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Park National 10-Q 2012

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

S QUARTERLY REPORT PURSUANT TO SECTION 13 OR

15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2012

 

OR

 

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR

15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from   to  

 

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   x   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   x   No   ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting company     ¨
(Do not check if a smaller reporting company)

 

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

 

Yes   ¨   No   x

 

15,405,902 Common shares, no par value per share, outstanding at May 3, 2012.

 

 
 

 

PARK NATIONAL CORPORATION

 

CONTENTS

 

  Page
PART I.   FINANCIAL INFORMATION  
   
Item 1.  Financial Statements  
   
Consolidated Condensed Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011 3
   
Consolidated Condensed Statements of Income for the three months ended March 31, 2012 and 2011 (unaudited) 4
   
Consolidated Condensed Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011 (unaudited) 6
   
Consolidated Condensed Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2012 and 2011 (unaudited) 7
   
Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2012 and 2011 (unaudited) 8
   
Notes to Unaudited Consolidated Condensed Financial Statements 9
   
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations 42
   
Item 3.  Quantitative and Qualitative Disclosures About Market Risk        61
   
Item 4.  Controls and Procedures 61
   
PART II.  OTHER INFORMATION  
   
Item 1.  Legal Proceedings 63
   
Item 1A. Risk Factors 63
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 63
   
Item 3.  Defaults Upon Senior Securities 64
   
Item 4.  Mine Safety Disclosures 64
   
Item 5.  Other Information 64
   
Item 6.  Exhibits 64
   
SIGNATURES 68

 

2
 

 

PARK NATIONAL CORPORATION

Consolidated Condensed Balance Sheets (Unaudited)

(in thousands, except share and per share data)

 

   March 31,   December 31, 
   2012   2011 
           
Assets:          
Cash and due from banks  $121,730   $137,770 
Money market instruments   39,400    19,716 
Cash and cash equivalents   161,130    157,486 
Investment securities          
Securities available-for-sale, at fair value (amortized cost of $991,373 and $801,147 at March 31, 2012 and December 31, 2011)   1,007,481    820,645 
Securities held-to-maturity, at amortized cost (fair value of $795,075 and $834,574 at March 31, 2012 and December 31, 2011)   782,250    820,224 
Other investment securities   67,604    67,604 
Total investment securities   1,857,335    1,708,473 
Loans   4,324,383    4,317,099 
Allowance for loan losses   (59,758)   (68,444)
Net loans   4,264,625    4,248,655 
Bank owned life insurance   157,225    154,567 
Goodwill and other intangible assets   73,089    74,843 
Bank premises and equipment, net   52,157    53,741 
Other real estate owned   41,965    42,272 
Accrued interest receivable   21,227    19,697 
Mortgage loan servicing rights   8,975    9,301 
Other   139,123    120,748 
Assets held for sale   -    382,462 
Total assets  $6,776,851   $6,972,245 
           
Liabilities and Stockholders' Equity:          
Deposits:          
Noninterest bearing  $1,055,745   $995,733 
Interest bearing   3,761,643    3,469,381 
Total deposits   4,817,388    4,465,114 
Short-term borrowings   236,687    263,594 
Long-term debt   821,801    823,182 
Subordinated debentures and notes   75,250    75,250 
Accrued interest payable   5,034    4,916 
Other   64,262    61,639 
Liabilities held for sale   -    536,186 
Total liabilities   6,020,422    6,229,881 
COMMITMENTS AND CONTINGENCIES          
Stockholders' equity:          
Preferred stock (200,000 shares authorized; 100,000 shares issued with $1,000 per share liquidation preference)   98,372    98,146 
Common stock (No par value; 20,000,000 shares authorized; 16,151,014 shares issued at March 31, 2012 and 16,151,021 shares issued at December 31, 2011)   301,201    301,202 
Common stock warrants   4,297    4,297 
Retained earnings   440,074    424,557 
Treasury stock (745,109 shares at March 31, 2012 and 745,109 shares at December 31,2011)   (77,007)   (77,007)
Accumulated other comprehensive (loss), net of taxes   (10,508)   (8,831)
Total stockholders' equity   756,429    742,364 
Total liabilities and stockholders’ equity  $6,776,851   $6,972,245 

 

SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

3
 

 

PARK NATIONAL CORPORATION

Consolidated Condensed Statements of Income (Unaudited)

(in thousands, except share and per share data)

 

   Three Months Ended 
   March 31, 
   2012   2011 
         
Interest and dividend income:          
           
Interest and fees on loans  $61,105   $65,454 
           
Interest and dividends on:          
Obligations of U.S. Government, its agencies and other securities   13,584    19,053 
Obligations of states and political subdivisions   46    149 
           
Other interest income   103    6 
Total interest and dividend income   74,838    84,662 
           
Interest expense:          
           
Interest on deposits:          
Demand and savings deposits   754    991 
Time deposits   4,639    6,734 
           
Interest on borrowings:          
Short-term borrowings   175    267 
Long-term debt   7,542    7,357 
           
Total interest expense   13,110    15,349 
           
Net interest income   61,728    69,313 
           
Provision for loan losses   9,000    14,100 
Net interest income after provision for loan losses   52,728    55,213 
           
Other income:          
Income from fiduciary activities   3,828    3,722 
Service charges on deposit accounts   4,071    4,245 
Other service income   2,734    2,301 
Checkcard fee income   3,172    2,976 
Bank owned life insurance income   1,202    1,229 
ATM fees   608    654 
OREO devaluations   (1,359)   (2,535)
Gain on sale of the Vision business   22,167    - 
Other   3,197    2,438 
Total other income   39,620    15,030 
           
Gain on sale of securities   -    6,635 

 

4
 

 

PARK NATIONAL CORPORATION

Consolidated Condensed Statements of Income (Unaudited) (Continued)

(in thousands, except share and per share data)

 

   Three Months Ended 
   March 31, 
   2012   2011 
         
Other expense:          
Salaries and employee benefits  $24,823   $25,064 
Occupancy expense   2,670    3,000 
Furniture and equipment expense   2,621    2,657 
Data processing fees   1,200    1,253 
Professional fees and services   5,581    4,874 
Amortization of intangibles   1,754    669 
Marketing   843    623 
Insurance   1,490    2,269 
Communication   1,537    1,556 
Other expense   5,289    4,381 
Total other expense   47,808    46,346 
           
Income before income taxes   44,540    30,532 
           
Income taxes   13,065    8,336 
           
Net income  $31,475   $22,196 
           
Preferred stock dividends and accretion   1,477    1,464 
           
Net income available to common shareholders  $29,998   $20,732 
Per Common Share:          
           
Net income available to common shareholders          
Basic  $1.95   $1.35 
Diluted  $1.95   $1.35 
           
Weighted average common shares outstanding          
Basic   15,405,910    15,398,930 
Diluted   15,417,745    15,403,420 
           
Cash dividends declared  $0.94   $0.94 

 

SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

5
 

 

PARK NATIONAL CORPORATION

Consolidated Condensed Statements of Comprehensive Income (Unaudited)

(in thousands, except share and per share data)

 

   Three Months Ended 
   March 31, 
   2012   2011 
         
Net income  $31,475   $22,196 
           
Other comprehensive income, net of tax:          
Change in funded status of pension plan, net of income taxes of $222   412    - 
Unrealized net holding gain on cash flow hedge,net of income taxes of $60 and $71   113    133 
Unrealized net holding (loss) on securities available-for-sale, net of income tax benefit of $(1,188) and $(3,431)   (2,202)   (6,371)
Other comprehensive loss  $(1,677)  $(6,238)
           
Comprehensive income  $29,798   $15,958 

 

SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

6
 

 

PARK NATIONAL CORPORATION

Consolidated Condensed Statements of Changes in Stockholders' Equity (Unaudited)

(in thousands, except per share data)

 

 

Three Months ended March 31, 2012 and 2011  Preferred
Stock
   Common
Stock
   Retained
Earnings
   Treasury
Stock at
Cost
   Accumulated
Other
Comprehensive
Income
 
                     
Balance at December 31, 2010  $97,290   $305,677   $406,342   $(77,733)  $(1,868)
Net Income             22,196           
Other comprehensive loss, net of tax:                         
Unrealized net holding gain on cash flow hedge, net of income taxes of $71                       133 
Unrealized net holding (loss) on securities available-for-sale, net of income tax benefit of $(3,431)                       (6,371)
Cash dividends on common stock at $0.94 per share             (14,475)          
Cash payment for fractional shares in dividend reinvestment plan        (1)               
Accretion of discount on preferred stock   214         (214)          
Preferred stock dividends             (1,250)          
Balance at March 31, 2011  $97,504   $305,676   $412,599   $(77,733)  $(8,106)
                          
Balance at December 31, 2011  $98,146   $305,499   $424,557   $(77,007)  $(8,831)
Net Income             31,475           
Other comprehensive loss, net of tax:                         
Change in funded status of pension plan, net of income taxes of $222                       412 
Unrealized net holding gain on cash flow hedge, net of income taxes of $60                       113 
Unrealized net holding (loss) on securities available-for-sale, net of income tax benefit of $(1,188)                       (2,202)
Cash dividends on common stock at $0.94 per share             (14,481)          
Cash payment for fractional shares in dividend reinvestment plan        (1)               
Accretion of discount on preferred stock   226         (227)          
Preferred stock dividends             (1,250)          
Balance at March 31, 2012  $98,372   $305,498   $440,074   $(77,007)  $(10,508)

 

SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

7
 

 

PARK NATIONAL CORPORATION

Consolidated Condensed Statements of Cash Flows (Unaudited)

(in thousands)

 

   Three Months Ended 
   March 31,  
   2012   2011 
         
Operating activities:          
Net income  $31,475   $22,196 
           
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation, accretion and amortization   1,470    2,784 
Provision for loan losses   9,000    14,100 
Amortization of core deposit intangibles   1,754    669 
Realized net investment security gains   -    (6,635)
OREO devaluations   1,359    2,535 
Bank owned life insurance income   (1,202)   (1,229)
           
Changes in assets and liabilities:          
(Increase) in other assets   (19,773)   (19,547)
Increase (Decrease) in other liabilities   2,854    (6,539)
           
Net cash provided by operating activities  $26,937   $8,334 
           
Investing activities:          
           
Proceeds from sales of available-for-sale securities  $-   $113,105 
Proceeds from maturity of:          
Available-for-sale securities   229,878    75,071 
Held-to-maturity securities   157,101    59,506 
Purchases of:          
Available-for-sale securities   (419,998)   (231,714)
Held-to-maturity securities   (119,127)   - 
Net (increase) in loans   (23,339)   (25,403)
Sale of assets/liabilities related to Vision Bank   (153,724)   - 
Purchases of bank owned life insurance   (2,213)   (3,000)
Purchases of premises and equipment, net   (125)   (1,990)
           
Net cash (used in) investing activities  $(331,547)  $(14,425)
           
Financing activities:          
           
Net increase in deposits  $352,274   $219,258 
Net (decrease) in short-term borrowings   (26,907)   (346,950)
Proceeds from issuance of long-term debt   -    150,000 
Repayment of long-term debt   (1,381)   (24)
Cash payment for fractional shares in dividend reinvestment plan   (1)   (1)
Cash dividends paid on common and preferred stock   (15,731)   (15,725)
           
Net cash provided by financing activities  $308,254   $6,558 
           
Increase in cash and cash equivalents   3,644    467 
           
Cash and cash equivalents at beginning of year   157,486    133,780 
           
Cash and cash equivalents at end of period  $161,130   $134,247 
           
Supplemental disclosures of cash flow information:          
           
Cash paid for:          
Interest  $12,992   $15,217 
           
Income taxes  $-   $- 
           
Non cash activities:          
Securities acquired through payable  $-   $25,000 

 

SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

8
 

 

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 (the “Registrant”, “Corporation”, “Company”, or “Park”) and its subsidiaries. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of results of operations for the interim periods included herein have been made. The results of operations for the three month period ended March 31, 2012 are not necessarily indicative of the operating results to be anticipated for the fiscal year ending December 31, 2012.

 

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 stockholders’ equity and condensed statements of cash flows in conformity with U.S. generally accepted accounting principles (“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, 2011 from Park’s 2011 Annual Report to Shareholders (“2011 Annual Report”).

 

Park’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in Park’s 2011 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. Management has evaluated events occurring subsequent to the balance sheet date, determining no events require additional disclosure in these consolidated condensed financial statements, with the exception of the subsequent events discussed in Note 20 of these Notes to Consolidated Condensed Financial Statements.

 

Note 2 – Recent Accounting Pronouncements

 

Adoption of New Accounting Pronouncements:

 

No. 2011-04 – Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirement in U.S. GAAP and IFRSs: In May 2011, FASB issued Accounting Standards Update 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirement in U.S. GAAP and IFRSs (ASU 2011-04). The new guidance in this ASU results in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Certain amendments clarify FASB’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. These amendments also enhance disclosure requirements surrounding fair value measurement. Most significantly, an entity is required to disclose additional information regarding Level 3 fair value measurements including quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements. The new guidance is effective for interim and annual periods beginning on or after December 15, 2011. The adoption of the new guidance on January 1, 2012 impacted the fair value disclosures in Note 16.

 

No. 2011-05 – Presentation of Comprehensive Income: In June 2011, FASB issued Accounting Standards Update 2011-05, Presentation of Comprehensive Income (ASU 2011-05). The ASU eliminates the option to report other comprehensive income and its components in the statement of changes in equity. An entity can elect to present the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The ASU does not change the items that must be reported in other comprehensive income, when an item of other comprehensive income must be reclassified to net income, or how earnings per share is calculated or presented. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and must be applied retrospectively. The adoption of the new guidance impacted the presentation of the consolidated financial statements.

 

9
 

 

 

 

No. 2011-08 – Intangibles – Goodwill and Other: In September 2011, FASB issued Accounting Standards Update 2011-08, Intangibles – Goodwill and Other (ASU 2011-08). The ASU allows an entity to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Management does not expect the adoption of this guidance will have an impact on the consolidated financial statements.

 

No. 2011-12 Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05: In December 2011, FASB issued Accounting Standards Update 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12). This ASU defers only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments. Entities are to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. The other requirements in ASU 2011-05 are not affected by this ASU.

 

Note 3 – Sale of Vision Bank Business

 

On February 16, 2012, Park and its wholly-owned subsidiary, Vision Bank (“Vision”), a Florida state-chartered bank, completed their sale of substantially all of the performing loans, operating assets and liabilities associated with Vision to Centennial Bank (“Centennial”), an Arkansas state-chartered bank which is a wholly-owned subsidiary of Home BancShares, Inc. (“Home”), an Arkansas corporation, as contemplated by the previously announced Purchase and Assumption Agreement by and between Park, Vision, Home and Centennial, dated as of November 16, 2011, as amended by the First Amendment to Purchase and Assumption Agreement, dated as of January 25, 2012 (the “Agreement”) for a purchase price of $27.9 million.

 

The assets purchased and liabilities assumed by Centennial as of February 16, 2012, included the following:

 

(in thousands)  February 16, 2012 
Assets sold     
Cash and due from banks  $20,711 
Loans   355,750 
Allowance for loan losses   (13,100)
Net loans   342,650 
Fixed assets   12,496 
Other assets   4,612 
Total assets sold  $380,469 
Liabilities sold     
Deposits  $522,856 
Other liabilities   2,049 
Total liabilities sold  $524,905 

 

10
 

 

Subsequent to the transactions contemplated by the Agreement, Vision was left with approximately $22 million of performing loans (including mortgage loans held for sale) and non-performing loans with a fair value of $88 million. Park recorded a pre-tax gain, net of expenses directly related to the sale, of $22.2 million, resulting from the transactions contemplated by the Agreement. The pre-tax gain, net of expense is provided in the table below:

 

(in thousands)    
Premium paid  $27,913 
One-time gains   298 
Loss on sale of fixed assets   (2,434)
Employment and severance agreements   (1,610)
Other one-time charges, including estimates   (2,000)
Pre-tax gain  $22,167 

 

Promptly following the closing of the transactions contemplated by the Agreement, Vision surrendered its Florida banking charter to the Florida Office of Financial Regulation and became a non-bank Florida corporation (the “Florida Corporation”). The Florida Corporation merged with and into a wholly-owned, non-bank subsidiary of Park, SE Property Holdings, LLC (“SE LLC”), with SE LLC being the surviving entity.

 

The balance sheet of SE LLC as of March 31, 2012 was as follows:

 

(in thousands)  March 31, 2012 
Assets     
Cash  $16,049 
Performing loans   16,123 
Nonperforming loans   82,326 
OREO   28,578 
Other assets   18,417 
Total assets  $161,493 
      
Liabilities and equity     
Intercompany borrowings  $140,000 
Other liabilities   4,623 
Equity   16,870 
Total liabilities and equity  $161,493 

 

Note 4 – Goodwill and Intangible Assets

 

The following table shows the activity in goodwill and core deposit intangibles for the first three months of 2012.

 

(in thousands)  Goodwill   Core Deposit
Intangibles
   Total 
December 31, 2011  $72,334   $2,509   $74,843 
Amortization   -    1,754    1,754 
March 31, 2012  $72,334   $755   $73,089 

 

The core deposit intangibles are being amortized to expense principally on the straight-line method, over a period of six years. The amortization period for the core deposit intangibles related to Vision was accelerated due to the February 16, 2012 acquisition of Vision branches by Centennial Bank. Management expects that the core deposit intangibles amortization expense will be approximately $139,000 for each of the remaining quarters of 2012.

 

11
 

 

 

Core deposit intangibles amortization expense is projected to be as follows for the remainder of 2012 and for each of the following years:

 

(in thousands)  Annual
Amortization
 
Remainder of 2012  $418 
2013   337 
2014   - 
Total  $755 

 

Note 5 – Loans

 

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

 

   March 31, 2012   December 31, 2011 
   Loan
balance
   Accrued
interest
receivable
   Recorded
investment
   Loan
balance
   Accrued
interest
receivable
   Recorded
investment
 
(In thousands)                        
Commercial, financial and agricultural *  $752,392   $3,439   $755,831   $743,797   $3,121   $746,918 
                               
Commercial real estate *   1,088,348    3,795    1,092,143    1,108,574    4,235    1,112,809 
Construction real estate:                              
Vision/SE LLC commercial land and development *   26,081    39    26,120    31,603    31    31,634 
Remaining commercial   148,922    425    149,347    156,053    394    156,447 
Mortgage   19,628    65    19,693    20,039    64    20,103 
Installment   9,184    44    9,228    9,851    61    9,912 
Residential real estate                              
Commercial   392,552    1,120    393,672    395,824    1,105    396,929 
Mortgage   1,004,957    1,540    1,006,497    953,758    1,522    955,280 
HELOC   221,780    884    222,664    227,682    942    228,624 
Installment   48,410    217    48,627    51,354    236    51,590 
Consumer   610,180    2,580    612,760    616,505    2,930    619,435 
Leases   1,949    52    2,001    2,059    43    2,102 
Total loans  $4,324,383   $14,200   $4,338,583   $4,317,099   $14,684   $4,331,783 

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

 

12
 

 

Credit Quality

 

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

 

   March 31, 2012 
(In thousands)  Nonaccrual
loans
   Accruing
restructured
loans
   Loans past due
90 days or more
and accruing
   Total
nonperforming
loans
 
Commercial, financial and agricultural  $36,164   $4,100   $12   $40,276 
Commercial real estate   36,754    6,551    -    43,305 
Construction real estate:                    
SE LLC commercial land and development   20,518    -    -    20,518 
Remaining commercial   14,724    17,949    -    32,673 
Mortgage   66    -    -    66 
Installment   182    -    16    198 
Residential real estate:                    
Commercial   43,211    541    -    43,752 
Mortgage   26,374    5,421    1,523    33,318 
HELOC   2,043    -    -    2,043 
Installment   1,147    22    221    1,390 
Consumer   2,044    -    567    2,611 
Leases   -    -    -    - 
Total loans  $183,227   $34,584   $2,339   $220,150 

 

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

 

13
 

 

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

 

   March 31, 2012   December 31, 2011 
(In thousands)  Nonaccrual
and accruing
restructured
loans
   Loans
individually
evaluated for
impairment
   Loans
collectively
evaluated for
impairment
   Nonaccrual
and accruing
restructured
loans
   Loans
individually
evaluated for
impairment
   Loans
collectively
evaluated for
impairment
 
Commercial, financial and agricultural  $40,264   $40,241   $23   $40,645   $40,621   $24 
Commercial real estate   43,305    43,305    -    51,978    51,978    - 
Construction real estate:                              
Vision/SE LLC commercial land and development   20,518    19,433    1,085    25,761    24,328    1,433 
Remaining commercial   32,673    32,673    -    25,912    25,912    - 
Mortgage   66    -    66    66    -    66 
Installment   182    -    182    30    -    30 
Residential real estate:                              
Commercial   43,752    43,752    -    44,276    44,276    - 
Mortgage   31,795    -    31,795    29,958    -    29,958 
HELOC   2,043    -    2,043    1,412    -    1,412 
Installment   1,169    -    1,169    1,875    -    1,875 
Consumer   2,044    20    2,024    1,876    20    1,856 
Leases   -    -    -    -    -    - 
Total loans  $217,811   $179,424   $38,387   $223,789   $187,135   $36,654 

 

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

 

14
 

 

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

 

   March 31, 2012   December 31, 2011 
   Unpaid
principal
balance
   Recorded
investment
   Allowance
for loan
losses
allocated
   Unpaid
principal
balance
   Recorded
investment
   Allowance
for loan
losses
allocated
 
(in thousands)        
With no related allowance recorded                              
Commercial, financial and agricultural  $33,769   $26,956   $-   $23,164   $18,098   $- 
Commercial real estate   55,974    35,236    -    58,242    41,506    - 
Construction real estate:                              
Vision /SE LLC commercial land and development   68,297    19,433    -    54,032    17,786    - 
Remaining commercial   28,851    24,604    -    33,319    18,372    - 
Residential real estate:                              
Commercial   52,550    39,483    -    49,341    38,686    - 
Consumer   20    20    -    20    20    - 
                               
With an allowance recorded                              
Commercial, financial and agricultural   14,597    13,285    4,704    23,719    22,523    5,819 
Commercial real estate   9,831    8,069    1,506    12,183    10,472    4,431 
Construction real estate:                              
Vision/SE LLC commercial land and development   -    -    -    20,775    6,542    1,540 
Remaining commercial   20,927    8,069    2,096    9,711    7,540    1,874 
Residential real estate:                              
Commercial   5,642    4,269    1,199    6,402    5,590    2,271 
Consumer   -    -    -    -    -    - 
                               
Total  $290,458   $179,424   $9,505   $290,908   $187,135   $15,935 

 

Management’s general practice is to proactively charge down loans individually evaluated for impairment to the fair value of the underlying collateral. At March 31, 2012 and December 31, 2011, there were $91.0 million and $83.7 million, respectively, of partial charge-offs on loans individually evaluated for impairment with no related allowance recorded and $17.3 million and $20.1 million, respectively, of partial charge-offs on loans individually evaluated for impairment that also had a specific reserve allocated.

 

The allowance for loan losses included specific reserves related to loans individually evaluated for impairment at March 31, 2012 and December 31, 2011, of $9.5 million and $15.9 million, respectively, related to loans with a recorded investment of $33.7 million and $52.7 million.

 

15
 

 

The following table presents the average recorded investment and interest income recognized on loans individually evaluated for impairment as of and for the three months ended March 31, 2012 and March 31, 2011:

 

   Three months ended March 31, 2012   Three months ended March 31, 2011 
(in thousands)  Recorded
investment as of
March 31, 2012
   Average
recorded
investment
   Interest
income
recognized
   Recorded
investment as of
March 31, 2011
   Average
recorded
investment
   Interest
income
recognized
 
                         
Commercial, financial and agricultural  $40,241   $40,135   $105   $19,391   $19,515   $65 
Commercial real estate   43,305    48,214    207    53,259    55,076    70 
Construction real estate:                              
Vision/SE LLC commercial land and development   19,433    21,974    -    82,060    84,272    - 
Remaining commercial   32,673    27,314    251    26,126    26,789    78 
Residential real estate:                              
Commercial   43,752    43,276    40    58,123    59,465    139 
Consumer   20    20    -    -    22    - 
                               
Total  $179,424   $180,933   $603   $238,959   $245,139   $352 

 

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

 

   March 31, 2012 
(in thousands)  Accruing loans
past due 30-89
days
   Past due nonaccrual
loans and loans past
due 90 days or
more and accruing*
   Total past due   Total current   Total recorded
investment
 
                     
Commercial, financial and agricultural  $3,935   $28,225   $32,160   $723,671   $755,831 
Commercial real estate   1,062    23,067    24,129    1,068,014    1,092,143 
Construction real estate:                         
SE LLC commercial land and development   337    16,587    16,924    9,196    26,120 
Remaining commercial   -    7,702    7,702    141,645    149,347 
Mortgage   173    -    173    19,520    19,693 
Installment   61    75    136    9,092    9,228 
Residential real estate:                         
Commercial   502    13,261    13,763    379,909    393,672 
Mortgage   13,174    18,840    32,014    974,483    1,006,497 
HELOC   331    297    628    222,036    222,664 
Installment   611    510    1,121    47,506    48,627 
Consumer   7,302    1,807    9,109    603,651    612,760 
Leases   -    -    -    2,001    2,001 
Total loans  $27,488   $110,371   $137,859   $4,200,724   $4,338,583 

 * Includes $2.4 million of loans past due 90 days or more and accruing.

 

16
 

 

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

* Includes $3.6 million of loans past due 90 days or more and accruing.

 

Credit Quality Indicators

 

Management utilizes past due information as a credit quality indicator across the loan portfolio. The past due information is the primary credit quality indicator within the following classes of loans: (1) mortgage loans and installment loans in the construction real estate segment; (2) mortgage loans, HELOC and installment loans in the residential real estate segment; and (3) consumer loans. The primary credit indicator for commercial loans is based on an internal grading system that grades all commercial loans from 1 to 8. Credit grades are continuously monitored by the respective loan officer and adjustments are made when appropriate. A grade of 1 indicates little or no credit risk and a grade of 8 is considered a loss. Commercial loans with grades of 1 to 4 (pass-rated) are considered to be of acceptable credit risk. Commercial loans graded a 5 (special mention) are considered to be watch list credits and a higher loan loss reserve percentage is allocated to these loans. Loans classified as special mention have potential weaknesses that require management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Commercial loans graded 6 (substandard), also considered watch list credits, are considered to represent higher credit risk and, as a result, a higher loan loss reserve percentage is allocated to these loans. Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Commercial loans that are graded a 7 (doubtful) are shown as nonaccrual and Park generally charges these loans down to their fair value by taking a partial charge-off or recording a specific reserve. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Any commercial loan graded an 8 (loss) is completely charged-off.

 

17
 

 

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

 

   March 31, 2012 
(in thousands)  5 Rated   6 Rated   Impaired   Pass Rated   Recorded
Investment
 
Commercial, financial and agricultural  $10,458   $5,217   $40,264   $699,892   $755,831 
                          
Commercial real estate   30,257    10,798    43,305    1,007,783    1,092,143 
                          
Construction real estate:                         
SE LLC commercial land and development   2,801    -    20,518    2,801    26,120 
Remaining commercial   6,748    232    32,673    109,694    149,347 
                          
Residential real estate:                         
Commercial   16,793    1,469    43,752    331,658    393,672 
                          
Leases   -    -    -    2,001    2,001 
                          
Total Commercial Loans  $67,057   $17,716   $180,512   $2,153,829   $2,419,114 

 

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

 

18
 

 

Troubled Debt Restructurings (TDRs)

 

Management classifies loans as TDRs when a borrower is experiencing financial difficulties and Park has granted a concession. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy. Management’s policy is to modify loans by extending the term or by granting a temporary or permanent contractual interest rate below the market rate, not by forgiving debt. Certain loans which were modified during the period ended March 31, 2012 did not meet the definition of a TDR as the modification was a delay in a payment that was considered to be insignificant. Management considers a forbearance period of up to three months or a delay in payment of up to 30 days to be insignificant. TDRs may be classified as accruing if the borrower has been current for a period of at least six months with respect to loan payments and management expects that the borrower will be able to continue to make payments in accordance with the terms of the restructured note. Management reviews all accruing TDRs quarterly to ensure payments continue to be made in accordance with the modified terms.

 

At March 31, 2012 and December 31, 2011, there were $98.6 million and $100.4 million, respectively, of TDRs included in nonaccrual loan totals. As of March 31, 2012 and December 31, 2011, there were $34.6 million and $28.7 million, respectively, of TDRs included in accruing loan totals. At March 31, 2012 and December 31, 2011, $52.8 million and $79.9 million of the nonaccrual TDRs were current. Management will continue to review the restructured loans and may determine it appropriate to move certain of the loans back to accrual status in the future. At March 31, 2012 and December 31, 2011, Park had commitments to lend $5.1 million and $4.0 million, respectively, of additional funds to borrowers whose terms had been modified in a TDR.

 

The specific reserve related to TDRs at March 31, 2012 and December 31, 2011 was $4.4 million and $9.1 million, respectively. Modifications made in 2011 and 2012 were largely the result of renewals, extending the maturity date of the loan, at terms consistent with the original note. These modifications were deemed to be TDRs primarily due to Park’s conclusion that the borrower would likely not have qualified for similar terms through another lender. Many of the modifications deemed to be TDRs were previously identified as impaired loans, and thus were also previously evaluated for impairment under ASC 310.  Additional specific reserves of $252,000 were recorded during the period ending March 31, 2012 as a result of TDRs identified in the 2012 year.

 

The terms of certain other loans were modified during the three month period ended March 31, 2012 that did not meet the definition of a TDR. Modified substandard commercial loans which did not meet the definition of a TDR had a total recorded investment as of March 31, 2012 of $3.6 million. The modification of these loans: (1) involved a modification of the terms of a loan to a borrower who was not experiencing financial difficulties, (2) resulted in a delay in a payment that was considered to be insignificant, or (3) resulted in Park obtaining additional collateral or guarantees that improved the likelihood of the ultimate collection of the loan such that the modification was deemed to be at market terms.  Modified consumer loans which did not meet the definition of a TDR had a total recorded investment as of March 31, 2012 of $6.3 million. Many of these loans were modified as a lower cost option than a full refinancing to borrowers who were not experiencing financial difficulties.

 

19
 

 

The following table details the number of contracts modified as TDRs during the three month period ended March 31, 2012 as well as the period end recorded investment of these contracts. The recorded investment pre- and post-modification is generally the same.

 

   Three months ended
March 31, 2012
 
   Number of
Contracts
   Accruing   Nonaccrual   Total
Recorded
Investment
 
(In thousands)                
Commercial, financial and agricultural   5   $1,289   $750   $2,039 
Commercial real estate   16    2,212    2,967    5,179 
Construction real estate:                    
SE LLC commercial land and development   4    -    894    894 
Remaining commercial   9    8,641    1,565    10,206 
Mortgage   -    -    -    - 
Installment   -    -    -    - 
Residential real estate:                    
Commercial   3    -    318    318 
Mortgage   9    111    1,170    1,281 
HELOC   -    -    -    - 
Installment   -    -    -    - 
Consumer   1    -    91    91 
Leases   -    -         - 
Total loans   47   $12,253   $7,755   $20,008 

 

As of December 31, 2011, $6.2 million of those loans modified during the three month period ended March 31, 2012 were on nonaccrual status.

 

20
 

 

The following table presents the recorded investment in financing receivables which were modified as troubled debt restructurings within the previous 12 months and for which there was a payment default during the three month period ended March 31, 2012. For this table, a loan is considered to be in default when it becomes 30 days contractually past due under the modified terms.

 

   Three months ended
March 31, 2012
 
   Number of
Contracts
   Recorded
Investment
 
(In thousands)        
Commercial, financial and agricultural   15   $8,469 
Commercial real estate   8    3,201 
Construction real estate:          
SE LLC commercial land and development   3    659 
Remaining commercial   8    4,155 
Mortgage   -    - 
Installment   -    - 
Residential real estate:          
Commercial   6    3,948 
Mortgage   5    684 
HELOC   1    48 
Installment   -    - 
Consumer   -    - 
Leases   -    - 
Total loans   46   $21,164 

 

Of the $21.2 million in modified trouble debt restructurings which defaulted during the period ended March 31, 2012, $205,000 were accruing loans and $20.0 million were nonaccrual loans.

 

Note 6 – Allowance for Loan Losses

 

The allowance for loan losses 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 2011 Annual Report.

 

21
 

 

The activity in the allowance for loan losses for the three months ended March 31, 2012 and March 31, 2011 is summarized below.

 

   Three months ended March 31, 2012 
   Commercial,
financial and
agricultural
   Commercial
real estate
   Construction
real estate
   Residential
real estate
   Consumer   Leases   Centennial
loan put
   Total 
(In thousands)                                
                                 
Allowance for credit losses:                                        
Beginning balance  $16,950   $15,539   $14,433   $15,692   $5,830   $-   $-   $68,444 
Charge-offs   4,538    4,934    4,320    3,922    1,253    -    -    18,967 
Recoveries   468    92    67    609    707    -    -    1,943 
Net Charge-offs   4,070    4,842    4,253    3,313    546    -    -    17,024 
Provision   5,448    1,309    (433)   1,489    525    -    -    8,338 
Ending balance  $18,328   $12,006   $9,747   $13,868   $5,809   $-    -   $59,758 
Provision for Centennial loan  put   -    -    -    -    -    -    662    662 
Allowance for Credit Losses  $18,328   $12,006   $9,747   $13,868   $5,809   $-   $662   $60,420 

 

   Three months ended March 31, 2011 
   Commercial,
financial and
agricultural
   Commercial
real estate
   Construction
real estate
   Residential
real estate
   Consumer   Leases   Total 
(In thousands)    
                             
Allowance for credit losses:                                   
Beginning balance  $11,555   $24,369   $70,462   $30,259   $6,925   $5   $143,575 
Charge-offs   1,841    1,785    3,420    2,487    1,973    -    11,506 
Recoveries   569    802    96    501    390    3    2,361 
Net Charge-offs   1,272    983    3,324    1,986    1,583    (3)   9,145 
Provision   1,508    1,834    4,697    4,142    1,923    (4)   14,100 
Ending balance  $11,791   $25,220   $71,835   $32,415   $7,265   $4   $148,530 

 

22
 

 

The composition of the allowance for loan losses at March 31, 2012 and December 31, 2011 was as follows:

 

   March 31, 2012 
   Commercial,
financial and
agricultural
   Commercial
real estate
   Construction
real estate
   Residential
real estate
   Consumer   Leases   Total 
(In thousands)    
Allowance for loan losses:                                   
Ending allowance balance attributed to loans:                                   
Individually evaluated for impairment  $4,704   $1,506   $2,096   $1,199   $-   $-   $9,505 
Collectively evaluated for impairment   13,624    10,500    7,651    12,669    5,809    -    50,253 
Total ending allowance balance  $18,328   $12,006   $9,747   $13,868   $5,809   $-   $59,758 
                                    
Loan balance:                                   
Loans individually evaluated for impairment  $40,210   $43,265   $52,046   $43,752   $20   $-   $179,293 
Loans collectively evaluated for impairment   712,182    1,045,083    151,769    1,623,947    610,160    1,949    4,145,090 
Total ending loan balance  $752,392   $1,088,348   $203,815   $1,667,699   $610,180   $1,949   $4,324,383 
                                    
Allowance for loan losses as a percentage of loan balance:                                   
Loans individually evaluated for impairment   11.70%   3.48%   4.03%   2.74%   -%    -%    5.30%
Loans collectively evaluated for impairment   1.91%   1.00%   5.04%   0.78%   0.95%   -%    1.21%
Total ending loan balance   2.44%   1.10%   4.78%   0.83%   0.95%   -%    1.38%
                                    
Recorded investment:                                   
Loans individually evaluated for impairment  $40,241   $43,305   $52,106   $43,752   $20   $-   $179,424 
Loans collectively evaluated for impairment   715,590    1,048,838    152,282    1,627,708    612,740    2,001    4,159,159 
Total ending loan balance  $755,831   $1,092,143   $204,388   $1,671,460   $612,760   $2,001   $4,338,583 

 

23
 

 

   December 31, 2011 
(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  $5,819   $4,431   $3,414   $2,271   $-   $-   $15,935 
Collectively evaluated for impairment   11,131    11,108    11,019    13,421    5,830    -    52,509 
Total ending allowance balance  $16,950   $15,539   $14,433   $15,692   $5,830   $-   $68,444 
                                    
Loan balance:                                   
Loans individually evaluated for impairment  $40,621   $51,978   $50,240   $44,276   $20   $-   $187,135 
Loans collectively evaluated for impairment   703,176    1,056,596    167,306    1,584,342    616,485    2,059    4,129,964 
Total ending loan balance  $743,797   $1,108,574   $217,546   $1,628,618   $616,505   $2,059   $4,317,099 
                                    
Allowance for loan losses as a percentage of loan balance:                                   
Loans individually evaluated for impairment   14.33%   8.52%   6.80%   5.13%   -%    -%    8.52%
Loans collectively evaluated for impairment   1.58%   1.05%   6.59%   0.85%   0.95%   -%    1.27%
Total ending loan balance   2.28%   1.40%   6.63%   0.96%   0.95%   -%    1.59%
                                    
Recorded investment:                                   
Loans individually evaluated for impairment  $40,621   $51,978   $50,240   $44,276   $20   $-   $187,135 
Loans collectively evaluated for impairment   706,297    1,060,831    167,856    1,588,147    619,415    2,102    4,144,648 
Total ending loan balance  $746,918   $1,112,809   $218,096   $1,632,423   $619,435   $2,102   $4,331,783 

 

Loans collectively evaluated for impairment above include all performing loans at March 31, 2012 and December 31, 2011, 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 March 31, 2012 and December 31, 2011, which are evaluated for impairment in accordance with GAAP (see Note 1 of the Notes to Consolidated Financial Statements included in Park’s 2011 Annual Report).

 

24
 

 

Note 7 – Earnings Per Common Share

 

The following table sets forth the computation of basic and diluted earnings per common share for the three months ended March 31, 2012 and 2011.

 

(in thousands, except share and per share data)  Three months ended
March 31,
 
   2012   2011 
Numerator:          
Income available to common shareholders  $29,998   $20,732 
Denominator:          
Denominator for basic earnings per share (weighted average common shares outstanding)   15,405,910    15,398,930 
Effect of dilutive options and warrants   11,835    4,490 
Denominator for diluted earnings per share (weighted average common shares outstanding adjusted for the effect of dilutive options and warrants)   15,417,745    15,403,420 
Earnings per common share:          
Basic earnings per common share  $1.95   $1.35 
Diluted earnings per common share  $1.95   $1.35 

 

As of March 31, 2012 and 2011, options to purchase 66,625 and 75,895 common shares, respectively, were outstanding under Park’s 2005 Incentive Stock Opion Plan. A warrant to purchase 227,376 common shares was outstanding at both March 31, 2012 and 2011 as a result of Park’s participation in the U.S. Treasury Capital Purchase Program (“CPP.”) In addition, warrants to purchase an aggregate of 71,984 common shares were outstanding at March 31, 2011 as a result of the issuance of common shares and warrants to purchase common shares on December 10, 2010 (the “December 2010 Warrants”). The December 2010 Warrants expired in 2011, with no warrants being exercised.

 

The common shares represented by the options and the December 2010 Warrants totaling a weighted average of 73,683 and 149,591 were not included in the computation of diluted earnings per common share for the three months ended March 31, 2012 and 2011, respectively, because the respective exercise prices exceeded the market value of the underlying common shares such that their inclusion would have had an anti-dilutive effect. The warrant to purchase 227,376 common shares issued under the CPP was not included in the three month weighted average of 73,683 for 2012 or 149,591 for 2011, as the dilutive effect of this warrant was 11,835 and 4,490 common shares for the three month periods ended March 31, 2012 and March 31, 2011, respectively. The exercise price of the CPP warrant to purchase 227,376 common shares is $65.97.

 

Note 8 – Segment Information

 

The Corporation is a bank holding company headquartered in Newark, Ohio. Prior to February 16, 2012 the operating segments for the Corporation were its two chartered bank subsidiaries, The Park National Bank (headquartered in Newark, Ohio) (“PNB”) and Vision Bank (“VB” or “Vision”) (headquartered in Panama City, Florida). On February 16, 2012, Vision sold certain assets and liabilities to Centennial Bank (see Note 3). Promptly following the closing of the transaction, Vision surrendered its Florida banking charter to the Florida Office of Financial Regulation and became a non-bank Florida corporation (the “Florida Corporation”). The Florida Corporation merged with and into a wholly-owned non-bank subsidiary of Park, SE Property Holdings, LLC (“SE LLC”), with SE LLC being the surviving entity. The closing of this transaction prompted Park to add SE LLC as a reportable segment. Additionally, due to the increased significance of the entity, Guardian Financial Services Company (“GFSC”) was added as a reportable segment during the first quarter of 2012.

 

25
 

 

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 Chairman and Chief Executive Officer, who is the chief operating decision maker.

 

   Operating Results for the three months ended March 31, 2012 
(in thousands)  PNB   VB   GFSC   SE LLC   All Other   Total 
Net interest income  $55,846   $-   $2,211   $2,610   $1,061   $61,728 
Provision for loan losses   4,672    -    250    4,078    -    9,000 
Other income and security gains   16,661    -    -    22,891    68    39,620 
Other expense   38,056    -    721    7,503    1,528    47,808 
Net income   21,561    -    806    9,059    49    31,475 
                               
Assets (as of March 31, 2012)  $6,587,773   $-   $47,380   $161,493   $(19,795)  $6,776,851 

 

   Operating Results for the three months ended March 31, 2011 
(in thousands)  PNB   VB   GFSC   SE LLC   All Other   Total 
Net interest income  $60,236   $6,755   $2,025   $-   $297   $69,313 
Provision for loan losses   4,975    8,600    525    -    -    14,100 
Other income (loss) and security gains   22,897    (1,318)   -    -    86    21,665 
Other expense   36,321    7,425    577    -    2,023    46,346 
Net income (loss)   29,030    (6,846)   600    -    (588)   22,196 
                               
Assets (as of March 31, 2011)  $6,573,541   $786,856   $45,366   $20,000   $(102,658)  $7,323,105 

 

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 periods ended March 31, 2012 and 2011. The reconciling amounts for consolidated total assets for the periods ended March 31, 2012 and 2011 consisted of the elimination of intersegment borrowings and the assets of the Parent Company which were not eliminated.

 

Note 9 – Stock Option Plan

 

Park did not grant any stock options during the three month periods ended March 31, 2012 and 2011.

 

The following table summarizes stock option activity during the first three months of 2012.

 

   Stock Options   Weighted 
Average Exercise
Price Per Share
 
Outstanding at December 31, 2011   74,020   $74.96 
Granted   -    - 
Exercised   -    - 
Forfeited/Expired   7,395    74.96 
Outstanding at March 31 ,2012   66,625   $74.96 

 

26
 

 

All of the stock options outstanding at March 31, 2012 were exercisable. The aggregate intrinsic value of the outstanding stock options at March 31, 2012 was $0. In addition, no stock options were exercised during the first three months of 2012 or 2011. The weighted average contractual remaining term was 0.69 years for the stock options outstanding at March 31, 2012.

 

All of the common shares delivered upon the exercise of incentive stock options granted under the Park National Corporation 2005 Incentive Stock Option Plan (the “2005 Plan”) are to be treasury shares. At March 31, 2012, incentive stock options granted under the 2005 Plan covering 66,625 common shares were outstanding. At March 31, 2012, Park held 517,733 treasury shares that were available for issuance under the 2005 Plan.

 

Note 10 – Mortgage Loans Held For Sale

 

Mortgage loans held for sale are carried at their fair value. At March 31, 2012 and December 31, 2011, respectively, Park had approximately $11.1 million and $11.5 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 Notes 5 and 6. The contractual balance was $10.9 million and $11.4 million at March 31, 2012 and December 31, 2011. The gain expected upon sale was $163,000 and $182,000 at March 31, 2012 and December 31, 2011. None of these loans are 90 days or more past due or on nonaccrual as of March 31, 2012 or December 31, 2011.

 

Note 11 – Investment Securities

 

The amortized cost and fair values of investment securities are shown in the following table. Management performs a quarterly evaluation of investment securities for any other-than-temporary impairment. For the three months ended March 31, 2012 and 2011, there were no investment securities deemed to be other-than-temporarily impaired.

 

Investment securities at March 31, 2012, were as follows:

 

(in thousands)
Securities Available-for-Sale  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  $599,125   $478   $2,128   $597,475 
Obligations of states and political subdivisions   2,616    39    -    2,655 
U.S. Government sponsored entities asset-backed securities   388,444    16,734    -    405,178 
Other equity securities   1,188    1,014    29    2,173 
Total  $991,373   $18,265   $2,157   $1,007,481 

 

Securities Held-to-Maturity  Amortized
Cost
   Gross
Unrecognized
Holding Gains
   Gross
Unrecognized
Holding Losses
   Estimated
Fair Value
 
Obligations of states and political subdivisions  $1,427   $3   $-   $1,430 
U.S. Government sponsored entities asset-backed securities   780,823    13,102    280    793,645 
Total  $782,250   $13,105   $280   $795,075 

 

27
 

 

Management does not believe any of the unrealized losses at March 31, 2012 or December 31, 2011 represent an 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.

 

Securities with unrealized losses at March 31, 2012, were as follows:

 

(in thousands)  Less than 12 months   12 months or longer   Total 
Securities Available-for-Sale  Fair value   Unrealized
losses
   Fair value   Unrealized
losses
   Fair
value
   Unrealized
losses
 
Obligations of U.S. Treasury and other U.S. Government agencies  $347,872   $2,128   $-   $-   $347,872   $2,128 
Other equity securities   -    -    74    29    74    29 
Total  $347,872   $2,128   $74   $29   $347,946   $2,157 
                               
Securities Held-to-Maturity                              
U.S. Government sponsored entities asset-backed securities  $62,420   $280   $-   $-   $62,420   $280 

 

Investment securities at December 31, 2011, were as follows:

 

(in thousands)
Securities Available-for-Sale  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  $370,043   $1,614   $-   $371,657 
Obligations of states and political subdivisions   2,616    44    -    2,660 
U.S. Government sponsored entities asset-backed securities   427,300    16,995    -    444,295 
Other equity securities   1,188    877    32    2,033 
Total  $801,147   $19,530   $32   $820,645 

 

Securities Held-to-Maturity  Amortized cost   Gross
unrecognized
holding gains
   Gross
unrecognized
holding losses
   Estimated
fair value
 
Obligations of states and political subdivisions  $1,992   $5   $-   $1,997 
U.S. Government sponsored entities asset-backed securities   818,232    14,377    32    832,577 
Total  $820,224   $14,382   $32   $834,574 

 

28
 

 

Securities with unrealized losses at December 31, 2011, were as follows:

 

(in thousands)  Less than 12 months   12 months or longer   Total 
Securities Available-for-Sale  Fair value   Unrealized
losses
   Fair value   Unrealized
losses
   Fair value   Unrealized
losses
 
Other equity securities  $-   $-   $80   $32   $80   $32 
                               
Securities Held-to-Maturity                              
U.S. Government sponsored entities asset-backed securities  $-   $-   $38,775   $32   $38,775   $32 

 

 

 

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

 

The amortized cost and estimated fair value of investments in debt securities at March 31, 2012, are shown in the following table by contractual maturity or the expected call date, except for asset-backed securities, which are shown as a single total, due to the unpredictability of the timing in principal repayments.

 

(in thousands)  Amortized
cost
   Fair value 
Securities Available-for-Sale          
U.S. Treasury and sponsored entities notes:          
Due within one year  $249,125   $249,604 
Due one through five years   275,000    273,532 
Due five through ten years   75,000    74,339 
Total  $599,125   $597,475 
           
Obligations of states and political subdivisions:          
Due within one year  $2,121   $2,130 
Due one through five years   495    525 
   $2,616   $2,655 
           
U.S. Government sponsored entities asset-backed securities:          
Total  $388,444   $405,178 

 

(in thousands)  Amortized
cost
   Fair value 
Securities Held-to-Maturity          
Obligations of state and political subdivisions:          
Due within one year  $1,427   $1,430 
Total  $1,427   $1,430 
           
U.S. Government sponsored entities asset-backed securities:          
Total  $780,823   $793,645 

 

29
 

 

The $599.1 million of Park’s securities shown in the above table as U.S. Treasury and sponsored entities notes are callable notes. These callable securities have a final maturity in 9 to 15 years, but are shown in the table at their expected call date.

 

Note 12 – Other Investment Securities

 

Other investment securities consist of stock investments in the Federal Home Loan Bank and the Federal Reserve Bank. These restricted stock investments are carried at their redemption value.

 

   March 31,   December 31, 
(in thousands)  2012   2011 
Federal Home Loan Bank stock  $60,728   $60,728 
Federal Reserve Bank stock   6,876    6,876 
Total  $67,604   $67,604 

 

Note 13 – Pension Plan

 

Park has a noncontributory defined benefit pension plan covering substantially all of its employees. The plan provides benefits based on an employee’s years of service and compensation.

 

Park’s funding policy is to contribute annually an amount that can be deducted for federal income tax purposes using a different actuarial cost method and different assumptions from those used for financial reporting purposes. Pension plan contributions were $15.9 million and $14.0 million for the three month periods ended March 31, 2012 and 2011, respectively.

 

The following table shows the components of net periodic benefit expense:

 

(in thousands)  Three months ended
March 31,
 
   2012   2011 
Service cost  $1,068   $1,139 
Interest cost   1,012    992 
Expected return on plan assets   (2,186)   (1,886)
Amortization of prior service cost   5    5 
Recognized net actuarial loss   427    353 
Benefit expense  $326   $603 

 

As a result of the February 16, 2012 acquisition of certain Vision assets and liabilities by Centennial Bank it was necessary to re-measure the plan assets and liabilities resulting in a reduction to the unrecognized net loss account, within Accumulated Other Comprehensive (loss), of $412,000 (net of tax of $222,000).

 

Note 14 – Derivative Instruments

 

FASB ASC 815, Derivatives and Hedging, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by GAAP, the Company records all derivatives on the consolidated condensed balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

 

30
 

 

For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified into earnings when the hedged transaction affects earnings, with any ineffective portion of changes in the fair value of the derivative recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged item or transaction.

 

During the first quarter of 2008, the Company executed an interest rate swap to hedge a $25 million floating-rate subordinated note that was issued by Park during the fourth quarter of 2007. The Company’s objective in using this derivative is to add stability to interest expense and to manage its exposure to interest rate risk. Our interest rate swap involves the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreement without exchange of the underlying principal amount, and has been designated as a cash flow hedge.

 

At March 31, 2012, the interest rate swap’s fair value of $(700,000) was included in other liabilities. No hedge ineffectiveness on the cash flow hedge was recognized during the three months ended March 31, 2012. At March 31, 2012, the variable rate on the $25 million subordinated note was 2.47% (3-month LIBOR plus 200 basis points) and Park was paying 6.01% (4.01% fixed rate on the interest rate swap plus 200 basis points).

 

For the three months ended March 31, 2012, the change in the fair value of the interest rate swap reported in other comprehensive income was a gain of $113,000 (net of taxes of $60,000). Amounts reported in accumulated other comprehensive income related to the interest rate swap will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.

 

As of March 31, 2012, no derivatives were designated as fair value hedges or hedges of net investments in foreign operations. Additionally, the Company does not use derivatives for trading or speculative purposes.

 

As of March 31, 2012, Park had mortgage loan interest rate lock commitments outstanding of approximately $16.0 million. Park has specific forward contracts to sell each of these loans to a third-party investor. These loan commitments represent derivative instruments, which are required to be carried at fair value. The derivative instruments used are not designated as hedges under GAAP. At March 31, 2012, the fair value of the derivative instruments was approximately $169,000. The fair value of the derivative instruments is included within loans held for sale and the corresponding income is included within non-yield loan fee income. Gains and losses resulting from expected sales of mortgage loans are recognized when the respective loan contract is entered into between the borrower, Park, and the third-party investor. The fair value of Park’s mortgage interest rate lock commitments (IRLCs) is based on current secondary market pricing.

 

In connection with the sale of Park’s Class B Visa shares during the 2009 year, Park entered into a swap agreement with the purchaser of the shares. The swap agreement adjusts for dilution in the conversion ratio of Class B Visa shares resulting from certain Visa litigation. At March 31, 2012, the fair value of the swap liability of $135,000 is an estimate of the exposure based upon probability-weighted potential Visa litigation losses.

 

Note 15 – Loan Servicing

 

Park serviced sold mortgage loans of $1.30 billion at March 31, 2012, compared to $1.35 billion at December 31, 2011 and $1.44 billion at March 31, 2011. At March 31, 2012, $22.6 million of the sold mortgage loans were sold with recourse compared to $34.1 million at March 31, 2011. Management closely monitors the delinquency rates on the mortgage loans sold with recourse. At March 31, 2012, management determined that no liability was deemed necessary for these loans.

 

31
 

 

When Park sells mortgage loans with servicing rights retained, servicing rights are initially recorded at fair value. Park selected the “amortization method” as permissible within GAAP, whereby the servicing rights capitalized are amortized in proportion to and over the period of estimated future servicing income of the underlying loan. At the end of each reporting period, the carrying value of mortgage servicing rights (“MSRs”) is assessed for impairment with a comparison to fair value. MSRs are carried at the lower of their amortized cost or fair value.

 

Activity for MSRs and the related valuation allowance follows:

 

(in thousands)  Three months ended
March 31, 2012
   Three months ended
March 31, 2011
 
Mortgage servicing rights:          
Carrying amount, net, beginning of period  $9,301   $10,488 
Additions   562    330 
Amortization   (888)   (521)
Changes in valuation inputs & assumptions   -    68 
           
Carrying amount, net, end of period  $8,975   $10,365 
           
Valuation allowance:          
Beginning of period  $1,021   $748 
Changes due to fair value adjustments   -    (68)
End of period  $1,021   $680 

 

Servicing fees included in other service income were $1.2 million for the three months ended March 31, 2012. For the three months ended March 31, 2011, servicing fees included in other service income were $1.4 million.

 

Note 16 – Fair Value

 

The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that Park uses to measure fair value are as follows:

 

§Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that Park has the ability to access as of the measurement date.
§Level 2: Level 1 inputs for assets or liabilities that are not actively traded. Also consists of an observable market price for a similar asset or liability. This includes the use of “matrix pricing” to value debt securities absent the exclusive use of quoted prices.
§Level 3: Consists of unobservable inputs that are used to measure fair value when observable market inputs are not available. This could include the use of internally developed models, financial forecasting and similar inputs.

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability between market participants at the balance sheet date. When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to observable market data for similar assets and liabilities. However, certain assets and liabilities are not traded in observable markets and Park must use other valuation methods to develop a fair value. The fair value of impaired loans is typically based on the fair value of the underlying collateral, which is estimated through third-party appraisals or internal estimates of collateral values.

 

32
 

 

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 March 31, 2012 using:
(in thousands)  Level 1   Level 2   Level 3   Balance at
March 31, 2012
 
Assets                    
Investment securities                    
Obligations of U.S. Treasury and other U.S. Government sponsored entities  $-   $597,475   $-   $597,475 
Obligations of states and political subdivisions   -    2,655    -    2,655 
U.S. Government sponsored entities’ asset-backed securities   -    405,178    -    405,178 
Equity securities   1,417    -    756    2,173 
Mortgage loans held for sale   -    11,110    -    11,110 
Mortgage IRLCs   -    169    -    169 
                     
Liabilities                    
Interest rate swap  $-   $673   $-   $673 
Fair value swap   -    -    135    135 

 

Fair Value Measurements at December 31, 2011 using:
(in thousands)  Level 1   Level 2   Level 3   Balance at
December 31,
2011
 
Assets                    
Investment securities                    
Obligations of U.S. Treasury and other U.S. Government sponsored entities  $-   $371,657   $-   $371,657 
Obligations of states and political subdivisions   -    2,660    -    2,660 
U.S. Government sponsored entities’ asset-backed securities   -    444,295    -    444,295 
Equity securities   1,270    -    763    2,033 
Mortgage loans held for sale   -    11,535    -    11,535 
Mortgage IRLCs   -    251    -    251 
                     
Liabilities                    
Interest rate swap  $-   $846   $-   $846 
Fair value swap   -    -    700    700 

 

There were no transfers between Level 1 and Level 2 during 2012 or 2011. 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.

 

33
 

 

The following methods and assumptions were used by the Company in determining fair value of the financial assets and liabilities discussed above:

 

Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The Fair Value Measurements tables exclude Park’s Federal Home Loan Bank stock and Federal Reserve Bank stock. These assets are carried at their respective redemption values, as it is not practicable to calculate their fair values. For securities where quoted prices or market prices of similar securities are not available, which include municipal securities, fair values are calculated using discounted cash flows.

 

Interest rate swap: The fair value of the interest rate swap represents the estimated amount Park would pay or receive to terminate the agreement, considering current interest rates and the current creditworthiness of the counterparty.

 

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): IRLCs are based on current secondary market pricing and are classified as Level 2.

 

Mortgage loans held for sale: Mortgage loans held for sale are carried at their fair value. Mortgage loans held for sale are estimated using security prices for similar product types and, therefore, are classified in Level 2.

 

The table below is a reconciliation of the beginning and ending balances of the Level 3 inputs for the three months ended March 31, 2012 and 2011, for financial instruments measured on a recurring basis and classified as Level 3:

 

Level 3 Fair Value Measurements

Three months ended March 31, 2012 and 2011

(in thousands)  Obligations of states
and political
subdivisions
   Equity
Securities
   Fair value
swap
 
Balance, at January 1, 2012  $-   $763   $(700)
Total gains/(losses)               
Included in earnings – realized   -    -    - 
Included in earnings – unrealized   -    -    - 
Included in other comprehensive income   -    (7)   - 
Purchases, sales, issuances and settlements, other   -    -    - 
Periodic settlement of fair value swap   -    -    (565)
Balance March 31, 2012  $-   $756   $(135)
                
Balance, at January 1, 2011  $2,598   $745   $(60)
Total gains/(losses)               
Included in earnings – realized   -    -    - 
Included in earnings – unrealized   -    -    - 
Included in other comprehensive income   (128)   (5)   - 
Purchases, sales, issuances and settlements, other   -    -    - 
Re-evaluation of fair value swap   -    -    - 
Balance March 31, 2011  $2,470   $740   $(60)

 

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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. 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 commonly based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales 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. Non-real estate collateral may be valued using, (1) an appraisal, (2) net book value per the borrower’s financial statements, or (3) aging reports. 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 valuations are obtained annually for all impaired loans in accordance with Company policy.

 

Other Real Estate Owned (OREO): Assets acquired through or in lieu of loan foreclosure are initially recorded at fair value less costs to sell when acquired. The carrying value of OREO is not re-measured to fair value on a recurring basis, but is subject to fair value adjustments when the carrying value exceeds the fair value, less estimated selling costs. Fair value is based on recent real estate appraisals and is updated at least annually. These appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales approach and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments result in a Level 3 classification of the inputs for determining fair value.

 

Appraisals for both collateral dependent impaired loans and other real estate owned are performed by licensed appraisers. Appraisals are generally obtained to support the fair value of collateral. In general, there are two types of appraisals, real estate appraisals and lot development loan appraisals, received by the Company. 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.
·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 utilized. The calculated fair value is then compared to market values where possible to ascertain the reasonableness of the valuation in relation to current market expectations for similar products. Accordingly, MSRs are classified as Level 2.

 

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The following table presents assets and liabilities measured at fair value on a nonrecurring basis:

 

Fair Value Measurements at March 31, 2012 using:
(in thousands)  Level 1   Level 2   Level 3   Balance at
March 31, 2012
 
Impaired loans:                    
Commercial, financial and agricultural  $-   $-   $18,476   $18,476 
Commercial real estate   -    -    25,445    25,445 
Construction real estate:                    
SE LLC commercial land and development   -    -    18,468    18,468 
Remaining commercial   -    -    8,665    8,665 
Residential real estate   -    -    12,270    12,270 
Total impaired loans  $-   $-   $83,324   $83,324 
Mortgage servicing rights   -    7,138         7,138 
Other real estate owned   -    -    41,965    41,965 

 

Fair Value Measurements at December 31, 2011 using:
(in thousands)  Level 1   Level 2   Level 3   Balance at
December 31, 2011
 
Impaired loans:                    
Commercial, financial and agricultural  $-   $-   $19,931   $19,931 
Commercial real estate   -    -    24,859    24,859 
Construction real estate:                    
Vision commercial land and development   -    -    21,228    21,228 
Remaining commercial   -    -    8,860    8,860 
Residential real estate   -    -    12,935    12,935 
Total impaired loans  $-   $-   $87,813   $87,813 
Mortgage servicing rights   -    5,815    -    5,815 
Other real estate owned   -    -    42,272    42,272 

 

Impaired loans had a book value of $179.3 million at March 31, 2012, after partial charge-offs of $108.3 million. In addition, these loans had a specific valuation allowance of $9.5 million. Of the $179.3 million impaired loan portfolio, loans with a book value of $92.8 million were carried at their fair value of $83.3 million, as a result of the aforementioned charge-offs and specific valuation allowance. The remaining $86.5 million of impaired loans were carried at cost, as the fair value of the underlying collateral or present value of expected future cash flows on each of these loans exceeded the book value for each individual credit. At December 31, 2011, impaired loans had a book value of $187.1 million. Of these, $87.8 million were carried at fair value, as a result of partial charge-offs of $103.8 million and a specific valuation allowance of $15.9 million. The remaining $83.4 million of impaired loans at December 31, 2011 were carried at cost.

 

MSRs, which are carried at the lower of cost or fair value, were recorded at $9.0 million at March 31, 2012. Of the $9.0 million MSR carrying balance at March 31, 2012, $7.1 million was recorded at fair value and included a valuation allowance of $1.0 million. The remaining $1.9 million was recorded at cost, as the fair value exceeded cost at March 31, 2012. At December 31, 2011, MSRs were recorded at $9.3 million, including a valuation allowance of $1.0 million.

 

36
 

 

At March 31, 2012 and December 31, 2011, the estimated fair value of OREO, less estimated selling costs, amounted to $42.0 million and $42.3 million, respectively. The financial impact of OREO devaluation adjustments for the three month period ended March 31, 2012 was $1.4 million.

 

The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for assets and liabilities not discussed above:

 

Cash and cash equivalents: The carrying amounts reported in the consolidated condensed balance sheets for cash and short-term instruments approximate those assets’ fair values.

 

Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for certain mortgage loans (e.g., one-to-four family residential) are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

 

Off-balance sheet instruments: Fair values for the Corporation’s loan commitments and standby letters of credit are based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The carrying amount and fair value are not material.

 

Deposit liabilities: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed-term certificates of deposit approximate their fair values at the reporting date. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities of time deposits.

 

Short-term borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements and other short-term borrowings approximate their fair values.

 

Long-term debt: Fair values for long-term debt are estimated using a discounted cash flow calculation that applies interest rates currently being offered on long-term debt to a schedule of monthly maturities.

 

Subordinated debentures and notes: Fair values for subordinated debentures and notes are estimated using a discounted cash flow calculation that applies interest rate spreads currently being offered on similar debt structures to a schedule of monthly maturities.

 

37
 

The fair value of financial instruments at March 31, 2012 and December 31, 2011, was as follows:

 

(in thousands)  March 31, 2012 
       Fair Value Measurements 
                     
Financial assets:  Carrying value   Level 1   Level 2   Level 3   Total fair value 
Cash and money market instruments  $161,130   $161,130   $-   $-   $161,130 
Investment securities   1,789,731    1,417    1,800,383    756    1,802,556 
Accrued interest receivable - securities   7,027    -    7,027    -    7,027 
Accrued interest receivable - loans   14,200    -    1    14,199    14,200 
Mortgage loans held for sale   11,110    -    11,110    -    11,110 
Impaired loans carried at fair value   83,324    -    -    83,324    83,324 
Other loans   4,170,191    -    -    4,188,265    4,188,265 
Loans receivable, net  $4,264,625   $-   $11,110   $4,271,589   $4,282,699 
                          
Financial liabilities:                         
Noninterest bearing checking accounts  $1,055,745   $1,055,745   $-   $    $1,055,745 
Interest bearing transactions accounts   1,215,562    1,215,562    -    -    1,215,562 
Savings accounts   1,001,789    1,001,789         -    1,001,789 
Time deposits   1,541,374    -    1,547,748    -    1,547,748 
Other   2,918    2,918    -    -    2,918 
Total deposits  $4,817,388   $3,276,014   $1,547,748   $-   $4,823,762 
                          
Short-term borrowings  $236,687   $-   $236,687   $-   $236,687 
Long-term debt   821,801    -    907,995    -    907,995 
Subordinated debentures/notes   75,250    -    68,475    -    68,475 
Accrued interest payable – deposits   2,824    36    2,788    -    2,824 
Accrued interest payable – debt/borrowings   2,210    -    2,210    -    2,210 
                          
Derivative financial instruments:                         
Interest rate swap  $673   $-   $673   $-   $673 
Fair value swap   135    -    -    135    135 

 

38
 

 

(in thousands)  December 31, 2011 
  Carrying
value
   Fair value 
Financial assets:         
Cash and money market instruments  $157,486   $157,486 
Investment securities   1,640,869    1,655,219 
Accrued interest receivable   19,697    19,697 
Mortgage loans held for sale   11,535    11,535 
Impaired loans carried at fair value   87,813    87,813 
Other loans   4,149,307    4,167,224 
Loans receivable, net  $4,248,655   $4,266,572 
Assets held for sale  $382,462   $382,462 
           
Financial liabilities:          
Noninterest bearing checking accounts  $995,733   $995,733 
Interest bearing transactions accounts   1,037,385    1,037,385 
Savings accounts   931,526    931,526 
Time deposits   1,499,105    1,506,075 
Other   1,365    1,365 
Total deposits  $4,465,114   $4,472,084 
           
Short-term borrowings  $263,594   $263,594 
Long-term debt   823,182    915,274 
Subordinated debentures/notes   75,250    68,601 
Accrued interest payable   4,916    4,916 
Liabilities held for sale   536,186    536,991 
           
Derivative financial instruments:          
Interest rate swap  $846   $846 
Fair value swap   700    700 

 

Note 17 – Participation in the U.S. Treasury Capital Purchase Program (CPP)

 

On December 23, 2008, Park issued $100 million of cumulative perpetual preferred shares, with a liquidation preference of $1,000 per share (the “Senior Preferred Shares”). The Senior Preferred Shares constituted Tier 1 capital and ranked senior to Park’s common shares. The Senior Preferred Shares were to pay cumulative dividends at a rate of 5% per annum through February 14, 2014 and reset to a rate of 9% per annum thereafter. For the three month period ended March 31, 2012, Park recognized a charge to retained earnings of $1.5 million representing the preferred stock dividend and accretion of the discount on the preferred stock, associated with Park’s participation in the CPP.

 

As part of its participation in the CPP, Park also issued a warrant to the U.S. Treasury to purchase 227,376 common shares (the “Warrant”), which was equal to 15% of the aggregate amount of the Senior Preferred Shares purchased by the U.S. Treasury, having an exercise price of $65.97. The initial exercise price for the Warrant and the market price for determining the number of common shares subject to the Warrant were determined by reference to the market price of the common shares on the date the Company’s application for participation in the CPP was approved by the U.S. Department of the Treasury (calculated on a 20-day trailing average). The Warrant has a term of 10 years.

 

As a participant in the CPP, the Company was required to adopt certain standards for compensation and corporate governance, established under the American Recovery and Reinvestment Act of 2009 (the “ARRA”), which amended and replaced the executive compensation provisions of the Emergency Economic Stabilization Act of 2008 (“EESA”) in their entirety, and the Interim Final Rule promulgated by the Secretary of the U.S. Treasury under 31 C.F.R. Part 30 (collectively, the “Troubled Asset Relief Program (TARP) Compensation Standards”). In addition, Park’s ability to declare or pay dividends on or repurchase its common shares was partially restricted until December 23, 2011 as a result of its participation in the CPP. Please refer to Note 20 – Subsequent Events, which discusses the Company’s repurchase of the Senior Preferred Shares and of the Warrant.

 

39
 

 

Note 18 – Other Comprehensive Income (Loss)

 

Other comprehensive income (loss) components and related tax effect are shown in the following table for the three month periods ended March 31, 2012 and 2011:

 

Three months ended March 31,
(in thousands)
  Before-tax
amount
   Tax effect   Net-of-tax
amount
 
             
2012:            
Change in pension plan assets and benefit obligations  $634   $222   $412 
Unrealized losses on available-for-sale securities   (3,390)   (1,188)   (2,202)
Unrealized net holding gain on cash flow hedge   173    60    113 
Other comprehensive loss  $(2,583)  $(906)  $(1,677)
                
2011:               
Unrealized (losses) on available-for-sale securities  $(3,166)  $(1,108)  $(2,058)
Reclassification adjustment for gains realized in net income   (6,635)   (2,322)   (4,313)
Unrealized net holding gain on cash flow hedge   204    71    133 
Other comprehensive loss  $(9,597)  $(3,359)  $(6,238)

 

The ending balance of each component of accumulated other comprehensive income (loss) was as follows:

 

(in thousands)  Before-tax
amount
   Tax effect   Net-of-tax
amount
 
             
March 31, 2012:               
Changes in pension plan assets and benefit obligations  $(31,603)  $(11,061)  $(20,542)
Unrealized gains on available-for-sale securities   16,108    5,637    10,471 
Unrealized net holding loss on cash flow hedge   (673)   (236)   (437)
Total accumulated other comprehensive loss  $(16,168)  $(5,660)  $(10,508)
                
December 31, 2011:               
Changes in pension plan assets and benefit obligations  $(32,237)  $(11,283)  $(20,954)
Unrealized gains on available-for-sale securities   19,498    6,825    12,673 
Unrealized net holding loss on cash flow hedge   (846)   (296)   (550)
Total accumulated other comprehensive loss  $(13,585)  $(4,754)  $(8,831)
                
March 31, 2011:               
Changes in pension plan assets and benefit obligations  $(24,503)  $(8,576)  $(15,927)
Unrealized gains on available-for-sale securities   13,462    4,712    8,750 
Unrealized net holding loss on cash flow hedge   (1,430)   (501)   (929)
Total accumulated other comprehensive loss  $(12,471)  $(4,365)  $(8,106)

 

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Note 19 — Sale of Common Shares and Issuance of Common Stock Warrants

 

There were no sales of common shares or issuance of common stock warrants during the three months ended March 31, 2012 or March 31, 2011. Outstanding as of March 31, 2011 were 35,992 Series A Common Share Warrants and 35,992 Series B Common Share Warrants which were issued as part of the registered direct public offering completed on December 10, 2010. The Series A and Series B Common Share Warrants had an exercise price of $76.41. The Series A Common Share Warrants were not exercised and expired on June 10, 2011. The Series B Common Share Warrants were not exercised and expired on December 20, 2011.

 

Note 20 - Subsequent Events

 

In connection with the application submitted by Park to the U.S. Treasury for approval to repurchase from the U.S. Treasury the 100,000 Series A Preferred Shares, Park provided a proposed capital plan which included the issuance of an aggregate principal amount of $30 million of subordinated notes, which are intended to qualify as “Tier 2 Capital” under applicable rules and regulations of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).

 

On April 20, 2012, Park entered into a Note Purchase Agreement, dated April 20, 2012 (the “Purchase Agreement”), with 56 purchasers (each, a “Purchaser” and collectively, the “Purchasers”). Each Purchaser represented that such Purchaser qualified as an “accredited investor” within the meaning of Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended (the “Securities Act”). Under the terms of the Purchase Agreement, the Purchasers purchased from Park an aggregate principal amount of $30,000,000 of 7% Subordinated Notes due April 20, 2022 (individually, a “Note” and collectively, the “Notes”). The Notes are intended to qualify as Tier 2 Capital under applicable rules and regulations of the Federal Reserve Board. Each Note was purchased at a purchase price of 100% of the principal amount thereof.

 

On April 19, 2012, Park received the approval from the U.S. Treasury to repurchase the 100,000 Series A Preferred Shares, which were issued by Park to the U.S. Treasury on December 23, 2008 as part of the CPP. On April 25, 2012, Park entered into a Letter Agreement with the U.S. Treasury pursuant to which Park repurchased the 100,000 Series A Preferred Shares for a purchase price of $100 million plus a pro rata accrued and unpaid dividend. Total consideration of $100,972,222 included accrued and unpaid dividends of $972,222. In addition to the accrued and unpaid dividends of $972,222, the charge to retained earnings, resulting from the repurchase of the Series A Preferred Shares, was $1.6 million on April 25, 2012.

 

On May 2, 2012, Park entered into a Letter Agreement pursuant to which Park repurchased from the U.S. Treasury the Warrant to purchase 227,376 Park common shares (the “Warrant Repurchase Letter Agreement”) for consideration of $2,842,400, or $12.50 per Park common share.

 

41