
 
 
 
 
 


 
 
   Personal trust and agency accounts
 
$
2,012

 
$

 
$

 
$

 
$
2,012

   Employee benefit and retirement-related accounts
 
1,517

 

 

 

 
1,517

   Investment management and investment advisory agency accounts
 
2,143

 

 

 

 
2,143

   Other
 
353

 

 

 

 
353

Service charges on deposit accounts
 
 
 
 
 
 
 
 
 
 
    Non-sufficient funds (NSF) fees
 
2,015

 

 

 

 
2,015

    Demand deposit account (DDA) charges
 
974

 

 

 

 
974

    Other
 
167

 

 

 

 
167

Other service income (1)
 
 
 
 
 
 
 
 
 
 
    Credit card
 
497

 
(9
)
 

 

 
488

    HELOC
 
131

 

 
3

 

 
134

    Installment
 
119

 

 

 

 
119

    Real estate
 
2,412

 

 

 

 
2,412

    Commercial
 
271

 

 
23

 

 
294

Checkcard fee income
 
4,040

 

 

 

 
4,040

Bank owned life insurance income (2)
 
1,014

 

 

 
100

 
1,114

ATM fees
 
561

 

 

 

 
561

OREO valuation adjustments (2)
 
(272
)
 

 

 

 
(272
)
Gain on sale of OREO, net
 
48

 

 
5

 

 
53

Other components of net periodic pension benefit income (2)
 
1,403

 
16

 
29

 

 
1,448

Miscellaneous (3)
 
1,177

 
1

 
(52
)
 
1

 
1,127

Total other income
 
$
20,582

 
$
8

 
$
8

 
$
101

 
$
20,699

(1) Of the $3.5 million of revenue included within "Other service income", approximately $2.5 million is within the scope of ASC 606, with the remaining $1.0 million consisting primarily of residential real estate loan fees which are out of scope.
(2) Not within the scope of ASC 606.
(3) "Miscellaneous" income includes brokerage income, safe deposit box rentals, and miscellaneous bank fees totaling $1.1 million, all of which are within the scope of ASC 606.
(4) The Corporation elected the modified retrospective approach of adoption; therefore, prior period balances are presented under legacy GAAP and may not be comparable to current year presentation.


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Table of Contents

 
 
Six Months Ended
June 30, 2018
Revenue by Operating Segment (in thousands)
 
PNB
 
GFSC
 
SEPH
 
All Other
 
Total
Income from fiduciary activities
 
 
 
 
 
 
 
 
 
 
   Personal trust and agency accounts
 
$
4,389

 
$

 
$

 
$

 
$
4,389

   Employee benefit and retirement-related accounts
 
3,300

 

 

 

 
3,300

   Investment management and investment advisory agency accounts
 
4,583

 

 

 

 
4,583

   Other
 
789

 

 

 

 
789

Service charges on deposit accounts
 
 
 
 
 
 
 
 
 
 
    Non-sufficient funds (NSF) fees
 
3,682

 

 

 

 
3,682

    Demand deposit account (DDA) charges
 
1,739

 

 

 

 
1,739

    Other
 
327

 

 

 

 
327

Other service income (1)
 
 
 
 
 
 
 
 
 
 
    Credit card
 
1,060

 
14

 

 

 
1,074

    HELOC
 
217

 

 

 

 
217

    Installment
 
137

 

 

 

 
137

    Real estate
 
4,603

 

 

 

 
4,603

    Commercial
 
556

 

 
1,057

 

 
1,613

Checkcard fee income
 
8,384

 

 

 

 
8,384

Bank owned life insurance income (2)
 
1,862

 

 

 
178

 
2,040

ATM fees
 
1,034

 

 

 

 
1,034

OREO valuation adjustments (2)
 
(101
)
 

 
(220
)
 

 
(321
)
Gain on sale of OREO, net
 
1,406

 

 
2,768

 

 
4,174

Net loss on sale of investment securities (2)
 
(2,271
)
 

 

 

 
(2,271
)
Unrealized gain on equity securities (2)
 
33

 

 

 
3,760

 
3,793

Other components of net periodic pension benefit income (2)
 
3,304

 
38

 
68

 

 
3,410

Miscellaneous (3)
 
2,952

 
20

 
(15
)
 
492

 
3,449

Total other income
 
$
41,985

 
$
72

 
$
3,658

 
$
4,430

 
$
50,145

(1) Of the $7.6 million of revenue included within "Other service income", approximately $5.5 million is within the scope of ASC 606, with the remaining $2.1 million consisting primarily of residential real estate loan fees which are out of scope.
(2) Not within the scope of ASC 606.
(3) "Miscellaneous" income includes brokerage income, safe deposit box rentals, and miscellaneous bank fees totaling $3.4 million, all of which are within the scope of ASC 606.

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Table of Contents

 
 
Six Months Ended
June 30, 2017 (4)
Revenue by Operating Segment (in thousands)
 
PNB
 
GFSC
 
SEPH
 
All Other
 
Total
Income from fiduciary activities
 
 
 
 
 
 
 
 
 
 
   Personal trust and agency accounts
 
$
3,798

 
$

 
$

 
$

 
$
3,798

   Employee benefit and retirement-related accounts
 
2,967

 

 

 

 
2,967

   Investment management and investment advisory agency accounts
 
4,111

 

 

 

 
4,111

   Other
 
663

 

 

 

 
663

Service charges on deposit accounts
 
 
 
 
 
 
 
 
 
 
    Non-sufficient funds (NSF) fees
 
4,000

 

 

 

 
4,000

    Demand deposit account (DDA) charges
 
1,959

 

 

 

 
1,959

    Other
 
336

 

 

 

 
336

Other service income (1)
 
 
 
 
 
 
 
 
 
 
    Credit card
 
917

 
(9
)
 

 

 
908

    HELOC
 
222

 

 
3

 

 
225

    Installment
 
277

 

 

 

 
277

    Real estate
 
4,224

 

 

 

 
4,224

    Commercial
 
594

 

 
23

 

 
617

Checkcard fee income
 
7,801

 

 

 

 
7,801

Bank owned life insurance income (2)
 
2,021

 

 

 
196

 
2,217

ATM fees
 
1,103

 

 

 

 
1,103

OREO valuation adjustments (2)
 
(345
)
 

 

 

 
(345
)
Gain on sale of OREO, net
 
148

 

 
5

 

 
153

Other components of net periodic pension benefit income (2)
 
2,806

 
32

 
58

 

 
2,896

Miscellaneous (3)
 
2,094

 
1

 
(52
)
 
(299
)
 
1,744

Total other income
 
$
39,696

 
$
24

 
$
37

 
$
(103
)
 
$
39,654

(1) Of the $6.3 million of revenue included within "Other service income", approximately $4.4 million is within the scope of ASC 606, with the remaining $1.9 million consisting primarily of residential real estate loan fees which are out of scope.
(2) Not within the scope of ASC 606.
(3) "Miscellaneous" income includes brokerage income, safe deposit box rentals, and miscellaneous bank fees totaling $1.7 million, all of which are within the scope of ASC 606.
(4) The Corporation elected the modified retrospective approach of adoption; therefore, prior period balances are presented under legacy GAAP and may not be comparable to current year presentation.


A description of Park's revenue streams accounted for under ASC 606 follows:

Income from fiduciary activities (Gross): Park earns fiduciary fee income and investment brokerage fees from its contracts with trust customers for various fiduciary and investment-related services. These fees are earned over time as the Company provides the contracted monthly and quarterly services and are generally assessed based on the market value of the trust assets.

Service charges on deposit accounts and ATM fees: The Corporation earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Corporation fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are generally recognized at the end of the month, representing the period over which the Corporation satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance.

Other service income: Other service income includes income from 1) the sale and servicing of loans sold to the secondary market, 2) incentive income from third-party credit card issuers, and 3) loan customers for various loan-related activities and services. These fees are generally recognized at a point in time following the completion of a loan sale or related service activity.

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Checkcard fee income: Park earns interchange fees from debit cardholder transactions conducted primarily through the Visa payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, net of card network fees, concurrently with the transaction processing services provided to the cardholder.

Gain on sale of OREO, net: The Corporation records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When Park finances the sale of OREO to the buyer, the Corporation assesses whether the buyer is committed to perform the buyer's obligation under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Corporation adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.

Note 20- Subsequent Events

On July 1, 2018, NewDominion Bank, a North Carolina state-chartered bank (“NewDominion”), merged with and into PNB, with PNB continuing as the surviving entity pursuant to the Agreement and Plan of Merger and Reorganization, dated as of January 22, 2018, by and among Park, PNB, and NewDominion. As of June 30, 2018, NewDominion had approximately $329 million in total assets, $278 million in total loans, and $284 million in total deposits. The acquisition was valued at approximately $79 million and resulted in Park issuing approximately 435,457 Park common shares and paying approximately $31 million in cash in exchange for the NewDominion common stock as merger consideration.

The assets and liabilities of NewDominion will be recorded on Park’s consolidated balance sheet at their preliminary estimated fair values as of July 1, 2018, the acquisition date, and NewDominion’s results of operations will be included in Park’s consolidated statement of income from that date. The initial accounting and determination of the fair values of the assets acquired and liabilities assumed in the acquisition was incomplete at the time of the filing of Park’s Quarterly Report on From 10-Q for the quarterly period ended June 30, 2018 (the “June 30, 2018 Form 10-Q”) due to the timing of the closing of the acquisition in relation to the deadline for the filing of Park’s June 30, 2018 Form 10-Q. A more complete disclosure of the business combination is expected to be reported in Park’s Quarterly Report on Form 10-Q for the quarterly period ending September 30, 2018.

For the six months ended June 30, 2018, Park recorded merger-related expenses of $0.5 million associated with the NewDominion acquisition.

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 prepayment penalty income, mortgage banking income, 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 the newly-enacted tax reform legislation, 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;

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uncertainty regarding the nature, timing, cost 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, rent regulation and housing, financial accounting and reporting, environmental protection, insurance, 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 Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Federal Reserve Board, to implement the Dodd-Frank Act's provisions, 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 current presidential administration, including the recently-enacted Tax Cuts and Jobs Act, and uncertainty or speculation pending the enactment of such changes; uncertainties in Park's preliminary review of, and additional analysis of, the impact of the Tax Cuts and Jobs Act; the effect of healthcare laws in the United States and potential changes for such laws which may 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 policies (including the impact of tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars and other changes in trade regulations), monetary and other fiscal policies (including the impact of money supply and interest rate policies of the Federal Reserve Board) and other governmental policies of the U.S. federal government; 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, resulting in failures or disruptions in customer account management, general ledger, deposit, loan, or other systems, including as a result of cyber attacks; operational issues stemming from and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems on which Park and our subsidiaries are highly dependent; 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; the risk that the businesses of PNB and NewDominion Bank will not be integrated successfully following the recently-completed merger transaction involving Park, PNB and NewDominion Bank (the "NewDominion Transaction") or such integration may be more difficult, time-consuming or costly than expected; expected revenue synergies and cost savings from the NewDominion Transaction may not be fully realized within the expected timeframe; revenues following the NewDominion Transaction may be lower than expected; customer and employee relationships and business operations may be disrupted by the NewDominion Transaction; Park issued equity securities in the NewDominion Transaction, and may issue equity securities in connection with future acquisitions, which could cause ownership and economic dilution to Park's current shareholders; 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, 2017. 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.










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Critical Accounting Policies
 
Note 1 of the Notes to Consolidated Financial Statements included in Park’s 2017 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 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 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, as of June 30, 2018, 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 2018 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.



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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 Six Months Ended June 30, 2018 and 2017
 
Summary Discussion of Results

Net income for the three months ended June 30, 2018 was $28.2 million, compared to $19.0 million for the second quarter of 2017. Diluted earnings per common share were $1.83 for the second quarter of 2018, compared to $1.24 for the second quarter of 2017. Weighted average diluted common shares outstanding were 15,417,607 for the second quarter of 2018, compared to 15,398,865 weighted average diluted common shares outstanding for the second quarter of 2017.

Net income for the six months ended June 30, 2018 was $59.4 million, compared to $39.3 million for the six months ended June 30, 2017. Diluted earnings per common share were $3.85 for the first six months of 2018, compared to $2.55 for the first six months of 2017. Weighted average diluted common shares outstanding were 15,424,585 for the first six months of 2018, compared to 15,415,765 weighted average diluted common shares outstanding for the first six months of 2017.

During the first quarter of 2018, Park adopted ASU 2017-07, 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 as other compensation costs arising from services rendered by the pertinent employees during the period.  The other components of net benefit cost are required to be presented in the income statement separately from the service cost.  This ASU is required to be applied retrospectively to all periods presented.  As a result of the adoption of this ASU, all prior periods have been recast to separately record the service cost component and other components of net benefit cost.  For Park, this resulted in an increase in other income and an offsetting increase in other expense with no change to net income.

During the first quarter of 2018, Park adopted ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. Changes reflected in 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. As a result of the adoption of this ASU, Park recorded an increase of $1.9 million to beginning retained earnings and a $995,000 increase to beginning accumulated other comprehensive loss. Additional income of $3.2 million and $1.3 million was recorded in other income in the first and second quarters of 2018, respectively, as the result of changes to the accounting for equity investments.

Financial Results by Segment

The table below reflects the net income (loss) by segment for the first and second quarters of 2018, for the first half of 2018 and 2017, and for the fiscal years ended December 31, 2017 and 2016. 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)
Q2 2018
 
Q1 2018
 
Six months YTD 2018
 
Six months YTD 2017
 
2017
 
2016
PNB
$
28,797

 
$
26,745

 
$
55,542

 
$
41,649

 
$
87,315

 
$
84,451

GFSC
295

 
57

 
352

 
384

 
260

 
(307
)
Parent Company
(973
)
 
1,465

 
492

 
(2,145
)
 
(2,457
)
 
(4,557
)
   Ongoing operations
$
28,119

 
$
28,267

 
$
56,386

 
$
39,888

 
$
85,118

 
$
79,587

SEPH
122

 
2,856

 
2,978

 
(589
)
 
(876
)
 
6,548

   Total Park
$
28,241

 
$
31,123

 
$
59,364

 
$
39,299

 
$
84,242

 
$
86,135


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 and second quarters of 2018, for the first half of 2018 and 2017, and for the fiscal years ended December 31, 2017 and 2016.
(In thousands)
Q2 2018
Q1 2018
Six months YTD 2018
Six months YTD 2017
2017
2016
Net interest income
$
62,683

$
61,441

$
124,124

$
115,302

$
235,243

$
227,576

Provision for (recovery of) loan losses
1,623

(67
)
1,556

5,294

9,898

2,611

Other income
22,070

19,915

41,985

39,696

82,742

79,959

Other expense
48,169

49,001

97,170

90,486

185,891

182,718

Income before income taxes
$
34,961

$
32,422

$
67,383

$
59,218

$
122,196

$
122,206

    Federal income tax expense
6,164

5,677

11,841

17,569

34,881

37,755

Net income
$
28,797

$
26,745

$
55,542

$
41,649

$
87,315

$
84,451


Net interest income of $124.1 million for the six months ended June 30, 2018 represented a $8.8 million, or 7.7%, increase compared to $115.3 million for the six months ended June 30, 2017. The increase was the result of a $7.6 million increase in interest income and a $1.2 million decrease in interest expense.
The $7.6 million increase in interest income was due to a $6.2 million increase in interest income on loans, along with a $1.4 million increase in interest income on investments. The increase in interest income on loans was the result of higher yields on loans. The yield on loans was 4.74% for the six months ended June 30, 2018, compared to 4.53% for the six months ended June 30, 2017. Included in interest income for the six months ended June 30, 2018 was $817,000 in interest income, related to PNB participations in legacy Vision Bank ("Vision") assets.
The $1.2 million decrease in interest expense was due to a $4.3 million increase in interest expense on deposits offset by a $5.5 million decrease in interest expense on borrowings. The increase in interest expense on deposits was partially the result of a $87.9 million, or 2.0%, increase in average interest-bearing deposits from $4.29 billion for the six months ended June 30, 2017, to $4.37 billion for the six months ended June 30, 2018. Additionally, the cost of deposits increased by 19 basis points from 0.40% for the six months ended June 30, 2017 to 0.59% for the six months ended June 30, 2018. The decrease in interest expense on borrowings was the result of a decrease in long-term debt. During the fourth quarter of 2017, Park utilized excess cash to repay $350 million of long-term debt which matured during November 2017. The effective interest rate on the repaid long-term debt had been 3.22%.
The provision for loan losses of $1.6 million for the six months ended June 30, 2018 represented a decrease of $3.7 million, compared to $5.3 million for the six months ended June 30, 2017. 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 $42.0 million for the six months ended June 30, 2018 represented an increase of $2.3 million, or 5.8%, compared to $39.7 million for the six months ended June 30, 2017. The $2.3 million increase was primarily related to a $1.3 million increase in gains on sale of OREO, net, a $1.5 million increase in fiduciary income, a $486,000 increase in gains on sale of assets, net, a $498,000 increase in other components of net periodic pension benefit income, a $339,000 increase in other service income, and a $583,000 increase in check card fee income, offset by a $2.3 million net loss on sales of securities during the six months ended June 30, 2018 and a $547,000 decrease in service charges on deposit accounts.
Other expense of $97.2 million for the six months ended June 30, 2018 represented an increase of $6.7 million, or 7.4%, compared to $90.5 million for the six months ended June 30, 2017. The $6.7 million increase was primarily related to a $3.0 million increase in salaries expense, a $1.8 million increase in employee benefits expense, a $887,000 increase in furniture and equipment expense, a $358,000 increase in state tax expense, a $259,000 increase in non-loan related losses which are included in miscellaneous expense, and a $307,000 increase in occupancy expense, offset by a $418,000 decrease in other insurance.

Federal income tax expense of $11.8 million for the six months ended June 30, 2018 represented a decrease of $5.7 million compared to $17.6 million for the six months ended June 30, 2017.  The decrease in federal income tax expense was largely due to a decrease in the corporate federal income tax rate from 35% to 21%, effective January 1, 2018.

PNB's results for the first six months of 2018 and 2017, and for the fiscal year ended December 31, 2017, included income and

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expense related to participations in legacy Vision assets. The impact of these participations on particular items within PNB's income and expense for these fiscal periods is detailed in the table below:
 
2Q YTD 2018
 
2Q YTD 2017
 
2017
(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
$
124,124

$
817

$
123,307

 
$
115,302

$

$
115,302

 
$
235,243

$
233

$
235,010

Provision for (recovery of) loan losses
1,556

(5
)
1,561

 
5,294

(5
)
5,299

 
9,898

(5
)
9,903

Other income
41,985

1,431

40,554

 
39,696

24

39,672

 
82,742

244

82,498

Other expense
97,170

113

97,057

 
90,486

222

90,264

 
185,891

492

185,399

Income (loss) before income taxes
$
67,383

$
2,140

$
65,243

 
$
59,218

$
(193
)
$
59,411

 
$
122,196

$
(10
)
$
122,206

Federal income tax expense (benefit)
11,841

376

11,465

 
17,569

(57
)
17,626

 
34,881

(3
)
34,884

Net income (loss)
$
55,542

$
1,764

$
53,778

 
$
41,649

$
(136
)
$
41,785

 
$
87,315

$
(7
)
$
87,322

(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 six months ended June 30, 2018 and 2017, the three months ended March 31, 2018 and the fiscal year ended December 31, 2017.
(In thousands)
June 30, 2018
March 31, 2018
December 31, 2017
June 30, 2017
 
% change from 12/31/17
% change from 3/31/18
% change from 06/30/17
Loans
$
5,305,560

$
5,274,340

$
5,339,255

$
5,329,172

 
(0.63
)%
0.59
 %
(0.44
)%
Allowance for loan losses
47,110

46,519

47,607

51,699

 
(1.04
)%
1.27
 %
(8.88
)%
Net loans
5,258,450

5,227,821

5,291,648

5,277,473

 
(0.63
)%
0.59
 %
(0.36
)%
Investment securities
1,501,991

1,453,407

1,507,926

1,573,092

 
(0.39
)%
3.34
 %
(4.52
)%
Total assets
7,404,498

7,455,518

7,467,851

7,754,898

 
(0.85
)%
(0.68
)%
(4.52
)%
Total deposits
6,126,119

6,177,238

5,896,676

6,037,148

 
3.89
 %
(0.83
)%
1.47
 %
Average assets (1)
7,396,316

7,392,786

7,664,725

7,571,295

 
(3.50
)%
0.05
 %
(2.31
)%
Efficiency ratio
58.01
%
59.72
%
57.56
%
57.54
%
 
0.78
 %
(2.86
)%
0.82
 %
Return on average assets (2)
1.51
%
1.47
%
1.14
%
1.11
%
 
32.46
 %
2.72
 %
36.04
 %
(1) Average assets for the six months ended June 30, 2018 and 2017, the three months ended March 31, 2018 and for the fiscal year ended December 31, 2017.
(2) Annualized for the six months ended June 30, 2018 and 2017 and for the three months ended March 31, 2018.

Loans outstanding at June 30, 2018 were $5.31 billion, compared to $5.27 billion at March 31, 2018, an increase of $31.2 million, or 0.6%. The increase loan balances from March 31, 2018 to June 30, 2018 resulted from an increase in commercial loan balances of $18.7 million (0.7%) and consumer loan balances of $18.6 million (1.5%), offset by a decline in home equity line of credit balances of $5.1 million (2.6%) and residential loan balances of $1.0 million (0.1%).

Loans outstanding at June 30, 2018 were $5.31 billion, compared to $5.34 billion at December 31, 2017, a decrease of $33.7 million, or 0.6%. The loan decline in the first six months of 2018 resulted from a decline in commercial loan balances of $30.9 million (1.1%), residential loan balances of $15.3 million (1.3%) and home equity line of credit balances of $14.1 million (6.9%), offset by consumer loan growth of $26.9 million (2.2%).

PNB's allowance for loan losses decreased by $497,000, or 1.0%, to $47.1 million at June 30, 2018, compared to $47.6 million at December 31, 2017. Net charge-offs were $2.1 million, or 0.08% of total average loans, for the six months ended June 30, 2018 and were $2.4 million, or 0.09% of total average loans, for the six months ended June 30, 2017. 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.

Total deposits at June 30, 2018 were $6.13 billion, compared to $5.90 billion at December 31, 2017, an increase of $229.4 million, or 3.9%. The deposit growth for the six months ended June 30, 2018 consisted of savings deposit growth of $173.7 million (9.2%) and transaction account growth of $70.7 million (5.6%), offset by a reduction in non-interest bearing deposits of $11.1 million (0.6%) and a reduction in time deposits of $6.6 million (0.6%).


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Guardian Financial Services Company (GFSC)

The table below reflects GFSC's net income (loss) for the first and second quarters of 2018, for the first half of 2018 and 2017, and for the fiscal years ended December 31, 2017 and 2016.
(In thousands)
Q2 2018
Q1 2018
Six months YTD 2018
Six months YTD 2017
2017
2016
Net interest income
$
1,261

$
1,305

$
2,566

$
2,969

$
5,839

$
5,874

Provision for loan losses
87

503

590

810

1,917

1,887

Other income
42

30

72

24

103

57

Other expense
842

760

1,602

1,593

3,099

4,515

Income (loss) before income taxes
$
374

$
72

$
446

$
590

$
926

$
(471
)
    Federal income tax expense (benefit)
79

15

94

206

666

(164
)
Net income (loss)
$
295

$
57

$
352

$
384

$
260

$
(307
)

The table below provides certain balance sheet information and financial ratios for GFSC as of or for the six months ended June 30, 2018 and 2017 and the fiscal year ended December 31, 2017.
(In thousands)
June 30, 2018
December 31, 2017
June 30, 2017
 
% change from 12/31/17
% change from 6/30/17
Loans
$
30,612

$
33,385

$
34,179

 
(8.31
)%
(10.44
)%
Allowance for loan losses
2,342

2,382

2,123

 
(1.68
)%
10.32
 %
Net loans
28,270

31,003

32,056

 
(8.82
)%
(11.81
)%
Total assets
29,232

32,077

33,860

 
(8.87
)%
(13.67
)%
Average assets (1)
30,656

33,509

33,691

 
(8.51
)%
(9.01
)%
Return on average assets (2)
2.32
%
0.78
%
2.29
%
 
197.44
 %
1.31
 %
(1) Average assets for the six months ended June 30, 2018 and 2017 and for the fiscal year ended December 31, 2017.
(2) Annualized for the six months ended June 30, 2018 and 2017.

Park Parent Company

The table below reflects the Park Parent Company net (loss) income for the first and second quarters of 2018, the first half of 2018 and 2017, and for the fiscal years ended December 31, 2017 and 2016.
(In thousands)
Q2 2018
Q1 2018
Six months YTD 2018
Six months YTD 2017
2017
2016
Net interest income (expense)
$
182

$
227

$
409

$
(24
)
$
588

$
(138
)
Provision for loan losses






Other income (loss)
1,059

3,371

4,430

(103
)
3,065

955

Other expense
2,666

2,522

5,188

4,313

8,805

9,731

Net (loss) income before income tax benefit
$
(1,425
)
$
1,076

$
(349
)
$
(4,440
)
$
(5,152
)
$
(8,914
)
    Federal income tax benefit
(452
)
(389
)
(841
)
(2,295
)
(2,695
)
(4,357
)
Net (loss) income
$
(973
)
$
1,465

$
492

$
(2,145
)
$
(2,457
)
$
(4,557
)

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 year ended December 31, 2016, the net interest income (expense) included interest income on loans to SEPH (paid off on December 14, 2016). Additionally, net interest income (expense) for all periods except the first and second quarters of 2018 and the first half of 2018, 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.

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Other income of $4.4 million for the six months ended June 30, 2018 represented an increase of $4.5 million compared to other loss of $103,000 for the six months ended June 30, 2017. The $4.5 million increase was largely due to a $4.3 million increase in income related to certain equity securities, which was impacted by the adoption of ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities.

Other expense of $5.2 million for the six months ended June 30, 2018 represented an increase of $875,000, or 20.3%, compared to $4.3 million for the six months ended June 30, 2017. The $875,000 increase was primarily related to an increase of $582,000 in professional fees and services, primarily related to the acquisition of NewDominion Bank, which was effective July 1, 2018, and an increase of $608,000 in salaries expense, offset by a $316,000 decrease in state tax expense.

SEPH

The table below reflects SEPH's net income (loss) for the first and second quarters of 2018, the first half of 2018 and 2017, and for the fiscal years ended December 31, 2017 and 2016. 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)
Q2 2018
Q1 2018
Six months YTD 2018
Six months YTD 2017
2017
2016
Net interest income
$
616

$
1,877

$
2,493

$
483

$
2,089

$
4,774

Recovery of loan losses
(324
)
(176
)
(500
)
(647
)
(3,258
)
(9,599
)
Other income
71

3,587

3,658

37

519

3,068

Other expense
857

2,025

2,882

2,072

5,367

7,367

Income (loss) before income taxes
$
154

$
3,615

$
3,769

$
(905
)
$
499

$
10,074

    Federal income tax expense (benefit)
32

759

791

(316
)
1,375

3,526

Net income (loss)
$
122

$
2,856

$
2,978

$
(589
)
$
(876
)
$
6,548


Net interest income increased to $2.5 million for the six months ended June 30, 2018 from $483,000 for the six months ended June 30, 2017. The increase was the result of an increase in interest payments received from SEPH impaired loan relationships.

For the six months ended June 30, 2018, SEPH had net recoveries of loan losses of $500,000, compared to net recoveries of loan losses of $647,000 for the six months ended June 30, 2017.

The $3.6 million increase in other income for the six months ended June 30, 2018, compared to the six months ended June 30, 2017, was primarily the result of a $2.8 million increase in gains on sale of OREO and a $1.0 million increase in loan fee income as a result of payments received from SEPH impaired loan relationships.

The $810,000 increase in other expense for the six months ended June 30, 2018, compared to the six months ended June 30, 2017, was the result of a $1.2 million increase in management and consulting fees resulting from the collection of payments on certain SEPH impaired loan relationships during 2018, offset by a $435,000 decrease in legal fees.

Legacy Vision assets at SEPH totaled $4.5 million as of June 30, 2018, compared to $18.8 million at December 31, 2017 and $19.4 million at June 30, 2017. In addition to these SEPH assets, PNB participations in legacy Vision assets totaled $2.5 million at June 30, 2018, compared to $9.0 million at December 31, 2017 and $9.1 million at June 30, 2017.


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Table of Contents

Park National Corporation

The table below reflects Park's consolidated net income for the first and second quarters of 2018, the first half of 2018 and 2017, and for the fiscal years ended December 31, 2017 and 2016.
(In thousands)
Q2 2018
Q1 2018
Six months YTD 2018
Six months YTD 2017
2017
2016
Net interest income
$
64,742

$
64,850

$
129,592

$
118,730

$
243,759

$
238,086

Provision for (recovery of) loan losses
1,386

260

1,646

5,457

8,557

(5,101
)
Other income
23,242

26,903

50,145

39,654

86,429

84,039

Other expense
52,534

54,308

106,842

98,464

203,162

204,331

Income before income taxes
$
34,064

$
37,185

$
71,249

$
54,463

$
118,469

$
122,895

    Federal income taxes
5,823

6,062

11,885

15,164

34,227

36,760

Net income
$
28,241

$
31,123

$
59,364

$
39,299

$
84,242

$
86,135


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 Second Quarters of 2018 and 2017
 
Net interest income increased by $5.0 million, or 8.3%, to $64.7 million for the second quarter of 2018, compared to $59.8 million for the second quarter of 2017. See the discussion under the table below.
 
 
 
Three months ended 
June 30, 2018
 
Three months ended 
June 30, 2017
(Dollars in thousands)
 
Average
balance
Interest
Tax
equivalent 
yield/cost
 
Average
balance
Interest
Tax
equivalent 
yield/cost
Loans (1)
 
$
5,289,056

$
64,623

4.90
%
 
$
5,327,114

$
61,512

4.63
%
Taxable investments
 
1,241,104

7,746

2.50
%
 
1,325,807

6,892

2.09
%
Tax-exempt investments (2)
 
300,383

2,756

3.68
%
 
226,579

2,559

4.53
%
Money market instruments
 
54,551

271

1.99
%
 
265,791

698

1.05
%
Interest earning assets
 
$
6,885,094

$
75,396

4.39
%
 
$
7,145,291

$
71,661

4.02
%
 
 
 
 
 
 
 
 
 
Interest bearing deposits
 
$
4,392,733

6,993

0.64
%
 
$
4,370,710

4,748

0.44
%
Short-term borrowings
 
217,997

420

0.77
%
 
202,352

184

0.37
%
Long-term debt
 
427,912

2,536

2.38
%
 
801,153

5,766

2.89
%
Interest bearing liabilities
 
$
5,038,642

$
9,949

0.79
%
 
$
5,374,215

$
10,698

0.80
%
Excess interest earning assets
 
$
1,846,452

 
 

 
$
1,771,076

 
 

Tax equivalent net interest income
 
 
$
65,447

 
 
 
$
60,963

 
Net interest spread
 
 

 
3.60
%
 
 

 
3.22
%
Net interest margin
 
 

 
3.81
%
 
 

 
3.42
%
(1) Loan interest income includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate in 2018 and a 35% federal corporate income tax rate in 2017. The taxable equivalent adjustment was $127,000 for the three months ended June 30, 2018 and $290,000 for the same period of 2017.
(2) Interest income on tax-exempt investment securities includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate in 2018 and a 35% federal corporate income tax rate in 2017. The taxable equivalent adjustment was $578,000 for the three months ended June 30, 2018 and $895,000 for the same period of 2017.
 

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Average interest earning assets for the second quarter of 2018 decreased by $260 million, or 3.6%, to $6,885 million, compared to $7,145 million for the second quarter of 2017. The average yield on interest earning assets increased by 37 basis points to 4.39% for the second quarter of 2018, compared to 4.02% for the second quarter of 2017.

Interest income for the three months ended June 30, 2018 and 2017 includes $814,000 and $201,000, respectively, related to payments received on certain SEPH impaired loan relationships, some of which are participated with PNB.  Excluding this income, the yield on loans was 4.84% and 4.63% for the three months ended June 30, 2018 and 2017, respectively, the yield on earning assets was 4.35% and 4.02% for the three months ended June 30, 2018 and 2017, respectively, and the net interest margin was 3.77% and 3.42% for the three months ended June 30, 2018 and 2017, respectively. 

Average interest bearing liabilities for the second quarter of 2018 decreased by $335 million, or 6.2%, to $5,039 million, compared to $5,374 million for the second quarter of 2017. The average cost of interest bearing liabilities decreased by 1 basis points to 0.79% for the second quarter of 2018, compared to 0.80% for the second quarter of 2017.

Yield on Loans: Average loan balances decreased by $38 million, or 0.7%, to $5,289 million for the second quarter of 2018, compared to $5,327 million for the second quarter of 2017. The average yield on the loan portfolio increased by 27 basis points to 4.90% for the second quarter of 2018, compared to 4.63% for the second quarter of 2017.

The table below shows for the three months ended June 30, 2018 and 2017, the average balance and tax equivalent yield by type of loan.

 
 
Three months ended 
June 30, 2018
 
Three months ended 
June 30, 2017
(Dollars in thousands)
 
Average
balance
 
Tax
equivalent 
yield
 
Average
balance
 
Tax
equivalent 
yield
Home equity
 
$
191,089

 
4.98
%
 
$
210,479

 
4.39
%
Installment loans
 
1,287,018

 
5.01
%
 
1,232,396

 
4.94
%
Real estate loans
 
1,147,684

 
4.05
%
 
1,200,915

 
3.83
%
Commercial loans (1)(2)
 
2,658,955

 
5.19
%
 
2,678,602

 
4.85
%
Other
 
4,310

 
13.41
%
 
4,722

 
12.96
%
Total loans and leases before allowance (2)
 
$
5,289,056

 
4.90
%
 
$
5,327,114

 
4.63
%
(1) Commercial loan interest income includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate in 2018 and a 35% federal corporate income tax rate in 2017. The taxable equivalent adjustment was $127,000 for the three months ended June 30, 2018 and $290,000 for the same period of 2017.
(2) Commercial loan interest income for the three months ended June 30, 2018 and 2017 includes $811,000 and $194,000, respectively, related to payments received on certain SEPH impaired loan relationships, some of which are participated with PNB. Excluding the impact of these loans, the tax equivalent yield on commercial loans was 5.07% and 4.85%, respectively. Excluding the impact of these loans, the tax equivalent yield on total loans and leases was 4.84% and 4.63%, respectively.

Cost of Deposits: Average interest bearing deposit balances increased by $22 million, or 0.5%, to $4,393 million for the second quarter of 2018, compared to $4,371 million for the second quarter of 2017. The average cost of funds on deposit balances increased by 20 basis points to 0.64% for the second quarter of 2018, compared to 0.44% for the second quarter of 2017.


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The table below shows for the three months ended June 30, 2018 and 2017, the average balance and cost of funds by type of deposit.

 
 
Three months ended 
June 30, 2018
 
Three months ended 
June 30, 2017
(Dollars in thousands)
 
Average
balance
 
Cost of funds
 
Average
balance
 
Cost of funds
Transaction accounts
 
$
1,361,792

 
0.45
%
 
$
1,308,516

 
0.25
%
Savings deposits and clubs
 
2,001,676

 
0.51
%
 
1,935,474

 
0.31
%
Time deposits
 
1,029,265

 
1.12
%
 
1,126,720

 
0.87
%
Total interest bearing deposits
 
$
4,392,733

 
0.64
%
 
$
4,370,710

 
0.44
%

Comparison for the First Half of 2018 and 2017
 
Net interest income increased by $10.9 million, or 9.1%, to $129.6 million for the first half of 2018, compared to $118.7 million for the first half of 2017. See the discussion under the table below.
 
 
 
Six months ended 
June 30, 2018
 
Six months ended 
June 30, 2017
(Dollars in thousands)
 
Average
balance
Interest
Tax
equivalent 
yield/cost
 
Average
balance
Interest
Tax
equivalent 
yield/cost
Loans (1)
 
$
5,295,814

$
129,148

4.92
%
 
$
5,302,961

$
121,697

4.63
%
Taxable investments
 
1,206,022

14,513

2.43
%
 
1,347,896

14,030

2.10
%
Tax-exempt investments (2)
 
300,256

5,508

3.70
%
 
213,155

4,805

4.55
%
Money market instruments
 
73,437

642

1.76
%
 
192,800

947

0.99
%
Interest earning assets
 
$
6,875,529

$
149,811

4.39
%
 
$
7,056,812

$
141,479

4.04
%
 
 
 
 
 
 
 
 
 
Interest bearing deposits
 
$
4,378,091

12,834

0.59
%
 
$
4,290,900

8,523

0.40
%
Short-term borrowings
 
248,793

995

0.81
%
 
241,201

419

0.35
%
Long-term debt
 
429,503

4,984

2.34
%
 
777,804

11,559

3.00
%
Interest bearing liabilities
 
$
5,056,387

$
18,813

0.75
%
 
$
5,309,905

$
20,501

0.78
%
Excess interest earning assets
 
$
1,819,142

 
 

 
$
1,746,907

 
 

Tax equivalent net interest income
 
 
$
130,998

 
 
 
$
120,978

 
Net interest spread
 
 

 
3.64
%
 
 

 
3.26
%
Net interest margin
 
 

 
3.84
%
 
 

 
3.46
%
(1) Loan interest income includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate in 2018 and a 35% federal corporate income tax rate in 2017. The taxable equivalent adjustment was $250,000 for the six months ended June 30, 2018 and $567,000 for the same period of 2017.
(2) Interest income on tax-exempt investment securities includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate in 2018 and a 35% federal corporate income tax rate in 2017. The taxable equivalent adjustment was $1.2 million for the six months ended June 30, 2018 and $1.7 million for the same period of 2017.
 
Average interest earning assets for the first half of 2018 decreased by $181 million, or 2.6%, to $6,876 million, compared to $7,057 million for the first half of 2017. The average yield on interest earning assets increased by 35 basis points to 4.39% for the first half of 2018, compared to 4.04% for the first half of 2017.

Interest income for the six months ended June 30, 2018 and 2017 includes $3.3 million and $482,000, respectively, related to payments received on certain SEPH impaired loan relationships, some of which are participated with PNB.  Excluding this income, the yield on loans was 4.80% and 4.62% for the six months ended June 30, 2018 and 2017, respectively, the yield on earning assets was 4.30% and 4.04% for the six months ended June 30, 2018 and 2017, respectively, and the net interest margin was 3.75% and 3.45% for the six months ended June 30, 2018 and 2017, respectively. 


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Average interest bearing liabilities for the first half of 2018 decreased by $254 million, or 4.8%, to $5,056 million, compared to $5,310 million for the first half of 2017. The average cost of interest bearing liabilities decreased by 3 basis points to 0.75% for the first half of 2018, compared to 0.78% for the first half of 2017.

Yield on Loans: Average loan balances decreased by $7 million, or 0.1%, to $5,296 million for the first half of 2018, compared to $5,303 million for the first half of 2017. The average yield on the loan portfolio increased by 29 basis points to 4.92% for the first half of 2018, compared to 4.63% for the first half of 2017.

The table below shows for the six months ended June 30, 2018 and 2017, the average balance and tax equivalent yield by type of loan.

 
 
Six months ended 
June 30, 2018
 
Six months ended 
June 30, 2017
(Dollars in thousands)
 
Average
balance
 
Tax
equivalent 
yield
 
Average
balance
 
Tax
equivalent 
yield
Home equity
 
$
194,938

 
4.93
%
 
$
211,618

 
4.29
%
Installment loans
 
1,280,442

 
4.97
%
 
1,208,701

 
4.97
%
Real estate loans
 
1,152,043

 
4.02
%
 
1,204,936

 
3.83
%
Commercial loans (1) (2)
 
2,663,876

 
5.26
%
 
2,672,223

 
4.85
%
Other
 
4,515

 
13.09
%
 
5,483

 
11.35
%
Total loans and leases before allowance (2)
 
$
5,295,814

 
4.92
%
 
$
5,302,961

 
4.63
%
(1) Commercial loan interest income includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate in 2018 and a 35% federal corporate income tax rate in 2017. The taxable equivalent adjustment was $250,000 for the six months ended June 30, 2018 and $567,000 for the same period of 2017.
(2) Commercial loan interest income for the six months ended June 30, 2018 and 2017 includes $3.3 million and $469,000, respectively, related to payments received on certain SEPH impaired loan relationships, some of which are participated with PNB. Excluding the impact of these loans, the tax equivalent yield on commercial loans was 5.02% and 4.84%, respectively. Excluding the impact of these loans, the tax equivalent yield on total loans and leases was 4.80% and 4.62%, respectively.

Yield on Average Interest Earning Assets: The following table shows the tax equivalent yield on average interest earning assets for the six months ended June 30, 2018 and for the fiscal years ended December 31, 2017, 2016 and 2015.
 
 
Loans (1) (3)
 
Investments (2)
 
Money Market
Instruments
 
Total(3)
2015 - year
 
4.66
%
 
2.46
%
 
0.26
%
 
3.95
%
2016 - year
 
4.74
%
 
2.30
%
 
0.51
%
 
4.08
%
2017 - year
 
4.69
%
 
2.47
%
 
1.18
%
 
4.08
%
2018 - first six months
 
4.92
%
 
2.68
%
 
1.76
%
 
4.39
%
(1) Loan interest income includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate for 2018 and a 35% federal corporate income tax rate for 2017, 2016 and 2015. The taxable equivalent adjustment was $250,000 for the six months ended June 30, 2018, and $1.1 million, $1.0 million and $767,000 for the fiscal years ended December 31, 2017, 2016 and 2015, respectively.
(2) Interest income on tax-exempt investment securities includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate for 2018 and a 35% federal corporate income tax rate for 2017, 2016 and 2015. The taxable equivalent adjustment was $1.2 million for the six months ended June 30, 2018, and $3.9 million, $1.4 million and $98,000 for the fiscal years ended December 31, 2017, 2016, and 2015, respectively.
(3) Interest income for the six months ended June 30, 2018, and the years ended 2017, 2016, and 2015 includes $3.3 million, $2.3 million, $6.2 million, and $1.1 million, respectively, related to payments received on certain SEPH impaired loan relationships, some of which are participated with PNB. Excluding this income, the yield on loans was 4.80%, 4.66%, 4.64% and 4.66%, for the six months ended June 30, 2018, and the fiscal years ended December 31, 2017, 2016, and 2015, respectively and the yield on earning assets was 4.30%, 4.05%, 4.00%, and 3.95%, for the six months ended June 30, 2018 and for the fiscal years ended December 31, 2017, 2016, and 2015, respectively.

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Table of Contents

Cost of Deposits: Average interest bearing deposit balances increased by $87 million, or 2.0%, to $4,378 million for the first half of 2018, compared to $4,291 million for the first half of 2017. The average cost of funds on deposit balances increased by 19 basis points to 0.59% for the first half of 2018, compared to 0.40% for the first half of 2017.

The table below shows for the six months ended June 30, 2018 and 2017, the average balance and cost of funds by type of deposit.

 
 
Six months ended 
June 30, 2018
 
Six months ended 
June 30, 2017
(Dollars in thousands)
 
Average
balance
 
Cost of funds
 
Average
balance
 
Cost of funds
Transaction accounts
 
$
1,339,507

 
0.40
%
 
$
1,280,645

 
0.21
%
Savings deposits and clubs
 
2,009,171

 
0.48
%
 
1,897,580

 
0.27
%
Time deposits
 
1,029,413

 
1.07
%
 
1,112,675

 
0.84
%
Total interest bearing deposits
 
$
4,378,091

 
0.59
%
 
$
4,290,900

 
0.40
%

Cost of Average Interest Bearing Liabilities: The following table shows the cost of funds on average interest bearing liabilities for the six months ended June 30, 2018 and for the fiscal years ended December 31, 2017, 2016 and 2015.

 
 
Interest bearing deposits
 
Short-term borrowings
 
Long-term debt
 
Total
2015 - year
 
0.30
%
 
0.18
%
 
3.10
%
 
0.72
%
2016 - year
 
0.32
%
 
0.19
%
 
3.13
%
 
0.74
%
2017 - year
 
0.44
%
 
0.43
%
 
2.86
%
 
0.80
%
2018 - first six months
 
0.59
%
 
0.81
%
 
2.34
%
 
0.75
%

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.


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Table of Contents

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 six-month periods ended June 30, 2018 and 2017.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(Dollars in thousands)
2018
2017
 
2018
2017
ALLL, beginning balance
$
48,969

$
49,922

 
$
49,988

$
50,624

 
 
 
 
 
 
Net charge-offs (recoveries) :
 
 
 
 
 
Park's Ohio-based operations
1,227

1,047

 
2,682

2,906

SEPH
(324
)
(366
)
 
(500
)
(647
)
Park
903

681

 
2,182

2,259

 
 
 
 
 
 
Provision for (recovery of) loan losses:
 
 
 
 
 
Park's Ohio-based operations
1,710

4,947

 
2,146

6,104

SEPH
(324
)
(366
)
 
(500
)
(647
)
Park
1,386

4,581

 
1,646

5,457

 
 
 
 
 
 
ALLL, ending balance
$
49,452

$
53,822

 
$
49,452

$
53,822

 
 
 
 
 
 
Annualized ratio of net charge-offs (recoveries) to average loans:
 
 
 
 
 
Park's Ohio-based operations
0.09
%
0.08
 %
 
0.10
 %
0.11
 %
SEPH
N.M.

(12.50
)%
 
(29.55
)%
(10.85
)%
Park
0.07
%
0.05
 %
 
0.08
 %
0.09
 %
 
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.

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 June 30, 2018, December 31, 2017 and June 30, 2017.
Park Ohio-based operations - Allowance for Loan Losses
(In thousands)
 
June 30, 2018
 
December 31, 2017
 
June 30, 2017
Total allowance for loan losses
 
$
49,452

 
$
49,988

 
$
53,822

Specific reserves
 
1,396

 
684

 
4,145

General reserves
 
$
48,056

 
$
49,304

 
$
49,677

 
 
 
 
 
 
 
Total loans
 
$
5,323,164

 
$
5,361,593

 
$
5,354,148

Impaired commercial loans
 
60,070

 
46,242

 
62,405

Non-impaired loans
 
$
5,263,094

 
$
5,315,351

 
$
5,291,743

 
 
 
 
 
 
 
Total allowance for loan losses to total loans ratio
 
0.93
%
 
0.93
%
 
1.01
%
General reserves as a % of non-impaired loans
 
0.91
%
 
0.93
%
 
0.94
%

The allowance for loan losses of $49.5 million at June 30, 2018 represented a $536,000, or 1.1%, decrease compared to $50.0 million at December 31, 2017. This decrease was the result of a $1.2 million decrease in general reserves, offset by a $712,000 increase in specific reserves. The decrease in general reserves was largely the result of a decline in loan balances.


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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; (4) OREO which results from taking possession of property that served as collateral for a defaulted loan; and (5) other nonperforming assets which consist of receivables acquired through a loan workout.

The following table compares Park’s nonperforming assets at June 30, 2018, December 31, 2017 and June 30, 2017.
 
Park National Corporation - Nonperforming Assets 
(In thousands)
 
June 30, 2018
 
December 31, 2017
 
June 30, 2017
Nonaccrual loans
 
$
81,124

 
$
72,056

 
$
90,378

Accruing TDRs
 
16,306

 
20,111

 
18,631

Loans past due 90 days or more
 
1,437

 
1,792

 
1,895

Total nonperforming loans
 
$
98,867

 
$
93,959

 
$
110,904

 
 
 
 
 
 
 
OREO – PNB
 
3,280

 
6,524

 
7,108

OREO – SEPH
 
2,449

 
7,666

 
7,773

Other nonperforming assets - PNB
 

 
4,849

 

Total nonperforming assets
 
$
104,596

 
$
112,998


$
125,785

 
 
 
 
 
 
 
Percentage of nonaccrual loans to total loans
 
1.52
%
 
1.34
%
 
1.68
%
Percentage of nonperforming loans to total loans
 
1.86
%
 
1.75
%
 
2.07
%
Percentage of nonperforming assets to total loans
 
1.96
%
 
2.10
%
 
2.34
%
Percentage of nonperforming assets to total assets
 
1.40
%
 
1.50
%
 
1.61
%
 
Nonperforming assets for Park's Ohio-based operations and for SEPH as of June 30, 2018, December 31, 2017 and June 30, 2017 were as reported in the following two tables:
  
Park's Ohio-based operations - Nonperforming Assets 
(In thousands)
 
June 30, 2018
 
December 31, 2017
 
June 30, 2017
Nonaccrual loans
 
$
79,489

 
$
61,753

 
$
79,688

Accruing TDRs
 
16,306

 
20,111

 
18,631

Loans past due 90 days or more
 
1,437

 
1,792

 
1,895

Total nonperforming loans
 
$
97,232

 
$
83,656

 
$
100,214

 
 
 
 
 
 
 
OREO – PNB
 
3,280

 
6,524

 
7,108

Other nonperforming assets - PNB
 

 
4,849

 

Total nonperforming assets

$
100,512


$
95,029

 
$
107,322

 
 
 
 
 
 
 
Percentage of nonaccrual loans to total loans
 
1.49
%
 
1.15
%
 
1.49
%
Percentage of nonperforming loans to total loans
 
1.83
%
 
1.56
%
 
1.87
%
Percentage of nonperforming assets to total loans
 
1.89
%
 
1.77
%
 
2.00
%
Percentage of nonperforming assets to total assets
 
1.36
%
 
1.27
%
 
1.38
%
  



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SEPH - Nonperforming Assets 
(In thousands)
 
June 30, 2018
 
December 31, 2017
 
June 30, 2017
Nonaccrual loans
 
$
1,635

 
$
10,303

 
$
10,690

Accruing TDRs
 

 

 

Loans past due 90 days or more
 

 

 

Total nonperforming loans
 
$
1,635

 
$
10,303

 
$
10,690

 
 
 
 
 
 
 
OREO – SEPH
 
2,449

 
7,666

 
7,773

Total nonperforming assets
 
$
4,084


$
17,969

 
$
18,463

 
Impaired Loans:  Park’s allowance for loan losses includes an allocation for loans specifically identified as impaired under GAAP. At June 30, 2018, 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 a 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 June 30, 2018, Park had taken partial charge-offs of $11.4 million related to the $61.7 million of commercial loans considered to be impaired, compared to partial charge-offs of $10.0 million related to the $56.5 million of impaired commercial loans at December 31, 2017.
 
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 2017 to incorporate losses through December 31, 2017.

The allowance for loan losses related to performing commercial loans was $31.0 million or 1.18% of the outstanding principal balance of performing commercial loans at June 30, 2018. At June 30, 2018, the coverage level within the commercial loan portfolio was approximately 3.18 years compared to 3.24 years at December 31, 2017. Historical loss experience, defined as charge-offs plus changes in specific reserves, over the 96-month period ended December 31, 2017, for the commercial loan portfolio was 0.37%. This 96-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 1.18% for other accruing commercial loans breaks down as follows: pass-rated commercial loans are reserved at 1.18%; special mention commercial loans are reserved at 2.83%; and substandard commercial loans are reserved at 9.65%. The reserve levels for pass-rated, special mention and substandard commercial loans in excess of the 96-month loss experience of 0.37% are due to the following factors which management reviews on a quarterly or annual basis:

Historical Loss Factor: Management updated the historical loss calculation during the fourth quarter of 2017, incorporating net charge-offs plus changes in specific reserves through December 31, 2017. With the addition of 2017 historical losses, management extended the historical loss period to 96 months from 84 months. The 96-month historical loss period captures all annual periods subsequent to June 2009, the end of the most recent recession, thus encompassing the full economic cycle to date.


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Loss Emergence Period Factor: At least annually, management calculates the loss emergence period for each commercial loan segment. This loss emergence period is calculated based upon the average period of time it takes from the probable occurrence of a loss event to the credit being moved to nonaccrual. 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 period was last updated in the fourth quarter of 2017.
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 factor was last updated in the fourth quarter of 2017.
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. There was no change to the environmental loss factor during the second quarter of 2018.
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 96 months, through December 31, 2017. 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). At June 30, 2018, the coverage level within the consumer loan portfolio was approximately 1.89 years compared to 1.92 years at December 31, 2017. Historical loss experience, over the 96-month period ended December 31, 2017, for the consumer loan portfolio was 0.34%.

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.
 
Other Income
 
Other income increased by $2.5 million to $23.2 million for the quarter ended June 30, 2018, compared to $20.7 million for the second quarter of 2017, and increased by $10.5 million to $50.1 million for the six months ended June 30, 2018, compared to $39.7 million for the six months ended June 30, 2017.


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The following table is a summary of the changes in the components of other income:
 
 
 
Three months ended
June 30,
 
Six months ended
June 30,
(In thousands)
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Income from fiduciary activities
 
$
6,666

 
$
6,025

 
$
641

 
$
13,061

 
$
11,539

 
$
1,522

Service charges on deposit accounts
 
2,826

 
3,156

 
(330
)
 
5,748

 
6,295

 
(547
)
Other service income
 
3,472

 
3,447

 
25

 
7,644

 
6,251

 
1,393

Check card fee income
 
4,382

 
4,040

 
342

 
8,384

 
7,801

 
583

Bank owned life insurance income
 
1,031

 
1,114

 
(83
)
 
2,040

 
2,217

 
(177
)
ATM fees
 
510

 
561

 
(51
)
 
1,034

 
1,103

 
(69
)
OREO valuation adjustments
 
(114
)
 
(272
)
 
158

 
(321
)
 
(345
)
 
24

(Loss) gain on sale of OREO, net
 
(147
)
 
53

 
(200
)
 
4,174

 
153

 
4,021

Net loss on sale of investment securities
 

 

 

 
(2,271
)
 

 
(2,271
)
Unrealized gain on equity securities
 
304

 

 
304

 
3,793

 

 
3,793

Other components of net periodic pension benefit income
 
1,705

 
1,448

 
257

 
3,410

 
2,896

 
514

Miscellaneous
 
2,607

 
1,127

 
1,480

 
3,449

 
1,744

 
1,705

Total other income
 
$
23,242

 
$
20,699

 
$
2,543

 
$
50,145

 
$
39,654

 
$
10,491

 
The following table breaks out the change in total other income for the three and six months ended June 30, 2018 compared to the same periods ended June 30, 2017 between Park’s Ohio-based operations and SEPH.

 
 
Change from 2017 to 2018 for the three months ended June 30,
 
Change from 2017 to 2018 for the six months ended June 30,
(In thousands)
 
Ohio-based operations
 
SEPH
 
Total
 
Ohio-based operations
 
SEPH
 
Total
Income from fiduciary activities
 
$
641

 
$

 
$
641

 
$
1,522

 
$

 
$
1,522

Service charges on deposit accounts
 
(330
)
 

 
(330
)
 
(547
)
 

 
(547
)
Other service income
 
4

 
21

 
25

 
361

 
1,032

 
1,393

Check card fee income
 
342

 

 
342

 
583

 

 
583

Bank owned life insurance income
 
(83
)
 

 
(83
)
 
(177
)
 

 
(177
)
ATM fees
 
(51
)
 

 
(51
)
 
(69
)
 

 
(69
)
OREO valuation adjustments
 
200

 
(42
)
 
158

 
243

 
(219
)
 
24

(Loss) gain on sale of OREO, net
 
(227
)
 
27

 
(200
)
 
1,257

 
2,764

 
4,021

Net loss on sale of investment securities
 

 

 

 
(2,271
)
 

 
(2,271
)
Unrealized gain on equity securities
 
304

 

 
304

 
3,793

 

 
3,793

Other components of net periodic pension benefit income
 
252

 
5

 
257

 
504

 
10

 
514

Miscellaneous
 
1,429

 
51

 
1,480

 
1,670

 
35

 
1,705

Total other income
 
$
2,481

 
$
62

 
$
2,543

 
$
6,869

 
$
3,622

 
$
10,491


Income from fiduciary activities, which represents revenue earned from Park’s trust activities, increased by $641,000, or 10.6%, to $6.7 million for the three months ended June 30, 2018, compared to $6.0 million for the same period in 2017 and increased $1.5 million, or 13.2%, to $13.1 million for the six months ended June 30, 2018, compared to $11.5 million for the same period in 2017. Fiduciary fees charged are generally based on the market value of customer accounts. The average market value for assets under management for the six months ended June 30, 2018 was $5,422 million compared to $4,926 million for the six months ended June 30, 2017.


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Service charges on deposits decreased by $330,000, or 10.5%, to $2.8 million for the three months ended June 30, 2018, compared to $3.2 million for the same period in 2017 and decreased $547,000, or 8.7%, to $5.7 million for the six months ended June 30, 2018, compared to $6.3 million for the same period in 2017, largely as a result of a decline in non-sufficient funds (NSF) fee income.

Other service income increased by $1.4 million, or 22.3%, to $7.6 million for the six months ended June 30, 2018, compared to $6.3 million for the same period of 2017. The primary reason for the increase was the recovery of fees from certain SEPH impaired relationships.

Checkcard fee income increased by $342,000, or 8.5%, to $4.4 million for the three months ended June 30, 2018, compared to $4.0 million for the same period of 2017 and increased $583,000, or 7.5%, to $8.4 million for the six months ended June 30, 2018, compared to $7.8 million for the same period of 2017. The increases in 2018 were attributable to continued increases in the volume of debit card transactions.

Gain on sale of OREO, net increased by $4.0 million, to $4.2 million for the six months ended June 30, 2018, compared to $153,000 for the same period in 2017. The increase is primarily due to a $4.1 million gain on the sale of one OREO property during the first three months of 2018, which was partially participated to PNB from SEPH.

During the six months ended June 30, 2018, investment securities with a book value of $254.3 million were sold at a net loss of $2.3 million. There were no securities sold during the same period of 2017.

During the six months ended June 30, 2018, there were unrealized gains on equity securities of $3.8 million. Prior to January 1, 2018, unrealized gains on equity securities were recognized in other comprehensive income. With the adoption of ASU 2016-01 on January 1, 2018, Park recorded an increase of $1.9 million to beginning retained earnings with all future changes in unrealized gains/loss on equity securities being recorded on the consolidated condensed statement of income.

Miscellaneous income increased by $1.5 million to $2.6 million for the three months ended June 30, 2018, compared to $1.1 million for the three months ended June 30, 2017 and increased $1.7 million to $3.4 million for the six months ended June 30, 2018, compared to $1.7 million for the six months ended June 30, 2017. The increase for the year-to-date periods was primarily related to a $752,000 increase in income from equity investments, a $486,000 increase in net gain on sale of assets, and a $308,000 increase in income from the operation of OREO properties for the six months ended June 30, 2018, compared to the six months ended June 30, 2017.

Other Expense

Other expense increased by $3.0 million to $52.5 million for the quarter ended June 30, 2018, compared to $49.6 million for the second quarter of 2017, and increased by $8.4 million to $106.8 million for the six months ended June 30, 2018, compared to $98.5 million for the six months ended June 30, 2017.

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

 
 
Three months ended
June 30,
 
Six months ended
June 30,
(In thousands)
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Salaries
 
$
24,103

 
$
23,001

 
$
1,102

 
$
49,423

 
$
45,718

 
$
3,705

Employee benefits
 
7,630

 
6,206

 
1,424

 
14,659

 
12,674

 
1,985

Occupancy expense
 
2,570

 
2,565

 
5

 
5,506

 
5,200

 
306

Furniture and equipment expense
 
4,013

 
3,640

 
373

 
8,162

 
7,258

 
904

Data processing fees
 
1,902

 
1,676

 
226

 
3,675

 
3,641

 
34

Professional fees and services
 
6,123

 
6,018

 
105

 
12,313

 
10,847

 
1,466

Marketing
 
1,185

 
1,084

 
101

 
2,403

 
2,140

 
263

Insurance
 
1,196

 
1,517

 
(321
)
 
2,624

 
3,087

 
(463
)
Communication
 
1,189

 
1,155

 
34

 
2,439

 
2,488

 
(49
)
State tax expense
 
958

 
943

 
15

 
2,063

 
2,006

 
57

Miscellaneous
 
1,665

 
1,749

 
(84
)
 
3,575

 
3,405

 
170

Total other expense
 
$
52,534

 
$
49,554

 
$
2,980

 
$
106,842

 
$
98,464

 
$
8,378


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The following table breaks out the change in total other expense for the three and six months ended June 30, 2018, compared to the same period ended June 30, 2017 between Park’s Ohio-based operations and SEPH.
 
 
 
Change from 2017 to 2018 for the three months ended June 30,
 
Change from 2017 to 2018 for the six months ended June 30,
(In thousands)
 
Ohio based operations
 
SEPH
 
Total
 
Ohio based operations
 
SEPH
 
Total
Salaries
 
$
1,105

 
$
(3
)
 
$
1,102

 
$
3,723

 
$
(18
)
 
$
3,705

Employee benefits
 
1,362

 
62

 
1,424

 
1,934

 
51

 
1,985

Occupancy expense
 
5

 

 
5

 
306

 

 
306

Furniture and equipment expense
 
373

 

 
373

 
904

 

 
904

Data processing fees
 
226

 

 
226

 
34

 

 
34

Professional fees and services
 
592

 
(487
)
 
105

 
680

 
786

 
1,466

Marketing
 
101

 

 
101

 
263

 

 
263

Insurance
 
(321
)
 

 
(321
)
 
(463
)
 

 
(463
)
Communication
 
34

 

 
34

 
(49
)
 

 
(49
)
State tax expense
 
15

 

 
15

 
47

 
10

 
57

Miscellaneous
 
(103
)
 
19

 
(84
)
 
188

 
(18
)
 
170

Total other expense
 
$
3,389

 
$
(409
)
 
$
2,980

 
$
7,567

 
$
811

 
$
8,378


Salaries increased by $1.1 million, or 4.8%, to $24.1 million for the three months ended June 30, 2018, compared to $23.0 million for the same period in 2017 and increased by $3.7 million, or 8.1%, to $49.4 million for the six months ended June 30, 2018, compared to $45.7 million for the same period in 2017. The increase for the six months ended June 30, 2018 was due to a $1.1 million one-time incentive paid out in March 2018, along with an $1.2 million increase in salary expense, a $629,000 increase in share-based compensation expense related to PBRSU awards granted under the 2013 Incentive Plan (prior to 2017) and the 2017 Employee LTIP, and a $500,000 increase in incentive compensation expense.

Employee benefits increased by $1.4 million, or 22.9%, to $7.6 million for the three months ended June 30, 2018, compared to $6.2 million for the same period in 2017 and increased $2.0 million, or 15.7%, to $14.7 million for the six months ended June 30, 2018, compared to $12.7 million for the same period in 2017. The increase for the six months ended June 30, 2018 was primarily due to a $788,000 increase in expense related to Park's voluntary salary deferral plan, a $611,000 increase in group insurance costs and a $555,000 increase in pension service cost expense. The Company contribution match under the voluntary salary deferral plan was increased from 25% to 50% in March of 2018.

Furniture and equipment expense increased by $373,000, or 10.2%, to $4.0 million for the three months ended June 30, 2018, compared to $3.6 million for the same period in 2017 and increased $904,000, or 12.5%, to $8.2 million for the six months ended June 30, 2018, compared to $7.3 million for the same period in 2017. The increases for the three and six months ended June 30, 2018 were primarily due to maintenance and repairs on equipment.

Professional fees and services increased by $105,000, or 1.7%, to $6.1 million for the three months ended June 30, 2018, compared to $6.0 million for the same period in 2017 and increased $1.5 million, or 13.5%, to $12.3 million for the six months ended June 30, 2018, compared to $10.8 million for the same period in 2017. The $786,000 increase at SEPH for the six months ended June 30, 2018 was primarily the result of a $1.2 million increase in management and consulting fees resulting from the collection of payments on certain SEPH impaired loan relationships during the first six months of 2018, offset by a $435,000 decrease in legal expense. The $680,000 increase at the Ohio based operations for the six months ended June 30, 2018 was largely the result of a $504,000 increase in legal expense at the Parent Company primarily related to the acquisition of NewDominion Bank, which was effective July 1, 2018.

Income Tax
 
Federal income tax expense was $5.8 million for the second quarter of 2018, compared to $7.3 million for the second quarter of 2017, and was $11.9 million for the six months ended June 30, 2018, compared to $15.2 million for the six months ended June 30, 2017. Effective January 1, 2018, the federal corporate income tax rate was lowered to 21% from 35%. The effective federal income tax rate for the second quarter of 2018 was 17.1%, compared to 27.8% for the same period in 2017 and the effective federal income tax rate for the six months ended June 30, 2018 was 16.7%, compared to 27.8% for the six months ended June

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30, 2017. The difference between the statutory federal income tax rate and Park’s effective federal income 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, 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 2018 year will be approximately $5.4 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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Table of Contents

Comparison of Financial Condition
At June 30, 2018 and December 31, 2017
 
Changes in Financial Condition
 
Total assets decreased by $75.5 million, or 1.0%, during the first six months of 2018 to $7,462 million at June 30, 2018, compared to $7,538 million at December 31, 2017. This decrease was primarily due to the following:

Loans decreased by $47.5 million, or 0.9%, to $5,325 million at June 30, 2018, compared to $5,372 million at December 31, 2017.
Cash and cash equivalents decreased by $23.0 million to $146.2 million at June 30, 2018, compared to $169.1 million at December 31, 2017. Money market instruments were $23.2 million at June 30, 2018, compared to $37.2 million at December 31, 2017 and Cash and due from banks were $122.9 million at June 30, 2018, compared to $131.9 million at December 31, 2017.

Total liabilities decreased by $74.5 million, or 1.1%, during the first six months of 2018 to $6,707 million at June 30, 2018, from $6,782 million at December 31, 2017. This decrease was primarily due to the following:

Short-term borrowings decreased by $175.2 million, or 44.8%, to $216.1 million at June 30, 2018, compared to $391.3 million at December 31, 2017.
Long-term borrowings decreased by $100.0 million, or 20.0%, to $400.0 million at June 30, 2018, compared to $500.0 million at December 31, 2017.
Total deposits increased by $198.5 million, or 3.4%, to $6,016 million at June 30, 2018, compared to $5,817 million at December 31, 2017.
 
Total shareholders’ equity decreased by $1.0 million, or 0.1%, to $755.1 million at June 30, 2018, from $756.1 million at December 31, 2017.

Retained earnings increased by $31.6 million during the period as a result of net income of $59.4 million and cumulative effects of changes in accounting principle of $5.7 million, offset by common share dividends of $33.2 million.
Treasury shares increased by $4.5 million during the period as a result of the repurchase of treasury shares, offset by the issuance of treasury shares.
Accumulated other comprehensive loss, net of taxes increased by $28.6 million during the period as a result of unrealized net holding losses on securities available for sale, net of taxes, of $25.8 million, and the cumulative effects of changes in accounting principle of $4.8 million, offset by a net realized loss on the sale of securities of $2.0 million reclassified from accumulated other comprehensive loss.
 
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 $60.5 million and $40.0 million for the six months ended June 30, 2018 and 2017, respectively. Net income was the primary source of cash from operating activities for each of the six months ended June 30, 2018 and 2017.
Cash provided by investing activities was $32.4 million for the six months ended June 30, 2018 and cash used in investing activities was $89.5 million for the six months ended June 30, 2017. Proceeds from the sale, repayment, or maturity of investment securities provide cash and purchases of investment securities use cash. Net investment securities transactions used cash of $29.6 million for the six months ended June 30, 2018 and provided cash of $5.5 million for the six months ended June 30, 2017. Another major use or source of cash in investing activities is the net increase or decrease in the loan portfolio. Cash provided by the net decrease in the loan portfolio was $53.2 million and cash used by the net increase in the loan portfolio was $94.2 million for the six months ended June 30, 2018 and 2017, respectively.

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Cash used in financing activities was $115.9 million for the six months ended June 30, 2018 and cash provided by financing activities was $314.1 million for the six months ended June 30, 2017. A major source of cash for financing activities is the net change in deposits. Deposits increased and provided $198.5 million and $439.6 million of cash for the six months ended June 30, 2018 and 2017, respectively. Another major source/use of cash from financing activities is borrowings in the form of short-term borrowings and long-term debt. For the six months ended June 30, 2018, net short-term borrowings decreased and used $175.2 million in cash, and net long-term borrowings decreased and used $100.0 million in cash. For the six months ended June 30, 2017, net short-term borrowings decreased and used $211.0 million in cash, while net long-term borrowings increased and provided $120.0 million in cash. Finally, cash declined by $32.9 million for the six months ended June 30, 2018 and $28.8 million for the six months ended June 30, 2017, 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, FHLB borrowings, the capability to securitize or package loans for sale, and a $50.0 million revolving line of credit with another financial institution, which had an outstanding balance of $10.0 million as of June 30, 2018. The Corporation’s loan to asset ratio was 71.36% at June 30, 2018, compared to 71.28% at December 31, 2017 and 68.51% at June 30, 2017. Cash and cash equivalents were $146.2 million at June 30, 2018, compared to $169.1 million at December 31, 2017 and $411.1 million at June 30, 2017. 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 June 30, 2018 was $755.1 million, or 10.1% of total assets, compared to $756.1 million, or 10.0% of total assets, at December 31, 2017 and $752.2 million, or 9.6% of total assets, at June 30, 2017.
 
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 AFS debt 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 under the prompt corrective action regulations applicable to PNB. 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 2018 is 1.875%. The amounts shown below as the adequately capitalized ratio plus capital conservation buffer includes the fully phased-in 2.50% buffer. The Federal Reserve Board has also adopted requirements Park must satisfy to be deemed "well-capitalized" and to remain a financial holding company.
 
Park and PNB met each of the well capitalized ratio guidelines applicable to them at June 30, 2018. The following table indicates the capital ratios for PNB and Park at June 30, 2018 and December 31, 2017.
 
 
As of June 30, 2018
 
Leverage
 
Tier 1
Risk-Based
 
Common Equity Tier 1
 
Total
Risk-Based
The Park National Bank
7.93
%
 
10.85
%
 
10.85
%
 
12.18
%
Park National Corporation
10.12
%
 
13.75
%
 
13.48
%
 
14.66
%
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)
5.00
%
 
8.00
%
 
6.50
%
 
10.00
%
Well capitalized ratio (Park)
N/A

 
6.00
%
 
N/A

 
10.00
%


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As of December 31, 2017
 
Leverage
 
Tier 1
Risk-Based
 
Common Equity Tier 1
 
Total
Risk-Based
The Park National Bank
7.36
%
 
10.35
%
 
10.35
%
 
11.60
%
Park National Corporation
9.44
%
 
13.22
%
 
12.94
%
 
14.14
%
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)
5.00
%
 
8.00
%
 
6.50
%
 
10.00
%
Well capitalized ratio (Park)
N/A

 
6.00
%
 
N/A

 
10.00
%

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 2017 Annual Report (Table 38) for disclosure concerning contractual obligations and commitments at December 31, 2017. There were no significant changes in contractual obligations and commitments during the first six months of 2018.
 
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)
 
June 30,
2018
 
December 31, 2017
Loan commitments
 
$
935,018

 
$
893,205

Standby letters of credit
 
$
12,068

 
$
13,421

 

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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 43 of Park’s 2017 Annual Report.
 
On page 43 (Table 37) of Park’s 2017 Annual Report, management reported that Park’s twelve-month cumulative rate sensitivity gap was a positive (assets exceeding liabilities) $407 million or 5.88% of total interest earning assets at December 31, 2017. At June 30, 2018, Park’s twelve-month cumulative rate sensitivity gap was a positive (assets exceeding liabilities) $204 million or 2.95% 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 43 of Park’s 2017 Annual Report, management reported that at December 31, 2017, the earnings simulation model projected that net income would decrease by 1.8% using a rising interest rate scenario and decrease by 5.2% using a declining interest rate scenario over the next year. At June 30, 2018, the earnings simulation model projected that net income would decrease by 1.7% using a rising interest rate scenario and would decrease by 1.8% in a declining interest rate scenario. At June 30, 2018, 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 June 30, 2018, 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

There are no pending legal proceedings to which Park or any of its subsidiaries is a party or to which any of their property is subject, except for routine legal proceedings to which Park's subsidiaries are parties to incidental to their respective businesses. Park considers none of those proceedings to be material.

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, 2017 (the “2017 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 2017 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 June 30, 2018, as well as the maximum number of common shares that may be purchased under Park’s previously announced stock repurchase authorization to fund 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:
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)
April 1 through April 30, 2018
 

 
$

 

 
1,380,000

May 1 through May 31, 2018
 
17,645

 
114.27

 
17,645

 
1,362,355

June 1 through June 30, 2018
 
32,355

 
116.41

 
32,355

 
1,330,000

Total
 
50,000

 
$
115.66

 
50,000

 
1,330,000

(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 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

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treasury shares for subsequent issuance and delivery under the 2017 Employees LTIP and the 2017 Non-Employee Directors LTIP.

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.

Item 4.      Mine Safety Disclosures
 
Not applicable.

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

Item 6.      Exhibits
 
 
2.1
 
 
 
 
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)
 
 
 

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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)
 
 
 
 
3.2(b)
 
 
 
 
3.2(c)
 
 
 
 
3.2(d)
 
 
 
 
3.2(e)
 
 
 
 
10.1
 
 
 
 
10.2
 
 
 
 
10.3
 
 
 
 
31.1
 
 
 

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31.2
 
 
 
 
32.1
 
 
 
 
32.2
 
 
 
 
101
The following information from Park’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018 formatted in XBRL (eXtensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Condensed Balance Sheets as of June 30, 2018 and December 31, 2017 (unaudited); (ii) the Consolidated Condensed Statements of Income for the three and months ended June 30, 2018 and 2017 (unaudited); (iii) the Consolidated Condensed Statements of Comprehensive Income for the three and six months ended June 30, 2018 and 2017 (unaudited); (iv) the Consolidated Condensed Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2018 and 2017 (unaudited); (v) the Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 2018 and 2017 (unaudited); and (vi) the Notes to Unaudited Consolidated Condensed Financial Statements (electronically submitted herewith).
________________________________________

*Schedules have been omitted pursuant to Item 601(b)(2) of SEC Regulation S-K. A copy of any omitted schedules will be furnished supplementally to the SEC upon its request.


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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: July 27, 2018
 
/s/ David L. Trautman
 
 
David L. Trautman
 
 
Chief Executive Officer and President
 
 
 
 
 
 
DATE: July 27, 2018
 
/s/ Brady T. Burt
 
 
Brady T. Burt
 
 
Chief Financial Officer, Secretary and Treasurer
 
 
 



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